Satyam Scandal: Ethics in Corporate Governance
Satyam Scandal: Ethics in Corporate Governance
PUNEET AGGARWAL
(280/51)
FEBRUARY 9, 2015
IIM CALCUTTA
Abstract
In 2009, India witnessed its biggest corporate scandal, Satyam Scandal, where a firms
promoters, Mr Ramalinga Raju and his brother misused their dominant position in the firm to
influence management decision making for his personal gains. He and his family secured illegal
gains to the tune of 2743 crore by bloating the revenue of the firm through false sales invoices
and showing corresponding gains by forging the bank statements. They published financial
statements with inflated revenues for several years, thus misleading the retail investors and
sustaining high share prices in the stock market. In an attempt to cover the misconducts, he
sought to acquire the companies of his relatives which eventually led to the expose. CBI
investigated the case and filed the charge-sheet against the accused on grounds of criminal
conspiracy, forgery, and falsification of accounts.
This paper discusses corporate ethical issues from a submission perspective. It makes a
distinction between legal and ethical submission mechanisms and also shows that the legal
submission mechanism has clearly proven to be inadequate as it lacks the moral firepower to
restore confidence and the ability to build trust. An attempt to substitute accountability for
responsibility can result in an attempt to legislate morality. The focus of the virtues in
governance is to establish a series of practical responses which depend on the consistent
application of core values and principles as well as commitment to ethical business practice. In
my opinion, No one makes it to the top ranks of corporate management without a healthy
amount of self-assurance. Confidence underlies decisive, strong leadership, but does
overconfidence lead managers to cross the line and commit fraud? Some frauds evolve, not
out of pure self-interest, but because executives are overly optimistic that they can turn their
firms around before fraudulent behaviour catches up with them.
As a part of this study, I would be presenting the case in detail, identifying motivations behind
Mr Rajus unethical behaviour, and how similar happenings can be avoided in the future. Failed
institutions, including Lehman Brothers, Enron, and Satyam, would stand a testimony to this
commotion in this investigative analysis.
Introduction
The wrong in deception must be understood in terms of the burden on choice it imposes, I
have argued that lying imposes a more onerous burden on an audience than does misleading.
What Happened at Satyam
A firm named "Satyam" (Truth, in Sanskrit) is supposed to inspire trust. Satyam Computer
Services was one of the largest and was the one listed on the Indian and US Stock Exchange.
On 7 January 2009, the Chairman of Satyam, Mr. Ramalinga Raju issued a letter (the 7 January
letter) to the Board of Satyam and the Indian stock exchanges and confessed that the books
of Satyam reflected non-existent cash and bank balances, fictitious accrued interest, an
overstated debtor position and understated liability in an aggregate amount of 7136 crore
(approximately US$1.5 billion).
The September 2008 quarterly accounts did not reflect the true position of the firms revenues
and operating margins and resulted in artificial cash and bank balances of 588 crore
(approximately $120 million). Mr. Raju stated that the financial statements showed inflated
profits over a period of several years. Satyams stock price had been under pressure since midDecember 2008, when its Board announced the proposed acquisition of two companies
owned and controlled by Mr. Rajus sons, Maytas Infra Limited (a listed firm) and Maytas
Properties Limited, for an aggregate purchase price of approximately US$1.6 billion.
These two companies were in the infrastructure and real estate sectors and the proposed
acquisition was of secondary shares held by the existing shareholders. The acquisition
proposal was withdrawn after adverse investor reaction and four independent directors on
the Board resigned subsequently. In the 7 January letter, Mr. Raju admitted that the proposed
acquisition of the Maytas companies was an attempt to hide the gap in Satyams balance sheet
by acquiring real assets. The stock market reaction to the 7 January letter was immediate. The
share price fell from a high of 188 to a closing price of approximately 30 during the day.
On 7 January 2009, the Indian stock market regulator, the Securities and Exchange Board of
India (SEBI) commenced investigations under various SEBI regulations. The Ministry of
Corporate Affairs of the Central Authority separately initiated a fraud investigation through its
Serious Fraud Investigation Office (SFIO). In addition, the Ministry of Corporate Affairs filed a
petition before the Firm Law Board (CLB) to prevent the existing directors from acting on the
Board and to appoint new directors. On 9 January 2009, the CLB suspended the current
directors of Satyam and allowed the Authority to appoint up to 10 new nominee directors.
Subsequently, the new, six-member Board has appointed a Chief Executive Officer and
external advisors, including the accounting firms KPMG and Deloitte to restate the accounts
of Satyam.
Following the 7 January letter and in accordance with the requirements under the Indian and
the United States accounting standards, PricewaterhouseCoopers (PwC), Satyams auditors,
issued a letter stating that the audit reports and the opinion prepared by them for Satyam
should not be relied upon. Authority agencies including the Income Tax Department (for
income tax violations), the Enforcement Directorate (foreign exchange violations) and the
Provident Fund authorities (non-payment of compulsory contributory pension and insurance
dues) also investigated Satyam.
As the details of one of the biggest accounting frauds in India came to light, heads began to
roll. Ramalinga Raju and his brother were fleetly arrested on various criminal charges and an
investigation was initiated by the CID. Merrill Lynch and Credit Suisse terminated their
engagements with the firm. The New York Stock Exchange halted trading in Satyam stock on
the same day. India's National Stock Exchange has announced that it will remove Satyam from
its S&P CNX Nifty 50-share index on January 12. The scrip fell faster than a dive-bomber on
steroids and Satyam investors lost clumps of money in the ensuing bloodbath. The credibility
of Satyams statutory auditors, Price Water house Coopers (PWC) took a severe beating. PWC
partners in charge of the Satyam account were suspended. SEBI initiated an inquiry into its
audit process and threatened cancellation of its India license.
Mr. Raju, his brother (who was the Managing Director on the Board of Satyam) and the former
Chief Financial Officer (CFO) were arrested. Two PwC partners were also arrested in
connection with the fraud. Their bail applications have been refused by the Metropolitan
Magistrates court in Hyderabad and they continue to remain in police custody. The employees
of Satyam Computer Services were shocked to learn that the founder and chairman of their
firm, Ramalinga Raju, had resigned after confessing to a massive accounting scandal that had
been percolating for years. In Raju's words, "It was like riding a tiger, not knowing how to get
off without being eaten." The firm was soon dubbed "India's Enron". Stock markets reeled
and trading of Satyam's shares was suspended. And for the 53,000 employees of Satyam, life
would never be the same again.
2.
Countrys booming economy feared slight risk as countrys GDP fell by 0.4%.
3.
4.
The share prices of Satyam saw a sharp fall after Rajus Confession. The sharp prices
fell down from 190 to 30 (approximately) in a day. The scandal affected the image
of Indian Companies among foreign investors portfolio.
shareholders and other stakeholders and spells out the rules and procedures for making
decisions in corporate affairs. By doing this, it also provides the structure through which the
firm objectives are set and the means of attaining those objectives and monitoring
performance.
income taxation in the same way that gifts between persons are subjected to income taxation.
If the corporation were not a separate legal person (as, for example, in U.S. and English law a
partnership is not a separate legal person from the partners who compose it) the distribution
of dividends would not be a taxable event (because money would not be changing hands).
(ii)
Corporations are subject to civil liability that is distinct from that of its owners. Indeed,
one of the principal motivations for organizing business activities in the corporate form is that
corporate assets are legally separate from the personal assets of the corporation's
shareholders. Shareholder liability for corporate debts is limited to whatever assets owners
have contributed to the corporation in return for their ownership stakes.
(iii)
Corporations are subject to criminal liability that is distinct from that of its owners,
Virtues are traits of character that make a person a happy person, a firm a productive and
profitable one, a nation a great and fine nation. Virtues are acquired by habituation or
repetitive practice. Sporadic bursts of effort do not lead to the attainment of virtue. Also,
virtue is attained through continuity of effort, the constancy of trying each day. People who
habitually act well continue to do so even when they are confronted with difficulties since
virtues sustain them. Raju was compelled to act in the way he did by the circumstances
prevailing around him. Had he sustained to his virtues, he would never have showcase inflated
balance sheets which led to one of the largest scandals in history of corporate India. The
success of both (personal and professional) depends on the increase in virtues.
Virtues are good habits that are acquired by repetition which must follow the rule of right
reason (prudence). For example, for a person to acquire the virtue of self-mastery, he or she
must follow the rules laid down by right reason for the proper use of, for example, food, drink
or sex, for the preservation of oneself and the human species. To be virtuous, we must acquire
the habit of choosing to act well in a variety of contexts. The moral virtues also work according
to what Aristotle called the golden mean of human reason, which is the middle path that
reason indicates between two other paths that lead to excess or deficit (this middle or
mesortes is the summit or peak between the two extremes or vices).
Apart from the virtue of justice, every moral virtue has these two opposites: courage
(cowardice foolhardy), generosity (stinginess extravagance), humility (vanity pride). The
acquisition or development of virtues can be compared to that of becoming a good athlete performance is habitual or consistent, superior performance depends upon the ability to avoid
too much or too little, and no one reaches the highest level of athletic performance without
intensive practice. Leaders play a significant role in the development or erosion of virtue in
employees and other persons. Crisp and Slote (1998), MacIntyre (1984), and Statman (1997)
provide excellent and comprehensive discussions on virtue ethics. There are fundamental
virtues that are essential for any (ethical) decision-making agent. These are the four cardinal
virtues (from the Latin cardo which means hinge): prudence, justice, courage, and selfmastery. These cardinal virtues are the roots from which all other human virtues grow because
the former perfects all a persons natural powers in their functions in pursuit of good.
Prudence (also called wisdom, good judgment, competence, practical reasoning) is the habit
of recognizing good ends and choosing the most effective and efficient means of achieving
them. The wise or prudent professional knows what is worth pursuing and chooses the good
(legitimate) means. The imprudent person can see what the goals should be but he or she
cannot consistently find a good way of accomplishing these goals. There is a vice of what can
be termed a false prudence which leads people to seek only what is useful to their own
material well-being; examples of these are deceit, hypocrisy, and self-interested calculation.
Prudence is the most important among the cardinal virtues since it is necessary in order to
practice the others. Prudence can be equated to good judgment and right reasoning about
people and action. The prudent manager has a grasp of the complexity of the business
environment and instantiates the other virtues in a concrete situation. Going too fast means
concentrating excessive risk or abusing ones power (managers are not paid to take risk, they
are paid to know which risks are worth taking) corporate world, prudence is the virtue
necessary to select the most appropriate and effective means to attain the desired outcomes
through making the right calls. Prudence in business is fostered by developing a great
familiarity, beyond mere intellectual comprehension, with the different elements of business
decisions which must be known not only in their principles, but also in their concrete aspects.
Justice (commonly referred to as fairness) describes a situation or a habit in which one
constantly gives others what is their due so that they can fulfil their duties and exercise their
rights, and at the same time, one tries to see that others do likewise. For instance, the market
requires justice in exchange (for example, the payment of a just wage which ought not to be
solely determined by the market) and it is a criterion under which we can judge the whole
socio-economic system. Justice does not lead us to jump to conclusions or form hasty
judgments of others. To live justice is to respect another persons privacy which we need to
protect from the curious gaze of outsiders and not divulge in public what ought to remain
within the domain of the organization. Many injustices are committed by pronouncing
irresponsible judgments; every person and institution has a right to a good name. Calumny,
slander, malicious gossip constitute serious unjust assaults against persons and organizations.
Courage (formerly referred to as fortitude) is the habit moderating the emotions of fear or
boldness to achieve a rational goal. It is the ability to face and to overcome difficult situations
and the power to act even when we are afraid. In a business situation, courage may be required
to enable a person to overcome fear consistently and stand up for the rights of others, to
venture unpopular criticisms, to relocate incompetent employees, to proceed in difficult
downsizing or rightsizing exercises, to participate in politically charged labour-management
negotiations, or to take action in worthwhile projects in spite of the risks involved. The
courageous person should be contrasted with both the cowardly and the foolhardy or
reckless. Cowardly persons exaggerate the risk or danger of a situation/circumstance.
Foolhardy persons may be insensitive to the risks and dangers, and also suffer from the
consequences. Being courageous does not mean that person might never retreat from danger
or never assume a risk, but rather that this persons judgment about such situations is
consistently sound. It leads one to be patient when unpleasant things happen or in dealing
with obstacles, to overcome own whims, selfishness, laziness to face up to the normal
obstacles of everyday life, to bear sickness patiently, and to avoid outer display of bitterness,
bad temper, gloominess.
Self-mastery (also known as temperance or discipline) is the ability to have control over our
tendencies to laziness, anger, complacency, procrastination, and reluctance to fulfill our
responsibility. It can be defined as the virtue of moderating the disordered emotions of
enjoyment. It is required in business, for example, to overcome pressures to play favorites, to
be excessively frugal, or to waste money on luxuries.
If someone always acts cowardly, he or she cannot be a prudent person. On the other hand, if
someone is imprudent, then he or she may not be able to make proper decisions that are based
on the virtues of courage or justice. There is an interdependent relationship among the
cardinal virtues. More so, all other moral virtues hinge on these four fundamental virtues:
prudence (hinged to understanding, docility, shrewdness, etc), justice (hinged to order,
truthfulness, loyalty, mercy, etc), temperance (hinged to sobriety, continence, abstinence,
modesty, etc) and courage (hinged to patience, perseverance, constancy, etc). Because of the
interconnectedness of the virtues, growth in one reflects a growth in all, while a fall in one
results in a decrease in the virtuous life.
Lessons learnt
Listen to your mind in complying with law and to your heart in dealing with people.
Many good things done get washed away in one bad conduct.
Ability may take you to the top but it takes Character to stay there.
Conclusion
Failure in corporate governance is actually a real threat to the future of any
corporation/organisation. With effective corporate governance based on core values of
integrity and trust (reputational value) who was an companies will have competitive
advantage in attracting and retaining talent and generating positive reactions in the
marketplace if you have a reputation for ethical behaviour in todays marketplace it
engenders not only customer loyalty but employee loyalty. Effective corporate governance
can be achieved by adopting a set of principles and best practices. A great deal depends upon
fairness, honesty, integrity and the manner in which companies conduct their affairs.
Companies must make a profit in order to survive and grow, however, the pursuit of profits
must stay within ethical bounds. Companies should adopt policies that include environmental
protection, whistle blowing, ethical training programs and so on. Such compliance
mechanisms help develop and build corporate image and reputation, gain loyalty and trust
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