Governance Failure at Satyam

It was like riding a tiger, not knowing how to get off without being eaten
-

B. Ramalinga Raju

When Ramalingas once in a life time quote become public, somebody ridiculed he should
have figured out the get off without being eaten problem before getting on the tiger. But then
the other said did not he know from the start that it was a tiger?
The problem with ethics in business, or in more open words, the problem with fraud in
business is that people know that they are coming fraud but they are too much self-absorbed to
know that they would be caught. The case Satyam fraud was an eye opener for everyone who has
a part to play in the business chain the promoters, employees, auditors (both internal and
external), customers, shareholders, board-members, executives, creditors, institutional banks,
regulatory bodies and even the Government. Just because regulators and Government were not
directly linked to the functioning of the company they cannot deny that they were faultless or
knew nothing or were not supposed to know anything.
Satyam case especially shouts out loud this same point. Satyam failed because none of its
link in Satyam business chain thought it was his/her responsibility to proactively look into the
black smoke passing over the Satyam. Or at least, everyone was so sure of their success story
and busy in making of Satyam that nobody was lousy enough to check what is going at the
backstage.
Satyam failure can be classified into four major errors:
a) Related party transaction: Investopedia defines related party transaction
as A business deal or arrangement between two parties who are joined by a
special relationship prior to the deal. Usually in business any such deal
should raise suspicion and call for background check. The case of Satyam
trying to acquire Maytas Infra was one such case that no one looked into. In
India section 188 of the Companies Act, 2013 now take cares of such
mishaps.
b) Obligations of Board - What are the obligations of board members toward
the company? Is it just to sit on board while Chairman alone takes all the
decision? This is also one of the key issues that came forward from the
Satyam case.
c) Director's Remuneration- Executive of any company are compensated by
fee/salary or by shares. In some cases they are also remunerated by the
numbers of sitting in the board meetings. Is this the right parameter to bind
the working of executives and board members?

Governance Failure at Satyam

d) Role of Auditors (Internal & External) How is that the body who has been
tasked to act as a cop turned out to be a conman? PwC was the auditor of
Satyam Computers Ltd. However, it helped Satyam in committing fraud. Why
does not India have laws that restricts such auditing and accounting firms to
provide non-auditing services the same way many European countries do?
e) Presence and composition of various board committees - The role played
by board committees was really questionable. Instead of sticking to the
calamity and solving it, various executives decided to resign so that they
would not be linked to a sinking ship. How good was this governance model?
Overall, it can be said that, the fraud was not done by one man. It was done
by the promoters who decided to blindly act, on creditors who gave credit
without questioning and auditors who were equally responsible in covering
up the fraud.