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Consulting|Technology|International business

The Satyam fiasco – Ramalinga Raju’s misadventures

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Sorry for not blogging about this earlier. I did not have access to broadband Internet at my home for the last 3 days and was working off my Blackberry for office related tasks.

While the economic and financial implications have been written about far and wide and everyone is busy reading the tea leaves, what are the lessons one take’s away from this? Before I begin my analysis, I would like to remind my readers that I had blogged on Corporate governance and sound accounting practices as early as 1.5 years ago on this very blog: https://ecofin.wordpress.com/2007/07/06/importance-of-accounting-for-the-business-world/ and on http://www.accounting101.wordpress.com AND on Corporate Ethics here: https://ecofin.wordpress.com/2006/11/16/corporate-ethics/ more than TWO years ago!

1. I think the Satyam management has not been transparent in their dealings. This is obvious to all and is a no-brainer. This is a lesson to all Indian corporate houses that we need to practice utmost transparency – in everything we do, business dealings (As the World Bank ban on Satyam showed, they have not even been transparent there) or in accounting (pulling up a Rs. 5000+ crore scam cannot be done by 1 Raju alone – it has larger ramifications).

2. There are almost half a dozen or more class action lawsuits against Satyam in the US. While ultimately, they will all fold into 1 single filing against Satyam, the costs to Satyam to bear with for all these lawsuits could run into 100’s of millions of dollars. Lesson learnt: Have enough whistleblowers in the top management who can sniff such phoney’s a mile away and reward them for their integrity and honesty. NR Narayanamurthy was talking about ET and others running a “Most respectable corporate person” award. I agree with this. Reward based on individual honesty/respectability and responsibility/integrity/ethics and values than on the growth projections and merely higher “beating the average every quarter and show consistent earnings growth”. Money can do strange things as we saw in Ramalinga Raju’s case. The future of 50000+ Satyamites alongwith another few millions of investors is in jeopardy largely due to him and his top management and this is due to his callous attitude to cheat the very company he created. It is suspected that his dealings with another company he promoted – Maytas Properties and infrastructure (and a subsequent plan to acquire Maytas infrastructure for $ 1.6 billion that was strongly rejected by Satyam shareholders and the investor community alike) is largely responsible for all this fracas and misdeeds of colossal magnitude. Again, pointing to the fact that Real Estate is such a murky business in India that it can sway even the most established stars into rut. The “love for land” is an old greed of mankind, but one needs to know where to draw the line between ethical business practice and greed when it comes to this. Unfortunately, Raju has proven that even CEO’s and Chairman of top blue chip corporates are not immune (aka Enron Arthur Anderson saga of 2001 that I was following closely then as well – the key architects of the Enron debacle then in 2001 – ex-Chairman of Enron, Ken Lay (http://en.wikipedia.org/wiki/Kenneth_Lay), its ex-CEO Jeff Skilling and ex-CFO Andrew Fastow).

People liken the Satyam controversy to the Enron controversy because it is quite similar. A Chairman being in the know cooks the books, a CEO is party to this crime and a CFO turns a blind eye to this. The auditors shred all accounting documents of this (in this case, Arthur Anderson accounting).

As a result, Ken Lay is today dead, Skilling is serving a 24-year jail sentence and Fastow is serving a 6-year jail sentence with 2 year community service.

In Satyam, we had Raju (ex-Chairman of Satyam) cook the books alongwith his brother – Rama Raju. We had the CFO – Srinivas Vadlamani sign on documents blindly or so he claims. And we had PwC (Pricewaterhouse Coopers) audit these false accounting statements (more than the Income statement, the Cashflow statement and the balance sheet). Not to mention the independent Directors and top management claiming, they had no clue of what was going on around them. They were caught napping at the right time – it appears! And most of those are esteemed names in the corporate world!

I even saw a movie (I had blogged about it earlier here: https://ecofin.wordpress.com/2006/11/16/corporate-ethics/) on this Enron scandal and what transpired. I am sure in future, there would be movies created on Satyam as well. There was already a Hindi movie I had seen on misdeeds of a cola company in India starring Bipasha Basu and some other ensemble of characters) – the movie was called Corporate – http://www.bollywoodmantra.com/movie-review/corporate-1/. 

I have followed EACH AND EVERY newspaper article and business news channel (my favorites – CNBC TV 18 and NDTV Profit) alongwith all regional dailies and it is sad to say a founder can back stab his own company. What was he thinking? Forget corporate governance, he lacked basic integrity, ethics and values. And after all, how much money does one need? He was easily one of the most respected person’s in the Indian IT service industry before all this happened so could he not have been content with that? That should have been ‘creation of company 101’.

3. The UPaid lawsuit against Satyam Computers for an IPR case running since a few years is estimated to be in the region of $ 1 billion if UPaid has their way. While not much is known on this in recent days on its outcome in the Texan court, SAtyam has this as a liability nevertheless. What does this teach Indian IT service companies. This should serve as a reminder call that when you are in the IT service business, you don’t create IP. As a result, when such scandals errupt, you are left with the pieces of dwindling customers, profits, employees – everything. You are losing your only source of income – human capital and customers. Instead, if they at least had IP, they had something intangible that had value that they could have banked on – in times of such crises. Instead, the IP they were involved with also landed them in trouble – like the UPaid/Satyam case of a few years.

Lastly, I strongly believe that other than the fact that our authorities took 3 days to arrest Raju, they have done things at their quickest pace after that. The Indian legal system and the MCA (Ministry of company affairs) have acted swiftly in appointing a new board after sacking the existing board (people would be nuts to trust the existing board after all the ruckus they have created in last 1 month alone).

I salute the Government of India for their speed (finally) and hope they will act to save the future jobs of over 50000 Satyamites and would do well to get the guilty parties to justice as quickly as possible. I have tremendous respect for HDFC Chairman Deepak Parekh who is part of the new Satyam board and hope they do justice to the customers, employees and all stakeholders of Satyam to get them through this difficult phase.

I wish the new board of Satyam the best of luck and hope they can again make it the gem it once was – I also hope and pray that all the Satyamites are secure in their jobs with the current board and am confident the new board will steer a clear path for Satyam to get it to being the prestigious company it once was (after all, it once was a top 4 Indian IT service company!).

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