India's Enron

2008 has been an eventful year with newspaper dailies overflowing with content around the globe. Be it the economic meltdown, Barack Obama’s win in the US presidential elections or the worst terror strike India has ever seen, the events of the last year have changed millions of live, some directly and some indirectly. However, the event that has really influenced my thinking has been the recent fraud exposed at the Indian IT giant Satyam Computers. Being an Indian Information Technology professional, the fraud seems so much closer to me than any other event could ever be.

In one of the biggest frauds in India's corporate history, B. Ramalinga Raju, founder and Chairman of Satyam Computers, India's fourth-largest IT services firm, announced on January 7 that his company had been falsifying its accounts for years, overstating revenues and inflating profits by $1 billion. This is particularly ironic since just three months ago; Satyam received a Golden Peacock award for Excellence in Corporate Governance from London-based World Council for Corporate Governance.

This incident is like an eye opener for me and an early lesson on how corporate governance can make or break corporations and with it, the lives of those associated with these corporations. Corporate governance as the name suggests is a system of governance to administer, control and orient the management activities towards the interests of shareholders and other stakeholders.

History of the corporate world shows many instances of the failure of “Corporate Governance”. The Satyam incident in particular deserves attention for a number of reasons including the fact that it is the first of its kind (in scale) in India. When the news broke out, it really made me think about key aspects of corporate governance, why companies indulge in such acts and what are the different measures regulatory agencies and governments have taken to ensure that such acts of financial malfeasance do not occur.

Corporate governance emerged as the new focus among corporates across the world post 2001, when, what was touted as the biggest corporate scandals in the business history - the” Enron Scandal” was unearthed .Enron Corporation was a leading American energy company until it was revealed that the firm's success turned out to have involved an elaborate scam. Enron misrepresented its accounting numbers and was accused of being involved in a range of fraudulent practices, including concealing debts so they didn't show up in the company's accounts. As the depth of the deception unfolded, investors and creditors retreated, forcing the firm to declare bankruptcy. The accounting fraud at Enron, initiated by its senior executives including CEO out of their personal greed at the expense of their employees and the American public, is considered a landmark case in the field of business fraud .This scandal brought into question the accounting practices of many corporations throughout the United States. Such was the societal effects of this scandal that there were cases of striking parallels being drawn between September 11 attacks on the USA and the collapse of Enron.

Along the lines of Enron is the Satyam fraud where Satyam's chairman admitted in a letter addressed to the market regulator Securities & Exchange Board of India (SEBI) that he was involved in tampering the account books to create fictitious assets. What makes Satyam’s case even more disturbing is that it was listed on New York Stock Exchange (NYSE) which mandates a higher level of governance.
Satyam, which ironically means "truth" in Sanskrit, has dealt a severe blow to the pristine image of business in post-reform India which has not only impacted brand India and the IT sector, it could also impact the capital flows into the country. Satyam fraud branded as the largest corporate fraud in Indian history could not have come at a worse time for corporate India. With the world economy facing a recession, caused by the US subprime crisis, and growth in India slowing, this crisis impacting one of the biggest Indian software companies could have devastating impact on the Indian economy.

It is indeed unfortunate that the same Information Technology (IT) sector in India which holds the distinction of advancing the country into the new-age economy is in the news for all the wrong reasons. It is a well known fact that the success of Information Technology in India post-economic reforms in 1991 not only had economic repercussions but also had far-reaching political consequences. India's reputation both as a source and a destination for skilled workforce helped it improve its relations with a number of world economies. The Satyam scandal has raised a serious question-mark on the credibility of IT outsourcing services being offered by India which constitute more than 65% of IT outsourcing and around 45% of ITES share of the world’s market. As India's IT firms handle sensitive financial information for some of the world's largest enterprises, there could be an impact on the trend of outsourcing to India.

All of this makes me wonder how individuals involved in such frauds can be so selfish and avoid seeing the far reaching impact their actions can have on other people sometimes even nations. Massive scams like these apart from affecting the economy have serious consequences on the innocent-stakeholders who suffer for apparently no fault of theirs. Thousands of Enron employees and investors lost all their savings and pensions when Enron collapsed. Similarly, Satyam shareholders took a direct hit as the company's share price crashed 77% on the day its Chairman made the mind-boggling confession. And not to talk of the 53000 Satyam employees, barring any miracle, most of these people would lose their jobs. With the IT sector hit hard by the economic downturn in the United States, and the other big three Indian IT giants (TCS, Wipro and Infosys) dealing with layoffs of their own, there is not much appetite to accommodate any of the 53,000 employees. As an employee, even the thought of finding me in such a situation is disturbing.

Another aspect which I believe has not found support yet is the impact of this fraud on the various social and philanthropic causes associated with Satyam. For instance, The Byrraju foundation, an initiative by Chairman Raju is a huge project involving 200 villages and covering one million people, according to reports. Similarly there are around 1/2 million homeless children who are in Satyam foundation camp and under care indirectly. With Satyam future itself not clear, projects like these are bound to suffer and that will impact heavily the millions of lives dependent on them.

Now all these things raise a very important and critical question: What triggers such kind of financial skullduggery? I believe there are several reasons for this to happen. What happened in the case of Enron or Bernard Madoff (who orchestrated a US $50 investor fraud) is a clear cut indication of greed where senior management not only tried to escape the sinking ship but also made sure they made the most money off it in a clear insider trading. However Satyam episode reveals one more factor: immense pressure on companies to maintain their financial performance. But I believe that whatever be the reason, financial cleverness is no substitute for a good corporate strategy.

While upholding ethical values is the primary responsibility of the individual, scams like the Satyam fraud also indicate failure of all the checks and balances on corporate governance: board of directors, external accounting firm, market regulator, Stock Exchange, and ultimately the press.

Satyam failure very clearly shows that the involvement of the board was at the strategic level while it is the founder who is the real power-centre. This renders the board practically ineffective. I believe that this calls for a change in the ownership structure which involves the separation of the Chairman and CEO posts. However as per a recent data, out of the 30 companies that constitute the Sensex, the benchmark share index of the Bombay Stock Exchange, only 19 have split the positions of the chairman and the CEO. Even if some companies that have split the roles, the division of powers is merely cosmetic as both the roles are played by the members of the promoter family such as seen in the Satyam case. This basically defeats the purpose of a regulation enacted by the Securities and Exchange Board of India that calls for an increase in the number of independent directors serving on the boards of large Indian companies. Here Indian companies could take a cue from Europe and the UK where splitting of the roles is considered the bulwark of corporate governance.

Also the regulator’s role is very critical in preventing such scams as the regulator is the ultimate authority on managing to check frauds by setting up required checks and balances. Satyam scam puts the focus on whether there is enough oversight in all of the publicly traded companies. If this thing can happen in what was until recently a much respected company that boasts of a clientele including 150 of the Fortune 500 companies, it could very well happen in any other company.

Though the authorities around the world have taken strict measures to protect shareholders and the general public from accounting errors and fraudulent practices in the enterprise, massive financial frauds keep on happening time and again. One such measure was the Sarbanes-Oxley Act of 2002, a legislation enacted in response to the high-profile Enron financial scandal. This Act covers range of issues such as auditor independence and corporate governance and is considered one of the landmark acts passed in the US.

One of my key learnings from this incident is that business is not only about growth or accumulating wealth and status. It is about being a good corporate citizen. This is the model to follow for any corporate operating in any part of the world.

At the same time, I have understood that although non-ethical business practices might tender some short-term gains but to grow in long-term, high emphasis on corporate governance is critical .This is the thing which makes difference between companies like Infosys, well-known for its integrity and companies like Satyam who are on the verge of collapse. I can now see the value addition in even small steps taken by companies such as Adobe etc. to garner a work-culture operating with the highest ethical standards.