This case has been compared to the Enron scam in the US, and indeed there are many similarities. These dodgy financial practices can work during a boom, but start to unravel in a slump. As the Indian economy also slows down, as export orders come down, and particularly as auditors and external investors start looking more closely at the books, there may be more unsavoury revelations emerging from the corporate world. If recent experience is any guide, maybe we should start by being especially suspicious of all award-winning companies,writes Jayati Ghosh on the Satyam scam.
The truly extraordinary story of the Satyam Computers scam has many interesting side features to it. It is of course an amazing tale in itself: a humongous corporate financial swindle involving account books that were not just cooked but made into the financial equivalent of gourmet fantasies, over a prolonged period of several years, all to inflate reported profits and returns so that stock market valuations would keep on rising.
The magnitude of the false numbers involved, the sheer brazenness of the lies and the fact that they could have continued undetected for so many year, are stupefying. But the issues that this particular case raises are not individual but systemic.
So far industry insiders and analysts have all gone on record to declare that this is an isolated case, of a single bad egg in an otherwise honourable and well-behaved corporate sector. But unfortunately this argument simply will not wash, because too many other players have directly or indirectly been involved in creating and building up this remarkable but ultimately fake story of successful entrepreneurship.
Much is already being made not only of individual greed that is supposed to have prompted this tale of financial mendacity on a grand scale, but of the agencies that enabled and possibly even encouraged it. Attention has been drawn to the obvious failings of the Board of the company, including its so-called "independent" Directors. The dereliction of the auditors, Price Waterhouse Coopers, is obviously coming under scrutiny.
But there are some other important players who celebrated Satyam Computers and its Chairman of the Board Mr. B. Ramalinga Raju all through this period, even up to just a few months ago – the national and international dispensers of entrepreneurship and corporate governance awards. Satyam Computer's much vaunted success was not only defined in terms of its rising share values and apparently remarkable returns: it was also because of the explicit recognition that came from national and international awards to the company and its managers.
Thus, Mr. Ramalinga Raju was named the "Entrepreneur of the Year" in 2007 by the consulting company Ernst & Young. Business media, including TV channels and journals, vied with one another to proclaim him "Man of the Year", "Business Icon", "Role Model for Young India", etc. Investor Relations Global Rankings (IRGR) rated Satyam as the company with Best Corporate Governance Practices for 2006 and 2007.
By the company's own reckoning, the most impressive achievement was bagging the "Golden Peacock Awards" for corporate governance, distributed by the UK-based World Council for Corporate Governance. These awards were received twice by Satyam - in 2002 and most recently again in September 2008. While receiving the award, G. Jayaraman, Satyam's Global Head of Corporate Governance and the Company Secretary, emphasised that "this honour demonstrates the value Satyam places on corporate governance, and on the importance of serving the interests of our investors, clients, associates and of society." The then Chief Financial Officer of the company, Srinivas Vadlamani, noted that this recognition was "/a testament to our efforts to continually innovate and advance corporate governance best practices in our industry and around the world."// /
And what was this particular corporate governance award for? It was under the category of special achievement in "risk management and compliance issues"!! It was further noted that the "importance of ensuring best practices in corporate governance is magnified in difficult economic environments"…
This is worth going into, because the Golden Peacock Awards are trumpeted as "the holy grail of corporate excellence", based on a rigorous and detailed two-tiered assessment process and presided over by a panel of forty extremely eminent independent judges. The Chairman of this particular jury in 2008 was the former Prime Minister of Sweden, Dr. Olla Ullsten. The panel included other international heavyweights like Baroness Sheela Flather of the British House of Lords; Dr Olivier Giscard d'Estaing, Founder and Managing Director of the famous European business school INSEAD; and the NRI businessman Lord Swraj Paul.
The Indian side of the panel was headed by Former Chief Justice of India P. N. Bhagwati and included other retired justices; current and retired senior bureaucrats like T.K.A. Nair, Secretary to the Prime Minister and N. Vittal, the Former Central Vigilance Commissioner; managers from Bollywood and corporate honchos like Rakesh Bharti Mittal.
Obviously, those who gave the award now have quite a lot of egg on their face, and the World Council for Corporate Governance has rushed in almost unseemly haste to withdraw this award from Satyam four months after granting it. But unfortunately, it cannot be expunged from public memory so quickly. The World Council may argue (like the Satyam Board members who are now protesting their innocence) that they had only looked at the audited accounts, and took everything on trust. And the eminent people who have lent their names to the jury may protest that they personally do not go over each entry with a toothcomb.
But then the question can legitimately be asked, why exactly are they there? What are they doing if not examining the legitimacy of the awardees? And why was Satyam Computers given this award anyway? Since it was not based on a detailed examination of the books it must have been based simply on the high returns that Satyam has been showing, returns that have now been exposed as fictitious. But surely profitability alone cannot be an indicator of "good governance", even in "difficult economic circumstances".
So what does this tell us about those who disburse this award? Essentially, they are obviously not objective assessors, but are hugely influenced by hype. In addition, they are dramatically behind the curve of events and do no more than reinforce whatever the market and media are together determining. When Satyam was riding high on the basis of bogus claims and falsified accounts, these high priests of corporate governance joined the crowds shouting hosanna, clearly without any proper investigations of their own. And only after Mr. Raju revealed at least some of the scam and announced his own downfall in his farewell letter, did the organisation rush to take back its award, once again without any real investigation of its own.
This is one more indicator of how the previous boom was so heavily reliant upon a mutually reinforcing set of players who could talk up the market through constant self-congratulation, often without much real economic contribution. The media played a big role in this too, lionising those who delivered profits and refraining from asking any really difficult questions.
But now that the scandal has broken, there must be many unanswered questions in every mind. If Satyam could get away with this for so long, and receive so many awards for doing so, what about other companies? How do we know that everything is in order in other corporate accounts, especially in other IT companies? After all, the same pressures for showing high profits to push up share prices, and the same lack of disincentives because of the still persisting tax holiday on the IT sector, presumably operate for them as well. And the complete ignorance of not only the auditors but regulatory authorities like SEBI with respect to the Satyam fraud suggests that other companies could also have got away with such malpractices if they had wanted to.
This case has been compared to the Enron scam in the US, and indeed there are many similarities. These dodgy financial practices can work during a boom, but start to unravel in a slump. As the Indian economy also slows down, as export orders come down, and particularly as auditors and external investors start looking more closely at the books, there may be more unsavoury revelations emerging from the corporate world. If recent experience is any guide, maybe we should start by being especially suspicious of all award-winning companies.