14th November, 2009 Satyam Case studyIntroduction/Background

“On 7th January, Wednesday, Satyam Computer Services Chairman B Ramalinga

Raju resigns and disappears after confessing to the largest fraud of Rs. 7,136 crore

in Indian corporate history. He admitted to committing a gigantic fraud that shook

corporate India and the stock markets to the core. In a letter to the board, Raju, 54,

unburdened his conscience and admitted that there was a huge hole in the

company’s balance-sheet created by reporting “inflated profits over a period of the

last several years.” He tried to fill this “gap” by announcing the merger of Satyam,

India’s fourth largest software firm, with two family-owned companies, but an investor

revolt aborted the move. The Sensex lost 749.05 points, or 7.25%, to end at

9,586.88 on 7th January after Mr Raju admitted the fraud. It eroded Rs. 2,13,000

crore of investor wealth. Satyam investors lost Rs. 9,327 crore as the share went into

a free fall, from Rs. 179 on 6th January to Rs. 39.95 on 7th January.In his letter he

stated that there was Missing cash/bank balance of Rs. 5040 crores plus missing

interest income of Rs. 376 crores plus understated liabilities of Rs. 1230 crores plus

overstated dues to company of Rs. 490 crores adding it up Rs. 7136 crores was total

missing amount. He also said that ‘Every attempt to eliminate the gap failed. It was

like riding a tiger, not knowing how to get off without being eaten’.”

Objectives

To identify a problem statement

To identify causes of a problem statement

To analyse the ethical issues involved in stated problem statement.

To provide determine and evaluate the alternatives.

To provide recommendation/s to solve the problem.

Problem statement:

Negligence of fiduciary duties, maintenance of ethical standards and CSR in attempt

of covering up for accounting gap created by cooking up financial books over the

years.

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14th November, 2009 Satyam Case studyCauses of the Problem:

Power of greed overshadowed the responsibility to meet fiduciary duties.

Low ethical and moral standing of the top management.

External factors are fierce competition and the need to impress the investor,

analyst, shareholder, and stock market

The other lacuna in the modern financial world is lack of human touch.

More focus on short term gains

Analysis of the Causes of the Problem

Satyam is an ‘aberration’, it is a human greed, human desire which made this

fraud possible. Greed for money is not only the greed: greed for power,

competition, success, prestige (as Mr Raju did win many accolades and

awards) may compelled the highly educated man to ‘ride the tiger’ which

resulted in violation of fiduciary duties by the executive and independent

directors of the company. They have violated all duties imposed upon them as

fiduciaries – the duty of care, the duty of diligence, the duty of loyalt , the duty

of disclosure towards the stakeholders.

Low ethical and moral standards as they involved in following :

1. Fudging Numbers: Pumped up revenue, profit, bank deposits, and cash

reserve numbers.

2. Undisclosed pledges: Procured a loan of Rs.1230 crore without disclosure

3. Insider trading: Sold most of his 26% stake while tweaking numbers to keep

share price high.

4. Take Over code: Probable violation if he knew when his stake fell below 5%

5. Foreign Exchange Management Act: Converted fictious export income into

cash.

It is also believed that this is not one man’s role, many company officials and

political backup influenced this happening.

Satyam experienced a pressure to perform and satisfy investor’s

expectations. In today’s go-go growth of grab companies are often compelled

to show-off, window dress to convince customers and attract investors.

Satyam has incurred the loan of Rs 1230 crore from various sources so they

were under a pressure to show rosy picture of a company otherwise creditors

would have been sceptical. Temptation to be the best and aggressive growth

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14th November, 2009 Satyam Case studymay create a temptation to follow easy and crooked path. Satyam did not

shared much transparency with shareholders, so to keep them in confidence

Raju got caught in vicious circle of cooking up books and it increased the gap

over the years.

It is notion that money and trust are poles apart but in modern era trust is the

major component in financial institutions. Wealth is often considered as an

instrument for fulfilling the basic needs, legitimate desires and the higher

aspirations of human beings. This human factor is totally obscured when the

main focus of financial management is quantitative number crunching and

speculative manipulation.

Satyam did focus on the short term gains rather than long term strategies to

flourish the company thereby engaging in cooking up the accounting books

and then without consideration of shareholders in order to rectify the gap

made an attempt to buy share in sister concern Maytas for $1.6 billion which

was although granted by board but shareholders experienced an objective

conflict of interest. However, the deal was called off.

Alternatives

1.Personal ethics, the self discipline & high moral reasoning is a key to avoid unethical

behaviour.

Advantages Disadvantages

Helps to avoid the path of Unethical

behaviour

Increased Ethical Dilemmas

Help to keep up with fiduciary duties Survival becomes difficult for the

individual in corrupt and bureaucratic

Systems.

High moral reasoning helps to

resolve ethical dilemmas logically.

May have to deal with stress and

pressure

2.Transparency of the company’s activities in company books as moral duty and

ethical conduct.

Advantages Disadvantages

1)More trust and loyalty of stakeholders 1)Proactive Competitors

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14th November, 2009 Satyam Case study2)Enhanced Goodwill 2) May not always enhance goodwill if

company is exposing both favourable and

unfavourable part.

3)Increased Investor’s & shareholder’s

confidence

3)Difficult to gain stakeholder’s confidence

&company may face reduced attractiveness

for investors

3. Creating the organization culture that supports ethical conduct by well defining the

tools like Ethical code of conduct, Considering CSR & Corporate governance with

due diligence

Advantages Disadvantages

1) Encourages employees to speak the

language of ethics

1) May increase conflict of interest

2) Aids in increasing inner discipline 2) Employees may feel they have to abide by

rigid set of rules and regulations

3) Give the organisation a value based

vision to follow

3) Requires more supervision that includes

time & cost

Recommendations

Who can guide the guardian? The lasting solution to the problem lies in a

transformation of human consciousness through an inner discipline & high moral

reasoning..The long term and sustainable competitive advantage is through ethics,

values, excellence, quality, social responsibility& human development. In addition to

this the manifesto of corporate governance must provide an integrated, value based

vision of leadership and governance. Only writing in books that we care for ethics &

CSR is not a help, organization’s culture has to be painted with ethical conduct and

moral values to strengthen the roots of the company. Transparency of the company

activities and effective regulatory checks through authorised internal & external

auditors and regulated bodies like SEBI plays an essential role.

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14th November, 2009 Satyam Case study

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