Tuesday, January 13, 2009

Letting Satyam fail is not an option

Salvaging Satyam

From The Statesman

Is Satyam Computer Services Ltd, India’s fourth largest information technology company that specialises in business software and back-office services, too important to be allowed to fail? What kind of rescue does it need? Can India handle the truth coming out of companies like Satyam?

What a shame! Last September, the World Council on Corporate Governance awarded Satyam Computer Services the “Golden Peacock Global Award for Corporate Governance.” Now the company is in disgrace for fraudulent accounting practices, which actually began to be exposed when the World Bank banned the company for eight years from doing business with it because of the allegation that Satyam had installed spyware on the bank’s computers and indulged in other illegal behaviours. Satyam huffed and puffed and demanded apologies from the Bank and threatened legal action. And now the revelation of fraud by the company’s storied chairman has begun to adversely affect the reputation of India’s entire outsourcing industry. Corporate India has never been de-hyphenated from rest of the world and in fact depends and thrives on the goodwill of others. It has nothing but its reputation and therefore needs extreme vigilance.

Just Imagine! PricewaterhouseCoopers, the company’s auditors, certified that the company was flush with cash (more than $1 billion) when actually it was scratching the bottom of the barrel. Satyam was supposed to be like the shining company on a hill. But now it has turned out to be just like another fraudster and ranks with one of the worst American companies like WorldCom that went bust a few years ago.

Ramalinga Raju, Satyam’s founder and former chairman, who has an MBA from Ohio University, should have known how corporate heads get chopped off in the United States. He should not have forgotten the fate of WorldCom. In July 2005, the former chief executive, Bernard Ebbers, of WorldCom whose $11 billion fraud dumped the telecommunications company into bankruptcy, was sentenced to serve 25 years in prison. The former financial chief officer of the company, Scott Sullivan, who pleaded guilty and testified against his former boss, told the jury that he had warned Ebbers that accounting adjustments, creative accounting or cooking books could not be justified. Ebbers told him nevertheless that the company had to “hit the numbers,” and meet the financial and revenue targets. Ebbers of course blamed his underlings for the fraud, said to be one of the largest in the US corporate history. When WorldCom real earnings could not meet the forecast, Ebbers asked that the accounting department to “adjust the numbers.”
Corporate accounting department are notorious for spinelessness. Outside auditors want to retain their clients and sing the company’s song. Wall Street analysts and financial journalists (some of whom work as unpaid employees of big corporations rather than watchdogs of public interests) went along with the web of lies woven by WorldCom team until the whole edifice began to collapse in 2000; and the share price crashed.

Ebbers’ personal fortune was also tied with WorldCom’s market share price and in order to keep it high, he raised analysts’ expectations. One cannot get away with lies for too long, but sometimes the price a company and eventually the public pay is too high; and the damage to the reputation is irreparable. It seems Satyam was re-enacting the WorldCom old play. Good corporate leadership is essential, but the news media and shareholders should not turn company founders and CEOs into national icons.

Corporate leaders rise to power on the promise of raising profits, market values and corporate growth but they should be watched where they are taking the company. Boards of directors need to play a bigger role in the running of the companies and their interests should go beyond maximising profits.

No one should be allowed to get away with excesses. What goes through the brilliant heads of these brilliant people that they begin to think of themselves as unbeatable once they sit on the top floor is beyond anyone’s comprehension. Riding a tiger by a circus man may be fun to watch but not when a company CEO does it. India needs to pay attention to corporate governance which is unfortunately based on secrecy and authoritarianism, not on internal checks and balances.

In contrast, democratic governance is based on a healthy distrust of people in power. The built-in checks and balances along with a free Press have kept politicians from abusing power by exposing them to public ridicule, threatening to impeach them or put them in jail. Presidents, state Governors and legislators have been disgraced because of their abuse of power.

Watch the unfolding American drama of political corruption in Illinois where Governor Rod Blagojevich was arrested (and let out on bail) on the charge that he tried to sell President-elect Barack Obama’s Senate seat to the highest bidder. He has been impeached by the Illinois House and faces trial in the state Senate.

The democratic system does not leave the functioning of the political system to the innate goodness of the people seeking power. Nor is good behaviour left to any kind of special education or training in ethics course work in schools or colleges. The temptation of power or the compulsive need to maintain the company’s public reputation trumps everything else; so transparency and accountability are indispensable to corporate governance. That unfortunately is not the case with financial markets where most middle-class people, whether Americans, Indians or Chinese, are vested through their pensions and other retirement accounts.

Today, we live in a world where corporations influence and control most of our activities. We are at the mercy of transnational corporations like Satyam that employ thousands of highly educated people and are integrated globally with hundreds of other companies.

Letting Satyam fail is not an option for India; nor is its nationalisation, though temporary takeover by the government to stabilise the company and restore global confidence may be essential. After all, no one has questioned the quality of products and services that Satyam provides to the corporate global. Its intellectual and technological foundation is strong. But to avoid clockwork corporate scandals, India needs a culture of skepticism not corporate myth-making. The news media through its investigating reporting should assume the role of outside auditors.

(ND Batra is professor of communications at Norwich University)

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