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THEGEORGEWASHINGTONUNIVERSITY

SATYAM:BROTHERLYDEMISE

THERISEANDFALLOFRAMALINGARAJU

SUBMITTEDTO

PROF.JohnW.Dunfee

AdjunctProfessorSchoolofBusiness

TheGeorgeWashingtonUniversity

BY

ChristinaCaraballoAnilCheerlaOmeedJafari

ASREQUIREDFORMANAGEMENTCOURSENUMBER28120BUSINESSETHICS

WASHINGTON,DC

May6,2010

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TABLEOFCONTENTS

COVERPAGE

TABLEOFCONTENTS

EXECUTIVESUMMARY

1. BACKGROUND

1.1INDIAINTHEGLOBALECONOMY

1.2EMERGENCEOFSATYAMCOMPUTERSERVICES

2. RAMALINGARAJUANDTHESATYAMSCANDAL

2.1FACTORSLEADINGTOTHEFRAUD

2.2AFTERMATHOFTHESATYAMSCANDAL

2.3VICTIMSOFTHESCANDAL

2.4CORPORATEGOVERNANCEISSUESATSATYAM

2.5ETHICALDILEMMASFACEDBYRAJU

3. HOSMERSSIXSTEPPROCESS

4. LESSONSLEARNED

5.RECOMMENDATIONS

8. CONCLUSION

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EXECUTIVESUMMARY________________________________________________________TheSatyamComputerServicesscandalbroughttolighttheimportanceofethicsanditsrelevancetocorporateculture.ThefraudcommittedbythefoundersofSatyamisatestamenttothefactthatthescienceofconductisswayedinlargebyhumangreed,ambition,andhungerforpower,money,fameandglory.ScandalsfromEnrontotherecentfinancialcrisishavetimeandtimeagainproventhatthereisaneedforgoodconductbasedonstrongethics.Inthisresearchpaper,weexamineindetailthegrossnegligenceofstakeholderconcernsandoverindulgenceofkeymanagementonapersonalandorganizationallevelinimmoralpracticesforpersonalbenefit.Wealsoassesstheimplicationsofethicsinthebusinessenvironment.WethendelveintotheethicaldilemmasfacedbytheexecutivesatSatyam,applyHosmersframeworktomoraldecisionmaking,andsuggestalternativestohandlesuchmoraluncertainties.Finally,weconcludebyprovidingrecommendationsforethicalcodeofconductinorganizationsandtheneedtofosteracultureofintegrityandtrust.1.BACKGROUND___________________________________________InordertoevaluateandunderstandtheseverityofSaytamsfraud,itisimportanttounderstandfactorsthatcontributedtothedecisionsmadebythecompanysexecutives.First,itisimportanttounderstandIndiaseconomicgrowthwithinthecontextoftheglobaleconomy.Second,itisnecessarytodetailtheriseofSatyamasacompetitorwithintheglobalITservicesmarketplace..And,finally,itishelpfultoevaluatethedrivingforcebehindSatyamsdecisions:RamalingaRaju.1.1 INDIAINTHEGLOBALECONOMY,2003PRESENT___________________________________________________

Brazil,Russia,IndiaandChinahavesolidifiedtheirplaceintheglobaleconomy.PositedbyGoldmanSachschiefeconomist,JimONeil,thesenations,commonlyreferredtoastheBRICNations,werebelievedtoemergeasthefourdominantemergingeconomiesofthetwentyfirstcentury.iIn2003,theypossessedonequarteroftheworldslandcoverage;approximately45%oftheworldspopulation;andacollectivegrossdomesticproductof$3.3trillion.iiBy2009,thesenationsnearlytripledtheirgrossdomesticproduct.iiiTogether,theBRICNationsarenowthelargestblocofemergingnationaleconomieswithintheglobaleconomy,outperformingotheremergingmarketsworldwide.By2025,economistshavepredictedthesefoureconomieswouldbehalfthesizeofthecombinedG6(USA,Japan,Britain,German,FranceandItaly)and,by2039,couldovertaketheG6.ivTheyarefixturesintodaysglobaleconomy.Geopoliticalrisks,increasingincomeinequality,andstructuralconstraintsinthesefoureconomiesnotwithstanding,globalizationhascontributedsignificantlytotheireconomicgrowth.Indiahasbenefitedimmensely.Itsgrossdomesticproduct(currentdollars)hasgrownatacompoundannualgrowthrateof14%since2003.vToday,itspopulationstandsat1.2

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billionpeople,a2%compoundannualgrowthrateoverthelastsixyears.viGivenitsabilitytosustainproductivityasitspopulationgrowsinsizeandskill,Indiasattractivenessasanemergingmarketisevident.DeregulationpoliciesadoptedbytheGovernmentofIndiahaveledtosubstantialdomesticinvestmentandinflowofforeigncapitaltothisindustry.Ithasdrawnnearly$90billioninforeigndirectinvestmentvii,andofthatamount,approximately28%wasachievedbetweenApril2009andFeb2010.viiiInthelasttenyearstheInformationTechnologyindustryinIndiahasgrownatanaverageannualrateof30%.Exportscontributetoaround75%ofthetotalrevenueoftheITindustryinIndia.Indiasgrowthisattributabletoitssurgeinproductivity.And,givenitsfavorabledemographictrendsandfurtherriseincapitalformation(accumulation)ix,Indiasinfluenceontheworldeconomyisimmediateandwidelyfelt.1.2EMERGENCEOFSATYAMCOMPUTERSERVICES.________________________________________________________SatyamComputerServices,Ltd.wasarisingstarintheIndianoutsourcedITservicesindustry.Thecompanywasformedin1987inHyderbad,IndiabyB.RamalingaRaju.Thefirmbeganwithtwentyemployeesandgrewrapidlyasaglobalbusiness.Itoffersinformationtechnology(IT)andbusinessprocessoutsourcing(BPO)servicesspanningvarioussectorsx,including:aerospaceanddefense,bankingandfinancialservices,energyandutilities,lifesciencesandhealthcare,manufacturinganddiversifiedindustrials,publicservicesandeducation,retail,telecommunicationsandtravel.By2003,SatyamsITservicesbusinessesincluded13,120technicalassociatesservicingover300customersworldwide.xiAtthattime,theworldwideITservicesmarketwasestimatedatnearly$400billion,withanestimatedannualcompoundgrowthrateof6.4%.xiiThemarketsmajordriversatthatpointintimeweretheincreasedimportanceofITservicestobusinessesworldwide;theimpactoftheinternetoneBusiness;theemergenceofahighqualityITservicesindustryinIndiaandtheirmethodologies;and,thegrowingneedofITservicesproviderswhocouldprovidearangeofservices.xiiiThefollowingchartshowsSatyamscompositioninrelationtoconsulting,systemsintegration,andoutsourcing:

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TheIndianITservicesindustryhaditsrisks:geopoliticalconflictinSouthAsiaandterroristattacksintheUnitedStates;Indianpoliticalinstability;restrictionsonforeigninvestmentdecisions;theimpactofexchangerateandtaxregimes;and,finally,lawsassociatedwithintellectualproperty.xivTocompeteagainstAccenture,BearingPoint,Capgemini,Deloitte,HewlettPackardandIBM,CSC,ElectronicDataSystems,InfosysTechnologies,TataConsultancy,andWipro,thecompanyembarkedonamultiprongedbusinessgrowthstrategy.First,thecompanywouldbuilduponitscustomerrelationshipstocrosssellitsarrayofserviceswhilemaintainingacontinuedfocusonenterprisewidebusinesssolutionsandhighqualityITservicesxv.Second,thecompanywouldexpanditsmarketsbypenetratingnewgeographicmarketsthroughoutNorthAmerica,Europe,LatinAmerica,andtheAsianPacificregions.xviThird,thecompanywouldfurtherdevelopitsindustryexpertisetoaccessnewcustomergroups,suchasmanufacturing,financialservices,etcxvii.Fourth,Satyamwantedtoattractandretaintechnicalassociatesandaugmentemployeetrainingtoimproveretentionandservicesofferingsxviii.And,finally,thecompanywantedtoenhancecapabilitiesthroughtechnicalalliancesandstrategicacquisitions,e.g.theproposedstrategicacquisitionofCitisoftplc,anicheorientedbusinessconsultancyintheUnitedKingdom.xixThismultiprongedbusinessgrowthstrategywouldbethestatedmeanstogrowSatyamandboostshareholdervalue.From2003to2008,innearlyallfinancialmetricsofinteresttoinvestors,thecompanygrewmeasurably.SatyamgeneratedUSD$467millionintotalsales.xxByMarch2008,thecompanyhadgrowntoUSD$2.1billion.xxiThecompanydemonstratedanannualcompoundgrowthrateof35%overthatperiod.xxiiOperatingprofitsaveraged21%.Earningspersharesimilarlygrew,from$0.12to$0.62,atacompoundannualgrowthrateof40%.xxiiiOverthesameperiod(20032009),thecompanywastradingatanaveragetrailingEBITDAmultipleof15.36x.xxivFinally,beginninginJanuary2003,atasharepriceof138.08INR,Satyamsstockwouldpeakat526.25INRa300%improvementinsharepriceafternearlyfiveyears.xxvSatyamclearlygeneratedsignificantcorporategrowthandshareholdervalue.

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ThecompanywasaleadingstarandarecognizablenameinaglobalITmarketplace.TheexternalenvironmentinwhichSatyamoperatedwasindeedbeneficialtothecompanysgrowth.But,thenumbersdidntrepresentthefullpicture.2.B.RAMALINGARAJUANDTHESAYTAMSCANDAL________________________________________________________TheSatyamscandalisaclassiccaseofnegligenceoffiduciaryduties,totalcollapseofethicalstandards,andalackofcorporatesocialresponsibility.Itishumangreedanddesirethatledtofraud.Thistypeofbehaviorcanbetracedto:greedovershadowingtheresponsibilitytomeetfiduciaryduties;fiercecompetitionandtheneedtoimpressstakeholdersespeciallyinvestors,analysts,shareholders,andthestockmarket;lowethicalandmoralstandardsbytopmanagement;and,greateremphasisonshorttermperformance.Greedformoney,power,competition,successandprestigecompelledMr.Rajutoridethetiger,whichledtoviolationofalldutiesimposedonthemasfiduciariesthedutyofcare,thedutyofnegligence,thedutyofloyalty,thedutyofdisclosuretowardsthestakeholders.xxviAccordingtoCBI,theIndiancrimeinvestigationagency,thefraudactivitydatesbackfromApril1999,whenthecompanyembarkedonaroadtodoubledigitannualgrowth.AsofDecember2008,Satyamhadatotalmarketcapitalizationof$3.2billiondollars.SatyamplannedtoacquireafiftyonepercentstakeinMaytasInfrastructure,aleadingInfrastructureDevelopment,ConstructionandProjectManagementCompany,for$300million.TheRajusshada37%stake.Thetotalturnoverwas$350millionandanetprofitof$20million.Rajusalsohada35%shareinMaytasProperties,anotherrealestateinvestmentfirm.Satyamrevenuesexceeded$1billionin2006.InApril,2008SatyambecamethefirstIndiancompanytopublishIFRSauditedfinancials.xxviiOnDecember16,2008,theSatyamboard,includingitsfiveindependentdirectorshadapprovedthefounder'sproposaltobuythestakeinMaytasInfrastructureandallofMaytasProperties,whichwereownedbyfamilymembersofSatyamsChairman,BRamalingaRaju,asfullyownedsubsidiaryfor$1.6B.Withoutshareholderapproval,thedirectorswentaheadwiththemanagement'sdecision.Thedecisionofacquisitionwas,however,reversedtwelvehoursafterinvestorssoldSatyam'sstockandthreatenedactionagainstthemanagement.xxviiiThiswasfollowedbythelawsuitsfiledintheUScontestingMaytasdeal.TheWorldBankbannedSatyamfromconductingbusinessfor8yearsduetoinappropriatepaymentstostaffandinabilitytoprovideinformationsoughtoninvoices.xxixFourindependentdirectorsquittheSatyamboardandSEBIorderedpromoterstodisclosepledgedsharestostockexch