Scandal at Satyam: Truth, Lies & Corporate Governance An Ethical perspective

Mr Raju, winner of innumerable awards of excellence, unarguably noticed once as one of the most successful

entrepreneurs, suddenly turns from a great leader to a great thief in a few weeks in the wake of India’s biggest corporate

scam amounting to over 1 billion USD. What could be the possible reason behind such a huge corporate fraud ? Why

could someone of the intellect & stature of Mr Raju do this ?

A Report presented by PGDM 2010-12 students at the Goa institute of management towards the partial fulfillment of the

course on Ethics and Corporate governance

Submitted By:

Abhimanyu Sukhwal

Meghna bhattacharya

Ahefaz khan

David Vaz

Ashwin Ramaswamy

PGP-1 Section “D”

Scandal at Satyam: Truth, Lies & Corporate Governance

Ramalinga Raju is one of the pioneers of the Information Technology industry in India.

He is the founder and Chairman of Satyam Computer Services Ltd. Ramalinga Raju was

born on September 16, 1954 in a family of farmers. He did his B. Com from Andhra

Loyola College at Vijayawada and subsequently did his MBA from Ohio University,

USA. Ramalinga Raju had a stint at Harvard too. He attended the Owner / President

course at Harvard.

Satyam achieved huge number of Awards and achievements under the leadership of

Ramalinga Raju. Detail of these awards can be viewed on Satyam Website. Some

of Ramalinga Raju’s awards and honors include Ernst & Young Entrepreneur of the

Year for Services in 1999, Dataquest IT Man of the Year in 2000, and CNBC’s Asian

Business Leader – Corporate Citizen of the Year award in 2002, Asian MAKE (Most

Admired Knowledge Enterprise) Award 2008, Partner Innovation Award for Anti-Money

Laundering (AML) solution 2007 etc.

Great Leader to Great Thief:

Amid of Economic Recession, Biggest news of 2009 start was, When Mr. Raju

announced, Satyam’s Financial statements are based on lies. Raju resigned as chairman,

revealing profits had been falsified for years and that $1 billion of cash on the books did

not exist. With this news, Satyam badly damaged on Stock Exchange and a big question

mark raised on Indian’s largest IT Company and its 53,000 Employees. Ramalinga Raju

resigned after revealing that he had systematically falsified the company’s accounts as it

expanded from a handful of employees into a back office giant with a workforce of 3,000

and operations in 66 countries. Mr. Raju said Wednesday that 50.4 billion rupees, or

$1.04 billion, of the 53.6 billion rupees in cash and bank loans the company listed in

assets at the end of its second quarter that ended in September were nonexistent.

Revenues for the quarter ending September 30 were 20 percent lower than the 27 billion

rupees reported, and the company’s operating margin for the quarter was a fraction of

what it declared, he said in a letter to the Bombay stock exchange authorities.

The Ethics perspective

In a four-and-a-half page statement to the Bombay stock exchange, Mr. Raju described a small

discrepancy that grew beyond his control. “What started as a marginal gap between actual operating

profit and the one reflected in the books of accounts continued to grow over the years. It has

attained unmanageable proportions as the size of company operations grew,” he said. “It was like

riding a tiger, not knowing how to get off without being eaten,” he wrote.

Mr. Raju said he had attempted and failed to bridge the gap, including an attempt in December to

buy two construction firms in which the company’s founders held stakes. Speaking of a “deep

regret” and a “tremendous burden,” Mr. Raju said that neither he nor co-founder and managing

director B. Rama Raju had “taken one rupee/dollar from the company.” He said the board had no

knowledge of the situation, nor did his or the managing director’s families.

In the light of various articles and documents publicly available, it is imperative that such a huge

scam and inflating of cash reseves isn’t possible without the management being aware of the same.

Considering the huge negative impact that the scandal had over the future of India IT industry and

over the life of its employees, and no visible logic in going forth with the overstated figures in false

financial statement, the issue is clarly unethical. There was no observable pattern in Raju’s behavior

since he had been appreciating the firm’s progress over the past and had been a role model for

others to follow, just before the revealation of the fraud.

Raju’s behaviour and actions in the light of the Kohlberg’s framework and the context of

shadow self

Kohlberg’s Stage 5 respondents are working toward a conception of the good society. They suggest

that we need to (a) protect certain individual rights and (b) settle disputes through democratic

processes. However, democratic processes alone do not always result in outcomes that we

intuitively sense are just. A majority, for example, may vote for a law that hinders a minority. Thus,

Kohlberg believes that there must be a higher stage--stage 6--which defines the principles by which

we achieve justice. Stage 5 respondents are working toward a conception of the good society. They

suggest that we need to (a) protect certain individual rights and (b) settle disputes through

democratic processes. However, democratic processes alone do not always result in outcomes that

we intuitively sense are just. A majority, for example, may vote for a law that hinders a minority.

Thus, Kohlberg believes that there must be a higher stage--stage 6--which defines the principles by

which we achieve justice.

In the light of the Satyam scam, one might infer that Mr Raju might have resorted to inflating

SATYAM’s financial statements to

Gain larger investor confidence

Huge Client confidence

Grab various new and bigger projects

Easily obtain funding/financing approvals from banks-

by showing a stronger financial muscle.

This was essential since in the prevalent IT sector, firm size and capabilities unarguably count a lot

in grabbing prospective assignments, since it’s the perception of prospective clients what really

matters at the end of the day. Satyam night not have grown at such a rapid pace had it been

transparent & honest in all of its dealings. Besides, he might be envisioning an aggressive

expansion/diversification strategy for huge growth by riding on a fake bubble of gaps between

actual Operating profits and those stated in the financial reports, which he would have possibly

absorbed/dissolved later on by adjusting from greater profits. One example of this is going for the

Maytas investment soon after which the scam revealed in public. Had Satyam/Raju been able to

contain such a big goof up under wraps even after Maytas acquisition, it might have driven off the

first few IT/Real estate giants in its revenues and profits, and nobody would be ever aware of such a

scam. Thinking that way, one can think of Mr Raju as a mastermind, who could play such a serious

game really well for years altogether, but just being unfortunate that things got out of his control all

of a sudden to irrecoverable & unmanageable extents.

Satyam made several freshers stand on their feet to get better jobs elsewhere across the globe and

attain on site exposure through Satyam. What Raju did was to keep the business of Satyam going at

any cost. One can see a very smart man in him when he understood that he should rather accept his

mistake than be caught by the USA laws . He had a selfish father in him too that he put a lot at stake

for Maytas. However, he resigned with a lot of dignity and his letter of resignation shows humility.

It takes a mammoth amount of courage to accept one’s mistake in public at a time when the media

is ready to blow everything out of proportion. Thus considering assuming truth in the claim that

not even a penny was misused by Raju or his family, only the charts and figures were inflated. If

all this was done for the common good of benefitting india’s masses with huge employment, and

positioning india better in the IT landscape, then Mr Raju would be placed at some of the

heighest levels ever in morality - Level 6.

Dr Karl Jung says that oppression of the shadow can lead us to the shadow overwhelming us and we

end up doing things that we earlier used to condemn. Same appears to be the case with Raju. Jung

says that there are undesirable qualities like greed and manipulation which we suppress and these

qualities enter our sub-consciousness. There, they remain active and finally emerge and force us to

do something which we might not have otherwise done. Satyam scandal involved greediness and

manipulation of information by Raju and his colleagues, which resulted in one of the corporate

India’s biggest financial scam.

Raju’s employees and Kohlberg’s framework

Raju’s employees who were aware of the proceedings of the scam when the financials were

constantly inflated would all be operating at Kohlberg’s morality stage number 1, since they were

afraid of loosing their jobs / careers with Satyam in the event of their revolting against the existing

malpractices. They choose to stay quiet over the issues in the fear of power authority of senior

management of Satyam.

Something larger than greed or mere projection ?

Several supporters of Raju’s actions claim that this was done largely to keep the businesses of

Satyam going, and he generated employment for some 50,000 plus odd individuals who were

provided employment despite having backlogs, low grades from unpopular universitites. By

bloating the figures he managed to cover up the aggressive growth despite not actually being

capable of the same, and made lives meaningful for those who would have never got decent jobs

had Satyam not absorbed them. However, it’s quite evident that indulging into such a big scam,

even for the benefit of the masses surely had its pie of side- effects for the entire indian IT industry

and investors, employess and other stakeholders of Satyam as a whole whose lives were made

miserable the moment the scandal was disclosed in public. Hence justifying such an act even with

the target of social benefit is all in vain.

My reaction if I were in those Shoes ?

Had I been part of the Satyam corporate scandal, as a member of one of the teams aware of the

wrong-doings, I would have firstly tried to convince the internal management to abolish such

malpractices for common good, and be honest, truthful & transprent in their financial reports. But

even if after repeated requests the scandal kept inflating, I would have firslt found out another

substitute job for myself so as to sustain my own career going forward, and as soon as I would quit

the organization, I would blow the whistle leaking out the entire fraud for common good.