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The Satyam Computer Services' scandal brought to light the importance of ethics and social responsibility and its relevance to corporate culture. The fraud committed by the founders of Satyam is a testament to the fact that "the science of conduct" is swayed in large by human greed, ambition, and hunger for power, money, fame and glory. Scandals from Enron to the recent financial crisis have time and time again proven that there is a need for good conduct based on strong ethics. In this research paper, we examine in detail the gross negligence of stakeholder concerns and over indulgence of key management on a personal and organizational level in immoral practices for personal benefit. We also assess the implications of ethics in the business environment. We then delve into the ethical dilemmas faced by the executives at Satyam Finally, we conclude by providing recommendations for ethical code of conduct and social concern taken in organizations and the need to foster a culture of integrity and trust.
BACKGROUND In order to evaluate and understand the severity of Saytam's fraud, it is important to understand factors that contributed to the decisions made by the company's executives. First, it is important to understand India's economic growth within the context of the global economy. Second, it is necessary to detail the rise of Satyam as a competitor within the global IT services marketplace.Â Â . And, finally, it is helpful to evaluate the driving force behind Satyam's decisions: Ramalinga Raju.
INDIA AND SATYAM IN THE GLOBAL ECONOMY, 2003â€PRESENT
Brazil, Russia, India and China have solidified their place in the global economy.Â Â Posited by Goldman Sachs chief economist, Jim O'Neil, these nations, commonly referred to as the BRIC Nations, were believed to emerge as the four dominant emerging economies of the twentyâ€first century. Satyam Computer Services, Ltd. was a rising star in the Indian outsourced IT services industry.Â Â The company was formed in 1987 in Hyderbad, India by B. Ramalinga Raju.Â Â The firm began with twenty employees and grew rapidly as a global business. It offers information technology (IT) and business process outsourcing (BPO) services spanning various sectors, including: aerospace and defense, banking and financial services, energy and utilities, life sciences and healthcare, manufacturing and diversified industrials, public services and education, retail, telecommunications and travel.
RAMALINGA RAJU AND THE SAYTAM SCANDALÂ Â Â
The Satyam scandal is a classic case of negligence of fiduciary duties, total collapse of ethical standards, and a lack of corporate social responsibility. It is human greed and desire that led to fraud. This type of behaviour can be traced to: greed overshadowing the responsibility to meet fiduciary duties; fierce competition and the need to impress stakeholders especially investors, analysts, shareholders, andÂ Â the stock market. Greed for money, power, competition, success and prestige compelled Mr. Raju to "ride the tiger," which led to violation of all duties imposed on them as fiduciaries - the duty of care, the duty of negligence, the duty of loyalty, the duty of disclosure towards the stakeholders.
FACTORS CONTRIBUTING TO FRAUD
Numerous factored contributed to the Satyam fraud. "The independent board members of
Satyam, the institutional investor community, the SEBI, retail investors, and the external auditor â€â€ none of them, including professional investors with detailed information and models available to them, detected the malfeasance. The following is a list of factors that contributed to the fraud:
Ambitious corporate growth
Deceptive reporting practices-lack of transparency
Excessive interest in maintaining stock prices
Stock market expectations
Nature of accounting rules
ESOPs issued to those who prepared fake bills
Audit failuresâ€ Internal & External
Aggressiveness of investment banks, commercial banks,
Rating agencies & investors
Weak Independent directors and Audit committee
VICTIMS OF FRAUD
Employees of Satyam spent anxious moments and sleepless nights as they faced nonâ€payment of salaries, project cancellations, layoffs and equally bleak prospects of outside employment. "They were stranded in many ways - morally, financially, legally, and socially.
Clients of Satyam expressed loss of trust and reviewed their contracts preferring to go with other competitors. Cisco, Telstra and World Bank cancelled contracts with Satyam. "Customers were shocked and worried about the project continuity, confidentiality, and cost overrun."
Shareholders lost their valuable investments and there was doubt about revival of India as a preferred investment destination. The VC and MD of Mahindra, in a statement, said that the development had "resulted in incalculable and unjustifiable damage to Brand India and Brand It in particular."
Bankers were concerned about recovery of financial and nonfinancial exposure and recalled
Indian Government was worried about its image of the Nation & IT Sector affecting faith to invest or to do business in the county.
Unethical Business Practices
The Satyam scam is one more proof that these days there are many companies who blatantly
Thrive on unethical behaviour and practices. They seem to create an environment or try to
Promote one where acts of violation of norms to amass wealth in an unethical manner are practiced with impunity until such time it comes into the open. Companies like Satyam indulge in the following activities that come under the ambit of unethical practice:
Resorting to dishonesty, trickery or deception.
Distortion of facts with a view to misleading or creating confusion.
Manipulating executives emotionally by exploiting their vulnerabilities.
Resorting to profiteering due to excessive greed.
Over invoicing through false documents to show higher profits.
Using political clout to avoid penalty or compensation for unlawful act.
Lack of transparency and avoiding investigation.
Damaging the environment by violating the government prescribed norms for pollution.
Resorting to money laundering.
Diverting through foul means from a public limited company to family-owned concerns.
Abusing the legally constituted institutions such as boards of directors, auditors and
Independent directors to achieve nefarious ends.
CORPORATE SOCIAL RESPONSIBILITY AND CORPORATE GOVERNANCE ISSUES AT SATYAM
Indian business culture puts a premium on favors, friendship, and clanship.xlv The Western concept of conflict of interest does not always mesh well with the Indian value of loyalty. " On a quarterly basis, Satyam's earnings grew.
Mr. Raju admitted that the fraud which he committed amounted to nearly $276 million. In the process, Satyam grossly violated all rules of corporate social responsibility and corporate governance.
The Satyam scam had been the example for following poor governance practices.It had failed to show good relation with the shareholders and employees. Governance issue at Satyam arose because of non fulfillment of obligation of the company towards the various stakeholders.
Distinguishing the roles of board and management; separation of the roles of the CEO and chairman; appointment to the board; directors and executive compensation; protection of shareholders rights and their executives. Shareholders never had the opportunity to give their consent prior to the announcement of the Matyas deal.
Falsified documents with grossly inflated financial reports were delivered to them. Ultimately, shareholders were at a loss - and, cheated. Surely, questions about management's credibility were raised in addition to the nonâ€payment of advance taxes to the government. Together, these raise questions about Satyam's financial health.
ETHICAL DILEMMAS FACED BY RAMALINGA RAJU
An ethical problem cannot be resolved unless it is first recognized as a dilemma. "Reward or punishment to ethical integrity and moral courage decide the act of an individual."l The existence of rules, policies, job descriptions and cultural norms will discourage individuals from unethical behavior even if they have a feeble moral sense. But, in the presence of unethical organizational culture and structure, even highly moral individuals may become corrupt.
The culture at Satyam, especially dominated by the board, symbolized such an unethical culture. In the case of Mr. Raju, Satyam, as the smallest of the big four players, was under pressure to show extraordinary results in order to survive. Apart from that there was greed, perhaps reckless greed, causing the brothers to indulge in illegal and unethical activities.
On one hand, his rise to stardom in the corporate world coupled with immense pressure to impress investors made Mr. Raju a compelled leader to deliver outstanding results. On the contrary, Mr. Raju had to suppress his own morals and values in favor of the greater good of the company. The board connived with his actions and stood as a blind spectator. But, in the end, truth is sought and those violating the legal, ethical, and societal norms are taken to task.
The public confession of fraud by Ramalinga Raju speaks of integrity still left in the individual. His acceptance of guilt and blame for the whole fiasco shows a bright spot of an otherwise tampered character. After quitting as Satyam's Chairman, Raju said, "I am now prepared to subject myself to the laws of land and face consequences thereof." Mr. Raju had many ethical dilemmas to face, but his persistent immoral reasoning brought his own demise.
Satyam's fraud spurred the government of India to tighten corporate norms to prevent recurrence of similar frauds in future. The government took action to protect the interest of the investors and safeguard the credibility of India and the nation's image across the world. It has forced the government to reâ€write corporate governance rules and tighten the norms for chartered accountants. Some of the regulations include promotion of shareholders' democracy
with protection of rights of minority shareholders, responsible selfâ€regulation with adequate
disclosure and accountability and lesser government control over internal corporate processes,
voluntary corporate governance code, an institution of mechanism for whistle blowers, and a cap at 10 percent on the revenues coming from a single client to an audit firm. Promoters should be prohibited from interfering in the recruitment of independent directors. Independent directors should have challenging, skilled ID's, who have time to devote to the business, rather than well known faces. Additional lessons include having an effective 'whistle blower policy' in place, education on ethical values, criteria for remuneration to key personnel, and strengthening of quality review.
Lasting solutions can only be found by transforming human consciousness through an inner
discipline and higher moral reasoning. A company can build sustainable competitive advantage
through ethics, values, excellence, quality, social responsibility and human development. An
integrated, value based vision of leadership and governance will go along in creating corporate
governance. A transformed organizational culture which pays highest attention to ethical
conduct and moral values will strengthen sustainable roots of the company. Transparency and
effective auditing and regulatory checks through internal and external auditors and monitoring
agencies will help establish long lasting credibility for any company. Companies should gather
feedback, measure effectiveness, and continually improve their code of conduct. They always
distinguish between opportunities and temptations. No matter what heights a person may
reach, character must be maintained at any cost. Companies must take a step back when
presented with challenging decisions and individuals must listen to "the little voice in their
head" in complying with law and to their heart in dealing with people. When making corporate
decisions, it is important to not lose sight of the individual's ethical reasoning.
Personal ethics, selfâ€discipline, and high moral reasoning are critical to avoiding unethical
behavior. Some of the advantages of these elements include avoiding unethical behavior,
performing fiduciary duties, and resolving ethical dilemmas. But such personal ethics may put a
person in direct conflict with existing corrupt bureaucratic systems, increased ethical dilemmas,
and exposure to stress and intense emotional pressure.
Transparency in financial reporting as a moral duty and ethical conduct is also very important
for companies to adhere to in order to uphold ethical standards. Benefits from such
engagement include higher trust and loyalty from stakeholders, increased goodwill, and higher
investor confidence. Absolute transparency may lead to revelation of favorable and
unfavorable performance which in turn may result in loss of investor confidence and inability to
attract new capital. It is also important for companies to establish an organizational culture which supports ethical conduct through a code of conduct and properly laid out corporate governance policies and procedures. Advantages of this approach include fostering ethical behavior from employees, increased inner discipline, and providing value based corporate vision. However, such a culture will add new conflicts of interest, strict compliance with rules and regulations and extra supervision.
Social responsibility and Corporate governance framework needs to be implemented in letter as well as spirit. The increasing rates of white collar crimes demands stiff penalties and punishment. The small distortions created by few immoral executives lad far reaching negative consequences. Hopefully, creating an awareness of the large consequences of small lies may help some ton avoid this trap.