The term 'gorvernance' derives from the Latin 'gubernare', meaning to 'steer'. In general corporate governance is the way by which companies are regulated, controlled and directed. Corporate governance simply means what is right and what is wrong for a company and how the company executives should work. Standards and principles of corporate governance are not codified in any single document. Corporate governance has undergone tremendous changes following the recent corporate collapses and economic scenario.
Cadbury report (1992) recommended a code of best practice which the boards of all listed companies registered in UK should comply  .
There were various others reports and committees as well reviewing corporate governance such as Greenbury report(1995), Hampel report(1998), Combined code(1998) , Turnbull(1999) , Myners(2001), Higgs(2003) , Smith(2003) , Combined code(2003) and many more in UK as well as in whole of the Europe.
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OECD which means organisation for economic co-operation and development provided with the standards & guidelines of corporate governance for all its member states.
Nearly in all the reports and codes shareholders interest is protected as well as the protection is also given for the stakeholders interest.
In the recent form of corporate governance rights, liabilities and duties of executives is also provided. Provisions are also provided for the compulsory existence of independent executive directors in a company for the protection of shareholders interests. Importance of shareholder activism is also being highlighted.
The changes in the standards and principles of the corporate governance have been made after looking into various corporate collapses through out the world so as to reduce such collapses and ensure security to the shareholders and the society.
ENRON is considered to be the biggest corporate collapse in the world so far which compelled the framers of the corporate governance to rethink and make some changes in the framework.
Enron was the 10th largest company in USA filed for the bankruptcy as a result of the weak corporate governance and fraudulent activities of the executives.
Parmalat is another big example of corporate failure considered to be as 'European Enron". Both Enron and Parmalat highlighted the essential functions of non executive audit and disclosure  . The failure also showed that how weak corporate governance of a company effects society as a whole.
In this course work we will be discussing about the failure and the fraud of Satyam computers limited.
Satyam Computers was the 4th largest IT Company in India. The founder chairman B Ramalinga Raju committed a fraud of 5000 Crores of rupees and stunned everyone.
The failure and the fraud is surely an example of weak corporate governance, monopoly of single executives and fraudulent behaviour of auditors and weak share holder activism.
Raju, 53, confessed in a letter to Satyam's board of directors to inflating profits for years with "fictitious" assets and non-existent cash  .
Now we will discuss in brief how company started, reached the heights of success and how a single person made a fraud of around 5000 crore rupees.
2. SATYAM COMPUTERS Ltd.
2.1. ABOUT THE COMPANY
The "Satyam computers" was established on 24th of June 1987 with headquaters in Hyderabad, with employee strength of 20 people founded by B Ramalingam Raju. B Ramalinga Raju was born in a farmers family & started his business with building construction and textile industry. Later converted his business into IT industry and formed "Satyam computers". Satyam Computers was operating in 66 countries with 53000 employees. Satyam specialised in the field of business software, back office outsourcing and consulting services.
Satyam was listed on Mumbai and New York stock exchange.
Satyam computers won the golden peacock award from group of Indian directors for excellence in corporate governance,
Satyam computers won an award from the London based world council for corporate governance for excellence in corporate governance.
Raju won the Ernst & Young 2007 entrepreneur of the year award  .
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Satyam was named as the official software provider for the FIFA world cup 2010 in South Africa and 2014 event in Brazil.
Satyam served for around 700 companies including 185 fortune companies. Satyam made half of its revenue from United States alone.
Satyam had been the head of the Indian outsourcing firm and a giant in the IT industry, and committed India's biggest ever corporate scandal which has same effect as of Mumbai bomb blasts. It may not have killed anyone but had the same impact on everyone's mind.
2.2. EMERGENCE OF DOWN FALL
Everything was going fine with the company. The only incident which indicated the downfall was when the World Bank blacklisted Satyam computers for bribing its officials and the other factor which ignited the whole fraud to be exposed was the rejection of Raju's offer by the share holders to purchase two constructions firms called " Maytas properties" and "Maytas infra" owned by his sons. This was the last step by the Raju to hide the financial irregularities. Shareholder's revolt harmed Raju's credibility and dropped down Satyam's share prices.
2.3. THE DISASTER DAY AND THE FRAUD
Satyam which means 'truth' in Hindi breached its essence when on the 7th of January 2008 the company's founder chairman B Ramalingam Raju unfolded the fraud of $1 billion committed by him and resigned from the post of chairman.
He admitted that company's profits had been falsely inflated for years which were not in existence and fictious. He admitted that about 94% of the cash listed in the company's balance sheet never existed. He later stated that he made a last attempt to cover up the cash in the company's balance sheet by buying two companies of his son that is "Maytas properties and Mayats infra" but the company board of directors rejected his offer. The deal was for $1.6 billion and this was the last attempt to cover up the Satyam losses. These acquisitions were to fill up the company's unreal assets with the real ones. Raju said he and his family has not taken even a single rupee from the company's accounts  . According to Raju there was total fraud of around 7000 crore rupees. Company overstated his assets and profits to impress and attract investors. This overstating in the companies balance sheet by the inflation of profits was to get more money from the investors so as to gain more wealth to overtake from other competitors and the desire to keep the company at the top. According to Raju this padding of company's balance sheet started few years ago and there was a marginal gap between the actual profits and what was shown in the company's balance sheet. He tried a lot to cover up the losses but it was like "riding a tiger, not knowing how to get off without being eaten"  .
Actually company was working fine and the financial health also looked fine "Satyam reported a 46.3% rise in the revenue to $2.1billion"  . Raju announced to make them better in the next year.
Raju had an idea in his mind to cover up the fake profit in the company's balance sheet by purchasing the two companies of his son. Company would have shown that they have invested the part of the profit which is shown in the balance in buying these two companies. The deal was expected to be of the same capital as the overstatement of profit in the company's balance sheet and he could have purchased his own two companies and would have shown that he purchased them from the company's profit amount. This was the actual plan of B Ramalingam Raju how to convert the never existing profits into the real ones. His idea was good but he couldn't make this deal real because of the opposition by other board of directors and share holders. But in no way we can defend a fraud whether it was for the benefit of the company or against the company. What Raju did was illegal in the eyes of law and he had to be punished for the same.
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His idea of showing fake profits and altered balance sheets led to the collapse of the company. Soon after the confession of the company's chairman there was a collapse in the Indian market and the sensex fell down by more than 5% and Satyam's shares fell down by almost 70%. Indian rupee fell down in the international market. New York stock exchange stopped working with Satyam anymore. "India's national stock exchange has expelled Satyam from all its equity indices and the Bombay Stock exchange is expected to follow a suit"  . Several other brokerage firms like Religare and Angel broking boycotted Satyam.
The impact of the Satyam fraud could be seen on other Indian firms and companies as well. Investors became cautious before investing there money in shares. Foreign investors started hesitating a lot in investing any money in India. It has harmed the image of the entire Indian economy in the international market.
It raised several questions on the corporate governance regulations in India.
HOW WEAK CORPORATE GOVERNANCE LED TO THE FAILURE OF SATYAM
Corporate governance includes how the work should be done in a company, how the executives should be regulated, role of auditors, share holders activism, role of independent executive directors and much more. Corporate governance is related to the entire working of the company.
In the case of Satyam as well there were many loopholes and signs of weak corporate governance which led to the failure of the company.
First sign of weak corporate governance was the concentration of power in the hands of a single executive that is Chairman (B Ramalingam Raju). He was acting independently without consulting other executives in the company. According to his confessional statement only he was known with the non-existing profits in the company's balance sheet and what ever fraud was going on in the company. This means all the work was regulated by a single person only who was holding less than 10% of shares in the company and all the other executives were silent and inactive.
Second and the most important sign of weak corporate governance was the suspicious role of auditors. Satyam's fraud is also called as an accounting scandal. Satyam's account books were audited by internationally recognised auditing firm "Pricewaterhousecoopers". How is it possible that they didn't come to know about the financial irregularities in the company's accounts. This was not the first time when work of this auditing firm was in question. In 2005, the Reserve Bank of India barred PwC from bank audits after it found that the firm under provided for non-performing assets of Global Trust Bank  . Auditors never ever complained about any of the financial irregularities in Satyam.
The third sign of weak corporate governance was the role of independent executive directors. Though company's board was having right number of independent directors and even one of them was the former professor of university of Harvard, even they never came to know about anything. In fact there main duty was to protect the rights of the share holders. Even they missed out all the frauds going on in the company.
The fourth sign of failure of corporate governance in Satyam's fraud is the lack of share holder activism. None of the share holders ever bothered or stepped forward to enquire and give their opinion in the working of the executives only one foreign investor stepped forward to stop Raju's plan of buying other two companies which exposed the whole fraud.
Another factor was the loop holes in the policies or the working of the government machinery. Government also never bothered to care about enquiring the assets and the expenditures of the company. They never checked the balance sheet of the Satyam and assets accordingly.
These are the signs of weak corporate governance which allowed such a fraud to happen which not only harmed the Satyam employees or shareholders it effected the whole economy and society nationally as well as internationally.
IMPACT OF SATYAM's FRAUD
Satyam's failure is a prominent sign of betrayal by one of the key and iconic figures in the country, Mr. B Ramalinga Raju  . This scandal affected the Indian economy and the IT sector as well. Investments in India by foreign investors decreased as they started hesitating before investing in India. One should understand that "Satyam's scam is not something that will shatter the peace and tranquillity of Indian public beyond repair"  . It is also not right to consider Satyam as a failure. It was a fraud actually what happened in Satyam and that resulted in fall of company's share value.
HOW TO PREVENT THESE FAILURES?
Principles and standards of corporate governance provided by different committees and codes should be observed very carefully. Each and every effort should be made to work on them.
There should be strict rules for the auditing and government should always keep an eye on the working of the auditors and the company.
Independent directors should be appointed by proper constituted committees and government regulatory authorities.
Share holder activism is the most essential part of corporate governance and it should be followed as well.
Concentration of power should never be in the hands of one or a few persons. It should be checked by the concerned authorities that all the major decisions are being taken by the majority of the board and in consultation of the shareholders, who are the actual owners of the company. It is the investment of the shareholders which is assigned to the board with a fiduciary duty to act for the profit maximization of these people.
4.3 ENDING NOTE
It is not possible to conclude such a fraud. Whatever ever happened was not only a fraud or failure of corporate governance but it was more than that. This event degraded the image of Indian IT industry in the whole world. Though government of India made some attempts to wash off the stains of Satyam by providing 2000 crore of rupees and establishing a new board for Satyam. Whole IT industry and Government of India has though appealed to whole world that this kind of incident will not happen in India again. Lets see will the local investors and international investors show there interest in investing in this sector again specially in Satyam computers. Let us see how the things go after this and hope for the best.