Satyam

Learnings of Business Ethics through Satyam Scandal Business Ethics Submitted by: Group 4 Chitra Yadav (91076) Neha Mittal (91095) Priyank Chhabra (91098) Shweta Kathuria (91108) Sowmyadeepthi KVN (91111) FMG 18 B

Submitted to: Mr. Jitender Chaudhary Faculty, Business Ethics FORE School of Management, New Delhi

Table of Contents

1. India in the Global Economy, 2003‐2008 .................................................................... 3 2. Emergence of Satyam Computer Services .................................................................. 4 3. Defining Business Ethics .............................................................................................. 5 3.1 Forces That Shape Business Ethics ........................................................................... 7 3.2 Ethical and unethical practices in a corporate environment .................................. 7 4. Satyam Case Revisited .................................................................................................. 8 4.1 What Went Wrong? .................................................................................................... 8 4.2 Time Line ..................................................................................................................... 9 4.3 Dynamics Generated ................................................................................................. 10 4.4 Who is responsible? .................................................................................................. 13 4.5 Why did it happen?................................................................................................... 14 5. Aftermath of Satyam Scandal .................................................................................... 16 5.1 Effects of Satyam Scandal on Various Stakeholders ............................................. 16 6. Ethics in Business ........................................................................................................ 18 6.1 Ethical Dilemmas Faced By Ramalinga Raju ........................................................ 20 6.2 Principles on Which Businesses Must Operate ...................................................... 23 7. Handling of Crisis ....................................................................................................... 24 8. Applicable Regulations ............................................................................................... 30 9. How this could be avoided in future? / Recommendations ..................................... 32 10. Learnings ................................................................................................................... 34 References ........................................................................................................................ 35

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1. India in the Global Economy, 2003‐2008 Brazil, Russia, India and China had solidified their place in the global economy. 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 twenty‐first century. In 2003, they possessed one‐quarter of the world‘s land coverage; approximately 45% of the world‘s population; and a collective gross domestic product of $3.3 trillion. By 2009, these nations nearly tripled their gross domestic product. Together, the BRIC Nations were the largest bloc of emerging national economies within the global economy, outperforming other emerging markets worldwide. By 2025, economists have predicted these four economies would be half the size of the combined G6 (USA, Japan, Britain, German, France and Italy) and, by 2039, could overtake the G6.

Geo‐political risks, increasing income inequality, and structural constraints in these four economies notwithstanding, globalization had contributed significantly to their economic growth. India had benefited immensely. Its gross domestic product (current dollars) had grown at a compound annual growth rate of 14% since 2003. Its population stood at 1.2 billion people, a 2% compound annual growth rate over the last six years. Given its ability to sustain productivity as its population grows in size and skill, India‘s attractiveness as an emerging market was evident. Deregulation policies adopted by the Government of India had led to substantial domestic investment and inflow of foreign capital to this industry. It had drawn nearly $90 billion in foreign direct investment. In the last few years the Information Technology industry in India had grown at an average annual rate of 30%. Exports contributed to around 75% of the total revenue of the IT industry in India. India‘s growth was attributable to its surge in productivity. And, given its favorable demographic trends and further rise in capital formation (accumulation), India‘s influence on the world economy was immediate and widely felt.

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2. Emergence of Satyam Computer Services Satyam Computer Services, Ltd. was a rising star in the Indian outsourced IT services industry. The company was formed in 1987 in Hyderbad, India by B. Ramalinga Raju. 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. By 2003, Satyam‘s IT services businesses included 13,120 technical associates servicing over 300 customers worldwide. At that time, the worldwide IT services market was estimated at nearly $400 billion, with an estimated annual compound growth rate of 6.4%. The markets major drivers at that point in time were the increased importance of IT services to businesses worldwide; the impact of the internet on eBusiness; the emergence of a high‐quality IT services industry in India and their methodologies; and, the growing need of IT services providers who could provide a range of services. From 2003 to 2008, in nearly all financial metrics of interest to investors, the company grew measurably. Satyam generated USD $467 million in total sales. By March 2008, the company had grown to USD $2.1 billion. The company demonstrated an annual compound growth rate of 35% over that period. Operating profits averaged 21%. Earnings per share similarly grew, from $0.12 to $0.62, at a compound annual growth rate of 40%. Over the same period (2003‐2009), the company was trading at an average trailing EBITDA multiple of 15.36. Finally, beginning in January 2003, at a share price of 138.08 INR, Satyam‘s stock would peak at 526.25 INR – a 300% improvement in share price after nearly five years. Satyam clearly generated significant corporate growth and shareholder value. The company was a leading star – and a recognizable name – in a global IT marketplace. The external environment in which Satyam operated was indeed beneficial to the company‘s growth.

But, the numbers didn’t represent the full picture

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On 7 January 2009, company Chairman Ramalinga Raju resigned after notifying board members and the Securities and Exchange Board of India (SEBI) that Satyam's accounts had been falsified. Raju confessed that Satyam's balance sheet of 30 September 2008 contained: inflated figures for cash and bank balances of Rs 5,040 crore (US$1.09 billion) as against Rs 5,361 crore (US$1.16 billion) reflected in the books. an accrued interest of Rs 376 crore (US$81.59 million) which was non-existent. an understated liability of Rs 1,230 crore (US$266.91 million) on account of funds was arranged by himself. an understated debtors' position of Rs 490 crore (US$106.33 million) (as against Rs 2,651 crore (US$575.27 million) in the books). Raju claimed in the same letter that neither he nor the managing director had benefited financially from the inflated revenues. He claimed that none of the board members had any knowledge of the situation in which the company was placed.

Before we go deep into the study of the Satyam case, let us first of all study about the business ethics in practice.

3. Defining Business Ethics Business ethics is the behavior that a business adheres to in its daily dealings with the world. The ethics of a particular business can be diverse. They apply not only to how the business interacts with the world at large, but also to their one-on-one dealings with a single customer. Many businesses have gained a bad reputation just by being in business. To some people, businesses are interested in making money, and that is the bottom line. It could be called capitalism in its purest form. Making money is not wrong in itself. It is the manner in which some businesses conduct themselves that brings up the question of ethical behavior.

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Good business ethics should be a part of every business. There are many factors to consider. When a company does business with another that is considered unethical, does this make the first company unethical by association? Some people would say yes, the first business has a responsibility and it is now a link in the chain of unethical businesses. Many global businesses, including most of the major brands that the public use, can be seen not to think too highly of good business ethics. Many major brands have been fined millions for breaking ethical business laws. Money is the major deciding factor. If a company does not adhere to business ethics and breaks the laws, they usually end up being fined. Many companies have broken anti-trust, ethical and environmental laws and received fines worth millions. The problem is that the amount of money these companies are making outweighs the fines applied. Billion dollar profits blind the companies to their lack of business ethics, and the dollar sign wins. A business may be a multi-million seller, but does it use good business ethics and do people care? There are popular soft drinks and fast food restaurants that have been fined time and time again for unethical behavior. Business ethics should eliminate exploitation, from the sweat shop children who are making sneakers to the coffee serving staff who are being ripped off in wages. Business ethics can be applied to everything from the trees cut down to make the paper that a business sells to the ramifications of importing coffee from certain countries. In the end, it may be up to the public to make sure that a company adheres to correct business ethics. If the company is making large amounts of money, they may not wish to pay too close attention to their ethical behavior. There are many companies that pride themselves in their correct business ethics, but in this competitive world, they are becoming very few and far between.

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3.1 Forces That Shape Business Ethics The following forces do influence a lot in shaping the business ethics of an individual/organization: 1. Personal ethics a. Beliefs and Values b. Moral Development c. Ethical Framework 2. Organizational Culture a. Founder b. History c. Defining Moments d. Stories of Development 3. Organizational Systems a. b. c. d. e.

Structure Policies and Rules Code of Ethics Reward System Selection and Training

4. External Stakeholders a. Government Regulations b. Customers c. Special Interest Groups d. Market Forces

3.2 Ethical and unethical practices in a corporate environment The following are some of the ethical practices that have to be followed by the corporations: a. b. c. d. e. f. g. h.

Compliance with rules and regulations Optimum use of company resources Environment free from discrimination and harassment Accounting and reporting Strategic recruitment and selection Enhancing the valuation of an enterprise Community service Integrated Communication and transparency

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Now let us see some of the unethical practices that should be avoided and restrained from in the organizations: a. b. c. d. e. f. g. h.

Bribery Coercion Undue Influence Insider Trading Tax Evasion Pollution Unfair dealing and discrimination Improper accounting practices

4. Satyam Case Revisited 4.1 What Went Wrong?  The scam took place primarily on account of inflated profits and revenues over a period that lasted several years starting in April 1999. It could also have started off as an attempt to cover up the bad performance in one quarter.  In the words of Mr. Raju himself, as stated in his letter to the board and shareholders “What accounted as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years.”  Another factor was, Satyam, as the smallest of the big four players, was under pressure to show extraordinary results in order to survive.  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.  The lure of big compensation to members further encouraged such behavior.

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4.2 Time Line The events of the Satyam scam unfolded in a matter of few days, however, the impact is felt even today.  Dec 16, 2008: Satyam Computers announces it is buying a 100 percent stake in two companies owned by chairman Ramalinga Raju's sons - Maytas Properties and Maytas Infra. The proposed $1.6 billion deal is aborted seven hours later due to a revolt by investors who oppose the takeover. But Satyam shares plunge 55 percent in trading on the New York Stock Exchange.  Dec 23, 2008: The World Bank bars Satyam from doing business with the bank's direct contracts for a period of eight years in one of the most severe penalties by a client against an Indian outsourcing company. In a statement, the bank says: "Satyam was declared ineligible for contracts for providing improper benefits to Bank staff and for failing to maintain documentation to support fees charged for its subcontractors." On the day the stock drops a further 13.6 per cent, its lowest in more than four-and-ahalf years.  Dec 25, 2008: Satyam demands an apology and a full explanation from the World Bank for the statements, which the outsourcer said damaged investor confidence. Interestingly, Satyam does not question the company being barred from contracts, or ask for the revocation of the bar, but instead objects to statements made by bank representatives. It also does not address the charges under which the World Bank said it was making Satyam ineligible for future contracts.  Dec 26, 2008: Mangalam Srinivasan, an independent director at Satyam, resigns following the World Bank‘s critical statements.  Dec 28, 2008: Satyam postpones a board meeting, where it is expected to announce a management shake up, from December 29 to January 10. The move aims to give the group more time to mull options beyond just a possible share buyback. Satyam also appoints Merrill Lynch to review ―strategic options to enhance shareholder value‖.  Jan 7, 2009: Ramalinga Raju resigns, admitting that the company inflated its financial results. He says the company's cash and bank balance sheet has been inflated and fudged to the tune of Rs 5,040 crore. Other Indian outsourcers rush to assure clients and investors of credibility. Indian IT industry body Nasscom jumps to defend the reputation of the Indian IT industry as a whole. "This is a stand-alone case of failure of corporate governance and it is critical that it be viewed in this light," Nasscom said.

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 Jan 8, 2009: Satyam attempts to placate customers and investors that it can keep the company afloat, after its former CEO admitted to India's biggest ever financial scandal. But law firms Izard Nobel and Vianale & Vianale file class action suits on behalf of US shareholders, in the first legal actions taken against the management of Satyam in the wake of the fraud.  Jan 11, 2009: The Indian government steps into the Satyam outsourcing scandal and installs three people to a new board in a bid to salvage the firm. The board is comprised Deepak S. Parekh, the executive chairman of home loan lender Housing Development Finance Corporation (HDFC), C. Achuthan, director at the country's National Stock Exchange, and former member of the Securities and Exchange Board of India, and Kiran Karnik, former president of Nasscom.  Jan 12, 2009: The new board at Satyam holds a press conference, where it discloses that it is looking at ways to raise funds for the company and keep it afloat during the crisis. One such method to raise cash could be to ask many of its Triple A-rated clients to make advance payments for services.

4.3 Dynamics Generated 1. Satyam's balance sheet of September 30, 2008, contained the following irregularities: 

Inflated figures for cash and bank balances of US$1.04 billion vs. US$1.1

billion reflected in the books 

An accrued interest of US$77.46 million which was non‐existent



An understated liability of US$253.38 million on account of funds was

arranged by himself 

An overstated debtors' position of US$100.94 million vs. US$546.11 million

in the books  For the September quarter(Q2), a revenue of Rs 2,700 crore and an operating margin of Rs 649 crore(24 per cent of revenue) as against the actual revenues of Rs 2,112 crore and an actual operating margin of Rs 61 crore (3 per cent of revenues)  This has resulted in artificial cash and bank balances going up by Rs 588 crore in the mentioned quarter alone

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2. Company funds were diverted into real estate investment 3. One of the key performance indicators of the company, the earnings per share was able to be retained at a high level consistently for many years 4. Executive compensation was raised and huge profits resulted by selling stake at inflated price 5. Though the precise numbers quoted vary, according to observers the stake of the promoters fell sharply after 2001 when they held 25.60 per cent of equity in the company. This fell to 

22.26 per cent by the end of March, 2002



20.74 per cent in 2003, 17.35 per cent in 2004



15.67 per cent in 2005



14.02 per cent in 2006



8.79 in 2007



8.65 at the end of September 2008



5.13 per cent in January 2009

6. This points to a conscious decision by the promoters to sell shares, which may have been used to acquire assets elsewhere. The more inflated the share values, the more of such assets could be acquired. It is quite possible that the assets built up by the eight other Raju family companies under scrutiny, including Maytas Properties and Maytas Infra, partly came from the resources generated through these sales. If true, this makes Raju‘s confession suspect, since he stated that ―neither myself, nor the Managing Director (including our spouses) sold any shares in the last eight years — excepting for a small proportion declared and sold for philanthropic purposes.‖

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7. Money could have been siphoned out through opaque transactions with beneficiaries who were paid sums not warranted by their business profile. Satyam‘s business strategy did involve unusual transactions. One example was the acquisition in 1999 by group company Satyam Infoway, which was the largest private Internet Services Provider in the country at that time, of IndiaWorld Communications, for a sum of $115 million. The acquired company operated popular portals such as samachar.com and khel.com that had no clear revenue model, and was the principal beneficiary just as in the AOL deal. According to reports, the owner of IndiaWorld was himself charged with intellectual property violations by his erstwhile employer IndiaWorld.com, an Internet services company managed by U.S.-based ASAP Solutions Inc. Satyam Infoway‘s position was that it was aware of the claim being made by ASAP Solutions, but that its interest was not in IndiaWorld.com but was ―limited to the URL indiaworld.co.in and the other portals under its banner,‖ for which it had of course paid a huge sum. There is reason to suspect that this acquisition delivered little to the company, raising questions about the motivation. 8. The gap which started in April 1999, reached unmanageable proportions as company operations grew significantly 9. The differential in the real profits and the one reflected in the books was further accentuated by the fact that the company had to carry additional resources and assets to justify a higher level of operations thereby significantly increasing the costs 10. As the promoters held a small percentage of equity, the concern was that poor performance would result in the takeover, thereby exposing the gap 11. Every attempt to eliminate the gap failed, and the aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones. But the investors thought it was a brazen attempt to siphon cash out of Satyam, in which the Raju family held a small stake, into firms the family held tightly. The Satyam deal with Matyas was salvageable. It could have been saved only if ―the deal had been allowed to go through, as Satyam would have been able to use Maytas' assets to shore up its own books.‖ Raju, who showed artificial cash on his books, had planned to use this nonexistent cash to acquire the two Maytas companies. Given the stake the Rajus held in Matyas, pursuing the deal would not have been terribly difficult from the perspective of the Raju family 12. After the news came out, the stock price fell drastically

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4.4 Who is responsible? The responsibility for a case like Satyam scam to happen is due to people involved in three levels – Individual, Corporate and Societal. 1. Individual Level  Mr. Ramalinga Raju, who is the master mind behind the Satyam scam is personally responsible for the saga at individual level. It is his greed that led him to resort to unethical and illegal behavior

2. Corporate Level  The top management of the company should also have been involved to a large extent. After all, Mr. Raju could not have done this alone without the confidence of his top management.  The Board of directors for any company is responsible to question the management and the working of the company. In this case, many dignitaries were involved as directors, but they were a complete failure in acting on their responsibility. Raju was able to steer the fabricated accounts through his board members for 6-years. At times,

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the company was holding excessive cash, as per the books. This should have invited questions by board members.  The Auditors are supposed to have checked, verified cash balances, bank statements, assets with relevant confirmations. In this case, PWC could not handle its role effectively. Infact, many questions have been raised on the collusion of PWC with Mr. Raju. Several articles claim that DSP Merrill Lynch found out immediately (they were apparently approached for help with a merger) that there were serious accounting issues, while PwC found out nothing for years. PwC was paid 3.53 crore for the year 2008 as compared to 1 crore paid by Infosys as auditing fees  Satyam's banks – ICICI Bank, HDFC Bank, Bank of Baroda, etc. If the auditors were conned, it means that the bank statement and certificates were forged  SEBI in December 2008 gave a clean chit to Satyam in the probe on violation of corporate governance law

3. Societal Level  The institutional investor community, retail investors ‐‐ none of them, including professional investors with detailed information and models available to them, detected the malfeasance  Satyam was the 2008 winner of the coveted Golden Peacock Award for Corporate Governance under Risk Management and Compliance Issues, the same year that the scam came out shortly afterwards. This raises serious questions on the expertise of the evaluation committee and the award itself  Government should have been able to detect the manipulation of financial statements through effective policies and regulations

4.5 Why did it happen? The reasons for Satyam scam to happen can be listed as follows 1. Individual Factors  Greed for money, overshadowing the responsibility to meet fiduciary duties  Craving for Power and Prestige  Image as a Successful person  Overconfidence in his ability to turn things around before they got out of hand

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2. Organizational Systems  Ambitious corporate growth  Executive incentives  High risk deals that went sour  Audit failures‐ Internal & External  Weak Independent directors and Audit committee  Whistle blower policy not being effective  To get eligible for contract criteria like sales, net worth, etc.  Deceptive reporting practices—lack of transparency  ESOPs issued to those who prepared fake bills

3. Organizational Culture  Excessive interest in maintaining stock prices i.e short term goals emphasized  Low ethical and moral standards by top management  Ethics and intentions of founder himself were on a low level in this case  Emphasis on impressing stakeholders especially investors, analysts, shareholders, and the stock market

4. External Factors  Stock market expectations  Nature of accounting rules  Aggressiveness of investment banks, commercial banks, • Rating agencies & investors  Fierce competition

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5. Aftermath of Satyam Scandal Rebuilding Satyam's reputation may be a near-impossible task. "There are only two things a service firm has, its people and reputation. People can be replaced but reputation is far more difficult to re-establish." Immediately following the news of the fraud, Merrill Lynch terminated its engagement with Satyam, Credit Suisse suspended its coverage of Satyam, and PricewaterhouseCoopers came under intense scrutiny and its license to operate may be revoked. Coveted awards won by Satyam and its executive management, such as Golden Peacock Award for Corporate Governance under Risk Management and Compliance Issues, SAP Pinnacle Award, E & Y Entrepreneur Award etc, were stripped from the company. Satyam's shares fell to 11.50 rupees on January 10, 2009, their lowest level since March 1998, compared to a high of 544 rupees in 2008. In the New York Stock Exchange, Satyam shares peaked in 2008 at US$ 29.10; by March 2009 they were trading around US $1.80. Investors lost $2.82 billion in Satyam. Criminal charges were brought against Mr. Raju, including: criminal conspiracy, breach of trust, and forgery. After the Satyam fiasco and the role played by PwC, investors became wary of those companies who are clients of PwC, which resulted in fall in share prices of around 100 companies varying between 5-15%.

5.1 Effects of Satyam Scandal on Various Stakeholders Employees of Satyam spent anxious moments and sleepless nights as they faced nonpayment of salaries, project cancellations, layoffs and equally bleak prospects of outside employment. "They were stranded in many ways - morally, financially, legally, and socially." Following the confession of the Chairman, many of them put up their resumes, seeking jobs in other companies. Apparently fearing that he may lose his job, a 23-year-old employee of Satyam, Vishwa Venkatesan, hailing from Salem, allegedly committed suicide in Chennai. Impact of Satyam Scandal on H-1B Employees - The unfolding scandal surrounding Satyam founder, B. Ramalinga Raju, has far-reaching consequences for the IT industry in India and the United States, not least for H-1B workers employed by the company. CNN.com reported

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on January 19, 2009 that insurance giant State Farm cancelled its contract with Satyam for IT consulting services. It is possible that other Satyam clients may follow suit. This leaves Satyam's H-1B employees, whose services may no longer be required by the company, in a difficult situation for a number of reasons. 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." The sharp fall in the price of Satyam shares also seriously affected investors. Many speculators who had backed the company are now left with shares that cost about Rs.10 per share. The Central Bureau of Investigation (CBI) said the loss suffered by investors in the fraud may rise to a whopping Rs 14,000 crore (Rs 140 billion), instead of the initial estimate of Rs 7,800 crore (Rs 78 billion). Bankers were concerned about recovery of financial and nonfinancial exposure and recalled facilities. Indian Government was worried about its image of the Nation & IT Sector affecting faith to invest or to do business in the county. Huge losses to investors aside, the Satyam scandal has caused ―serious damage‖ to India Inc‘s reputation as well as the country‘s regulatory authorities outside, the government has said. “The admission of fraudulent manipulation of the financial affairs has created an adverse impression in the minds of the trade, business and industry across the world.” ―This has also resulted in serious damage to the reputation of Indian Corporate sector and the regulatory mechanism in the eyes of the world,‖ the government said.

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Indian Students Shun IT Companies - The Satyam effect has starting spreading its tentacles, and has proved to have a negative impact on the Engineering students. IT (Information Technology) which used to be the Mecca of all jobs is now the outcaste. Students are preferring to take jobs in their core branches rather than move to the dwindling IT sector.

6. Ethics in Business Sustainable advantage of an organization can be determined by its ethical capability. Ethical capability of an organization is its duty to do what is right. Some organizations such as Enron, Satyam, and Tyco etc have made false statements in their accounts and cheated both the stakeholders and government. These kinds of issues gave rise to the importance of business ethics in business schools all around the world. Sustainable advantage can be defined as the beneficiary element that determine the long term objectives of an organization, where objectives would be the economic development that generates wealth and meets the needs of the current generation while saving the environment, so future generation can meet their needs as well. There are number of factors that determine the sustainability of an organization, which are its ethics, strategy, employees, financial capital etc. In present scenario, human resource of an organization is considered to be its competitive advantage, but it will not provide sustainability. Sustainability of an organization will depend on the impact it has on the people, in the form of trust, honesty, integrity, respect, quality and responsibility. Organizations with poor sustainability will fall back as happened in case of Enron and Satyam. Ethical companies not only make profit but also overcome their competitors and other turbulent changes happening throughout the years and have contributed to social welfare. Ethical companies have social responsibilities which allow them to flourish undiminished and make profit. Tata group of companies is one company which follows ethical practices. It is said that the chief executive officer of Tata is also its chief ethics officer. Some of the ethical policies followed by the company include national interest, support from open market economy, gift and donation for social cause, political non alignment, health safety and environment care, quality product and service and regulatory compliance etc. Ratan Tata the present chairman of Tata group has declined from airline industry because he was told to bribe then minister to enter the business, which he claimed to be unethical and against the

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policies the group follows. His predecessor JRD Tata had set up the first commercial airlines 'Tata Airlines' in India which was later overtaken by the government of India and named it as Indian airlines. So besides being a pioneer in airline industry they were not able to procure it because they felt it would not sustain them and it would bring a bad image for the company. This is the reason why people have great respect for Tata group and their ethical practices and policies have created brand loyalty which has helped them to survive in market even though many competitors came.

Factors influencing business ethics are leadership, strategy and performance, individual characteristics, corporate culture and environment.

Leader is a person who leads the people towards achieving a common goal. Leader can be good or bad, great or small they arise out of the needs and opportunities of a particular time and place. Not all leaders are considered to be perfect in their decision making because each and every decision they make will depend upon the character of person which differ from person to person. Character of a person includes their inborn talents, learned and acquired traits which were imposed upon them by life and experience. Leaders are models and mentors to their followers therefore they follow the path way set by their leaders. In a large organization the top level managers or CEO are considered to be the executive and supervisory leader. The CEO should have strong commitment towards ethics and ethical conduct and should give a constant leadership in renewing the values of an organization. They play a key role in creating, maintaining and changing the ethical culture. It is necessary for the leader to set good examples, and follows ethics. One such good leader is JRD Tata who set a good example for his successor and they still follow it. Where there are good leaders there will be good ethical practices in business. Business ethics is the application of ethical principle in the organization or business. An organization should produce or make its own ethical cultures, but this ethical culture formulated should be drawn from the concept of what is ethical to all and not what is right for the organization itself. The employees of the organization, also has to follow the same ethical principles. The organization being ethical will provide certain social responsibilities such as they do not harm the stake holders, the general public and the society as well. "Business that

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treat their employees with dignity and integrity reap rewards in the form of high moral and productivity" (Frederic, Post and Davis).

There are three major types of ethical issues that arise in a business they are, face to face ethics, corporate policy ethics and functional area ethics. Face to face ethical issues happen between the employees of an organization in their day to day organizational life. The employees face these ethical conflicts when their personal standards differ from what their job demands. Corporate policy ethical issues happen in the basic operations of a company. The top level management including the board of directors and CEO's are responsible for ethical practices of the organization. Functional area ethics issues arise at all functional levels of the organization. For example in the accounting department, if unfair pressure is put on employees to deliver an audit report which has been altered or not showing current accounts of the organization would be un ethical, as it does not follow the standards and policies set by the organization.

Values and ethics are a part of our everyday lives. We wake up to these values and beliefs each day as they are the ―rules‖ that govern us. Ethics is not just about morality; it is a complex dimension of personal and corporate life that can lead to higher performance by both business and society. Individual experiences of values and beliefs stem from the personal point of view, a cultural perspective all the way to an organization perception.

6.1 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.‖ 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

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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. The lure of big compensation to members further encouraged such behavior. But, in the end, truth is sought and those violating the legal, ethical, and societal norms are taken to task. The fraud finally had to end and the implications were far reaching. 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.

Upper right hand corner box - The potency of All or Nothing for a stakeholder combined with intense external pressure is a sure fire recipe for an attack on ethics. Analyzing on this model of ethics dilemma grid, what Mr. Raju did was in the upper right hand corner box. Mr. Raju was looking at his own personal benefit and there was also an intense external pressure to show exceeding good corporate results.

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Servant-leadership is a philosophy and practice of leadership, coined and defined by Robert Greenleaf.

Egoism: When a person acts to create the greatest good for himself or herself. You can find people exhibiting this orientation at every level of an organization. When the organization and its employees make decisions merely to achieve individual goals (at the expense of others), they lose sight of a larger goal. This is where Mr. Raju‘s behavior fell into.

Utilitarianism: The idea that the moral worth of an action is determined solely by its usefulness in maximizing utility or minimizing negative utility. The focus is to create the greatest good for the greatest number of people. In Star Trek II: The Wrath of Khan, Spock says ―logic clearly dictates that the needs of the many outweigh the needs of the few.‖ Altruism: The opposite of egoism, a person‘s primary purpose is to promote the best interests of others.

From this perspective, a leader may be called on to act in the

interests of others, even when it runs contrary to his or her own self-interests. In Start Trek III: The Search for Spock, Kirk says altruistically, ‖Because the needs of the one… outweigh the needs of the many.‖

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6.2 Principles on Which Businesses Must Operate The following are the 6 main principles on which businesses/ organizations should operate in the society so as to maintain good ethical standards and show high ethical values: 1. Responsibility to stakeholders 2. Contribution to social and economic development of society 3. Respecting the law of land (laws related to employees, customers, accounting etc) 4. Beyond legal obligations – showing high moral responsibility 5. Being transparent in business 6. Build an organization culture based on honesty, integrity and accountability

We can clearly see that these principles were not followed by the leaders and heads in Satyam. The organization failed to stand on these principles.

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7. Handling of Crisis Following the revelations of fraud and misdemeanour in the financial accounts of Satyam Computers, the Indian Ministry of Company Affairs moved swiftly to replace the company‘s Board of Directors. Several investigations, regulatory as well as criminal, were launched by different state and central agencies, and the promoter, Mr R. Raju, got arrested. Three professionals, Mr Kiran Karnik, former head of the National Association of Software and Service Companies, the IT industry association, Mr Deepak Parikh, head of HDFC Bank and Mr C. Achuthan, a former member of the Securities and Exchange Board of India (SEBI), got appointed as directors. The new board‘s job was to prevent the unravelling of the company, even as key clients and employees threatened to jump ship. Ultimately, while some of the customers cancelled their contracts, two big clients, Cisco and General Electric, along with a host of smaller ones remained, on the assurances of the board. Towards the end of the month, the reconstituted board appointed Goldman Sachs and Avendus, an Indian investment bank, to identify possible strategic investors in the beleaguered company. The government allowed this group to increase the number of directors further, as needed, up to 10 members in all. The government used provisions under Section 388 (B to D) of the Companies Act to push its intent to appoint 10 nominees on the Satyam board. The section provides for a change of management in case the existing personnel are found to be guilty of fraud, malfeasance, persistent negligence or default in carrying out their obligations and functions under the law, or for breach of trust. The government can use the ground that the business is not being run in a prudent manner and the management can cause, or has caused damage to the business. Such a board is independent in nature and the appointment of a new Board of Directors does not mean government acquisition of the company. It is a provision which is used as a last resort. The government‘s nominee-directors will have the powers to appoint new statutory auditors. The government is empowered to issue directives to the board. The nominee-directors are immuned to any prosecution and they are not subjected to the requirement that they hold any qualification shares or are liable to retire by rotation.

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Issues in front of new Board The company‘s operating margin of three percent now reported appears to be far below industry standards. The company‘s September 2008 financials state that it had as many as 690 clients, suggesting a large number of small clients. It does not have many clients who are billed more than US$100 million a year. It has claimed that it specialises in enterprise-based solutions, where margins in the industry are close to 20 percent. The only explanation for the low revenues earned could be that Satyam was heavily discounting its services to its clients in order to secure orders and clients. The sizeable dressing up of both its revenues as well as financials makes it difficult to value Satyam as a business. However, even with a new Board in place, and investigations launched by SEBI, the Ministry of Corporate Affairs and the police, it would be difficult for Satyam to do ‗business as usual‘. New clients may be difficult to come by, employees may look for alternatives and existing order books may vanish. Any merger or takeover would also have to take note of the class action suit in the United States as well as the suit by Upaid in the United Kingdom. There are also issues relating to other companies linked to Satyam such as Maytas Estates and Maytas Infrastructure, and the inter-corporate investments. Some of these transactions would have to be written off, as the underlying cash is no longer in the business. Unraveling the transactions and the flow of funds is likely to take considerable time.

Action Plan The three eminent members of the Board along with the three who joined later, Tarun Das of CII, TN Manoharan and Suryakant Balkrishna Mainak were unanimous from the beginning on certain issues. First and foremost was that the turn of events should not lead to a government takeover of Satyam. The standard procedure of going through BIFR was completely ruled out. The collective wisdom was that topmost priority should be given to

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collection of financial receivables that would provide the working capital on which the company could sustain itself till it found a new owner. Government bailouts never work out for a company in the long run. Therefore, though the temptation was high to go to the government, we desisted from taking the short cut. The major problem was that there was no precedence of this scale in India. Even in the US, corporate fiascoes of this nature only led to the companies collapsing like Worldcom, Enron or Arthur Andersen. So when the board embarked on its Salvage Satyam mission, the first few days only highlighted the daunting challenges facing them.

The two biggest concerns were to retain customer confidence and to maintain and sustain employee motivation; with either one failing, there would not have been much future for the company. The firefighting was on literally from day one, as the Board realized that US salaries had to be paid by January 15. The immediate focus therefore was on collections of receivables even as the Board members spoke with the US employees assuring them that compensations would be paid even if it takes a few days time. With US salaries being paid fortnightly, there was the same situation again on January 31, but with collections increasing the crises was again averted. Gradually over the next six weeks, the situation stabilized. Employee motivation was another big challenge. On the one hand there were media rumors about the veracity of the number of employees (most saying that the reported 53,000 employees was overblown by at least 40%) and on the other with no money in the coffers, there was no certainty where the next compensation would come from. The assurances from the Board that salaries would be paid regularly till the time a decision was reached, helped Satyam retain most of its workforce through these trying times. The Board made it clear to them that this is not a Satyam scam, but a Raju scam, and no way could Satyam employees be held responsible. It was a great company, delivering high quality of services, and they should maintain those standards, more so in these times of crises, to boost customer confidence. As a result, the service quality never flagged, even in the days of initial handholding of employees. Even attrition levels were kept to a bare minimum. Though there was a verbal understanding between companies through Nasscom not to poach Satyam employees, there were enough instances where HRDs of competitors either directly

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or through headhunters even created special cells to attract Satyam employees. Fortunately, not many such offers were taken up. The scenario might have been different if the scam had happened in 2006-07 where many jobs were available. The paucity of jobs in recessionary times, turned out to be a blessing in disguise for Satyam. Once the initial media hype cooled off, it was also found, at least on the workforce count, that the 53,000 number was accurate. While the total number of employees not being inflated to divert funds in the name of wages was a big relief, it was paradoxically an Achilles heel for the Board too. Especially in a contracting economy where the immediate need was to drastically cut the wage bill for Satyam to sustain itself in the short term. The Board was also able to ensure timely payment of salaries for the large workforce so that they were not unduly inconvenienced. Most importantly, they were able to devise the virtual pool to support the large number of workforce already on the bench. The fact that Satyam always had a huge bench, bigger than most of its competitors, had given rise to the apprehension that employee headcount too is grossly inflated. While that was not the case, it was found that there were nearly 8,000-10,000 people on the bench. Under the Virtual Pool concept, the Board informed those on Board to remain at home with the assurance to call them up immediately as and when required. However, what was more reassuring was the commitment to protect their base salaries, provident funds and health insurances. Many were encouraged to work with NGOs too in the meanwhile. Though some of these people did join other companies, most remained and even before the Tech Mahindra takeover, more than 1,000 of these were already into projects. Another factor that helped the Virtual Pool concept succeed was the excellent training program that thankfully the Raju regime had invested in at Satyam. Actually having a huge bench meant Satyam was giving continuous training to these people and that had actually created wonderful assets of these people. Therefore, once they got into projects, they straightaway started contributing into the company bottomline. Therefore despite Satyams specializations in niche areas like engineering services, it did not lose that many people that could have crippled any resuscitation effort put into action by the board.

The other big action-point on the Boards agenda was to retain the existing customers. A mass exodus would have obliterated both topline and bottomline, and unerringly led to its

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early demise. As a bigger picture, it would have caused immense damage to the reputation of the Indian software services sector, though in the short term the Board was not willing to look beyond immediate Satyam needs. What the Board members did in the initial few weeks was to individually speak to each client, offering their assurance that the show would go on with no drop in quality of services. Karnik, with his Nasscom legacy and experience of dealing with many of these customers, was the preferred negotiator in most cases. He personally met about seventy to seventy-five customers with the message that, yes, there has been a huge fraud, but now the government has stepped in and all measures are being taken to retrieve the situation. And, yes, there will be no deterioration or break in delivery of services or QoS. The strategy paid off and hardly any company left at that stage. The regulatory investigations on Satyam in the US persuaded a few companies, to jump ship, because of the apprehension of the damage the continuing Satyam association could have on their brand equity. Fortunately, not too many thought on these lines, though they had a proviso of returning when things stabilized under a new owner. Another problem faced initially was to verify how many of the customers and the financial deals in place with them were genuine. While the two audit firms KPMG and Deloitte were checking the antecedents of each customer as well as each and every transaction quarter-byquarter, going back to 2001-02 (time of the US ADR), the investigating agencies including CBI too wanted to check whether the customers were genuine or not. The problem was that it was one thing for these companies to receive letters of verification from KPMG or Deloitte, and another thing receiving them from CBI. It gives rise to the apprehension that something is seriously afoot and its prudent to stay away from investigating agencies. The Board fortunately was able to convince the CBI to deal in this matter with extreme sensitivity so it did not lead to customer exodus. That the Board entrusted to save and rescue Satyam performed its two biggest challenges of retaining employees and customers with aplomb, the credit must go largely to the six eminent personalities appointed by the government, and to some extent to the Ministry of Corporate Affairs. On the government side, the very fact that there was no procrastination in constituting the Board in record time itself was laudable. Even more praiseworthy was its action in not unnecessarily meddling with its affairs. It kept its trust on the eminent Board members and their recommendations.

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Some decisions of the Board stood out: foremost, was the decision not to accept government financial doles. Another crucial decision at the very beginning was around the composition of the Board. The decision was taken not to have any bureaucrats on board, not even retired ones, as their set style of functioning could delay the process. Also, while the initial clamoring was to have many eminent IT personalities on Board (Satyam being an IT company), the Board members argued against the reasoning. Their point of view was not to fall prey to a knee-jerk reaction and look at this as an IT problem, and to instead go for personalities from the finance world who will understand the financial and accounting aspects. More importantly, someone from the regulatory side with an understanding of regulations and statutory knowledge. They also convinced both SEBI and the Company Law Board against proceeding on any takeover option; in fact, they managed to create a solution that was more generic and did not look at Satyams as a one-off case. Thanks to the board, corporate India now has a blueprint of the course of action to follow in case there is another such incident. The Board successfully co-ordinated with top sets of legal firms in both India and the US to protect itself against the class action suits threatened in the US and also against many of the SEC regulatory investigations. It also co-ordinated with two top sets of audit firms to check out whatever discrepancies there were in the accounting system and subsequently devise a fresh set of norms and guidelines that would help not just Satyam but also provide a corporate governance guideline for India, Inc. Once, by March, when things had stabilized, the board was embarking on its last crucial role of finding a new and trustworthy owner for Satyam through a fair and transparent bidding process. In fact, the situation had stabilized to such an extent that some started questioning the need to sell at all, though none of the board members was supporting that. Again, they were able to convince the government not to set a floor price for the sale. Again, in an option-based mechanism for a fair and transparent bidding process, there was the need to have someone to oversee the whole process. Ex-Chief Justice Sam Bharucha consented to join in and meticulously signed every bid and document in quick time. Even when various potential bidders were informally treading the waters, the board members had to constantly parley with customers to allay their apprehensions. Many of them were uncomfortable with an MNC company taking over Satyam. Some were not comfortable

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with the likes of Indian majors like TCS taking over Satyam. The reason was that they consciously outsource to multiple vendors and do not want to put all their eggs in one basket now. And some were reluctant to see any of the traditional IT bigwigs taking over Satyam, in a tacit acknowledgement of Satyams specialized niche skills. Ultimately, according to the Board members, Tech Mahindra was an appropriate choice as the new owner. They had two advantages barring the appointment of a CEO and a few positions in top management they hardly had to undergo any restructuring. And, more importantly, being telecom-centric till now, they will be able to cross-sell extensively between Tech Mahindra and Satyam clients.

Raju’s Fate The Satyam founder, Ramalinga Raju, his brother B Rama Raju, former Satyam CFO V Srinivas and three other former employees of the company -- G Ramakrishna, Venkatapathi Raju and Srisailam were found to be guilty and are in jail. They were arrested by the Andhra Pradesh police on charges of breach of trust, conspiracy, cheating, falsification of records. Raju was hospitalized in September 2009 following a minor heart attack and underwent angioplasty. Raju was granted bail on condition that he should report to the local police station once a day and that he shouldn't attempt to tamper with the current evidence. This bail was revoked on 26 October 2010 by the Supreme Court of India and he was ordered to surrender by 8 November 2010. He is now barred from seeking bail till 31st July 2011 if trial is not over by then.

8. Applicable Regulations There are various liability provisions that may be invoked following such investigations. Under the Companies Act, any person who makes a false statement or who omits any material fact knowing it to be material, in any return, report, certificate, balance sheet, prospectus, statement or other document may be held liable to a fine or imprisonment or both.

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The shareholders of a company also have the right to file a suit against the directors of a company on the grounds of oppression and mismanagement. Under the Indian Penal Code, any person who is a party to a criminal conspiracy, commits a criminal breach of trust, is guilty of cheating, falsifies accounts or forges documents is liable to a fine or imprisonment that may extend to 10 years or both. The SEBI has the powers to issue orders and suspend the trading of any security, restrain any persons from accessing or buying, selling or dealing in securities, impound and retain the proceeds of any transaction and attach bank accounts. The SEBI can also impose a penalty in the amount of the higher of Rs.250 million (approximately US$5.2 million) and three times the profit from transactions relating to insider trading, the substantial acquisition of shares or unfair and fraudulent trade practices. Additionally, the SEBI can initiate criminal prosecution for these offences and hold a person liable for imprisonment for up to 10 years or a fine of up to Rs.250 million or both. Further, under the SCRA, a company can be held liable to a penalty of up to Rs.250 million for the failure to comply with the listing conditions. The stock exchanges also have the power to suspend the dealings with respect to the securities of such company. There are also various liability provisions and penalties specified under the FEMA and the Income Tax Act and other legislations such as the EPF Act. Under the FEMA, the penalty is civil in nature and may be up to three times the sum involved in a contravention. Under the Income Tax Act, a person may be liable to fine or imprisonment or both for contravention of certain offences. The auditors may be liable under the Companies Act, the Indian Penal Code and the CA Act, including for failure to report material misstatements, lack of due diligence and gross negligence of professional duty.

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9. How this could be avoided in future? / Recommendations The Satyam Computer Services‘ scandal brought to light the importance of ethics 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.

The Satyam scandal is a classic case of Negligence of fiduciary duties, Total collapse of ethical standards, Lack of corporate social responsibility.

It is human greed and desire that led to fraud. This type of behavior can be traced to: Greed overshadowing the responsibility to meet fiduciary duties, Fierce competition and the need to impress stakeholders especially investors, analysts, shareholders, and the stock market, Low ethical and moral standards by top management, Greater emphasis on short‐term performance.

Some of the initiatives/ steps which an organisation can undertake in order to avoid future ‗Satyams‘ are:-

a. 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. b. A transformed organizational culture which pays highest attention to ethical conduct and moral values will strengthen sustainable roots of the company.

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c. Transparency and effective auditing and regulatory checks through internal and external auditors and monitoring agencies will help establish long lasting credibility for any company. d. Companies should gather feedback, measure effectiveness, and continually improve their code of conduct. e. The top management should always distinguish between opportunities and temptations. No matter what heights a person may reach, character must be maintained at any cost. f. 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, self‐discipline, and high moral reasoning are critical to avoiding unethical behavior. g. 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. h. 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. i. A lot of fraud schemes start out small, with the perpetrator thinking that small changes here and there won't make a big difference- and is less likely to be detected. This sends a message to a lot of companies: if your accounts aren't balancing or if something seems inaccurate, even just a tiny bit, it's worth investigating. Break down tasks so that there are checks in each area. Dividing responsibilities across a team of people makes it easier to detect irregularities or misappropriated funds. j. Companies must be careful when selecting executives and top level managers. These are the people who set the tone for the company- if there's corruption at the top; it's bound to trickle down. Each employee must be accountable for their actions, regardless of the role they play in the company. Separate the role of CEO and

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Chairman of the Board. When the same person takes on both roles, who's left to check up on the CEO? Splitting up the roles helps avoid situations like the one at Satyam.

10. Learnings 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 re‐write corporate governance rules and tightens the norms for chartered accountants. Some of the regulations include: o Promotion of shareholders ‗democracy with protection of rights of minority shareholders, o Responsible self‐regulation with adequate disclosure and accountability and o Lesser government control over internal corporate processes, o Voluntary corporate governance code, o Certificate of independence for independent directors, o An institution of mechanism for whistle blowers, o 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.

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 to avoid this trap.

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References http://testfunda.com/ExamPrep/CatCentre/Article/the-satyamscandal.htm?AssetID=5f724d53-6890-4a27-9155-efff1e38b619s http://en.wikipedia.org/wiki/Satyam_scandal http://business.rediff.com/slide-show/2010/jan/06/slide-show-1-one-year-after-thesatyam-scandal.htm http://www.ilw.com/articles/2009,0210-rizzo.shtm http://www.india-post1947.com/satyam-fallout.html http://blogs.amrresearch.com/outsourcing/2009/01/the-impact-of-satyam-on-theindian-it-industry.html http://satyamscam.in/category/impact-of-satyam-scam-on-indian-economy/ http://satyamscam.in/2009/01/satyam-employee-commits-suicide/ http://ezinearticles.com/?Ethics-in-Business&id=5509483 http://www.cmctraining.org/articles_view.asp?sid=0&article_id=54 http://thecriticalpath.info/2010/12/27/servant-leadership/ www.managedecisions.com/.../Project_Term-Paper_SatyamScandal.pdf http://www.computerworlduk.com/how-to/outsourcing/1982/satyam-fraud-scandaltimeline/

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