satyam case
6
Abstract: The case examines the corporate governance issues at the India based IT services company, Satyam Computer Services Limited (Satyam). In mid-December 2008, Satyam announced acquisition of two companies - Maytas Properties and Maytas Infrastructure owned by the family members of Satyam's founder and Chairman Ramalinga Raju (Raju). Due to adverse reaction from institutional investors and the stock markets, the deal was withdrawn within 12 hours. Questions were raised on the corporate governance practices of Satyam with analysts and investors questioning the company's board on the reasons for giving consent for the acquisition as it was a related party transaction. After the deal was aborted, four of the prominent independent directors resigned from the board of the company. In early January 2009, Raju revealed that the revenue and profit figures of Satyam had been inflated for past several years. The revelation further deepened concerns about poor corporate governance practices at the company. The case describes the corporate governance structure at Satyam, its code of conduct, roles and responsibilities of different committees under the board, whistle blower policy etc. It highlights the role played by the independent directors of Satyam in approving the Maytas deal and discusses their limitations. Issues:
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Transcript of satyam case
Abstract
The case examines the corporate governance issues at the India based IT services company Satyam Computer Services Limited (Satyam) In mid-December 2008 Satyam announced acquisition of two companies - Maytas Properties and Maytas Infrastructure owned by the family members of Satyams founder and Chairman Ramalinga Raju (Raju) Due to adverse reaction from institutional investors and the stock markets the deal was withdrawn within 12 hours Questions were raised on the corporate governance practices of Satyam with analysts and investors questioning the companys board on the reasons for giving consent for the acquisition as it was a related party transaction
After the deal was aborted four of the prominent independent directors resigned from the board of the company In early January 2009 Raju revealed that the revenue and profit figures of Satyam had been inflated for past several years The revelation further deepened concerns about poor corporate governance practices at the company The case describes the corporate governance structure at Satyam its code of conduct roles and responsibilities of different committees under the board whistle blower policy etc It highlights the role played by the independent directors of Satyam in approving the Maytas deal and discusses their limitations
Issues
raquo Study the corporate governance structure that existed at Satyam Computers
raquo Appreciate the importance of Code of Conduct and Whistleblower policy of a company
raquo Examine the roles and responsibilities of a companys board and independent directors
raquo Critically analyze the instances where the independent directors failed to fulfill their responsibilities
raquo Understand the limitations of independent directors in Satyams case
This was one of those few companies in India that supposedly had been doing things the right way - that is the Western way It allegedly had all the checks and balances a US company would want in an overseas business partner Its financial statements received repeated clean bills of health from a respected outside auditor PricewaterhouseCoopers And still its corporate governance rotted away from the inside1
- Matt Kelly Editor-in-Chief Compliance Week2 in January 2009
The idea of corporate governance has not sunk in as much as it should Certainly we have dynamic modern companies in which it has but in many family-owned businesses it has not We need truly independent directors and auditors3
- T K Bhaumik Chief Economic Adviser JK Organization4 in January 2009
Satyam board acted to the best of the knowledge they had and what they thought was the best for the company So I dont think there was any violation of any corporate governance spirit or the law The board acted in good faith5
- M Rammohan Rao Former Independent Director in Satyam Board in December 2008
Introduction
On January 08 2009 M Rammohan Rao (Rao) resigned as the Dean of the Indian School of Business (ISB)6 The resignation followed the announcement the previous day by B Ramalinga Raju (Raju) Founder and Chairman of Indias fourth largest IT services company Satyam Computer Services Limited (Satyam) that the company had been inflating the revenue and profit figures for past several years In his resignation letter Rao who had recently resigned as independent director on the Satyam board said Unfortunately yesterdays shocking revelations (by Raju) of which I had absolutely no prior knowledge mean that we are far from seeing the end of the controversy surrounding Satyam Computers My continued concern and preoccupation with the evolving situation are impacting my role as dean of ISB at a critical time for the school7
On December 30 3008 Rao resigned from the board of Satyam With him two other independent directors Vinod Dham (Dham) inventor of the Pentium chip and Krishna Palepu
(Palepu) Professor at the Harvard Business School also submitted their resignations to the board of the company
Another independent director Mangalam Srinivasan8 (Srinivasan) had resigned from the Satyam board a few days earlier on December 25 The resignations of these directors were the result of an aborted deal by Satyam to acquire two companies run by Rajus sons Maytas Properties Pvt Ltd (Maytas Properties) and Maytas Infrastructure Limited (Maytas Infra) for US$ 16 billion
Satyams board of directors had given its consent for the acquisition However when the acquisition was announced publicly it received flak from the investor community who did not find any synergies in an IT company acquiring companies involved in construction and infrastructure
Background Note
Satyam was incorporated in 1987 as a private limited company providing software development and consultancy services Raju and his brother Rama Raju were the promoters of the company Before starting Satyam they were involved in other businesses like construction and textiles
Governance Practices at Satyam
According to Satyams annual reports corporate governance was given high importance in the company The corporate governance in Satyam was driven by its core values - Associate Delight Investor Delight Customer Delight and the Pursuit of Excellence
The Maytas Fiasco
As on September 30 2008 Satyam reported that it had cash reserves of US$ 12 billion On December 16 2008 the company announced that it planned to use these cash reserves to acquire two companies - Maytas Infra and Maytas Properties Maytas Infra was a public listed infrastructure development company that had been operational for more than two decades
Raju Confesses to Accounting Irregularities
On January 07 2008 Raju made a shocking admission that for several years the revenues and profits of Satyam had been inflated without the knowledge of the board senior managers of the company and the auditors
Analysts believed that Rajus confession of the accounting fraud had been prompted by DSP Merrill Lynchs termination as the advisors of Satyam
What was the Board Doing
The issue of Maytas aborted acquisition and the subsequent disclosure of financial irregularities in Satyam cast a shadow on the role played by the independent directors at Satyam
The Boards Limitations
Some corporate governance experts pointed out that though the independent directors were responsible for good governance in companies they themselves relied mostly on the information presented to them by the management and that it was not possible for them to investigate such accounting frauds
The Aftermath
The Satyam fiasco was expected to have an adverse impact on the image of IT services companies in India as it was the fourth largest company in the industry Anand Mahindra Vice-chairman and MD Mahindra Group said This development has resulted in incalculable and unjustifiable damage to Brand India and Brand IT in particular What is especially ironic is that Satyam was started by entrepreneurs who have served as role models for an entire generation of young Indians
- Abstract
- Issues
- Introduction
- Background Note
- Governance Practices at Satyam
- The Maytas Fiasco
- Raju Confesses to Accounting Irregularities
- What was the Board Doing
- The Boards Limitations
- The Aftermath
-
This was one of those few companies in India that supposedly had been doing things the right way - that is the Western way It allegedly had all the checks and balances a US company would want in an overseas business partner Its financial statements received repeated clean bills of health from a respected outside auditor PricewaterhouseCoopers And still its corporate governance rotted away from the inside1
- Matt Kelly Editor-in-Chief Compliance Week2 in January 2009
The idea of corporate governance has not sunk in as much as it should Certainly we have dynamic modern companies in which it has but in many family-owned businesses it has not We need truly independent directors and auditors3
- T K Bhaumik Chief Economic Adviser JK Organization4 in January 2009
Satyam board acted to the best of the knowledge they had and what they thought was the best for the company So I dont think there was any violation of any corporate governance spirit or the law The board acted in good faith5
- M Rammohan Rao Former Independent Director in Satyam Board in December 2008
Introduction
On January 08 2009 M Rammohan Rao (Rao) resigned as the Dean of the Indian School of Business (ISB)6 The resignation followed the announcement the previous day by B Ramalinga Raju (Raju) Founder and Chairman of Indias fourth largest IT services company Satyam Computer Services Limited (Satyam) that the company had been inflating the revenue and profit figures for past several years In his resignation letter Rao who had recently resigned as independent director on the Satyam board said Unfortunately yesterdays shocking revelations (by Raju) of which I had absolutely no prior knowledge mean that we are far from seeing the end of the controversy surrounding Satyam Computers My continued concern and preoccupation with the evolving situation are impacting my role as dean of ISB at a critical time for the school7
On December 30 3008 Rao resigned from the board of Satyam With him two other independent directors Vinod Dham (Dham) inventor of the Pentium chip and Krishna Palepu
(Palepu) Professor at the Harvard Business School also submitted their resignations to the board of the company
Another independent director Mangalam Srinivasan8 (Srinivasan) had resigned from the Satyam board a few days earlier on December 25 The resignations of these directors were the result of an aborted deal by Satyam to acquire two companies run by Rajus sons Maytas Properties Pvt Ltd (Maytas Properties) and Maytas Infrastructure Limited (Maytas Infra) for US$ 16 billion
Satyams board of directors had given its consent for the acquisition However when the acquisition was announced publicly it received flak from the investor community who did not find any synergies in an IT company acquiring companies involved in construction and infrastructure
Background Note
Satyam was incorporated in 1987 as a private limited company providing software development and consultancy services Raju and his brother Rama Raju were the promoters of the company Before starting Satyam they were involved in other businesses like construction and textiles
Governance Practices at Satyam
According to Satyams annual reports corporate governance was given high importance in the company The corporate governance in Satyam was driven by its core values - Associate Delight Investor Delight Customer Delight and the Pursuit of Excellence
The Maytas Fiasco
As on September 30 2008 Satyam reported that it had cash reserves of US$ 12 billion On December 16 2008 the company announced that it planned to use these cash reserves to acquire two companies - Maytas Infra and Maytas Properties Maytas Infra was a public listed infrastructure development company that had been operational for more than two decades
Raju Confesses to Accounting Irregularities
On January 07 2008 Raju made a shocking admission that for several years the revenues and profits of Satyam had been inflated without the knowledge of the board senior managers of the company and the auditors
Analysts believed that Rajus confession of the accounting fraud had been prompted by DSP Merrill Lynchs termination as the advisors of Satyam
What was the Board Doing
The issue of Maytas aborted acquisition and the subsequent disclosure of financial irregularities in Satyam cast a shadow on the role played by the independent directors at Satyam
The Boards Limitations
Some corporate governance experts pointed out that though the independent directors were responsible for good governance in companies they themselves relied mostly on the information presented to them by the management and that it was not possible for them to investigate such accounting frauds
The Aftermath
The Satyam fiasco was expected to have an adverse impact on the image of IT services companies in India as it was the fourth largest company in the industry Anand Mahindra Vice-chairman and MD Mahindra Group said This development has resulted in incalculable and unjustifiable damage to Brand India and Brand IT in particular What is especially ironic is that Satyam was started by entrepreneurs who have served as role models for an entire generation of young Indians
- Abstract
- Issues
- Introduction
- Background Note
- Governance Practices at Satyam
- The Maytas Fiasco
- Raju Confesses to Accounting Irregularities
- What was the Board Doing
- The Boards Limitations
- The Aftermath
-
(Palepu) Professor at the Harvard Business School also submitted their resignations to the board of the company
Another independent director Mangalam Srinivasan8 (Srinivasan) had resigned from the Satyam board a few days earlier on December 25 The resignations of these directors were the result of an aborted deal by Satyam to acquire two companies run by Rajus sons Maytas Properties Pvt Ltd (Maytas Properties) and Maytas Infrastructure Limited (Maytas Infra) for US$ 16 billion
Satyams board of directors had given its consent for the acquisition However when the acquisition was announced publicly it received flak from the investor community who did not find any synergies in an IT company acquiring companies involved in construction and infrastructure
Background Note
Satyam was incorporated in 1987 as a private limited company providing software development and consultancy services Raju and his brother Rama Raju were the promoters of the company Before starting Satyam they were involved in other businesses like construction and textiles
Governance Practices at Satyam
According to Satyams annual reports corporate governance was given high importance in the company The corporate governance in Satyam was driven by its core values - Associate Delight Investor Delight Customer Delight and the Pursuit of Excellence
The Maytas Fiasco
As on September 30 2008 Satyam reported that it had cash reserves of US$ 12 billion On December 16 2008 the company announced that it planned to use these cash reserves to acquire two companies - Maytas Infra and Maytas Properties Maytas Infra was a public listed infrastructure development company that had been operational for more than two decades
Raju Confesses to Accounting Irregularities
On January 07 2008 Raju made a shocking admission that for several years the revenues and profits of Satyam had been inflated without the knowledge of the board senior managers of the company and the auditors
Analysts believed that Rajus confession of the accounting fraud had been prompted by DSP Merrill Lynchs termination as the advisors of Satyam
What was the Board Doing
The issue of Maytas aborted acquisition and the subsequent disclosure of financial irregularities in Satyam cast a shadow on the role played by the independent directors at Satyam
The Boards Limitations
Some corporate governance experts pointed out that though the independent directors were responsible for good governance in companies they themselves relied mostly on the information presented to them by the management and that it was not possible for them to investigate such accounting frauds
The Aftermath
The Satyam fiasco was expected to have an adverse impact on the image of IT services companies in India as it was the fourth largest company in the industry Anand Mahindra Vice-chairman and MD Mahindra Group said This development has resulted in incalculable and unjustifiable damage to Brand India and Brand IT in particular What is especially ironic is that Satyam was started by entrepreneurs who have served as role models for an entire generation of young Indians
- Abstract
- Issues
- Introduction
- Background Note
- Governance Practices at Satyam
- The Maytas Fiasco
- Raju Confesses to Accounting Irregularities
- What was the Board Doing
- The Boards Limitations
- The Aftermath
-
The issue of Maytas aborted acquisition and the subsequent disclosure of financial irregularities in Satyam cast a shadow on the role played by the independent directors at Satyam
The Boards Limitations
Some corporate governance experts pointed out that though the independent directors were responsible for good governance in companies they themselves relied mostly on the information presented to them by the management and that it was not possible for them to investigate such accounting frauds
The Aftermath
The Satyam fiasco was expected to have an adverse impact on the image of IT services companies in India as it was the fourth largest company in the industry Anand Mahindra Vice-chairman and MD Mahindra Group said This development has resulted in incalculable and unjustifiable damage to Brand India and Brand IT in particular What is especially ironic is that Satyam was started by entrepreneurs who have served as role models for an entire generation of young Indians
- Abstract
- Issues
- Introduction
- Background Note
- Governance Practices at Satyam
- The Maytas Fiasco
- Raju Confesses to Accounting Irregularities
- What was the Board Doing
- The Boards Limitations
- The Aftermath
-
