Georgia State University Harvard Governance Failure at Satyam Case Study Paper Assignment: Students must address the following questions in an essay: Disc

Georgia State University Harvard Governance Failure at Satyam Case Study Paper Assignment: Students must address the following questions in an essay:

Discuss the circumstances under which Satyam’s fraud was exposed. What do you think were the reasons for the fraud? How was the fraud able to occur?
Critically evaluate the corporate governance mechanisms adopted by Satyam. What characteristics of the board of directors may prevent financial statement fraud? What lessons about the audit committee can be learned from this case? What other governance mechanisms should be adopted to ensure compliance?

Directions: : Must address the questions above in a typed document (double spaced; 12-point font; 5 pages maximum; essay format). Strong responses will reference the material covered in Chapter 10 of our textbook, as well as the additional readings suggested on the following page. You may also conduct your own research on existing literature to formulate answers to the questions posed above.

Guidelines: Please note the following:

All case reports are to be written (double spaced) using 12 point type with a serif font for the body (Times New Roman) and sans serif font for headings (Calibri). The report should follow correct form, spelling, grammar, etc. The body of the paper should be no more than five pages including specific recommendations supported by your analyses. Number the pages.
The report may include an assortment of charts, tables, and exhibits in an appendix to support your analyses and recommendations. Do not add exhibits that are already included in the case. Each exhibit must be referenced and discussed in the body of the paper. The appendix does not count towards the main body limit of five pages.
Please reference all sources used in the main body of the report.
The main body of your report should contain sufficient detail to explain and support the major issues identified in the case and the primary recommendations for solving these problems. Do not just rehash case facts. Present an insightful and unique analysis.
The reports will be judged according to standards of effective business communication. They should be clear and cogent.
The criteria for grading case reports include:
Use of appropriate analytical techniques, sound logic, and well-supported arguments in evaluating the organization’s present condition and future prospects.
Evidence of your ability to formulate realistic and workable recommendations for action. Quality contributions will reference the material in Chapter 10 of your textbook, as well as the additional readings suggested below.
Thoroughness — both (a) scope and coverage and (b) depth of analysis.
Use of a clear and effective writing style; i.e. strong communication skills.

Suggested Readings and Material:

Bronner, R. (2003). “Pathologies of Decision-Making: Causes, Forms, and Handling,” Management International Review, 43, pp. 85-101.

Camillus, J.C. (2008). “Strategy as a Wicked Problem,” Harvard Business Review, May, pp. 98-106.

Certo, S.T., Connelly, B.L., and Tihanyi, L. (2008). “Managers and Their Not-So Rational Decisions,” Business Horizons, 51, pp. 113-119.

De La Rama, M. (2012). “Corporate Governance and Corruption: Ethical Dilemmas of Asian Business Groups,” Journal of Business Ethics, 109: 501-519.

Paine, Lynn, Rohit Deshpandé, Joshua D. Margolis, and Kim Eric Bettcher (2005). “Up to Code: Does Your Company’s Conduct Meet World-Class Standards?” Harvard Business Review, December, pp. 122-133.

Soltani, Bahram (2014). “The Anatomy of Corporate Fraud: A Comparative Analysis of High Profile American and European Corporate Scandals,” Journal of Business Ethics, 120: 251-274.

Shi, W., Connelly, B.L., and Hoskisson, R.E. (2016). “External corporate governance and financial fraud: Cognitive evaluation theory insights on agency theory prescriptions.” Strategic Management Journal, 38(6): 1268-1286. For the exclusive use of V. King, 2020.
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GOVERNANCE FAILURE AT SATYAM1
Ajai S. Gaur and Nisha Kohli wrote this case solely to provide material for class discussion. The authors do not intend to illustrate
either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other
identifying information to protect confidentiality.
Richard Ivey School of Business Foundation prohibits any form of reproduction, storage or transmission without its written
permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies
or request permission to reproduce materials, contact Ivey Publishing, Richard Ivey School of Business Foundation, The University
of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail cases@ivey.uwo.ca.
Copyright © 2011, Richard Ivey School of Business Foundation
Version: 2011-04-29
Satyam, a word in Sanskrit — an ancient Indian language — means truth. Ironically, a company by the
same name was involved in one of the largest scandals in the history of the Indian corporate world. On
January 7, 2009, B. Ramlinga Raju, chairman of Satyam Computer Services Ltd., wrote a letter to the
company board in which he took responsibility for fraud of about 50 billion Indian rupees (INR) (see
Exhibit 1).
The fraud took the corporate world by surprise, not only due to its size but also because Satyam had been
touted as a pioneer of corporate governance practices. Satyam won the Golden Peacock Global Award for
Excellence in Corporate Governance given by the World Council for Corporate Governance in 2008, just
three months before the scandal. Satyam also won the Golden Peacock National Award for Excellence in
Corporate Governance in 2002, and was rated as having the best corporate governance practices by the
Investor Relations Global Rankings (IRGR) for 2006 and 2007. In his letter, Raju acknowledged that the
fraud had been going on for several years. As analysts tried to understand how a company with strong
corporate governance practices could keep such a huge fraud under wraps, about 115 independent directors
on the boards of listed Indian companies resigned in the one-month period following the Satyam scandal.
Following the scandal, the big question facing the corporate world and the regulators was how to ensure
good corporate governance, moving beyond the ceremonial adoption of best practices by firms.
HISTORY OF SATYAM
Satyam Computers Limited (Satyam) was India’s fourth-largest software development and information
technology (IT) consulting company based on 2008 figures2. A private limited company incorporated by
two brothers — B. Rama Raju and B. Ramalinga Raju — in 1987, Satyam’s success became synonymous
with the success of the Indian IT industry for the next 20 years. Satyam was converted from a private
limited company to a public company in August 1991, issuing shares to the public in 1992. The money
1
This case has been written on the basis of published sources only. Consequently, the interpretation and perspectives
presented in this case are not necessarily those of Satyam Computer Services Ltd. or any of its employees.
2
Prowess database, Centre for Monitoring of Indian Economy.
This document is authorized for use only by Vince King in BUSA 4980 – Summer 2020 taught by STEVEN DIONNE, Georgia State University from Jun 2020 to Jul 2020.
For the exclusive use of V. King, 2020.
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raised in the stock market was used to build a software technology park and a 100 per cent export-oriented
unit. In the following year, Satyam made its first global foray by entering into a joint venture with the U.S.
company Dun and Bradstreet. In 1996, Satyam set up its first foreign office in the United States, followed
by another one in Japan. It developed new business partnerships in several other countries including
Australia, Canada and some European countries. Meanwhile, Satyam continued its growth initiatives in the
domestic market, opening new offices and facilities in different parts of India, promoting four subsidiaries
— Satyam Spark Solutions, Satyam Renaissance Consulting Ltd., Satyam Enterprise Solutions Pvt. Ltd.
and Satyam Infoway Pvt. Ltd. — and opening IT schools — the Indian Institutes of Information
Technology (IIIT). The IIITs were a result of public-private partnership, with several of these schools
being promoted by global corporation such as IBM, Microsoft and Oracle in different parts of India. In
1997, Satyam became the first Indian company to receive Information Technology Association of America
(ITAA) certification for Y2K solutions.3
To capitalize on the IT boom in the late 1990s, Satyam made its first greenfield investment in the United
States in 1998, opening a software development centre in New Jersey and subsequently opening several
such centres all over the world in Singapore, the United Arab Emirates (UAE), Australia, Malaysia, China,
Egypt and Brazil. In 1999, different subsidiaries of Satyam were merged with the parent firm, and Satyam
was listed on the NASDAQ. The money raised by the NASDAQ listing was used for further growth
initiatives including new ventures. Satyam entered into several alliances and long-term contracts with
global bodies and corporations such as World Bank, Microsoft, Yahoo!, SEEC Inc, Healthaxis, InsurEnroll Solution, Computer Associates, Saint-Gobain Abrasives, Venture Global Engineering, Vignette
Corporation, Computer Associates, Emirates, SAS Institute Inc, i2 Technologies and Ford. As of 2008,
Satyam had a revenue of more than US$2 billion, more than 51,000 associates of more than 60
nationalities, 654 customers which included one-third of the Fortune Global and US 500 companies, a
presence in 63 countries and 31 global solution centres. It was listed on the New York Stock Exchange in
the United States, Euronext in Amsterdam and Bombay Stock Exchange and the National Stock Exchange
in India.4
Along with its phenomenal growth, Satyam and its employees also won several national and international
awards and recognitions. In 2000, Satyam was named a Web Business 50/50 award winner for its
corporate intranet. In the same year, Satyam won the national Human Resource Development (HRD)
Award for its outstanding HRD efforts. Dataquest, a leading IT magazine, named Raju as IT Man of the
Year for 2000. Hong Kong-based Far Eastern Economic Review ranked Satyam as one of the 10 most
well-regarded companies in India, based on a survey conducted in 2000. Satyam also won the Frost &
Sullivan market engineering award for competitive strategy in 2001, and the application service provider
category IBM Lotus award for innovation in 2003. These awards and honours were clear reflections of
Satyam’s prestige and reputation amongst its clients, employees and society in general.5
GOVERNANCE AT SATYAM
Satyam had a relatively small promoter holding for a traditional family-run firm in India (see Exhibit 2); in
fact, the promoters’ ownership share had steadily declined over the years. Foreign institutional investors
had the maximum holding, varying between 40 and 50 per cent. Other important groups of investors
included the Indian public, banks and financial institutions as well as mutual funds. With a relatively high
3
http://content.icicidirect.com/Research/HistoryCompany.asp?icicicode=SATCOM, accessed on January 7, 2009.
Satyam Annual Report, 2008.
5
http://content.icicidirect.com/Research/HistoryCompany.asp?icicicode=SATCOM, accessed on January 7, 2009.
4
This document is authorized for use only by Vince King in BUSA 4980 – Summer 2020 taught by STEVEN DIONNE, Georgia State University from Jun 2020 to Jul 2020.
For the exclusive use of V. King, 2020.
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9B11M028
level of ownership in the hands of domestic and foreign institutional investors, it was important for Satyam
to have a ‘good’ corporate board to gain legitimacy amongst its different stakeholders.
As of December 2008, Satyam had five independent and four internal members on its board (see Exhibit
3). Ramalinga Raju and Rama Raju, the two founding brothers, were the only relatives on the board.
Ramalinga Raju was the chairman of the board; the other two internal directors included Ram Mynampati,
an internal employee, and Krishna Palepu, a Harvard Business School professor who was listed as an
internal director because he also worked as a consultant for Satyam. The audit and compensation
committees had four members each who were all independent directors. The audit committee met eight
times in the year preceding the scandal, while the compensation committee met three times.
The composition of the board and different committees was in total compliance with the prescribed rules
and regulations in India; in addition, Satyam seemed to follow the governance standards beyond what was
prescribed by law, as is evident from the company’s philosophy on corporate governance, stated in the
governance reports that Satyam submitted to regulatory authorities:
Corporate Governance assumes a great deal of importance in the business life of Satyam
(“the Company”). The driving forces of Corporate Governance at Satyam are its core
values — Associate Delight, Investor Delight, Customer Delight and the Pursuit of
Excellence. The Company’s goal is to find creative and productive ways of delighting its
stakeholders, i.e., Investors, Customers, Associates and Society, thereby fulfilling the role
of a responsible corporate representative committed to best practices.
Satyam believes that sound Corporate Governance practices provide an important
framework to assist the Board in fulfilling its responsibilities. The Board of directors is
elected by shareholders with a responsibility to set strategic objectives to the management
and to ensure that the long term interests of all stakeholders are served by adhering to and
enforcing the principles of sound Corporate Governance. Thus, the management is
responsible to establish and implement policies, procedures and systems to enhance longterm value of the Company and delight all its stakeholders (Associates, Investors,
Customers and Society).6
FINANCIAL HEALTH
Satyam’s balance sheet showed all the signs of a healthy company (see Exhibits 4 through 6). In eight
years from 2001 to 2008, Satyam’s turnover increased from INR14.12 billion to INR84.73 billion. Profit
after tax also showed a consistent gain, with the net profit margin increasing from 10 per cent to 20 per
cent. Satyam expected revenue of about US2.7 billion in the 2008/09 financial year (as stated in its 10k
form for the 2007/08 financial year)7. These figures meant an increase in growth rate from 24 per cent to
26 per cent between 2008 and 2009. Basic earnings per American Depository Receipts (ADS) for 2009
were expected to be between US$1.44 and US$1.47, implying a growth rate of 15.2 per cent — up 17.6 per
cent from the previous year. The earnings per share (EPS) for 2009 were expected to be between INR29.54
and INR30.04, with a growth rate of 17 per cent to 19 per cent over the previous year.
Satyam’s financial health was based on a robust profile of customers: its top 100 customers accounted for
85 per cent of the company’s revenue. Satyam had two customers with annual run rates greater than
6
7
Satyam Annual Report 2007.
Satyam Annual Report 2008.
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For the exclusive use of V. King, 2020.
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US$100 million, while 50 customers exceeded an annual run rate of US$10 million. There were 230
customers with annual run rates of US$1 million. Satyam was the first Indian company to post its audited
results for the 2007/08 financial year in accordance with the International Financial Reporting Standards
(IFRS)8. The company’s chief financial officer (CFO), Srinivas Vadlamani, commented on reporting
results according to IFRS:
We see considerable value in adopting IFRS. As a global standard, it enables comparison
and comprehension of financials, regardless of a company’s location. And, since Satyam
has adopted the standards, our operational reporting can be understood, without
reconciliation, by more than 100 countries that already permit or require IFRS reporting.
Further, the move provides clarity and consistency to Satyam’s investors in Europe, where
our company is growing quickly.9
THE UNFOLDING OF THE CRISIS
On December 16, 2008, Satyam’s board approved a 51 per cent stake acquisition of Maytas Infra, a listed
company in the Bombay Stock Exchange for US$1.3 billion, and a 100 per cent stake in the unlisted firm
Maytas Properties for US$300 million. Both of these firms were in the construction and real estate business
and were promoted by the two sons of Satyam’s chairman, Ramalinga Raju. Raju’s immediate family and
friends held a 36 per cent stake in Maytas Infra and 35 per cent stake in Maytas Properties. The successful
completion of the acquisition required borrowing US$300 million to add to the US$1.2 billion of cash that
Satyam claimed to possess. Satyam justified the diversification into the real estate and property business on
the grounds that real estate was a sunrise industry in India, and that diversification was essential given the
sluggish growth of IT business in key markets such as the United States and Europe.10
The investors reacted very negatively to this news, resulting in a 55 per cent decline in Satyam’s ADRs.
Following stiff resistance from investors in general and institutional investors in particular, Satyam called
off the acquisition on December 17, 2008; however, this did not pacify the negative sentiments and share
prices, which fell by 30 per cent on the Indian bourses. Given the significant related party transactions
involved, investors and media also started raising doubts over the corporate governance practices at
Satyam; to restore investor confidence, Satyam scheduled a board meeting to consider a share buyback on
December 29, 2008. On December 23, the World Bank suspended Satyam for eight years from doing any
business with itself, on the grounds that Satyam was offering bribes to World Bank staff for obtaining
lucrative contracts. While Satyam vehemently denied the allegations, its share prices continued to fall. On
December 26, Mangalam Srinivasan — who had been an independent director since 1991 — resigned,
taking the moral responsibility for not opposing the acquisition decision in writing. On December 28,
Satyam postponed the board meeting scheduled for December 29; on the same day, Infrastructure Leasing
and Financial Services (IL&FS) Trust sold 4.41 million Satyam shares at INR139.83 in the open market.
Raju and his family had pledged these shares in lieu of the loans obtained from IL&FS Trust; as a result,
Raju and his family’s stake in Satyam diluted to 5.13 per cent by late December, from a high of 8.65 per
cent in September 2008.11 Satyam’s market capitalization eroded by 40 per cent in just two weeks in the
latter half of December 2008.12
8
Satyam Annual Report, 2008.
Ibid.
10
Ravi Kant, “Satyam-Maytas deal: A mockery of corporate governance,” Merinews, December 18, 2008,
www.merinews.com/article/satyam-maytas-deal-a-mockery-of-corporate-governance/153334.shtml, accessed on March 13,
2009.
11
Ibid.
12
“Satyam promoters may have lost stakes,” Livemint, Reuters, December 29, 2008, accessed on March 12, 2009.
9
This document is authorized for use only by Vince King in BUSA 4980 – Summer 2020 taught by STEVEN DIONNE, Georgia State University from Jun 2020 to Jul 2020.
For the exclusive use of V. King, 2020.
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In the midst of this disaster, someone claiming to be a former senior executive in Satyam wrote an
anonymous email to one of the board members: the email had details about financial irregularities and
fraud at Satyam. The letter also mentioned that Satyam did not have enough liquid assets that could be
confirmed with its bankers. The email was forwarded to all the board members along with the chief
executive officer (CEO), B. Ramlinga Raju. Some people speculated that this letter ultimately became the
basis of the uncovering of the financial fraud. Facing heat from the market and criticism from the analysts,
three more independent directors — Rammohan Rao, who headed the board meeting that approved the
acquisition, Krishna Palepu and Vinod Dham — resigned from the board.
On January 7, 2009, B. Ramlinga Raju wrote a resignation letter to the Securities and Exchange Board of
India (SEBI), which was the market regulator in India. In his resignation letter (see Exhibit 1), Raju
admitted that he falsified the financial statements to the tune of INR71.36 billion: this falsified amount
included INR50.46 billion in non-existing cash and bank balances. Raju confessed that he overstated the
profits, as the profit margins were as low as three per cent; he also stated that the financial gap in actual
and stated profits was known to senior officials including the chief operating officer and the CFO. Raju
stated that he was forced to overstate the profits to maintain the share price level, which was important to
make sure that Satyam was not subjected to a hostile takeover. Raju further stated that he never profited
from the high market prices of Satyam shares because he never sold any of his shares, but only pledged
them with family and others to raise loans to bridge the gap between fake and real assets. Raju described
the situation in his letter: “It was like riding a tiger, not knowing how to get off without being eaten.”
To meet Satyam’s cash commitments, Raju had to take loans from his friends, family and others by
pledging his shares: his ownership stake declined from 20.74 per cent in 2003 to 8.74 per cent in 2008.
Justifying his actions, Raju stated in the letter that in his last attempt to save Satyam from a hostile
takeover and to bridge the gap between actual and stated cash, he tried the Maytas deal that failed;
consequently, he chose to resign.
This scandal had many consequences: Raju was arrested and imprisoned; shares of Satyam fell to
INR39.95 on the Bombay Stock Exchange from a 52-week high of INR544; DSP Merrill Lynch
terminated its engagement with the company; Raju’s brother Rama was also arrested; a special team of
auditors from SEBI began investigations into the fraud; several law suits were filed in different courts
including in the United States; and the government of India disbanded the Satyam board and appointed
new directors and an interim CEO.
INVESTIGATIONS
The Central Bureau of Investigation (CBI) was asked to initiate an inquiry into the financial fraud at
Satyam. According to the CBI, the amount of manipulated profits was more than INR96 billion.13 Other
findings were also different from what Raju stated in his letter. The biggest puzzle for the shareholders,
investigators and the general public was how Raju could have hidden the evidence of fake assets from
various regulators such as the income tax authorities, SEBI and the Reserve Bank of India for seven years.
Further, what was the role played by governance mechanisms such as the board and internal/external
auditors, whose main job was to make sure that firms did not indulge in such irregularities? Raju’s claim
that Satyam was earning only three per cent net profits was hard to believe given that other competitors
made 20-25 per cent net profits during the same years. Such a massive case of fraud without intention to
make private gains was difficult to believe .14
13
14
“Satyam fraud could amount to Rs10,000 cr:CBI,” Livemint, Press Trust of India, March 22, 2009.
K.Venkatasubramanian, “Satyam Computer — Open Offer: Reject”, Hindubusinessline, J…
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