A Study on the Corporate Governance Issues at SATYAM COMPUTERS CONSULTANCY LTD

Subject: Business Ethics

CONTENTS

PARTICULARS PAGE NO.Introduction to Corporate Governance 1-4

Relevance in the present Scenario 5Introduction to Satyam computers

consultancy ltd6-7

Details of the case 8-11Importance & learning of the study

CORPORATE GOVERNANCE

Corporate Governance is typically perceived as dealing with problems that

result from the separation of leadership & control.

DEFINITION :-

Corporate Governance may be defined as holding a balance between

economic & social goals & between individual & commercial goals.

A good corporate governance is one where a firm commits & adopts

ethical practices across its entire value chain & in all of its dealing with

a wide group of stakeholders encompassing employee, customer,

venders, regulators & shareholders in both good and bad times.

DESIDERATA OF CORPORATE GOVERNANCE

Right of Shareholders: The right of shareholders are namely as below:

They should secure ownership of their shares.

They have voting rights.

They have right to full disclosure of information.

They can participate in decision on sale or any other change in corporate

assets & new shares.

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ManagementEmployees

Board

Shareholder

Equitable treatment of shareholders: All the shareholders including minority

and foreign shareholders should get equal treatment.

Disclosure & Transparency: The disclosure and dissemination of key

information about the company to all those entitled for such information.

Responsibilities of the Board: The functions of the board include

protecting the company, its shareholders & all its other stakeholders. The

functions would include concerns about corporate strategy, risk, executive

compensation & performance, accounting & reporting system, monitoring

effectiveness & changing them, if needed.

ISSUES IN CORPORATE GOVERNANCE

Distinguishing the roles of Board & Management:

The functions of the board include the below

Select, decide the remuneration & evaluate on a regular basis, and

if necessary, change the CEO

Oversee the conduct of the company’s business

Review & where necessary approve the company’s financial

objectives & major corporate plans & objectives.

Provide advice & counsel to top management.

Select & recommend candidate to shareholder’s for electing them to

board of directors

Review any other functions to be performed by law.

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Seperation of the roles of the CEO & the Chairman: The roles of the

CEO and the Chairman are different. The CEO takes care of the senior

management whereas the chairman takes care of the board.

Appointment to the board & reappointment: The board or its specially

appointed committee selects & appoints the prospective director and gets

the person formally elected by the shareholders at the ensuring Annual

General Body Meeting.

Directors & Executives Remuneration: This is one of the mixed & vexed

issues of corporate governance that first came to the center stage. The key

issues would include

Transparency

Justifiability of the pay in the context of performance

The process adopted in determining it

Severance payments

Non-executive directors’ pensions

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Protection of Shareholders rights & their executives:

There are a number of questions relating to this issue as

1. Should companies adhere to 1 share 1 vote principle always?

2. Should companies retain voting by a show of hands or by poll?

3. Can shareholders resolution be bundled?

4. Should shareholders approval be required for all major transactions?

MAJOR THRUST AREAS OF CORPORATE GOVERNANCE

The six major thrust areas of corporate governance are as bellows:

1. They call upon government to put in place an effective institutional

and legal framework to support good corporate governance practices.

2. They call for a corporate governance framework that protects and

facilitates the exercise of shareholders rights

3. They strongly support equitable treatment of all shareholders

including minority & foreign shareholders.

4. They recognize the importance of the role of stakeholders

5. They stress the importance of timely, accurate and transparent

disclosure mechanism.

6. They deal with the board structures & responsibilities.

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RELEVANCE TO THE PRESENT SCENARIO

Satyam scam was not an easy issue. It has its own complexities as it involved

14000 crore scam. Satyam scam had been the example for following poor

governance

Practices. It had failed to show good relation with the shareholders and employees.

So as to throw a light on the poor governance practice at one of the major IT

giants, the need to study such case is made important. Taking this scam as a role

model, it could be suggested that there is a need to frame up good governance rules

and see to the proper implementation of it.

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INTRODUCTION TO SATYAM COMPUTER CONSULTANCY LIMITED

SATYAM COMPUTER CONSULTANCY LIMITED was established on

June 24 1987. the founder of such organization was mr.Ramalinga Raju.

Chief executive officer at the time of the scam was Mr. Ram Mynampati

And chief financial officer of such was mr. Valdamani Srinivas.Non executive

directors were Krishna Palepu & Vinod.K.Dham. satyam computer consultancy

limited has its headquarter at Hyderabad.

Satyam computer services limited has its several subsidiaries:

1) Satyam BPO

Citisoft

CA Satyam

STI

Bridge Consultancy

The various services offered by the satyam compute consultancy limited

Included:

Application Software

Business process outsourcing

Business value enhancement

Consulting and Enterprise Solution

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Infrastructure Management Service

Integrated Engineering Solution

Product and Application Testing

Six Sigma Consulting

Offices of satyam computer consultancy limited are located global at

America, Europe, Middle East Africa.

SCS had achieved several awards and achievements for its meritorious work.

To name a few:

1) UK trade and Investment India business award for “ CORPORATE

SOCIAL RESPONSIBILITY”

2) Ranked No.1 in American society for and development best

award 2007.

After the scam of rs.14000 crore came into light, the board of members were

Replaced temporarily by experts. Several board members retired voluntarily.

Even the auditing company, named KPMG was penalized. Several bidding

took place for acquiring satyam by several companies. The final three bidders

for satyam were L&T, Spice group and tech mahindra.

After the successful bidding, Tech mahindra acquired satyam and the

new chief executive officer is Mr. C.P. Gurnani. The two independent

directors are C.Achuthan and T.N.Manoharan. working directors included

Mr. C.P.Gurnani and MR.Vineet Nayyar.

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DETAILS ABOUT THE CASE- SATYAM SCAM

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). It planned to acquire 100% and 50% stakes in

Maytas property and infra for $1.6B. 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 following were the inflated figures:

Inflated cash and bank balance Rs.5040cr

Non existent accrued interest Rs376cr

Understated liability of Rs.1230cr

Overstated Debtor position of Rs.490cr

Inflated staff by 12000 ( Actual were 40000)

Revenue of Rs.2700cr (Actual were Rs.2112cr)

Operating margin to be 6494 cr ( Actual were 61cr)

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INDIA’S LARGEST FRAUD- Rs.7800crore( now estimated as 14000

crore)

As per the definition of corporate governance discussed above,

A good corporate governance is one where a firm commits & adopts

ethical practices across its entire value chain & in all of its dealing with

a wide group of stakeholders encompassing employee, customer,

vendors, regulators & shareholders in both good and bad times.

Corporate governance includes various parties:

1) shareholders

2) employees

3) management

4) bankers

5) government

Governance issue at Satyam arose because of non fulfillment of

obligation of the company towards the various stakeholders. It proved a

poor relationship with all the stakeholders.

It is well known that a shareholder has a right to get information from the

organization, such information could be with respect to the merger and

acquisition. Shareholders expect transparent dealing in an organization.

They even have right to get the financial reporting and records.

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In the case of satyam, the above obligations were never fulfilled. The

acquiuisition of maytas infrastructure and properties were announced,

without the consent of shareholders. They were even provided with false

inflated financial reports. The shareholders were cheated.

It is well known that the collapse of any organization’s reputation has a

diect impact on the employee’s job. As per the case, employees were

shown with a inflated figure. The excess of employees in the organization

were kept under VIRTUAL POOL who received just 60% of their

salaries and several were removed.

The entire scam had its impact on management. Questions were raised

over the credibility of management.

Any organization has its obligation towards the Government by means of

timely payment of taxes and abiding by the rules and laws framed up by

the Government. As per the case with satyam , the company did not pay

advance tax for the financial year 2009. As per the rule, the advance tax

is to be paid 4 times a year; such was not fulfilled by them.

Finally the satyam computer consultancy limited didn’t have good

relationship iwt bak too. SCS was blacklisted by world Bank over

charges of Bribery.It was declared ineligible for contracts to providing:

1) improper benefit to bankstaff.

2) Failing to maintain documentation to support fees.

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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.

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CONCLSION:As earlier stated that corporate governance consist of four parties. In case of satyam fraud, board is unable to fulfill its role & responsibilities.

Now we discuss the responsibilities that should be followed ethically by board and what is actually did –

Ethical responsibilities:•governing the organization by establishing broad policies and objectives; •selecting, appointing, supporting and reviewing the performance of the chief executive; •ensuring the availability of adequate financial resources; •approving annual budgets; •accounting to the stakeholders for the organization's performance.

EMPLOYEES

SHARE HOLDERS

MANAGEMENT

BOARD

Actual scenario: Despite the shareholders not being taken into confidence, the directors

went ahead with the management's decision.

The government too is equally guilty in not having managed to save the shareholders, the employees and some clients of the company from losing heavily.

Simple manipulation of revenues and earnings To show superior performance

Raising fictitious bills for services that were never rendered.

To increase the Cash & bank balance correspondingly.

Operating profits were artificially boosted from the actual Rs 61 crore to Rs 649 crore.

Its financial statements for years were totally false, cooked up and... Never had Rs 5064 crores (US$ 1.05 Billion) shown as cash for

several years.

Its liability was understated by $ 1.23 Billions.

The Debtors were overstated by 400 million plus.

The interest accrued and receivable by 376 Millions never existed.

So when the case came in light following are the actions that has been taken:

Nasscum sets up panel to avoid satyam like case in future- formed a corporate Governance & ethics committee, chaired by N.R.Narayana Murthy (chairman and chief mentor of Infosys.)

Hinduja Global chalks out 100 day plan for satyam.

8 Year ban on satyam to be reviewed.

Govt. orders CBI to probe fraud ( concerned about 52000 employees) - agencies ( 3 months time to probe)-

Serious fraud investigation office(SFIO)

Market regulation SEBI,

Institute of chartered accountancy India (ICAI)

Andhra police

The Sebi had in December given a clean chit to Satyam in the probe on violation of corporate governance law. The government has realized the need of code of conduct & whistleblower policy, now we will discuss what is these terms and how they played an important role.

CODE OF CONDUCT:This Code of Business Conduct covers a wide range of business practices and procedures. It does not cover every issue that may arise, but it sets out basic principles to guide all employees and officers of the Company. Those who violate the standards in this Code will be subject to disciplinary action, including possible dismissal. Furthermore, violations of this Code may also be violations of the law and may result in civil or criminal penalties for you, your supervisors and/or the Company. The basic principles discussed in this Code are subject to any Company policies covering the same issues:

Compliance with Laws, Rules and Regulations Conflicts of Interest Corporate Opportunities Competition and Fair Dealing Political Contributions Discrimination and Harassment Health and Safety Confidentiality Protection and Proper Use of Company Asset

BIBLIOGRAPHY

1) www.google.com 2) www.wikipedia.org 3) Business ethics: concepts and cases- velasquez.