Satyam, corporate governance and emerging markets

Perhaps the most tragic thing about the Satyam saga is the name of the company.

Satyam means ‘the truth’ and the company’s fortunes have fallen on the sword of anything-but-the-truth. India’s first IT company to list on the NASDAQ and also trading on several Indian stock exchanges is being described as India’s Enron.

The Satyam saga is a complex case that raises many questions. On the one hand, these questions are about the role of board directors, the possible complicity of auditors, and the efficacy of regulator oversight. On the other hand, the case raises profound doubts about the basis of growth in emerging markets. On yet another level, one has to wonder if companies from countries with less advanced corporate governance frameworks should really engage in the masochistic exercise of going public and raising money in markets which hold them to tougher standards of growth and profitability, and then watch them like hawks to ensure those expectations are delivered upon.

There is inevitable collateral damage within India. Institutional investors are hardly likely to be happy about the lead-balloon like drop in the share price although some, like Sundaram BNP Paribas, offloaded their stake, ‘before the event’ as they naively point out. I say ‘naively’ because the timing appears highly suspicious to onlookers and the offloading will hardly spare them possible enquiries about alleged charges of insider dealing, for instance. The auditors, PwC, may also find themselves in some hot water.

But there is a silver lining in all this.

Corruption and infrastructure are often cited as India’s twin Achilles’ heels. But the Satyam case is not about systemic corruption and bribery which concern institutional investors aiming to invest in India. It is a more contained crisis, a failure of governance within a company.

That is where the silver lining ends.

Because one wonders if there are other such ‘contained crises’ brewing elsewhere. Because this failure of corporate governance raises a red flag for businesses seeking partnerships and joint ventures in India. There is a systemic angle to it, of course, in terms of regulatory oversight or the role of auditors as I mention earlier. But that can happen in the best regulated, stable, ‘developed’ economies as evidenced by the CDO crisis, the Madoff crisis and of course, Enron. The solutions will have to take into account all the various possible weak links.

Meanwhile, what do you do, if you are a business seeking to enter India or another emerging market, with a strategic partnership or alliance?

Of course, you persist with robust due diligence on companies, which are potential partners. Then there are the wrongly-described ‘soft’ aspects of a deal.

An outstanding strategy consultant will not just deliver the numbers, the hard due diligence, but also guide you on the major issue of executive reputation and articulate the tacit knowledge essential to your success in your target emerging market. Choosing the right person to be on your side in your global growth plans therefore is your first step in partnership, and in your quest for success in emerging markets.

Related readings:

Corruption is the greatest stumbling block to infrastructure development in India, says Nita Kulkarni

10 thoughts on “Satyam, corporate governance and emerging markets

  1. anybody watching the indian corporate scene since the early 90’s knows that there are many more where this came from , in all industries, property, development, software, newspapers, banks, public sector companies, telecommunications, energy, manufacturing .. it is simply the way the game is played in that culture, and everybody within it knows .. share price manipulation is the least of it …

    there are of course exceptions, wipro, infosys, tata who have learned from international exposure to best practices …

    your writing is very precise and analytical, and if you wanted to make some serious enemies, you could do some heavy investigative reporting on indian industry. god knows it wont come from kamla bhatt or sravana misra .. or ndtv .. no one, in fact, will write this story until it is safe ..


  2. Shefaly, as you suggested there are quite a few companies which indulge in questionable practices in India, and more so the closely held companies. What is outrageous is that audit firms play along. Mostly a little asking around tells you which companies these are, it is mostly an open secret, but there is usually never any proof. These companies never let the top people go and if they do, they are paid for life, just to keep their mouth shut. I know of two cases like this.
    But at the same time I think there are a lot of professional companies out there and these too are well known. Overall there is a mixed bag out there.
    And thanks for linking my post.


  3. Shefaly
    I am again saddened by how our (global) inabilty to help companies stay on the right track and make correct choices impacts all. We can be hopeful that this instance is a “contained crisis” that will not be mirrored elsewhere within India, but should not be surprised as the fine edge many of these companies walk, is further sharpened by the financial meltdown.

    As a good mutual friend of ours has pointed out, “no one who is a billionaire has gotten there without deals and practices on the edge.” When money is easily made or credit accessible, many sins are forgiven.

    As we know, good governance starts with the individuals at the top, with the daily example of management doing the right thing and expecting those in the organisation to follow suit. It is too easy to mislead a Board, and present compensation schemes can only foster favourable characterisations of financial postions and fiscal responsibility that expand reality.

    Some of these on-the-edge approaches are rooted in practices of the generation of managements/executives we term ‘old white guys’ (who obviously can be Indian, Chinese or whatever), likely a function more of their age and experience than their race. There was a similar, somewhat more subtle shift in the late ’80’s when the ‘management by intimidation and abuse’ style started to be less acceptable.



  4. Shefaly one has to remember that this is not new when I was undertaking my MBA we had Polly Peck and Maxwell frauds. When the bubble burst we had Worldcom, Enron, Tyco.

    Here in Europe we have a number of businesses that deploy strange accounting practices and a number of firms have developed that look at the background and reputation of executives as Accounts are no longer a reliable statement of a companies health. When it comes to Audit firms the fees do not justify making waves, they reply on the client to make the account profitable by undertaking Tax and Consulting.

    I guess the difference is that Satyam was a public company that went bad. The issue for me is that India seems more like America in that the CEO has no Shame. Over the last month with the Madoff fall out we have seen two Europeans take their life because of the losses.


  5. As Buffet once said: “It’s when the tide runs out you see who’s swimming naked”. Satyam’s tide seems to have run out. Question is whether other companies and related people are also swimming naked… For one, I’d like to find out what PWC was up to. And the directors at Satyam.


  6. I’ve been on seven-eight earnings conference calls in India over the past week, and apart from one instance, I’ve noticed that analysts and investors haven’t been asking the tough questions.

    Once the Satyam fraud was brought to light, one key approach that the industry took was to keep going on and on portraying Satyam as the black sheep, and a one-off case. The effort put into that appears to have worked.


  7. @GregoryLent: Thanks for your comment. I think when you say ‘that culture’, the descriptor probably applies to corporate cultures in most countries as the comments by @Ian (who writes from the UK) and @Wendy (who writes from the US) suggest.

    As for making enemies, I think I shall pass on the temptation. Not for lack of material though. 🙂

    @Nita: Thanks. I think bad eggs are found everywhere and audit firms are no exception. In this particular case, it is noteworthy that the same audit firm oversees many IT companies so either the ‘errors’ (assuming poor professional judgement) are propagated or the partners in this case were truly asleep at the wheel (or complicit, which is a greater possibility).

    @Wendy: Thanks for your note. And yes, that piece of wisdom from our mutual friend.

    The tricky thing about edges is that they can give us a sense of adventure – and some gains – but they can also damage and hurt and cause us to bleed. Knowing the difference between the two is probably what we call ‘morality’ and sensibility too.

    I hope there will be a shift towards more transparency and as things stand, it may well be forced and not voluntary.

    @Kathleen: Thanks. I think corruption is systemic but greed is very individual and perhaps an essential human condition which can be triggered by helpful circumstances or be ‘auto-immune’ as in needing no external stimulus.. Sad but true.

    @Ian: Thanks. Your point about ‘shame’ made me stop and think. India I feel once again is paradoxical in this respect. In societal matters, the loss of face matters a lot to Indians; but in corporate contexts, perhaps wealth is the ultimate metric? It is a society in flux too – rules are changing and it is hard to say where the balance will emerge.

    @Atul: Thanks. We would all like to know what PWC was doing! Since you quote The Sage, here are one more that comes to mind: “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”. May be someone should have told Mr Raju all this ahead of time.

    @Nikhi: Thanks. Sorry to sound like a broken record but tough questions can not come from analysts who are hired fresh and have not a jot of work experience in the industry about whom they are expected to spout short and long term wisdom!

    Many investors, in turn, rely on these analysts’ recommendations mostly to make short-term gains. Stable businesses need long-term investors who take time to understand the business and can ask tough questions. Can’t help but cite Warren Buffett again (I blame @Atul!): “We believe that according the name ‘investors’ to institutions that trade actively is like calling someone who repeatedly engages in one-night stands a ‘romantic.'”

    @Poonam: Thanks for your kind words. 🙂


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