SATYAM COMPUTER SERVICES - DOMINANT SHAREHOLDER & CORPORATE

GOVERNANCE IN DEVELOPING COUNTRIES (INDIA)

Author: Bikram Satpathy

Creation Date: Jun 01, 2009
Version: 4.2

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Contents

Executive Summary.......................................................................................3
Introduction....................................................................................................4
Satyam and its Stakeholder before Turbulence..............................................6
Employees......................................................................................................6
Investor/Stock Holder....................................................................................7
Customer .......................................................................................................9
Controversies and Recent Turbulence..........................................................10
Failure of Satyam corporate governance and Role of Dominant Shareholder
......................................................................................................................12
Impact of Satyam controversy on its Stakeholders:.....................................14
Employees....................................................................................................14
Shareholders: ...............................................................................................15
Impact on Customers: ..................................................................................15
Recommendations........................................................................................17
Reference:.....................................................................................................21

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Executive Summary
The case examine the corporate governance issue at the India based

Information Technology (IT), Satyam Computer Services Limited

(Satyam). The company has just been added to the list of companies

involved in fraudulent financial activities, one that includes such names

as Enron, WorldCom, and Allied Irish. Our paper argues however that

the corporate governance problem in Satyam was different from Enron,

WorldCom and Allied Irish. The problem in the Indian company is that

of disciplining the dominant shareholder and protecting the minority

shareholders. The newly unleashed forces of deregulation,

disintermediation, institutionalization and globalization in India are

going to make the minority shareholder more powerful and forcing the

companies to adopt healthier governance practices. These trends are

expected to become even stronger in future. Indian regulators can

facilitate the process by measures such as: enhancing the scope,

frequency, quality and reliability of information disclosures; and

reforming the bankruptcy related laws.

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Introduction
Satyam Computer Services Limited (NYSE: SAY) provides information

technology (“IT”) services and business process outsourcing (“BPO”)

services in North America, Europe, Australia, Africa and South America.

The company was incorporated on June 24, 1987 in Hyderabad [1],

India by Mr. Ramalinga Raju.

Milestones

• 1991 Debuts on Bombay (India) stock exchange [2].

• 1993 awarded as ISO 9001 certification [4].

• 2001 listed on New York Stock Exchange (NYSE) [4].

• 2007 Becomes the official IT service provider for the FIFA world

cups, 2010 and 2014 [4].

• Announces acquisition of UK based Nitor Global Solution Limited

[2].

• 2008 Revenue crosses $2 Billion mark [2].

• Awards & Recognition [2]

o Golden Peacock Award: The world Council for Corporate

Governance presented Satyam with a coveted Golden

Peacock Global Award for Excellence in Corporate

Governance for 2008.

o UK’s India Business Award: Satyam earned the United

Kingdom Trade and Investment India Business award for

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 Corporate Social Responsibility. The company was honored

for its participation to provide remote electrocardiograms

(EKGs) to villagers, an initiative that likely prevented

hundred of people from suffering serious heart troubles.

o Asian MAKE Award: A distinguished panel of Asian Fortune

Global 500 business executives and leading knowledge

management and intellectual capital experts named

Satyam a Most Admired Knowledge Enterprise (MAKE) for

the third year in a row. The award recognizes Satyam’s

knowledge-driven corporate culture, development of

leaders and employees, innovation and transforming

corporate knowledge into shareholder value.

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Satyam and its Stakeholder before Turbulence
The driving forces of Satyam growth from the year 1987 to 2008 were

because of – Employees Delight, Investor Delight and Customer

Delight. The principle of “Delighting Stakeholder” at Satyam is shown

below.

Employees
Satyam refers the employees as “associates.” Before the financial

crisis the company used to provide competitive salaries, incentive pay

and stock based compensation (ESOP) to all the employees along with

extensive training program and entrepreneurial work environment.

They were devoting significant resources for the training and

development of their associates. The Satyam Learning Center &

Satyam School of Leadership was started by the company to promote

the culture of learning and to develop leadership quality among the

associates. Also the company had a strong believe in caring for the

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associates’ welfare. In 2006, Satyam was selected as one of the Top

three Best Employers in India by BT-TNS-Mercer [1].

Because of entrepreneurial environment and initiative, Satyam was

able to attract and retain a large number of highly skilled technical

associates from 2001 to 2008. Till March 31, 2008, the company had

50, 570 associate and the growth rate in the number of associate was

nearly 29% since the year 2001 [2].

From our research, the key delight parameters of Satyam associates

(Employees) were:

 Wealth creation through exercise of stock options

 Performance linked pay

 Leadership development initiative and training program

 Improved associate Delight Index

Investor/Stock Holder

Before the financial crisis, Satyam used to find creative and productive

ways to delight the stockholder of the company. The Board of

Directors got elected by shareholders with a responsibility to set

strategic objectives to the management and to ensure long-term

interest of all stakeholders. Although the amount varies, it was

customary for Satyam to pay cash dividends to the stock holder. They

had paid out dividends of $68.3 million in fiscal year 2008, $56.7

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million in fiscal year 2007 and $41.3 million in fiscal year 2006 [2]. Also

there was an amazing brand value growth for Satyam from the year

2004 to 2008.

The key delight parameters of Satyam investors (Stock holders) before

crisis were:

 Bonus stock issues 1:1 [1].

 Dividend: 350% (Final + interim)

 Growth in revenues, profit and earning per share (EPS)

 Improved liquidity and market capitalization in US.

 Sponsored ADS offering

 Investment in acquisitions and expansion while paying dividends

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Customer

Satyam had a global customer base and by March 31, 2008 they were

providing service to 654 customers including 185 Fortune Global 500

and Fortune U.S. 500 companies [2]. The company had strategy to seek

new customers and at the same time to secure additional

engagements from existing customers. Because of high quality

services, they were able to receive significant recurring revenue from

existing customer. Before the financial crisis, their business from

existing customers was around 92.1% in the year 2008 [2].

The key delight parameters of Satyam customers before crisis were:

 Customer-centric organization design and arrangement of

customer appreciation event.

 Customer intimacy programs like customer summits are held

annually by the company.

 Company was encouraging highly process-driven solution.

Satyam had received company-wide CMMI Level 5 certification

[1].

 One of the core values of the company was “Customer Delight”.

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Controversies and Recent Turbulence

On 7 January 2009, Satyam chairman Mr. Raju resigned after notifying

the board members and the Securities and Exchange Board of India

(SEBI) that Satyam’s accounts had been falsified [5].

Mr. Raju confessed that Satyam’s balance sheet of 30th September

2008 contained:

 Inflated figures for cash and bank balance. A non existent cash

and bank balance of $1,026,581,108.66 USD was shown in the

year 2008 [6].

 An accrued interest which was non-existent. Nonexistent accrued

interest of $77,354,015.41 USD was also shown in the year 2008

[6].

 An overstated debtors’ position. An overstated debtors’ position

of $100,988,273.72 USD was given in 2008 [6].

 An understated liability. An understated liability of

$253,491,055.26 USD was given in 2008 [6].

On 10th January 2009, India government and Company Law Board

decided to bar the current board of Satyam from functioning and

appointed a new Satyam’s Board. India Charted Accountants Regulator

(ICAI) issued a show-cause notice to Satyam’s auditor

PricewatherhouseCooper (PWC) on accounts fudging.

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Mr. Ramalinga Raju and the former CFO of the company Mr. Srinivas

are currently in India prison. Mr. Raju is charged with several offences,

including criminal conspiracy, breach of trust, and forgery. Also he was

charged for diverting money from company bank account to his

relative bank account.

We all know that honesty, integrity and accuracy are absolute

requirements of the accounting function. The financial records of

public companies are required to be audited by a certified professional

accounting firm. From the annual report of Satyam, it is clear that the

financial records are audited by certified professional accounting firm

Price Waterhouse Cooper (PWC). The auditors of Satyam might have

faced with conflicts of interest while certifying the financial record of

Satyam. They have softened their standard while auditing the

company financial statement. It is clear that the loyalty or obligation to

the client (Satyam) is divided or in conflict with self-interest of Auditors

and the interest of Satyam’s management.

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Failure of Satyam corporate governance and Role of Dominant

Shareholder

Issues of corporate governance have been hotly debated in the United

States and Europe over the last decade or two. For example in the

year 2000-2002 the fraudulent financial statements filed by WorldCom,

Enron and Adelphia misled investor and led to billions of dollars of

losses in the stock market. The main cause of these companies failure

is “agency problem”. In this environment the owner and management

have become widely separated and the management did not work in

the long term interest of the shareholders. Also the Board of Directors

of these companies was unable to exercise effective control over the

management.

However, the main cause of Satyam corporate governance failure was

not “agency problem”. The company corporate governance does not

show any conflict of interest between management and owners as we

have seen in case of Enron, WorldCom and Adelphia. Our research

shows, the problem was caused by the conflict of interest between the

dominant shareholders (promoters) and the minority shareholders. In

case of Satyam, the promoters (Mr. Raju, together with their friends

and relatives) were the dominant shareholders. Though the financial

institutions owned majority of stake, but historically they used to play a

passive role in the company. This was allowing the promoters (Mr. Raju

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and his relatives) to play the corruption game. The promoters were

trying to re-structure the business and were also diverting assets

between group companies.

Currently, Satyam accounting scandal is under investigation. But our

research shows the company was doing much healthier business in

2006-2008 and the profit was diverted to cheat the minority

shareholders. This reminds us a famous joke among bankers in India

that there are many financially sick companies in India but no

financially sick promoters.

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Impact of Satyam controversy on its Stakeholders:

Employees

Satyam is a knowledge driven company and employee represent this IT

organization by working on business ideas with support from investors.

But because of the corporate governance failure and consequent

financial problem in the company, the employees’ wishes have been

badly impacted.

• Current Satyam management is not able to provide stable

employment to the employees. They have recently handed over

pink slips to 450 employees [7].

• The employees as a stake holder of the company are not getting

fair pay. The new Satyam’s management has implemented the

virtual pool employees program under which around 14000

employees will only get only part of their salary for the fiscal

year.

• Banks like ICICI, HDFC, HSBC and Citibank have cut credit card

limits for Satyam staff.

The India's flagship information-technology is under world economic

crisis and the number of new openings in other Indian IT companies

like TCS, Infosys and IBM are limited. In this situation, the companies

are clogged with double-digit resumes from Satyam employees looking

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for better salaries and stability. Moreover this has limited Satyam

employees’ bargaining power to get better salaries elsewhere.

Shareholders:
Stockholders are critically important stakeholder group of Satyam. By

providing capital, monitoring corporate performance and assuring the

effective operation of stock market, stockholders play a very important

role in making the business system work.

After the crisis the company is no more able to delight the stock

holders.

• Current Satyam management and Board of directors are not able

to distribute dividends to the stock holders as they used to give

in the year 2006 and 2007.

• Stockholders are facing 57% erosion in stock price since the

scandal broke. Stockholders never got a fair opportunity to exit

because of the stock price falling off a peak within minutes of the

scandal being revealed.

• About a dozen lawsuits have been filed against Satyam

computers in US courts, charging the Indian firm with duping

thousands of American investors out of billions of dollars.

Impact on Customers:
This scandal has created serious trust issue among Satyam’s existing

customers and has hindered its ability to attract new customers.

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GlaxoSmithKline (GSK) did not renew its contract with Satyam on

ethical grounds. Telstra Corp., Australia's largest telephone company,

has said publicly that the scandal will be a factor when it carries out a

planned elimination of two of its four IT suppliers this year. As the

fallout from the Satyam scandal continues, many of the existing

Satyam’s clients are examining their options. While each customer's

opportunities will depend on its specific contractual rights, many

outsourcing agreements include a provision allowing the customer to

terminate the agreement without payment of a termination fee (or

payment of a reduced fee) upon a change of control of the supplier.

However, because the customer bears the cost of re-sourcing the

terminated services, termination usually makes sense only in the most

extreme cases.

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Recommendations

We have already identified the problem in Satyam Computer Services

and our research shows the problem is also present in most of the

other business houses in India. Clearly, the problem is abuse of

corporate governance by dominant shareholder and it can be solved by

disciplining the dominant shareholder. The regulator (the company law

administration as well as the securities regulator for example SEBI) and

the capital market can play an important role in preventing the Satyam

scandal happens again.

Government and Regulator Action Required

• Large blocks of shares in corporate India are held by public

sector financial institutions and they are mainly passive

spectators on managing the company. These shareholdings could

be transferred to other investors who could exercise more

effective discipline on the company managements. Alternatively,

these institutions could be restructured and privatized to make

them more vigilant guardians of the wealth that they control.

• Government and regulator should encourage the company to

disclose the company information regularly. This will help the

minority shareholder or the capital market to act against errant

management. The regulator can enhance the scope,

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 frequency, quality and reliability of the information that is

disclosed.

• Whistle Blowing: India’s regulatory agency (SEBI) should consider

“whistleblower policy” under which employees of a company can

report any wrongdoing to the firm’s whistleblower committee

without informing their supervisors or revealing their identities.

Capital Market Action

Now a day, the capital market is getting powerful in India. The

market should identify the management of the organizations those are

working in the best interests of the dominant shareholders. Once

these organization and their management are got identified, the

capital market can restrict their ability to raise money from the market.

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SATYAM Action Plan to regain business

• Regain Customer and Investor confidence: The new management

should convince customers that fraud that happened at Satyam

was localized by few people and that company’s delivery

excellence, committed associates and differentiated services are

still intact.

• Internet & Public Relation. The World Wide Web (WWW) is

extensively used for organization product marketing. Satyam

can use the same internet potential for increasing public relation

activity. The company website for public relation can provide the

new management greater control of message consistency and

communication. Satyam management can also use real time

devices like online press conference, executive chats and

instance messaging facility for rapid movement of company

information to the stakeholders. The internet presence will also

keep Satyam’s image fresh in the public’s eyes.

• Appointment of Independent lead director: Board should

separate the duties of CEO and the board chairman rather than

combining the two in one person. The independent chairman

should hold meetings without the management present,

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improving board’s chances of receiving candid reports about

company’s affairs.

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Reference:

1 Satyam Company Annual Report 2005-2006

2 Satyam Company Annual Report 2007-2008
3 Satyam Stock Report by Motilal Oswal Securities Ltd; Author:
Navin Agarwal, 2007
4 www.satyam.com/
5 www.sebi.gov.in/
6 http://www.scribd.com/doc/9812606/Satyam-Raju-Letter
7 http://www.humsurfer.com/satyam-layoff-400-450-employee-
satyam-pink-slip
8 http://timesofindia.indiatimes.com/India_Business/Satyam_fudge
d_FDs_has_40000_employees_Public_prosecutor/articleshow/401
5830.cms
9 http://cnnwire.blogs.cnn.com/2009/03/04/scandal-hit-satyam-
going-up-for-sale-2/
10 http://www.financialexpress.com/news/satyam-receives-golden-
peacock-global-award-for-excellence-in-corporate-
governance/364843/

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