Final Report for Ethics and Value Management on

Satyams Demise
Submitted to Prof. Govinda Sharma N.R.

Submitted by Group C9 Deepan Sathyamoorthy (11134) Malladi Manikanta (11148) Navin Prakash (11152) Sneha Jaiswal (11170) Soumya Siddhartha Rout (11172) Vasanth Raj (11178)

Abstract:
On September 30, 2008, Mr Raju confessed that Satyams balance sheet carried inflated figures for cash and bank balances of Rs. 5,040 crore, as against Rs. 5,361 crore reflected in the books. Also the liabilities were understated while accrued interest was shown that was non-existent. In addition, Satyam also inflated employee numbers as 53,000 employees but it had only 40,000 employees, to siphon off more than Rs. 20 crore a month. Also Mr Raju tried to cover up the virtual money in Satyams balance sheets by acquiring Maytas, so that. he can spend the virtual money and convert his family assets (Maytas) to Satyams assets so that the inflation of the financial reports can be concealed. Meanwhile The World Bank banned Satyam from all the business at the bank for eight years counting from Sep-2008 for it has installed spy software on workstation inside the banks Washington headquarters, resulting in theft of data and bribing the bank officials. The report largely focuses on the Ethical issues and dilemma involved in the case. The report doesnt end there. We also have tried to state the ethical theories that may be applied to resolve the dilemma. In addition we also have made an attempt to give recommendations for resolving the dilemma at the moment of committing such an unethical act. Finally we have given our recommendations for avoiding such occurrences in the future.

Satyam History:
Mr Ramlinga Raju, founder of Satyam Computer Services, got MBA from Ohio University. He came back to India in 1977 and started a spinning mill. Later he was in real estate and infrastructure sectors. Later he diversified into IT services. He started Satyam Computer Services in 1987 with 20 employees. Satyam had rapid development in IT sector and became a major player in Indian IT industry specialising in software outsourcing services. It was incorporated as private limited company in beginning and later recognized as public limited company in 1991, debuts on BSE. Satyam had joint venture with Dun & Bradstreet and GE in 1993. In May 1997, Satyam became the first Indian IT Company to get ITAA Certification for Y2K Solutions. Satyam Infoway (Sify) was the first Indian Internet company to be listed on NASDAQ by 1999. It had established its presence in 30 countries by then. In 2007 they became the official IT service provider for the FIFA world cups, 2010 (South Africa) and 2014 (Brazil). They acquired UK-based Nitor Global Solutions Limited. From 2003 to 2008, in nearly all financial metrics of interest to investors, the company grew measurably. Satyam generated USD $467 million in total sales. By March 2008, the company had grown to USD $2.1 billion. The company demonstrated an annual compound growth rate of 35% over that period. Operating profits averaged 21%. Earnings per share similarly grew, from $0.12 to $0.62, at a compound annual growth rate of 40%. Finally, beginning in January 2003, at a share price of Rs. 138.08, Satyams stock would peak at Rs. 526.25 a 300% improvement in share price after nearly five years. Satyam clearly generated significant corporate growth and shareholder value. The company was a leading star and a recognizable name in a global IT marketplace.

Ethical Issue:
 Inflation of financial reports  Maytas acquisition  World Bank ban Inflation of financial reports Mr Raju confessed that Satyams balance sheet as of the September 30, 2008, carried inflated figures for cash and bank balances of Rs. 5,040 crore, as against Rs. 5,361 crore reflected in the books. It carried an accrued interest of Rs. 376 crore which was nonexistent. An understated liability of Rs. 1,230 crore on account of funds was arranged by himself. Also an overstated debtors position of Rs. 490 crore was showed, as against Rs. 2,651 crore in the books. For the September quarter Satyam reported revenue of Rs. 2,700 crore and an operating margin of Rs. 649 crore (24% of revenues) as against the actual revenues of Rs.

2,112 crore and an actual operating margin of Rs. 61 crore (3% of revenues). This has resulted in artificial cash and bank balances going up by Rs. 588 crore in Q2 alone. Accrued inflation of money over the past years has led the gap into a gulf. Satyam inflated employee numbers 53,000 employees but it had only 40,000 employees, to siphon off more than Rs. 20 crore a month. Maytas acquisition In 2008, before confession, Mr Raju attempted to acquire Maytas group, i.e. Maytas Properties and Maytas Infrastructure for $1.6 billion. This Maytas group was owned by Mr Raju and his family members. Mr Raju tried to cover up the virtual money in Satyams balance sheets by acquiring Maytas, i.e. he will spend the virtual money and convert his family assets (Maytas) to Satyams assets so that the inflation of the financial reports can be concealed. This announcement created a lot of panic in shareholders and was criticized because they thought this deal would benefit only Mr Rajus family. Investors opposed to the decision which eventually led to crash of the companys stock price. This was followed by the lawsuits filed in US contesting Maytas deal. Stock value of the company plummeted 50% in US stock market. Four independent directors quit the Satyam board and SEBI ordered promoters to disclose pledged shares to stock exchange. Investment bank DSP Merrill Lynch, which was appointed by Satyam to look for a partner or buyer for the company, ultimately blew the whistle and terminated its engagement with the company soon after it found financial irregularities. On January 7, Merrill Lynch wrote to the Securities & Exchange Board of India (SEBI) stating that it had terminated its advisory agreement. The reason: "In the course of such engagement, we came to understand that there were material accounting irregularities." It took Merrill Lynch only days to discover the inflated reports. On 7 January 2009, Satyams previous Chairman, Ramalinga Raju, resigned after notifying board members and the Securities and Exchange Board of India (SEBI) that Satyam's accounts had been falsified. Raju claimed in the same letter that neither he nor the managing director had benefited financially from the inflated revenues. He claimed that none of the board members had any knowledge of the situation in which the company was placed. The fraud took place to divert company funds into real estate investment, keep high earnings per share, raise executive compensation and make huge profits by selling stake at inflated price. The gap in the balance sheet had arisen purely on account of inflated profits over a period that lasted several years starting in April 1999. Mr Raju in his confession statement has stated as What accounted as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years. This gap reached unmanageable proportions as company operations grew significantly. Every attempt to eliminate the gap failed, and the aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones.

Later the registrar of Indian Companies ordered a probe into Satyams Maytas acquisition deal. This move was to investigate as whether this acquisition deal was in any way a violation of corporate governance norms or a diversification strategy. World Bank ban The World Bank banned Satyam from all the business at the bank for eight years counting from Sep-2008. The reason stated was that, Satyam has installed spy software on workstation inside the banks Washington headquarters, resulting in theft of data. Bank officials were also bribed for this incident.

Dilemma Involved:
Dilemma - a situation requiring a choice between equally undesirable alternatives. An ethical problem cannot be resolved unless it is recognized as a dilemma. Mr Raju was under pressure to show extraordinary results in order to survive. Apart from that, there was greed for prestige and money, overshadowing the responsibility to meet fiduciary duties. Businessman can have greed about profit but does he get to that in an ethical way is more important. On one hand, his rise to stardom in the corporate world and the immense pressure to impress investors made Mr Raju a compelled leader to deliver outstanding results. On the contrary, Mr Raju had to suppress his own morals and values in favour of the greater good of the company. The root cause for all these incidents was inflating the financial reports. This continued over several quarters. Was it necessary to inflate the financial reports? This was the first dilemma which led to chain of other dilemmas like:  Should the financial results be inflated even though it was illegal?  Was it ethical to plan to acquire Maytas group without investors approval?  Was it ethical to have to go for data theft and bribing bank officials?  Should this risk be taken at the cost of companys credibility?  Is it ethical that he has not prioritized the fact that his actions may ruin the countrys image as the ultimate IT destination in the world?  Is it ethical to cheat shareholders?  Is it ethical the livelihood of thousands of faithful employees? He must have got into a final dilemma as, should he confess about the reports or not - where he took the decision to go for it and took full responsibility. He also might have confessed because there was no other choice for him.

Ethical Theory and Approaches

Applying three theories to assess Satyams case namely:  The Utilitarian Theory  The Television Test  Ethical Relativism Theory The Utilitarian Theory The Utilitarian Theory states that moral actions are those that produce the greatest net pleasure compared with net pain. One aspect of the Utilitarian Theory is the Cost Benefit Analysis which quantifies the benefits and the costs of the alternative in a given situation. In Rajus situations, the benefit of falsifying Satyams accounting was increasing Satyams stock price and the appearance of continued rapid growth but if got caught company might get a bad name, sued for forging financial reports, defamation for the country, loss of stakeholders etc., as in the case on Enron scandal. The alternative would be to report the companys correct finances. This would lower stock value, reduce profits for Satyam and its shareholders, and lead to less buy ins from investors but no bad name and defamation. Here one has to decide which of the two options is better and has to take the decision accordingly. The Television Test The Television Test asks if an individual would want their actions broadcasted on television. If their answer was yes then it means that they are okay with everyone looking into their actions, i.e. they dont feel guilty or ashamed of their acts. So they can proceed with that act. On the other had if they dont want to broadcast it means they are either ashamed or guilty of their actions. Their conscience says that, the action is not the right way. In our case whether Mr Raju wants to watch his actions on television or not, will be the question. Ethical Relativism Ethical Relativism says that actions must be judged by what individuals subjectively feel is right or wrong for them. Situational Ethics is an aspect of the Ethical Relativism Theory that says one must judge a person's actions by first putting oneself in the actor's situation. Raju chose to act in his best interest. He may have believed that he was protecting Satyams market shares, but this was short sighted. Raju received a lot of prestigious awards that were

based on Satyams success. Raju was arrogant and believed he could fudge Satyams accounting and make up for it in the long run. Deontological Theory According to this theory all it matters is the action that you perform to attain the goal. It doesnt care what the goal is about but all it talks about is how you reach the goal. According to the theory doesnt matter what Mr Raju was trying to attain, all one needs to look into is the action of inflating the financial reports.

Recommendations for resolving the dilemma:

As we saw earlier in this case, Mr Raju has to go through various dilemmas throughout this scandal. All these dilemmas were because of one particular decision that he took during the beginning, i.e. the dilemma as to whether to forge the financial results or not. If the decision for that dilemma was taken as not to forge the results, then incidents that followed suit would have been completely different, be it good or bad - for the company or himself. Since we know the result of the decision that he took, we could easily now say that whatever he did was not ethical, was not legal, was not correct, etc. So lets forget the aftermath of his decision and lets assume we are in the same time as Mr Raju, who now has to take this decision and lets analyse this dilemma and get into a conclusion as whether to forge the financial results or not. Important decisions cannot be made out of thin air. For any decision making process we need to analyse three important factors:  Why did this decision making situation come?  What are the consequences of the decision?  Who all will get affected because of the decision and how?

Decision Making Situation:

First part of decision making process should be to find the root cause for this situation. In this case the decision making process was whether to forge or not. This dilemma came into picture because Satyam was one of the top performing companies in India and was showing good numbers in financial reports. Now this has deteriorated and this is not good for the company and its stakeholders. He also had very high ambition of taking the company to great heights but the results were not helping him at all. So something has to be done to keep up to the pace the company is going through because the competitors were able to show good growth rate but Satyam cannot do so. He was under immense pressure, he has to do something about it or else he will lose face. He did not want to lose the companys respect to its competitors. The market share of Satyam Computer Service Limited has reduced too much that something has to be done immediately.(Google Finance)

The actual issue for this is lack of competence. Being competent means being the best or one among the best at what you do. (Neither he was competent enough to beat the competitors nor was he competent enough to cover up the forgery). There is no point in being ethical without competence. To solve up this issue, the first thought that comes to our teams minds is how we would become competent enough so that we could be back in track in showing good numbers in financial reports. The thought process should have been I would check what is going wrong or what have my competitors adopted to show better results for them. Mr Raju should have analysed this situation and checked out with his managers and executives as why this has happened.

Consequences of the decision:

Maybe Mr Raju might have discussed about making the company competent by employee management, increase in efficiency and other normal ways as a common manager would think and those strides did not work out, we do not know. May be he might have tried a lot of possibilities to improve the companys share price which did not help and finally he has to take this decision, we do not know. Considering the dilemma as to whether to forge the documents or not, let us see what will probably be the consequences on either of the decisions. If he is going to forge the document first he will be relieved from the pressure of showing deteriorating results to stakeholders. (For a while) The company and he will not lose respect. Employees would not be worried about their companys poor performance. He can boost the performance in the upcoming years and could somehow cover up this forgery that he is going to perform now. These are the good side of the decision that the scam has to be carried through. Lets see the bad side of the scam. Forging a financial statement is illegal (Section 468 Forgery, a common man would not know the section number of IPC but will certainly know that forgery is illegal).(IPC)Being a person who leads a big organization cannot afford to do illegal activities, which brings shame not only to the person but to the entire organization. Even if one feels that one had to be illegal, one has to realize as at what cost one has to do it. Is the action worth the cost should be analysed. Answering stakeholders for poor performance is much better being guilty in front of employees, family and the world. Lets assume its hard to find this scam as this is the only time that he is going to forge.(Mr Raju thinks he can improve efficiency in the upcoming years without forging, he says It was like riding a tiger, not knowing how to get off without being eaten.(Reuters) He intended to get down off the tiger but was worried about losing his life.) The only other consequence (if the scam is not found) is that he will not have a peaceful life. His own conscience would pester him day after day; he would have to lead a scary life as whether this scam would be found out or not. Even that may occur only for a year till the next financial report comes, after that no one would even care about the previous year report. (Mr Raju was expecting to get off the tiger but did not think about the part of being eaten i.e. if he can show performance without forging).

Stakeholders:
When a dilemma is analysed it should be analysed considering only the people involved in the dilemma but everybody who is related to it, who will be affected by decision of that dilemma should be considered. In this case the alleged affected would be:       Mr Raju Employees Investors Clients The entire country The auditor company and their associated organizations

In every aspect of the above mentioned criteria, forging the document will certainly help but how long? - May be a year. One year the above people may feel happy about the company performance (except Mr Raju who will know which is not) but after that either the company has to really perform well and show the results or Mr Raju should reveal what his company is capable of or he should continue with the forging process! There are no other options. If Mr Raju has to reveal the actual performance then he can do it in the beginning itself instead of forging this year and revealing it in the next year. If Mr Raju expects to perform well in the next year and if he has any plans for that, then he can implement them now and wait for one year. Showing poor performance is better that forging the documents because if he is forging then he has to go through the three options above and again that will lead to forging again and will become an endless loop. Forging the statement may be hard to find but if forging is going on year after year, bubble wont last long one day or the other it will blast and all those people mentioned above will be affected badly. Mr Raju will lose self-respect and will be behind the bars, the organization might be shut down and all the employees might lose their jobs, Investors and clients would be doomed and frustrated which eventually would bring a bad name to the sector and to the country as well. (Satyam is a big MNC listed in NASDAQ. If this scam comes to lime light Satyam would be named as An Indian IT sector Company) This scam might put the Indian government in a bad position and would make them look unreliable to the rest of the world causing Indian companies to lose international credibility, experience a decline in stock prices, and cause outsiders to question investing in Indian companies. The auditors of the company will also lose their credibility which is more important for an auditing concern. The companies linked with PricewaterhouseCoopers might also be scrutinized. Satyam helped in Indian Economy yes thats true but if the scam comes into light that would degrade the nation and the IT sector which would bring down the Indian Economy. Mr Raju should try to improve the companys performance by his managerial skills which would have reflected in stock markets. Even if this years financial statement figures are not appealing, by improving performance he should be able to show better figures next year. That should have been the decision for problem.

Now lets get back to present date and analyse. If we look deep into the scandal we can see that the main issue was due to the performance of the company in stock market. He should have taken measures to bring it back on track (of course he did by forging) as a manager not as a fraud. If the issue was resolved in this way the forge dilemma would have never come into play. If he had tried it (maybe he really might have tried) and since it did not work out he if he had got this dilemma then he has go through the second and third steps of the above decision making process. As discussed in the third point if he forges, then that may get into the forging loop, which will never let him go.

Recommendations for avoiding recurrence of the issue:

Ask What do I gain?
Shifting our focus towards how to avoid such occurrences in future, we would like to ask Mr.Raju one question, Did you by any chance have the possibility of getting a personal gain from the massive risk you took? The answer may well be a silent No. Of course we are not authenticated to question such a celebrated and respected business tycoon just because he divulged the fraud. No offense. But assuming us in a position to shoot a question upon him we shall get the simple but the very truth. The answer No has a lot of things to convey to the world. After all each one of us is self interested and do an act if only if we are benefitted by any means. Mr.Raju at no point had any personal interests while doing this forge let alone his gaining of popularity and fame on account of this inflated performance. The reason why we say that the answer No is quite significant is basically this, should we take such a career and image threatening risk even though it has no life changing benefit to offer personally? So the point is simple. We need to first ask ourselves the benefit and the magnitude of risk that we get actually realise in doing an unethical act. If we keep comparing the benefits and the magnitude of risk involved in each and every act of us more than half of us will try not to commit any unethical act. So this is our first and foremost recommendation i.e., in most of the cases the amount of risk always outweighs the benefits that we may possibly derive from an unethical act. Hence if we always have the habit of comparing the benefits and the risks more often than not we end up on the ethical side of the behaviour.

Corporate governance:
Just as we kept thinking about any other recommendation that can possibly be made we were fortunate to be taught corporate governance by you sir. On listening about the corporate governance in the class we all were in unison in our team that corporate governance if employed in the right way will be the most effective thing to avoid any kind of distortion in the organization. Let us see what a corporate governance is all about in the first place:

The simplest understanding of corporate governance is that - it is the way corporations or commercial organizations are managed. If management is about running the business, governance is about seeing that it is run properly (Kumar). Corporate governance is a means of providing assurance to the society that corporations are well-run institutions which not only promote the interest of shareholders but create value for the society at large. Companies based on transparent and efficient systems which provide fair treatment and quality output to all its stake holders are as important to democracy as political institutions. Companies founded on ethics and good governance are the foundation of sound market economies. Good corporate governance creates safeguards against mismanagement and acts as an anti-dote to corruption. Coming back to satyams case there was a widespread criticism that the corporate governance laws are not adequate in India. (p. CG failure in satyam by Prof. NRG). It is learnt that like most other firms in India the board members are handpicked by the promoter himself. These independent directors need to be identified, nominated and employed after careful introspection. Rather the Indian companies Act unfortunately did not specify the qualities or qualifications of an independent director. . As we learnt in the class, a good corporate governance is something which is accountable, transparent, fair and responsible. It may be seen that the modern concept of corporate governance is not very different from Gandhijis theory of trusteeship wherein he envisaged that the owners of business should act as the trustees of society. Modern theories also conceive corporate governance as the action of the owners and management of a company in the interests of its shareholders. Even the concept of corporate social responsibility has its deep roots in Gandhi's theory of trusteeship. The existing Clause 49 of the Listing Agreement of SEBI and the proposed new Companies Bill, 2011 cover the fundamentals of effective corporate governance. India compares favourably with most other developing economies as far as the adequacy of corporate governance regulations are concerned. (Kumar, p. Central vigilance commission) The Company Bill, 2011 tabled in the Parliament envisages significant improvements in corporate governance through improved corporate social responsibility, appointment of independent directors, serious fraud investigations, and investor protection especially of minority shareholders. The new law also proposes more stringent norms and increased penalty. (Kumar) The bigger challenge in India, however, lies in the proper implementation of these rules at the ground level. The correct approach would be to design and sustain a system that imbibes the spirit of corporate governance and not merely the letter of the law. Improved corporate governance, however, does not solely rest on control through increased regulations. After all, good behavior cannot be legislated. Enforcing corporate governance through a value-based system of self regulation is more sustainable and meaningful. Mervyn King, Chairman of the King Committee on Corporate Governance in South Africa had stated in his famous report Good corporate governance is about intellectual honesty and not just sticking to rules and regulations. Capital flowed towards companies that practiced this type of good governance. (Kumar)

Young Indians, whether in industry or in the business schools, must be exposed to business ethics, corporate governance and corporate social responsibility. That is the way forward in avoiding such occurrences in future. Exposing them to ethics alone cannot help, as we have seen in the past that even those who had done their graduation in Harvard still found themselves in doing unethical acts. Hence we recommend a combination of stringent corporate governance laws as well early exposure of ethics and corporate governance to the young Indians.

Personal Note from the group:

We thank you sir for having instigated us to look at an unethical issue beyond the newspapers. We feel immensely happy for having gone under the skin (to an extent) of the issue and be able to understand the dilemma that may possibly be involved. We thank you once again for the kind of requirement set with respect to the structuring of the report and thereby giving us an opportunity to learn something that is the need of the hour for any future manager. We conclude with a kind suggestion sir: Please make all the groups to post their final report in the common folder so that it will facilitate all of us to gain more insights of the ethical issues, presented by other groups as well, which we may not be knowing.

References:
http://www.oppapers.com/essays/Satyam-Scam/753647 http://jan.ucc.nau.edu/~dgs2/theories.pdf http://www.slideshare.net http://im.rediff.com/money/2009/jan/07satyam-the-letter-raju-wrote.pdf http://www.scribd.com/doc/35579580/SATYAM-CBI-CHARGESHEET-Satyam-Computer-Services http://knowledge.wharton.upenn.edu/india/article.cfm?articleid=4346 http://www.financialexpress.com/news/satyam-hires-dsp-merrill-lynch-to-mollify-shareholderoutcry/404056/2 http://www.igovernment.in/site/Satyam-blacklisted-by-World-Bank-for-eight-years

http://www.vccircle.com/500/news/world-bank-names-wipro-satyam-among-blacklistedindian-it-firms http://en.wikipedia.org/wiki/Consequentialism

http://en.wikipedia.org/wiki/Utilitarianism http://en.wikipedia.org/wiki/Ethics
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