Corporate Governance: Satyam Computer Service Limited Report

Introduction

For effective operation of an organisation, monitoring and control are necessary. Corporate governance comprises one of the ways of controlling and monitoring of organisational operations (Abdulla & Page, 2009). The key agenda of corporate governance is to alleviate any clashes of demands among partners.

This task is mostly accomplished through the enactment of various customs, laws, processes, policies, and institutions, which influence the manner in which organisations are controlled.

For example, the UK has established a set of rules that guide all organisations to ensure that they do not engage in unethical practices, which harm the interest of the shareholders.

State-established policies and other control structures that are established within the field of corporate governance may help to regulate employees’ conducts and decisions. Alternatively, organisations may develop codes that guide the practices of their employees so that they do not engage in issues that harm their shareholders.

However, even with the codes, directors and other employees may fail to uphold accountability as witnessed in the case of Satyam Computer Service Limited. The company misrepresented financial performance information. The act misguided the shareholders concerning the company’s performance.

This paper discusses corporate governance issues in the contemporary organisations using Satyam Computer Service Limited as a case study.

Summary of the Case of Satyam Computer Service Limited

Satyam Computer is an Indian-incorporated information services organisation. At the dawn of 2008, the business announced its plan to secure two organisations. The first one was Maytas Infrastructures while the second one was Maytas Properties. Ramalinga Raju’s folks owned these two organisations.

Raju was the pioneer and chair of Satyam Computer Service Limited. However, following issues with the stock market, the organisation withdrew its acquisition deal within 12 hours. Questions began to emerge from the company’s corporate governance systems.

Satyam Computer Service Limited authorised an acquisition while knowing that the transaction was party-related. However, people began to take responsibility for the malpractice. Two independent directors offered to resign.

At the beginning of 2009, the chairperson exposed how Satyam Computer Service Limited had been exaggerating its returns. This case increased concerns over the company’s corporate governance.

In his resignation letter, the head confessed that the company had engaged in accounting malpractices that involved the manipulation of over $1billion cash balance. The collusion to engage in the acquisition without consulting the independent director aimed at benefiting the chair’s immediate family members.

The vice cost Satyam Computer Service Limited over $1.6billion.

In India, the SEBI Act of 1956 addresses the company’s operations. Clause 49 of the Act specifies issues of corporate governance in relation to investments that are done with group companies.

It sets forth the provision for constituting a board of directors, independent directors, the procedures that the board has to follow, audit committees, remuneration issues, and shareholder committees among other issues that are meant to increase transparency and accountability of decisions that the organisation makes through its board of directors. Indeed, corporate governance under the SEBI Act of 1956 is founded on equality, responsibility, and intelligibility.

Companies also need to appoint people who have the appropriate qualifications to participate in the independent board. More importantly, they should demonstrate integrity.

The goal is to ensure that the directors make independent decisions in an objective manner in the process of executing their mandate of adding value to the success of an organisation (Bhagat & Black, 1999). Satyam Computer Service Limited has the appropriate number and qualified independent directors.

What went wrong? Did they fail in their responsibility of protecting the shareholder interests by permitting the proposed acquisition? Did the Satyam board not consider their roles? Could they not detect the inflated revenues? These questions are relevant in the discussion of corporate governance issues.

However, the debate in the next section addresses corporate governance within the context of the UK in the effort to determine whether the Satyam fraud, possibly the Indian Enron, could have been avoided under the UK 2014 corporate governance guide.

Theoretical Framework

The UK Financial Reporting Council develops and implements guides to corporate governance. The latest version of the code was released in September 2014.

It addresses various issues that relate to the operations of an organisation. Some of the particular areas of relevance entail the composition and remuneration of organisations’ board of directors. It addresses issues that relate to finance, regulations, and ownership systems.

In the UK, corporate governance also cuts across various relationships that exist between many organisational stakeholders in relation to a particular company’s objectives and goals.

The 2014 UK version of corporate governance guide identifies four major areas of concern, namely headship, efficiency, accountability, remuneration, and shareholder relations.

The overall aim of the UK corporate responsibility guide is to ensure ardent protection of all organisational stakeholders. In the contemporary business settings, stakeholders are classified either as external or internal. The chief external stakeholders include groups such as creditors, suppliers, and debt holders (Taylor, 2006).

Internal stakeholders encompass the executive board of directors and other workers.

Within the sphere of corporate governance concerns in the UK, an endeavour is made to ensure that the organisations are directed and controlled with utmost transparency, professionalism, and in a responsible manner to safeguard the interests of all stakeholders.

A key interest is the increment of confidence among investors in the capital markets and shareholders. A dominant issue in the contemporary corporate governance debate in the UK is the effect of the system of corporate governance on economic efficiency (Bebchuck, 2005).

To this end, an emphasis is deployed on the shareholders’ welfare within the established regulatory policy framework. The fall of high profile corporations because of accounting fraud since 2001 has fuelled the need to address the issue of the contemporary corporate governance across the globe (Masdoor, 2011).

In the discourses of corporate governance, managers are responsible to the board. The board needs to exercise utmost responsibility to the shareholders. To conceptualise Enron and Marconi’s scandal, corporations are required to foster and portray high levels of integrity in conducting their business in a transparent manner.

Certain rules to regulate corporate audit committees are established to promote accountability to both shareholders and other business partners.

Before the enactment of 2010 corporate code and the 2014 policy, the UK corporate accountability check was predominately pegged on demanding corporations to prepare annual reports explaining “the basis on which the company generated or preserved its long-term value and the model for delivering its objectives” (Clarke & Marie, 2008, p.27).

Ideally, accountability infers the provision of information that makes business stakeholders mitigate the perceived risks that result from fraud within corporations, which largely act against their interests.

In the UK, the 2014 accountability and business reporting code requires directors to explain their responsibilities in the preparation of accounts and yearly reports. Financial Reporting Council (2014) reckons, “the board should present fair, balanced, and understandable assessment of the company’s position and prospects” (p. 16).

This claim underscores the role of directors in guaranteeing transparency and correct representation of financial information. With the information, shareholders possess the ability to evaluate the performance of a company, the success of its business model, and its success strategies.

Auditors are required to state their role in reporting (Financial Reporting Council, 2014). The report that is presented to the shareholders and other people who are interested in the operation of listed companies will have to pass through the scrutiny of different levels of organisational leadership, control, and monitoring structures.

Therefore, the capacity to recognise fraud increases.

The accountability principle also establishes the risk management and internal controls as strategies for increasing transparency of an organisation’s dealings and decisions of different stakeholders.

Under this principle, ‘the board is responsible for determining the nature and extent of principal risks that it is willing to take to achieve its strategic objectives’ (Financial Reporting Council, 2014). Therefore, it needs to ensure that it maintains effective risk management and internal systems control.

Robustness in the evaluation of risks by directors is important before making the decision of taking risky investments.

Under the principle of audit committees and auditors, the board has the obligation for ensuring formal and transparent decisions in terms of applying corporate reporting, internal controls, and the principle of risk management.

The board for the UK-based corporations is required to form a committee that consists of at least three people for big companies and two individuals for small companies that serve in the position of non-executive directors who should also work independently.

For small companies, the chair can be a member of the committee. However, for big companies, he or she cannot form part of the committee.

As the main watchdog for the institutional investors, the committee’s functions comprise monitoring integrity of organisational financial statements, reviewing internal control, monitoring the effectiveness of an organisation’s auditing functions, and reviewing the independence of external auditors among other auditing-related issues.

Apart from accountability, which is the key issue in Satyam Computer Service Limited’s corporate fraud, the UK corporate governance codes also have a principal concern in the regulation of remuneration, leadership, effectiveness, and shareholder relations.

The principle of leadership underlines the necessity of power separation in organisations.

In corporations’ leadership, Financial Reporting Council (2014) reveals, “There should be a clear division of responsibilities at the head of the company between the running of the board and the executive responsibility of running of the company’s business” (p.5).

This separation of powers ensures that the executives become accountable to the board. As the two different entities have access to the decisions that are made by one of them, separation of powers encourages transparency. The guide also provides that no single person can demonstrate the domination of authority to make choices.

To encourage effectiveness, the 2014 UK code for corporate governance requires the board to conduct formal and rigorous yearly evaluations of its performance together with that of the directors and committees.

It becomes possible to discover loopholes in organisations’ performance as the basis for establishing mechanisms for sealing them. All provisions of the 2014 UK corporate governance ensure long-term organisational success in a bid to protect the interest of all shareholders.

For example, the principle of compensation requires payments to be done such that they promote the long-term performance of listed companies where directors are not permitted to take part in the process of determining their remunerations.

This strategy is an attempt to eliminate the setting of one’s remuneration in a manner that may act against the interest of institutional investors and other stakeholders.

From the context of shareholder relations, the 2014 UK corporate governance code requires the establishment of dialogue that is founded on the principle of mutual understanding between an organisation and the investors. Indeed, this task is the primary role of the board.

While passing resolutions, the board is required to arrange general meetings with investors to foster their participation in making key decisions that may overly influence or expose them to excessive risks. Unfortunately, this strategy was not the case for Satyam in India.

Could the company’s leadership have engaged in fraud if India had developed and implemented corporate governance codes that were similar to those of the UK?

The next section analyses the applicability of the UK’s corporate governance codes in mitigating corporate governance challenges that are similar to those that were experienced in Satyam Computer Service Limited.

Case Study Analysis

Different nations have different theoretical corporate governance frameworks. For example, the Anglo-American corporate governance model, which is also termed as unitary corporate governance model, prescribes a system that constitutes a mixture of non-executive and administrative board of directors (Clarke & Marie, 2008).

The owners of a corporation’s shareholders elect these boards of directors. According to the model, non-administrative leaders assume central ranks, including reimbursement and stocktaking commissions. They also outnumber the executive directors. In the case of Satyam, executive directors held key positions.

Indeed, independent directors who served oversight roles on behalf of the institutional investors seemed to have little say concerning the board’s decisions.

For example, the acquisition deal of the two companies whose owners belong to the family of Satyam Computer Service Limited’s chair leaves a prudent question on how such a deal would be reached without whistle blowing by the independent directors.

Opposed to the case of the UK, issues such as the unanimous authorisation of the acquisition deal and the inflation of the company’s accounts suggest lack of corporate governance principles that can protect the interest of the shareholders.

The situation suggests the investment of power in few individuals who make decisions on behalf of the investors.

To this extent, although literature on corporate governance finds no relationship between the separation of powers and corporate governance, vesting power in few individuals without providing a room for sufficient ventilation is hazardous (Abdulla & Page, 2009).

The resignation of the chair and the independent directors occurred when investors complained over corporate governance approaches of the company once a risky decision had already been made.

This situation implies that the shareholders were not engaged in the decision-making process on a vital investment that would have significantly influenced their interests negatively.

The chairperson had also developed an appetite for making risky investments, which prompted him to misrepresent financial accounts to give the company a high value and ratings in the international markets. This case suggests the lack of adequate experience and knowledge on the likely implications of misrepresenting financial accounts.

Therefore, the chair failed to meet the UK’s requirements for corporate governance. Such demands call businesses to appoint leaders who are experienced in risk analysis and evaluation.

The codes and principles of corporate governance have immensely been developed in different nations. As Arcot and Bruno (2006) observe, in the UK “compliance with governance recommendations is not mandated by law, although the codes that are linked to stock exchange requirements may have a coercive effect” (p. 57).

In fact, the applicability of the UK corporate governance codes is restricted to corporations that appear in the stock exchange listings. This observation suggests their likely application in Satyam Computer Service Limited since Indian corporate governance principles also apply to all listed companies as established in the SEBI Act of 1956.

The UK’s 2014 corporate governance code is accorded statutory authority by the Financial and Services Market Act of 2000. This authority exemplifies the ‘comply or explain’ rule.

The 2000 Act persuades, “public listed companies to disclose how they have complied with the code and to explain where they have not applied the code” (Arcot & Bruno, 2006, p.56).

To this extent, the UK corporate governance deviates from the Indian approaches to corporate governance in the sense that the 2014 code upholds Indian principle-based as opposed to rule-based corporate governance approaches.

The UK’s corporate governance code provides general principles, which act as a guide for the general best practices. Therefore, it can effectively help in mitigating risks such as those that were exposed to Satyam’s investors.

Recommendations

In the UK, corporations’ operations are subject to the application of a common law in addition to relevant jurisdictional statutory laws. Within particular jurisdictions, corporations have specific individualised rules that govern their codes of ethics or authority.

Such rules even constrain the mandates of the corporation directors’ decision-making capacities. The rules are provided in the corporations’ constitution. In the UK, the jurisdictions are termed as corporate charter.

In India, the successful prosecution of crimes that were committed by Satyam’s committee members and chairperson faces constitutional impediments. Indeed, prosecuting the chairperson requires a person to file a case against him on the grounds of fraud.

This situation is quite unlikely. Even if it were likely, there is no guarantee that vital evidence would still be preserved. Participants of corporate fraud are always intelligent enough to ensure that they conceal or destroy any evidence that can link them to wrongdoing.

Therefore, the statutory law may fail to prevent future occurrence of fraud such as Satyam’s fraud. Strong corporate governance policies are required.

From the above expositions, Satyam should consider power breakdown, increased participation of independent directors in the decision-making process, and whistle blowing. More importantly, investor awareness is crucial in enhancing Satyam’s future success. Organisations must serve shareholders’ interest.

This role is the reason why the board of directors is formed. Consequently, in its endeavour to move forward, Satyam needs to develop policies for increasing shareholder participation, accountability, and transparency in its dealings.

Internal and external auditors also need to play their roles as established by the UK corporate governance codes to ensure that any accounting malpractice is discovered and revealed to the investors before money is transferred.

These recommendations are captured in the UK’s 2014 corporate governance manual. Consequently, India needs to establish a corporate governance guide that is similar to that of the UK.

Conclusion

In corporate governance, institutional investors have a noble role of supervising corporate managers who demonstrate any form of self-interest with organisations, which hire them. This situation occurs when investors have sufficient information on the practices of the board of directors and the chairpersons.

However, this state of affairs was not the case for Satyam Company. The leadership made acquisition decisions, which exposed investors to high risks without their participation. The revenues of the company were inflated in a well-calculated plan to depict the company as generating high revenues.

Unfortunately, the independent directors and the auditors could not reveal this malpractice until when the chairperson admitted wrongdoing when things had already gone bad. This paper has revealed how this case highlighted lack effective corporate governance.

Hence, it recommends the adoption of corporate governance codes that are similar to those of the UK, not only at Satyam, but also in India in general.

Reference List

Abdulla, A., & Page, M. (2009). Corporate Governance and Corporate Performance: UK FTSE 350 Companies. Scotland: The Institute of Chartered Accountants of Scotland.

Arcot, S., & Bruno, V. (2006). In Letter but not in spirit: an Analysis of Corporate Governance in the UK. London: Routledge.

Bebchuck, L. (2005). The Case for Increasing Shareholder Power. Harvard Law Review, 118(3), 833-914.

Bhagat, S., & Black, B. (1999). The Uncertain Relationship Between Board Composition and Firm Performance. Business Lawyer, 54(3), 921-943.

Clarke, T., & Marie, R. (2008). Fundamentals of Corporate Governance. Thousand Oaks, CA: SAGE.

Financial Reporting Council. (2014). The UK Corporate Governance Code. London: Financial Reporting Council.

Masdoor, A. (2011). Ethical Theories of Corporate Governance. International Journal of Governance, 1(2), 484-492.

Taylor, B. (2006). Corporate Governance: the crisis, investors’ losses and the decline in public trust. Corporate Governance, 11(3), 155-163.