In this report, I intend to address my concern over the manner in which management practices in Satyam Computer Services Limited have been governed, and the manner in which various failures and successes have been attributed to corporate governance, structure, and management control. Notwithstanding, there has been a strong case against a number of Indian corporations with respect to fraud; 42% of them are connected with this vice (IBS Case Development Centre, 2009). However, in this report, am cognizant of the tremendous role the IT sector plays in the Indian economy, like in other world economies. I, therefore, find it essential to offer my analysis about corporate governance in Satyam Computer Services Limited.
This is because Satyam is one of the most respected companies in the IT sector. Consequently, in this report, the author shall address various issues in the realm of management in order to provide, the honorable members, with a clear and incisive interpretation, and the way forward towards effective corporate governance. Additionally, in this report, I engender to analyze the current corporate governance in Satyam, and thereafter, proceed by issuing recommendations pertaining those changes that could see this IT Corporation achieve its primary goal.
Corporate Governance in Satyam Computer Services Limited
Satyam Computer Services Limited has had its successes and failures. As a public company, Satyam has been a source for occupation for over 50,000 personnel stationed in different nations (Winkler, 2010). Notwithstanding, it has been perceived as the fourth largest company in the IT industry in India, having 67 patrons worldwide (Winkler, 2010). This increased number in customer base is due to the company’s core values, which include the endowment of customers with the highest priority, an optimistic corporate citizenship, individual dignity, professionalism, as well as its focus on quality (Satyam Computer Services, 2010). Furthermore, in its corporate structure, Satyam has continually embraced all the stakeholder including its associates, customers, investors, as well as the community at large (Satyam Computer Services, 2010). This perspective appears in the company’s vision; ‘To be the world’s most valued ICT Company’ (Satyam Computer Services, 2010). In order to achieve the aforementioned vision, the company does not only value shareholders, but also its “goodwill and (the) respect that… (it) earns from various stakeholders” who are associated with it (Satyam Computer Services, 2010).
One of the distinguishing aspects of the company relates to the structure of the Board Committees since this is what defines the fundamental governance of the company. The Board Committee comprise of the Audit committee, the Compensation Committee, and the Investors’ Grievance Committee (Satyam Computer Services, 2010). All these committees are endowed with the responsibility of overseeing that their respective duties are done carefully, and in the best way possible. Therefore, in case of any failure in accountability within its business functions, the support functions, and the operational functions, the Board Committees must take responsibility to address these inefficiencies by pointing them out and ensuring that there is effective adherence to the principles of corporate governance.
However, in the light of the above understanding, this report submits that the Board of Directors acquaints with the various corrupt practices within the company, in view of fostering effective management control practices. However, as explicitly indicated in his report the Board of Directors, the ex-Chairman of Satyam Computer Services Limited, there were different corrupt practices that the same ex-Chairman carried out, thus making the company’s credibility questionable. Moreover, the fact that a principal executive officer was responsible for covering up fraudulent practices makes it more distressing.
This is because; it is the role of top management executives to ensure that there exists a thorough understanding regarding the principal-agency problem that governs modern corporations. In accordance with agency theory, the “principals invest their money in a company that is managed by altogether different group of people called directors and managers (Sanghani, 2010).” This problem calls for proper observance towards the interests of key stakeholder, by taking to heart the company’s mission, vision, and objectives. Moreover, the company values should be formulated under the auspices of ethics and social responsibility.
Fraudulency in Satyam Computer Services Limited
As disclosed by the former Satyam Computer Services chairperson, fraudulent practices included the violation of the accounting practices regarding bookkeeping. For instance, as indicated in his report, there were instances of bank and cash balance inflation as of September 30, 2008 in which case, a figure of Rs.5,040 crore was fraudulently reflected as Rs. 5361 crore in the books. This figure was erroneously put in place as a cover-up poor performance. Similarly, an interest of Rs. 376 crore was reflected in the books even though this interest was not real in the actual sense. Additionally, the ex-Chairman attested to have understated the liability of Rs. 1230 crore illegally, while overstating the position of debtors by Rs.490 crore, contrary to the Rs. 2651 that had been indicated in the books. All these malpractices had been represented in the Balance Sheet of the Company as of September 30, 2008.
Nonetheless, the company continually experienced fake bank and cash balances by a margin of Rs.588 crore in the first quarter of 2008. Due to these improper balances, the revenue totals appeared to be Rs.2700, and the operating margin of Rs.649 crore in contrast to the actual earnings of Rs.2112 crore and operating margin of Rs. 61 crore.
Because of the above-mentioned instances of account violation, there emerged enormous gaps between the balance sheets over the years. This consequently led to erroneous financial representation of the company by promoting operating profits that were contrary to the actual ones. Consequently, the company has had to bring in additional resources in a bid to justify increased operations, even though this approach did not yield success in the concealment of information.
In order to address failure in the company, it is necessary to recognize that corporate governance is a commitment that should be shared by the Chief Executive officer, the shareholders, the board of directors, the management, as well as auditors, also, other key players include the employees, suppliers, customers, society, and creditors. The involvement of these key parties must be embraced in order to maintain accountability within Satyam Computer Services limited. the shareholders have the capacity to delegate duties to company employees. This is because they are the principals who are responsible for delegation of duties to the employees of the company. By delegating their duties, the shareholders are bound to separate ownership from control.
Consequently, through separation of ownership from the organizational control, the shareholders are bound to create a corporate governance system, which promotes the alignment of both the shareholders and managers’ incentives. Moreover, in order to align the objectives of the two parties; that is, the management and the shareholders), the shareholders are charged with the task of guarding and formulating organizational strategy, make appropriate appointments, issue significant remunerations to senior executives, and to come up with policies pertaining to organizational progress. By doing so, the Board participates in effective performance.
In addition to sound corporate governance, a set of principles have to be adhered to in order to ensure that Satyam Computer Services Limited maintains its business going-concern. These principles are meant to ensure that there is trust and integrity, focus on performance, honesty, openness, accountability, responsibility, direction, and mutual respect. Many other corporations worldwide had violated all these factors in one way or another, however, in the case of Satyam Computer Services Limited, the violation of these aspects of corporate governance led to noticeable flaws in the Indian corporate platform. Consequently, different legal structures governing corporate governance had to be established in order to ensure that order to restore order within the regulatory authority of India, in view of promoting the Foreign Direct Investment in India (Leahy and Tucker, 2010).
For instance, did manifest itself during the proposal to solve the economic crisis through “family transactions without giving minority shareholders a chance to vote” (Leahy and Tucker, 2010). This behavior manifested a violation of the rights of each shareholder within the company. In addition, clearly, the minority shareholders were not provided with a chance to vote regarding the issue. In this respect, therefore, Mr. Raju was ended up putting Foreign Direct Investment at a higher risk of poor corporate governance practices (Leahy and Tucker, 2010), which includes full disregard for minority stakeholder.
One of the aspects that the Board of Directors are expected to understand is that governance plays a key role in organizational success. The Satyam case, as confessed by the ex-Chairman, led to a clear indication of failure within the company’s governing body. This is because it was due to the failure within the governing platform that different malpractices were bound to have taken place. Moreover, the governance structures in Satyam Computer Services Limited were to be operated under the control of business operations, featuring accountability and responsibility in order to avoid the inclusion of family transactions in the business practices.
Business functions are the most adversely affected facets of the company during corrupt practices. This is because of the illegal manipulation of the books of accounting in order to conceal misappropriation in the company. Business functions only depend on proper accounting of the financial information. These functions should be done in the international standards in order to ensure that the company operates under the highest standards in the land.
It is with deep concern that, after critically evaluating the company’s condition, that the author of this report proceeds to submit that a number of changes need to be pursued since they are bound to be essential to effective corporate governance in the Satyam Computer Services Limited. Some of the changes that this report recommends to the Board of Directors include the following:
- Merger opportunities;
- Accounts restatement;
- Mobilization of governance support;
- Financial revival procedures;
- Strategic investment.
The Board of Directors is encouraged to issue stern directives towards the manner in which the company is operated right from the recruitment procedures to the way in which the principal-agency problem is being addressed. With regard to recruitment and appointment, focus should be placed on skills, competencies, and historical records of candidates for top seats. In this case, those appointed must be entirely free of fraudulent practices in their past areas of service. This consideration is meant to bring to table people bearing honesty and integrity so that they are able to channel this behavior down the hierarchy. Additionally, by appointing sound leaders into office, the Board of Directors is expected to make it clear that organizational objectives bear more weight than individual objectives.
Due to the past practices of fraud within the company, many financial resources were lost and unaccounted for. This, therefore, calls for the restatement of accounts in order to attain a clear record of the actual situation on the ground. Moreover, the bank and cash balances available should be aligned with the ones reflected in the books of accounts. However, in the due course of bringing to level the poorly recorded financial information, the company is bound to discover the amount of funds accounted for and yet unavailable. As a result, in order to restore the losses incurred, the Board of Directors is advised to pursue financial revival procedures.
Financial Revival procedures
This involves the discovery and establishment of investment opportunities across the globe in order to cater for improved economies of scale. It is necessary to acknowledge that many companies pursue investment opportunities outside their home regions in a bid to increase their revenue growth and market sustainability.
The author of this report recommends this factor of strategic investment to the Board of Directors as a backup plan towards financial revival procedures. Strategic investment in Satyam Computer Services Limited shall have to take to focus the various products and services that the company offers. Hence in order to achieve this, there is a need to have effective managerial expertise as well as strategies that call for improved capital equity. This is because it is through expert managerial control that various investments across the globe are to be effectively managed. Additionally, the Board is encouraged to formulate manners through which managerial personnel could identify and select relevant strategic investment partners. This includes having the equity capital and authorized equity capital increased in order to meet the investment demands. Therefore, the most preferred strategic investment partner should be one with considerable or sufficient financial resources as well as managerial capabilities in order to help avert future failures in corporate governance. Further, in a bid to stick to effective practices in the company, the Board is encouraged to participate in a remarkably transparent procedure of selecting its strategic partners.
Additionally, in order to acquire an increased financial resource base, the following recommendations are extremely beneficial:
- The capital clause of the company’s Memorandum of association should be amended in order to increase the number of equity share capital to a considerable figure.
- In the process of identifying its strategic investor, the board of directors should embrace a transparent and competitive process.
- To bestow the Board of Directors with the responsibility of approving any share-allotment.
- To ensure that all company records and books of account are kept up-to-date.
Merger and Outsourcing Opportunities
Outsourcing implies the moving of company operations to areas featuring lower costs in its entirety (Monks, and Ninow, 2008, p.353). Satyam Computer Services Limited specializes in many ICT services. This calls for expertise from different areas in the world, and individuals who possess excellent skills in many fields. Nevertheless, most importantly, the company should grow significantly if it adopts an outsourcing approach alongside mergers. There are many advantages that this approach is bound to bring, but most importantly, this procedure tends towards portfolio diversification. However, one of the things that the company should take caution about is the conflicts that are bound to arise between political interests and corporate interests since the two occasionally conflict against each other (Monks, and Ninow, 2008, p.352). This comes as a result of the company’s over reliance on sovereign support regarding permission to operate, and the reliance of political sovereignties on funds, jobs, and other economic contributions (Monks, and Ninow, 2008, p.352).
Typical Management Control Systems in Satyam
As a resolution to curb the threat of fraudulent practices, this report purports to promote a management control system that promotes effective corporate practices. In this case, management control is “the process by which managers assures that resources are obtained and used effectively and efficiently in the accomplishment of the organization’s objectives” (Anthony, 1965). Therefore, effective management control systems must be put in place in order to aid the process of decision-making, planning as well as evaluation (Merchant and Otley, 2007). This approach shall actually help get rid of the misappropriation of funds, and fraudulent practices that ensure whenever management control systems are not effectively put into perspective.
Another aspect of effective management control system should be a database approach, in which information is kept in a central reservoir from where various managerial personnel are able to access any relevant information for purposes of effective decision-making. This approach is deemed vital in the sense that it could foster transparency, accountability, and strict monitoring both in the managerial side as well as in other departments. Additionally, the use of access codes should be taken serious, so that whoever accesses information that he/she is not supposed to access, is brought to questioning.
Management and Ethics
Besides Satyam, there has been a general decline in regard for management and business ethics across the world (Frederick, 2002, p.151). Ethics management deals with the development of “instruments which contribute to the ethical development of a corporation, and methods that can be used to determine in what direction corporations should develop themselves (Kaptein, 1998, p.44). After going through the Satyam scandal, and observing the tremendous impact that ethical misbehavior created, it is essential to acknowledge the rightful words of Vineet Nayar. According to Nayar, ethics go beyond rules; it has a lot to do with honesty (Nayar, 2009). That is to say, even though companies formulate strict guidelines about ethics it is up to individuals to be truthful to themselves and to others.
In other words, employees who bear ethics and social responsibility enable their organizations to focus on the expectations of their stakeholder (Sims, 2003, p.7). Management ethics operates hand in hand with social ethics since the impact of corporate behavior transcends humans and touches the business environment in a direct way (Brown, 2005, p.2). These connections emanate from the existence of organizations having to exist in environments that are social and natural, thus; the duty inherent in every organization is to account for the environment within which each organization exists (Berle and Means, 2003). Thus, no matter what, businesses must be as ethical as possible because no matter what happens, organizations will always affect stakeholder (Collier and Esteban, 2007, 19; Levinas, 1969, 195-6). Notwithstanding, ethics always regulates the activities of business organizations (Badiou, 2001).
It was Milton Friedman who pioneered one of the most prominent views regarding business ethics. According to Friedman, companies should generate returns within legal frameworks (Machan, 2002). He further explicated this view with the assertion that business leaders should “make as much money as possible while conforming to the basic rules of the society, both those embodied in the law and those embodied in ethical customs” (Friedman, 1970).
Nevertheless, the most prominent approach that board members must address is the formulation of ethical guides that would help streamline corporate operations with easy. This conception is connected to Zimmerli’s assertion that “the cause of immoral behavior does not lie in the evil motives of (employees), but instead can be traced to institutional defects (Zimmerli, Richter, and Holzinger, 2007, p.1). Therefore, success can only result from effective policy variables that work to promote the organizational reputation (Beck, 1992).
In this report, the author has systematically presented the concept of corporate governance from the perspective of Satyam Computer Services Limited IT company in India that specializes in outsourcing and other computer services in different parts of the world. Right from the beginning, the essay author has clearly indicated the prevalence of fraud, the measures that could best promote excellent corporate governance in the company. Furthermore, the author has echoed the supremacy of corporate governance, the failure of which can lead to poor performance in the corporate world. Even though the Satyam Computer Services Limited did not enter into grave liquidity problems, there has been an overt indication of the manner in which its failure severely affected the operations and profitability of the company.
Because of this, Board of Directors should take caution on the same in order to avoid future downfall. Secondly, the Board of Directors is encouraged to take into serious concern the fact that the recommendations presented in this report are not absolute but rather avenues through which the Indian authorities and corporation executives are to establish effective governance practices. Furthermore, in order to ensure that future practices remain immune of fraud, the Board need to ensure that office bearers be chosen based on their clean record. However, this report maintains that a lot or research need to be carried out in order to ensure that various measures are in place, to help improve the realm of corporate governance in Satyam Corporation.
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