CORPORATE GOVERNANCE AND

CORPORATE SOCIAL RESPONSIBILITY

Mahindra Satyam Restoring Corporate Governance

CASE ANALYSIS

Submitted to Prof. S. Subramanian

BySHAKUN (PGP/17/295)

WHAT WENT WRONG WITH SATYAM?

I.

THE INTERNAL AND EXTERNAL CORPORATE GOVERNANCE FAILURES

Passive Board
In 2008, when the Satyam scam happened, the board at Satyam was passive and functioned
at the discretion of the CEO. It accepted the proposed unrelated diversification into real
estate which was termed by B. Ramalinga Raju as serving a poison pill to make it
unattractive to potential predators. The board was limited in its participation and activities as
well. The promoters holdings fell from 15.67% in 2005 to 2.7% in 2008, but the board
ignored the red flag. They also held limited accountability as they rescinded the approval to
the Maytas deal in response to spontaneous investor outrage. Most of them also resigned 2
days after the rescission of the transaction. The approval of proposed Maytas deal itself
ratifies management preferences as unrelated diversification was portrayed as normal
business for which shareholders approval wasnt deemed necessary. Some of the following
functions were not carried out effectively by the Board of Directors:

Evaluating and approving mergers and acquisitions

The marginal gap between actual operating profit and the profits reported in the books
continued to grow over the years. Due to pressure by the investors to invest the surplus
money depicted in the balance sheet, the company took to various acquisitions in India
and outside. Most of these acquisitions were not carefully planned and executed and
hence turned out to be losing propositions in the long run.
Provide counsel to employees
Evaluating the CEO - Also, the CEO was the chairman of the board too
Ensuring effective audit process
Monitoring investments

Information Asymmetry
The reams of financial information that was possibly shared with the board few days before
the board meeting might have been too much to absorb as Satyam had grown to become a big
company. This could have been a possible point of failure. There were accounting
irregularities like inflated cash balances, understated liabilities and overstated receivables and
revenues but all of this went unnoticed as the channel of information was from the
management to the internal auditing agencies.
People
Satyams board of directors consisted of nine members. Five members of the Board were
independent as required by Indian listing standards. The board did not have a financial expert
on the board during 2008. Also, there were several prominent figures of the business world
on the board which could have led to a lack of scrutiny. The independent directors
succumbed to serve the interests of the family group instead of the interests of the
corporation.
II.

CULTURE

The board followed traditional culture. The structure, composition and information flow was
pre-determined. The culture was passive, lacked candor and there was little willingness to
challenge. In addition, there was a tendency to be deferential to age, seniority and authority.
AUDITING AGENCIES Internal Audit and PWC
Actions of Global Head Internal Audit: Created fake customer identities, generated fake
invoices, forged board resolutions, illegally obtained loans
PWC: Ignored the red flags and did not investigate non-interest bearing deposits, did not
verify independently with the banks, was paid exorbitant audit charges, was associated to
Satyam for nine years in a row

III.

IV.

STRUCTURE
Satyam had a top-down pyramid structure and had weak corporate governance historically, in
spite of being awarded the corporate governance award as well as getting listed on NYSE. It
had several business lines but treated them all as one entity. This led to tunnelling of
corporate gains i.e. transferring funds from one entity to another. Groups were permitted to
control more of the operations than their equity claims. It was difficult for the outside
shareholders to monitor performance. So in a way, the controlling group benefitted while the
minority shareholders were harmed.

WHAT WERE RAKESH SONIS PRIORITIES WHEN HE TOOK OVER AS CCO?

Corporate governance standards

Reducing conflict of interest
Metrics to keep track of performance
Code of conduct for directors, senior management and employees
Compliance in terms of fair dealing, confidentiality, whistle blowing, proper use of assets
Good relationships with clients and maintain customer loyalty
Honest Leadership Walk the talk on integrity and maintaining Mahindras reputation
Reducing information asymmetry between management, board and auditing agencies
Brand creation by aptly using Satyams image for value creation
Correction and Validation of financials, new audits and enforce internal audits
Create ambience for employee trust and integrity

HOW CAN SIMILAR SCAMS BE PREVENTED?

AUDITORS
i.
Fixed, finite and rotating tenure of auditors
ii.
Subsidiaries over a certain size to have different auditors than the parent company
iii.
Rating of auditors - a continuous review
iv. Surprise audit of select companies on a random basis every five-to-ten years
v. Mandatory for all listed companies to appoint auditors who satisfy some minimum
requirements
STRENGTHENING THE BOARD
i.
Independent directors should have no professional/business dealings with the company

ii.
iii.
iv.
v.

Full-time independent directors

Capping the number of company boards that an independent director can sit on
Make independent directors truly independent with a finite tenure
Institutional nominees on the Board