(This was written some three years ago, after Satyam. Somehow this seems quite appropriate now)
There is this hypothesis floating about in my mind – that one criterion for judging if a country is now a developed economy or not is to check out the size of its scams and frauds. This, of course, does not invalidate other criteria that economists and bankers use – it’s just an additional factor they may wish to include in their calculations. The more I think about, the more I am convinced that there’s a PhD thesis lurking in there somewhere, and if and when I get the time, I may take a rain check on doing that PhD. If someone else pre-empts me, remember you read it here first.
The Satyam scam is worth some Rs 7000 crores, making it the largest corporate fraud in Indian history. Translated into international language, that’s about US $ 1.4 billion. While it’s not in the same league as the $ 50 billion that Madoff made off with, or the few trillions that the sub-prime thing will cost the globe, you can’t scoff at $ 1.4 billion – there are many here among us who would be proud and happy to make off with a small percentage of this goodly sum.
On a serious note, this raises many fundamental issues about how companies are being run in India, particularly in the private sector. The fundamental principle underlying all business is trust – trust that the business owners will make money in a fair and just manner, trust that business managers will run the company in a fair, just and transparent manner, trust that the business will deliver fair value to its customers and get a fair price for the value delivery, trust that the business with deal with their employees, business partners, and other stakeholders – including the community – in a manner which is fair, just, transparent, and builds on the foundation of trust on which the business was built.
J R D Tata had written. “No success or achievement in material terms is worthwhile unless it serves the needs or interests of the country and its people, and is achieved by fair and honest means.” (Ref R M Lala’s “The Creation of Wealth”). That’s that in a nutshell.
It is also my belief that all manner of regulations and industry supervision procedures is based on the same principle of trust, and a belief that the number of businesses who are backsliders are very small, and do not represent the industry as a whole.
The Satyam fraud throws up some issues involving this very trust and those in whom shareholders, employees and other stakeholders had reposed their faith to ensure that the business is carried out in a fair and honest means.
The fraud has been going on for some years, so who carries the can for letting it happen, in addition to those who’ve been arrested?
The bankers? Is it credible that a fraud of this scale had been going on for years, and the bankers didn’t know about it? Or were they in cahoots?
Ditto for the auditors – and the fact that they are among the global giants in their domain is no excuse. Arthur Andersen was also a global giant, and look at what they did with Enron. Is it credible that PwC were not aware? Were they in cahoots as well?
The independent directors on the board of Satyam? Were those illustrious ladies and gentlemen doing their job, or were they merely a bunch of rubber stamps? After all, that august body included such academic luminaries as Prof M Rammohan Rao (who has since resigned from the Satyam board, as well as from his position as Dean of Indian School of Business), and Prof Krishna Palepu (who has also resigned from the Satyam board). Has Prof Palepu resigned from his Professorship at the Harvard Business School as well? His bio at Harvard Business School has this to say:
“In the area of corporate governance, Professor Palepu’s work focuses on how to make corporate boards more effective, and on improving corporate disclosure. Professor Palepu teaches these topics in several HBS executive education programs aimed at members of corporate boards … He also co-led Harvard Business School’s Corporate Governance, Leadership, and Values initiative, launched in response to the recent wave of corporate scandals and governance failures.” Interesting – he has to seriously consider his position in the light of the Satyam scandal.
The investigations into the fraud can actually lead to a few significant positivesIt can help redefine and crystallise the role/s of independent directors and strengthen their hands in running the company
- It can remove auditors from the protection of ‘peer reviews’, and allow the law-makers to create strict quality control guidelines and perhaps even a regulatory body. If PwC gets reviewed by their peers, it is open to question if they will get punished adequately – after all, many, if not all, the auditing giants have significantly scary skeletons in their respective cupboards. Right now, at best a few individual heads will roll and PwC will get away to live to do business another day. Perhaps, only a quasi-governmental regulatory body would have the independence, the power and the objectivity to create guidelines and ensure adherence as well as punishment on transgression. Auditors should no longer be able to hide behind those two magical words: “management representation.”
- The naming and severe punishment of the guilty in public would, hopefully, serve as a deterrent to others in corporate India to cease and desist from such practices in the future.
From what I read in many leading international business journals, their correspondents hold it as axiomatic that Indian private business is among the most manipulative and corrupt in the world – the nexus between businessmen, politicians, bankers, auditors, the stock market, etc is so strong that anything goes.
Perhaps what India Inc. needs are bigger and better scams to hit the headlines. Hopefully, that will blow the lid off the corruption and manipulation, and we shall emerge into cleaner times. And to follow through with my first thought in this post – maybe we can then truly claim to be a developed economy.