Lecture Note Week 12

Topics: Board of directors, Corporate governance, Auditing Pages: 8 (1272 words) Published: June 24, 2013
Session 1, 2013

FINS 3626 p International Corporate Governance

Week 12 Case‐study & Final Examination Review

Dr Gloria Y. Tian School of Banking & Finance y.tian@unsw.edu.au

Satyam Computers Ltd.
 Satyam Computers Ltd., the winner of Golden 

Case‐study: Governance Failure Satyam Computers Ltd. 

Peacock Award for Excellence in Corporate  Governance, ironically became a black mark in the  history of corporate governance in India, when  Ramalinga Raju (f li j (founder, CEO and the chairman)  d d h h i ) admitted fraud in his resignation letter.   Satyam, founded by Ramalinga Raju and his brother,  became a publicly listed company in 1992.  The  company expanded into foreign countries in 1996, and  Satyam has been cross‐listed in the U.S (as ADR) since  1999.  4

Satyam Computers Ltd. (Cont.)
Name

Satyam:  Board Composition (pre‐crisis)
Affiliation Executive chairman, Promoter‐director Managing director, Promoter‐director Executive director, Declared interim CEO Non‐executive director ,  consultant Non‐executive director,  independent Non‐executive director,  independent Non‐executive director,  independent Non‐executive director,  independent Non‐executive director,  independent Qualification MBA MBA MCA Ph.D. Ph.D. Occupation Promoter of Satyam Computers Promoter of Satyam Computers Employee and executive director on  board of Satyam Professor at Harvard Business  School Management consultant and  advisor to Kennedy School of  Management Director of New Path Ventures  LLC,NEA—Indo U.S. Ventures LLC Ramalinga Raju Rama Raju Ram Mynampati Prof. Krishna G.Palepu Dr.(Mrs) Mangalam  Srinivasan Mr. Vinod K.Dham Prof. M. Rammohan  Rao Mr, T.R. Prasad

 The company had some (foreign) institutional investors.   The company had a board with majority independence, 

and Raju brothers were the only “promoter  shareholders” sitting on the board.  The audit and  remuneration committees were independent.  ti itt i d d t  In 2008, ranked as one of the largest software  development and information technology consulting  company in India, Satyam Computers Ltd. was  recognized for its outstanding corporate governance  practice.  5

B.E /M.E.(Electrical) Ph.D.

Prof. V.S. Raju

Former dean , Indian School of  Business M.Sc.Physics/F.I.E.(Fello Retired Bureaucrat(cabinet  w Institution of  secretary, Government of India) Engineers ‐ India) Ph.D. Chairman of the Naval Research  Board,Defense Research and  Development  Organization,Government of India

1

Acquisition of (family) related firms:

Satyam:  Ownership Structure (pre‐crisis)

• Opposition by (institutional) investors • Drop in share prices

Negative reactions from investors & other parties:
• World bank suspended its business contracts • IL&FS Trust sold Satyam shares that were pledged for loans

Troubled corporate governance:
• Independent directors resigned • Anonymous e‐mail from former senior executive: irregularities  and fraud

Fraud exposed:
• Ramlinga Raju’s resignation letter ‐‐ confirmation of fraud.

Satyam:  “Stated” Reasons for Fraud
 To fend off (potential) hostile takeovers;  To maintain its pride as an industry leader;  Raju never personally profited from the high share 

Satyam:  True Reasons for Fraud
 Significant financial manipulation & fraud;  A web of family‐controlled companies;  Raju brothers have decreased shareholdings over 

prices because he never sold any of his shares; “It was like riding a tiger not knowing how to get off  without being eaten.”

time, and used shares as pledges to obtain loans;
 Poor corporate governance: inadequate supervision & 

lack of questioning culture.

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Satyam:  The Audit Committee
Responsibility Did the Audit Committee fulfil its  responsibility?

Satyam:  The Internal Auditor
Responsibility Did the Internal  Auditor fulfil its  responsibility?

Exercise care, diligence and skill in reporting of financial ...
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