The Satyam Computer Services Ltd scandal has shown what bad corporate governance can lead to. It will take some time before the story of the fraud unfolds fully but as of now, it seems to be much more serious than just the window dressing of the balance sheet. Probably Satyam created its contradiction in the true sense with Maytas Properties Ltd and Maytas Infra Ltd, and money was siphoned off from the computer software services firm to buy real estate and bribe politicians that eventually led to its fall. In the process, shareholders’ wealth and confidence have been devastated. The management has put the careers of its staff in jeopardy and the image of Indian companies has suffered greatly. Some years in jail for the key perpetrators of the fraud look inevitable.
Most of the people primarily involved in the Satyam scam have a connection with reputed business schools.
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B. Ramalinga Raju has a master’s in business administration from Ohio University and has also had a stint at the Harvard Business School (HBS), where he attended the owner/president course. But it seems this education didn’t help him in his transition from the mode of governance suitable for a small entrepreneur, which he was before starting Satyam, to the kind needed to run a public limited company, where one deals with other people’s money.
Satyam’s audit committee consisted of “independent director” M . Rammohan Rao, then dean of the Indian School of Business (ISB). He was on Satyam’s payroll, drawing a compensation of Rs13.2 lakh, besides getting 10,000 shares for a nominal value of Rs2 each. Satyam was paying another director, HBS professor Krishna G. Palepu, Rs91.91 lakh, plus 5,000 shares for Rs2 each. Raju cleverly used the HBS and ISB brands to cover up his unethical activities. Like Rao, Palepu too should resign from HBS; he was closely associated with Raju for several years and has brought a bad name to his institute by failing to protect the interests of shareholders. Raju’s other possible accomplice PricewaterhouseCoopers, the auditing firm, is a regular recruiter from the Indian Institutes of Management (IIMs). It no longer has the moral right to continue operations.
To assume Satyam is an isolated case would be folly. Window dressing of balance sheets is a common phenomenon in the Indian corporate sector. In the licence raj era, it was common for firms to give one set of accounting documents to the sales tax office, another to the income-tax department and yet another to the banks from where finances were sought. In those days, it was difficult to do business honestly, even for big companies, as money had to be siphoned off to cut through the red tape. With economic reforms in the 1990s, doing business without greasing palms became a possibility. But still, manipulation of accounts is practised by some to siphon off funds or to inflate share prices which are then mortgaged to financial institutions to get cash.
This raises the issue of corporate governance and what business schools can do about it. Stricter laws or more government interference will not help much if the people running affairs don’t internalize basic ethics. Making students aware of good governance practices is the job of business schools. Cases such as Satyam’s fall or the rise of Infosys Technologies Ltd can convey how ethics are good for any business in the long run. But the best way to preach issues of ethics is to demonstrate them. In most Indian business schools, governance is in crisis, and this has a negative influence on students. It presents wrong role models and an unethical culture at the starting point. Beating the system seems more lucrative.
It is time business schools had a code of ethics for their own governance. IIMs can jointly draft the ethics code for all the processes and practices in an institute and for the conduct of the governing board, director, faculty and students. There should be clear guidelines of conduct for directors or faculty members who join boards of companies. If any faculty member lends his name to a board, he is also lending the name of the institute he represents, and should be made more accountable. Similarly, ethical ways of internal processes—including admissions, faculty selection and evaluation, the selection of the director, student evaluation, interaction with industry, placements, etc.— should be clearly defined. Such a document can be a guide for all business schools. Maybe this could be the agenda of the next quarterly meeting of all IIM directors.
Premchand Palety is director of Centre for Forecasting and Research (C-fore) in New Delhi, from where he keeps a close eye on India’s business schools. Comments are welcome at email@example.com