Will the Satyam debacle really harm Indian business?

Will the Satyam debacle really harm Indian business?
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First Published: Thu, Jan 15 2009. 01 18 AM IST

Updated: Thu, Jan 15 2009. 01 18 AM IST
Is the Satyam episode truly a watershed in the globalization saga of Indian business? Put bluntly, Satyam was an instance of deliberate and systematic fabrication of financial results by a single company which had, on surface, embraced every good governance practice.
Such financial scandals are neither unique to emerging economies such as India, nor the sole preserve of companies driven by the “family/promoter” model. So, are commentators justified in blaming Satyam for undermining international trust in Indian companies, and for jeopardizing the credibility of India’s growth and investment attractiveness?
Beyond the immediate issue of the future of Satyam as a going concern, there are three questions worth examining. First, is Satyam truly a one-off episode, or does it point to a broader breakdown of accountability and governance among Indian companies? Second, will the Satyam affair have a more lasting adverse effect on the international prospects of the Indian information technology (IT)/business process outsourcing (BPO) sector? Finally, does the episode call for an extensive overhaul of corporate governance and regulatory frameworks in India?
The extent and audacity of what appears to have transpired at Satyam is indeed unparalleled in Indian corporate history. However, we believe that Satyam is by no means the norm from which standards of corporate governance can be generalized. The sizeable majority of Indian companies follow the highest international standards of governance and compliance in multiple legal and capital market jurisdictions. Any casual generalization of the Satyam situation would be both unfair and damaging to such well-managed companies.
However, it would also be naïve to believe that Satyam is the only Indian public company whose accounting or governance integrity has been compromised. In fact, as far back as 1999-2000, the Kumar Mangalam Birla Committee on Corporate Governance had said, “There are some Indian companies which have voluntarily established high standards of corporate governance, but there are many more whose practices are a matter of concern.” As the global economic downturn bites further, we should not be shocked if other similar “bad apples” are exposed.
We feel it would be irresponsible to trivialize the broader implications of Satyam for India’s IT/BPO sector. The sector is already feeling the impact of recession in developed economies as well as concerns around the likely stance of the new US administration towards offshoring.
The Satyam scandal has emerged at a time when several overseas clients have been evaluating near-shore alternatives or other offshore destinations than India, mainly driven by political and security concerns, hyperinflation in Indian technical salaries and soaring real estate prices. The Satyam debacle may accelerate the pursuit of alternatives.
Trust is a vital factor when international clients pick offshore providers, especially since such providers have significant access to sensitive data, proprietary systems and complex processes. Recent discussions with our international clients clearly indicate that the Satyam experience has shaken that trust. Overseas clients and investors will demand much higher standards of transparency and due diligence, especially during the current climate of financial crisis. Well-governed companies with established disclosure norms and robust accounting practices will be clearly favoured. Weaker and smaller players will likely suffer as clients and investors seek out more stable and credible partners.
Does the Satyam saga warrant an extensive overhaul of corporate governance and regulatory frameworks in India? No regulatory regime is either perfect in design or perfectly enforceable. Neither is it possible to legislate morality. Instances of financial malfeasance have cropped up with depressing regularity, in spite of tightening regulatory regimes. By and large, existing market and legal mechanisms deal with such incidents and discipline the wrongdoers. More radical intervention by authorities is warranted if there is clear evidence of systematic and widespread failures of market and regulatory mechanisms, for example, in the Enron and WorldCom scandals.
It is premature, even dangerous, to conclude that such fundamental breakdown has indeed taken place in India. Satyam had apparently implemented good governance practices—renowned external directors, independent audit committees, stated compliance with Indian and US accounting standards, reputed external auditors. The fraud appears to have occurred due to a concurrent failure of several stakeholders in discharging their fiduciary (a relationship of confidence or trust) duties.
The issue is therefore one of execution and operationalization of governance practices, rather than lack of governance mechanisms.
Markets tend to reward companies which demonstrate proactive commitment to the highest standards of governance and compliance. Satyam should be seen as a timely wake-up call for India. In the near term, relevant authorities must ensure ruthless and timely action against proven wrongdoers in Satyam according to applicable laws. This will help restore the perceived erosion of trust, and also make the consequences of white collar crime crystal clear.
In the medium term, Indian companies should adopt a robust code of conduct for effective operationalization of corporate governance requirements. Such a code should bring greater clarity on duties and obligations of management, directors, committees and external auditors, and the consequences of not discharging the obligations adequately. It should also provide avenues to highlight corporate wrongdoing and offer adequate protection to stakeholders choosing to do so.
Warren Buffett famously said, “It’s only when the tide goes out that you learn who’s been swimming naked.” The ongoing economic downturn has already been merciless in punishing weaker players across many industries. Satyam ups the ante further.
Vinay Couto is a partner at Booz & Co.’s Chicago office and heads the firm’s outsourcing advisory practice. Suvojoy Sengupta is a partner leading Booz & Co.’s India operations, and has 15 years’ experience in IT and outsourcing.
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First Published: Thu, Jan 15 2009. 01 18 AM IST