On January 7, 2009, Satyam Computer Services’ Chairman Ramalinga Raju informed shareholders that he had “cooked” the company’s books for years. Raju’s statement opened a can of worms that had investors and fund managers questioning the veracity of several companies’ numbers who had dubious dealings in the past.

There were several calls for improving corporate governance of listed entities. In fact, the market regulator, the Securities and Exchange Board of India (Sebi), introduced peer review, whereby another auditor would scrutinise a company’s financial documents with their existing auditor.

Irrespective of the debate, corporate governance is one of the key areas that investors should look at before putting their money in stocks. Some companies, such as HDFC and Infosys, get better valuations because of transparency. If you look at most of the corporate bankruptcies globally in the last two decades, you will find that a majority of the businesses failed not because of market conditions, but due to lack of corporate governance.

While financial results, earnings per share (EPS) and operating margins show the quantitative characteristics of a company, the qualitative ones are judged by corporate governance and ethical behaviour. All these combined have a bearing on the stock prices of a company.

Simply put, corporate governance is a system of checks and balances between a company’s board, its management and investors. The system strives to create shareholder value. And scandals like Enron, Worldcom and Satyam are painful reminders that companies, which do not follow ethical values, are likely to hurt both employees and investors.

Studies have proved that good corporate governance not only increased investors’ confidence, but also brought down the cost of capital for the company. A company that is transparent has standardised accounting practices, free flow of information and clear policies. They even find it easier to sail through bad times and secure support of stakeholders in times of difficulty.

Let’s look at some of the practices companies with better corporate governance follow and how one should interpret their actions as an investor.

INTERNAL
Board-level governance: Independence of the Board and professionalism are key to corporate governance. The Board is required to discharge its fiduciary obligations. Look for companies that have proper committees to decide on remuneration, audit, nomination, investor grievances and so on.

Auditors: Auditors should keep proper checks and balances on company affairs. In case of any wrongdoing, they should report to the Board and shareholders. In case of Satyam, its auditor Pricewaterhouse faced a lot of flak.

Investor servicing: Companies with good governance adopt greater transparency in their reporting. They provide proper disclosures to their shareholders and are prompt in resolving investor grievances. Many companies’ governance is reduced to a narrative in a paragraph in the annual report or directors’ reports. This should not be the case. Corporate governance should be part of the Board’s responsibility towards shareholders.

Shareholder participation: Institutional investors have the means to play an active role in ensuring that the management doesn’t go off-track. The institutional investors can demand the required changes at companies they have invested in.

For instance, just a couple of weeks before Raju admitted to fudging Satyam’s books, institutional investors blocked his proposal to buy a majority stake in his family owned Maytas Infrastructure by using the cash in the company’s balance sheet.

Forming minority shareholders’ groups can also be a positive step. There are several activist minority shareholders abroad, who constantly keep a check on the company’s plans. Individual or retail shareholders should use these groups to communicate with institutional shareholders for taking up their concerns with the company’s management. They can always question a company’s governance at the annual general meetings.

EXTERNAL
Rating: Rating agencies, such as CRISIL and ICRA rate companies on the basis of corporate governance. Ratings enable the stakeholders to know how much importance the company attaches to corporate governance.

Self-regulatory bodies: Industry should be encouraged to form self-regulatory bodies to look at improving governance at industry level. This can be by way of standardised disclosures, fair practices, customer care initiatives and so on. This is seen in case of banks (Indian Bankers’ Association) and automobile companies (Automobile Association of India).

While these pointers are mostly associated with good governance, there are some clear signals about misgovernance. For instance, stay away from companies which have been accused of under or over reporting of revenues and profits, misrepresentation of facts, insider trading, oppression of minority shareholders, non-payment of dividend and interest to lenders/depositors. Sometimes, companies are even debarred from raising capital from the financial markets because of the above traits. Investors need to keep an eye on such developments to separate the good from the bad.

(The writer, Ashish Pai, is a certified financial planner)

It was a fraud that threatened to dent India’s image and its FDI inflows. So serious that within hours of L’affair Satyam breaking out on January 7, the PMO was directly looking into it. So much so that before he was wheeled for cardiac surgery on January 24, Prime Minister Manmohan Singh, is supposed to have said even while he is inside the operation theatre, Satyam should be top priority.

December 16 marks one year of the crucial Satyam board meeting to approve merger of Maytas and Satyam that quite literally burst the Satyam bubble. From his vantage point as head of legal side charting Satyam’s turnaround and ultimate sell off, Shardul S Shroff managing partner of Amarchand Mangaldas had a insider’s view of it all.

Mr Shroff shared some never-told-before facts about L’affair Satyam to a select gathering of legal eagles on Wednesday at Bengal Chamber of Commerce. What emerged out of it was a unique story of how a company with a $1.8-billion hole in its balance sheet was turned around in 100 days. Of how the country’s entire regulatory mechanism was harnessed and tweaked to achieve it. How Satyam employees and even its competitors like Wipro, Infy and TCS helped it.

“It is perhaps the only company in corporate history to come out of such a major fraud. The Satyam saga has nearly a dozen lessons for Indian industry and for the world. Little wonder, Harvard Business School is now doing a case study on it. India can now offer a unique vertical globally — Crisis Management,” Mr Shroff told ET.

It proves India has a good crisis management system, but there should be an early warning system embedded in financial system to prevent it. The role of invited directors came into question. This has also led to a new voluntary code of corporate governance to be adopted on December 21. Depending on its success, the code will be made mandatory.

“It underlined need for rotation of auditors and liability of independent directors. Six former Satyam directors have been sued since there is no insurance against fraud and a D&O (directors & officers) coverage does not apply in a case of fraud. More important, it opens up an whole new area in law regarding insolvency of a non-bricks & mortar company and issues on how to recover information that resides on computers of a bust company in cross-border locations. The future is fraught with such questions,” Mr Shroff said.

Post-Satyam, it calls for every set of accounts to be reviewed by independent auditors. If auditors qualify the accounts, it needs to be picked up, reviewed by the company board and re-done. “But it is also a story of effective government intervention in selection of directors with relevance to the company — the six wise men who laboured pro bono, 24×7 for four months at a stretch. There have been several instances when a director for instance, was on global customer calls at 2 am,” Mr Shroff pointed out.

“For a virtual company, two of its biggest assets are its people and its contracts. Both have risk of flight. For employees, it was a personal crisis and you cannot compel people to stay back. So, unlike a manufacturing company, Satyam needed a fast turnaround to survive an event of default,” Mr Shroff said. For the first time, the Satyam case threw up questions like whether customers can pull away software embedded in systems/servers located elsewhere. That is real challenge in a virtual company and all big gun IT companies need to take note of it.

Thanks to Satyam, a number of things like ‘forensic accounting’ were tried out for the first time. Each and every hard disk, server and laptop
with key individuals at Satyam was scanned to gather data from 2002 to 2009. It yielded some two terabytes of information! No warehouse in India could store it. So all information had to be sent to the UK where accounting firms could hire locations for its storage. An army of 80 people scanned every single entry. The idea was to detect a pattern, which was finally traced right back to the chairman’s office. Indian regulators need to develop skills in this unlike the SEC in the US has a 400-strong team on forensic accounting.

Another little known fact was that eight different means were adopted to check falsification of Satyam 53,000 employee base, like employee bonds, mails, mail IDs, etc. With barely Rs 100 crore left in balance, against a January wage bill of Rs 400 crore, the new directors and the Satyam employees worked their hearts out to generate Rs 700-900 crore in receivables, including futures ones. A loan of Rs 600 crore from Citibank, IDBI Bank and Bank of Baroda helped build a Rs 1,300-crore reserve — the amount estimated to tide over the optimal survival period before the sell-off.

All this in a situation, where 300-600 of its core, trained staff were resigning every week! “Satyam’s competitors, Wipro, Infy and TCS, too, chipped in, when they decided against poaching Satyam staff,” Mr Shroff said. “The lesson here is to set temporary, short-term goals when faced with a crisis in people, contracts and cash,” Mr Shroff said. Companies also need to establish trust. “In a person-centric organisation like Satyam each of 16 verticals worked in silos. Without Mr Raju, there was complete atrophy in the organisation,” he added.

There were enormous external challenges, too. The Securities and Exchange Commission (SEC) was active on Satyam. Five agencies, including Serious Frauds Investigation Office (SFIO), local police, CBI and RoC, were looking for evidence all at the same time.

Amidst all this, the first tender documents for sale of shares came out on February 5. By the second batch of documents, four potential bidders were already doing due diligence and four data rooms were opened for this. “It was an unprecedented fast track turnaround. Not even an ordinary company gets sold in 100 days let alone one facing such a serious fraud. Satyam was truly a one-off case,” he pointed out.

Sebi had already ceded its jurisdiction on Satyam, a listed company, since it was brought under CLB after becoming a government-controlled entity. Sebi also dispensed with its two week high-low for the price part. “It agreed to a man-made process rather than stick to a rule-made process,” Mr Shroff added. “In a sense, it was also one of the most creative periods in the country’s corporate history,” Mr Shroff remarked.

Satyam scam accused B Rama Raju, Vadlamani Srinivas and three former directors of erstwhile Satyam Computers Services Ltd appeared before a local court today relating to complaints filed by Serious Fraud Investigation Office (SFIO), the investigation arm of Union Corporate Affairs Ministry.

Among the 11 former directors, against whom the seven different complaints have been filed by SFIO for violations under different sections of the Companies Act of 1956, former cabinet secretary T R Prasad, ex-director of IIT V S Raju, former Dean of the Indian School of Business (ISB) M Rammohan Rao and Satyam’s then company secretary G Jayaraman, appeared before the Special Court for Economic Offences here.

Apart from naming them as accused, the SFIO which filed the complaint on December 2, also named Satyam founder Ramalinga Raju, its former managing director Rama Raju, ex-CFO Vadlamani Srinivas, Vinod K Dham, Krishna G Palepu, M Srinivas, besides naming two top executives Ram Mynampati and G Jayaraman in the multi-crore accounting scam in the IT firm, after which the court summoned all of them to appear in court.

The court ordered the six accused to execute personal bonds of Rs 10,000 each. The judge T Rajani posted the case pertaining to Ramalinga Raju, Rama Raju and Vadlamani Srinivas to December 17 for examination of them, while the remaining six cases were posted for December 30 for appearance of Ram Mynampati and other accused who did not turn up today.

Almost a year after it was rattled by the Satyam scam, auditing firm PricewaterhouseCoopers (PwC) on Monday announced a sudden change of leadership of India operations as its chairman Ramesh Rajan stepped down prematurely to make way for Gautam Banerjee, who takes over from Singapore with immediate effect.

Rajan, who was at the helm of affairs when the Satyam scam broke early this year, had about one-and-a-half years remaining of his four-year tenure as the chairman of PricewaterhouseCoopers India network of entities (PwC India).

When contacted, he refused to divulge exact reasons behind his sudden exit, and said he wanted time to “look at other things “within the firm and “allow someone else to take charge of the operations.”

Indian operations of the auditing firm has been in the dock for its alleged role in Satyam scam that broke early this year after Satyam founder Ramalinga Raju confessed to cooking the company’s books on January 7, 2009. Rajan, who has been at the helm of PwC India since 2007, was also summoned by CBI to Hyderabad for questioning after the Satyam scam broke.

Two senior PwC partners S Gopalakrishnan and Srinivas Talluri, who were statutory auditors for Satyam, are cooling their heels in jail for their alleged involvement in the Satyam scam.

Apart from CBI, PwC’s alleged role in the Satyam scam is also being probed by US SEC. PWC is also facing investor suits in the US, where Satyam is listed on NYSE. PwC India said in a statement, “After leading PwC India through a challenging year, Rajan has decided it is time to allow others to lead, as it continues to address the various enquiries concerning Satyam. The other members of the PwC India leadership team continue in their roles.”

Officials at PwC India, could not explain why no elections were held for the post of the chairman.

Raju, in his confession statement, said he owed Rs 1,230 crore to some of the privately-owned companies of the Raju family who had loaned out money to the IT firm. He said the amount was an understated liability and was not stated in the books of the firm that were dressed for seven years.

A Satyam spokesperson said the companies sent legal notices to Satyam two weeks ago. The notices claim the money back to allegedly repay their creditors, some of whom include Maytas Properties and Maytas Infra.

However, the information pack given to the bidders has listed this only as a claim and not a liability since there are no entries in the company’s books.

After Raju’s disclosure about financial wrongdoings, the Indian government had superseded the company’s board appointing its nominees to monitor the fraud-struck firm’s bidding process. Tech Mahindra emerged as the highest bidder and acquired control of Satyam in April this year.

Satyam, while disclosing the financials for October-December 2008 quarter and the first two months of 2009, had said that the 37 companies had made claims totalling Rs 1,230 crore from it. The company then said it didn’t acknowledge any of these claims as the matter was being investigated.

The fraud is still being investigated by the Central Bureau of Investigation, the country’s apex investigation body. Satyam’s shares closed at Rs 104.85 on BSE on Tuesday.