Instead of a bang, the new year for many Indians may have begun with a whimper. Less than a fortnight into 2009, the new year celebrations have already given way to an all-pervasive mood of dismay over what all can go wrong with India Inc.
What happened in the last one week was a rude shock for those who believed that India’s new breed of entrepreneurs had a robust system of procedures and governance. These are the entrepreneurs, remember, whose animal spirits had been unleashed by Manmohan Singh’s economic reforms in the early 1990s, prompting them to conquer new markets with their products and services. And what did one of them do? He simply cooked up the numbers in his profit and loss account.
A newspaper had announced on its front page in the first week of January that India’s systems are safe, its markets are steady and its numbers are strong. Two days later, Satyam Computers’ B Ramalinga Raju showed that India Inc’s systems are vulnerable, its markets are shaky and its numbers may be spurious.
What an irony! The sector that allowed India’s professionals to dream big on the global stage has now seen one of the biggest financial scams in corporate India. Don’t forget that Satyam Computers was not promoted or run by a Marwari traditional business family (often derogatorily referred to as a lala promoter). It was promoted and run by an educated professional entrepreneur.
The malaise is even deeper. Note that it was only Mr Raju’s confessions of inflating his company’s profit numbers for several years that allowed everybody inside and outside the company to know that there was a scam. His fraud came to light not because a regulator or a bank pressed the alarm bells, but because Mr Raju chose to come out with his shenanigans.
Worse, there are some more IT companies whose conduct is under the scanner. Why should Wipro even consider allotting shares from its director’s quota to employees of the World Bank, with whom it already has or may have business relations? No rules may have been broken. But the relationship between a company and its client has been clouded by the allotment of those shares. If such questions can be raised about Wipro, a company that has set enviable standards of corporate governance, why blame observers of India Inc for distrusting every number that Indian companies dish out every quarter? Not surprisingly, the market regulator has now insisted on a peer audit review of results of all companies that figure in the Sensex and the Nifty.
So, what are the key lessons that one draws from the Satyam scam? First, have faith in the ordinary middle-class householder’s policy that door locks do not always deter a thief. Equally important is the need for a watchful neighbour. In the case of Satyam Computers, the locks were in place, but the thief got away with his booty. The system of neighbourhood watch did not work. In fact, there was no effective neighbourhood watch in place. Independent directors were either incompetent or turning the other way while Mr Raju was manipulating the accounts.
Secondly, India Inc. may also have fallen prey to the so-called eleventh commandment of modern-day India: Thou shalt not be caught. Starting from the manner in which even ordinary motorists flout traffic rules, Indians now believe that nothing can be done in this country without violating the law. The system may be corrupt or at fault. But ordinary Indians show no resistance to the idea of bribing an official to get a job done. Nor do they think twice before doing something which is blatantly unlawful. This is because everybody believes that he will not be caught while flouting the rules. The name of the game for most Indians is how to get things done, by legal or illegal means, and then not get caught. Mr Raju could even think of cooking up all those numbers, with the complicity of quite a few of his senior colleagues, because he was hoping that somehow he would not get caught. Once he realised that he would not be able to get away, he made a grand gesture with that confession.
And finally, it is the people and their commitment to correct values that matter more than systems and procedures. Satyam Computers and Mr Raju had every system and procedure in place to ensure compliance with governance norms. Mr Raju won many awards for corporate governance because of those systems and procedures. But where were the people who would implement those systems and honour the procedures? In the final analysis, it was a failure of the people who were at the helm at Satyam Computers. It was a failure of the people who were expected to regulate the company. It was a failure of the people who were entrusted with the responsibility of auditing the accounts.
Systems are important. But you also need the right people to use and implement those systems.
