Lessons Learnt: From Enron to Satyam

Pattabhi Ram Sir

First time in the history of our country something of this grandeur happened.

Enron was mighty and spectacular; Enron and Arthur Anderson fell by the wall side for lessons to the world. But lessons were learned the hard way, and that should have not been repeated. But it did happen. 

All accounting scandals 

• Overstating of income - Satyam
• Understanding of expenses - 9 companies 
• Assets are overstated - Satyam hid 5000 crores of cash
• Enron - understated their liability.

Question asked, 

• 'What were the auditors doing'? Where they negligible or involved?
• Credit Raters, what were they doing? 
• What was the role of Independent Directors?

Lessons:

They all are paid by the company:

• Auditors
• Employees
• Credit Raters
• Directors

Trust; nevertheless verify.  When earnings come from profit, there is a tendency to jack up profit. Basic Maxim - higher the risk, higher compensation. 

Each story tells us 'Honesty in public life, is perhaps lack of opportunity'. If you link reward, best of men, will end up having legs of clay.

Great thing to have great character.

Even company which we held in high esteem have fallen down. 

Delink reward from performance and profit. 

Manoharan

Satyam scam came to light, at the time of Subprime crises. People failed paying interest and principal, and so banks collapsed. Many institutions collapsed. The inflow of orders to IT company was dwindling, and there was liquidity crisis. Satyam too fell into the crisis, and promoter had to confess because they wanted to keep the rating of the company, with fictitious billing, and had to show it as collected in the books.  Bogus banks statements were prepared. It was channelised by bank statements being fictitious. It was difficult to show expenses, and was shown as bank's Fixed deposit, which had interest. Software revenue was taxed, but Interest was exempt. Even taxes shown to have been paid were bogus. Everything seemed to be manipulated. 

1. Restore financial stability - 500 crore p.m. 
2. Employee motivation
3. Continue patronage of the customer in 66 countries. 

Withing 100 days was able to turn around, amidst many challenges. Ultimately, it was taken over by Tech Mahindra, which has grown three-fold.

Purpose of writing the book:

1. Document the learning, that could be read with interest
2. Lessons learnt for corporate life and personal life 

Q1. Corporate Governance - How is it looked at? 

A1. There are two perceptions. It is very essential. Scares resources of shareholders are entrusted with the Management, how they use their talent is to be regulated. Buzz word today is ESG - Environmental, Social Governance. CSR is one small segment of this. Governance is Profit should be earned in a proper way. It is to be regulated. It is challenging because few people do not follow Government regulation or norms. Government is mandated to put in stringent regulation, which make compliance difficult and thriving of good company too, difficult. Morality cannot be regulated but conduct can be. 

Q2. Independent Directors - do they have power?

A2. By far, have been happy with the quality of independent director. Independent director where not in Favor but were persuaded. Courage of conviction, the independent director should have. It is better to get it recorded to get it descendent. 

Q3. How Independent is the Independent Director?

A3. Bonus paid even if it could have stopped in a recent case, having them is one way of ensuring independency - their remuneration should be fixed by outside. After Satyam, sitting fee cannot be in the way of Bonus share. Good people will always follow the law, and those who want to find loophole and avoid, they will do it. Striking a balance is recommended, if the compensation is lowered, the quality may be lower. Independence does not mean, being disruptive. They are there to facilitate the company to grow. 

Madoff punishment, for 150 years, nothing of that sort in India, which is needed. 

Experience of writing the book was a great experience. What Raju and Mahendra did was a different story which can happen again. But what happened, during those 100 days is important, and got first-hand information on that.