Corporate Governance in Indian Companies

Professor Sudhakar V Balachandran mentioned in one of his article who teaches accounting at the Columbia Business School, where he is the faculty director of the executive programs "Finance & Accounting for Non-Financial Executives" and "Essentials of Financial Management, that we teach a course called Performance Measurement in which we study some of the dynamics that lead to this type of accounting scandal. In our course, we study the fraud committed at WorldCom and Kidder Peabody in detail. In our studies, a distinct pattern emerges.
It starts small. Typically, executives do not wake up one morning and say, "I feel like adding 5 billion rupees to our revenue today." They usually start by fudging the number a little--and then it grows.

It is usually a response to competitive pressures. Companies have targets that they need to reach every month, quarter and year. And they start playing with figures, It gets out of control When the company is unable to make up the gap, a larger distortion is needed to cover it up. This in turn creates pressure to deliver even better results--which leads to bigger cover-ups, and so on. In his letter to his board, Satyam's Raju, rightly said that the process is as "like riding a tiger, not knowing how to get off without being eaten."

Typically, we rely on corporate governance, audit and legal consequences. Satyam, for example, had a reputation of excellent corporate governance. In fact, the World Council for Corporate Governance awarded Satyam its Golden Peacock Award for Corporate Governance in 2008. This suggests that we need to fundamentally rethink the criteria that we require in order for boards to provide effective governance.
Finally, we also need stiffer penalties. Simply put, "white collar" crime cannot be viewed as less of an evil than any other form of crime. The fact that white collar crime continues to occur, and seemingly at an increasing rate, suggests that the expected costs do not outweigh the expected benefits from cheating. Stronger penalties are needed.

Despite improvements in governance, audit and legal penalties, At the end of the day, the actions at Satyam were perpetrated by one or two individuals who simply may not have realized that the small distortions they created in the past would lead to massive problems today. Hopefully, creating an awareness of the large consequences of small lies may help some to avoid this trap.

Actions such as those of Satyam are being observed all over the world, and their effects are not simply localized to their executives, employees or even their countries. Whether it is accounting fraud, excessive trading risks, a Ponzi scheme or making loans to those who can't pay, many are hurt by corporate improprieties. These types of actions affect the global economy. In other words, they affect us all. If there isn't sufficient belief in the notion that business will act in good faith, then the capitalist system is itself at risk.