Code Breaker

There is a myth about the peacock. Swollen with pride at its beauty, it suffered a curse that made its once-sweet voice turn hoarse. Such lessons in modesty come to mind in the week of disgrace for a company that was, not so long ago, a darling of the country’s iconic software sector.

Satyam Computer Services had become, alongside the Charminar, a symbol of pride for Hyderabad, and its founder-chairman Byrraju Ramalinga Raju, a local hero. Apart from being a profitable technology showpiece, Satyam was a New York Stock Exchange-listed company honoured with the prestigeous Golden Peacock award for corporate governance.

The award was stripped off last week as Raju sang less like a peacock and more like a canary in full public view. He confessed to violating sacred rules of corporate governance — a term management pundits use for ‘good boy behaviour’ in the world of public companies that use investor capital.

Raju’s plain admissions amount to a swindle involving at least Rs 7,000 crore, aided no doubt by its globally-renowned auditor Pricewaterhouse in errors of either omission or commission — or worse. To put it plainly, he had overstated the revenues he did not have, understated the debt he did, and cooked up profit numbers. All to keep up a face of success — for years.

Quietly, the shares his associates and he controlled had come down to 3 per cent from 25 per cent in a boom phase, enabling him to raise cash that helped build a parallel real estate empire that will increasingly be in the news over the coming days as the nether side of a fraud that bombed.

But numbers don’t quite tell the story.

Beneath it all stands not only a plain web of deceit and feet of clay, but a moral fable of modern capitalism, especially for a latter-day follower like India embracing it all with a neo-convert’s zeal.

We have to look at the honourable people who aided and abetted this tragedy that left 53,000 employees and countless investors in the lurch. We also need to see it, perhaps, through the prism of a small town boy from a rural Andhra belt whose obsession with local pride brought him global dishonour.

Go global or bust

Shareholder democracy lies at the heart of listed companies that promise much — very much like political parties seeking votes in elections by promising the moon. Limited liability companies borrow from banks, but the money they owe is not owed by the managers or even shareholders as individuals or promoters, but by a somewhat abstract entity called the Firm. These companies, in turn, are owned often by a huge diversity of shareholders, who effectively place trust in the founders and/or managers. Between the trusting bankers and the unsuspecting shareholders lie corporate governance procedures, institutions and practices that supposedly help a healthy system of accountability.

When these fail — as they did with Enron in the US and now Satyam in India — it is a crisis of confidence.

As it turns out, the golden feathers of the failed peacock had a brandname auditor in Pricewaterhouse, which seems to have rubber-stamped numbers it was meant to verify and police. Non-executive independent directors, who act like custodians of public good in a listed company, included figures like Harvard don Krishna Palepu and the dean of Indian School of Business, Rammohan Rao. They have since quit, and Rao has lost his job as well.

Such names act like brand ambassadors to a company seeking public capital. When they appear a little more than mannequins to dress shop windows, trust is eroded.

Satyam shook others in Corporate India who might have genuine plans to seek overseas capital to build real businesses. It shook employees awaiting a Promised Land on the day their loyalty-based stock options would turn into profitable shares. It shook up middle-class investors waking up to a new fantasy of pensions based on share market gains.

The Promised Land, if any, lay elsewhere.

Take the boy out of the town, but…

It lay in two companies called Maytas Infrastructure and Maytas Properties, controlled by the Raju family. Maytas, an anagrammatic reverse of Satyam, was in perfect asymmetry to Satyam in more ways than one.

Satyam is built around services delivered by hourly wages by skilled programmers and knowledge workers, and was accountable to global investors. But being the small town boy he was and probably still is at heart, it seems Maytas is where Raju’s heart lay, notwithstanding his management-speak aimed to please Satyam’s Fortune 500 customers. His family came from Vijayawada, and tentatively lurched into a global IT revolution that proved a path to social mobility.

Land, political connections and local glory must have been heady wine for the US-educated Raju. The denouement came in early December, when he tried to use $1.6 billion in cash from Satyam to effectively control Maytas. That led to a howl of protest in the world of corporate governance, where combining a software business with a real estate game amid a financial meltdown and a property bubble was like mixing stale vodka with champagne.

Mountain out of a mole hill

As it turns out, Satyam’s cash was non-existent. Ironically, Maytas probably has more assets in thousands of acres of land, besides lucrative politically-blessed infrastructure contracts, unless the murky trail leads us to murkier grounds.

Raju might end up with the dubious honour of setting a corporate precedent for umpires to wake up in this game. The tracts of land that Raju controls through Maytas may come to the rescue of whatever little is left of his reputation. But then, that would be looking for poetic justice.