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As the Satyam saga unfolds, it is interesting to read the various reactions and theories as to why what happened did happen.
Some readers of Truths of the Untruth asked me how I could call Mr. Raju a crook when he is not proven guilty by the courts. My explanation: he has confessed and told us he is a crook. The law, the legal system, and the government machinery may take its own course and decide one way or the other over the next few decades. For now, there is the confession letter which says that he has done something wrong and illegal. Whether he did it to save Satyam, to give a better valuation for the ESOP holders, or just to save himself - that is not relevant. A crime was committed. A voluntary confession has been tabled.
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Keep the business - change the ownership
From a client’s perspective, the clients paid money to Satyam and Satyam delivered the product. The employees of Satyam got their salaries. So where is the danger of Satyam shutting down? Whether they made a 3% operating margin or a 24% operating margin is a problem for the shareholders in Satyam stock - including the employees who own the shares. It has no material impact on the client or his decision to hire Satyam. Have you stopped buying Toyota and Honda cars because they are losing money? Have you stopped shopping at Pantaloon because it may lose money as a store? Have you stopped flying Jet Airways because it is losing money?
But, Satyam is in trouble - the danger exists. Because of the way the government is reacting. The government is confused between trying to save the company - and trying to save the shareholders. There are 2 distinct issues here: shareholders who have been cheated because of a dramatic oversight from the still silent audit firm of PricewaterhouseCoopers, PwC - and the fact that Satyam has done satisfactory work for its clients.
Panellists on TV channels, commentators, and industry experts are all howling about the "Satyam problem". The international press is barking about the terrible business practices in India - but they forget to focus on the fact that the auditor, PwC, is part of a global company.
The solution, in my opinion, is pretty simple:
It is important for the government to understand the problem at Satyam: a real company with real people and real clients - but an unreal founder. And investors who put real money behind fake numbers verified by PwC.
We know there will be more terrorist attacks and Satyams down the road - we need to know how to deal with them efficiently and quickly.
Of course, these corporate thieves have "given" some of it back to us all in the form of higher share prices - just as Mr. Raju did. But we should be smart enough to know - just as the Satyam investors now realise - that all this "giving" can vanish in one day. And the shares we own will be useless.
Who are the companies we need to stay away from as investors?
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There are many companies that are built on the connections and influence of the founding families - enthusiastically called "entrepreneurs" for discovering more ingenious ways of institutionalising corruption. Many in the media shower them with accolades and awards. They glamorise them as business barons we should all aim to emulate. The emperors of corruption, meanwhile, shower the media with advertisement money.
Money is power. The powerful are even part of business associations. When I hear representatives of FICCI or CII or ASSOCHAM talk about corruption in government and the exposure of the political-business nexus because of the Satyam episode, I laugh at that pathetic hypocrisy. If these associations disqualified all their member companies who paid bribes or bought favours, I am afraid there would be a very short list of companies that they would need to represent.
But it would be a quality list. A list that we could, as investors, scrutinise for further investment. That would sure make our life easier. Today, we have to go through all the muck that the Indian stock markets have to offer in the guise of "business houses" and "business barons" and "future leaders".
"Be realistic," these businessmen would argue, "this is India - we need to survive. We cannot take this impractical stand."
That is why, as investment managers and advisors, we take the practical - and difficult - stand of staying away from companies and managements that we suspect.
Be careful where you work
Satyam is unusual in that it has not bribed its clients to get contracts. Or bribed the government to get any special benefit which other IT companies do not enjoy. Well, at least no client has come forward to say that. (The World Bank has debarred Satyam because of a corruption issue but the World Bank is another animal and is reportedly going through its own overhaul process to weed out corruption in within.) By and large, Satyam has competed in the market space and won contracts. It has real employees (whatever the number may be) who have not joined a corrupt company - but it was run by a crooked person.
The Satyam episode exposes the government’s lack of preparedness on how to deal with a crisis. Just like it has been exposed during the terrorist attacks in Bangalore, New Delhi, or Bombay.
The government needs to have a crises management in place. For companies like Satyam - with mostly innocent employees - and companies (like the ones I cannot mention) where most of the employees know their bosses are crooked and willingly sign on to be part of some greater India mission.
Can we stop corruption? Of course we can. As investors, employees, business heads we need to continue to work with honest people in a dishonest world. That will truly make India "sundaram".
P.S. An airplane with 155 people crash-landed into the Hudson River just west of New York City at 1 am Friday, India time. I am watching the scenes live on television. Ferry boats, police boats, and some sort of crane boat rescued every passenger. La Guardia airport was closed for a while and reopened for normal traffic in what seems like 90 minutes from the time the plane hit the river.
Let’s assume a plane takes off from any Indian airport and lands into a river. The plane moves in fast currents, in freezing weather, in below-freezing water, and is sinking as it fills up with water. How many passengers do you think would have been rescued?
Maybe buying shares of companies listed on the Indian stock exchanges is still a safer proposition!