Sit up and take notice

Extract from Max H Bazerman's The Power Of Noticing

Published 6 years ago on Nov 14, 2014 Read

Far too many [corporate] boards, of both for-profit and nonprofit organizations, fail to notice even the facts before them, let alone the information that executives may be hiding from them... The Indian corporation Satyam, founded in 1987, was a phenomenal success, eventually supplying IT solutions to more than 35% of the largest five hundred companies in the world. At its peak Satyam employed nearly 50,000 people and operated in sixty-seven countries. As markets around the world collapsed in 2008, and the Indian Stock Exchange fell from a high of over 21,000 to below 8,000, Satyam continued to report positive results during most of the year.

The first hint of a problem came in October 2008, when the World Bank fired Satyam as a service provider and issued an eight-year ban on hiring the company. The World Bank claimed that Satyam installed spy systems on its computers and stole some of its assets. Also in October, during a public conference call that Satyam held with stock analysts, one analyst drew attention to the large cash balances that Satyam’s owners were holding in non interest-bearing bank accounts. The owners offered no explanation. Why would the owners allow large amounts of cash to sit passively in accounts that were not accruing interest? Moreover why did the owners fail to explain this behavior when asked about it?

 A third hint that there were problems at Satyam occurred in December 2008, when its board of directors unanimously approved the purchase of Maytas Properties and Maytas Infrastructure, two companies that were unrelated to Satyam’s core business. The board was unanimous in its support of the transactions, but investors were outraged. As it turned out, Satyam CEO B. Ramalinga Raju’s Family held a larger stake in Maytas Properties and Maytas Infrastructure that it did in Satyam. Some observers suspected that the transactions were an attempt to siphon money out of Satyam and into the hands of the Raju family. As a result of the public outrage, the owners aborted the transactions. A fourth hint was the fact that CEO Raju’s personal holdings in Satyam fell from 15.67 percent in 2005-6 to just 2.3 percent in 2009. But Satyam’s board appeared to notice none of these strong indicators of trouble at the company.

 After the Maytas acquisition incident, analysts put sell recommendations on Satyam’s stock. Its shares dropped nearly 10 percent, four of the company’s five independent directors resigned, and on December 30,2008, Forrester Research analysts advised its clients to stop giving IT business to Satyam because of growing suspicions of widespread fraud. Satyam hired Merrill Lynch for advice on how to stop the freefall of its stock price. Eight days later Merrill Lynch sent a letter to the stock exchange stating that it was withdrawing from the project because it had uncovered material accounting irregularities.

 On January 7, 2009, Raju confessed to Satyam’s board that he had been manipulating the company’s books for years. He eventually confessed to overstating assets on Satyam’s balance sheet by $1.47 billion. Indeed the company had overstated income virtually every quarter for several years. According to Raju, the manipulation had started out small but grew larger over the years. “It was like riding a tiger, not knowing how to get off without being eaten,” he said... Satyam’s auditors and board also bear responsibility for failing to see the obvious signs of wrongdoing, and they have been sued by investors for their wrongdoing.