CorporateGovernance on June2009

Volume 1 Issue 2
Business & Management Ezine
The
Barings Bank
Scandal
The Enron
Scandal
June, 2009
Nick Leeson
Arthur
Andersen &
Co, SC
The Satyam
Scam
B. Ramalinga
Raju
The game where wrong moves come back to haunt you !!!
Techno India, EM-4/1, Sector-V, Salt Lake, Kolkata - 700091
Table of Contents
Sl. No.
[1]
[2]
Topic
Page No.
First Byte [ Editorial ]
Ed/1
Advertising
Se/1-9
Semiotics and its application in Liril Advertisement from 1975 to
1990
(Anis Chattopadhyay)
[3]
Cover Story
Co/1-6
Corporate Governance
(Monojit Banerjee)
[4]
Cover Story
Ba/1-3
Case Study : Baring’s Bank
(Monojit Banerjee)
[5]
Cover Story
En/1-4
Case Study : Enron
(Monojit Banerjee)
[6]
Cover Story
Sa/1-6
Case Study : The Satyam Scam
(Monojit Banerjee)
[7]
Social Entrpreneurship
Mu/1-4
Muhammad Yunus - The miracle of micro-finance
(Ishita Guha)
Bizzy Bytes
Page : Cr/1
May 2009
The Bizzy Bytes Team:
Editorial Team:
Content Writers:
[1]
[2]
[3]
[4]
[5]
[1]
[2]
[3]
Monojit Banerjee
Anis Chattopadhyay
Bijan Chakraborty
Arjan Biswas
Vijay Kumar Singh
Anis Chattopadhyay
Ishita Guha
Monojit Banerjee
Graphics Design Team:
Marketing Team:
[1]
[2]
[1]
[2]
[3]
[4]
[5]
[6]
[7]
Monojit Banerjee
Archita Pal Choudhury
Monojit Banerjee
Anis Chattopadhyay
Bijan Chakraborty
Amit Kundu
Archita Pal Choudhury
Arjan Biswas
Vijay Kumar Singh
Bizzy Bytes is available at:
www.tisoms.co.nr
(Download all issues today)
Contact details:
Techno India School of
Management studies
EM-4/1, Sector-V, Salt Lake,
Kolkata – 700091
Monojit Banerjee
M: +(91)9231342749
E: monojit.net@gmail.com
All intellectual property rights are reserved by Bizzy Bytes magazine. No part of
this magazine can be copied, extracted or distributed without prior written
permission. The magazine issue itself may be freely distributed, provided all due
credits are visible.
Bizzy Bytes
Page : Cr/1
May 2009
Editorial
First Byte
Monojit Banerjee
Editor
Bizzy Bytes
Email: monojit.net@gmail.com
This is another joyous occasion for me to present to you the June 2009 edition of Bizzy Bytes, the
ezine (electronic magazine / online magazine) of Techno India School of Management Studies
[TISOMS], on behalf of the alumnae, students, faculty members and the management of Techno India
college.
This is a collaboration of three departments of Techno India college:
School of Management Studies [ MBA / BBA ] [Represented by all students & faculties]
Hospital Management department [BHM] [Represented by Mr. Anis Chatterjee]
Media Studies department [BMS] [Represented by Mr. Bijan Chakraborty]
My special thanks goes to all of you for making it a grand success.
Your comments and criticisms are requested so that we may strive to achieve the high standards that
we have set for ourselves.
We have been overwhelmed by the positive feedback and encouragement that we have received from
our readers after the first issue was circulated. Till date there has been no negative feedback.
In this edition, we decided to focus on the “Satyam” issue. But since there has been a lot of content
written in newspapers, magazines or shown on TV channels, we decided that it would be better if we
presented a somewhat different angle to our viewers. Instead of being caught up with the Satyam aura,
we try to present here a brief but comprehensive view of Corporate Governance, its importance,
opportunities and challenges. The rights and duties of various stakeholders of a business are
highlighted. We have tried to focus on cases that define the concept of corporate Governance. Case
studies are presented which highlight the landmark failures of Corporate Governance.
Other than this, there is also a very informative and entertaining article on the use of symbolism
(semiotics) in advertisement by Anis. Also Ishita focuses on Muhammad Yunus and his Nobel winning
concept of micro-finance implemented by Grameen Bank. We can all take away some inspiration from it.
Hope you enjoy all this. Keep sending us your views.
Yours sincerely,
Monojit Banerjee
Bizzy Bytes
Ed/1
May 2009
Advertising
Semiotics and its application in Liril
Advertisement from 1975 to 1990
-- Anis Chattopadhyay
Now-a-days we are surrounded by different kinds of advertisements. A survey portrays that in
general we are exposed to more than 3000 advertising messages per day. But, we do not pay
attention to everyone. This is because of our selective attention, selective distortion and
selective retention.
The primary function of advertisement, as we know, is to introduce a wide range of consumer
goods and services to the public and thereby support the free-market economy. But that is
clearly not its only role. Advertisements also assume certain characteristics which are less
directly connected to selling. Advertisers try to manipulate people into buying a way of life
as well as goods / services. In this respect it could be argued that advertising fulfils the
function traditionally met by art or religion. Gillian Dyer claims that advertising is 'the
"official art" of the advanced industrial nations of the west' (1982: 1).
Some critics even suggest that it works in the same way as myths in primitive societies in as far
as it conveys values and beliefs through providing people with simple stories and explanations
which helps them to organize their thoughts and experiences and to make sense of the world.
Advertising can also be called one of major elements of communication. As means of promotion
it has to communicate with the masses. That’s why it follows the communication process which
can be explained by means of a diagram, - called communication process diagram.
As we know advertising as been defined from various angles, of which communication point of
view and business point of view definition is most important.
1. According to AMA ( marketing point of view) :- Advertising is paid form of non
personal presentation and promotion of goods, service and ideas by an identified sponsor.
2. ( Communication point of view) – it is controlled identifiable information and persuasion
by means of mass communication media under clear sponsorship
Media
source
Decoding
Encoding
Receiver
Message
Noise
Feedback
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Response
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June 2009
Communication: - It is an interactive dialogue between the company and its customers that
takes place during the pre-selling, selling, consuming and post consuming stages.
To communicate effectively, marketers need to understand the fundamental elements
underlying effective communication.
Above communication model have nine elements.
ƒ Two major parties in communication are Sender and receiver.
ƒ Two major communication tools are message and media.
ƒ Four major communication functions are encoding, decoding, response and feedback.
ƒ The last element is noise ( random and competing messages that may interfere with the
intended communication )
ƒ The model underscores the key factors in effective communication. Sender must know
what audience they want to reach and what responses they want to get.
ƒ They must encode their messages in a way that must be understood by their target
audience. Target audience decodes those messages according to their perception,
learning, attitude, etc.
ƒ The messages must be transmitted through a (may be more than one) media to reach
the target audience and they should develop feedback mechanism to know the customer
response.
ƒ For a message to be effective, the sender’s encoding process must be at per with the
receiver’s decoding process.
ƒ The more the sender’s field of experience overlaps with that of the receiver, the more
effective the message is likely to be.
) This puts a burden on communicators from one social spectrum (such as
advertising people)
) Who want to communicate effectively with another spectrum (such as factory
workers)
BASIC DIFFERENCE BETWEEN NORMAL
ADVERTISING COMMUNICATION PROCESS
SOURCE
CHANNEL
(MEDIA)
And
encoding
RECEIVER
(AUDIENCE)
COMMUICATION
CHANNEL
(word of
mouth)
PROCESS
AND
DESTINATION
Model of Advertising Communication Process
Source:ƒ It is the point at which the message originates.
ƒ Sources are many types in the context of advertising, such as – the company offering
the product, the particular brand, spokespersons used, model, etc.)
Messages:ƒ The message refers to both the context and execution of the advertisement. It is the
totality of what is perceived by the receiver of the message.
ƒ The message can be executed in a great variety of ways and can include use of humor
and fear.
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June 2009
Channel:ƒ The message is transmitted through some channel from the source to the receiver.
ƒ The channel in an advertising communication system consists of one or, more kinds of
media such as radio, television, newspaper, magazines, billboards, point of purchase,
displays and so on.
Receiver:ƒ The receiver in an advertising communication system is also called the target audience.
ƒ Audience can be described in terms of audience segmentation variables, lifestyles,
benefits sought, demographics and so on.
ƒ Particular interest of a person might regulate the involvement with the product and
willing to search for the product (more precisely, processed information).
ƒ The demographic, psychographic and social characteristics of the receiver provide or,
influence the basis for understanding, communication, persuasion and market process.
Destination:ƒ The advertising communication model does not stop at the receiver but allows receiver
as the interim source and the destination becomes another receiver.
In order to design a campaign and its message content advertiser has to understand its target
audience in different way, i.e., geographically, demographically, psychographically, and
behaviourally. Among which, psychographic and behaviour aspects are most important factors to
know the consumer’s mind better. By understanding (to some extent) this, advertisers have to
think about their message content. At that point of time they have to consider other variables
such as culture, sub-culture (religious, regional and linguistic culture), reference group
influence, family influence, lifestyle, socio-economic class structures, etc.
Major part of this message formation is to encode (it is marked in the first diagram) the
message in such a manner that it could be decoded by the target audience as desired by the
advertisers. I think this toughest job in making an advertising message.
Semiotics
In the encoding process the advertiser has to use semiotics. Let’s find out the meaning of
semiotics. The term semiotics (often also referred to as 'semiology') derives from the Greek
word semeion meaning 'sign'. In its simplest definition it can be understood as the 'study of
sign'. Ferdinand de Saussure (1857-1913), a Swiss linguist, gave the subject its name when he
first taught the 'course in general linguistics' in Geneva university. Another key figure in the
early development of semiotics was the American Charles Sanders Peirce (1839-1914). He
constructed a triangular model to illustrate the relationship between what he termed 'signobject-interpretant'. According to Peirce's model a 'sign' refers to anything from which
meaning is generated. Saussure, however, proposed a different, dyadic model. He saw the sign
as a physical object with meaning which consists of the 'signifier' and the 'signified'. The
‘signifier' is the material vehicle for the sign and the 'signified' can be understood as the
mental concept it represents which is common to all members of the same culture, who share
the same language (Fiske 1990:43). For Saussure the meaning of signs was only lying in the
relation of signs to each other.
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June 2009
In the discussion of semiotics there are three main areas of interest, identified as:
• the sign itself
• the codes or systems in which the signs are organized
• The culture within which these codes and signs operate.
The semiotic analysis of advertising believes that meanings of adverts are to move out from the
page, to lend significance to our experience of reality. We are encouraged to experience the
advertised, in terms of the mythic meanings on which adverts draw (Bignell, 1997: 33).
Adverts are often built around codes and symbols, which highlights the fact that the argument
most often used when buying a product, is that it is related to the individual on an emotional
level.
Femininity
Masculinity
Nature
Culture
Life
Death
Instinct
Combination
Energy
Eye
Rhombus
Mother
Arrow
Mask
Father
Meeting
House
Shoulders
Sexual
intercourse
Arms
Monolith
Pouring out
Fascination
Signs
Eye
Bodily
Sexual
opening
Breasts
Face
Sexual mouth
Penis
Bottom
skull
Mouth
Symbols
Sun
Examples
Symmetrical
crack
Beam
Clayey liquid
Flower
Weapon
Dangerous
animal
Window
Box
Lightning
Abstract
meaning
Concentration
Urge
Solitude
Urge
Aggression
Saying
I am
Love me
I care for you
I want to
make love
Be aware
Power
Sex
Meeting
between
opposites
Civilization
Trust me
We make love
We protect
you
In the above figure Asger Liebst has ordered the symbols of advertising in a schematic form.
In this figure we see some of the most important codes when trying to reach for the viewers.
The codes used most effectively are the sexual codes. Moreover, such codes and symbols can
evoke certain energy within each individual, an energy of which the individual is not aware, an
energy that comes into existence in the individual’s sub-conscience – symbols and codes that the
advertisers consciously choose in order to convey a message.
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June 2009
Effect of the Colour in advertisement
COLOURS
COLOUR INFLUNCE
SYMBOLISM
RED
Activating, warm, love, aggression,
extrovert
Love, revolution, fury, aggression,
warning
ORANGE
Joy, extrovert, encouraging,
activating
Fire, heat, joy, sun, vitality
YELLOW
Stimulates, logical way of thinking,
joy
Cowardness, falseness, sickness,
vitality
GREEN
Calming, harmonizing, strength, self
control
Hope, renewal, freshness, youth,
inmature, jealous
TURQUOISE Cooling, refreshing, calming
Cold, freshness, eternity
BLUE
Promotes concentration, absorption,
quiet, relaxing
Sadness, melancholy, quality,
stability, spiritual
PURPLE
Restlessness, nervousness, fear,
depression
Storm, solemn, spiritual, mystery
PINK
Strains fear, stress and depression,
intuition
Unrealistic, fantasy, daydreaming
WHITE
Hushing up, emptiness
Purity, peace, innocence, sensitive
Analysis of Semiotics of Liril Advertisements:
Before analyzing the semiotics used in different print advertisements in different times we
should look at the history of Liril soap.
Liril is a popular soap brand sold in a large degree, in India, and Asia, as well as a few places in
Europe. The advertisements for Liril soap are usually shown on television.In India reigning top
Hindi film actress are generally chosen as model for the soap. The soap is currently
manufactured by Hindustan Lever Limited in India. The advertising for this product was
Handled by Lintas India Pvt. Ltd. However, their current advertising agency is Mc Cann. Most of
their ads are woman bathing in rains or under a waterfall.
The name Liril had been registered by Hindustan Lever from a list sent to them by Unilever in
London. Liril- The soap whose name is a Palindrome!!! Like the word Malayalam, spelt the same
forward & backward
Liril was positioned on the freshness platform right from its birth. The girl and the waterfall
with the unique jingle ensured that the audience experiences the freshness. Liril can be called
as an experiential brand and the communication perfectly supported that.
Liril did not change its positioning for 25 years although the models changed, the brand
communication was consistent.
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June 2009
According to market research reports Liril had to change because of its stagnant market share,
may be for declining market share, which can be result of failing to understand the changing
consumer expectations. There was a flurry of brand launches during the past 10 years and Liril
was sleeping all the time “may be resting on the laurel”. It should have hold on its positioning of
' freshness " not by changing its communication but by communicating more, developing variants,
bringing in flanking brands or variants and thus owning the whole segment for itself.
Liril launched a blue variant called Icy Cool Mint in 2002. It also tried launching an Orange
variant , called Liril Orange Splash in India in 2004. Neither of these variants created much
splash in the market. Liril has been having a static market share for quite some time now.
Majority of their sales happen during summer. Preity Zinta, among others, has advertised for
this product.
About the semiotics of “La La …La .. Liril”:
The year was 1975. Karen did this after her accidental discovery in a boutique by the ad
makers. Liril came to us through the print ad’s
featuring a gorgeous girl wearing a lime green
bikini, joyously splashing around in a waterfall
(Pambar falls, - now known as Liril falls). Then
we saw it in movie theatres & TV for the next
few decades. Karen Lunel, the lady who
cavorted under the Kodai waterfall modeled
for Alyque Padamsee from Lintas, the great
ad maker working to launch HLL’s new soap
and was photographed by Surendranath.
Remember the simple jingle tune (composed
by Vanraj Bhatia) la, laaa laaa la..la la laaa!!!
Just see the print advertisement, all you can
see green colour all over ad except bottom.
The green colour depicts cheerfulness and
freshness of the lime which has been
conferred by this soap that is what expected
by Derk Wooller, (1975) the Marketing
Controller of Hindustan Lever's soaps
division, he suggested adding the freshness
of lime to this story. He felt that though the
waterfall had tremendous emotional appeal,
Fig. 1: Earliest Liril Print Advt.
Liril needed a rational ingredient to clinch the
deal. He also suggested that freshness of
lime can be added by green colour. Then onwards colour of the soap is green. In the picture, the
next thing which has to be noted the smiling face of the model (Karen) and her cheerful
postures which provoke target audience to buy the product or at last view this ad again
(Oh! How I wish I could see that old ad all over again!!). This is what we call total effect of an
advertisement campaign. The naughty cheerfulness and graceful smiling face of Karen trying to
inject freshness of lime in the mind of target audience and above all Liril was trying to inject
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June 2009
the sense of independence (meri marzi) and freedom in the mind of the female target
audience which was hardly found in middle class family. According to Guru Alyque Padamsee
“The girl in the waterfall symbolises that the bathing experience can be bindaas and free.”
Because at that time women were portrayed (used as) secondary role players or we can say only
executioner.
In the backdrop we can see water falls, - the free-flowing nature of which depicts, energy,
enrichment with freshness, and it was trying to “instigate” the bathing method which was
dream for the average Indian women who were surrounded by chaos, in-laws, husband, and
children. This ad was first trying to emphasise that the ten minutes splash bath under the
shower is the right for woman where she can experience her freedom by using Liril soap.
A headline has been written on the north east corner of this campaign. This headline “Come
alive with freshness” describing the total pictures and their motto to the target audience. The
headline is trying to suggest something to their target audience (women) which they can not
explain of their own by seeing the pictorials of the ad. The middle class women who are bogged
down with their day to day work in their house can have a freedom of doing anything (as Karen
did !!!!) in the time of bath under the shower.
The advertisement also shows a package of Liril, one opened Liril soap with two round shaped
limes, which trying to show similarities. At the bottom slogan is “with the exciting freshness
of lime” which is completing the total campaign.
Water falls advertisements continue up to 25 years. Different advertisement campaigns are as
follows:-
Pic.2 : Liril advt. B/W 1975
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Pic. 3: Liril Colour Advt. 1982
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June 2009
Pic 4: Liril B/W Advt. 1980
Pic 5: Liril colour Advt. 1989
In the above four pictures we can found the
same kind of messages they were using with
same more or less same kind of pictorials. But in
case of 5th picture we can also see major
differences that is inclusion of a new endorsers
in the place of Karen. In this pictures
advertisers also reduced the proportion of
green colour which was present in previous
campaign in major proportion. I think, campaign
released in 1989, was a reminder ad that’s why
they had reduced the green colours. But, whitish
flow of falls
water and more
Pic 6: New variance of Liril, close view of
Liril orange Splash
endorsers were
emphasized. They were trying to focus on freedom of splash
bath with lots of water (were they trying to provoke Indian
women to use lots and lots of water by using shower while
bathing !!!!!) with Liril to be refreshed. In addition to the
previous headline and slogan they had added another slogan , “Liril, - the freshness soap”. New slogan was added to
associate this brand with freshness in more direct way than
previous. They had also changes colour of packaging and colour
of the soap. Instead of deep green colour they had used light
green colour in case of both and yellow patches had been
introduced in the package which signified enrichment with
Pic 7: New Liril
more lime extract.
Orange splash
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June 2009
At the threshold of new century they had totally changed the positioning strategies of the soap
along with advertising message and features of the soap. They totally rejected ‘falls’
proposition, as a result of which their market share was reduced from 2.5% to 0.8% in 2009.
According Guru Alyque Padamsee “taking away Falls proposition from this advertisement, is
similar to taking away Bansuri from Lord Sri Krishna”
References:
[1]
[2]
[3]
[4]
www.afaqs.com
www.magindia.com
www.ibanklive.com
www.8ate.blogspot.com
Author profile:
Anis Chattopadhyay
The author is B.Sc. (H), PGDMSM, PGDBM (IISWBM), Former faculty of IISWBM,
Acharya Jagadish Chandra Bose College. He is presently associated with Techno India. He
can be reached at:
anis_c2002@yahoo.co.in
Disclaimer:
Any views expressed by the author are his own. Bizzy Bytes is in no way responsible for
the personal opinions of the author.
Bizzy Bytes
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June 2009
Cover Story
Corporate Governance
-- Monojit Banerjee
its owners as compensation for assuming
the risks of business.
Separation of ownership from control
In the case of a sole proprietorship firm,
or a partnership, the activities of a
business are carried out / supervised by
the owners of the business themselves.
The primary purpose of corporate
leadership is to create wealth legally
and ethically. This translates to
bringing a high level of satisfaction
to five constituencies - customers,
employees, investors, vendors and
the society-at-large. The raison
d'être (reason for existence) of
every corporate body is to ensure
predictability,
sustainability
and
profitability of revenues year after
year.
N.
R.
Narayana
Murthy
Chairman of the Board and Chief
Mentor, Infosys [www.infosys.com]
An organization behaves like an artificial
person. The business is supposed to have a
legal entity separate from its owners.
Thus, an organization can raise funds, own
assets, run its operations through hired
employees, and earn profits or suffer
losses. Its earnings are used to pay its
expenses and any surplus is provided to
Bizzy Bytes
But it is often the case that the owners
of a business are not the managers of a
business. The owners appoint agents to
act on their behalf and manage the
business
in
their
name.
Thus,
shareholders trust that the business
managers would run the business
faithfully, following the principles of
“stewardship” and that their interests
would be looked after. The owners, in
this case, are not in a position to run the
activities of the business. Because of
that, they are also unable to maintain
strict supervision over what is done with
their money.
Corporate governance is the set of
processes, customs, policies, laws, and
institutions affecting the way a
corporation is directed, administered
or controlled. Corporate governance
also includes the relationships among
the many stakeholders involved and
the goals for which the corporation is
governed. [www.wikipedia.org]
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June 2009
Corporate governance 'an internal
system
encompassing
policies,
processes and people, which serves the
needs of shareholders and other
stakeholders,
by
directing
and
controlling management activities with
good business savvy, objectivity,
accountability and integrity. Sound
corporate governance is reliant on
external marketplace commitment and
legislation, plus a healthy board
culture which safeguards policies and
processes’
- Gabrielle O'Donovan, in his
book, “A Board Culture of
Corporate Governance”
Government: The Government also wants
any organization to be a good corporate
citizen by obeying the laws of the land,
paying taxes regularly, etc.
Parties to Corporate Governance
Stakeholders of a business
Board of Directors
Chairman
C.E.O.
Customers: Customers want that their
needs be fulfilled by organizations
through their acts of providing goods and
services or other value adding activities.
Suppliers: Suppliers require that their
payments be made regularly and on time.
Employees:
Employees
want
their
financial security and a sense of belonging
and achievement.
Creditors: Creditors expect remuneration
for their funds on a regular basis.
Society / Community: Society wants an
organization to be a good corporate
citizen. An organization is supposed to
contribute in the form of employment
generation, support for social causes,
avoiding anything that is harmful to the
society or the environment, etc. Thus an
organization is supposed to be a symbiotic
partner and not a parasite which exploits
the resources of the land.
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Regulatory Body
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Management
Shareholders
Stakeholders
Customers
Suppliers
Employees
Creditors
Society / Community
Government
June 2009
Principles of Corporate Governance
[1] Shareholders’ rights:
Proper
information
to
shareholders on a prompt and
regular basis
Shareholders’
rights
to
be
respected
Organization to facilitate the
exercise of those rights
[2] Stakeholders’ interests:
Recognition of all duties towards
stakeholders
Discharge
of
those
duties
faithfully
Proper
information
to
stakeholders
[3] Code of conduct:
Every organization should develop
a code of conduct
Organizations must always act
with integrity and ethics
Decision making should always be
rational and responsible
[4] Role and Responsibilities of the
Board of Directors:
Needs to be properly chosen by
the shareholders and / or
nominated by the Government,
where applicable
Needs to be of proper size and
composed of the right mix of
executive
and
non-executive
directors
Must have the necessary skills and
understanding of the business
Must have the right degree of
commitment and responsibility
towards all stake holders so that
their interests are safeguarded
Must monitor and challenge
management performance where
necessary
Bizzy Bytes
[5] Compliance:
All
laws
and
standards
/
conventions (established by the
industry or society) must be
adhered to
[6] Disclosure and transparency:
Important for good PR
Roles,
responsibilities,
accountabilities should be clearly
declared
Financial statements should be
based on truth and must disclose
all relevant facts impacting the
business
Procedures
to
independently
verify / certify (audit) financial
statements must be established
and followed diligently
Investors must have access to all
material facts which affect their
decisions in an unambiguous and
timely manner
Role and responsibilities of the auditor
It is a well established fact that “an
auditor
is
a
watchdog,
not
a
bloodhound” [Remark made by an English
judge (L. J. Lopez) in the landmark
Kingston Cotton Mills case.]
Case: Kingston Cotton Mill Co. (1896)
The manager of Kingston Cotton Mill had
been exaggerating the quantity and value
of the company’s inventory over a period
of several years in order to inflate the
company’s profits. The auditor did not
physically verify stock but relied on a
certificate signed by the manager.
Neither did the auditor check the
consistency of figures with the opening
and closing stock, purchases and sales
data.
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June 2009
The judge remarked that: “An auditor is
not bound to be a detective, or as was
said, to approach his work with a suspicion
or with a foregone conclusion that there
is something wrong. He is a watch-dog but
not a blood-hound … If there is anything
calculated to excite suspicion he should
probe it to the bottom; but in the absence
of anything of that kind, he is bound to be
reasonably cautious and careful.”
Case: London and General Bank (1895)
In this case, the bank in question provided
loans to customers without acquiring
adequate security from them. Even
though interest due on the loans was
accrued but not received, the bank paid
dividends out of profits arising from such
interest. The auditors report to the
directors was detailed as regards the
valuation of the loans. It stated the need
to make a provision for bad debts against
both the loan and the accrued interest.
But, the auditor’s report to the share
holders merely stated that “The value of
the assets as shown on the balance sheet
is dependent upon realization”.
It was held that “the duty of an auditor is
to convey information, not to arouse
enquiry.” But, whereas an unusual
statement would arouse the suspicions of
an expert like an auditor, it is not
necessary that ordinary people would also
be alerted by such a statement.
These two land mark cases have formed
the basis of subsequent decisions on the
question of auditor negligence. An auditor
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is not necessarily answerable for an error
of judgement, provided he or she has
exercised the skill and care expected of a
competent member of the profession.
Thus, due diligence was supposed to be
sufficient on the part of the auditor.
Case: Thomas
(1967)
Gerrard
&
Son
Ltd
The judge concluded that the standards
of reasonable care and skill are, on the
expert evidence, more exacting today
than those which prevailed in 1896
(referring to the Kingston Cotton Mill
case).
Case: Pacific Acceptance Corporation
Ltd v. Forsyth (1970)
In this case a branch manager of Pacific
Acceptance made loans to a real estate
speculator, based on security confirmed
by a solicitor who was introduced by that
speculator himself. Later, it was found
that, most of the security offered in the
form of title deeds, registered charges
and mortgages was worthless, being
either forged or flawed.
The auditors were charged with several
auditing deficiencies, such as the
assignment of inexperienced audit staff,
lack of adequate supervision, excessive
reliance on management representations
instead of examination of documentary
evidence.
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June 2009
The
judgement
in
the
Pacific
Acceptance case was highly significant
because it redefined the role of
auditors as follows:
Auditors must pay due regard
to the possibility of material
fraud or error in carrying out
audit procedures
Auditors must closely supervise
and review the work of
inexperienced staff
Auditors
must
properly
document audit procedures in a
written audit program which is
to be amended as and when
necessary
as
the
audit
progresses
Auditors must carry out proper
objective auditing procedures
Need for a bloodhound
But it is now felt that there is the need
of a separate bloodhound to watch over
the watchdog itself. The point is, if the
roles of a standard-setter, licensor,
player and regulator are combined in the
same entity as is the case of ICAI (The
Institute of Chartered Accountants of
India) today, there is bound to be some
slip-ups somewhere. The ICAI is:
The standard-setter for the
accounting profession
Examiner and licensor for auditors
A player (since auditors, who are
members of ICAI, furnish reports
about the financial accounts of
organizations, which are relied
upon by the government, financial
institutions, investors, and other
regulators like SEBI, CLB, etc. on
faith)
The regulator for the auditing
profession.
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Usually, there is bound to be a clash of
interest where conflicting roles are being
performed by the same entity.
It is interesting to note that the
Government of India had been thing of
establishing an independent oversight
body
for
regulating
the
auditing
profession in Feb. 2002, as a result of the
Enron scandal. It was proposed to be
comprised of representatives of the
accounting profession, judges and public
representatives. The Finance Ministry had
moved a note to the Department of
Company affairs, under whose jurisdiction
the ICAI falls, but no results were
actually obtained. The WorldCom and
Xerox accounting scandals that year
further underscored the need for such an
unbiased regulatory body. Had those
recommendations been taken seriously,
the Satyam fiasco might probably have
been avoided.
References:
[1] www.infosys.com
[2] Business Line (7th July 2002)
[3] Modern Auditing & Assurance
Services, by Barry J. Cooper &
Shireenjit Johl, RMIT University,
published by Wiley
[4] Commercial Law including Company
law and industrial law, by Arun
Kumar Sen & Jitendra Kumar Mitra,
published by The World Press
Private Limited, Calcutta, 2000.
[5] www.wikipedia.org
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June 2009
Author profile:
Monojit Banerjee
The author is an MBA from the
Institute
of
Business
Management
(Affiliated to Jadavpur University,
Kolkata). He is currently Lecturer,
School of Management Studies, Techno
India [TISOMS]. He can be reached
at:
monojit.net@gmail.com
Disclaimer:
Any views expressed by the author are
his own. Bizzy Bytes is in no way
responsible for the personal opinions of
the author.
Bizzy Bytes
Page : Co/6
June 2009
Cover Story
Case Study: Baring’s Bank
-- Monojit Banerjee
Fact sheet:
Barings was the oldest investment bank in Britain.
List of distinguished clients included the Queen herself.
HQ:
London
Established:
1762
Collapsed:
1995
Reason for
collapse:
Nick Leeson, one of the bank’s employees, lost £827
million ($1.3 billion) speculating (mainly on futures
contracts).
Nick Leeson was the manager of a new operation in futures markets on the Singapore Monetary
Exchange (SIMEX). His job was to bet on the future direction of the Nikkei Index. Initially, he
was extremely successful, resulting in millions of dollars profits for Barings. At one point his
speculative operations accounted for 10% of Baring’s profits. He was considered to be an
investment whiz kid by his bosses in London, who trusted him a lot.
Arbitraging
Arbitraging is the technique of earning profits by using
the differences in the prices of futures contracts listed
on different exchanges. One buys futures contracts on
another and immediately sells them on another exchange
at a higher price. Due to the high competition in this
business, the profits per unit traded are very small or
insignificant. Thus, to make a significant profit the
volumes traded must very large. The risks of arbitraging
are managed by simultaneously buying and selling the
contracts. In the normal course of business this would not
have bankrupted Baring’s Bank.
Leeson was engaged in arbitraging,
i.e., seeking to profit from
differences in the prices of
Nikkei 225 futures contracts
listed on the Osaka Securities
Exchange in Japan and the
Singapore International Monetary
Exchange.
For example, he
could buy a
futures contract on Nikkei worth
$100 million on one day but at the
same time sell the same product in
Singapore for say $100,001,000.
Though a person would have bought and sold nearly 200 million, their profit is only $1,000, that is
1,000 dollars for a 100 million dollar investment.
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June 2009
However, instead of hedging his positions, Leeson gambled on the future direction of the
Japanese markets. In the above example, one could buy $100 million worth of Nikkei futures
contracts then hope that the contract price goes up in future. In this instance, even a percentage
change of the price would create 1 million dollar worth of profit or loss.
Leeson started doing this from January 1995.
Failure of internal auditing
The management structure of Barings Futures Singapore, permitted Leeson to play a double role
of both the floor manager for Barings' trading on the Singapore International Monetary
Exchange and the head of settlement operations. In the latter role, he was charged with ensuring
accurate accounting for the unit. The positions would normally have been held by two different
employees. As trading floor manager, Leeson reported to the head of settlement operations, an
office inside Barings Bank which he himself held, thereby bypassing normal accounting and
internal control/audit safeguards. In effect, Leeson was able to operate with no supervision from
London. After the collapse, several observers, including Leeson himself, placed much of the blame
on the bank's own deficient internal auditing and risk management practices.
It was later revealed on enquiry that people at the London end of Barings dared not ask a stupid
question in case they looked silly in front of everyone else. So Leeson’s operations went
unquestioned.
Leeson altered the branch's error account, subsequently known by its account number 88888 as
the "five-eights account", to prevent the London office from receiving the standard daily reports
on trading, price, and status.
Kobe earthquake
Using the hidden five-eights account, Leeson began to aggressively trade in futures and options
on the Singapore International Monetary Exchange. His decisions routinely resulted in losses of
substantial sums, but he used money entrusted to the bank by subsidiaries for use in their own
accounts. He falsified trading records in the bank's computer systems, and used money intended
for margin payments on other trading. As a result, he appeared to be making substantial profits.
Due to the Kobe earthquake in 1995, which sent the Asian financial markets downward, Leeson
was finnally trapped. Leeson bet on a rapid recovery by the Nikkei, which failed to materialize due
to tha catastrophic event.
On 23 February, 1995, Leeson fled to Kuala Lumpur after sending a confession note to the
chairman. Simultaneously the auditors also discovered the fraud. But it was to late to rectify the
damages, as the losses totalled £827 million ($1.3 billion). This was twice the bank’s available
trading capital. Baring’s Bank was declared insolvent on 26 February 1995.
Leeson lives happily ever after
Leeson was caught and sentenced to six and a half years in prison in Singapore, but was released
early in 1999 after being diagnosed with colon cancer. Despite grim forecasts at the time, he did
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June 2009
not succumb to the disease. After his release, he capitalized from all the publicity suurounding
the scandal. He was paid a substantial fee for the newspaper serialisation of his book in The Mail.
The story was then turned into a film, “Rogue Trader”, starring Ewan McGregor. During 2001 he
undertook a Psychology degree and Nick now spends much of his time presenting talks to
companies on Risk Management and undertaking after-dinner and conference speaking based on
his life experiences. In early 2005 Nick was appointed General Manager of Galway United Football
Club. June 2005 saw the release of his new book “Back from the Brink, Coping with Stress”,
published by Virgin Books.
Questions for discussion: [Mail your views to the author.]
[Q.1.] Could the collapse of Baring’s Bank have been prevented?
[Q.2.] Where was the failure of corporate governance at Barings Bank?
[Q.3.] What measures should be implemented to prevent such frauds and subsequent losses
to an organization?
[Q.4.] Was Leeson punished enough?
[Q.5.] Would punishing one individual solve this problem? Who else should be held
responsible?
References:
[1]
[2]
[3]
[4]
http://www.riskglossary.com/link/barings_debacle.htm
http://www.time.com/time/2007/crimes/18.html
www.nickleeson.com
www.wikipedia.org
Author profile:
Monojit Banerjee
The author is an MBA from the Institute of Business Management (Affiliated to Jadavpur
University, Kolkata). He is currently Lecturer, School of Management Studies, Techno India
[TISOMS]. He can be reached at:
monojit.net@gmail.com
Disclaimer:
Any views expressed by the author are his own. Bizzy Bytes is in no way responsible
for the personal opinions of the author.
Bizzy Bytes
Page : Ba/3
June 2009
Cover Story
Case Study : Enron
-- Monojit Banerjee
Fact Sheet:
Company Name:
Enron Corporation
Founded:
Omaha, Nebraska, (USA) 1985
Headquarters:
Founder:
Industry:
Collapsed:
Auditor:
Houston, Texas, United States
Kenneth Lay (Former chairman & CEO)
Energy
November, 2001
Arthur Andersen LLP, one of the five largest
accounting and consulting firms in the world.
Formulation of Sarbanes-Oxley Act in the US.
Major Impact:
The Enron scandal (late 2001) was a financial scandal involving Enron Corporation and its accounting
firm Arthur Andersen.
Enron Corporation
Enron went from being a company claiming assets worth almost £62bn to bankruptcy within three
months. Its share price collapsed from about $95 to below $1.
Enron was formed in July 1985 when Houston Natural Gas merged with Omaha-based Inter-North.
Kenneth Lay, an energy economist became chairman and chief executive. As the energy markets,
and in particular the electrical power markets were deregulated, Enron’s business expanded into
brokering and trading electricity and other energy commodities.
The Company leveraged itself through debt, which it used to grow its non-core wholesale energy
operations and service business. Some of this debt was reportable on the company's balance sheet,
and some was not. This was not a problem for the company, as long as the stock price held up.
But the stock price fell. When that happened, off-balance-sheet liabilities put pressure on debt
agreements, and eventually led to credit downgrades. The margins in this business are very thin and
lower credit quality increased Enron's cost of borrowing to the point where the whole company fell
into a liquidity trap.
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June 2009
Jeffrey Skilling (former president, CEO and COO) was arrested on February 11, 2004, by the FBI.
Kenneth Lay (former chairman and CEO) was indicted by a federal grand jury on July 7, 2004 for
his involvement in the scandal.
On May 25, 2006, the jury in the Lay and Skilling trial returned its verdicts. Skilling was convicted
of 19 of 28 counts of securities fraud and wire fraud and acquitted on the remaining nine, including
charges of insider trading. He was sentenced to 24 years, 4 months in prison. He was ordered to
restore the Enron pension fund with $26 million out-of-pocket. Lay was convicted of all six counts
of securities and wire fraud for which he had been tried, and he faced a total sentence of up to 45
years in prison. Lay died on July 5, 2006, before sentencing was scheduled. Many other executives
and other peopleinvolved faced harsh legal punishments.
Timeline:
20 Feb, 2001
On 14 Aug, 2001
12 Oct, 2001
16 Oct, 2001
24 Oct 2001
8 Nov 2001
2Dec,2001
12 Dec 2001
9 Jan 2002
A Fortune story calls Enron a highly impenetrable Co. that is piling on
debt while keeping the Wall Street in dark.
Jeff Skilling resigned as chief executive, citing personal reasons.
Kenneth Lay became chief executive once again.
Arthur Anderson legal counsel instructs workers who audit Enron’s
books to destroy all but the most basic documents.
Enron reports a third quarter loss of $618 million.
CFO Andrew Fastow who ran some of the controversial SPE’s is
replaced.
The company took the highly unusual move of restating its profits for
the past four years. It admitted accounting errors, inflating income by
$586 million since 1997. It effectively admitted that it had inflated its
profits by concealing debts in the complicated partnership
arrangements.
Enron filed for Chapter 11 bankruptcy protection and on the same day
hit Dynegy Corp. with a $10 billion breach-of-contract lawsuit.
Anderson CEO Jo Berardino testifies that his firm discovered possible
illegal acts committed by Enron.
U.S. Justice department launches criminal investigation.
Aurther Andersen LLP : role in the fraud and consequences
Arthur Andersen – one of the world's five leading accounting firms - was the auditor to Enron.
When the scandal broke, Andersen’s chief auditor for Enron, David Duncan, ordered the shredding
of thousands of documents that might prove compromising. Besides obstruction of justice,
Andersen also faced charges that it improperly approved of Enron's off-balance-sheet
partnerships, called "special purpose entities", which the company used illicitly to hide losses from
investors.
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June 2009
Using Special Purpose Entities (SPE’s):
At the heart of Enron's demise was the creation of partnerships with shell companies. These
dummy companies, run by Enron executives who profited richly from them, allowed Enron to keep
hundreds of millions of dollars in debt off its books. But once stock analysts and financial
journalists heard about these arrangements, investors began to lose confidence in the company's
finances. The results were disastrous - a run on the stock, lowered credit ratings and insolvency.
Consequences faced by the auditor:
June 15, 2002: Arthur Andersen was convicted of obstruction of justice for shredding
documents related to its audit of Enron.
August 31, 2002: As the U.S. Securities and Exchange Commission does not allow convicted
felons to audit public companies, the firm agreed to surrender its Certified Public
Accountant licenses and its right to practice before the SEC.
May 31, 2005: the Supreme Court of the United States unanimously overturned Andersen's
conviction due to flaws in the jury instructions. Despite this ruling, Andersen has not
returned as a viable business even on a limited scale. There are over 100 civil suits pending
against the firm related to its audits of Enron and other companies.
Impact:
After a series of revelations involving irregular accounting procedures conducted
throughout the 1990s, Enron was on the verge of bankruptcy by November 2001.
As the scandal was revealed, Enron shares dropped from over US$90.00 to less than 50¢.
Enron's plunge occurred after revelations that much of its profits and revenue were the
result of deals with special purpose entities (limited partnerships which it controlled). The
result was that many of Enron's debts and the losses that it suffered were not reported in
its financial statements.
The scandal also resulted in the dissolution of Arthur Andersen, the auditing firm.
The scandal led to the creation of the U.S. Sarbanes-Oxley Act (SOX), signed into law on
July 30, 2002. It is considered the most significant change to federal securities laws since
FDR's New Deal in the 1930s.
This law provides:
o stronger penalties for fraud
o requires public companies:
ƒ to avoid making loans to management,
ƒ to report more information to the public,
ƒ to maintain stronger independence from their auditors,
ƒ to report on and have audited, their financial internal control procedures.
Other countries have also adopted new corporate governance legislations.
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June 2009
Questions for discussion: [Mail your views to the author.]
[Q.1.] Could the collapse of Enron have been prevented?
[Q.2.] Where was the failure of corporate governance at Enron?
[Q.3.] What measures should be implemented to prevent such frauds and subsequent losses
to an organization?
[Q.4.] Was the punishment enough?
[Q.5.] Comment on the impact of the Enron scandal.
[Q.6.] What lessons can the Indian corporate sector learn from the Enron scandal?
References:
[1] www.enron.com
[2] Anuj Thakur, Samir Kalra and Rahul Karkun, “What Happened to Enron?”
[3] http://specials.ft.com/enron/FT3LTT9G2XC.html
[4] www.time.com (http://www.time.com/time/business/article/0,8599,193520,00.html)
[5] http://www.federatedinvestors.com/commentaries/equity/01-11-30_madden.asp
[6] www.wikipedia.org
Author profile:
Monojit Banerjee
The author is an MBA from the Institute of Business Management (Affiliated to
Jadavpur University, Kolkata). He is currently Lecturer, School of Management
Studies, Techno India [TISOMS]. He can be reached at:
monojit.net@gmail.com
Disclaimer:
Any views expressed by the author are his own. Bizzy Bytes is in no way responsible
for the personal opinions of the author.
Bizzy Bytes
Page : En/4
June 2009
Cover Story
Case Study : The Satyam Scam
-- Monojit Banerjee
19 Feb
2009
Highlights:
Rs. 7000 Crore fraud
India’s largest corporate scam
(labeled as India’s Enron).
Inflated (or non-existent) cash
and bank balances of Rs.5,040
Cr.
Non-existent accrued interest
of Rs. 376 Cr.
Understated liability of
Rs.1,230 Cr.
Overstated debtor position of
Rs. 490 Cr.
Shareholders lose Rs.9374 Cr.
In a day.
9 Mar
2009
12 Mar
2009
11 Apr
2009
13 Apr
2009
Timeline:
16 Dec. Satyam announces $ 1.6 Billion
2008
acquisition of 100% stake in
Maytas Properties and 51%
stake in Maytas Infra
17 Dec. Satyam-Maytas deal is
2008
scrapped following a rebellion
by investors and shareholders;
Raju considers share buyback.
7 Jan
Chairman B. Ramalinga Raju and
2009
MD Rama Raju resign after
confessing to a Rs.7000 Cr.
Fraud.
9 Jan
Government intervenes and
2009
decides to appoint nominees to
replace the existing board of
directors
11 Jan
Kiran Karnik, Deepak Parekh
2009
and C. Achutan appointed in the
board.
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Company Law Board (CLB)
authorizes Satyam to induct
strategic investor, raise equity
capital & make preferential
allotment.
Search for a suitable investor
begins.
Process of registration of
bidders ends; 8 competitors
4 bidders remain in the race:
Larsen & Toubro, Tech
Mahindra, Cognizent
Technology Solutions, Wilbur
Ross
Tech Mahindra wins Satyam
stake for Rs. 2900 Cr.
Shock and Horror after the revelation
of the fraud:
“What’s happened
is shocking. It will have a deep
impact on the entire Indian industry.
I believe it is a bad case but an
isolated case. The need of the hour
is for the IT sector to walk that
extra mile.”
N.R. Narayana Murthy
Chief Mentor, Infosys
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June 2009
“It is an event of horrifying
magnitude. We are in touch with the
ministry of company affairs for
coordinated action. We need to
learn a few lessons from this. This
development
will
have
serious
implications for the market.”
C.B. Bhave
Chairman, SEBI
The full impact of the Satyam scandal on
the industry can be easily understood if
one considers the fact that before Raju’s
fraud came to light, it used to be India’s
fourth largest IT company after TCS,
Infosys and Wipro.
Also the Sensex shed 749 points and
investors lost about $23 billion.
Satyam has been labeled as the “India’s
Enron” owing to the severity of impact.
It shook the industry and the economy
and got the government worried enough to
try and bail it out.
Other big IT majors were worried that
whoever bought out Satyam would surpass
the others and become the largest IT
company of India.
Let us now examine this scam from
different viewpoints:
Text of the letter written to the
Satyam Board by Satyam’s Chairman B
Ramalinga Raju, who resigned from the
company after admitting to the scandal
at Satyam.2
To
The Board of Directors,
Satyam Computer Services Ltd.
Dear Board Members,
It is with deep regret, at tremendous
burden that I am carrying on my
conscience, that I would like to bring the
following facts to your notice:
1. The Balance Sheet carries as of
September 30, 2008:
- Inflated (non-existent) cash and bank
balances of Rs.5,040 crore (as against Rs.
5361 crore reflected in the books)
- An accrued interest of Rs. 376 crore
which is non-existent
- An understated liability of Rs. 1,230
crore on account of funds arranged by me
- An over stated debtors position of Rs.
490 crore (as against Rs. 2651 [cr.]
reflected in the books)
2. For the September quarter (02) we
reported a revenue of Rs.2,700 crore and
an operating margin of Rs. 649 crore
(24% Of revenues) as against the actual
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Page : Sa/2
June 2009
revenues of Rs. 2,112 crore and an actual
operating margin of Rs. 61 Crore ( 3% of
revenues). This has resulted in artificial,
cash and bank balances going up by Rs.
588 crore in Q2 alone.
The gap in the Balance Sheet has arisen
purely on account of inflated profits over
a period of last several years (limited only
to
Satyam standalone,
books
of
subsidiaries reflecting true performance).
What started as a marginal gap between
actual operating profit and the one
reflected in the books of accounts
continued to grow over the years. It has
attained unmanageable proportions as the
size of company operations grew
significantly (annualized revenue run rate
of Rs. 11,276 crore in the September
quarter, 2008 and official reserves of Rs.
8,392 crore). The differential in the real
profits and the one reflected in the books
was further accentuated by the fact that
the company had to carry additional
resources and assets to justify higher
level
of
operations
—
thereby
significantly increasing the costs.
Every attempt made to eliminate the gap
failed. As the promoters held a small
percentage of equity, the concern was
that poor performance would result in a
take-over; thereby exposing the gap. It
was like riding a tiger, not knowing how
to get off without being eaten.
The aborted Maytas acquisition deal was
the last attempt to fill the fictitious
assets with real ones. Maytas’ investors
were convinced that this is a good
divestment opportunity and a strategic
fit. Once Satyam’s problem was solved, it
was hoped that Maytas’ payments can be
delayed. But that was not to be. What
followed in the last several days is
common knowledge.
Bizzy Bytes
I would like the Board to know:
1. That neither myself, nor the Managing
Director (including our spouses) sold any
shares in the last eight years — excepting
for a small proportion declared and sold
for philanthropic purposes.
2. That in the last two years a net amount
of Rs. 1,230 crore was arranged to
Satyam (not reflected in the books of
Satyam) to keep the operations going by
resorting to pledging all the promoter
shares and raising funds from known
sources by giving all kinds of assurances
(Statement enclosed, only to the
members of the board). Significant
dividend payments, acquisitions, capital
expenditure to provide for growth did not
help matters. Every attempt was made to
keep the wheel moving and to ensure
prompt payment of salaries to the
associates. The last straw was the selling
of most of the pledged share[s] by the
lenders on account of margin triggers.
3. That neither me, nor the Managing
Director took even one rupee/dollar from
the company and have not benefited in
financial terms on account of the inflated
results.
4. None of the board members, past or
present, had any knowledge of the
situation in which the company is placed.
Even business leaders and senior
executives in the company, such as, Ram
Mynampati, Subu D, T.R. Anand, Keshab
Panda, Virender Agarwal, A.S. Murthy,
Han T, SV Krishnan, Vijay Prasad, Manish
Mehta, Murali V. Sriram Papani, Kavale,
Joe
Lagioia,
Ravindra
Penumetsa,
Jayaraman and Prabhakar Gupta are
unaware of the real situation as against
the books of accounts. None of my or
Managing
Director’s
immediate
or
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June 2009
extended family members has any idea
about these issues.
Having put these facts before you, I
leave it to the wisdom of the board to
take the matters forward. However, I am
also taking the liberty to recommend the
following steps:
1. A Task Force has been formed in the
last few days to address the situation
arising but of the failed Maytas
acquisition attempt. This consists of some
of the most accomplished leaders of
Satyam; Subu D, T.R. Anand, Keshab
Panda
and
Virender
Agarwal
,
representing business functions; and A.S.
Murthy, Han T and Murali V representing
support functions. I suggest that Ram
Mynampàti be made the Chairman of this
Task Force to immediately address some
of the operational matters on hand. Ram
can also act as an interim CEO reporting
to the board.
2. Merrill Lynch can be entrusted with the
task of quickly exploring some Merger
opportunities.
3. You may have a restatement of
accounts’ prepared by the auditors in light
of the facts that I have placed before
you.
In light of the above, I fervently appeal
to the board to hold together to take
some important steps Mr T R Prasad is
well placed to mobilize support from the
government at this crucial time. With the
hope that members of the Task Force
arid the financial advisor, Merrill Lynch
(now Bank of America) will stand by the
company at this crucial hour, I am marking
copies of this statement to them as well.
Under the circumstances, I am tendering
my resignation as the chairman of Satyam
and shall continue in this position only till
such time the current board is expanded.
My continuance is just to ensure
enhancement of the board over the next
several days or as early as possible.
I am now prepared to subject myself to
the laws of the land and face
consequences thereof.
(B. Ramalinga Raju)
Copies marked to:
1. Chairman SEBI
2. Stock Exchanges
The rescue operation:
I have promoted and have been associated
with Satyam for well over twenty years
now I have seen it grow from few people
to 53,000 people, with 185 Fortune 500
companies as customers and operations in
66 countries. Satyam has established an
excellent leadership and competency base
at all levels. I sincerely apologize to all
Satyamites and stakeholders, who have
made Satyam a special organization, for
the current situation. I am confident they
will stand by the company in this hour of
crisis.
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The government became swiftly
involved and initiated the rescue
operation.
Sunday, Jan. 11, 2009, 11:00am:
Kiran Karnik (former presidentb
of NASSCOM) gets an SOS phone
call from Anurag Goel, Secretary,
Ministry of Corporate affairs,
requesting him to be a part of the
proposed
government-appointed
board of Satyam that will
undertake the salvage operation.
Deepak Parekh, Tarun Das, T.N.
Manoharan, S. Mainak and C.
Achutan were also appointed to
June 2009
the
board.
Karnik
elected
chairman.
The new board worked out a plan
of action involving:
o Securing working capital
o Paying salaries
o Retaining customers
o Retaining employees
o Ensuring transparency
o Initiate
the
bidding
process to find a new
owner for Satyam.
The board met in Hyderabad
every week.
They
used
their
personal
persuading powers to convince the
existing clients to stay with
Satyam.
They communicated with the
employees and the management
regularly to boost confidence and
retain essential skill-sets.
The board appointed A.S. Murthy
as the new CEO, as they were
convinced of his integrity. This
was intended to further boost
confidence and morale.
They speedily implemented the
process
of
identifying
and
selecting bidders until the final
winner was found in the form of
Tech Mahindra.
It is now considered a landmark
rescue operation. It is expected
that Tech-Mahindra & Satyam will
regain its former glory as the
fourth largest IT company.
Bizzy Bytes
Kiran Karnik
Chairman, Satyam
Comments:
“We hope this will infuse greater
confidence
and
comfort
among
customers. It ought to dispel the
anxiety of all stakeholders as it
repositions
the
company’s
commitment to revival and good
governance.”
Anand Mahindra
Chairman,
Tech Mahindra
Comments:
“This is a historic and gamechanging day for Tech-Mahindra. In
Satyam’s history, we are at the end
of the tunnel.”
“You don’t look to your left or to
your right in a deal. You also don’t
look behind yourself … This was a
reasonable bid and accretive for our
shareholders.”
Aftermath of Tech Mahindra acquiring
Satyam:
Page : Sa/5
Due to the stable financial
condition of Tech Mahindra,
Satyam employees feel reassured
regarding their salaries and perks.
Satyam employees feel that the
company would get back on track
and there would be a steady flow
of work again.
Industry experts feel that the
wide client base of the two
June 2009
companies would be combined and
would grow further due to the
synergistic effect.
There is also a positive feeling
among industry watchers that the
positive image of Tech Mahindra
will repair that of Satyam and will
will help stem the exodus of
clients and employees away from
Satyam.
Benched employees are skeptical
because Tech Mahindra itself has
a large pool of employees on the
bench. They are fearful of job
cuts.
The marketing department of
Satyam is also fearful of
downsizing as they feel that the
strong marketing team of Tech
Mahindra
would make them
redundant, should it decide to
downsize. [It is estimated that
thay have about 20% more chance
of being handed the pink slip than
the techies, even though senior
management have assured that
there would be no firing at least in
the next few months.]
Many states feel that where
either of the two companies has a
presence, they would also start
operations sooner and later. This
is good for the local economy and
for employment generation.
“Tech Mahindra has a presence
here and has expressed confidence
in being able to grow. We are
hopeful that its taking control of
Satyam will now lead to the latter
also starting operations.”
Debesh Das
WB State IT Minister
Bizzy Bytes
References:
[1] www.satyamscam.info
[2] http://satyamscam.in
[3] The Times of India (Issue Jan 8,
2009)
[4] The Times of India (Issue April 14,
2009)
[5] The Economic Times (Issue April 14,
2009).
[6] P. Vaidyanathan Iyer & George
Mathew, “Salvaging Satyam”, The
Indian Express, April 19, 2009
(Link:
http://www.indianexpress.com/news
/salvaging-satyam/448585/0)
[7] www.wikipedia.org
Author profile:
Monojit Banerjee
The author is an MBA from the
Institute
of
Business
Management
(Affiliated to Jadavpur University,
Kolkata). He is currently Lecturer,
School of Management Studies, Techno
India [TISOMS]. He can be reached
at:
monojit.net@gmail.com
Disclaimer:
Any views expressed by the author are
his own. Bizzy Bytes is in no way
responsible for the personal opinions of
the author.
Page : Sa/6
June 2009
Social Entrepreneurship
Muhammad Yunus: The miracle of micro-finance
-- Ishita Guha
Quotations (Dr. Muhammad Yunus):
“We believe that poverty does not belong to a civilized human society.
It belongs to museums.”
“All human beings have an innate skill - survival skill. The fact that poor
are still alive is a proof of their ability to survive. We do not need to
teach them how to survive. They know this already.”
MICRO-FINANCE NEEDS AND CONCEPTS
Lack of savings and capital make it difficult for many poor people to become self employed and to
undertake productive employment generating activities. Productive credit seems to be a way to
generate self employment opportunities for the poor. But since the poor lack physical collaterals
(assets against which banks would provide loans), they have almost no access to institutional credit.
Informal money lenders can be a source of credit. But poor households do not gain from investing in
productive income increasing activities because of high interest rates. Moreover, although informal
groups such as the rotating savings and credit associations or chit funds (ROSCA) can meet
occasional financial needs of the poor, they are not reliable sources of finance for income
generating activities.
In addition, the poor can rarely save enough to form and participate in such informal groups. Also
village based informal groups, as they are formed with people living in the same agro-climatic area,
are risky source of finance for business or enterprising activities because of covariate risk that
affects equally every member of the group. A micro-credit programme which is able to pool risk
across agro-climatic areas can provide credit to the poor at affordable cost and can help them to
become productively self-employed.
Micro-credit programme thus emerged as an anti-poverty instrument in many low-income countries
for example, Bangladesh, India, Brazil, South Africa, Mexico, Turkey, Benin, etc. They target the
poor, especially women, with financial services to help them become self-employed in rural non-farm
activities of their choice for example weaving, pottery, bidi-binding, craftwork, etc. Micro-credit
programmes for the village banks supported by Accion International or Women’s World Banking
Bizzy Bytes
Page : Mu/1
June 2009
(WWB) provide financial services in response to market failure, in which, formal financial
institutions failed to cater financial services to small and medium-scale enterprises.
The Grameen Bank owes its origin to the concern felt by its founder, Dr. Muhammad Yunus, for
the pitiable condition of the landless women labourers, who were exploited both by their masters
and by their own families.
Dr. Yunus felt that, if these women could work for themselves, instead of working for others, they
could retain much of the surplus generated by their labour, currently appropriated by others. The
other reason for selecting rural women was to elevate their social status within their own families,
so as to reduce male domination in a tradition–bound conservative society. And the conviction that
womenfolk were more responsible as family-leaders, were quick and sincere enough to seize the
opportunity for improving the economic conditions of their families.
The missing ingredient was credit. The guiding concept was that the poor know best how to improve
their economic conditions, provided, adequate credit was made available. The translation of this
simple idea into practice gave birth to an imaginative project, which has grown to attract worldwide appreciation including the Nobel Prize.
The initial scheme was started as a village credit society in December, 1976 in Jobra, a village
adjacent to Chittagong University, where Dr. Yunus was a lecturer in economics. At first, credit
arrangements were made with one of the nearby banks and the economic programme of Chittagong
University under the leadership of Dr. Yunus. The success of the experiment evoked interest among
more banks. In 1980, the subject caught international attention and funds started to flow from
different donor institutions like IFAD (International Fund for Agricultural Development), NORAD,
GTZ, etc.
A short biography of Dr. Muhammad Yunus:
Dr. Mohammad Yunus was born in 1940 to an affluent family in the village of Bathua, by the
Boxirhat Road in Hathazari, Chittagong, Bangladesh. His father was Hazi Dula Mia Shoudagar, a
jeweler, and his mother was Sofia Khatun. His biggest influence was his mother, who always had a
soft corner for the down trodden and helped them whenever possible. This resulted in his lifelong
mission to fight against poverty.
His early childhood years were spent in his native village of Bathua. In 1944, his family moved to
the city of Chittagong, where he recived his early education. Yunus was an outstanding student who
won a Fullbright Fellowship to do PhD at Vanderbilt University in Nashville, Tennessee in 1965. He
returned home in 1972 to become the head of the economics department at the Chittagong
University.
He found the situation in newly independent Bangladesh worsening day by day. The terrible famine
of 1974 in Bangladesh changed his life forever. He thought that while people were dying of hunger
on the streets, he was teaching elegant theories of economics. He felt that those theories were
inadequate to help the poor in their struggle for survival. He began to study the causes of poverty
in a bid to identify possible solutions.
Bizzy Bytes
Page : Mu/2
June 2009
One day, interviewing a woman who made bamboo stools, he learnt that, because she had no capital
of her own, she had to take loans from local middlemen at exorbitant rates, who would often usurp
more than 93% of her proceeds. This exploitation shocked Dr. Yunus. He realized that the root
cause of the problem was lack of credit to the poor. He thought that people were poor because
they did not have easy access to institutional credit. Thus was born the revolutionary idea of microcredit.
Professor Yunus has received honorary doctorates from many Universities in the United States,
Canada, England and many other countries. The World Bank has made him the head of advisory
committee to propagate his vision worldwide. The countless prizes he has been awarded include The
World Food Prize, the highest honor of the Rotary International, "Award for World Understanding"
and Care Humanitarian Award. Asia Week magazine called him one of the 25 most influential Asians.
New York Times hailed him as the star of the UN's women's conference.
He is the 2006 Nobel Peace Prize winner along with Grameen Bank.
Muhammad Yunus was the first Bangladeshi and third Bengali to ever get a Nobel Prize. After
receiving the news of the important award, Yunus announced that he would use part of his share of
the $1.4 million award money to create a company to make low-cost, high-nutrition food for the
poor; while the rest would go toward setting up an eye hospital for the poor in Bangladesh.
Impact:
The Grameen Bank (in Bengali, Grameen means rural), which Dr. Yunus has built over the last
22 years, is today the largest rural bank in Bangladesh.
Over 2 million borrowers
Covers more than 35000 villages out of 68000 villages in Bangladesh.
94 % of its borrowers are women.
The bank is based on simple, sensible rules, meticulous organization, imagination and peer
pressure among borrowers.
The break that Grameen Bank offers is a collateral-free loan, sometimes equivalent to just
a few U.S. dollars and rarely more than $100. In rural areas, it makes things happen.
98% of its loans are honored.
Dr. Yunus has turned into reality a philosophy that the poorest of the poor are the most
deserving in the land and that given the opportunity they can lift themselves out of the mire
of poverty. His ideas combine capitalism with social responsibility.
Micro-credit concept is now being practiced in 58 countries.
In the US, it is a success even with the shifting poor of Chicago's toughest districts.
The United States alone has over 500 Grameen branches and spin-offs.
Bill Clinton said in his election campaign that Yunus deserved a Nobel Peace Prize and cited
the Experiment of Dr. Yunus as a model for rebuilding the inner cities of America.
Pilot projects are starting in Britain. The methods are adapted to suit local conditions, but
the principle of empowering individuals with their own capital is the same.
Bizzy Bytes
Page : Mu/3
June 2009
References:
[1] Social Edge (www.socialedge.org)
[2] Grameen Foundation [www.grameenfoundation.org]
[3] http://muhammadyunus.org/
[4] M.M. Nabi, Biography of Dr. Muhammad Yunus, Bongoz.com (Link:
http://www.bongoz.com/people/yunus.html)
[5] Official website of Grameen Bank [http://www.grameen-info.org/]
[6] UN NEWS CENTRE
(http://www.un.org/apps/news/story.asp?NewsID=13116&Cr=microfinance&Cr1)
Author profile:
Ishita Guha
The author is an M.Sc. in Economics from Calcutta University. She is presently
teaching in Our Lady Queen of the Missions School, Salt Lake. She is also associated
with Techno India college, Salt Lake and Aliah University as a management faculty.
She can be reached at:
iguha_eco@yahoo.co.in
Disclaimer:
Any views expressed by the author are her own. Bizzy Bytes is in no way responsible
for the personal opinions of the author.
Bizzy Bytes
Page : Mu/4
June 2009
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