Satyameva Jayate—‘the truth will prevail’—is the motto emblazoned on India’s national emblem, the Ashoka Lions. The name of the Indian company whose chairman admitted, in January 2009, that he had defrauded the company of thousands of crores of rupees is Satyam—‘the truth’. The nation was shocked because Satyam was one of India’s most admired companies and its chairman and founder, Ramalingam Raju, was a widely respected corporate leader.
For the record, the way the Indian Government steered Satyam out of its crisis has done the nation proud. Within 100 days of having a huge financial hole unexpectedly blown in its bottom, the company was is in the hands of new management with sufficient capital. Its customers will continue to be served, and its employees and shareholders can look to the future hopefully—and all this without spending any tax payer money. Satyam’s rescue contrasts sharply with the stories of distressed companies in the USA that are not out of the woods in spite of public money being poured into them. Satyam could be saved swiftly because many people, including the eminent members of the interim board that government appointed, gave their services willingly, and free of cost, in the larger national interest.
‘Is the Satyam Saga over?’ was the question posed by a TV anchor on the day Mahindras won the bid for that troubled company. A panelist posed a counter-question: ‘Is the Cold War over?’ The Soviet Union has collapsed. Nevertheless the West remains worried about threats from nuclear armed ideological opponents—North Korea, China, Russia, and Iran. The panelist’s point was that until the underlying forces that led to the concern have passed, the saga cannot be over. Therefore, will there be another Satyam?
What are the factors that created the problem? Satyam exposed weaknesses in institutions. It opened up questions about role models of leadership. The Satyam saga will be over only when we understand and effectively address these root causes.
Institutions with Integrity
Satyam complied with all the formal requirements of good corporate governance. It had eminent independent directors. The board had the required committees. It had internationally respected auditors. For its compliance with form, the company had even won international awards for exemplary corporate governance. Shortly before the Satyam fraud was exposed, the collapse of Lehman Brothers in the US and weaknesses in AIG, Fannie Mae, Citibank, and many other large financial institutions, had created panic around the world. The world was dismayed, says the Financial Times, by ‘the spectacle of bankers driving their institutions into bankruptcy while being rewarded with million pound bonuses and munificent pensions’.
It is not just the governance of these firms, but also the institutions set up to ensure the integrity of the corporate system —auditors, credit rating agencies, etc—which have failed in their duties to society. Polls showed a dramatic erosion of faith in business. Three out of four Americans trusted business less than they did a year earlier. Only a third trusted business to do the right thing—half of what it used to be a year before. Businessmen pleaded that governments should not react to the egregious lapses by a few and impose controls on all. That way the system will become sclerotic, they said. Besides, it will induce corruption of another kind—between the controllers and those they must control. Therefore, they pleaded that controls should be voluntary. Trust us, they said.
The question that any institution or person who wants to be trusted must ask is, “What is my responsibility towards others, especially those whose trust I want?” They must not merely seek smarter ways to produce more wealth for themselves and their investors. The Hippocrates Oath that all doctors take is a commitment to use their skills to serve others. Similarly the professional associations that society depends on to voluntarily uphold the standards of their members, whether doctors, lawyers, or accountants, are required to ensure that their members deliver the services society expects. They are expected to discipline members who break the code and, in the extreme, even debar them from serving. And when they do not have the courage to do this, society must impose controls on them. The problem with business associations is that they are unwilling to discipline their own members when they serve society poorly. Because associations that would, will not attract members. Members join business associations to protect their business interests, and to lobby governments to give them more freedom.
Business leaders, who until 2008 had urged governments to stay out of business, are now urging governments to vigorously save businesses. They want governments to intervene in the markets but, at the same time to keep markets free. This raises questions in the public’s mind about what they want markets to be free from. Freedom only from barriers to trade? Or also freedom from government regulations? Or even freedom from responsibility for their actions?
In the metaphor of the architecture of a house, trust in institutions is the solid roof that we all need above us. It gives us security to live without fear of bad things falling upon us. Structures are necessary to uphold this roof. When the roof begins to cave in, architects may propose more vertical pillars to support it. Thus, when problems of malfeasance appear in economies and societies, there is demand for more rules and more agencies for regulation and control. The multiplication of such structures reduces the room to move around within the house, thus reducing the freedom of enterprises. Therefore, the architect must conceive of other ways to strengthen the structure that do no require this plethora of top down controls. These could be well placed horizontal struts and beams, which strengthen the integrity of the structure while giving space within it.
These horizontal structures are the values by which people relate to each other and business conducts itself. Economists say that ‘incentives’ must be aligned to induce people to behave properly. Economists tend to think of incentives in terms of improvement of measurable financial outcomes for individuals and investors. Therefore they emphasize the creation of financial wealth, and measure ‘value’ in financial terms. And when societies are in trouble, economists will concentrate on improving the flow of money and investments. Whereas the present crisis of confidence in the free market system requires that leaders also focus on moral and ethical values.
Like Arjun on the battlefield at Kurukshetra who asked Krishna a moral question, not advice on how to fight the battle, business leaders fighting the recession must also ask what they must change in their approach to business to regain society’s trust if they want more freedom in future. Therefore corporate boards should introspect from time to time about the values that guide their decisions. Independent directors on boards are not expected to merely provide functional expertise, in finance, law, business management, etc or knowledge of the industry—which is the principal qualification sought when they are added to the board. Whereas the notion of ‘independence’ is that these directors must also be a moral check, built into the system of corporate governance, to sense when promoters and managers are failing in their responsibilities to society and to correct them. How many independent directors are prepared to fulfill this role? And how often does the board candidly introspect into the values guiding its work?
Leaders with Values
Surveying the myriad challenges before the nation—social, economic, and political—optimistic Indians will point to how far the nation has come in six decades since its Independence. Pessimists are dismayed by how much remains to be done. However, both agree that progress requires stronger institutions whereas the nation’s institutions seem to be crumbling. Both would also agree that strong institutions are built by good leaders.
Imposing more structures and creating more rules will not prevent another Satyam. Just as the imposition of more stringent corporate governance rules by Sarbanes Oxley, after the failure of Enron—which also was admired for its corporate governance systems until its fraud was exposed, has not stopped other greedy corporate executives in the USA from finding clever ways to work around the rules.
Satyam reveals an insight into why the leaders we count on to build our institutions are failing us. It also reveals our culpability in their failure. Satyam’s founder, Ramalingam Raju, was widely admired for his philanthropic work in addition to building a large, successful company. The question to which people are seeking an answer is how could such a person damage his own creation for which he was given much respect? In fact the weaknesses in corporate governance arose from the aura of respect with which people in his company and around it surrounded Raju.
Rules cannot work if those charged with ensuring they are followed break them. Nor can the required checks be effective if the checkers presume that some persons are too good to be checked: that they are above the rules, and checking them would be committing the crime of ‘lese- majeste’. In the minds of the builders of institutions as well as the people around them, the builders often become conflated with the institution itself. People who build great institutions are deservedly placed on high pedestals. The problem is that they are also put above the checks and controls that apply to lesser mortals below. This is the Achilles Heel in the governance of all institutions, whether political parties, educational institutions, or business corporations.
Those who wish to build institutions should insist that the rules of the institution apply to themselves too. Tata Administrative Officers attending a program at the Tata Management Training Center in Pune in December 1965 learned this lesson from J.R.D.Tata himself. It was the first program at the Center. J.R.D. Tata had come to inaugurate it. He was stopped from entering the dining hall for lunch by Col. Cama, the Center’s administrator. J.R.D was dressed in a safari suit as he always was. ‘I am sorry, sir, you need to wear a tie in the dining hall—that is the rule’, said Cama. ‘But I do not have one,’ said J.R.D. ‘Then I will have lunch sent to you in your room, sir’, said Cama. The TAS officers were aghast at the Colonel’s lessee majesty. But J.R.D showed them what a great man he was, not by berating the Colonel, but by turning around and going to his room, where he had lunch. He spoke no words. His action spoke loud and clear. He made the point that the rules of institutions must apply equally to all if they are to be effective—and he allowed a junior officer to apply the rule even to the great J.R.D.
Policemen in Delhi are frightened to stop people in big cars that break traffic rules because the cars may be carrying VIPs, or someone who will claim he knows a VIP and threaten to get the policeman punished. Similarly corporate rules are not applied to the promoters because their subordinates are afraid to question them. Satyam employees said they never questioned Raju because they assumed he would be acting in the best interest of the company he had built. Directors in board meetings are expected to ask questions, even if they have to confront the chairman. But this is not done. Therefore it is not the structure of the board and quality of independent directors that improve governance, but the conduct within the board, including the freedom within it to question the chairman. And auditors too must be skeptical of everything. They must probe deeply regardless of the aura around the company and its leaders because that is what they are paid to do.
Nations’ and a societies’ values are not measured by the wealth they produce, but by the means considered acceptable by their members. Institutions and values are eroding in India because the norm has become that those charged with building and maintaining institutions are above even their institution’s own rules. Whereas it has become our habit to accuse politicians for the breakdown of national values, they are not the only culprits. Even business leaders consider themselves above the rules that apply to others. Our youth look up to these role models. What they see is self-serving behavior. They even begin to admire the display of power to distort the system for one’s own ends. They aspire to do the same: to do otherwise would be wimpy and weak. Thus, ‘make out for yourself—the means do not matter’, is a cancerous idea spreading in our society. And so the Satyam saga will go on.
Krishna says in the Gita that whenever societal values erode, God will return to earth to restore them. God evokes his transformational power on earth through transformational leaders. Now is the time for more leaders to awaken God’s voice within them. And it is also the time for each of us to discover the leader within ourselves.
A leader is she or he who takes the first steps towards what she or he most deeply cares about, and in ways that others wish to follow. Ethical leaders care about others, not merely their own gain. There are millions of Indians who care about the condition of the people around themselves. They envision a society in which all, whatever their religion or caste, and whether born rich or poor, will have a fair chance to live in dignity and to make something of their own lives and the lives of their children. They must take steps, in whatever they do—whether in business, government, professional service, politics, or social service, towards that vision. They will be role models for others who may follow too. Taking the first steps, even when others around are not, is leadership. Thus a few, acting in multiple places, can soon stir a whole movement of change to shape a values-based society that all want.
Are you stepping forward? Or are you waiting for someone else?