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The Caste of a Scam: A Thousand Satyams in the Making

February 13, 2009

Guest post by D.PARTHASARATHY

Industry leaders, CEOs, and Corporate big-wigs have been falling over each other to portray the Satyam scam as an isolated case, as a simple failure of corporate governance. On the other hand critics from the left once again have had a field day with their “I told you so” condemnation of capitalist free market economies. There is also a moralistic middle class which blames it on greed pure and simple. The fact that the Indian private sector is largely dominated by family owned and controlled businesses of sundry sizes, that caste, community, gender, and social networks play a significant role in who gets nominated to top positions within the companies, and how businesses are run, that these have significant implications for corporate governance as well as corporate loot – these are issues that are too dangerous and embarrassing at the same time, and so are conveniently ignored.

An editor of a leading newspaper once remarked that corporate leaders usually came up to him for names to fill top positions in their companies. Their requirements were minimal – that the candidate should preferably be male, not be a Muslim, and should as far as possible be a twice-born. The real reason for corporate India’s opposition to reservations in the private sector is not any great appreciation of merit and efficiency. It is rather the urgent imperative to protect their family inheritances (baap ka maal) and positions (baap ka kursi), so that their incompetence in facing competition in liberalized markets are not exposed. Even as they have opposed reservations, they have revelled in reserving top positions for their own sons, nephews, brothers, and increasingly sons in law (rarely daughters, sisters, or mothers). However much family and fellow caste members may be groomed and be educationally qualified, the implication of family control for good corporate governance is rarely recognized or acknowledged. India’s business leaders are quick to brush aside such concerns suddenly developing a concern for protecting India’s ‘culturally different and unique business tradition’. This despite the fact that even when the ‘culturally unique’ great Indian business family splits, the businesses are divided among male (usually male) family members, with no concern for the interests of the business or that of the shareholders who are not even consulted, all presided over and mediated by other business leaders supposedly known for their honesty and integrity.

Not just top executive positions but directorships – including so-called independent ones, are also based on kinship, caste, and community. No one has bothered to ask how so many of Satyam and other companies floated by the family have directors who are Rajus – related by kinship and caste. How qualified are they to assume these directorships? Immediate and extended family members assuming director positions is widespread among most large corporates in India. Gender does not seem an issue here, as the same men who deny positions in their companies to women from the family, miraculously discover a great deal of merit in them when it comes to appointing them to directorships in various companies. Also, it is interesting as to how many of these independent directors and vice-presidents are ex-bureaucrats usually from twice born castes. The same private sector which criticizes the babudom for lethargy and inefficiency finds dynamism, efficiency and merit once the bureaucrats retire. After all is it not easier to thrive on government contracts than compete in the free market, and expose one’s inefficiencies? And what better way to liaise with the government than to have ex-bureaucrats as directors? Independent directors are also recruited from the academia – from the merit conscious IITs and IIMs, and other business schools. In return for the prestige, sitting fees, and retainerships, vice-chancellors, deans and directors only have to look the other way when corporate illegalities are committed, and occasionally call upon these CEO to deliver convocation addresses. For all their adulation of American style free market economy, most industry leaders in India are not just reluctant but strongly oppose corporate governance reforms which would put in place independent boards and CEOs who will have the interests of business, employees and shareholders in mind, and not the interests of founder and promoter families.

It is not by accident that independent directors, auditors, and CFOs associated with the Satyam scam have pleaded guilty to the lesser but more ignominious charge of incompetence than be arraigned for the higher crime of complicity in financial irregularities. The CFO of Satyam – Vadlamani Srinivas has confessed that he does “not pay much attention to the details of the balance sheet”, and that he just passes the balance sheets and accounts statements prepared by his assistants. Perhaps the CFO was recruited on the basis of reservation and hence was incompetent and inefficient? He has also stated that PricewaterhouseCoopers – the auditors of Satyam – “never pointed out any ‘deficiencies’ during their discussions with me”. PricewaterhouseCoopers is known for recruiting from the IIMs and other reputed business schools. Is it the IIMs and other business schools that have produced the incompetent auditors employed by the company? Or perhaps PricewaterhouseCoopers recruited candidates through reservations? One of the independent directors of Satyam was the Dean of the prestigious Indian School of Business which only recruits on the basis of merit. He has been reported as being ‘stunned’ by the revelations of Ramalinga Raju, and in his resignation statement said that he had “absolutely no prior knowledge” of the scam. What was he doing then on Satyam’s board as an independent director? Clearly, owning up to incompetence and ignorance seems a safer step than disturbing the family based governance structures of Indian companies. How else can private business schools make money through “family owned business” MDPs?

Satyam, Maytas, and Nagarjuna Finance – the three companies that have been involved in financial irregularities and are on the verge of collapse, are not only run and controlled by members of the Raju clan, but also have several other ‘professional’ employees and directors who have or have had links with other Raju owned companies and government institutions. Such linkages are not uncommon in the capitalist west, nor is it uncommon in western capitalist countries for such companies to survive or even thrive on government contracts. What is different is that for a company like Maytas with little infrastructure expertise to get huge government contracts, to get these contracts implemented through sub-contractors over a long period, to obtain land at a fraction of the market cost, all these require the building up of intricately linked caste and political networks over a long period of time. Despite being numerically small, the Rajus have been financially and politically powerful enough to influence whichever government has been in power in Andhra Pradesh. It is not surprising to read newspaper reports talking about “members of the Raju community” being “in despair”, or that Ramalinga Raju had a meeting with members of his caste community before confessing to his role in the scam, or even that his caste fellows have pledged financial support for his legal battles.

Newspapers have also reported on the support for Ramalinga Raju among the ‘villagers’ who have ‘benefited’ from the development works undertaken by Satyam’s philanthropic and charitable arm – the Byrraju Foundation. The enthusiasm of India’s big companies for corporate social responsibility in the form of rural development works belies its criticism even by neo-liberal enthusiasts. On the one hand free market fundamentalists such as Milton Friedman have questioned the ethics of diverting shareholder money for social purposes – a criticism that cannot be easily brushed aside. On the other hand, corporate leaders wishing to attain the status, prestige and power of erstwhile zamindars, have started sundry foundations with shareholder wealth ostensibly in the name of carrying out rural development activities, but also with the additional objective of finding sinecures for spouses, siblings, children, in-laws and other kin group members. It would be an interesting exercise to find out how many of these foundations are headed and run by spouses and other relatives of CEOs, and how many of them went through a proper process of recruitment, and were selected on the basis of ‘merit’. The ethics of using public money in the form of shareholder wealth for family benefit is not something that concerns even the most ‘progressive’ of our CEOs and managing directors.

For that matter, how are CEOs and managing directors recruited in Indian companies? Was Ramalinga Raju appointed as CEO of Satyam after a rigorous search, selection, vetting, and recruitment process? Was his son Teja Raju appointed to Maytas on the basis of being the best from among a pool of candidates? Did he have the requisite qualifications and experience in the infrastructure sector to head Maytas?

So long as companies are controlled and run by people occupying top positions and linked through caste, community and social networks, even the best of corporate governance regulations and practices cannot prevent scams and financial regularities. So long as corporate boards are occupied by family members and caste fellows who have little or no responsibility to shareholders and whose interests are restricted to wealth maximization and retaining positions solely for family members, a thousand, or maybe even a million Satyams will be played out across the country.

9 Comments leave one →
  1. Anant permalink
    February 14, 2009 6:44 AM

    There is a parallel here with China that may be instructive. Since the 1980s, the success of Chinese businessmen in the global economy has been a subject of great interest to policymakers and academic social scientists. While on the one hand, western businessmen and international policy makers often expressed frustration at the opaqueness of Chinese business practices, on the other hand, there was also a fascination mixed with admiration at their success at the business of making money.

    At the heart of what has come to be celebrated as Chinese capitalism, lies an unabashed mobilization of family and kinship networks – which is then defended under the broad rubric of Asian values.

    But of course, the seeds of failure are sown into the making of this success from the very beginning. You got to be an insider to family and kinship networks to know what is going on. This style of driving local economic growth in China through kinship networks spread across the world in all sorts of sectors from manufacturing to real estate across all sorts of international locations, presents insurmountable regulatory problems from the perspective of a modern liberal democratic state, and is not amenable to principles of democratic corporate governance.

    In the rough and tumble of the post 90s world economy, this style of doing capitalism through wooing and promoting transnational ethnic networks has gained widespread acceptability in India too. In every state government, there are people operating behind the scenes as well as through formal positions to mobilize such networks. It is not that such networks have been unknown in India until then. Just a quick look through the membership of the committee that wrote the Bombay Plan, or through the membership of the main Indian business associations in the 40s can be revealing. The difference lies in the rise of a host of regional actors in the 90s. The glue that keeps elements of these new actors is a range of diverse caste and linguistic identities often based in post green revolution agrarian surpluses. (as compared to let us say the parsi, marwari type urbane networks of an earlier era).

    The Satyam story is amazing simply because in one stroke it brought so much into view. Ramalinga Raju tries to acquire his son’s firm Maytas in a bid to kill two birds with one stone. Lend Satyam’s corporate image to Maytas so as to meet the latter’s running capital requirements, and at the same time put quite literally a patch of firm ground under Satyam’s own feet, by transferring to Satyam, the thousands of acres of land gradually acquired by the Raju clan members around Hyderabad since 1960s.

    It is just one of those instances when what could have worked, if the winds had been favorable, just didnt work. Ramalinga Raju himself summed up the situation quite nicely the day after he signed the confession. It was like riding the tiger! But as Parthasarathy indicates, Raju is not the only one riding the tiger. In so far as large swathes of the economy are dependent on such networks now, we are all taking a collective tiger ride.

  2. congrats permalink
    February 14, 2009 10:45 AM

    Congratulations! This post goes to the root of the scam and dangers of capitalism and Indian democracy. The challenge for radical/dalit politcial activist is how to create a class of capitalist and land owners who belong to the subaltern and dalit sections of society. It is only they who can challenge patriachal and kinship oriented hegemony and build a more egalitarian and compassionate society.

  3. Subash permalink
    February 15, 2009 1:56 PM

    Interesting point above is about the silence of the independent directors (ex bureaucrats, learned business school experts etc) to let things pass even if they saw some wrong doing-they preferred to do so because even though not directly involved its best not to bite the hand that feeds ,the fear of losing the good life.This habit is acquired out of a lifetime of working in a ‘yes sir’ environment in our business and government spheres. Honest fellows who follow the rules and procedures are the losers in such environments.

  4. ranju radha permalink
    February 15, 2009 7:32 PM

    …the story never ends here

    even in jail Mr. Raju, the great gets special treatment.

    Rajus enjoy life even in Indian prisons, whereas the major chunk of indian population gets tortured by system’s vanara sena labelling them as history sheeters

    truly this society is made for Rajus

    jai ho!

  5. kshmendra kaul permalink
    February 18, 2009 3:51 PM

    As far as I know (I may be corrected), the Independent Directors are not responsible for “preparation” of the Balance Sheet.

    That is the domain of Executive Directors and other Operating Officers

    In my opinion, as far as the financial irregularities are concerned, “Incompetence” is the apt charge against the Independent Directors and not “Complicity”

  6. kureela permalink
    February 22, 2009 12:44 AM

    India is a country of thugs who called hindu intellectuals.We can compare them Jews of America.if you can control the medias,finanacial institution and political systems means you are the king maker and able administrator.what a shame for hindus and their hindu led government in India.

    • September 8, 2010 1:44 PM

      The author should have touched upon the inter same category caste wars and political, economic implications they are having.In Andhra,, the place from where rajus come, it’s not about the higher caste colluding to hinder the growth of the lower ones.The four major “higher castes”(all kshatriya clans) , everyone involved in zamindari, kingship etc in their own areas of influence, fight each other for the upperhand.if “rajus” everywhere meant they were disallowing the lower sections of the society, that would have been a much better situation.But here the other three higher castes are also being disallowed.As such the % population of higher castes is very low.And even among them , there are restrictions,, oe can guess the kind of tacit accumulation of wealth within one’s own community that is happening.

  7. Shashwati permalink
    February 22, 2009 7:12 PM

    Taiwan’s “economic miracle” has similar roots in kinship relations, but its a lot more gender based. It depends on exploiting female members of the family. It was wives, mothers, daughters who performed the low paid, or even unpaid labor that was performed in the Taiwanese living room which became the factory floor, and created Taiwan’s wealth, it was not the only reason for Taiwan’s economic strength, but certainly a big part of it, especially in the 80s. Even today, most enterprises are managed through family and kinship connections, which makes for a certain “unprofessionalism” in most things, though this is not completely true of the tech sector.

  8. kureela permalink
    February 23, 2009 5:44 PM

    Dear Kaul,If independent director are not responsible for balance sheet then what for they holding the chairs.Independent director are responsible for fraud in satyam because all belongs to telgu clan.

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