Thursday, January 8, 2009

Satyam and Governance

Posted by Jeff Lipshaw

Once again, our mouths are agape as a putative paragon of "good governance" - the Indian outsourcing firm, Satyam - turns out to be rife with out-and-out fraud.  Larry Cunningham has a nice post on this over at Concurring Opinions.

Two quick reactions.

One.  It really is a mystery how somebody who is audited by PWC gins up a billion dollars in fake cash.  My wife has been an inactive CPA since about 1983, and her comment this morning was:  "I haven't been on an audit in over 25 years, but I'd still know how to audit cash!"

Two.  Back in October, I did a sarcastic little post on whether having good governance somehow insulated firms from the consequences of the financial tsunami.  One of the exemplar firms in my little survey was none other than Satyam.  I took the list from a group I had never heard of, but unless it also is lying, it seems to have the endorsement of outfits like Bloomberg, NYSE Euronext, Arnold & Porter, KPMG, etc. (A sidebar WSJ article refers to another London good governance rating outfit that also extolled Satyam, but intimated that the rating outfit itself was a little corrupt.  My point is that Satyam seemed to have fooled everybody, even those who were on the up and up.) I have suggested many times that attempts to legislate good governance by things like independence rules are based on tenuous cause/effect relationships.  Since that post, I tried to reconcile this with my own intuition that, indeed, something does stink if the board consists of a bunch of people who receive financial benefits (other than their fees) from the institution they purport to govern. 

What I realized is that the relationship between rules ("entrenched generalizations" in Fred Schauer's coinage) and consequences is not symmetrical.  We may reasonably generalize that when a director's public relations firm, for example, receives $500,000 a year in business from the company on whose board the director sits, there is a plausible enough connection between the conflict of interest and bad judgment to institute a financial independence rule (this is good ol' rule utilitarianism).  The fallacy is in thinking that similar rules will by themselves create good judgment.  That, of course, is the problem with much of governance reform.  The rules will probably inoculate the board against one kind of disease, but it's otherwise no assurance of good health.

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Comments

Of course all of this corporate governance stuff is pretty opaque to me given my lack of knowledge in this area. Nonetheless, perhaps we might think of the pedagogic and expressive function of the rules, beyond their prescriptive and proscriptive function, and thus the larger social purposes and values we're trying to communicate through the rules (as a by-product perhaps). In other words, the rules serve to create a corporate climate more conducive to (i.e., one that recognizes, facilitates, encourages) good judgment which, after all, needs an hospitable environment for its exercise. Think, by analogy (from the world of torts) of the first time a corporation was held liable to a consumer who suffered injury as a result a defective product (as a result of negligence). From the perspective of tort law and perhaps corrective justice generally, the decision in favor of the plaintiff involves a ruling between two the parties. But we rightly look to the larger ramifications and implications of the ruling and speak of its "policy" effects, better, the wider socio-economic and political considerations suggested by the ruling, which of course may then involve the formulation of a general rule, etc. The point being that while we rightly concentrate on the specific ruling, or here, rule(s), the consequences extend in various directions and these are best seen as expressive and pedagogic functions of the law. That is to say, I think they help create the conditions conducive to the exercise of good judgment (a greenhouse for [legal] responsibility as it were) about which you've written so eloquently. Rules, and the institutional resources of law more generally, teach us, in other words (and in the end or in the larger picture) both directly AND indirectly about legal AND ethical or moral responsibility.

Posted by: Patrick S. O'Donnell | Jan 8, 2009 10:34:38 AM

Corporate Governance and external audit through big CA/CPA firms to meet regulatory requirement looks like a formalility which is being fulfilled at a cost of billion of dollars.There is a need to know for generalal public interest as to how many frauds involving how much amount is being detected by these so called professionals on whom such huge funds are being spent. Lets analyse current global recession and compare the current status of all major institutions with their audit reports issued during last one year issued by these financial experts.

Posted by: M.Ishtiaq Ali | Jan 10, 2009 9:02:44 AM

All is fine and unerstood.

Tell me whay can we not save it. get the money back from Raju and get Satyam back to its feet. Can not the employees have asay in it. Then who can

Arnav

Posted by: arnav jain | Jan 29, 2009 3:20:06 PM

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