Who's the company?

The Mahindra Satyam case raises questions about who is fraudster, and who victim.

Mahindra Satyam’s decision to sue the company’s former directors and auditors raises some interesting questions. The present chairman of the company has been quoted as saying, “We believe the company has suffered incredible loss.” Assuming that the company was defrauded and needs to be compensated, what exactly is the “company” that should get the compensation that has been sought through the civil suit? A company usually consists of its shareholders, but these have changed over time. The people who lost out were those who held shares in January 2009, when the scam surfaced and the company’s share price tanked. As against that, the company today is controlled by people who bought into it after the scam, when the share price was low — and both the scam and the risks involved in buying into a troubled company were known. If they are not losers in the process, by what logic should they be the people asking for or getting compensation, and not the shareholders who may have ended up being out of pocket three years ago?

 

Similar questions can be asked with regard to the other parties involved. For instance, the company has sued the auditors who failed to detect the scam, and therefore failed in their fiduciary duty to shareholders, whereas the auditors (Price Waterhouse) say they are victims too, in that they were fed incorrect information — every audit report maintains that the audit has been done on the basis of the information placed before the auditors by the management. This is already a live issue: the auditors have been charged and incarcerated, pending trial. Ditto with the non-executive directors of the relevant period. To the extent that they were not party to the scam (and no one has claimed that a retired IIT director and a professor from the Harvard Business School were active scamsters), and that they were fed with erroneous reports from a usually reliable auditor, as well as bank statements that were forgeries, were the directors party to the scam, or guilty of failure to detect the scam in their fiduciary capacity, or victims like the others — or some combination of these? This issue has cropped up in other contexts as well, such as the liability for bounced cheques, where the agreed position that has evolved is that non-executive and executive directors have different levels of responsibility, and therefore of liability when things go wrong. How does that apply to the current situation?

Finally, if the perpetrators of the scam did cause substantial losses to various stakeholders, what about employees who lost their jobs for no fault of theirs? Or should it be the position that employees are bound by the contracts that govern their relationship with the company, and that so long as the terms of the contracts have been honoured (dues paid, notice period served), no employee has any larger claim on the company — even if some of them can claim reputation loss because of a Satyam rub-off. These, and other interesting questions, arise from the case that Mahindra Satyam has filed, and it will therefore be watched with keen interest.