Professor caught up in India's Enron
Harvard academic learned of fraud after leaving Satyam board
Accounting professor Krishna G. Palepu, one of the leading lights at Harvard Business School, has long advocated sweeping reforms in the auditing business, but he was under no illusions that such measures would always succeed in preventing abuses.
"If there is a crook in the system," Palepu said in a 1997 interview with the Globe, "it is going to be pretty tough to detect it."
His words are proving prescient. Palepu, 55, resigned as a director of Indian-based technology services company Satyam Computer Services Inc. on Dec. 28, nine days before it touched off a raging business scandal in India and an embarrassment at Harvard Business School in Boston.
Last week, founder and chairman Byrraju Ramalinga Raju quit Satyam after admitting to fraudulent accounting - among other things, falsifying a cash balance of $1 billion - in a case that's being called India's Enron. Raju, an alumnus of a Harvard Business School executive education program, was arrested by Indian authorities last Friday, along with his brother B. Rama Raju, the Satyam managing director. They are currently being held in Chanchalguda Central Prison in Hyderabad, awaiting trial on criminal conspiracy and other charges.
Palepu, in a statement yesterday, said he didn't learn about the fraud until after he had resigned from the company. The scandal has rocked the Indian business community, caused anxiety among other Indian outsourcing companies, and angered Satyam investors.
For Palepu and his colleagues at Harvard Business School, which encourages faculty members to serve on boards to learn about global business practices, it has been an unwelcome distraction. Faculty members have received anonymous e-mails, purportedly from Indian shareholders, suggesting Palepu and the venerable business school weren't practicing the corporate governance lessons they preached.
Palepu has been among the business school's highest-profile educators, leading a delegation to India in 2006 that included former Harvard University president Lawrence H. Summers and current business school dean Jay O. Light. The delegation hosted a research symposium and opened a Harvard research center in Mumbai.
"It's incomprehensible to me," said Jay W. Lorsch, a professor of human relations at the business school who has led its corporate governance initiatives in recent years. "Krishna's so careful, he's so thoughtful, that it's almost ironic he got caught up in this. He's been an advocate of improved governance in everything he did."
In his statement yesterday, Palepu said, "I fulfilled my responsibilities fully and appropriately" as an independent director. "The actions of Mr. Raju and his brother has caused Satyam, thousands of Satyam employees, customers and investors, and India enormous damage," he said. Palepu declined to be interviewed for this story.
Corporate governance specialists said Palepu and other directors may be sued by Satyam stockowners in Indian and US courts for alleged lack of oversight, though it's unlikely they'll be held negligent.
In the many lawsuits filed in fraud cases in the United States, only about 15 directors have had to pay fines - usually covered by their companies' directors and officers insurance - while none have faced criminal charges, said Jeffrey M. Cunningham, chief executive of Directorship LLC, a Boston website providing corporate governance information to directors of public companies.
"The independent board member in the United States has a lot of protection," said Cunningham, who has sat on boards of companies with US and Indian operations. "If you didn't have that protection, you wouldn't have directors. Being a board member is a fine art in the United States. In many other countries, including India, cronyism still rules. There's very little disclosure and a complete lack of transparency."
Palepu's resignation from Satyam followed a hastily called Dec. 16 board meeting, which Palepu listened to by teleconference, at which Raju discussed plans to acquire a pair of companies run by his sons. Raju and his brother had ownership stakes in the companies. The board approved the plan, though Palepu didn't vote because he wasn't physically present. Then, on Dec. 27, the company received margin calls from creditors, requiring cash payments and underscoring Satyam's deteriorating financial condition.
In his statement, Palepu said he recommended steps to get the company back on solid footing, including reconstituting the board and hiring an outside financial adviser. He said he also realized the company's worsening outlook would require board members to spend more time in India, which he would be unable to do. "This realization was what drove my decision to resign from the board," he said.
Harvard Business School is rallying behind Palepu, citing his contributions as a teacher, scholar, and administrator. "He is recognized by his colleagues and associates at HBS, who are eager to see him preserve his reputation and good standing in the academic community, as a man of tremendous integrity," the school said in a statement.
Lorsch said Palepu is respected throughout the business school and beyond. "In his chosen field of accounting, he's certainly seen as one of the outstanding academics," Lorsch said. "Knowing Krishna, if he had any knowledge of what was happening at Satyam, he would have acted quickly to get to the bottom of it."
Corporate directors have responsibility for oversight of a company's management activities, including financial affairs, though they often rely on auditors, lawyers, investment bankers, and other outside professionals for specific tasks. Lorsch said the primary responsibility for detecting Satyam's fictitious assets lay with its outside auditor, accounting firm PricewaterhouseCoopers, which should have scrutinized the finances and alerted the board's audit committee.
While he is an authority in accounting, writing books and teaching classes on the subject, Palepu wasn't on the audit committee because he believed a prior paid consulting relationship he'd had with Satyam could have posed a conflict, according to Lorsch.
Mike Ascolese, a global affairs spokesman for PricewaterhouseCoopers in New York, declined to comment.
Even if they're deceived by management, directors should be held responsible for oversight, some financial executives suggested. "Boards in this environment have higher responsibility," said Surjeet Singh, chief financial officer at Patni Computer Systems Inc., a global outsourcing company based jointly in Cambridge and Mumbai. "They can not be operating as rubber stamps." Singh added that he didn't believe Satyam directors knew of Raju's fraudulent activity.
But lack of knowledge won't necessarily inoculate Satyam's board members from lawsuits by outraged shareholders.
"This is America," said Nell Minow, an ethics specialist for the Corporate Library research firm in Washington. "We sue everybody. That's our national pastime."
Robert Weisman can be reached at weisman@globe.com. 