Satyam and the Indian Family Business
 by Gita Piramal


After all the investigations into the Satyam scandal are over, on...
towards protecting the family business. These social mores, in turn, translate into government
regulations that make it ve...
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Satyam And The Indian Family Business

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Satyam And The Indian Family Business

  1. 1. Satyam and the Indian Family Business by Gita Piramal After all the investigations into the Satyam scandal are over, one question will remain: why did its founder, B Ramalinga Raju, plunge into fraud? Four out of ten entrepreneurs fail in the first five years -- but in Raju's early entrepreneurial years, he had a family advantage. His father, Satyanarayana Raju, built a grape growing business profitable enough to support entrepreneurship in the next generation (three sons and one daughter). It was a big relief in the Raju family when, after a rough stretch, the grape farm started bringing in a steady income. This new prosperity led to a transformation of the family from farmers to professionals. During such transitions, typically parents want their children to become doctors, lawyers or engineers. Satyanaranaya could afford to send his two sons to the USA, where Ramalinga became fascinated by computers -- hence the family's entry into the IT industry. A highly talented entrepreneur, Raju built Satyam to a point where it had 185 Fortune 500 companies as customers; 53,000 very employable employees; and systems and paperwork so sophisticated that razor-sharp analysts from the world's top financial firms could not detect a fraud committed over seven years. Indian family-run businesses historically have taken the notion of governance very seriously. In 2003, when new governance regulations were implemented around the world in the wake of the dot-com implosion and the Enron debacle, 71 percent of family owned businesses in India said they had "tightened up internal controls as a safeguard"--despite the governance regulations mainly affecting only publicly traded firms, according to a Grant Thornton International Business Owners' Survey (IBOS) in India that year. But by falling into the temptation to cook the books, Raju was soon "riding a tiger, not knowing how to get off without being eaten," as he put it. In the process he not only seriously damaged the company--he destroyed the family inheritance and the legacy he had so carefully built. Legacy -- the conviction that one is not just building a business, but providing a stable and successful future for the next generation -- is one of the most important aspects of the Indian family business. In the West, aging entrepreneurs either sell off the business or close it down if their children don't want to run it. In India such an approach is largely unthinkable; it's assumed both that children will continue the family venture, and that parents are building the business for that very purpose -- not to sell it. Indian culture, like most of Asia, puts society at the center, unlike the West (and particularly the USA) where the individual is foremost. Hence Indian social mores are geared
  2. 2. towards protecting the family business. These social mores, in turn, translate into government regulations that make it very hard to close down a business. Further, if a firm closes its doors or is sold, it is automatically assumed that there was a failure -- rather than just a rite of passage in the entrepreneur's long career. Very recently, we've seen some changes to this culture, from leaders like Hemendra Kothari (a merchant banker who sold his stake in DSP Merrill Lynch to Merrill Lynch) and Narottam Sekhsaria (founder of cement major Gujarat Ambuja), but these entrepreneurs are still seen as outliers. It's too soon to tell what effect Satyam will have on the family business either as concept or institution. Family businesses in India remain vibrant. Could the Satyam example (couched as a "family business gone wrong") or the recent examples of Westernized succession planning change the cultural norms of family businesses? Perhaps. But parental figures in these businesses are still under tremendous pressure to build their legacies, and their children remain expected to follow in their parents' endeavors. Whether this remains the case rests on the shoulders of India's other, diverse family entrepreneurs

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