Accessibility links

Indian Fraud Scandal Clouds Economic Reforms in Asia

The fraud scandal at one of India's largest software outsourcers, Satyam Computer Services, has again placed the spotlight on corporate governance in Asia. Experts say the region has made some progress, but more needs to be done.

Satyam Computer Services had been one of India's most admired companies. Last year, it received an award for corporate governance.

But many are asking, was it a mirage?

The arrest for fraud of the Raju brothers who ran the company is seen as a setback for Asia's efforts to shake off perceptions of poor corporate governance. The collapse of some Asian family-run conglomerates during the region's financial crisis 10 years ago exposed some bad business practices - such as lack of transparency and shady financial transactions between family members.

"The problem has been there all this time," said Lee Kha Loon, who heads the CFA Institute's Center on Financial Markets Integrity in Hong Kong. "Some [family-run businesses] bought into the concept of these regulations and changes that needed to be done. We do see some good corporate governance, but it is very hard to measure the level of success."

Since the Asian financial crisis, governments have instituted new laws on how businesses should behave, including adopting Western accounting standards, appointing independent directors on company boards and protecting minority shareholders' rights. India was among those governments.

Asian Corporate Governance Association research director Sharmila Gopinath says there is what she calls a "mystique" of good governance in India largely because of the presence of a handful of exemplary companies.

"There are 9,000 listed companies in the country," said Gopinath. "If you look at the vast majority of them you are not going to find corporate governance standards of any great depth."

The problem, experts say, is in implementation. Joseph Fan, a corporate governance expert at the City University of Hong Kong, says new laws and regulations are not enough because some companies are able to skirt the law.

"The quality of public governance, the quality of bureaucrats, the quality of government play a very important role," said Fan.

Indian regulators have been quick to start investigations into Satyam's business practices.

Trouble at Satyam began to emerge last month when its chairman wanted the company to buy two companies owned by his family. Shareholders objected and independent directors resigned. Earlier this month, the chairman admitted to fabricating about $1 billion in cash and the company's profits.

Lee says Satyam's case serves as a reminder of the need for continued improvements in corporate governance, despite the reforms over the past decade.

"Where is the fear of family-owned companies to change? One is, regulators would come after them. Second is, investors would react like in the Satyam case," he said.

As another crisis hits Asia and companies face financial difficulties, experts say regulators need to be vigilant for irregularities.