Ethical Analysis of Satyam Scandal

Ethical Analysis of Satyam Scandal

The Satyam Computer Services scandal involved India's fourth-largest software services exporting company and likely represents the largest case of corporate fraud in India's corporate history. Last January, the company's founder and chairman, Ramalinga Raju, suddenly announced that the company's profits had been grossly inflated for years and that approximately 94% of its $1 billion in assets were completely fictitious.

As an immediate result of the shocking disclosure, the shares of the company plummeted 80%, the entire Indian equity market was destabilized, Bombay's stock index fell 7.3%, and the Indian Rupee lost significant value worldwide.

Stakeholders

Naturally, these monumental consequences had tremendously detrimental results for a wide range of stakeholders. Innocent Satyam employees have had their careers permanently tarnished in addition to losing their jobs; stockholders have lost their investment capital; and any entities who had investments or pension funds that depended on the strength of Satyam holdings lost tremendous value that is likely irretrievable, possibly representing many thousands of individuals and family depending on those yields.

The damage to the Indian nation and its people is almost incalculable by virtue of the myriad ways that a 7.3% decrease in the national stock index and the corresponding diminution in the value of the rupee ripples across society in waves of financial damage. The case represents a fundamental violation according to virtually every objective set of ethical systems although different approaches to human ethics invites distinctly different specific analyses.

Utilitarian Analysis and Consequences of Application

The most basic tenet of the utilitarian ethical approach is: that which is the most beneficial for the happiness and welfare of the greatest number of individuals in society is the most ethical choice of action (Rosenstand, 2008). For that reason it is considered a form of philosophical consequentialism, although to different degrees depending on which version of utilitarianism is considered.

Briefly, within utilitarianism, there are two versions: act utilitarianism and rule utilitarianism, the principle distinction between them being that the former considers only the consequences of specific actions while the latter also considers the implications of general rules in their overall effect, notwithstanding the consequences in specific isolated instances (Rosenstand, 2008).

Application of act utilitarianism to the Satyam scandal leads to a highly critical evaluation of the actions of Ramalinga Raju (and anyone else with knowledge and involvement in the fraud). Simply by virtue of the tremendous negative consequences directly (and indirectly) attributable to the corporate malfeasance, act utilitarianism would absolutely condemn the actions of those responsible.

Because act utilitarianism does not consider any motives that could be argued to mitigate moral responsibility for those consequences, Raju would be considered absolutely responsible for all of the consequential harm to all stakeholders adversely affected by the scandal. Therefore, to the extent act utilitarian principles govern the adjudication of Raju, he would deserve the highest possible civil penalties allowed by Indian law.

Rights-Based Analysis and Consequences of Application

Generally, rights-based analyses depend on whether one applies concepts of natural rights or conventional rights. Since so-called "natural rights" depend on subjective beliefs about concepts such as "God" and the nature of man in the universe, application of conventional rights is the most appropriate ethical system for objective analysis (Shaw & Barry, 2007). Within conventional rights, rights-based analysis distinguishes between positive rights that impose affirmative obligations and negative rights that impose obligations to refrain from conduct that infringes on the rights of others (Shaw & Barry, 2007).

Briefly, right-based analyses evaluate conduct based on whether or not a particular choice of conduct interferes with the rights of others. Application of rights-based analysis in the Satyam scandal would focus on the duty of Raju not to take any course of action in running the Satyam company that could potentially interfere with the rights of others. Under rights-based analysis, Raju had absolutely no ethical positive obligation to do anything to benefit anybody. However, his fraudulent conduct absolutely violates the fundamental rights-based obligation not to negatively interfere with the conventional rights of others as measured by the rules, customs, and legislative principles of Indian society (Rosenstand, 2008).

In principle, Raju's ethical violations according to a rights-based analysis arise from the rights of all stakeholders that were violated without justification by Raju's fraudulent conduct. More specifically, stockholders and investors in particular have a specific right to honesty and fiduciary duties spelled put by law that are supposed to guarantee the safety of their financial investments and interests (Halbert & Ingulli, 2007; Rosenstand, 2008). By overstating the profits and worth of the Satyam company, Raju impermissibly violated conventional rights-based ethical principles by virtue of the degree to which his actions infringed upon the rights of stakeholders not to be harmed by business practices that are dishonest, fraudulent, and violative of Indian civil law.

Justice-Based/Rawlsian Analysis and Consequences of Application

Justice-based ethical analyses focus either on objective rights and obligations or on the principles of justice imposed by social rules and formal laws (Rosenstand, 2008). To the extent justice-based analysis relies on objective principles, it is very closely related to conventional rights-based ethical analysis. More specifically, objective justice is identical to rights-based analysis because it emphasizes the fundamental obligation to avoid impinging on or negatively affecting the rights of others (Rosenstand, 2008).

Conversely, to the extent justice-based analysis relies on the established rules and formal laws of society, it requires strict application of whatever laws exist in society. Application of objective justice concepts to the Satyam case would result in virtually identical results to applying legal standards of justice simply because, like the laws of most modern financial markets, Indian law strictly prohibits the fraudulent actions of Raju.

Rawls conceived of ethics substantially in relation to comparative liberties of the individual with respect to state action (Rosenstand, 2008). In that respect, that element of Rawlsian ethics would not necessarily be particularly helpful to the Satyam case. More generally, Rawls also argued that nobody in society deserves to earn the types of exorbitant salaries typical of CEOs of large financial firms, even where no other ethical violations are involved (Rosenstand, 2008). Perhaps the most useful aspect of Rawlsian ethics would be application of his veil of ignorance perspective, according to which the ethical analysis of Raju's conduct can be accurately analyzed by asking an unbiased group of strangers to consider his conduct in relation to objective principles of fundamental fairness. Therefore, Rawlsian ethics (to the extent they are applicable) would have been critical of Raju's CEO salary in the first place; the fact that his conduct was also dishonest and harmful to so many others would also likely be considered extremely unethical through the veil of ignorance analysis as well (Rosenstand, 2008).

Kantian Analysis and Consequences of Application

Kantian ethics emphasize the approach of rule utilitarianism according to which the ethical analysis of conduct relates to the larger consequences of the categorical imperative or the rule irrespective of the results in any specific cases (Rosenstand, 2008; Shaw & Barry, 2007). Because Kantian ethics completely ignores the consequences of specific applications of general rules (such as the rule prohibiting lying), it is not a reliable method of ethically evaluating conduct. For one example, because a rule against lying is generally beneficial, Kantian ethics requires telling the truth even to a murderer searching for an innocent victim whose knowledge is known to someone approached by the murderer for information (Rosenstand, 2008; Shaw & Barry, 2007).

The other principle tenet of Kantian ethics is that it is unethical to use others as a means to ends sought by the actor (Rosenstand, 2008; Shaw & Barry, 2007). Despite the relative uselessness of Kantian ethics in situations where conduct that is decidedly unethical by other analyses is permissible, in the Satyam case, even Kantian ethics would condemn Raju's actions. His fraudulent conduct violated the general rules against financial fraud, dishonest misrepresentation, and also simultaneously used everyone who purchased Satyam stock or otherwise relied on the company's misstated value to his detriment as a means to Raju's ends.