Absolute Power Corrupts Absolutely

Absolute Power Corrupts Absolutely
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Ever since English historian Lord Acton uttered his famous words, “Power tends to corrupt, and absolute power corrupts absolutely,” the phrase has come to become synonymous with the dangers of unchecked power.

First generation entrepreneurs often have total or majority ownership of the entity that they have founded. This also means that oftentimes, they wield total power within the company. When they use this power with restraint for the good of the company and employees, it can consolidate a culture of healthy growth and vision in the enterprise. On the other hand, there is a real danger that they can end up misusing this power, often to disastrous consequences.

An example of the latter is Ramalinga Raju, an early IT czar and former head of Satyam Computers in India. On 9 April 2015, he was sentenced to 7 years in prison and a fine of nearly $1 million for accounting malpractices in one of the country’s biggest ever corporate scandals. In an incident often referred to as India’s Enron, the accounting fraud and inflated profits of Satyam Computers caused the company to collapse in 2009 and cost shareholders $2 billion.

The scandal was a huge fall from grace for a man whose company was founded in 1987 with 20 employees but then grew to one of India’s biggest IT players with 40,000 employees, 185 Fortune 500 clients, and operations in 66 countries. Many in India were shocked to hear the scandalous revelations of a nationally respected man who had received the E&Y Award for Entrepreneur of the Year, as even the Golden Peacock Award for Excellence in Corporate Governance.

But entrepreneurial success had changed Raju. He had an insatiable greed to own land – it is said that he owned property in 63 countries. Raju had siphoned off funds from Satyam to buy more and more land, and when land values slumped, he had a serious problem on his hands. His incredibly lavish lifestyle was also brought to light, as it was revealed that his collection of luxurious goods included 321 pairs of shoes, 310 belts, 13 cars including Mercedes and BMW, and even a priceless telescope that was installed in his personal residence.

According to investigators, Raju began cooking the books from 2001 and artificially increasing the share price after he saw a Satyam subsidiary trading at twice its value on the NASDAQ exchange. Realizing that this was a means to access huge amounts of money, Raju claimed in 2006 that Satyam had crossed the $1 billion mark in revenues. In the meantime, he reduced the promoters’ share in Satyam from 80% in 2001 to nearly 0% in 2008. By the time the scandal broke out, the unsuspecting investors had suffered massive losses.

The only good that came out of the scam came about when the government asked the Institute of Chartered Accountants and the Institute of Secretaries to launch a probe into the role of auditors and company secretaries in the matter. Ultimately, 2 partners from auditing firms as well as independent directors were found guilty, shedding a light on the systemic issues in corporate governance. As a result, the Companies Act was amended to ensure that such scandals do not occur again.

This sad story of how a successful entrepreneur can climb to great heights only to fall into the trap of gross negligence and greed serves as a reminder to all of us of the dangers of unbridled corporate power. It is also yet another reminder of the importance of establishing and enforcing good corporate governance in your company to ensure the well-being of all its employees as well as its surrounding community.