Scandal in the sector

The list of problems befalling Satyam Computer Services is enough to stop any IRO in his or her tracks. Since former CEO Ramalinga Raju admitted in early January that he falsified accounts and disclosure over several years to make the business appear more promising, there has been hell to pay.

Satyam, which is listed in India and New York, has been abandoned by investors and clients, had its trading suspended, become the focus of a dozen lawsuits and investigations, and had sell-side banks saying they no longer have any basis for determining an investment rating. It all amounts to a predicament of ‘horrifying magnitude’, as one regulator described it.

This makes it triage time not only for Satyam, but also for all the IT outsourcing companies in its sector. Long considered some of the leading companies in India, rival firms like Infosys, HCL and Wipro now have their own challenges scrambling to protect their reputations as investors wonder whether Satyam’s weaknesses aren’t an aberration.

The Satyam situation is also serving as a reminder to all listed companies to review their own disaster-coping skills. ‘Frankly, all large-scale businesses and their advisers need to ask themselves, What if it were us?’ says Nicky Havelaar, managing director of London-based Crown Business Communications.

The crisis has public companies potentially calling in a range of IR advisers including specialists in communications, conferencing, market intelligence and proxy and governance issues to study the Satyam story.

‘Fortunately, major frauds aren’t an everyday occurrence in the corporate world,’ Havelaar says. ‘But they do occur with sufficient frequency that corporate advisers need to have a skeleton campaign plan ready to go if the worst happens, either to the firm, a competitor or a corporate entity of sufficient profile that wider business confidence may be affected.’

Standing out from the crowd
Satyam’s competitors have some of the biggest challenges. ‘Companies that are not at the center of a crisis need to be particularly strategic in their outreach efforts to avoid getting pulled into the fray,’ says Barrett Golden, a partner with Joele Frank Wilkinson Brimmer Katcher. ‘Issues and questions should be addressed head-on rather than waiting for rumors and doubts to fill the void. A company needs to show – not just tell – how it is different.’

There should be a script to the message. ‘For example, Satyam’s competitors should be specific about their processes, procedures and governance practices and use third parties, such as accounting experts, to validate their practices,’ Golden advises.

The publicity around an incident can be brutal, but is survivable. Satyam, of course, faces an uphill battle. ‘Once the fraud is admitted or detected, there is little credibility in any communication emanating from the company,’ says Mehul Mehta, COO of Tatva Public Relations in Mumbai.

Nevertheless, some give Satyam positive reviews. ‘To be able to report publicly that orders are still coming in, staff are showing commitment and the board is dealing with the key issues, as Satyam has done, shows that it is possible to counter a media onslaught even in the worst of times,’ says Havelaar.

Companies have a wide range of stakeholders to consider: the investment community, clients, suppliers, government, regulators, the media and staff. Questions for each of them include: what are they thinking? Are they likely to take immediate action that could be catastrophic for the business? Do they have accurate information? The answers provide the building blocks for the construction of a crisis response.

Tool kit
Companies also need to consider which communications tools and channels are most appropriate for reaching out. Havelaar says options include FAQs, face-to-face targeted briefings, public meetings within the communities affected, electronic communications such as webcasting, and PR activity.

Tiffany Killcreas, a product manager for conferencing firm InterCall, works with clients ahead of time to develop tools and messages they may need in a crisis. The ‘phone trees’ they have thought out in advance can be tapped in an instant. The internal company audience, particularly for a company the size of Satyam, which employs 50,000, is important to mobilize first.

Ryan Malone, operations director of UK communications firm Grasswhispers, says companies are using technology to transmit their words to thousands of mobile phones and landlines. ‘In a crisis, it is fast and effective,’ he explains.

Conferencing specialists say a large part of their job is educating ahead of a crisis about the possibilities. ‘The challenge for us is to get clients to let us think about the logistics so they can focus on the message,’ says Steven Fink, managing partner of MessageBank.

An ill wind
For Satyam’s competitors, the news isn’t all bad. ‘Some of the rival firms may actually gain from some of Satyam’s clients shifting to them,’ Mehta says. ‘Customers, of course, are likely to be more cautious and will subject the firms to more intense scrutiny.’

Scott Sprandel, business development director of New York-based Zacks Investment Research, says there could be an opportunity for rival companies to target Satyam’s investors. But firms also need to watch for whether the scandal is sparking a sell-off of the whole sector. ‘It would benefit any interested company to hire a market intelligence provider to find out whether these new targets were actually buying their own stock or shorting it,’ Sprandel warns.

While there may be some upside, the scandal is likely to cast a long shadow over proxy season. ‘If a scandal hits your sector, what you’ll find is that activist investors will latch on to the issue and look for other companies in the sector that may be vulnerable,’ says Mark Harnett, president of proxy solicitors MacKenzie Partners. ‘They do it because they think it will benefit their fellow investors and garner publicity for themselves. They may have the advantage of being right, but it creates a ripple effect. If they come up with a credible argument, rank-and-file investors will also start taking notice.’

At that point, shareholders may be able to lodge significant opposition to directors and equity plans in proxy votes. And there’s no chance the scandal will pass you by, either. ‘If you’re anywhere near the storm, someone is going to put questions to you,’ Havelaar says. ‘So have your answers ready. And have your channel mix organized, too: who you are going to talk to, how and when.’

News spreads fast

Within hours of news breaking about Satyam, the firm’s IR website linked to a YouTube video containing a calming message from interim CEO Ram Mynampati. In a brief statement, also posted in a transcript on Satyam’s website, Mynampati said the board and senior management were assessing the situation and taking steps to ensure continuity of operations.

Communications pros say it may be a bit of a gamble to go the YouTube route for such a critical release. For one thing, viewers can immediately start sending texts of their own commentary; in Satyam’s case, these were especially unflattering.

The milieu for the video isn’t professional, stuck as it will be between outtakes of Paris Hilton interviews and student movies. ‘It could be sacrificing the brand or the image the company wants to project, especially if the audience is the investment community,’ notes Steven Fink, managing partner of MessageBank.

YouTube gained some stature with Barack Obama using it in his successful campaign and now in his presidency. Tiffany Killcreas, a senior product manager in event, premium and value-added services at InterCall, says her firm works with companies to produce messages for crisis situations and gives them URL links they can post to YouTube. ‘It’s an efficient way to get word out,’ she says.