Missing Men of Honor

The Story of Disgrace

A wave of shame and disgrace washed over Indian Premier League’s (IPL) Rajasthan Royals team. Three players of the team – S Sreesanth, Ajit Chandila and Ankeet Chavan – were identified as part of the spot fixing racket. Eleven bookies were involved. Investigators have found some evidence connecting it to underworld don Dawood Ibrahim.

As per police disclosure Chavan was paid Rs.60 lakhs by the bookies, Sreesanth and Chandila got Rs.40 lakhs each. By the number of matches they have played they would have earned a few crores each. The bookies lured the players by throwing parties and providing female escorts.

It is shocking that players with such international repute and excellent career opportunities would take a criminal route to earn money. One wonders what they were thinking. Were they joyously throwing up their hands in the air and dancing with happiness. Did they think that for a few millions they would be breaking the hearts, trust and expectations of billions of people, starting with their family?

It is reported that Rahul Dravid, the captain of the team suspected something. He made Sreesanth sit a couple of matches and the team managers asked him to leave the team. How painful it must have been for Dravid, a man reputed for gentlemanly conduct.

This isn’t the first time followers hearts have been broken by their idols. It started with the political leaders. Now the cancer has spread through all facets of life. Indian politicians – Gandhi, Nehru, and Azad – were known for their impeccable behavior  Congress leaders fought for Indian independence. They spent years behind bars to fight for a cause. Now Indian politicians spend time behind bars for corruption and fraud. Instead of feeling shame or humiliation, they get back into public life with renewed vigor to mislead people and make money.  Over 30% of Indian politicians have a criminal track record.

The new breed, who have joined the infamous bandwagon are senior managers of Indian corporates. After Satyam and 2G telecom scam, their names appear frequently for being interrogated by CBI and spending time in jails.

Valuing Honor in Our Lives

So where has honor disappeared? Previously, the mark of distinction for a man was when people referred to him as – “he is an honorable man”.  Having a dishonorable reputation was disastrous socially and professionally. Now, honorable men among leaders can be counted on figure tips.

As a world civilization, we need honor back in our bloodstream. Without it, humanity will reach new levels of depravity. We require men and women to work dedicatedly to get it back for the sake of next generation, though it is a challenging task.

The cynics will say it is a pipe dream and point out various flaws. The idealists look at the times gone by and wish the same could somehow come back. The practical breed has learnt to work like an automaton to earn a living and look at nothing else.

So where do we get our heroes who will change the world for us?  The heroes have to pay a price. Lincoln, Gandhi and King – were all assassinated because they dared to bring about change. From the first step to the end of their journey they made personal sacrifices. They repeatedly saw failures, their hearts sank with despair and somehow they gathered their strength to walk on thorns again.

In the present world, who would wish to trade the high life, luxuries and comforts for a life full of dynamite?

But unless we do so, we are bestowing the next generation a dangerous life.

So our choice is between our generation and the next. Do we want to look that far ahead?

Closing Thoughts  

When we talk about change, our hackles rise. Even when it is obvious that we should change, we don’t want to. That is a human failing which 100% of us have. Our best excuse is that we can’t change the world, who would listen to us, how can all the people change? But if we study change, we just need 10% of the people to believe in our cause. That is, we need to influence just 1 in 10 people in our life. That doesn’t sound very difficult; all of us are capable of doing it. So why not give it a shot, and bring honor back in our lives. I leave you with words of Dorothy L. Sayers from Gaudy Night:

“If it ever occurs to people to value the honor of the mind equally with the honor of the body, we shall get a social revolution of a quite unparalleled sort.”

References:

IPL match fixing 

Human Rights Risk Management Process

The fire in a nine-story factory building in Bangladesh killed 400 people. More than 600 people remain unaccounted for. It housed five garment factories that supplied to international brands – J.C. Penny, The Children’s Place, Dress Barn, Primark, Wal-Mart etc. The workers were asked to come to work even when cracks appeared in the building the previous day.

Bangladesh is the second largest exporter of clothes and the workers get the lowest compensations. Just around USD 37-40 per month. The question arises why are the multinational organizations not following the UN Guiding Principles for Human Rights protection. The reason is simple; they want to show higher and higher profits to the investors.

In Delhi, in Munirka one will find numerous small factories full of workers making export garments. A friend of mine also ran one. I had bought a few shirts from her at cost price ranging from Rs 300-500 (USD 6-10). In one international visit, I found the same shirts selling in range of USD 15-30. The fivefold increase in price was because of the brand tag attached to the shirt.

The multinational buyers push the prices down and some supplier gives a rock bottom price. The others are forced to match that price to get the business. End result is that basic facilities are not provided to the workers and they work at really low wages. Unknown workers are paying with their lives in developing countries to satisfy the growth targets set by CEOs to earn their bonuses and keep investors happy.  It is the dark side of capitalism which organizations want to hide.

In most companies, human rights risk management is not a focus area. The 2013 Global Risk Management Survey conducted by RIMS identified seven risks related to human resources among the top fifty risks. Though worker injury and harassment were included there was no specific emphasis on human rights risk management.

The risk management team can conduct annually or bi-annually a human rights risk management assessment. It requires attention not only from human resources perspective but from operational, financial, legal and reputational risks perspective. Any breach can result in huge losses.

Here are some of the steps mentioned in the UN Guiding Principles on Human Rights and guide “Investing the Right Way” issued by Institute of Human Rights and Business.

1.     Review the Human Rights Policy Statement

Human rights risk management is emerging as an important issue, especially with multinationals entering emerging markets and developing countries. They are expected to protect and respect rights of workers, communities and society. Investors can play a crucial role by influencing companies to promote human rights relating to gender equality, child labor, rights of indigenous people, land acquisition, mineral processing etc.

Hence, companies need to publish Human Rights Policy Statement on their websites. The UN Guiding Principle 16 states –

 “As the basis for embedding their responsibility to respect human rights, business enterprises should express their commitment to meet this responsibility through a statement of policy that:

(a) Is approved at the most senior level of the business enterprise;

(b) Is informed by relevant internal and/or external expertise;

(c) Stipulates the enterprise’s human rights expectations of personnel, business partners and other parties directly linked to its operations, products or services;

(d) Is publicly available and communicated internally and externally to all personnel, business partners and other relevant parties;

(e) Is reflected in operational policies and procedures necessary to embed it throughout the business enterprise.”

As a first step risk managers need to check whether the organization has a human rights policy statement and the above mentioned steps have been adhered to.

2.     Human Rights Impact Assessment

The second aspect of UN Guiding Principles is for companies to establish human rights due diligence processes. Guiding Principle 17 states:

 “In order to identify, prevent, mitigate and account for how they address their adverse human rights impacts, business enterprises should carry out human rights due diligence. The process should include assessing actual and potential human rights impacts, integrating and acting upon the findings, tracking responses, and communicating how impacts are addressed. Human rights due diligence:

(a) Should cover adverse human rights impacts that the business enterprise may cause or contribute to through its own activities, or which may be directly linked to its operations, products or services by its business relationships;

(b) Will vary in complexity with the size of the business enterprise, the risk of severe human rights impacts, and the nature and context of its operations;

(c) Should be on going, recognizing that the human rights risks may change over time as the business enterprise’s operations and operating context evolves.”

Human rights risk management is complex and challenging. If ignored, they can increase political risks and deteriorate relationships of the organization with the government. For example, Tata Motors wished to establish Nano manufacturing plant in Singur, West Bengal. The government allocated agriculture land using 1894 land acquisition rule, meant for public improvement projects, to take over 997 acres farmland. The farmers protested with help of activists and the then opposition leader Mamta Banerjee. Tata Motors moved out of West Bengal and established the factory in Gujarat. Multinationals looking for large tracts of land to establish factories are facing similar challenges in India.

Another aspect to look into is that scrap, waste disposal, sewage, environment pollution etc. from factories can impact food, water and health of local communities.

Decision needs to be taken whether investments should be made in countries or states with poor human rights record. In India, the Naxalite area is extremely conflict prone and business operations can have severe human rights impact.

Risk managers should evaluate the strategy and operations of the company from human rights, environmental, social and governance factors. The companies can face operational risks (project delays or cancellation), legal and regulatory risks (lawsuits and fines) and reputational risks (negative press coverage and brand damage). The impact assessment should be done from investors, customers, employees, society and supplier perspective. Identify business owners for the risks and devise appropriate risk mitigation plans to address adverse impact.

3.   Grievance Mechanisms

UN Guiding Principles state that victims of corporate related human rights abuse should have access to judicial or non-judicial remedies. Companies should provide some remedies themselves and cooperate in the remediation process.

UN Guiding Principle 29 states –

“To make it possible for grievances to be addressed early and remediated directly, business enterprises should establish or participate in effective operational-level grievance mechanisms for individuals and communities who may be adversely impacted.”

However, this isn’t followed by the companies in true spirit. “A Vigieo analysis of human rights records of 1500 companies listed in North America, Europe and Asia revealed that, in the previous three years, almost one in five had faced at least one allegation that it had abused or failed to respect human rights.”

Ideally the investors in the company should ensure that grievance mechanisms exist and address human rights issues. The transparency and disclosure of the same in annual reports would highlight the financial, legal and reputational risks. However, the investors don’t seem to be bothered by it.

See the case of Apple. It reported  Gross Profit Margin – 42.5%, Net Profit Margin – 26.7%, Revenue Per Employee – $ 2,149,835 and Net Revenue Per Employee – $ 573,255. It has 43000 employees in US and 20,000 outside US. However, Apple contractors hire an additional 700,000 people to engineer, build and assemble iPads, iPhones and Apple’s other products.

An Apple supplier in Taiwan, Foxconn was recently in the news for its workers attempting suicide. As per reports “Workers are required to stand at fast-moving assembly lines for eight hours without a break and without talking. Workers, sharing sleeping accommodations with nine other workmates, often do not know each other’s names. They do not have much time to get to know each other. The basic starting pay of 900 RMB($130) a month – barely enough to live on – can be augmented to a more respectable 2,000RMB ($295) only by working 30 hours overtime a week.”

See the difference the company earns per employee and the payment made to the supplier’s employees. Apple shows profits at the expense of lives of Taiwanese workers.  The workers don’t have much of a grievance mechanism in China as the government stated that the suicides are within the normal suicide rate. Can Apple investors sacrifice some profit margin for safety and security of the contractual workers?

Another old example is the class action suit since 2001 on Wal-Mart Stores that involved 1.5 million current and former Wal-Mart female employees. It is the largest workplace bias case in US history.

 4.    Human Rights Reporting

 The biggest challenge is that most of the human rights abuses are not reported. The victims of human rights exploitation hold little power in comparison to the exploiters. They can hardly take up the might of powerful businesses when they are struggling to get basic food and shelter. Secondly, in the developing and emerging countries, corruption levels are generally high. Hence, media, law enforcement agencies etc. are bribed by the power players to silence the victims. However, with internet and social media, things are gradually changing. People have a voice and collectively they can fight.

UN Guiding Principle 21 lays out the requirement for companies to communicate human rights impact externally. It states -

 “In order to account for how they address their human rights impacts, business enterprises should be prepared to communicate this externally, particularly when concerns are raised by or on behalf of affected stakeholders. Business enterprises whose operations or operating contexts pose risks of severe human rights impacts should report formally on how they address them. In all instances, communications should:

(a) Be of a form and frequency that reflect an enterprise’s human rights impacts and that are accessible to its intended audiences;

(b) Provide information that is sufficient to evaluate the adequacy of an enterprise’s response to the particular human rights impact involved;

(c) In turn not pose risks to affected stakeholders, personnel or to legitimate requirements of commercial confidentiality.”

 As per the UN principles, the reports must cover appropriate qualitative and quantitative indicators, feedback from internal and external sources including affected stakeholders.

Risk managers can evaluate the reports and the reporting process to ensure that all risks are properly addressed. They should evaluate whether cautionary steps are taken and nothing is being done to exacerbate the situation. They should highlight severe or irreversible risks to the management to ensure appropriate decisions are taken.

Closing Thoughts

 Inequalities in income are the main cause of human rights abuse. The rich want to get richer at the expense of blood and sweat of the poor, and sometimes life. The diamond manufacturers and sellers took the right step to publish that they do not source blood diamonds. Since 2003, the Kimberley Process Certification Scheme (KPCS), supported by national and international legislation, has sought to certify the legitimate origin of uncut diamonds. Trade organizations – International Diamond Manufacturers Association (IDMA) and the World Federation of Diamond Bourses (WFDB) – representing virtually all significant processors and traders – have established a regimen of self-regulation.

Other industries, be it technology, electronics or textile manufacturers,  need to come out with similar steps to stop human rights abuse. The risk managers have a vital role to play in it. If we do not do anything, we are cheating this and the next generation of their right to live happily.

References:

1.  Investing the Right Way – A Guide for Investors on Business and Human Rights – By Institute of Human Rights and Business
2. Singur farmland-  Tata Motors conflict
3. Apple financial ratios
4. Foxconn Case Study
5. Diamond industry sales clauses
6. 2013 RIMS Global Risk Management Survey

 

Two Ethics Questions to Mr David Cameron

David Cameron recently visited India with a huge trade delegation to improve the bilateral relationships. Of course, with India’s growing power, world’s senior politicians and business heads are now coming to India every week. However, what made Mr Cameron’s visit remarkable were his two comments he made in respect to British colonial rule.

Though I generally keep away from commenting on political aspects, the hypocritical stance was just too amazing to ignore. Indians sometimes see this behaviour from whites in India. For instance, a British man recently said to me – “All Indians are slaves, we British are superior.” I have no idea on superiority or inferiority of any human race but Indians are definitely not slaves. Obviously, the deluded old chap lived in a different world. Point to note is, Roman traders introduced the concept of slaves to India, and Mughal rulers practiced slavery in India for the first time.

The British rule was an attempt of minority ruling the majority. That is only possible by fear and terror. While Indian rulers believed in servant leadership. British ruled the population in a significantly inhumane autocratic leadership style that Indians did not have much experience in dealing. That resulted in quite a few atrocities and it brings me back to Mr Cameron’s comments.

1.      Jallianwala Bagh Massacre

David Cameron, the British Prime Minister, visited Amritsar’s Jallianwala Bagh and laid a wreath at the memorial. Cameron considered the massacre “deeply shameful event in British history” but did not apologise for it. Before this, Queen Elizabeth had paid a visit to the same memorial in 1997 and laid a wreath. One is not sure what the British leaders are attempting to convey by these gestures.

Here is the historical perspective. On April 13, 1919, British troops opened fire on unarmed civilians, including women and children who were celebrating the Sikh festival Baisakhi at Jallianwala Bagh. The British estimated 379 dead and approximately 1100 wounded. Indian National Congress estimated 1000 dead and 1500 wounded.

The order was given by Brigadier-General Reginald E.H. Dyer. He was forced to retire from army, however was celebrated as a British hero. His actions were so twisted that when an Englishwoman, Miss Marcella Sherwood reported she had been molested on the streets of Amritsar, he issued an order requiring all Indians (men) using that street to crawl its length on their hands and knees. General Dyer said that – “Some Indians crawl face downwards in front of their gods. I wanted them to know that a British woman is as sacred as a Hindu god and therefore they have to crawl in front of her, too.” He was never punished for any of his actions nor was tried in court.

Under British rule, Indians suffered numerous inhumane acts. From the present day British leaders’ perspective, I would say that they cannot undo the past. Indians definitely are not waiting for an apology. However, using the gesture for political mileage, most probably to get Indian votes in Britain in the next election is a little bit too much to swallow.

The other aspects I find hypocritical are the double standards maintained. When Germans killed Jews, it was an inhumane act – “crime against humanity”. The Nazis were tried in Numerban trial and hanged for their war crimes during Second World War. Even until date, a list is maintained of the missing Nazi’s. American President Mr Franklin D. Roosevelt  and British Prime Minister Mr Winston Churchill, both were involved in the decision.

I absolutely agree that Hitler’s rule was atrocious. I have one observation – If atrocities are done on Americans and British it is a crime against humanity. If they do atrocities on people of other countries, then those people do not even deserve an apology.

How does one justify this stance on ethical standards?

2.      The Kohinoor Diamond

India requested David Cameron to return its Kohinoor Diamond and he responded – “I certainly don’t believe in ‘returnism’, as it were. I don’t think that’s sensible.”

Kohinoor diamond was discovered in Karnataka mines and the first mention is in 13^th century. It is one of the most well known diamonds in the world. Presently, it is set the in the British crown of Queen Elizabeth and is displayed in Tower of London.

The British acquired the diamond from India in 1850. Raja Ranjit Singh of Punjab owned the diamond and in his will bestowed it to Jagannath Puri temple. However, on his death in 1839 British administrators did not execute his will. In March 1849, British formally proclaimed Punjab as part of British Empire in India.  In terms of the treaty they mentioned that the “gem shall be surrendered to Queen of England”.  Lord Dalhousie treated it as spoil of war. He made the 13-year-old conquered prince Dulip Singh, to travel to England to present the diamond to the Queen.

India was a rich country when British arrived in the 17-century AD. They took away precious jewels from the kingdoms they captured. Most of them cannot be directly identified; however, Kohinoor is part of Indian heritage.

My question is – Is it ethical for a country to keep other countries national treasures? What if the roles were reversed? What would the world expect from India then?

Closing Thoughts

India is catching up with the developed countries and now ranks 9^th in the world in respect to Gross Domestic Product. Indians are confident of doing better in the 21^st century. Hence, they are not looking for rehashing history, as it can never be changed. Indian religions teach forgiveness as the greatest virtue. However, it does not mean Indians have forgotten the past and are gullible enough to be taken for a ride. Now as more world leaders visit India to take advantage of the large consumer market, they need to do far better. A new world order is establishing and India is in a position to choose the best partners.

References:

1. List of Most Wanted Nazi War Criminals according to the Simon Wiesenthal Center
2. Nuremberg Trials
3. Kohinoor Diamond
4. Britain GDP

Does Change Obstruct Ethics?

The media regularly reports that organizations are paying huge fines for ethical breaches. Politicians, defence officers and CEOs are getting exposed in illicit sexual relationships. It appears that present day leaders don’t feel obligated to show professional and personal ethics. One is forced to contemplate did the world always lack ethical discipline? Alternatively, is it that the volatile and dynamic business and political environment has contributed to the decline in ethical values?

In my view, history has shown that during times of massive change in social and political environment ethical values fall. As the environment stabilizes, ethical behaviour increases. I will give you the reason why I think so. Before that let me share with you this beautiful verse from “The Lines of Experience” written by Je Tsongkhapa over 2000 years back.

Ethical discipline is the water to cleanse the stains of wrongdoing,

And the moonlight to cool the painful heat of the kleshas (disturbing/ angry thoughts),

It makes you stand out from the crowd like a great mountain.

By its force, you can tame all beings without intimidation.

Knowing this, great beings guard like their very eyes

The ethical discipline to which they are committed.

I, the yogi, have practised in this way.

You, who aspire to liberation, do the same!

1. Income Inequality

In the present day, corruption levels are so high that a person who stands up for ethics is considered an idealistic fool. Whistle blowers face high level of retaliation and social isolation. Instead of society valuing an ethical person, it stigmatizes the person. However, if you notice carefully, the corruption scams are bigger in the emerging markets than the developed world. Transparency International Corruption Index shows increasing corruption trend in the emerging countries and decreasing trend in the developed world. In the last decade, population of the emerging countries suddenly enjoyed a better standard of living of which they were deprived of earlier. Hence, the changing business environment has inclined them to pursue financial goals at the expense of everything else.

2. Gender Inequality

Look at the impact of change from another lens. Worldwide women are facing higher levels of physical and psychological violence from men. A recent survey showed that working women face twice the level of abuse than housewives. Why is that so? Reason being that working women are challenging the male domination and supremacy established for centuries. Previously, women were doing as they were told and the housewives are still doing so. However, the working women are torchbearers for change and demanding equality. Hence, they are paying the price. The bias is so clear. Half the world population consists of women and the organizations call hiring women a “gender diversity” initiative.

3. Social Inequality

If you look at racial, social and political equality movements, the picture is the same. The Arab world reported increased violence during  revolutions. In India, the under privileged and lower caste people face dire situations and prosecutions for demanding equality. Even seeing the American history, whites increased violence against blacks after abolition of slavery. Hence, even when the conflict is initially non-violent, violence increases when the existing world order is threatened. Those holding beneficial positions in the old order get combative to continue the status quo and compromise human rights. Corporate sector reflects the same problems. White males ruled the business world. Now women and men of different racial communities are challenging their established supremacy. Can we really expect competitive business leaders to give up a superior position without a fight for the goodness of humanity?

In all the three examples, I have highlighted the compromise of human values when social changes occur. Presently, the world population is facing change at all levels. Global economy is in recession, China is threatening US supremacy, emerging markets will become economic leaders, people revolutions has shaken autocratic rules in many countries, technology has connected the global population and women are taking important roles in society. With the political, social and economic dynamics changing the world, can we really expect higher level of ethical behavior in this decade?

Closing thoughts

Change brings conflict. Unfortunately, human psychology is such that a person holding a different opinion, from a mere opponent becomes a tough adversary to enemy number one whenever our self-interest is threatened. Hence, in this dynamic environment expecting high level of ethics from business leaders is somewhat unrealistic. We tend to isolate business and expect organizations to have higher level of ethical disciple than the society around them. When business is a subset of society, how can business leaders portray values different from society.

Until the new world order establishes, ethics and principles would be put on a back-burner.   This viewpoint is definitely not what the regulators wish to hear. What do you think?

Bharti Walmart India – Internal FCPA Investigation – Part II

The previous post raised more questions than gave answers. In light of the on-going investigation, it is difficult to predict results. However, I looked at the recently released FCPA Resource Guide to the U.S. Foreign Corrupt Practices Act by the Criminal Division of the U.S. Department of Justice and the Enforcement Division of the U.S. Securities and Exchange Commission. It sets some clear guidelines and mentions earlier cases with similar issues. It is a good read for Indian managers working in multinationals dealing with FCPA compliance requirements. I am sharing below some insights about the implications of the case.

1.      Liability of Indian Employees

As per reports, the CFO and the legal team were suspended during the course of the investigation. If the US Department of Justice decides to pursue a criminal case, these employees can be prosecuted.

Interestingly enough, the Indian managers consider their capability to bribe various government officials to get a job done as strength. One often hears them saying – “Oh, I have a contact; s/he will do the job for X amount of money. Don’t worry about the legal provisions, they can be circumvented.” Since one rarely hears any action being taken by regulators on the provisions of Prevention of Corruption Act of India, hardly anyone hesitates to take or accept a bribe.

However, Indian employees working in multinationals have to think twice about paying a bribe to get a job done. The FCPA guidelines are strict. It states – “The FCPA’s anti-bribery provisions can apply to conduct both inside and outside the United States. Issuers and domestic concerns—as well as their officers, directors, employees, agents, or stockholders—may be prosecuted for using the U.S. mails or any means or instrumentality of interstate commerce in furtherance of a corrupt payment to a foreign official.” Hence, even sending mails to US boss or colleague that involves a discussion of a bribe payment can make an Indian employee liable. Considering the provisions, the best policy for Indian employees is to keep their hands clean and follow the legal process diligently.

Another aspect to note is that a bribe does not need to be paid to hold an employee liable. The guidance note says – “Also, as long as the offer, promise, authorization, or payment is made corruptly, the actor need not know the identity of the recipient; the attempt is sufficient. Thus, an executive who authorizes others to pay “whoever you need to” in a foreign government to obtain a contract has violated the FCPA—even if no bribe is ultimately offered or paid.” Hence, Indian management and employees both can be prosecuted on this basis.

2.      Challenges for Licenses

With the opening of the retail sector, multinationals need to obtain various licenses to operate in India. The challenge is getting the licenses according to their business strategy and plan.

For instance, IKEA recently obtained from Foreign Investment Promotion Board (FIPB) to invest euros 1.5 billion to open 25 stores in India. However, IKEA was granted permission to open single brand stores for furniture only. It was denied permission to sell textiles, office supplies, food and drinks.

Now the question is, under these circumstances what options will the foreign investor consider? Will they agree to sell products according to permission? The permissions maybe denied for the most profitable lines of products. It may not make sense to sell products with low margins. Hence, they will have the difficult choice of either not entering the Indian market or attempt to influence the government agencies to grant permissions for selling other products. If the second option is chosen, there is a high probability of bribes being paid. More so, since Indian government officials know what will hurt the business venture of the foreign company, they might use denial tactics to coerce the organization into paying bribes. Hence, it is a vicious circle.

A LinkedIn member gave a useful suggestion to curb bribes in the licensing process. Rangarajan Gopalan, Investigator US Department of Homeland Securities in New Delhi,  suggested a single window concept for obtaining licenses in retail industry. If government implements the suggestion, the retail companies will not have to run around 32 different agencies to get licenses.

3.      Partner Liabilities  

In the event of the holding-subsidiary relationship or joint venture partnership, the Indian company can be charged jointly and/or separately.

The guidance note illustrated the implications with a previous case. For instance, “a four-company joint venture used two agents—a British lawyer and a Japanese trading company—to bribe Nigerian government officials in order to win a series of liquefied natural gas construction projects. Together, the four multi-national corporations and the Japanese trading company paid a combined $1.7 billion in civil and criminal sanctions for their decade-long bribery scheme. In addition, the subsidiary of one of the companies pleaded guilty and a number of individuals, including the British lawyer and the former CEO of one of the companies’ subsidiaries, received significant prison terms.”

Hence, if the US company is ignorant of the bribes being paid by Indian employees to conduct business, the Indian employees can face criminal charges and the Indian organization may have to pay hefty fines.

Closing Thoughts

The Indian organizations need to assess their FCPA compliance level and not take the issue lightly. The repercussions of ignoring the issue are huge. The legal and reputation risks can put the company to a great disadvantage. Moreover, the employees must follow the legal process rather than find ways to circumvent it.

 References: 

1. FCPA Resource Guide to the U.S. Foreign Corrupt Practices Act by the Criminal Division of the U.S. Department of Justice and the Enforcement Division of the U.S. Securities and Exchange Commission.
2. FIPB clears IKEA retail store plan

Bharti Walmart India – Internal FCPA Investigation – Part I

Walmart after the Mexico US Foreign Corrupt Practices Act investigation identified India operations as a high risk. It commenced an internal investigation with the help of KPMG India and law firm Greenberg Traurig. Recently CFO and five officers of legal team were suspended. The legal team’s job entailed procuring licenses required for stores and other real estate approvals, taxation etc. Bharti Walmart has opened 18 stores till date. Hence, the suspicion is that these officers paid bribes to get the licenses.

According to the Economic Times article, multiple government permissions are required from the government. The Retail Association of India lists 51 different approvals from 32 different agencies. Seeing the corruption index of India and the way government departments’ function, I would be very surprised if an organization manages to obtain all the relevant licenses without any grease payments. Hence, the question is how will the organizations manage to function without paying bribes?

1.      Dubious Dealings

Considering the huge operations of Bharti group, I would be very surprised if the bribes were paid without senior management approval. Most of the liaisons work has senior managers’ tacit or explicit approval. Therefore, is it right to suspend some after obtaining licenses. What happens in such a case to the license? Will the license be revoked, cancelled, or returned? If not, what is stopping the organizations from first taking the licenses by paying bribes and then doing a clean-up exercise to show their commitment to ethics?

2.      Joint Venture Liabilities

The second issue that crops up is the working of the joint venture in such circumstances.  Let us assume the investigation reveals bribes were paid. In such a situation, will Bharti group be expected to pay back the bribe money? Secondly, if the US authorities under a civil case fine Walmart for FCPA contravention, will Bharti be expected to pay the fine. Seeing the trend the fine could be huge and would wipe out profitability of the company. Moreover, US Department of Justice can pursue criminal liabilities. Then will the Indian officers be implicated for the same.

3.      Foreign Direct Investment (FDI) in Retail Industry

The government has recently allowed FDI in retail industry. The challenge is that in India, most of the retail operations operate by paying bribes at different levels. Hence, a foreign investor will not get a level playing field as the anti-corruption laws of their country bind them. The situation is serious. For instance, the next stage after obtaining licenses would require importing goods.  The FCPA strictly prohibits paying bribes to custom officers whereas in India this is a common business practice. Can an organization wait for months to get its stock cleared by the custom officers? Now the foreign investors will analyse the reward versus risk scenario of their business plans for investing in retail industry in India.

Closing Thoughts

The case opens up interesting aspects of risks of doing business in India. Corruption poses serious obstacles in doing fair business dealings. The FCPA and laws of various countries strictly prohibit paying bribes to foreign officials. The US government has followed some stringent measures against companies contravening the laws. Under such circumstances will the joint ventures between foreign investors and Indian counterparts work?  India cannot change overnight, so what is the solution? Share your thoughts with me on this.

References:

Bharti Walmart suspends CFO, legal team due to FCPA bribery probe

Coal Gate Scam – Should Auditors Comment on Policy Decisions?

The Coal Gate Scam report has squarely put the loss of Rs. 1.86 lakh crores (USD 35. 097 billion) at the Prime Ministers door. Comptroller and Auditor General (CAG) report states that Prime Minister Manmohan Singh agreed to introduce competitive bidding for allocation of coal blocks way back in October 2004. However, his office indulged in delay tactics of approving the revised policy. This resulted in allocation of coal blocks according to the old policy introduced in 1993. Failure to use competitive bidding resulted in a loss of Rs. 1.86 lakh crores (USD 35.097 billion).

This raises interesting questions from the corporate sector perspective. Should auditors see the validity and applicability of policies? Alternatively, should they restrict their role to the compliance of existing policies?  What happens when a policy or standard operating procedure of an organization is redundant however is still being followed? If competitors are using better processes, technology and policies than the organization, what role should auditors play in it?

1.     Delaying Policies Becomes a Political Game

According to the CAG report, the Screening Committee allocated blocks and the process lacked transparency. Allegations are that private companies with political links benefited at the expense of others. However, competitive bidding policy could have been introduced with an amendment from the administrative desk. Prime Minister’s role becomes critical as he was also fulfilling the responsibilities of Minister of Coal. CAG says he made it into a bigger issue that the policy should be changed for all minerals and not just coal; hence the process for making such large-scale policy change was different. This allowed the coal ministry to follow the 1993 process.

This happens in the corporate sector too. For instance, an employee or a small group suggest a change to an existing control process that will take just one man-month effort. Some others with vested interests do not wish for the change to occur. However, they can’t reject the suggestion for strengthening controls without looking bad. Hence, to stall the project, they add a few more suggestions which make the project larger into 24 man-months effort. Now the change can only happen once the huge budget is approved. Since, the project is not priority; it stays on the bottom of the budget approval list. Hence, status quo remains and subsequently someone exploits the control weakness to conduct a fraud.

In such a situation, as an internal auditor would you highlight the initial attempt to strengthen controls and put responsibility on the other group for delaying the change? Do we as internal auditors go back in such depth to find out what projects or policies were kept pending approval and they had such a huge negative impact?

2.     Auditor’s Role in Policy Review

The Supreme Court has upheld CAGs power to comment on policies. Justices R M Lodha and A R Dave bench said “Do not confuse the constitutional office of CAG with that of an auditor of a company or corporation.” This response was in respect to a petitioner’s contention that CAG should restrict itself to auditing expenditure and not comment on the government’s rational of policy decisions. The bench had further added – “CAG is not the traditional Munimji to prepare only balance sheets. It is constitutionally mandated to examine the efficiency, effectiveness and economy of the decisions of the government in using resources. If the CAG will not do this, then who will?“

This viewpoint raises some interesting points for internal auditors in the corporate world. Should auditors be commenting on strategic or policy decisions of the company?

For instance, the company decides to use print media for advertising open job positions. However, it is much cheaper to use job portals and social media. These significantly reduce the cost of recruitment. Should an auditor restrict himself to checking that all expenditure is authentic or question the hiring policy?

Another aspect is the strategy decisions. Let us say, Company A decided not to enter into the emerging markets, whereas Company B operating in the same industry entered the emerging markets and increased the profitability tremendously. Should an auditor audit strategic decisions, and not just say that it is management responsibility. Where is the line of demarcation drawn in respect of corporate internal audit?

Institute of Internal Auditors new standard applicable from 2013 ‘Achievement of the organization’s strategic objectives’ states that – “The internal audit activity must evaluate risk exposures relating to the organization’s governance, operations, and information systems regarding the achievement of the organization’s strategic objectives”.  Hence, should we conclude that evaluating strategic decisions comes under internal audit purview?

3.     Auditor’s Role in Calculating Presumptive Loss

The CAG audit reports on 2G licenses and Coal Block allocations have raised a storm due to the calculation of presumptive loss figures. The government’s contention is that CAG should not be calculating the opportunity loss, as policy decisions are taken to benefit the public.

CAG however, contended that – “We had never commented on government policies, neither did we ever say that auction was the only route or that all natural resources should be auctioned. In both 2G spectrum licences and coal block allocations, we had only commented on the ‘effectiveness or non-implementation’ of policies. The presumptive loss or windfall gain figures are only to highlight the serious issues of an act of commission during implementation of government policies.”

In the corporate world, internal auditors make an observation and restrict their recommendations to suggest improvements. In rare cases, a cost-benefit analysis is done on the impact of the control weakness. We generally fail to draw management attention to the seriousness of the issue, as they are no numbers given. Should corporate internal auditors change their approach to audit work to give a cost-benefit analysis for their observations? Will that garner more attention from the management and initiate action?

Closing Thoughts

These are questions worth debating about and there are no easy answers. The business world internal auditors can learn quite a few lessons from the government auditors. They are doing a good job of raising contentious issues. Below is a poll to assess your views.

References:

1. CAG not a ‘munimji’ of govt’s balance sheet: SC
2. CoalGate: CAG does not let Manmohan, PMO off the hook
3.  Performance Audit of Allocation of Coal Blocks and Augmentation of Coal Production (Ministry of Coal)

Has Shame Disappeared From Indian Society?

Nowadays, one doesn’t hear “I am feeling so ashamed of….” . No, that is not exactly true. I have heard people feeling ashamed of not having the latest car, gadgets, botox treatment or size zero figure. But rarely about their behavior. Two political incidents last week made me think about why people have stopped feeling a sense of shame and how do ethics get impacted due to it.

1. Tamilnadu : A. Raja was released on bail from Tihar jail in May 2012 after fifteen months of imprisonment. He was implicated in the 2G telecom scam along with Kanimozhi. On his exit from prison, his supporters congratulated him as if he was a hero and there were huge celebrations. Then last week, the DMK family members – Stalin, Kanimozhi, Maran courted arrest as part of protest against Jayalalithaa’s government, stating that she was practicing vindictive politics.  Even after making headlines for corruption for over a year, among the DMK party key leaders there is no sense of shame, guilt or remorse.

2. Karnataka : Today, Mr. Jagadish Shettar is being appointed as Karnataka Chief Minister and he is replacing Mr. DV Sadananda Gowda. Mr. Gowda in his eleven months tenure made no headlines for the wrong reasons. The reason for his fall is former Chief Minister BSY Reddy. Mr. Reddy was implicated in illegal mining scandal and has a number of corruption charges against him. However, he still retains clout in Karnataka politics, and BJP party leaders to satisfy him replaced Mr. Gowda. Mr. Reddy doesn’t show any hangups that he is forcing changes in the government to retain his power and continues to arm twist BJP.

In both the cases, one thing was clear. Even after imprisonment, these political leaders did not feel a sense of shame. As the cases are still going on, one cannot say they are guilty. However, aren’t human beings supposed to feel ashamed on being implicated in such scandals? Have they lost their sense of ethics to such an extent, that they feel comfortable mocking the judiciary? Hence, I attempted to delve deeper into the psychology of shame and its impact on ethics.

I found a fascinating post titled “Shame as an Ethics Issue” on GoodTherapy.org. Here is an excerpt:

“Shame is defined as a deeply disturbing or painful feeling of guilt, incompetence, indecency, or blame-worthiness. Now considered a primary though under-acknowledged emotion, shame creates self-loathing and/or imploding or exploding rage. Shame is experienced as a global attack on the core Self that sentences the person to life with an irreparable flaw or inadequacy. No wonder we do our utmost to keep actions or experiences that engender shame a secret from others, and often ourselves.”

That is the crux of it. As long as we do not feel ashamed of our actions and behavior, we feel good about ourselves. To feel powerful, a person needs to feel invincible, shame threatens that concept by making a person feel powerless, vulnerable and fearful. Without a sense of shame, a person does not accept that they have done any wrong.  Therefore, the mental barrier created as self-defense, stops a person from taking accountability of their actions.   Hence, this makes self-correction and ethical behavior impossible.

Brene Brown, a world renowned researcher on shame, says shame causes a fear of disconnection and unworthiness. However, people have misconstrued having a sense of love and belonging. To connect and have self-worth, one has to be be open and vulnerable, live life honestly. But people mistakenly consider vulnerability and weaknesses as synonyms. On the other hand, vulnerability is about courage to be able to live whole-heartedly. Besides vulnerability forcing us to deal with shame, it allows us to live with joy. Worst news is, that if a person numbs oneself to shame, they numb themselves to happiness, because to numb one emotion, one has to become numb to everything. Watch her video below, it is absolutely mind-blowing.

Closing thoughts

It is horrifying to see a country’s social values deteriorate so rapidly in a span of few years.  India has Mahatma Gandhi as father of nation, and present day leaders are becoming prone to illegal and corrupt acts. Leaders need to be chosen for their ethics, values, character and courage. Incorrect choices will lead the society awry. Rather than celebrate unethical behavior with pomp and show, it is better for one’s own happiness and well-being to acknowledge the broken behavior and take corrective measures. Hiding behind walls to project invincibility and perfection harms one own self.

References:

1. Raja gets bail, walks out of Tihar jail- The Hindu
2. DMK leaders Stalin, Kanimozhi, Dayanidhi Maran court arrest protesting against Jayalalithaa’s govt
3. Karnataka: BJP MLAs to elect Shettar as new CM
4. Shame as an Ethics Issue – Part I

Indian Social Values – Root of Corruption

Page three newspapers are full of celebrities’ rave parties, fist fights, sex scandals, botox treatments, etceteras. The not so rich idealize these celebrities and mimic all, to be the in-crowd. With these social values, can Indian’s consider it cool to be good?

The west puts India on the pulpit for its values. From Beatles to Julia Roberts, western celebrities talk about Indian culture of prayers, the land of discovering one’s spirit and sense of being. When majority of the middle class Indians themselves are lost, the crown of leader of spiritual world appears  somewhat misplaced. Indians in the present world, from birth, get to understand that all human emotions come at a price. This may sound as a harsh statement, but is reality. Let us walk through the different phases of life of a middle class Indian to discover the spiritual compromises they make.

1. Indian Childhood

India post-independence from a land of leaders propagating good values  has turned into a land people indulging in  unscrupulous behavior in the name of social values. It starts with birth. From the 1960′s the desire to have a son grew among parents. Educated parents get female fetus aborted  since the son has more value in the marriage market. The sex ratio is 109.4 males to 100 females in 2011. According to reports nearly 50,000 female fetus are aborted every month.

The reason for abortions is financial. According to the Indian system, a girl’s father in arranged marriages pays dowry for getting a husband for his daughter. Secondly, in the conservative families daughters aren’t allowed to work. Hence, the cost of raising a daughter, educating her, is lost while a son earns back the money for parents from working and getting a dowry. Therefore, sons get a better treatment from parents from birth. From food, clothes, education and hobbies the girl is forced to sacrifice for the brother. Basically, from the day a child is conceived, Indian parents put a value on the child. There is a profit and loss motive in child upbringing.

With these values apparent in the household from childhood, is it surprising that Indians ethical values are confused? Can a child raised on the basis of returns s/he will bring to the parents on becoming an adult, consider emotions and principles above money? Are parents raising kids or cattle for sale?

2. Indian Youth

Indian parents tom-tom about their love for their children and their dedication to keep the children with them. They look down on their western counterparts, who let the kids leave home between the age of 16-20 years to live on their own. In India, 30 year old unmarried sons and daughters can also be found living with their parents. It arises from an attempt to control who the youngster marries, specially for sons, so that a big fat dowry can be earned.

In respect to daughters, it is a need to keep their image unsullied. A daughter having an affair is a no-no among conservative families. Good girls don’t have relationship with boys. While the boys can have relationships with girls, and any girl who has a sexual relationship with a boy is of loose moral character. It it surprising that with this culture, Indian youth does not have normal relationships with the opposite gender.

India is the 4th most unsafe place in the world. Eve teasing or sexual harassment is rampant and young Indian women endure comments from men even when walking to office at 9 a.m. According to a survey of developing nations, Indian men are the most sexually violent, with 24% having committed a sexual crime. Another survey states 65% men believe sometimes a women deserves to be beaten. With these results and mindset, can one ensure gender equality at work?

An Indian’s professional mentor/buddy in the first job is the person who teaches them to fudge the reimbursement bills of their salary. For instance, employees are entitled to medical reimbursements. The friendly mentor will share information of a medical store from where fraudulent medical bills can be obtained by giving a cut.

After being raised in this culture, can Indian youth have independent thinking, proper adult relationships and professional values? Most lip sync their parents’ desires for them, rather than discovering and understanding their own being. Abnormal behavior – living with one’s parents in adulthood, harassing opposite gender – is socially considered normal. Normal behavior of having adult relationships, independent living and maintaining professional ethics, may make the youth a social outcast. After being raised in this social climate, can Indian youth make India the next superpower?

3. Indian Marriage

The biggest trade in India, is of arranged marriages. Marriages aren’t made in heaven, they are negotiated for the best deal. The sons are put up for sale and the daughters’ fathers attempts to purchase the best available husband for her, according to their financial position.

If one sees it from an economic angle, the husband to provide for the wife lifelong, takes upfront payment from his wife’s father. Looking from another angle, the woman gets a man to have sex with her for life after being paid by her father. Prostitution is illegal in India, and prostitutes are looked down upon. But sale and purchase of husband and wife is a socially accepted norm.

In rural areas, the situation is worse. If a couple belonging to different castes falls in love, the male members of the girl’s family do honor killing, they kill the couple. It is a crime to fall in love, and humiliating for the parents. From all this one can conclude that Indian rational of honor, esteem and self-respect is quite contrary to human race.

Even divorce involves social stigma. In reality, 90% of urban husbands have had extra marital affairs. Most of the urban wives are educated but don’t leave their marriages even after being aware of the affair, as their standard of living will become lower. India has one of the lowest divorce rates with just one in a hundred marriages collapsing. There are just around 10,000 or so divorce cases filed each year. Despite the fact that there were 8391 dowry deaths in 2010 and 90,000 cases of torture and cruelty towards women by their husbands. This is when most women don’t report to police due to sense of social shame. Aren’t the numbers ironical. Abusing women is considered a social privilege of the Indian male. Moreover, educated women prefer to take abuse rather than stand on their own two feet and earn their living.

Closing Thoughts

Can Indian marriages teach valuing human emotions when they are nothing more than a financial transaction? After parent-child relationship, the second most precious relationship is of husband-wife. In India, both have monetary values attached to it. When critical relationships are not based on ethics, what is the probability of the society respecting professional ethics?

Indian ideas of honor, respect, ethics and principles are bunkum. A thief steals a women’s purse, he is a criminal. A  husband steals his wife’s dignity and her father’s retirement saving, he is respectable. It is a case of sacrificing rational thinking to camouflage social ills.

Last week, the government issued a “White paper on black money”. The paper describes ways and methods to curb corruption and reduce black money. However, with this social environment, the best efforts are likely to fail. Can an average Indian be considered as having a fully developed “Conscience”? Anywhere close to spiritual awakening? What do you think?

References:

1. Disappearing Daughters: Women pregnant with Girls pressured into abortion
2. Divorce Rate High Among Indian Techies
3. Dowry murders in India result in few convictions
4. Indian men most sexually violent, says survey of six developing nations
5. International Center for Research on Women

Impact of Political Will and Cornism on Risks

The Indian government is doing an about-face in respect to its stance on aviation industry. The government is looking at a proposal to allow 49% investment in Indian airline companies by foreign carriers. This proposal, if approved, will give a recourse to Kingfisher Airlines and Air India. A few years back, it had disallowed Tata group to do a joint venture with Singapore Airlines to block the move to acquire Air India. Now government may be looking for a buyer for Air India and has approved a financial restructuring plan of Rs. 30,000 crore. That means, though both the companies didn’t manage risks or business plans well, the government is bailing them out. They will be flying high; can we say because of Mr. Mallya’s political clout?

In another controversial decision, government is  passing a provision to tax a past transaction in Vodafone case. The decision is primarily taken in respect to Vodafone acquisition of Hutch Essar from Hong Kong based Hutchison Telecom. The government’s argues that though the deal was finalized in Hong Kong, the underlying asset resides in India, hence taxable in India for an amount of nearly Rs 12,000 crore ( USD 2.3 billion).  This has taken the company by surprise, as now it may have to make a cash payout as tax to Indian government. Although Indian government is entitled to pass laws with retrospective effect, the business sector bears the risks of it. Hence, out of blue regulatory changes can put the company in the red.

Of course last years telecom scam has left many telcos burnt. Supreme court cancelled 122 licenses of telecom companies granted by A.Raja. Norway’s Telenor and Abu Dhabi’s Etisalat questioned the government’s decision of three years back after cancellation of licenses of their joint venture partners.

These issues arise, as India does not have a political lobbying system similar to US and other developed countries. Individual relationships of business promoters with politicians result in out-of-the-way favorable decisions. However, as is clear from the writing on the wall, the decisions can be arbitrarily changed and revised due to new politician’s personal interest, Comptroller Auditor General’s reports and public outcry.

Therefore, leveraging on political relationships by bending the ethical rules is no longer a foolproof business plan. The risks arise unexpectedly and can wipe out the company. Hence, organizations need to focus on building an ethical culture and developing an ethical tone at the top. However, India is significantly lagging behind  in business ethics. The pathetic situation is highlighted by the fact, that today Economic Times ran an article titled “New Hats for the Chiefs”. It discusses the new titles being given to CXOs in India and mentioned Chief Ethics Officer as one of them. This is news in the most widely read financial newspapers of the country! Take a guess at envisaging the number of ethics officers in a country of over one billion people.

Closing Thoughts

While Indian government needs to get its act right to build public, private sector and foreign investors confidence, the private sector also needs to take a deep look at their own operating style and procedures. Political corniness doesn’t take the organization far, and may result in huge legal, reputation and operation risks. Business plans and strategies must be developed on sound ethical practices with complete adherence to regulatory requirements.

References:

1. Aviation industry FDI decision- Economic Times
2. Air India restructuring plan – India Today
3. Tax case Vodafone- Times of India
4. 2G Supreme Court Decision – Indian Express.
5. New Hats for the Chiefs – Economic Times