Impact of Power Styles on Organization Risks

Power, we all want it. If we don’t have it, we associate with the powerful in the hope some of it rubs down to us. Being in the upper echelons of corporate world or the political corridors of the country’s parliamentary houses ensures that you are exempt from the rules applicable to the common person.

However, the way a person gets power and uses it reflects the person’s character, and its influence on others. In the corporate world, the power styles used by senior managers directly influence the risk levels of the organization. Unsurprisingly,  power and politics are undiscussable topics in the corporate world; hence, when risk managers do risk assessments, they ignore the two.

I personally recommend risk managers to understand the individual power styles of the senior managers and overall organization power style. To appreciate the connection between power and risk, let us first look at the power styles and their impact on the organization.

Power Sttyles

Depending on the situation, a leader needs to use various power styles. However, if a leader uses coercive style even when it is not required, then something is wrong. Leaders frequently use power styles of reward and punishment for fulfilling illegitimate requirements. Hence, the probability of followers being involved in unethical activities requiring compromise of personal values is higher. On the other hand, the expert style ensures that followers make informed judgments as the leader attempts to enhance their ethical values and knowledge level. The reward is not in the form of a bribe and is implicit; the leader is dedicated to improving the organization.

Another aspect that requires understanding is the need for creating perception of power. When a leader is undertaking illegitimate activities (watch any Hindi movie to see the underworld Don) he needs to create a strong perception of power by using threat and punishment. Else, his coercive tactics will be ineffective, as people will not cooperate. Therefore, he makes some sacrificial goats to demonstrate that he is above the law and normal rules don’t apply to him. Another tactic is to break the social norms, and not behave rationally and predictably. Both these methods focus on creating fear to ensure compliance. Without the perception of power and fear, the leader becomes vulnerable to revolt from the common person. The only way for him to retain his power is by increasing the number of sacrificial goats, threats, and punishments.

1.   Impact on Legal and Reputation Risks

A coercive leader is usually riding a tiger. The organization risks continue multiplying as more and more people become aware of the unethical practices. An elastic can be stretched up to a limit. Eventually, the concocted environment cocoon will burst and all hell will break loose. The leader cannot trust anyone after a point. Hence, his fear increases in direct proportion to his vulnerability. The leader takes more and more risks to protect his personal fiefdom. The organizations reputation risks and legal risks increase proportionately.

2.   Impact on Human Resource Risks

Overtime, the leader’s charisma wears off. As the layers peel off, disillusion sets in. Employees realize that the leader doesn’t behave with integrity and honesty. Even the loyalists recognize that whenever it suits the leader’s personal agenda, they can face the bullet without any fault of their own. This creates disquiet among employees, and employee disengagement increases. The human resource risks increase manifold with disengaged employees.

3.   Impact on Operational and Financial Risks

The disengagement starts effecting productivity and performance as everyone grasps that meritocracy has no links with rewards. This in turn impacts the bottom line as leader fails to deliver on targets. Failure to show profitability and results makes the leader’s position precarious. The leader starts feeling pressure from the top. As he is unable to improve productivity, he attempts to manipulate results and financial statements. In nutshell, leader’s power style influences operational risks and financial risks of the organization.

Closing Thoughts

No one can deny that success in life depends quite significantly on a person’s power and influence. The general opinion is that means to the end do not matter when we strive for power. On the contrary, how we get power and maintain power, is crucial for longevity in the powerful position. For a coercive leader, the end is tragic, as the hunter becomes the hunted. Moreover, if a leader gets power by paying bribes or giving rewards, his power ends when he stops doing so. His loyalists disappear with speed. Abusing power is no longer safe in the present world, as it increases the personal risks of the leader and the organization risks. Therefore, risk managers need to ensure for continued prosperity of the organization, that leaders get power by the rights means and use it for the right purposes.

Satyagraha For Freedom From Corruption

Gandhi ji, in his book “History of Satyagraha in South Africa” narrates the coinage of the term Satyagraha and the journey of the movement. It is an amazing story of sacrifice, determination, and moral courage. Hence, I wondered whether we can use the concept to fight corruption in this century.

The irony is that Gandhi ji started the Satygraha movement in South Africa because Europeans passed unfavourable laws for Indians. They were scared of Indian traders and professionals taking a huge slice of the business, hence passed laws to restrict their liberty to live and trade freely. Greed was at the crux of it since there were plenty of natural resources in South Africa for Europeans, Blacks, and Indians. Now India is being destroyed by the greed of its leaders and public.

Gandhi ji’s story stands in stark contrast to the Anna Hazare led fight against corruption. Hazare’s was packaged as Gandhian inspired struggle but as results showed it was far from it. Hazare took the stance of my way and high way on the Lokpal Bill, whereas Gandhi ji believed in negotiation. Moreover, Hazare’s was a publicity driven exercise of a few fasts and he quickly distanced himself from it when he faced failure. Another aspect was that though thousands turned up in support at the initial stage, no one made use of that energy constructively and directed people to do something more than shout slogans on the streets. Hence, the euphoria disappeared after a short while, as the educated middle class needed an action plan to maintain their commitment.

It brings back to our understanding of Satyagraha. We generally confuse it with “passive resistance” and it was the same situation when Gandhi ji developed the concept a century back. Below are few points from the book:

1)      Satyagraha

Gandhi ji considered Satyagraha as a soul-force. The Satyagrahies never used physical force even when they had the capability for it. In Gandhi ji’s word – “Satyagraha is soul-force pure and simple, and whenever and to whatever extent there is room for the use of arms or physical force or brute force, there and to that extent is there so much less possibility for soul-force. These are purely antagonistic forces in my view, and I had full realization of this antagonism even at the time of the advent of Satyagraha

2)     Passive resistance

The term “passive resistance” originated in Europe as a weapon of the weak. It was generally used when other options of fighting were not available. It was a method used by people without voting rights, or lacking public support. The people were not averse to using arms for attaining their goals. But they did not go for it because they didn’t think they would succeed with it. Hence, passive resistance was more of a strategic manoeuvre than commitment to non-violence.

3)    Difference between the two

Gandhi ji described the fundamental difference in the concepts in the following paragraphs -

 “The power of suggestion is such that a man at last becomes what he believes himself to be. If we continue to believe ourselves and let others believe that we are weak and therefore offer passive resistance, our resistance will never make us strong, and at the earliest opportunity we will give up passive resistance as a weapon of the weak.

 On the other hand if we are satyagrahis and offer satyagraha believing ourselves to be strong, two clear consequences result from it. Fostering the idea of strength, we grow stronger and stronger every day. With the increase in our strength, our satyagraha too becomes more effective and we would never be casting about for an opportunity to give it up.

 Again, there is no scope for love in passive resistance; on the other hand, not only has hatred no place in satyagraha, but it is a positive breach of its ruling principle. While in passive resistance there is a scope for the use of  arms when a suitable occasion arrives, in satyagraha physical force is forbidden even in the most favourable circumstances. Passive resistance is often looked upon as a preparation for the use of force while satyagraha can never be utilized as such. Passive resistance may be offered side by side with the use of arms. Satyagraha and brute force, being each a negation of the other, can never go together.

 Satyagraha may be offered to one’s nearest and dearest; passive resistance can never be offered to them unless of course they have ceased to be dear and become an object of hatred to us.

 In passive resistance there is always present an idea of harassing the other party and there is a simultaneous readiness to undergo any hardships entailed upon us by such activity; while in satyagraha there is not the remotest idea of injuring the opponent. Satyagraha postulates the conquest of the adversary by suffering in one’s own person.”

 4)    Freedom From Corruption

Considering the above definition of Satyagraha and the differences highlighted by Gandhi ji, I haven’t seen very many noteworthy cases of mass movement of Satyagraha. Hazare’s movement just entailed short-term sacrifice and not a long-term struggle. When the public disappeared so did he.

The Satyagrahies courted prison and lived a simple life to fight for their cause. Hence, the question is that do we lack commitment and determination for long-term struggle to root out wrong habits. Is it possible and realistic to expect people to make these sacrifices in the present age of instant gratification. Can we expect Indian public to take a vow not to take or give bribes and kickbacks? Will it be expecting too much from the citizens to sacrifice a few luxuries. Will the public stay committed to the cause or leave it when it gets bored, to participate in the next novel thing.

We need to seriously think of eradicating corruption on this Independence Day. India has come a long way in one century but the corruption is eroding its sheen and destroying the country from within. We must not forget the sacrifices a whole generation of Indians made to ensure that the next generations live with freedom. Let us pledge to keep our souls free of greed.

Wishing all Indians a Very Happy Independence Day.

References:

History of Satyagraha in South Africa by M.K. Gandhi 

Human Rights Risk Management Process

Bangladesh Building Collapse

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 reportsWorkers 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

 

Accounting and Auditing in Ancient India

Professionals want to know the origin of their profession, the work done in olden times and the level of knowledge. I thought of sharing with you the history of Indian accounting and auditing profession. I discovered in Kautilya’s Arthshastra that it existed in ancient India in 4th century BC. Therefore, my guess is that it would have originated at least a few centuries earlier.  The accounting principles and standards used in the present century are similar to those that existed in the 4th century BC. This nugget of information may have surprised you.

Broadly, Kautilya’s Arthshastra covers accounting principles and standards, role and responsibilities of accountants and auditors, the methodology of accounting, auditing and fraud risk management, and the role of ethics in managing financial activities. Let me share some of the concepts with you in the next couple of posts.

1.     Maintenance of Accounts

The accounting financial year was fixed to July-June period and with a full process for closure of accounts and audit of the same. It covered the method of consolidating the accounts from various departments of the government to assess the net income and loss. The accountants were required to furnish the completed annual accounts to the head office mid-July. Delay and/or failure to do so attracted financial penalties.

 2.  Classification of Receipts

 Kautilya states thatreceipts may be (1) current, (2) last balance, and (3) accidental (anyajátah= received from external source).” In it, he differentiates between cash receipts and debtors, current and accrued income, income from other sources, windfall gains, and recovery of bad debts. He recognized the concept of risk and suggested different rate of interests for loans. Foreign trade loan attracted the highest interest, as the returns were uncertain.

3. Classification of Expenditure

Expenditure classification was similar to receipts classification and included the differentiation between capital expenditure and revenue expenses. Kautilya described it as – “Expenditure is of two kinds—daily expenditure and profitable expenditure.” The difference between income and expenditure was termed as “net balance”. He insisted on making long-term investments in construction and other works as these would generate profits over a period. It also entailed keeping track of work in progress.

4. Role and responsibility of accountants

A hierarchical organization structure of senior to junior accountants existed within the king’s treasury function. The accountants maintained books of accounts on an annual basis according to prescribed standards. The same were furnished for audit at year-end. Kautilya suggested good salaries to accountants and auditors as high income would keep them ethical. Accountants would be more prone to commit fraud if they earned very little.

5.     Segregation of Roles of Treasury and Auditor

The fascinating part of Kautilya’s approach was that he recognized conflict of interest between finance and auditing functions. He categorically stated that the head of finance and head of audit should independently and separately report to the king. He recognized the possibility of collision between the two. In India, in the government the Comptroller General of Audit and Ministry of Finance are two separate functions. However, in the corporate world still in quite a few companies chief audit executive are reporting to chief financial officer rather than the chief executive officer.

6.     Building an Ethical Culture

Kautilya believed character reflected personal values of individual and ethical values learning must commence from childhood. Even as an adult ethical conduct was as important as professional skills. He proposed measures to build ethical climate in the kingdom. However, he was practical and recognized the potential of corruption. In accounting, he talked about misstating financial statements due to abuse of power and fraudulent reporting. He devised a system of reward and punishment to ensure compliance to rules and regulations.

7.     Verification and Auditing of Accounts

The concept of continuous monitoring, periodical auditing, verification and vouching existed in ancient times. Checks were done daily and periodically (five nights, pakshás, months, four-months, and the year). The attributes used in the present day for verifying income and payment vouchers were also used in earlier times. Interestingly, each department had spies to provide information and report wrongdoing to the seniors. There was a full process for discovering fraudulent transactions and punishing accountants for misstating financial statements. I shall cover that in the next post.

Closing Thoughts

Kautilya prescribed the accounting theory that included bookkeeping, preparation of financial statements, auditing and fraud risk management. He considered accounting as an integral part of economics. Various kingdoms in India used his work until the 15th century AD i.e. before the colonial rule. I am not aware whether similar level of knowledge existed in other parts of the world before the Christian era. If you do have information, please share it with me. It will be an enthralling journey into the past.

References:

Kautilya’s Arthshastra 

India Inc. – Say Hello to Corporate Social Responsibility

The Lok Shabha approved the new Companies Bill and now it is pending with Rajya Sabha. After approval, companies will need to implement the new Sec 135 on Corporate Social Responsibility. The section applies to companies having:

a)     A net worth of Rs 500 crore or more, or

b)      A turnover of Rs 1000 crore or more, or

c)      A net profit of Rs 5 crore or more, during the financial year.

The company needs to form a Corporate Social Responsibility (CSR) Committee at board level of three or more directors, of which at least one should be independent. The board has to ensure that the company spends at least 2% of net profits on CSR. The clause specifies the requirement of “comply or explain”. If the company does not adhere to the requirement, it has to explain the reason for doing so.

With the last quarter of the Indian companies, they need to plan the activities for the next financial year. Here are a few of the things that they can do now:

1.     Hire a dedicated team

 Most Indian corporates do CSR activities in an arbitrary manner with responsibility either falling in Communications department or Administration department. CSR is a specialised line that requires people with altruistic temperament well versed with the problems of the society.

2.     Develop a CSR policy

 The organization requires a CSR policy approved by the board along with the budgets. Reports suggest that social responsibility adds to the brand value of the company and improves customer perceptions about the products. In view of this, the CSR policy should be long-term and aligned to the business objectives. For example, financial services sector has high risk of fraud. Hence, it can think of sponsoring fraud prevention and business ethics training, which is in short supply in India.

3.     Identify the right partners

 Corruption has influenced non-profit organizations also. As per media reports, a number of organizations opened prima facie for doing social work are actually acting as fronts to collect illicit money and route it into different areas. Hence, choosing the right partners who are actually committed to doing social good is important.

Closing thoughts

 Besides the external benefits, CSR improves employee engagements. Employees feel good when their companies act in a socially responsible manner. Moreover, with the mad rush to achieve targets this acts as a great stress buster while giving meaning to live. Getting a bigger pay packet can be an objective but never the purpose of life. Hence, this law is a win-win situation for all involved – the customers, employees and public. It is up to us how we leverage it.

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

A Debate – Profitability Versus Human Life

Everybody uses everybody else for their own benefit. That is the justification we give for most of our negative actions. Some follow use and discard policy; others follow use, abuse and discard policy. The complexity arises as it hard to differentiate when it is right to use. Isn’t a wife being used by her family when she is doing house work, looking after the kids and sacrificing her pleasures? Isn’t a husband being used by the family when he is putting ten hours in office to earn a living so that his family has food on the table and leads a comfortable life? What about the hired help in-house, who works twelve hours for minimum wages just because they are poor and uneducated, isn’t that exploitation? Hence, can the public really blame corporate world for perusing profitability at the expense of human life.

1. Scenario – Non-profit Social Organization

A couple of days back in Bangalore, a young footballer collapsed on the practicing field in Banglaore. There was no medical aid or ambulance available on the field and the young player died. Karanataka State Footballer Association is getting the flak and offered Rs 100,000 to the grieving parents. Is the money sufficient compensation for death? If a million was offered, will the negligence of the association be more tolerable to parents? What is the right value of use or exploitation of human life?

2. Scenario – Corporate World

The old 1960’s Ford Pinto case is an example where organizations put dollar value to human life. The Pinto had a gas tank in the rear, and it burst into flames on collision. A number of car users lost their lives or were severely burnt during accidents, but the company continued to lobby for lower safety standards. The engineers knew about the defects, however, the senior management advised them to continue manufacturing. In a judicial hearing, Ford management justified their actions claiming that they had done a cost-benefit analysis for the same. The cost of removing defects was higher to the benefit of saving a human life, hence it didn’t make business sense to improve safety measures. In the analysis, the price of human life was US$ 200,000.

The case is relevant, as Tata Nano in India, has in a few occasions burst into flames without an accident. The car just becomes a fireball. Although Tata Motors management has claimed that the defect was removed, customers are still wary . Therefore, the question is – is it justified for organizations to risk the life of customers for profitability?

3. Scenario – Crime Scene

With increasing crime, the question becomes more complex. Let us take a hypothetical case. A man was hired by group A to conduct a crime on X, to ensure X does something for group A. The same man was hired by group B to conduct a different crime on X, to ensure X agrees to the demands of group B. Now the man double crossed group A and didn’t inform them he was working for group B. He double crossed group B and informed them that he will be successful even when he knew his plan isn’t working. He involved a number of friends and associates to help him with his plans. He double crossed his friends and didn’t inform them about the risks of the crime and how they are jeopardizing their life.

In nutshell, he used everyone to his own advantage for sake of monetary gain and safeguarding his own life. He assumed safety in numbers;   involvement of other people will bullet proof him against the negative repercussions of  group A, B and X. Now in this case, would you say, since all involved except X were undertaking unethical behavior, the use and exploitation of everyone else is justified? If we remove the legal aspect, how should this person be judged on moral aspects of his action? If one is risking another’s life, does loyalty to his own group has value?

Closing Thoughts

In all the above cases, we will say it is wrong thing to do even if we ignore legal aspects of each case. Human beings code of conduct and morality states that use of another for fulfilling duty or a greater cause is justified. However, use of another for personal benefit without compensating them appropriately for labor amounts to immoral behavior. There is a saying that even in the mob world, loyalty counts. There also, using your colleagues or clients which might harm them is not acceptable.  Human life has value and all human beings are expected to respect it. A code of conduct is followed as it keeps all human beings safe and secure. Breaking those always results in negative repercussions.

References:

1. Ford Pinto

A Philosophical Discussion on Murder of Whistle Blowers

This Sunday, Anna Hazare is fasting in Delhi in support of Whistle Blower Protection Act. Indian laws don’t provide for whistle-blower protection and the damage is evident. Over the years, numerous whistle-blowers have lost their life. A few cases are covered up as personal dispute due to the high level corruption in the system.

Corruption benefits the majority, so does it make it acceptable? Legally, public will say – of course not. But even Hazare’s big protests in 2011 have lost public support. The government used delay tactics and maligned the name of key leaders of his team. Most state leaders didn’t want a Lokayukta in their states. There is no political will among the politicians, bureaucrats and business to pass a strong bill against corruption.

Then it isn’t surprising, that even on  witnessing the death of whistle blowers, public doesn’t protest about it. On the other hand, most keep quiet, lest they become the target. In such circumstances, majority of the people have given implicit consent to murder for their own self-interest. Of course readers would be outraged by this suggestion and claim they were no way involved in the murder. They didn’t give implicit consent!

Let us discuss this from a philosophical lens. Micheal Sandel, the Havard professor discusses this point in his video lectures : Justice – The Moral Side of Murder and The Case of Cannibalism. In the episode “Moral Side of Murder” he discusses a hypothetical case:

“Suppose you were driving a trolley on a rail track and its breaks failed. Five workers are ahead on the track, if you continue to drive straight, all five will die. On the other hand, in a diverging track, there is just one worker.  If you change track, that one worker will die but the other five will live. What is the right thing to do?”

Most students responded that they will swerve to the diverging track and chose to kill one to save five. At a psychological level, they have given moral justification of murder. Then Mr. Sandel gives another example :

“Suppose you are standing on a bridge with the track below, and you see this trolley hurtling without breaks. There are five workers on the track. There is a fat man standing next to you. If you push the fat man over the bridge, on the track, the lives of five workers would be saved. Would you do it?”

Majority of the students said – “No, they wouldn’t do it”. The reason is that it would involve explicitly murdering a person. Can we conclude from these examples, that human race is fine with implicit consent to murder however have qualms on explicitly murdering?

Some whistle blowers due to the psychological torture have committed suicide. That is an indirect attempt to murder. The rich and middle class gain from corruption, hence they give an implicit consent to murder of whistle-blowers. Does this statement hold true, or would you debate it?

Mr. Sandel discusses this in the next part of the lecture on cannibalism. He discusses The Queen v. Dudley and Stephens case, and the facts are as follows:

“At the trial of an indictment for murder it appeared, upon a special verdict, that the prisoners D. and S., seamen, and the deceased, a boy between seventeen and eighteen, were cast away in a storm on the high seas, and compelled to put into an open boat; that the boat was drifting on the ocean, and was probably more than 1000 miles from land; that on the eighteenth day, when they had been seven days without food and five without water, D. proposed to S. that lots should be cast who should be put to death to save the rest, and that they afterwards thought it would be better to kill the boy that their lives should be saved; that on the twentieth day D., with the assent of S., killed the boy, and both D. and S. fed on his flesh for four days; that at the time of the act there was no sail in sight nor any reasonable prospect of relief; that under these circumstances there appeared to the prisoners every probability that unless they then or very soon fed upon the boy, or one of themselves, they would die of starvation.”

To protect oneself or the majority, is murdering someone else justified? The students raised interesting aspects :

1) Some said if selection was done by lottery, then maybe it is illegal but more acceptable. Reason given was they would consider it that all participants on the boat knew the risks of losing.

2) A few students stated that if the boy would have volunteered to die for the benefit of others, it would be acceptable. The boy was an orphan and all others had family responsibilities.

In case of whistle-blower murders, the person dies without have consented to die or being made aware of the decision of the most. The majority votes behind his/her back for murder to safeguard themselves. Does that make majority behavior acceptable?

Watch the hour-long video, and share your thoughts.

In whistle blowing, most feel threatened about the repercussions from people in power and say that they have family responsibilities and cannot expose themselves to the risk. Hence, it is better to go against the whistle-blower attempting to do the right thing, than the person who is doing the wrong thing. Do the same psychological reasons as given in the above mentioned case apply when society goes against whistle blowers?

References:

Harvard University – Justice with Michael Sandel

India Country Risks in 2012

Indian organizations are in for a rocky ride in 2012 as darkening clouds hang over India growth story. In some ways it is a make or break year for India’s continuing successful journey for economic growth and power. The world is watching and India cannot afford to flounder. However, the risks in the economic environment are acting as tsunamis and volcanoes, wiping out past efforts swiftly. This year Indian organizations need to watch out for external risks and triggers carefully, as they can have huge impact on the bottom line of the company.

The prophets of gloom and doom predict that India’s GDP in 2012-2013 financial year will be between 6-7%. In light of prevailing political and economic environment this statement is a conservative realistic assessment. Hence, organizations to sustain and grow in 2012 need to conduct strategic risk assessment of India country risks. I am giving below my top four.

1. Political Paralysis

In 2011, Prime Minster Manmohan Singh’s reputation has nose-dived as the country was engulfed in corruption scandals. His continuance as Prime Minster till the end of term is widely debated in political circles. The Congress party is facing another crises due to Sonia Gandhi’s ill-health. Public is speculating that she has undergone surgery to treat cancer in USA. Hence, rumors are rife about Rahul Gandhi  taking over the reigns of the party. Moreover, senior Congress party leaders are having spats in public.

On the hand, Bhartiya Janta Party (BJP), the main party in opposition, is suffering from lack of strong leadership at national level. The ex-chief minister of Karnataka, Mr. B. S. Yeddyruppa, openly contravened orders of BJP leadership team when named in Illegal Mining Report.  At state level, local parties are gaining prominence and strength.

Last but not the least, Anna Hazare’s fight against corruption has awakened the middle class. Finally, they have lost their apathy and are demanding better governance.

Considering all aspects, there is little likelihood of a strong national party leading India in 2012. Moreover, political commentators are hinting about mid-term polls due to fishers in Congress party and it’s deteriorating credibility. Therefore, large organizations must manage political risks at national and local state level. Keep in mind sensitivities of various political parties otherwise their is a probability of getting caught in a tug of war. Also, adjust the growth plans for government ineffectiveness.

2. Financial Market Turmoil

Indian markets in 2011 have done badly on financial indicators. There is slowdown in growth and in October 2011 industrial output contracted by 5.1%. Fiscal and current deficit are expected to cross 3% and 5% of the GDP respectively in 2011-2012. The GDP growth forecast for the year was reduced to 7.5% on 10 Dec 2011.

Sensex on 16 December 2011 closed at 15,491, a 25 month low. Stock brokers predict that the market is not going to rise in a hurry.

Business Standard reported in its weekly report on 16 December that “The WPI inflation for the month of November came in at 9.11 per cent compared to 9.73 per cent in October. The market was looking at an inflation of below 9 per cent for November. Inflation for November 2010 stood at 8.2%. India’s food inflation eased to 4.35% in the year to December 3 — its lowest reading since late February 2008 — from an annual 6.60% rise in the previous week, government data showed today.

Further, On Thursday, the Indian rupee touched a record low of 54.30 to the US dollar on the back of sustained foreign fund capital outflows in view of the fall in the equity markets, coupled with a stronger dollar in global markets.”

The Finance Minister Pranab Mukherjee recently commented in a meeting – “The present indicators show that both private consumption and investment sentiments have weakened and it is this weakening of sentiments that makes it necessary to shift our focus back to near term issues.

Moreover, Moody’s in November 2011, “downgraded the entire Indian banking system’s rating outlook from “stable” to “negative,” citing the likely deterioration in asset quality in the months ahead.” Additionally, aviation, telecom, commercial real estate and power utilities industries collectively owe banks Rs 5 lakh crore. These industries are most affected by the slow down.

The financial market situation is unlikely to improve in the short run. India will most probably not see a double-digit growth in GDP in 2012-2013. Companies need to risk adjust the financial growth numbers keeping in mind the prevailing situation. . Conservative estimates and cost control will steer the organizations in safe waters. Maintain good liquidity throughout the year as banks are not going to save organizations in a crunch.

3. Future Regulatory Reforms

The regulatory reforms came to a standstill in 2011. The political deadlock between UPA government and BJP opposition party pushed all reforms on the back burner. The business leaders came out strongly criticizing the political parties for hampering economic growth. The unhappiness of corporate world is evident that investments – domestic and foreign – are at an all time low.

The government in December 2011 parliament session had a list of 50 Bills for approval. Some of the Bills presented were Companies Bill 2011, Banking Laws Amendment Bill 2011,Prevention of Money Laundering (Amendment) Bill,  Direct Taxes Code Bill, 2010, Forward Contracts (Regulation) Amendment Bill, 2010; Pension Fund Regulatory and Development Authority Bill, 2011, Securities and Exchange Board of India (Amendment) Bill 2009; Insurance Laws (Amendment) Bill, 2008 and Regulation of Factor (Assignment of Receivables) Bill, 2011, among others.

This shows the pending backlog of bills requiring approval in the parliament. Business leaders are likely to lobby for approval of these bills in 2012. Hence, risk managers need to be geared to manage numerous regulatory changes in 2012.

4. Skyrocketing Corruption & Bribery

In light of various scams – telecom, mining, land, etc, – the corruption perception index in 2011 has fallen to 3.1 from 2010’s 3.3. India’s world ranking in corruption has gone lower to 95 from a total of 183 countries assessed. This is not surprising as Indian’s in 2011 saw well known politicians and business owners implicated in scam cases.

The recently released report of Global Financial Integrity – Illicit Financial Flows from Developing Countries Over the Decade Ending 2009 – states that trade mis-pricing accounts over 80% of the illicit financial flows in Asia. India in the last decade lost US $104 billions in illicit flows and is ranked 15th highest among developing countries with China topping at US $ 2467 billion. Though in comparison to China, India doesn’t appear to be doing badly, but that is distorted reality. A couple of activists and whistle blowers lost their lives during the year for uncovering corruption cases.

In 2011, Anna Hazare initiated public rallies to force government to pass Lok Pal Bill. Although, parliament is expected to pass it in December 2011 winter session, the implementation will take some time. The government’s sincerity in eradicating corruption is questionable as the various anti-graft bills are being used to play political football. The UPA government to counteract Hazare’s war cry has presented three additional anti-graft namely –  Judicial Accountability Bill,  Public Interest Disclosure Bill (Protection to Whistleblowers Bill) and the Citizens’ Charter – in the parliament in December 2011. A step in the right direction but the road ahead is tough. Passing bills and implementing them are different ball games.

In light of the fraud cases, high-level prosecutions and political games, the Indian corporate world has become vary. In 2012, organizations must focus on implementing a code of conduct for employees and provide training to them on business ethics. The legal and reputation risks will be extremely high if these aspects are ignored.  The situation becomes more tricky for US and UK multinationals as they are governed by FCPA of their respective countries.

Closing Thoughts

Political deadlock, inflation and corruption have taken the air out of India’s growth story. 2012 will be the decisive year in assessing whether India can surmount these obstacles and accelerate economic growth or  go on a downward spiral. Organizations must maintain a balance between growth and risks. The downside risks can cost heavily and there may be no quick ways to turn around numbers. Hence, doing proper planning, implementation and cost effective operational execution are key for success.

References:

  1. Illicit Financial Flows from Developing Countries Over the Decade Ending 2009 – By Global Financial Integrity
  2. Corruption Perception Index
  3. Weekly Report: Sensex, Nifty hit 2-yr lows on growth woes – Business Standard

2011 Kroll Global Fraud Survey Report- An India Perspective

2010-2011 Annual Global Fraud Survey report of Kroll conducted by Economist Intelligence Unit gives expected results. Fraud continues to be a big problem worldwide and more so in India. Of the companies surveyed, globally 75% reported experiencing fraud during the year. Though the figure has reduced in comparison to previous year’s 88%, the situation is still dismal.

In India, the situation is disastrous, with 84% organizations reporting that they suffered from fraud during the year. It is wake-up call for India, as it is ranked second worldwide after Africa and shares the position with China

The chart below compares the top six fraud categories at global level with India. In most of the cases, India is doing much worse than its global counterparts are.  Worldwide management conflict of interest, internal financial fraud, corruption and bribery and vendor procurement related frauds have increased. Physical theft of assets and information theft decreased.  Indian business crucial pain points are corruption and bribery, information theft, internal financial fraud, financial mismanagement and vendor procurement.

1.    Cost of Fraud

The report answers the most relevant question relating to fraud – what is the loss caused by fraud? The estimated figure given in the report is that globally organizations suffered 2.1% revenue loss due to fraud. For India, the percentage is higher at 2.4%.  

Further analysis available in the report says that 18% of the companies reported an earnings loss of more than 4%. A quarter of these most affected companies suffered losses more than 10%.  These companies are reporting corruption, bribery, money laundering and regulatory breaches frequently. However, they are doing nothing about it. The lack of fraud prevention and investigation measures is causing huge losses in these companies.

Indian companies are ill prepared to the fight fraud menace. Just 50% companies have background screening, third-party due diligence and other fraud prevention measures in place. In my view, India does not have adequately trained fraud investigators as part of the risk management teams. Overall, the focus is on financial statements audits and internal audits. These audits are not done to detect frauds.

2.    The Inside Job

Management finds it hard to accept this fact that internal employees and related parties conduct most frauds. The report mentions that insiders conducted 60% of the frauds globally. That is, 28% junior employees, 21% senior employees and 11% third-party agents conducted frauds. In India, 59% of the frauds were conducted by internal sources.

The frauds conducted by senior employees cause more damage to the company. Not only are the financial figures larger, the reputation damage is huge. However, the companies in India still do not have adequate focus on internal controls and management controls.

However, government has initiated some steps to address the high level of frauds in Indian private sector. In my view, the Indian government’s decision to give more power to the Serious Fraud Investigation Office (SFIO) in the new Companies Bill is a step in the right direction. SFIO will be in a position to conduct more investigations, arrests, raids and seizures. This would put some brakes on the escalating financial fraud cases in India.

3.   Corruption & Bribery in India    

The report has a special coverage on corruption in India. It shows that the 2010-2011 corruption and fraud cases in India – 2G telecom scam, Adarsh Society scam, CWG fraud, various land scams etc. – have negatively impacted India’s reputation internationally.

Last decade depicted India’s growth story. The government and private sector post independence never had it so good. Huge investments were planned to improve infrastructure. With liberalization foreign investment flows increased. The sudden spurt in economy also resulted in higher greed and corruption soared. The cases show how senior level politicians and business heads who were much revered and respected compromised their ethics.

As per the report, 78% of the Indian organizations have stated that they are highly/moderately vulnerable to corruption. In my view, this is an understatement; around 90-95% of the companies are exposed to corruption.

The multinational subsidiaries in India are also significantly affected by corruption. Though the FCPA and/or UKBA are applicable to them, the acts do not have much teeth in Indian scenario. In my view, the US/ UK authorities will be able to follow through only on the bigger cases, and the smaller ones will be ignored. Hence, the effectiveness of these acts is limited. Secondly, the developed countries have a one sided view of corruption. They prohibit their own country’s companies from paying bribes. However, accept the bribe money deposits from Indian (and other countries) politicians and businesspersons in their country’s banks.  This encourages money laundering rather than curtailing corruption.

Although, India has a Prevention Against Corruption Act, it hasn’t reduced corruption. As per the act, government officials cannot receive any form of bribes or grease payments. However, receiving 2-10% bribe of total contract value assigned is quite prevalent. The India Against Corruption moment led by Anna Hazare has forced government to issue a strong Lokpal Bill. The bill expected to be passed in this winter session of parliament. The implementation of the bill may curb the demand side of corruption to some extent.  

 Recently in October 2011, the Prime Minister announced, “that his government was working on proposals to criminalize private sector bribery and to also make illegal gratification of foreign public officials an offence.” This is in line with United Nations Convention Against Corruption, which India had signed off earlier in the year. The government is also planning to issue a bill to protect whistle blowers. The two bills jointly would have significant impact on curbing supply side of corruption.

Closing thoughts

India to maintain its growth story needs to reduce fraud and corruption in government and private sector. As previously mentioned corruption and fraud stop multinationals from investing in the country. The decrease in foreign direct investment in 2011 and the international financial institutions outflow of funds from stock markets are clear indicators of the negative impact of  fraud and corruption.

Therefore, Indian government must improve governance and take strict action against the offenders.  Comptroller Auditor General is showing the way forward, the need of the hour is for political parties to have the spirit to clean up the mess. The private sector must implement fraud prevention measures and focus on ethics to reduce frauds. Both sectors have to collaborate to minimize fraud risks in India.

References:

1.  Kroll Global Fraud Survey 2011

2. Private sector graft may be made crime too: PM