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 

Risk Managers – Tone Down That Report!

This week three renowned figures – Angelina Jolie, Larry Page and Christine Quinn – disclosed their medical problems to the world. They discussed battle with breast cancer, paralysis of vocal cords, and struggles with bulimia and alcoholism. Jolie, a woman famous for her beauty bared her mastectomy details. They talked about fear of death and handicap, and frailty of human character. They risked high-profile careers by being candid. One word describes their actions – Courage.

However, the corporate world wants to hide behind lies and window dress their weaknesses. The corporate leaders sometimes threaten risk managers and auditors to tone down their reports. The messengers of bad news get shot. Risk managers face bullying, retaliation and threat to their jobs for showing courage to speak the truth. If they refuse to bow down to pressure, the business teams label them as politically dumb or difficult to deal with. Question is – should risk managers tone down their reports to please the business teams?

I want to discuss a couple of scenarios here and you decide the course of action.

Scenario 1- Don’t report correct facts to avoid giving bad news

Let us say, you are a CXO of an organization. You have a heart problem and visit a doctor who is a good friend of yours.

The doctor realizes your heart condition is bad. You require a heart surgery for four bypasses. The doctor doesn’t want to deliver the bad news to you, because he doesn’t wish to hurt your feelings.

The doctor tells you  – “You just have too much stress. You need a vacation to relax and have some fun.” He prescribes you some vitamins and discharges you.

You follow your doctor’s advice, take a vacation. You swim and jog for a couple of days and have a heart attack. You arrive at the hospital with a survival chance of 5%.

Did the doctor do the right thing by not telling you the truth?

Scenario 2 : Don’t report correctly to protect a friend

A civil engineer responsible for doing quality and inspection checks of a bridge notices that sub-standard quality of material is used. There is a high risk of bridge collapsing. However, he issues a clean report to his seniors because the engineer-in-charge of the bridge is a friend of his.

An organisation’s senior managers drive daily across the bridge to reach their office. One day all of them are on the bridge and it collapses. All die.

Would the families of the senior managers be happy with the quality control engineer’s for not disclosing the risks?

My guess is most of the corporate readers would have answered no. You would have preferred the truth when it is a question of your own life being at risk.

Corporate Scenario

So why don’t corporate citizens hesitate when they put other people’s life at risk. See the Bangladesh factory fire, Japan’s nuclear disaster or US banks home foreclosure and mortgage mess. Employees, customers and public lives or life savings were put at risk.

Wouldn’t a few honest risk management reports helped in fixing the problem in time to prevent the disasters?

The corporate world maintains double standards on reporting risks. They want full disclosure of the risks to them but not to others. Before setting these expectations, corporate citizens should answer these questions:

1) Isn’t it a risk manager’s job to identify the health problems of the organization, prescribe a cure, suggest amputation where required and nurse the organization back to health?

2) Is it right to compromise professional ethics and code of conduct to keep a few people happy?

3) Aren’t risk managers responsible for calculating the direct and indirect cost to others for non-disclosure of risks?

4) Shouldn’t risk managers hold their ground and stick to their independent advise as you will benefit from it in the long-run?

Closing Thoughts

Moral courage is one of the most difficult qualities to acquire. Larry Page, as CEO of Google fulfilled his responsibility to the investors by publicly disclosing his medical problems. Now the investors can make an informed decision. One has to admire Page for taking such a difficult call. It takes guts. Disclosing personal weakness makes one feel vulnerable, exposed and fallible. He has shown the path for corporate leaders to follow.

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

 

Role of Positivity in Risk Management Communication

Can something as simple as appreciation make business teams more willing to accept a risk manager’s viewpoint?

———————————————————————————————–

The Conflict

Proverbially risk managers are locking horns with business managers. Of course business managers out number risk managers, hence more often than not risk managers are licking wounds and complaining that business managers don’t listen to them. Business managers claim that they are running the show, so an interfering risk manager who is perpetually criticizing their hard work  should be shown the door.

Then risk manages lament that it is their job to high light risks which means negatives, so why go after them for being messengers of bad news. The conflict brews and sometimes reaches boiling point. No one wishes to see eye to eye because they wish to get eye for an eye. End result, the business suffers in this battle.

What is the cause of the stormy relationship? Criticism and negative feedback! No one likes it, so why blame the business managers.

What if risk managers change the approach? With the criticism they give a lot of positive reinforcement? Will the behavior of business managers change?

Research on Role of Positivity in Performance

Marcial Losada and Emily Heaphy conducted a research titled – “The Role of Positivity and Connectivity in the Performance of Business Teams – A Nonlinear Dynamics Model”. They studied the dynamics of team interaction in relation to approving and disapproving verbal feedback statements. Researchers coded the verbal communication among team members along three bipolar dimensions, positivity/negativity, inquiry/advocacy, and other/self. Sixty teams developing annual business strategy were analysed.

The results of the study have extremely important implications  from business performance aspect and for risk managers. The table below defines the ratios of various dimensions.

The positivity/ negativity ratios indicate that high performing teams give 5.6 positive comments to 1 negative comment. In contrast the low performing team give three negative comments to one positive comment. The medium performing teams give approximately two positive comments to one negative comment.

Similarly, under inquiry/advocacy ratios, the high performance teams are more balanced in their approach towards inquiry and advocacy. The team members question in an exploratory way. On the other hand, low performance teams are highly unbalanced and members advocate their own viewpoint. The medium performance teams are little bit tilted in favor of advocacy.

Again, high performance maintained a balance in discussing internal and external aspects. Whereas, low performance teams focus on internal inquiry. The medium performance are slightly more focused on internal than external aspects.

Thus, the high performance team have higher levels of connectivity, which results in better performance.

Overall, high performing teams show buoyancy throughout the meeting. They appreciate, compliment and encourage their team members. This expands the emotional space for team to function. In contrast, in low performance teams sarcasm and cynicism rules which restricts the emotional space. There is lack of mutual support, enthusiasm and a high degree of distrust.  The medium performance team don’t show distrust or cynicism but neither are they openly supportive and enthusiastic about their team members.

Implications for Risk Managers

The results are very important from a risk manager’s perspective. As the author states – “to do powerful inquiry, we need to put ourselves sympathetically in the place of the person to whom we are asking the question. There has to be as much interest in the question we are asking as in the answer we are receiving. If not, inquiry can be motivated by a desire to show off or to embarrass the other person, in which case it will not create a nexus with that team member.”

Hence, from the time we approach the business team, we need to ensure that we are inquiring about the business. We should not be advocating any quick recommendations based on high-level interactions.

Another point to note is that the questions should cover both the internal and external environment of the business. This would motivate the business team into a more open discussion.

The most important point is about positive feedback. In our verbal communication and written reports we focus on highlighting the negatives.

The research showed that positive comments (that is a terrific idea) create emotional space within the listener, hence the listener is more willing to take the feedback. The emotional space created by positive comments in high performing teams is twice the size of medium performing teams and three times that of low performing teams.

Negative reporting restricts the emotional space of the business team. To build a positive environment for acceptance of our views, recommendations and report, we need to give 6 positive comments for each negative comment.

The researchers have given equations to assess the emotional space based on various dimensions. It might be a good idea to calculate the same before issuing a report.

Closing thoughts

One of the incorrect assumptions that risk managers make is that there is a linear relationship between the observations and recommendations in the report. However, the study showed the impact of non-linear relationships on functioning of teams. Hence, the fault may lie in the straight forward cause and effect attitude taken by risk managers to get buy-in from business managers.

We generally discuss that in reports we should highlight the positives first to balance out the negatives. This research clearly points out the importance of doing so and the reasons why we are failing. We have to change our approach to be effective. We need to be part of the business team, develop a positive feedback system before giving any negative observations

References:

The Role of Positivity and Connectivity in the Performance of Business Teams: A Nonlinear Dynamics Model - Marcial Losada and Emily Heaphy

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

Do corporate awards misguide public?

I want to ask you a few questions. Have you ever thought of a company as a good investment prospect after seeing the awards it has received? Do you form a favorable opinion when a business leader receives an award for best CEO or Entrepreneur? What about when a company receives an award for corporate governance, innovation or great place to work? We assume the selection was unbiased and evaluation criteria were stringent. Hence, we form a positive image of the winner. Nothing succeeds like success.

Now what happens when we discover that the leaders whom we have put on a pulpit have feet of clay? Recently, a Miami businessman, Mr Claudio Osorio, former president of Inno Vida Holdings was arrested for a $40 million fraud. In 1997, Ernst & Young had awarded Mr Osorio “Entrepreneur of the Year” title for CHS Electronics, a company he owned. Amazingly, in 1999 CHS Electronics settled a class action lawsuit brought by its shareholders. The next year the company became bankrupt. Doesn’t this raise questions on jury’s decision and selection criteria for giving the award?

Closure home, the story is the same. Ramalinga Raju, previously the CEO of Satyam responsible for conducting the biggest corporate fraud in India, was awarded Ernst & Young Entrepreneur of the Year Services Award in 1999 & 2007 (which was withdrawn later). Other awards received by him were – Dataquest IT Man of the Year Award 2000, CNBC’s Asian Business Leader – Corporate Citizen of the Year award in 2002 and Golden Peacock Award for Corporate Governance 2008 (withdrawn later).

According to my understanding, the Indian scene for corporate leadership awards is quite easy to understand. There is a group of 25 prominent business leaders from whom the 6-7 jury members are selected. During the year, in the 5-6 corporate award functions at least 2-3 jury members are common. The same group of 50 companies receive the awards year on year. Each function distributes 9-10 awards. Around 7-8 awards are given to this group and just a couple of new names are added. In the newspapers, a detailed write-up is given of the jury interactions for selecting the awardees.

One might say that these are the top performing companies and CEOs; hence, they deserve the awards.  The other could be that these CEOs have excellent public relations teams working to get the business leaders and companies nominate. However, in my cynical view it appears as a game of corporate musical chairs where business leaders pat each other on the back and allow entry to a few in the exclusive club. I am not joking; a recent award function separated the members of the exclusive club from the non-exclusive business leaders by demarcating the area with a red rope.

Giving an award may not be big deal. However, it becomes serious when awards of corporate governance excellence or best entrepreneurs are given. People assume that after being evaluated by peers and benchmarked against best practices, these leaders and companies are best in the pack. A small individual investor relies on this information when making an investment decision. Can we count the number of investors who traded in Satyam shares believing it to be an excellent company? These investors lose money and sometimes their whole savings. Hence, the ethics and integrity of these awards must be maintained at all cost.

The corporate award functions should not become similar to the Bollywood award functions. The common perception of Bollywood awards is that whichever hero or heroine performs on the award function gets an award. Just a few awards are given on actual box office performance. I don’t have any information of behind the scene activities of corporate award functions. However, investors will lose faith if the Bollywood method is followed.

Closing thoughts

In my view a government body, something like SEBI should evaluate the criteria of the bodies giving awards. It shouldn’t become a brand building and sales exercise to get clients and investors. Hence, only a few select organizations should be allowed to distribute awards. Periodically, the government body should conduct a review. Moreover, the government body should evaluate the cases of awards given incorrectly and recommend legal action where required. What do you think?

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?

US Presidential Race – A Learning Board

A yearlong battle with approximately US $3 billion spent on it and the verdict is the  same. President Obama got re-elected; Republicans have majority in the house and Democrats in the senate. On the face, nothing changed. Even to maintain status quo, it is a case of survival of the fittest. So here are some lessons risk managers can learn from the US Presidential race.

1.      Don’t rest on your laurels

President Obama was leading the race, and then he was complacent in the first debate. Romney gained advantage and in the last few weeks, the race was neck-to-neck. Once we achieve something, we tend to take it for granted. Over time from peak status, we gradually unnoticeably start slipping until the gap is huge. Then we are shocked on discovering we are not as good as we thought. As risk managers, we need to continuously manage risks and upgrade skills. We cannot take it for granted that risks will remain the same and everyone will see things in the same light.

2.      Use disasters to demonstrate skills

President Obama in 2008 used the financial crises to demonstrate his leadership skills. In this election, he exhibited presidential capabilities during hurricane Sandy. The message was clear to the public, in crises he leads with calmness and control. He is on top of the things. Risk managers must lead from the front to build trust and confidence in the business teams. They must not start the blame game when risk disasters occur.

3.      Cover the whole organization

President Obama won the elections due to his people centric approach. He was the favorite among women, minority communities and middle class. The Republican party upper echelons are white dominated and Romney sounded pro-rich. He failed to address specific issues of the masses except the jobs shortfall. Risk managers to build a risk culture and make risk management successful, you must spread the word at all levels of the organization. Communicating just with the top management is insufficient and ineffective.

4.      Negative messages work

This election saw the highest number of negative messages from both parties. Democrats and Republicans ran down their competitors. Pointing out problems with others strategies benefitted their game. Risk managers need to incorporate negative messages in their communication strategy. Sometimes giving strong messages of what can go wrong helps in changing minds. Secondly, communication has to be continuous, not periodical. To build the right culture, communicate daily.

5.      Define starting point clearly

Most of the problems President Obama faced during first term were from President George Bush’s era. He took over an economy and country in distress. However, he made that clear to the public and did not take the blame for Bush’s bad decisions. In risk management too, on taking a new role clearly highlight the current status and previous problems. Define the starting point first before laying down the road map for progress. Don’t take blame or responsibility for predecessors problems.

Closing thoughts

President Obama’s first task is to address the fiscal deficit and that will lay the foundation of his second term. In his book – Audacity of Hope – he had inspired many to think beyond the present limitations and lead change. This term will define whether he will be remembered successfully as a President. With his personal achievements, he has shown the world that most barriers can be broken. Risk managers can take that lesson from his life and work towards changing the organizations risk climate.

Two Lessons from Purti Group Investigations

Nitin Gadkari, the BJP President, is under the scanner in respect to his Purti group. The allegations are that multiple layers of companies were created with numerous ghost investors. Some of the companies exist only on paper and the directors are all employees of Mr Gadkari. The Income Tax department and the Registrar of Companies have commenced investigations after the stories appeared in the media. I have a couple of questions about the whole thing.

1.     Unqualified Directors

Until fourteen months back, Mr Gadkari was the chairman of Purti Power and Sugar Limited (PPSL). Presently Mr Sudhir Wamanrao Diwe, Mr Gadkari’s personal assistant is the managing director. Moreover, as per media reports “four directors of Purti’s investment companies  - Kawdu Zade, Manohar Panse, Nishant Agnihotri and Sagar Vikaskotwaliwale – are either close associates or employees of Gadkari. While Zade is the accountant of Gadkari’s household, Peens is his driver.” Additionally, the four were directors in 16 corporate companies holding major shares in PPSL before 2010.

A fundamental question out here is why the director’s profession is a big deal. As per company law, any one can obtain a Director Identification Number (DIN) and be a director of the company. The DIN application requests for the residential address of the person. No details regarding professional qualifications or background are required.

The joke doing the rounds is that every driver now wants to be Nitin Gadkari’s driver. Seriously speaking, the onus of responsibility of appointing well-qualified directors rests with the promoters. It is their choice. In most cases, directors are friends and acquaintances of Chairman or CEO. Hence, the question is should the Corporate Laws be modified to ensure the quality of directors appointed?

2.     Fictitious Addresses of Companies

The second issue is that a number of group companies of PPSL are not operating from the addresses given to the Registrar of Companies. IT department visited the addresses in Mumbai including Damji Shamji Trade Centre at Vidyavihar (West), Dube Chawl at Andheri Kurla Road, two locations at Fort and Gupta Compound at Thane.

Further, as per Times of India – “four shareholding companies — Seven-Eleven Sales and Marketing Pvt Ltd, Ashwami Sales and Marketing Pvt, Nivita Trades Pvt Ltd and Rigma Fintrade Pvt Ltd — were shown as operating from the Vidyavihar office. Interestingly, at least three of these offices had earlier shown a room at Dube Chawl at the Andheri Kurla Road as their address. TOI’s investigation had found that the offices never existed in the chawl.

TOI had earlier reported that some two dozen companies had unverifiable addresses.”

As per the Companies Law while getting incorporated promoters have to give the correspondence address till its registered office is established. Secondly, the law states:

“(1) A company shall, on and from the fifteenth day of its incorporation and at all times thereafter, have a registered office capable of receiving and acknowledging all communications and notices as may be addressed to it.

(2) The company shall furnish to the Registrar verification of its registered office within a period of thirty days of its incorporation in such manner as may be prescribed.”

Since the companies were incorporated a decade back, the basic question is where the communication was sent from the Registrar of Companies. Secondly, at the time of registration and future years why the Registrar of Companies missed out that a multi-crore business is being run from a chawl . Is that not sufficient to raise alarm bells? How did the auditors of the company approve the corporate governance standard and where did they audit the books?

This would not be a one off case. There would be numerous cases where the registered address is fictitious despite that fact that Company Law prescribes serious penalties for furnishing incorrect information at the time of incorporation. Hence, the question is why are the review and investigation procedures at Registrar of Companies not improved to reduce wrongdoing?

Closing thoughts

The case has highlighted the prevailing malpractices in the corporate world. As the investigations are going on more dirt will be uncovered. However, the government instead of making a Congress – BJP power struggle, should introduce legal processes and procedures to curb these misconducts. The government should modify the new companies bill to address these loopholes. Lastly, the auditors liability for signing off on corporate governance standard of the company should be clearly mentioned when the basic tenants are not met.

References:

I-T heat on companies linked to Nitin Gadkari

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)