Risks at Christmas Time

It was Christmas yesterday and everybody is in a holiday mood. I don’t think any serious work will be done until New Year. I hope all of you are having a great time and enjoying yourself thoroughly. I am not going to put the regular corporate risks on this weekend post. Holidays and the partying bring different risks altogether. Therefore, here are some interesting posts about it.

The first is from Risk Management Monitor in which Jared Wade is discussing the risk mitigation plans Santa Claus had implemented to deal with the Christmas workload.

Christmas season is celebrated by giving gifts to your loved ones, friends and colleagues. Sometimes the choice is difficult since one doesn’t know the personal tastes. Moreover, you really-really want the receiver to like your gift. So the unique ones are remembered and cherished. Employees of AlixPartners received an unusual gift from their client Cerbus Capital Management’s Remington Arms. AlixPartners employees could buy rifles and shotguns at a 33% discount. The new way of celebrating the spirit of generosity and kindness of Christmas is by gifting arms and ammunition.

The holiday season has one aspect that sometimes has significant repercussions in life. With all the attraction available at parties, it is easy to fall in love, have a fling and find someone oh so irresistible. Some are smitten enough to marry quickly. A few of these married spouses later wonder why they got married in the first place. It is all right for normal folks to make these mistakes. But not the CEO’s. Finally, there is something, which common folks can do wrong and get away with, and CEOs are not so lucky. Here is an article describing the CEO’s divorce as a corporate risk. Why?  The CEOs financials earnings and assets are disclosed in divorce cases. Public and regulators start asking questions on the information available and corporate brand image suffers.

Enjoy the stories below by clicking on the headings.

1.     Managing Risk at the North Pole (via Risk Management Monitor)

It looks like Santa has been busy trying to improve his risk management this year. There are a lot of threats and just like all companies, Santa’s Workshop is not immune to new-age concerns. Given his giant list of who is naughty and who is nice, for example, he fears that a security breach that exposes his billions of person records could bring crippling lawsuits.

Santa Claus has announced the appointment of a Christmas Risk Officer (CRO) as part of a coordinated plan to maintain resilience at Grotto SE, the North Pole based toy manufacturing plant, as well as Claus’ flying sledge-based global distribution facility.

The new CRO, Mrs Santa Claus, is believed to be unhappy about the appointment but accepts that someone has to do it if clients’ confidence in Christmas is to be retained.

Grotto insiders told lloyds.com that the move to appoint a CRO was prompted by the Icelandic ash cloud that caused massive business interruption problems earlier this year, particularly for North European businesses. Sources also say that, in line with other big company CEOs, Santa Claus is also increasingly concerned about linked risks to do with brand and reputation, as well data security.

Hopefully this, as well as other new risk management initiatives from the Clauses, will help ensure you all get your toys, TVs and tubesocks this year.

2.         The Gift of Guns, Courtesy of Cerberus ( via Deal Book New York Times)

For employees of AlixPartners, finding a last-minute holiday gift may have gotten a little easier.

Thanks to some holiday generosity from a client, Cerberus Capital Management’s Remington Arms, staff members at the consultancy can choose from an array of rifles and shotguns — with a 33 percent discount.

In an internal memorandum obtained by DealBook, an AlixPartners director, Ralf Schwarzendahl, informed employees that Remington has opened up its “friends and family” discount program to the firm. (Other companies that work closely with the gun maker have also been extended the offer.)

The attached flier noted that the offer applied to about 91 bolt-action rifles, repeating shotguns and .22 caliber rimfire rifles. Free shipping? Naturally — but, as Mr. Schwarzendahl says, employees still have to pay the federal transfer fee that some dealers charge. The program began on Dec. 8 and runs through Jan. 19.

“AlixPartners takes discretion very seriously and, generally, does not comment on matters of this sort,” said a spokesman for the consulting firm.

3.   Is your divorce a corporate risk? (Via Mail Guardian Online)

There’s only one thing more fascinating than a celebrity marriage, and that’s a celebrity divorce. Particularly when it’s messy, vituperative and, yes, expensive.

But it’s when we think of divorce as a corporate risk that it takes on another whole dimension and provides cautionary tales to give CEOs nightmares. It may be bad enough that the dirty laundry of CEOs is aired in public, but the whole process can cause a chain of complex reactions: damage to company brand; shareholders asking questions, which can ultimately benefit the public but not necessarily the company; and the tricky financial fall-out of some truly convoluted deals.

Not to mention how the hits a company takes may affect the average employee.

Take Elon Musk’s divorce from his wife Justine, for example.

Musk ploughed most of his own money into Tesla, off the back of his sales of Zip2 and PayPal to Compaq and eBay respectively. Tesla has been his ‘baby’ in a certain sense — his electric car venture has consumed him. He netted $48-million in income investments between 2005 and 2008, which were sunk back into Tesla and SpaceX, a space exploration concern. But court filings brought his cash-flow problems to light, revealing he was living off personal loans from friends since October 2009.

Tesla also had cash-flow problems and had borrowed from the United States government (a cool $465-million in low-interest loans) through a Department of Energy loan programme.

At the time, Tesla was looking to go the IPO route — but the Securities and Exchange Commission (SEC) pored over Musk’s personal financial affairs, asking whether Tesla was forthright enough in its filings regarding how his impending divorce would affect the company’s bottom line. Tesla was relying heavily on Musk’s continued financial interest in his entrepreneurial venture, reimbursing him for his private jet flights in return, as well as awarding him 6,7-million stock options in December 2009.
Happy Holidays
I hope you enjoyed the posts this year. I am taking this week off and I will see you all next year.

Wishing all my readers Happy Holidays. I hope all of us get to welcome 2011 with a lot of joy and serenity.

Best Wishes,

Sonia

India’s Economic Growth and Democracy are Negatively Correlated?

India is recognized for two pre-dominant factors. First, it is the most populous democracy in the world. Secondly, India’s high economic growth has positioned it as an emerging global power. India’s major challenges are 25% of the population is below poverty line, corruption is pervasive, politics has religious overtones, terrorism threat is high and infrastructure requires improvement.

The prevailing mindset is that with economic growth the challenges will automatically resolve itself. As per capita income improves, corruption will reduce and politics will be cleaner. The Democracy Index 2010 prepared by The Economic Intelligence Unit gives statistical data that contradicts this assumption. India is ranked 40th in 2010 in the list of 167 countries with an overall score of 7.28. In 2008, India was ranked 35th with an overall score of 7.80. Limited political participation and flawed political culture have contributed to the low scores. This clearly indicates that though India has shown economic growth, as a democracy it has deteriorated. Hence, one cannot assume that there will be any direct correlation between improvement in democracy and economic growth in future.

Considering the world scenario also there is no significant correlation between democracy and economic growth. Authoritarian regimes economic success is amply demonstrated with economic growth of China and high per capita income of oil rich countries in Middle East. Secondly, France, Italy and Greece democracies were downgraded from full democracies in 2008 to flawed democracies in 2010. India therefore cannot presume that its economic success or global positioning will result in a better democracy.

From a business perspective, this result has significant implications. McKinsey Economic Studies Snapshot 2010 report indicates 85% respondents consider India to be a major influencers in global markets in the next five years. Secondly, 69% of the respondents said that government should make it easier for countries to do business in their country. West European countries and United States consider investment in India desirable in comparison to China due to its democratic status. Lack of transparency in government dealings due to authoritarian regime of China inhibits other democratic countries from developing stronger relationships with China. This is a clear advantage for India. This shows that India to maintain its place as an economic power has to focus on improving its democracy.

In nutshell, there are two contradictory positions from this analysis. India has grown economically while its democracy has worsened. However, to support its economic growth in future,  India needs to improve its democratic governance.

What is your opinion? Do you think India can risk its democratic status for economic growth? How would you assess this as a country risk at a macro level?

Impact of Crime on Society

Last Saturday Mark Madoff, the eldest son of Bernard Madoff committed suicide. Mark after bearing the cross of his father’s sins for two years, gave up the burden by hanging himself in his Manhattan apartment. His wife and four children would feel the loss of his life the most. His children are innocent and it is sad to think they will be now fatherless.

Bernard Madoff while conducting the massive Ponzi scheme fraud would have never thought that he and his family would one day pay such a heavy price. As most humans do, he would have been lured by the easy money and confident that he would escape unscathed. He would have not foreseen this end. For his crimes, he has a 150 years prison sentence. One son committed suicide because of his crimes.  He was unable to attend his own son’s funeral. His grandchildren lost their father at such a young age. Now he might be contemplating whether it was worth it. Would it have been better if he had restrained his greed and lived a simpler life?

Human beings have a tendency of not learning any lessons from other person’s life experiences. The lure of glitz, glamour and money has destroyed many lives. However, people still pursue it heedlessly. Some rationalize their desire to commit crime for the sake of greed. The end becomes more important than the means. This attitude leads a person to live a dangerous and risky life. The end is generally tragic, as the person involved does not see reality early enough to restrain and correct actions.

With a case like Bernard Madoff, one would think that people would think twice about crime. Unfortunately, that is not the case. Here are three posts of this week. The first from Task Force Financial Integrity & Economic Development is a money-laundering incident in Vatican Bank in Italy. The investigators suspect clergy of acting as front for corrupt businessperson and Mafia.

The second post covers “10 Great Moment of Corporate Malfeasance”. I consider it 10 dishonorable moments. Read them it gives a different perspective of business altogether. The last is a video advertisement of a book on financial crime. Watch the video I am not telling you more, except that it is a revelation.  Click on the headings to read the full story.

1.       God’s Bank By Ann Hollingshead (via Task Force Financial Integrity & Economic Development)

On September 21st of this year, Italian financial police seized $30.18 million from a Vatican Bank account at a Rome branch for possible ties to money laundering.  About $26 million of these funds were headed to JP Morgan in Frankfurt and the remainder was going to Banca del Fucino. Later that day investigators announced that the Vatican Bank’s chairman and director general are under investigation for failure to meet Italy’s anti-money laundering laws.  On that day in September, I wrote a blog post about the Institute for Works of Religion, known commonly as Vatican Bank, and its already dirty list of scandals.  This includes the infamous death a man named Roberto Calvi, nicknamed “God’s Banker,” and his connection to the Bank.

On month after the seizure, Holocaust survivors from the former Yugoslavia requested that the European Commission investigate the Vatican Bank for potentially aiding Nazis launder their stolen valuables.  The request follows from a decade-old lawsuit in the U.S., which alleges that—according to a U.S. State Department report—the Vatican Bank “laundered assets stolen from thousands of Jews, gypsies and Serbs killed or captured by the Ustasha, the Nazi-backed regime of wartime Croatia.”  But in December of 2009 a U.S. appeals court in San Francisco dismissed the case because the Vatican Bank has immunity under the 1976 Foreign Service Immunities Act.

The corruption probe has given new hope to these survivors and their case.  The Vatican has called the probe a “misunderstanding.”

Evidence revealed by the prosecution indicates otherwise.  In fact, prosecutors say the Vatican Bank “deliberately flouted anti-laundering laws with the aim of hiding the ownership, destination and origin of the capital.” Their documents also show that some members of the clergy may have acted as fronts for corrupt businessmen and Mafia.  These documents highlight two unreported transactions: one in 2009 that used a false name, and another in 2010 in which the Vatican Bank withdrew $860 million from an Italian bank account, but refused to disclose where the money was destined.

2.     10 Great Moments in Corporate Malfeasance by Josh Clark (via howstuffworks)

Swiss pharmaceutical maker Roche made Multinational Monitor’s “10 Worst Corporations of 2008” list because of a statement made by one of its executives regarding the company’s HIV drug Fuzeon.

Roche made $266 million from worldwide sales of the drug and had created a firm sales price of $25,000 for a year’s supply

Typically, drugs — especially life-saving ones — are sold around the world on a sliding scale, with developing countries paying less than industrialized nations, which pay the highest prices. Roche bucked this trend with its global price for Fuzeon.

When South Korea’s Ministry of Health, Welfare and Family Affairs valued a year’s supply of Fuzeon at $18,000 — essentially setting the limit Roche could charge for the drug within the country’s borders — Roche balked and refused to sell the drug there any longer. Because of the lack of alternative drugs, the company effectively withdrew treatment for South Korea’s HIV patients, despite the fact that the company still would’ve realized a profit from sales, even at the $18,000 price limit.

When the decision was challenged, the head of Roche’s Korea division reportedly said, “We are not in the business to save lives, but to make money. Saving lives is not our business”

3.  Money For Nothing

The video isn’t about Dire Straits song. The video advertises the book “Money for Nothing” authored by John Gillespie and David Zweig. The book discusses the financial crises and attributes it to systemic failure in corporate world. I have not read the book but I liked the metaphor used in this advertisement. Check it out.

Amazing isn’t it. The people whom we trust exploit us because of insatiable desire for money. So do you think sometime in future, the corporate leaders will show responsible behavior?

Prime Minister & Finance Minister Speak on Corporate Governance

India Corporate Week commenced on 14 December 2010 with the theme of “sustainable business.” Political leaders taking part in the sessions are making crucial statements on need for businesses to follow ethical practices. This could be because the ruling party has suffered a severe dent in image due to media reports of recent scams and frauds.

PM Manmohan Singh

 

Prime Minister Manmohan Singh inaugurated the India corporate week. In his opening speech, he requested corporate India to adopt ethical business practices, be role models for corporate governance and build a relationship of trust and transparency.   

“We wish to provide a level playing field for private businesses, free from fear or favor. I am aware of the nervousness in some sections of the corporate sector arising out of the powers conferred upon Governmental authorities to tap phones for protecting national security and preventing tax evasion and money laundering. While these powers are needed in the world that we live in, they have to be exercised with utmost care and under well defined rules, procedures and mechanisms so that they are not misused”

—-

“Finally, ethical and responsible behavior needs to become the cornerstone of corporate behavior, as indeed our national outlook. Ethics encompass a wide sphere of actions, economic, social and human, involving the consumer, labor, society at large and the government. Mahatma Gandhi repeatedly used to emphasize the importance of not only good ends but also of the use of fair means to attain them. It is the large companies that have to set the pace in this regard. The rest of the corporate sector will quickly follow as this becomes a national norm.

Our Corporate culture must be attuned to the universally accepted values of good governance – accountability, transparency, responsibility and responsiveness to stake holders. Our corporate endeavors have to be consonant with the demands of our eco system and the expectations of Indian democracy. The economic reforms of the last two decades have opened up many new opportunities. But just as over bearing controls stifle initiative; dogmatic adherence to extreme models of non-regulation can also be disruptive to sustainable growth. Ours is the middle path. We believe we must trust Corporate India as indeed you must trust us”.

Yesterday, Finance minister Pranab Mukherjee spoke at Institute of Company Secretaries in Delhi. He reiterated the need for corporate India to adopt good practices of corporate governance and business ethics. Given below is an excerpt of his speech from The Economic Times of India

FM Pranab Mukherjee

“Ethics and governance are the two brakes which should self-activate before an enterprise succumbs to a vicious cycle of ambition, greed and complacency.”

“Companies need to embed good governance as part of their business strategy to achieve their core objectives.”

The finance minister said there were fine examples in India of companies which have followed corporate governance practices long before they were mandated. He said the debate over corporate governance had moved from the effects of bad governance on minority shareholders to the effect on all stakeholders. “A company needs to balance the interests of different stakeholders,” he said. “The current focus on the role of the boards and their independent directors is the result of corporate failure and corporate governance scandals in many parts of the world,” Mukherjee said.

The minister said the subprime crisis in the US took place despite the stringent Sarbanes Oxley Act, which had set improved standards for all US public company boards, managements and public accounting firms. He said the US experience shows it is difficult to legislate against bad corporate decisions unless all the stakeholders are willing partners.

He said the current recession in the western world was triggered by mispricing of risk which led to excessive leverage and high prices of a wide range of assets.

Government and political leaders are finally acknowledging the need to reduce corruption. They are consistently giving the message to build a healthy corporate culture by adopting sound corporate governance practices. Let us see whether these statements are made to salvage their reputations or some real action follows. The heat is on due to the 2G Telecom Scam and release of Niira Radia tapes. If political leaders wish to clean up their images, the people identified in the scams will have to face judicial charges. The government may not be able to turn the tide in its favor by just making the right speeches. Do you think the political leaders will be able to walk the talk?

Highlights of COSO ERM Survey

COSO recently issued a report on ERM titled “Current State of Enterprise Risk Oversight and Market Perceptions of COSO’s ERM Framework”. The 460 respondents to the survey were mostly from US and are member organizations of COSO.

The results reveal a few useful trends, which depict the status of ERM within organizations. Here are some high level findings from the report.

  • Just 3.4% of the respondents considered their organization’s ERM process as very mature. However, 14.5% respondents described the process as very immature. The rest checked the three levels in between. The information shows that risk management in most organizations is far from satisfactory.
  • A little over a quarter (28% ) of the respondents described the current stage of ERM implementation as “systematic, robust and repeatable” within their organization. While majority (60%) stated that risk tracking is informal and 12.5% declared that there is no formal process for risk tracking. The results explain that most of the organizations are still not geared towards formally tracking and addressing risks.
  •  About one-third (36.6%) respondents confirmed that their board had assigned an appropriate level of risk oversight to a board risk committee. In comparison, 52.2% stated that board had not formulated a proper risk oversight committee. However, 48% respondents mentioned that board had assigned risk oversight responsibility to a senior executive. The results indicate that more than half the boards have not established formal risk oversight committees and board members prefer assigning the risk management responsibility to a single senior person.
  • A little less than half the respondents (44.8% ) stated that management regularly reported top risks to board.  In contrast, 37.3% acknowledged that management reports minimal or nil risks to the board on a scheduled or regular basis. The data illustrates that a significant percentage of senior management has limited access to information about risks.
  • Nearly one-third (30.1%) respondents agreed to possess good structured processes to identify and manage strategic risks within the organization. In comparison, 44.4% had no or minimal processes to assess strategic risks. This signifies that organizations are still not focusing on determining and mitigating their strategic risks.
  • About a quarter (24.9%) respondents confirmed that management and board regularly monitor a set of key risk indicators. However, 50.3% indicated lack of sufficient monitoring. The data points out that some boards and management are not focused on monitoring risks regularly.

 The results given in the report clearly show that despite the downturn in the US economy, some organizations have not learnt much from the financial crises in respect to risk management. A significant percentage of organizations lack focus in risk management and the some boards do not consider it a priority.

To read the full report, click here (PDF). Welcome your views on it.

Central Vigilance Commission Launches Project VIGEYE

Yesterday on International Anti- Corruption Day, Central Vigilance Commission (CVC) in New Delhi organized a seminar on “Empowering Citizens to Combat Corruption”. Former Central Vigilance Commissioner Mr. N. Mittal launched a user-friendly portal, which enables public to file complaints of corruption. Public can expose corruption activity by uploading audio, videos and files on this portal. You can access the portal through CVC’s website cvc.nic.in   

 The seminar included discussions on 1) engaging public in fighting corruption; 2) obtaining commitment of corporate sector to adopt higher level of business ethics; and 3) modernize vigilance framework to ensure improved compliance.

 Considering that, the present Central Vigilance Commissioner Mr. P. J. Thomas has an ongoing corruption charge public maybe skeptical regarding these initiatives.  Supreme Court has questioned his appointment as CVC Head, as his integrity is debatable. He is expected to reply on why he should be considered a man of impeccable integrity to lead CVC while he is being investigated.

My view is that the corruption has as cancer crept throughout the Indian society. Any initiative to curb it is a step in the right direction. Below are few paragraphs, which I am copying from the document “Battling India’s malaise of Corruption” from CVC site. These paragraphs are from an address to India CEO Forum. The numbering of the prargraphs is as per the document.

1.      There is no denying the fact that there is widespread corruption in India. Petty corruption which affects the basic rights and services of the common man is highly rampant besides the grand corruption scandals which break out every now and then. A report on bribery in India published by Trace International in January,09 states that :

  •  91% of the bribes were demanded by govt. officials.
  • 77% of the bribes demanded were for avoiding harm rather than to gain any advantage.
  • Of these 51% were for timely delivery of services to which the individual was already entitled. Example, clearing customs or getting a  telephone connection

4.       Various attempts have been made to indicate the impact of corruption in quantitative terms. Some estimates show that govt. loses about Rs. 2 lakh crores annually due to tax evasion while about Rs. 40,000 crores is lost due to delay in projects. Transmission and distribution losses in the Power Sector are estimated to be about 50%, out of which about 30% is attributed to theft in connivance with the Electricity Boards employees.

According to one estimate if corruption was not there, the Public Sector Enterprises would have improved their profit margin by almost 20%. According to a corruption economist (Mauro) if corruption in India is reduced to the level of the Scandinavian countries, then investment would rise by 12% annually and GDP would grow at an additional 1.5%.

5.         The important causes of corruption in India are poor regulatory framework, exclusivist process of decision making aggravated by discretion and official secrecy, rigid bureaucratic structures and processes; and absence of effective internal control mechanism. Social acceptability and tolerance for corruption and absence of a formal system of inculcating the values of ethics and integrity further propagates corruption.

11.       Anti-corruption efforts in India have been largely focused on the Public Sector which is called the “demand side” in the parlance of corruption economics. The private sector which forms the “supply side”, which actually pays the bribes, has been largely ignored. The supply side theories often put the onus of fighting corruption on the private sector. It states that firms pay bribes primarily for overcoming their shortcomings in terms of – poor quality of their product/service, high price of their product or to create a market for their goods which otherwise are not in demand. Thus they pay bribe to stay in competition despite these handicaps or to avoid true and fair competition. Corruption is the anti-thesis of a free, fair, competitive and efficient market, as it distorts the objectivity, transparency and fairplay in the market. It may therefore be argued that business entities are obliged to maintain integrity in order to maintain the efficiency and sanctity of the market. It would be self destructive to distort the very market on which they are dependent for their existence. Therefore the theory X of corruption economics advocates that given an opportunity and if the fears of the private sector are allayed, they will at all cost stand up against corruption. It is this thinking that has given rise to instruments like Code of Conduct and Integrity Pact through which we try to involve the private sector in fighting corruption.

The above-mentioned paragraphs highlight the problems due to corruption. India will gain many advantages if it is able to remove corruption from society. I know this appears somewhat preachy, but let us take some personal ownership for removing corruption from our life.

What do you say, worth your time?

International Anti-Corruption Day – Way Ahead for India

This may come as a surprise to some that today it is “International Anti-Corruption Day.” With the prevailing corruption across the world, now the status of society is so pathetic that we need to have a day remind us to follow ethical practices.

One of India’s biggest problems is the high-level corruption in the society.  The Corruption Perception Index 2010 issued by Transparency International ranked India 87th of the 178 countries listed. The score is 3.3 which comes under highly corrupt countries. The problem is systemic and government alone cannot address it. The Indian public, business and government have equally important roles to play to remove corruption in India. Expecting one sector to hold the bastion while others bring it down will not help India get rid of this disease. Each person can take a few steps to remove corruption. Below are ideas for eradicating corruption in India.

1. Society : Build a morally conscious society

In India, corruption is at grass root level. Each member of the society is either paying or accepting bribes. The bribes are normally paid and received for doing regular work, not out of turn favors. . People pay bribes for fulfilling day-to-day needs. A citizen may need to pay a bribe for a water or electricity connection or school admission for their 4-year-old child. This clearly indicates that the malice is ruining the society. Indians have developed an attitude “chalta hai” or “what to do, it happens”. This level of apathy dangerously destroys the moral conscience of the society. As such, all citizens need to pull their weight and do their bit to improve the society. Here are some actions that everyone can commit to:

  • Continuously educate children and adults on morals and ethics. Developing a moral conscience is equally important as staying physically fit and mentally agile.
  • Refuse to pay bribes or accept bribes for any jobs. Report on people who are asking for bribes in various forums to damage their reputations and expose their wrong doings.
  • Support the people who are raising their voice against crime and corruption. Do not stay silent as in such cases silence amounts to supporting the crime.
  • Pay personal taxes and fulfill all your legal obligations. Do not beef up your expense recovery statements or fudge your business accounts to pay fewer taxes.
  • Last but not least, understand the true meaning of your religious texts. All religions preach about leading an ethical and moral life. Practice the wisdom given in the religious texts instead of just following rituals.

2. Government : Clean up the government

The spate of recent scams have exposed the high-level corruption in government. The public is disillusioned with the government. Politicians and senior bureaucrats have grabbed headlines for the wrong reasons. Military, judiciary, police and media have come in the limelight for following unethical practices. India to transition from a developing country to a global economic super power needs to clean up the corruption in government departments. A few suggestions for removing corruption at government level are:

  • Issue and implement whistleblower act for protecting whistleblowers. As seen last year, eleven whistleblowers lost their life for following a high moral ground. The police failed to protect them even when orders were given for 24-hour surveillance and security. Considering the events Indian cabinet cleared a bill to protect whistleblowers. The proposed legislation – “Public Interest Disclosure and Protection to Persons Making The Disclosure Bill, 2010” authorizes Central Vigilance Commission to punish those who disclose whistleblower’s identity. However, this is insufficient and stricter norms should be implemented to protect whistleblowers who disclose information of government and private companies’ wrong doings.
  • Issue and implement a prevention of bribery act which encompasses government, public sector and private sector. The Prevention of Corruption Act is not applicable to private sector, hence this allows corrupt officials to transfer bribe money in private enterprises.
  • Reduce corruption in judiciary and law enforcement agencies. Ensure that those suspected of involvement in corrupt dealings receive a swift fair trail. Presently, these cases drag for over a decade while the officer continues to receive promotions in his/her job.
  • The report from Global Financial Integrity states that Indians have stashed away over US$ 462 billion in foreign country bank accounts. Some estimate that the figure is nearly a trillion dollars. Government should ensure this money is returned to India and appropriately taxed and/ or confiscated.
  • Political leaders who have pending criminal cases should be barred from standing in elections. India is one of the few countries which allows a political leader with a murder and rape charge to represent the community and hold a position in the parliament. This sends an extremely negative message to the Indian public and governments of other countries.

3. Business : Adopt ethical business practices

With liberalization of economic policies in 1990’s India’s private sector witnessed accelerated growth. India today owes its global position to private sector enterprises that took the lead to compete in the global market. However, with economic growth the corruption level increased. As stated in the Global Financial Integrity report, illegal transfer of funds to foreign banks increased after liberalization.

The Satyam fraud indicated that one of the leaders in ITES sector compromised business ethics. Recent micro-finance industry scandal showed that the companies are adopting unethical practices for recovery of loans from customers. Presently, the airlines industry is in news for charging astronomical prices to customers. These incidents show that some Indian companies are pursuing profits without adhering to business ethics and fulfilling their corporate social responsibility. The financial crises in US showed that pursuing profits without evaluating risks and being socially responsible could cause significant damage to the country. India cannot afford to make the same mistakes. Here are a few suggestions which private sector enterprises should adopt to remove corruption:

  • Indian institutes that have responsibility for maintaining adherence to ethical business practices should walk the talk. For example, Institute of Chartered Accountants of India and Stock Exchange Board of India should take tough stance on ethical issues to ensure compliance from companies. For instance, Kroll Global Fraud report 2010 indicates that while foreign direct investment in India is increasing, corruption remains at a high level. This sends an incorrect message to foreign investors, hence measures should be put in place to curb it.
  • Finance and audit professionals should follow their code of conduct in true spirit. They should highlight to appropriate authorities all cases where the senior management suggests to them to hide frauds and/or prepare false financial statements. Kroll Global Fraud Report 2010 states that 88% of the companies surveyed suffered at least one fraud and in 48%, perpetrators were their employees.
  • Empower audit committees and risk committees to take a more active role in business strategy and decisions. Encourage an environment of accepting audit observations even if contrary to business heads views and objectives.
  • Establish and implement a code of business ethics with clear policies regarding accepting or giving bribes. Secondly, add whistle-blower hotlines and policies to protect employees from retaliation. Investigate the cases and take strict action for non-adherence to policies. Empower the ethics department to drive and build an ethical organization culture.
  • Organizations should focus on fulfilling corporate social responsibility. They long-term benefit to society and stakeholders, including customers. A happy customer is a repeat customer, and will continuously add to profits. If a customer feels exploited or society questions an organization’s integrity, there will be negative impact on the organization

The reason corruption is so high in India is because Indian public adulates personalities on the basis of wealth without questioning the source of obtaining wealth. As people do not suffer any social or legal penalties for acquiring wealth by wrong means, corruption continues to be unabated. The apathy of Indian public has resulted in such a dismal situation.

Indians need to change their attitude towards corruption. Eradicating corruption is a battle worth fighting, as each Indian citizen will benefit from it. So let us join hands and collectively fight this battle. This is not an exhaustive list, however does enable us to take a few steps towards removing corruption.

Share your stories here about the incidents you experienced and the actions you took to remove corruption.

Tata Nano’s fire incidents – Do they raise question on business ethics?

Tata Nano sales figures dropped in November 2010. On comparing  year on year data, sales in September 2010 were 61% higher in respect to last year. In November, sales were 85% less when compared to last year. In August 2010 a Tata Nano car caught fire again. This was the sixth incident since launch in March 2009. The August incident occurred three months after a company investigation declared the car “absolutely safe”. These incidents have raised concerns amongst customers about the safety of the car. Let us study various aspects of this case in respect to business ethics and corporate governance.

The first aspect is regarding quality of goods sold. The Sales of Good Act, Section 16 covering “Implied condition as to quality or fitness” states that when goods are brought from a seller by specifying  a product description there is an implied condition that the goods will be of merchantable quality. That is, if a new car is bought, the buyer is relying on the seller’s judgment (manufacturer or in a car dealership store) that the car will be safe to drive. In this case, the buyer does not have to personally check the engine of the car to assess its durability and safety. This is a condition for the buyer to enter into a contract to purchase the car.

Tata Nano

In Tata Nano’s case, the merchantable quality clause is debatable although the company is stating the car is safe.  On 10 November 2010, Tata Motors Company (manufactures of Tata Nano) released a press statement “Tata Motors reconfirms robustness of Tata Nano design.” The first three paragraphs from the statement are as follows:

   
“Basis some media reports on the Nano recall, we would like to clarify that Tata Motors is not recalling Nanos. We would like to state again, as we had done in May 2010, that the Tata Nano is a safe car with a robust design, state-of-the-art components and built with an uncompromising attention to quality in all aspects. This has been re-established through a second analysis, conducted during the months of September and October 2010. Customers can rest assured that there are no generic defects in the Tata Nano.

Besides, our customer satisfaction studies with current Tata Nano owners indicate that about 85% are satisfied or very satisfied with the car, because of it being ‘small yet spacious’, its performance, maneuverability, durability, low operating cost and safety. Some owners have taken their Nanos on countrywide trips or to altitudes like Khardungla, the world’s highest motorable road. This adequately corroborates the Tata Nano’s reliability and safety, as was seen during the validation of the car with about 300 prototypes which covered more than 2 million km of safe operation before launch.

The investigation, by a team of internal and international experts, has once again concluded that the reasons for the incidents in few Tata Nano cars are specific to the cars which had such incidents. We have noticed instances of additional foreign electrical equipment having been installed or foreign material left on the exhaust system. It is also our belief that as we penetrate deeper, the Tata Nano will be bought increasingly by users in the hinterlands not fully familiar to cars.

As stated above, the reason attributed for the incidents is foreign material left on the exhaust system or installation of foreign electrical equipment. The company is denying that there is any failure of design. There is no way one can assess whether this is an accurate assessment or not.

My reasoning is simple, why are these incidents not occurring in other small cars. Maruti 800, Maruti Alto, Santro and Tata Indica are other cars in the small car market segment.  I have not heard any similar case though these cars have been longer in the market.  On a hypothetical basis is it ethical for a company to deny a situation which may exist that may result in risk to a customer’s life?  If another incident occurs will this not raise questions on corporate governance of the company?

Therefore, let us analyze the corporate governance and code of conduct of the company. The first paragraph of Company’s philosophy on corporate governance” as specified in its Corporate Governance report is given below:

As part of the Tata group, the Company’s philosophy on Corporate Governance is founded upon a rich legacy of fair, ethical and transparent governance practices, many of which were in place even before they were mandated by adopting highest standards of professionalism, honesty, integrity and ethical behavior. As a global organization the Corporate Governance practices followed by the Company and its subsidiaries are compatible with international standards and best practices. Through the Governance mechanism in the Company, the Board along with its Committees undertakes its fiduciary responsibilities to all its stakeholders by ensuring transparency fairplay and independence in its decision-making.

 The key words in the above paragraph are “ethical, transparent, integrity, fair, honesty and professionalism”. My question is do the actions of the company in respect to these incidents reflect the company’s commitment to walk the talk?

The substantial drop in the sales figures indicates that the customers may be unwilling to buy Tata Motors version of truth. In your view what should Tata Motors do to regain the trust of the customers? Here are two options to consider:

  • Do you think it is a good policy for an organization to acknowledge its mistakes and rectify them?
  • Is it possible that organizations fear that if mistakes are publicly accepted, the customers will legally sue the organization?

 Invite you to share your opinion here.

High Drama Surrounds Information Leaks

This week leaks of confidential information got the world’s attention. US faced the damaging consequences of WikiLeaks and India heard the controversial Radia tapes.

Senior political leaders world over were embarrassed by the derogatory terms US officials used to describe them in the cables. Some reacted angrily to defend their image. A few strong international relationships are now on a rocky path. Time will tell whether they will be able to sustain the relationship in this turmoil or end up warring with each other. Meanwhile US government is attempting damage control by pressurizing Julian Assange and related parties to close the website.

High drama is surrounding the tapes transcripts leaked in India of Nira Radia’s conversations. Prominent personalities in politics, corporate world and media are facing the heat. Allegations are doing the rounds for lobbying, corruption and frauds. Public is now skeptical about their integrity and leadership.

The question which comes up is – are these leaks good for the society? Is this benefitting society in the long run or is this just another attention seeking method and will pass away when bigger news breaks occur.

In this post, I am putting divergent views of the benefits of the leaks. The first post – “Julian Assange and the Computer Conspiracy; To destroy this invisible government” from zunguzungu blog highlights the benefits of the leaks as it frees citizens from authoritarian leadership. The post gives an excellent intellectual argument in favor of leaks.

The second post- “The Nira Radia Tapes: Making the Wrong Call?” from Disbursed Meditations, Nandini Krishnan’s Blog, is a humorous take on the plight of prominent leaders. With emails and tapes being leaked, and frequency of sting operations increasing, the working style of corrupt officials is severely impacted. How pray are they going to function now?

In the third section, I have put two videos of Barka Dutt. In the first video, she is clarifying her role in Radia tapes leaks. In the second tape, she is discussing WikiLeaks expose.

The question is will these leaks ensure better governance, force leaders to maintain integrity and reduce corruption? Are these in public interest? Read below and think about it. Click on the headings to read the full post.

1.     Julian Assange and the Computer Conspiracy; “To destroy this invisible government” (via zunguzungu)

“To radically shift regime behavior we must think clearly and boldly for if we have learned anything, it is that regimes do not want to be changed. We must think beyond those who have gone before us, and discover technological changes that embolden us with ways to act in which our forebears could not. Firstly we must understand what aspect of government or neocorporatist behavior we wish to change or remove. Secondly we must develop a way of thinking about this behavior that is strong enough carry us through the mire of politically distorted language, and into a position of clarity. Finally must use these insights to inspire within us and others a course of ennobling, and effective action.”

Julian Assange, “State and Terrorist Conspiracies”

The piece of writing (via) which that quote introduces is intellectually substantial, but not all that difficult to read, so you might as well take a look at it yourself. Most of the news media seems to be losing their minds over Wikileaks without actually reading these essays, even though he describes the function and aims of an organization like Wikileaks in pretty straightforward terms. But, to summarize, he begins by describing a state like the US as essentially an authoritarian conspiracy, and then reasons that the practical strategy for combating that conspiracy is to degrade its ability to conspire, to hinder its ability to “think” as a conspiratorial mind. The metaphor of a computing network is mostly implicit, but utterly crucial: he seeks to oppose the power of the state by treating it like a computer and tossing sand in its diodes.

He begins by positing that conspiracy and authoritarianism go hand in hand, arguing that since authoritarianism produces resistance to itself — to the extent that its authoritarianism becomes generally known — it can only continue to exist and function by preventing its intentions (the authorship of its authority?) from being generally known. It inevitably becomes, he argues, a conspiracy:

Authoritarian regimes give rise to forces which oppose them by pushing against the individual and collective will to freedom, truth and self realization. Plans which assist authoritarian rule, once discovered, induce resistance. Hence these plans are concealed by successful authoritarian powers. This is enough to define their behavior as conspiratorial.

2.    The Nira Radia Tapes: Making the Wrong Call? (via Disbursed Meditations, Nandini Krishnan’s Blog ) 

So, the question is, how do the movers and shakers of this country keep the corruption rate intact without getting themselves into any trouble? Here are some covers that could provide our politicians with fool-proof meeting ground:

Host more parties: Munching while talking should be a good enough code, the noise would buffer…ahem, diplomatic conversations, entry is by invitation only, and since most politicians will be in attendance, the process of Chinese whispers should be quicker.

How do politicians party when the nation’s in disarray? Well, they could consider not confining their secularity to the Iftar season. With Deepavali, Christmas, Pongal, Bihu,  Holi, chhath puja, Ganesh Chathurthi, Rath Yatra, Dusshehra/ Navaraatri/ Pujo, there are opportunities through the year to host festive dinners.

Buy more IPL teams: It’s hard to conceive of a manner in which the tournament could be further tarnished. With a couple of teams having been booted out, the round-robin pattern could run into problems unless more purchases are made. Chances are that viewership will decrease anyway. A good time to buy, one would say.

3.      Barkha Dutt

The two different faces of Barkha Dutt. Which one is more credible?

If you wish to see India’s high profile editors squabbling like kids, this is a must watch. Though she tried her best, Barkha didn’t manage to come out as an innocent victim of a conspiracy. She did manage to convey that while she loved her job of putting other people in a spot, she herself reacts badly when put in the spot by others.

Watch her interview on WikiLeaks Expose and you will be completely entertained with the contrast in emotional reaction and professional stance.

What do you say, will these leaks improve governance in the society?

If I Were An Auditor

I am dedicating the song “If I were an auditor” to all the auditors who are working overtime and weekends to finalize financial statements for the year ending 31 December 2010. Audit life is tough, involves a whole lot of hard work and sacrifices, including from family and friends. Just remember your better halves and thank them for their continuous support and love. There is another life waiting for you after the year-end.

Have fun and a nice weekend. 🙂

Sonia