Bharti Walmart India – Internal FCPA Investigation – Part I

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

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

1.      Dubious Dealings

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

2.      Joint Venture Liabilities

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

3.      Foreign Direct Investment (FDI) in Retail Industry

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

Closing Thoughts

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

References:

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

Risk Managers Leadership Challenge

British Petroleum was recently fined US $ 4.5 billion for the Deep-water Horizon disaster in April 2010. The highest ever fine till date. The verdict implicated two employees for negligence. Similar news is coming of regulators charging huge fines to banks for their wrong doings. Regulators and law enforcement agencies change in approach sends a clear message – regulators won’t tolerate lax attitude towards risk management. Organizations will have to pay through their nose if caught contravening laws and regulations. Therefore, risk managers have to pull up their socks and gear themselves for tougher times.

It is apparent that risk management approaches and practices that worked until 2011, will not work by 2015. Frequently, risk managers focused on self-preservation by blaming the top management for lack of support. They continued the silo approach and turf wars with other risk management departments at the expense of the organization. They escaped majority of the blame for the debacles, as business was responsible for the risk management decisions. Risk managers role was recommendatory and supportive in nature; hence, the ball was never in their court.

1.     New demands from business heads

In my view, business heads will not allow this type of smooth sailing to risk managers now. They will hold risk managers accountable and responsible for the level of risk within the organization and for failure to prevent risk management disasters. In the current environment, risk managers need to focus on the following.

a)     Build risk awareness across the organization and spread the message to every employee of the organization.

b)     Maintain a risk register that captures internal and external risks at strategic, tactical and operational level.

c)      Ensure decisions are taken after giving due regard to risk versus reward parameters. Organization risks remain within the risk appetite.

d)     Guarantee complete compliance to all legal and regulatory requirements at a global level.

e)     Make risk management departments efficient and effective by managing costs and working with limited resources.

2.     Change in leadership style

Hence, it is crucial for risk managers to change their leadership style and take a deep look on the management practices they have followed until date. I know you would think that isn’t a big issue. I also thought on the same lines before I read Lisa Wiseman’s views on multiplier effect of leadership. She is the author of the book – Multipliers: How the Best Leaders Make Everyone Smarter. I must say it is a revelation. She has divided leaders in two major categories – diminishers and multipliers. Multipliers use and amplify intelligence of others that results in a 2X effect. Unfortunately, diminishers use less than half the intelligence of those around them. Diminishers have the attitude that they are the smartest in the room, and hence do not leverage on the intelligence of others. On the other hand, multipliers create an environment where best thinkers grow. See the chart below to understand the ten sub categories.

3.     Risk managers diminish business teams

I understand that our first reaction is to believe that we are a multiplier leader. However, you will change your opinion on reading the details in the paper or on taking the accidental diminisher quiz (links below). Majority of us are somewhere between the spectrum on multiplier to diminisher. Here are some of the instances where risk managers show diminishing behavior:

a)     As risk managers sometimes we have focused on building large departments to show importance rather than deliver value.  We do so at the expense of other risk management departments who might be requiring the resources desperately.

b)     We use our positions politically to create a fearful environment among business teams. They believe all shortcomings and failures will be reported to senior managers and their jobs will be at risk.

c)      We use our limited knowledge of business operations to give advice to business teams without considering their viewpoints and thoughts on the same.

d)     We roll out risk management plans and initiatives without having any discussions with the business teams and people at lower levels that have to execute the plans.

e)     We believe without our personal involvement business teams cannot manage risks. Instead of training and educating business teams, we get involved in every small aspect.

Closing thoughts

Though, if you read the top five things risk managers have to do at the top of the page, we need to cultivate multiplier behavior patterns. Nothing can be better than using twice the brainpower of a resource at the cost of one. Moreover, the multiplier effect will facilitate using the knowledge residing with business teams. It is only when business teams start thinking about risk management on their own that organizations will avoid disasters.

In the present environment, risk managers have to meet new demands with insufficient resources and knowledge. Do you think becoming a multiplier will address some of the problems? According to you what alternative approaches should be followed?

References

  1. Multipliers: How the Best Leaders Make Everyone Smarter Management Forum Series presentation by Liz Wiseman Synopsis by Rod Cox
  2. Accidental diminisher quiz

Ruminations on Festival of Lights

Indians are in a festive mood celebrating Diwali, the festival of lights symbolising victory of good over evil. It is fascinating that in every religion, light symbolizes good and darkness signifies evil. But without darkness can goodness prevail in humanity? In my view, the darkest hours of our life sensitizes us to our deepest subconscious needs, desires, strengths, weaknesses and negative traits. We even notice the external environment entirely differently. For instance, switch off all the lights in your apartment. In five minutes, you will start noticing the smallest of sounds within and outside the apartment. Darkness heightens all our senses. Then why don’t we celebrate darkness or the darkest period of our life?

During Diwali, Hindu’s celebrate victory of Lord Ram typifying goodness, and defeat of Ravan, the embodiment of evil. However, if you read the fine print of Hindu mythology, Ravan wasn’t evil. As per one version of the mythology, Ravan and his brother Kumbhkaran were Lord Vishnu’s gatekeepers. Lord Ram was Lord Vishnu’s avatar. The story goes that Sanatha Kumara monks cursed Ravan and Kumbhkaran, when the two brothers mistakenly refused entry to the monks thinking they were children. As punishment, they had a choice between being born seven times as normal mortals and devotees of Lord Vishnu or three times as powerful people but enemies of Lord Vishnu. They chose the latter, to be back with Lord Vishnu at the earliest. If one relies on this story, then the difference between good and evil disappears. I end up asking the same question to myself – do we simplify distinctions between good and evil, to feel good about ourselves?

Alternatively, as on Diwali we welcome Goddess Lakshmi, (Goddess of Wealth), do we celebrate to get material possessions? From childhood, society has trained us to celebrate success and shun failure. Though, no one has succeeded without experiencing a huge amount of failure. Even Thomas Edison, the inventor of light bulbs failed repeatedly. Had he not gained strength and insight from his over 10,000 failed attempts, he would have never succeeded. Do we have a clear understanding of what is failure? Or do we just rely on stereotypical image that money, power, material possessions, trophies etc. signify a win and everything else is failure.

Hence, we pray to our respective Gods not to fail us. In my view, God has mapped a path for each human being for progressive growth of their souls. Each obstacle in life is for the spirit and soul to flourish. Thus, accept with serenity all the negatives in life – death, sickness, breakdown of relationships etc.. Why not look upon them as an opportunity to learn more about ourselves. We can take a leaf from Arthur Ashe’s, the first African American grand slam winner. On contacting HIV from blood transfusion he said – ‘If I were to say, ‘God, why me?’ about the bad things, then I should have said, ‘God, why me?’ about the good things that happened in my life.”

We celebrate Diwali on Amawasya, a pitch-dark night without a moon. In a way, we celebrate nature’s darkest period.  I have shared my musings on the subject with you. Now I am going to celebrate Diwali with all of you.

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.

Kingfisher Airlines – Ethical Dilemmas of Mr. Vijay Mallya

Kingfisher Airlines was grounded last month. The agitating employees refused to come to work from 1 October 2012. Employees had been peacefully protesting earlier for payment of their salaries from February 2012. Management ignored the pleas and the plight of the employees increased. On 4 October 2012, Kingfisher’s store manager Manas Chakravarti’s wife Sushmita Chakravarti committed suicide. In her suicide note she stated – “My husband works with Kingfisher where they have not paid him salary for the last six months. We are in acute financial crisis and so I am committing suicide”.

The employees led a candlelight vigil in support of the grieving family. However, there was not even a word spoken about it by Vijay Mallya, the chairperson of the company on such a tragic incident. He did not mention anything on his twitter account until 23 October, and most of the month he was not available in India. Media reported that he flew out of the country in his personal Airbus. Check out the following tweets.

Vijay Mallya ‏@TheVijayMallya – 23 October 2012.

I travel 24×7 where my multiple work responsibilities take me. Sections of media call me an absconder because I don’t talk to them.

His Formula One team reportedly participated in Korea and he attended the race. He then attended the Indian Grand Prix and his twitter comments are below. They caused a storm in the twitter world.

Vijay Mallya ‏@TheVijayMallya – 26 October 2012.

 I have learnt the hard way that in India wealth should not be displayed. Better to be a multi billionaire politician dressed in Khadi

 Vijay Mallya ‏@TheVijayMallya – 27 October 2012.

Kingfisher is probably the most written about Airline in the World thanks to Indian media. Top of mind brand recall must be at its highest.

The comments don’t show true leadership qualities. He appears to be completely disengaged from the situation his employees are facing. A little bit of humility and sharing of pain would have gone a long way in appeasing the hurt feelings of his employees. Though he is not legally liable to pay salaries to employees from his personal wealth, he has to take moral responsibility for his actions that have caused so much tragedy in the lives of his employees. Some personal austerity would have sent a different message to the world. However, in an interview Vijay Mallya made the following statement and refused to take responsibility for the financial mess.

“In a Plc where is one man, who might be the chairman, responsible for the finances of the entire Plc? And what has it got to do with all my other businesses? I have built up and run the largest spirits company in the world in this country.”

Kingfisher’s net-worth was eroded last year. The banks have refused to grant further loans since the outstanding amount is Rs. 7000 crore (USD 1299 million). Accumulated losses amount to Rs. 6000 crore (USD 1114 million). You can read the details in my earlier post (link here).  Since March 2012, Directorate General of Civil Aviation has been asking for a revival plan to resolve the crises. However, Kingfisher management took no concrete actions. On 20 October 2012, the Directorate General suspended the license of Kingfisher Airlines.

The situation is that the bank, investors and employees are the biggest losers. Vijay Mallya’s personal shareholdings in the company is just 1.87%.  His group companies – United Breweries (Holdings) Limited, Kingfisher Finvest India Limited and UB Overseas Limited – hold 33.97%. Individual investors hold around 33%. Banks and other institutions hold the balance shares. Hence, Mr. Mallya will personally not be liable and may not suffer extensive damage to his personal wealth.

Though, recently Forbes has dropped him from Billionaire list and stated that now he is only worth USD 800 million now. He made a satirical comment on it

Vijay Mallya ‏@TheVijayMallya -26 October

Thanks to the Almighty that Forbes has removed me from the so called Billionaires list. Less jealousy, less frenzy and wrongful attacks.

 Closing thoughts

Mr. Mallya is blaming the media for inaccurately bashing Kingfisher Airlines. It is a strange reaction considering the dire state of the company. He has abdicated his professional responsibilities as leader of the group. He is also not taking any moral responsibility for the situation and the damage. I am amazed at his brand management team. The Kingfisher brand was worth a whole lot. Due to his personal negative reactions and his son’s Siddharth Mallya being oblivious to the churning controversies, the public is completely outraged. Besides the moral disconnection, there doesn’t appear to be any control on communications and brand management.

According to you what should be the appropriate reaction for the Chairman of a company in such a situation?

References

Vijay Mallya flies in to attend Indian GP, blasts media for Kingfisher coverage – Economic Times