Corporate lying and collateral damage
The scrap heap of business history is filled with the debris of companies whose foundations were corroded by fraud and lying
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Ranbaxy did it, so did Volkswagen and BP, and long before them, Enron and WorldCom made a meal of it. In the wake of Mitsubishi Motors Corp.’s admission to manipulating fuel-economy data in its cars to exaggerate mileage numbers, the issue of corporate ethics is once again up for debate. Yet, lying to customers, regulators and shareholders is so rampant among companies across the world that one wonders what the fuss is all about.
In the 46 years since the Clean Air Act came into existence in the US, automobile manufacturers of all hues have regularly been busted for deploying ‘cheat’ devices to beat regulatory demands on emission norms. Over the years, manufacturers including General Motors, Ford and Honda have been forced to pay penalties and recall vehicles after getting caught.
In the oil and gas sector, large companies such as Shell, ExxonMobil and Chevron have had to cough up large fines to resolve allegations of under-reporting the value of natural gas and knowingly underpaying royalties. In May 1999, pharma major Roche paid the then highest ever fine of $500 million for leading a worldwide conspiracy to raise and fix prices for certain vitamins sold in the US and elsewhere.
If ever we worry about how lying and cheating is a problem in India, those names should reassure us that we are in good company. Indeed, the sins of a Satyam or a Saradha in India fade before indiscretions of big banks such as HSBC, Royal Bank of Scotland, JPMorgan Chase and Co., Citigroup Inc., UBS AG and Bank of America, who have coughed up billions of dollars in penalties for manipulating the foreign exchange market.
Frauds, half-lies, price fixing, bribes and kickbacks, name a crime and there’s a blue-chip company that was found guilty of it. ‘Found’ is the operative word here, since like the professional foul in football, it becomes a crime only when it is spotted. Till then, these are just business smarts.
The problem with cheating is that it is easy to criticize it when we are at the receiving end. The emission test cheating hurts us because it implies we were driving vehicles that were more polluting than we believed them to be. What if the same car came with a device that allowed us to slow down to permissible speed limits moments before the cops caught us for over-speeding? Would we consider that cheating?
Our tolerance for the white lies that pass for advertising also fits nicely into this behaviour cycle, with downright lying about reported numbers the logical conclusion of this willing suspension of disbelief. Think of the shampoo that claims to “improve the radiant natural beauty of your hair”, the energy drink that “gives you wings”. Rarely do we challenge such claims, even though most of the time when they are challenged, they are found to be false and misleading.
Companies lie, obviously to protect their carefully nurtured corporate reputations. And of course to enhance performance, much like top sportspersons use steroids to boost results. Those are understandable, though not condonable, reasons. Far more insidious and ultimately much more dangerous are instances of corporate lying that stem from the egos of corporate leaders.
The chief executive officer (CEO) who thunders “I don’t care how but I want 20% growth in sales”, or more blatantly, “to hell with reputation, find me a way to beat the regulator”. This machismo-driven lying is actually far more prevalent within companies than is commonly believed, and it is especially lethal in terms of its consequences.
Indeed, it is the equivalent of Kim Jong-un ordering his generals to get the N-device without worrying about the means. Some reports suggest that at Mitsubishi Motors, fuel-efficiency targets for the mini-vehicles were raised five times at the behest of management.
The problem is such CEOs move on, leaving behind doomed organizations. Satyam’s 40,000 employees spent months in uncertainty over their future after Ramalinga Raju’s confession. Kingfisher Airlines Ltd’s young men and women, among the best at their business, were left high and dry (and unpaid) because Vijay Mallya couldn’t run an airline.
Volkswagen’s CEO Martin Winterkorn resigned from his job within a week of the recall, but if you think that was retribution, spare a thought for the investors who saw the company’s stock fall 17% on the day the recall was announced. And as yet, the billions of dollars in fines the company is likely to have to pay haven’t hit.
The scrap heap of business history is filled with the debris of companies whose foundations were corroded by fraud and lying. Sadly, when the edifice crumbles, it isn’t just the perpetrators of the crimes who suffer the consequences.
Sundeep Khanna is a consulting editor at Mint and oversees the newsroom’s corporate coverage. The Corporate Outsider will look at current issues and trends in the corporate sector every week.