CASE 1: Case Study on Business Ethics: KFC in India

Abstract:
The case highlights the ethical issues involved in Kentucky Fried Chicken's (KFC) business operations in India. KFC entered India in 1995 and has been in midst of controversies since then. The regulatory authorities found that KFC's chickens did not adhere to the Prevention of Food Adulteration Act, 1954. Chickens contained nearly three times more monosodium glutamate (popularly known as MSG, a flavor enhancing ingredient) as allowed by the Act. Since the late 1990s, KFC faced severe protests by People for Ethical Treatment of Animals (PETA), an animal rights protection organization. PETA accused KFC of cruelty towards chickens and released a video tape showing the ill-treatment of birds in KFC's poultry farms. However, undeterred by the protests by PETA and other animal rights organizations, KFC planned a massive expansion program in India.

Issues:
Understand the significance of cultural, economic, regulatory and ecological issues while establishing business in a foreign country Appreciate the need for protecting animal rights in developed and developing countries like India Understand the importance of ethics in doing business Examine the reasons for protests of PETA Identify solutions for KFC's problems in India "Each bird whom KFC puts into a box or a bucket had a miserable life and a frightening death. People would be shocked to see our footage of a KFC supplier's employee who walks through a barn, carelessly lighting lamps and letting flames fall on the terrified birds. The air inside these filthy barns reeks of ammonia fumes, making it difficult for the birds to breathe. No one with a grain of compassion should set foot in KFC." - Ingrid Newkirk, Director, PETA. "The chicken they serve is full of chemicals, and the birds are given hormones, antibiotics and arsenic chemicals to fatten them quickly." - Nanjundaswamy.

Protest against KFC:

On August 20, 2003, a five-foot tall chicken complete with an ensemble of feathers and beak hobbled on a pair of crutches outside Kentucky Fried Chicken's (KFC) Indian outlet in Bangalore. The chicken was brought by PETA (People for Ethical Treatment of Animals) activists, who carried placards reading, "Quit India" and "Stop Playing Fowl" (a pun on "Foul"). The chicken was placed at the Centre and a peaceful protest was held against the alleged ill treatment of birds in KFC's poultry farms. Media persons were called to give the demonstration a wide coverage (Refer Exhibit I for a visual on the protest by PETA activists).

Explaining the rationale behind the protest, Bijal Vachcharajani, special projects coordinator of PETA, said, "Ours is the land of Gandhi. Just as 61 years back our leaders gave a call for colonizers to quit India, we too are saying we will not tolerate cruel multinationals." On the 61st anniversary of the 'Quit India' movement, PETA India wrote a letter to the Managing Director of Tricon Restaurant International, the parent company of KFC, asking them to close their sole KFC outlet in India.

Background Note
KFC was founded by Harland Sanders (Sanders) in the early 1930s, when he started cooking and serving food for hungry travellers who stopped by his service station in Corbin, Kentucky, US. He did not own a restaurant then, but served people on his own dining table in the living quarters of his service station. His chicken delicacies became popular and people started coming for food. Kentucky Fried Chicken was born. Soon, Sanders moved across the street to a motel-cumrestaurant, later named 'Sanders Court & Cafe,' that seated around 142 people. Over the next nine years, he perfected his secret blend of 11 herbs and spices and the basic cooking technique of chicken. Sanders' fame grew and he was given the title Kentucky Colonel by the state Governor in 1935 for his contribution to the state's cuisine. Sanders' restaurant business witnessed an unexpected halt in the early 1950s, when a new interstate highway was planned bypassing the town of Corbin. His restaurant flourished mainly due to the patronage of highway travellers.

Excerpts KFC's Entry in India:

Foreign fast food companies were allowed to enter India during the early 1990s due to the economic liberalization policy of the Indian Government. KFC was among the first fast food multinationals to enter India. On receiving permission to open 30 new outlets across the country, KFC opened its first fast-food outlet in Bangalore in June 1995. Bangalore was chosen as the launch pad because it had a substantial upper middle class population, with a trend of families eating out. It was considered India's fastest growing metropolis in the 1990s. Apart from Bangalore, PepsiCo planned to open 60 KFC and Pizza Hut outlets in the country in the next seven years. However, KFC got embroiled in various controversies even before it started full- fledged business in India. When the issue of granting permission to multinational food giants to set up business in the country came up for discussion in the Indian parliament, some members from the opposition parties were vocal in their displeasure.

Problems for KFC:

From the very first day of opening its restaurant, KFC faced problems in the form of protests by angry farmers led by the Karnataka Rajya Ryota Sangha (KRRS). The farmers leader, Nanjundaswamy, who led these protests, vehemently condemned KFC's entry into India, saying that it was unethical to promote highly processed 'junk food' in a poor country like India with severe malnutrition problems. Nanjundaswamy expressed concern that the growing number of foreign fast food chains would deplete India's livestock, which would adversely affect its agriculture and the environment. He argued that non-vegetarian fast-food restaurants like KFC would encourage Indian farmers to shift from production of basic crops to more lucrative varieties like animal feed and meat, leaving poorer sections of society with no affordable food. KRRS held a convention on November 01, 1995 to protest the entry of fast food multinationals and the Westernization of local agriculture.

The Aftermath
By late 2003, PETA further intensified its campaign against the cruel treatment meted out to chickens by KFC through protests at regular intervals. Celebrities like Anoushka Shankar, daughter of the legendary sitar maestro Ravi Shankar, directly supported the cause of PETA. Anoushka, a sitarist herself, wrote a letter to the top management of PepsiCo condemning the continued cruelty of KFC in spite of repeated requests of PETA. The organization also had the support of other celebrities like the famous cricket player Anil Kumble (based in Bangalore), popular Indian models like Aditi Govitrikar, the late Nafisa Joseph and John Abraham, who promoted vegetarianism. Film actresses like Raveena Tandon and Ameesha Patel also took up the cause of animal abuse. Undeterred by the continued protests, KFC added three more outlets to its existing one at Bangalore. KFC also announced a major expansion programme for 2005. Sharanita Keswani (Keswani), KFC's Marketing Director, said that as the retail business was poised for a boom in India, they considered it the right time for expansion. Feeling positive about the flourishing malls in all big cities, Keswani revealed that this time KFC planned to have a presence in prime locations or in a mall where turnout would be assured. The company aimed at targeting cosmopolitan cities like Chandigarh, Pune, Kolkata, Chennai and Hyderabad, where mall culture was fast developing. PepsiCo also decided to concentrate on the expansion of KFC since its other brand, "Pizza Hut", had successfully established a strong foothold in India.
Vegetarianism was predominant and was a way of life in India. Many people ate non-vegetarian food only occasionally and avoided it during festivals or religious occasions.

CASE 2: Case Study on Business Ethics: Napster Copyright Infringement Case

Abstract:
Duplicating software for friends, co-workers or even for business has become a widespread practice. All software programs are protected by copyright laws and duplicating them is an offense. How, then, has making illegal copies become such a common and accepted practice in peoples homes and places of work? Part of the answer revolves around the issue that software isnt like some other intellectual property. Intellectual property is that which is developed by someone and is attributable directly to the thinking process. Software is different from a book in that anyone can easily copy it-and an exact replication is achievable. Another reason is related to cultural differences. People dont see copy as stealing. People dont find anything wrong in making a video copy of a hit feature film and selling it or hiring out. People defend their behavior by saying: Everybody does it! I wont get caught! Or no one really loses! The same issue of copyright is involved in the famous Napster case in America. Napster is an online service that allows computer users to share high-quality digital copies (MP3s) of music recordings via the internet. The San Mateo-based company doesnt actually store the recordings on its own computers, but instead provides an index of all the songs available on the computers of members currently logged on to the service. Napster, therefore, functions as a sort of clearing house that members can log on to, search by artist or song title, and identify where songs of their interest are so and download them from another users hard drive. Napster has become one of the most popular sites on the internet, claiming some 15 million users in little more than a year. Indeed, so many students were downloading songs from Napster, that many universities were forced to block the site from their systems in order to regain bandwidth. Napsters service has been almost as controversial as it has been popular. Barely a year after its launch, it was sued by the Recording Industry Association of America (RIAA), which represents major recording companies such as Universal Music, BMG, Sony Music, Warner Music Group, and EMI. The RIAA claimed by allowing users to swap music recordings for free, Napsters service violated copyright laws. It also sought an injunction to stop the downloading of copyrighted songs owned by its members as well as damages for lost revenue. It argued that song swapping via Napster and similar firms has cost the music industry more than $300 million in lost sales. A few months after the RIAA lawsuit was filed, Metallica, a heavy metal band, and rap star Dr.Dre filed separate lawsuits accusing Napster of copyright infringement and racketeering. Lars Ulrich, Metallicas drummer, told a senate committee that Napster users are basically stealing from the band every time they download one of its songs.

The 1998 Digital Millennium Copyright Act (DMCA) grants immunity to Internet Service Providers for the actions of their customers. Napster attorneys argued that the company has broad protection from copyright claims because it functions like a search engine rather than having direct involvement with music swapping. However, according to the legal community, Napster does not take the legal steps required of search engines in dealing with copyright violations. Despite its claim, Napster was found guilty of direct infringement of the RIAAs musical recordings. To date, the service has not been shut down, because doing so could violate the rights of artists who have given Napster permission to trade their music. However, the company was required to block all songs on a list of 5,000 provided by the RIAA.

Questions:
1. Do you believe that there is nothing wrong in copying software, music or a video film? 2. Based on the facts of the Napster case, who do you think should have control over intellectual property- the artists or distributors of their work? How did the legal system answer this question? 3. Copying of software, music and films is very common in India. Is it due to our socioeconomic factor? Discuss. 4. As a manager, what guidelines could you establish to direct your employees behaviors regarding copying software?

CASE 3: A Case Study in Managerial Ethics Success at What Cost?

Abstract:
This case study is about SuperDrugz, a mid-sized pharmaceutical company in India. Initially starting off as an entrepreneurial venture, the company had been put in the hands of a professional management group. The new team strove to cultivate a performance culture through strong results-based controls and weeding out non-performers. However, a whistle-blower brought out into the open serious ethical lapses in the company. Shortly after joining as an Area Manager in the country's North Eastern Region, the person found that the team (including his seniors) was adopting unethical/illegal means to meet the high sales targets. Faced with the dilemma of whether to conform to the team or comply with law, he chose the latter. Now the founder of the company had to put in place mechanisms to ensure that everyone in the company complied with the company's code of ethics and the law of the land.

Issues:
Understand the issue in managerial ethics and challenges in ensuring compliance. Understand the factors that influence ethical behavior. Understand the mechanisms for ethical control and compliance. The chairman of SuperDrugz, Dhirubhai Patel (Patel), was livid. His company was in the news, and for all the wrong reasons. SuperDrugz had grown from a small start-up in 1985 to a mid-sized pharmaceutical company by the year 2000, thanks to Patel's vision and hard work. Though in the initial years it was run like a family business, Patel realized as the company increased in size that it was important for the business to be run by a professional management group. In 2000, he started the process of handing over the day-to-day operations of the company to a team of professional managers. He handpicked each member of the core management team. Since the company started showing sound growth within a few months of the new management team taking over, Patel gradually distanced himself from the day-to-day functioning of the company, opting to play more of a figurehead role. The chairman of SuperDrugz, Dhirubhai Patel (Patel), was livid. His company was in the news, and for all the wrong reasons.

CASE 4: A Case Study in Managerial Ethics

Abstract:
Managers undertake all their activities in the context of defined moral and ethical norms. But the profit motive and the competitiveness fostered in free enterprise economic systems put pressure on managers. Sometimes it is possible to operate in less than ethical ways and still be within the law. This may gain an advantage for a manager. The line between ethical and unethical behavior is not always clear. In this unit we will discuss the several approaches to analyzing ethical and moral issues in organizations.

Levels of Analyses
Managers facing ethical issues must be able to solve moral dilemmas. We must address three issues when faced with such dilemmas. First, ethical responsibility is of concern at three levels of analysis. The systemic level includes the entire environmental relationship to ethical responsiveness. An organization can address the ethical issues in an obstructionist manner, denying wrongdoing, or it can use legal rationalization to defend its actions. An accommodative approach would lead to corrective action after the occurrence of unethical activity. Finally, the organization could adopt a proactive approach and attempt to forestall unethical activities. These illustrate systemic issues which must be addressed. The organizational level must also be considered. An organization relates internally with employees and investors. It also must consider the external constituencies with which it interacts through boundary-spanning activities. Finally, individual behavior is relevant to the issue of managerial ethics. How one chooses to act in given situations becomes the direct manifestation of the social responsibility and managerial responsibility of an organization.

Conceptual Models
The second issue necessary when solving moral dilemmas is a set of conceptual models of ethical reasoning. The literature supplies three basic approaches. The first model of ethical reasoning can be termed the Utilitarian model. It is concerned with potential benefits and harm from any particular action. It judges an act to be morally appropriate if it maximizes net benefits and minimizes overall harms for all parties. Another model of moral reasoning is the Kantian, or basic rights model. It asserts that all people have basic rights which must be respected. Thus, an action is morally correct if it minimizes the violation of the rights of all parties to a given situation. A final model can be described as the enlightened self-interest approach. It combines elements of both of the previous models. The assertion here is that an action is morally correct if it increases the benefits for the interested parties without causing intentional harm to, or unduly violating the rights of others, and only if these benefits offset any resulting harms.

Steps to Resolve Ethical Questions

The final issue of concern in resolving moral dilemmas is the set of steps one take to reach a reasoned, ethical conclusion. The Cooke article presents seven steps which can help lead one to such a conclusion. First, one must become aware of the relevant facts of the situation. Next one must recognize the ethical issues involved. Identifying the primary stakeholders is also necessary. Fourth, generating several alternatives of actions possible must occur. Each of the alternatives must be evaluated in terms of their ethical outcomes. The sixth step involves evaluating the practical constraints surrounding the situation. Finally, the manager must recommend an ethical course of action. It should be noted that this approach is similar to more generalized problem-solving models which we will discuss in later units. For the purpose of this unit of Social Responsibility and Managerial Ethics we will discuss the situations and cases using this approach.

TQM and Managerial Ethics

Managers practicing their profession in a socially responsible fashion must consider TQM. The modern workplace requires the implementation of a TQM philosophy in order to compete in the global environment. An ethical manager will train all levels of employees and empower them with the TQM approach. This requires trust from the manager, and a responsible attitude from the work force. All stakeholders, both primary and secondary, will benefit from a sincere application of the TQM philosophy. We will integrate the issue of Social Responsibility and Managerial Ethics into each unit we study. Students of management should consider these issues in the context of every activity they undertake. When you face contingencies for decision making, you should be sure to recognize those relating to social responsibility and managerial ethics. CASE STUDY Shades of Gray: In response to a newspaper reporter's question about the ethical conduct of managers, a toplevel manager who asked to remain unnamed said: Ethics involves the difference between right and wrong, a black and white distinction. In management we very seldom deal strictly in terms of clear cut black and white distinctions. Most of our decisions are based on subtle shades of gray. We have no choice but to rely on the individual's sense of professionalism. Top management cannot dictate morality. Even if we wanted to we couldn't. People are either moral or immoral. Morality is and always will be a personal concern. If the organization gets tangled up in the area of morality, our primary responsibility of getting the job done will be shortchanged. Today, the unethical competitor has the upper hand. Now don't misunderstand me, I'm not advocating unethical conduct. I'm just saying that it's a fact of life today. One organization can't do much to reverse a social trend.

Questions:
1. What is this manager's operative ethics model? 2. What are your personal feelings about this manager's point of view? Which model do your feelings reflect? 3. What steps would you recommend to this manager for promoting ethical conduct within the organization? 4. How would this manager's approach integrate with TQM?

CASE 5: Case Study on Corporate Governance: UTI Scam

Of all the recent encounters of the Indian public with the much-celebrated forces of the market, the Unit Trusts US-64 debacle is the worst. Its gravity far exceeds the stock market downswing of the mid-1990s, which wiped out Rs. 20,000 crores in savings. The debacle is part of the economic slowdown which has eliminated one million jobs and also burst the information technology (IT) bubble. This has tragically led to suicides by investors. And then suspension of trading in US-64made the hapless investors more dejected at the sinking of this super-safe public sector instrument that had delivered a regular return since 1964. There is a larger lesson in the US-64 debacle for policies towards public savings and public sector undertakings (PSUs). The US-64 crisis is rooted in plain mismanagement. US-64 was launched as a steady income fund. Logically, it should have invested in debt, especially low-risk fixed-income government bonds. Instead, its managers increasingly invested in equities, with high-risk speculative returns. In the late 1980s UTI was politicised with other financial institutions (FIs) such as LIC and GIC, and made to invest in certain favoured scrips. By the mid-1990s, equities exceeded debt in its portfolio. The FIs were also used to boost the market artificially as an endorsement of controversial economic policies. In the past couple of years, UTI made downright imprudent but heavy investments in stocks from Ketan Parekhs favourite K-10 portfolio, such as Himachal Futuristic, Global Tele and DSQ. These technology investments took place despite indications that the technology boom had ended. US-64 lost half its Rs. 30,000 crore portfolio value within a year. UTI sank Rs. 3,400 crores in just six out of a portfolio of 44 scrips. This eroded by 60 percent. Early that year, US-64s net asset value plunged below par (Rs.10). But it was re-purchasing US-64 above Rs. 14! Today, its NAV stands at Rs. 8.30 a massive loss for 13 million unit-holders.It is inconceivable that UTI made these fateful investment decisions on its own. According to insiders, the Finance Ministry substantially influenced them: all major decisions need high-level political approval. Indeed, collusion between the FIs, and shady operators like Harshad Mehta, was central to the Securities Scam of 1992. The Joint Parliamentary Committees report documents this. In recent months, the Finance Ministry became desperate to reverse the postBudget market downturn. UTIs misinvestment now coincided with the global technology meltdown. US-64 crashed. UTI chairman resigned. Although culpable, he was probably a scapegoat too. The Ministry has kept a close watch on UTI, especially since 1999.The US-64 debacle, then, is not just a UTI scam. It is a governance scam involving mismanagement by a government frustrated at the failure of its macroeconomic calculations. This should have ensured the Finance Ministers exit in any democracy which respects parliamentary norms. There are larger lessons in the UTI debacle. If a well-established, and until recently well-managed, institution like UTI cannot safeguard public savings, then we should not allow the most precious of such savings pensions to be put at risk. Such risky investment is banned in many self avowedly capitalist European economies. In India, the argument acquires greater force given the poorly regulated, extremely volatile, stock market where a dozen brokers control 90 percent of trade. Yet, there is a proposal by the Finance Ministry to privatize pensions and provident funds. Basically, the government, deplorably, wants to get rid of its annual pension obligation of Rs. 22,000 crores.

CASE 6: The Tata Group: Integrating Social Responsibility with Corporate Strategy
Abstract:
The Tata group has been credited for aggressively pursuing several corporate social responsibility (CSR) initiatives in India. The case describes the vision and mission of Tata group which places importance on CSR. It then examines how the group's vision is translated into action through the various community development initiatives. The case focuses on issues like, how the Tata group had gone about integrating various CSR initiatives across the group companies, the measures it is adopting for institutionalizing the concept and the various benchmarks adopted. Finally, the case examines how Tata Group is integrating CSR with its business processes in the organization's journey towards business excellence.

Issues:
Corporate Social Responsibility Initiatives of Tata Group "In a free enterprise, the community is not just another stakeholder in business but is in fact the very purpose of its existence." - Jamsetji N. Tata, Founder, Tata Group. "Corporate Social Responsibility should be in the DNA of every organization. Our processes should be aligned so as to benefit the society. If society prospers, so shall the organization..." - Manoj Chakravarti, General Manager - Corporate Affairs and Corporate Head - Social Responsibility, Titan Industries Limited in 2004. Introduction In July 2004, B. Muthuraman, Managing Director, Tata Steel Limited (TISCO),3 announced that in future TISCO would not deal with companies, which do not confirm to the company's Corporate Social Responsibility (CSR) standards. Speaking at the annual general meeting of the Madras Chamber of Commerce and Industry, Muthuraman stated, "We will not either buy from or sell to companies that do not measure up to Tata Steel's social responsibility standards."4 As a global benchmark for CSR and a pioneer of the concept in India, the Tata group has adopted social responsibility as one of its integral values and the group has made concerted efforts to link it with the group's overall strategy for achieving business excellence. Besides undertaking CSR initiatives through its various companies, the Tata group has been actively involved in facilitating the development of this concept in India by setting standards and benchmarks.

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Background Note
Founded by Jamsetji Nusserwanji Tata (JN Tata) in 1868, the Tata group has developed into one of India's largest business conglomerates. Tata Sons, which was established as a trading company by JN Tata in 1868, is the promoter of the Tata group.

Tata Industries, initially established in 1945 as a managing agency for the businesses promoted by Tata Sons, propelled the group's entry into new and high-tech industries during the early 1980s. The Tata group generated total revenues of Rs. 614.34 billion during the year 200304 (Refer Exhibit I for Tata group's financials) through its various companies in seven key industry sectors.5 The group has 80 companies in diverse sectors, and has been moving from product-driven businesses to brand-driven businesses. The group listed its materials, chemicals, energy and engineering products as product-driven while engineering services, automotive, communications and IT, services and consumer goods have been identified as brand-driven businesses. The shift in the focus is also reflected in the contribution of different sectors to group revenues. While the materials sector comprised of the flagship company - TISCO and contributed 19% of the group's total revenues in 2003-04, as much as 24% came from the automotive & engineering sector i.e. Tata Engineering and Locomotive Company Limited (TELCO). Companies like TCS and Tata Tele Services, operating in the IT and telecommunication industry contributed the largest share of 27% in the group's earnings in 2003-04. A pioneer in several areas, the Tata group has consistently followed the path of innovation, growth and development. Tata is credited with pioneering India's steel industry, civil aviation and starting the country's first power plant. Tata was the market leader in several diverse fields - it had the world's largest integrated tea operation, was Asia's largest software exporter, and the world's sixth largest manufacturer of watches (Titan). The guiding mission of the Tata group was stated by JRD Tata in the following words: "No success or achievement in material terms is worthwhile unless it serves the needs or interests of the country and its people." The group has always been recognized as a value-driven organization. The company's values were imbibed from the founder of the group and his successors who took on the leadership of the group. All the individuals who headed Tata institutions emphasized the importance of philanthropy and the utilization of wealth to enhance the quality of public life. The core values espoused by the group included integrity, understanding, excellence, unity and responsibility (Refer Exhibit II for the Core Values of the Tata group). The values of the founders are reflected in the mission statement of the group, which lays great emphasis on CSR. The group's mission statement states, "At the Tata group, our purpose is to improve the quality of life of the communities we serve. We do this through leadership in sectors of national economic significance, to which the group brings a unique set of capabilities...

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Excerpts:
Community Development Initiatives Considered as pioneers in the area of CSR, the Tata group has played an active role in nation building and socio-economic development since the early 1900s. A survey conducted by the website www.indianngos.com revealed that Tatas spent Rs. 1.5 billion on community development and social services during the fiscal 2001-02 - the highest by any corporate house in India. Even when economic conditions were adverse, as in the late 1990s, the financial commitment of the group towards social activities kept on increasing, from Rs 670 million in 1997-98 to Rs 1.36 billion in 1999-2000. From its inception, the Tata group has taken up a number of initiatives for the development of society. A unique feature of the group is that 63 percent of the equity capital of the parent firm - Tata Sons Limited - is held by Tata trusts, which are philanthropic in nature. According to a statement on the Tata group's website (www.tata.com), "The wealth gathered by Jamsetji Tata and his sons in half a century of industrial pioneering formed but a minute fraction of the amount by which they enriched the nation... CSR as a Strategic Initiative There Tata group has long accepted the idea that CSR makes business sense. This was realized by JN Tata way back in 1895, when he stated, "We do not claim to be more unselfish, more generous or more philanthropic than others, but we think we started on sound and straightforward business principles considering the interests of the shareholders, our own and the health and welfare of our employees... the sure foundation of prosperity." Since inception, the Tata group has placed equal importance on maximizing financial returns as on fulfilling its social and environmental responsibilities - popularly known as the triple bottom line. After decades of corporate philanthropy, the efforts of the group in recent years have been directed towards synchronization of the Triple Bottom Line (TBL). Through its TBL initiative, the Tata group aimed at harmonizing environmental factors by reducing the negative impact of its commercial activities and initiating drives encouraging environmentfriendly practices. (Refer Figure I). In order to build social capital in the community, the group has got its senior management involved in social programs, and has encouraged employees to share their skills with others and work with community-based organizations... Institutionalizing CSR JRD Tata, the son of RD Tata, who was a business partner and relative of JN Tata, strongly believed that the CSR initiatives of the Tata group should be institutionalized and it should not be left to individuals to carry them forward. Therefore, suitable amendments were made to the Articles of Association of the major Tata group companies in the 1970s.

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Newly included was an article stating that the "company shall be mindful of its social and moral responsibilities to consumers, employees, shareholders, society and the local community." In another bid to institutionalize the CSR charter, a clause on this was put into the group's 'Code of Conduct.' This clause stated that group companies had to actively assist in improving the quality of life in the communities in which they operated. All the group companies were signatories to this code. CSR was included as one of the key business processes in TISCO. CSR was one of the eight key business processes identified by TISCO's management and considered critical to the success of the company... TBEM - Striving for Business Excellence To ensure that Tata group companies achieved high levels of business excellence, Tata Quality Management Services (TQMS - a division of Tata Sons) has been entrusted with the task of institutionalizing the Tata Business Excellence Model (TBEM). The role of TQMS includes setting up of standards of business excellence using the TBEM framework (Refer Figure III) and assisting group companies in achieving those established standards. The TBEM provides each company with an outline to help it improve business performance and attain higher levels of efficiency. The TBEM is a tool based on the Malcolm Baldridge National Quality Award. It aims to facilitate the understanding of business performance imperatives, manage planning activities and organizational learning, enhance organizational performance capabilities and the delivery of results, recognize excellent performance and identifying and sharing best practices... Recognition The dedicated CSR efforts by various Tata group companies have been globally recognized. The different group companies have received several awards for their fulfillment of social responsibility. For instance, TISCO was awarded 'The Energy Research Institute (TERI) award for Corporate Social Responsibility (CSR)' for the fiscal year 2002-03 in recognition of its corporate citizenship and sustainability initiatives. As the only Indian company trying to put into practice the Global Compact principles on human rights, labor and environment, TISCO was also conferred the Global Business Coalition Award in 2003 for its efforts in spreading awareness about HIV/AIDS...

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CASE 7: Governance Problems in Citigroup Japan

Abstract:
In September 2004, Federal Services Agency (FSA), the financial regulatory body of Japan, announced the closure of Citigroup's Private Banking business in Japan starting from September 30, 2005 onwards. Independent investigations conducted by FSA revealed major violations of law by the Private Banking unit. It was involved in activities which were permitted to be performed by only securities companies and not banking companies. The case details the irregularities in Citigroup's Japanese operations and highlights the importance of good governance. It also examines the measures taken by Citigroup to fix these problems and analyzes the efficacy of these measures.

Issues:
The importance of good governance in a financial services company The need for proper internal control measures and transparency in the dealings of a financial firm Need for coordination and close supervision of the foreign operations by a global financial services organization The importance of maintaining corporate integrity without succumbing to the temptation of short term benefits Study the role of regulatory agencies in Japan "Private Banking is what Citibank is here for. Citibank could lose the trust of wealthy clients, who had relied on the bank. This is a setback for the bank to keep its operations in Japan in the mid-to-long term." - Mitsushige Akino, Chief Fund Manager, Ichiyoshi Investment Management in 2004.2 "We've been kicked out of the Private Banking business in Japan because the regulator has said we're not fit to run that kind of business in Japan. It's embarrassing. That's a big deal; that's a really big deal." - Charles O Prince, CEO, Citigroup in 2004. The Withdrawal On September 17, 2004, the Financial Services Agency (FSA),4 the banking and financial services regulatory body of Japan, announced that it had revoked the licenses of the four Citigroup offices in Japan. Citigroup was asked to withdraw from the Private Banking business5 in Japan after several instances of illegal conduct of business by Citibank Japan came to light. The four branches, one in Tokyo's Marunouchi business district and three satellite branches in Fukuoka, Nagoya and Osaka, employing around 400 people, represented Citigroup's Private Banking business in Japan.

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The winding up of business commenced from September 29, 2004 onwards by suspending all new transactions with customers. Incorporated in 2001, FSA had been keeping a close eye on the working of foreign and domestic banks in Japan (Refer Exhibit I for more information on FSA). It uncovered a number of acts injurious to public interest, serious violations of law and regulations and extremely inappropriate transactions in the Private Banking unit.

The regulator further said that the unit had amassed large profits illegally by allowing money laundering transactions. Customers were misled in various private bond deals and were sold securities and derivatives at unfair prices without being informed about the risks. FSA further said that Citigroup's management in Japan was solely driven by profit motive and had created a law-evading sales system, breaking Japan's banking laws and regulations.

The irregularities at the Private Banking unit were preceded by continued failure to improve internal controls despite regulatory warnings over the past three years and a reprimand by the FSA in May 2004. After the unit was asked to wind up its operations, Charles O Prince (Prince), CEO, Citigroup, acknowledged the irregularities saying, "I sincerely apologize to customers and the public for the company's failure to comply with legal and regulatory requirements in Japan.....senior staff in the private bank had put short-term profits ahead of the bank's long-term reputation and broken the law. It was a unique breakdown in Japan due to the individuals involved."

Background Note
Citigroup was formed in 1998 by the merger7 of Citicorp and Travelers Group. The former's history could be traced to the City Bank of New York, formed in 1812 with an authorized capital of $2 mn. In 1865, the company joined the US national banking system and became The National City Bank of New York. By the 1890s, City Bank became the largest bank in the US and one of the major American banks to establish a foreign department. Branches were started in Asia, Europe and Latin America by the early 1900s. In 1955, City Bank's name was changed to the First National City Bank of New York, and later shortened to the First National Citibank (FNC). In 1968, First National City Corporation, a bank holding company, became the parent of FNC. In 1974, the holding company changed its name to Citicorp in tune with its global business. In 1976, the First National City Bank became Citibank NA (National Association).

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The history of the Travelers Group could be traced back to Travelers Life & Annuity, a life and accident insurance company, started in 1864. Other companies in Travelers group included Smith Barney, a stock broking firm and a subsidiary of Travelers; Salomon Brothers, primary dealers in US Government Securities.

The latter merged with Smith Barney; Banamex, a merged entity of Banco Nacional Mexicano and Banco Mercantil Mexicano and Primerica Financial Solutions, a personal insurance and asset Management Company. All these entities merged to form Citigroup in 1998. Citigroup was the first financial services company in the US to bring together banking, insurance and investments under one umbrella. By the early 2000s, it had emerged as the largest financial services conglomerate in the world with nearly 275,000 employees and 200 million customer accounts in over 100 countries. Citibank NA was the largest bank in the world in terms of market capitalization (Refer Exhibit II for the financials of Citigroup). Citigroup entered Japan in 1902 by opening its first branch at Yokohama.

Excerpts: Problems in Citigroup Japan: VIOLATIONS OF LAW

The FSA conducted a routine inspection of Citigroup branches in Japan and found several violations of Banking Law and Securities and Exchange Law (BL & SEL). Between August 1997 and December 2000, Citigroup's Private Banking unit had acted as an intermediary for the sale and purchase of securities. The FSA investigation report, dated August 09, 2001, noted serious irregularities in the Private Banking unit. The report said that the Private Banking unit had violated regulatory provisions of BL & SEL by promoting financial products that could only be sold by securities companies in Japan and not by banking companies. The report further added that the legal & compliance and internal control functions, including the business management and risk management, of the unit were 'inadequate.' FSA took administrative action against Citigroup which involved a suspension order and a Business Improvement order for the Private Banking unit. As per the suspension order, all business of alternative investment strategies was suspended between August 10 and August 16, 2001...

The Irregularities
According to media reports, enlarging the customer base and increasing the volume of business were given more importance by the Private Banking unit disregarding regulations. New bank accounts were opened without following proper procedures.

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Before advancing a loan, the management did not sufficiently review the risk profile of customers. Moreover, no screening measures were adopted to investigate and confirm the reasons for which the loan was sought. The reports also stated that customers misused loan funds for manipulating the price of publicly traded stocks. This amounted to money laundering by the bank. Apart from that, bogus loan were sanctioned to customers so that they could file for a financial grant of public funds from a regional government entity. The Banking Law of Japan considered that such 'bogus loans' constituted infliction of injury to public interests. Money was solicited from depositors and the sale of deposit schemes to customers was done without providing information on the features and inherent risks... Excerpts Contd... The Action Taken On September 14, 2004, SESC made a recommendation to the Prime Minister of Japan and the Commissioner of FSA to take disciplinary action against Citigroup's Private Banking unit in Japan. It stated that similar problems of non-compliance with regulations had been reported against the bank in different parts of the world and criticism against the group's disregard for a country's regulations was mounting. The group was already facing legal suits in other countries (Refer Exhibit IV for legal problems faced by Citigroup). FSA then ordered Citigroup to suspend new Private Banking business by the end of September 2004. It was given a year's time to wind up all Private Banking operations in Japan by the end of September 2005. Apart from discontinuing Private Banking business, Citigroup's consumer banking business was banned from accepting foreign currency deposits from new customers for a month starting September 29, 2004...

The Aftermath
The closure of the Private Banking unit in Japan, the second largest market, was a serious setback for Citigroup. Released in October 2004, Ludwig's report disclosed that the management of the Private Banking unit had knowingly and willfully committed all breaches of regulations. Citigroup's reputation was at stake, as the findings of the report were made public. Immediately after its receipt, Prince started a clean-up programme. Prince fired a number of employees, whom he held accountable for the irregularities, including three prominent senior executives - Deryck Maughan, Chairman of Citigroup International, Thomas Jones, Head of Investment Management and Peter Scaturro, Head of the Group's Private Bank. Twelve other staff of the Private Banking unit were asked to leave and for 11 others, salaries were cut. A new CEO, Douglas Peterson, who was appointed in May 2004 for Citibank Japan, was given the responsibility of renewing investor confidence. Prince promised to hire a new Chief Compliance Officer to oversee Japanese operations and to create an independent committee to monitor overall management in that country...

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CASE 8: Governance Issues at the New York Stock Exchange

Abstract:
The case focuses on the allegations of misgovernance at New York Stock Exchange (NYSE) and the governance reforms introduced in the exchange by interim Chairman John Reed. Over the years, NYSE was criticized by the analysts and industry observers for its outdated mode of working and governance practices. The disclosure of Grasso's compensation led to widespread criticism against the exchange regarding its governance practices. The case brings out the working of NYSE and allegations against it, and it also discusses the reforms initiated by NYSE's interim CEO and Chairman, John Reed.

Issues:
Understand NYSE's working and governance practices Understand the role of specialists in the working of the NYSE Understand the importance of good governance practices in an organization "The New York Stock Exchange is long overdue for a very serious and thorough examination and overhaul of its governance. The very fact that they nominate their own board without any input from anyone else should not be tolerated." - Nell Minow, Editor, Corporate-Governance Research Firm - The Corporate Library in August 2003. "Today, we take an important step towards a governance architecture with standards of independence and disclosure that are comparable to or stronger than those we require of our listed companies." - John Reed, Interim Chairman & CEO - New York Stock Exchange (NYSE) commenting on the proposed NYSE reforms, in November 2003. Payback Time at NYSE On September 18, 2003, Richard Grasso (Grasso), Chairman and CEO of NYSE resigned amidst widespread criticism of his pay package and governance practices at NYSE. Earlier in August 2003, NYSE announced that Grasso had been given a lumpsum amount of $140 million from NYSE (covering two decades of deferred compensation, and retirement benefits). It also announced that Grasso's contract had been extended upto 2007 with an annual pay of $1.4 million, and an additional $1million annual bonus. William Donaldson (Donaldson), Chief of the Securities and Exchange Commission (SEC),3 commented that Grasso's compensation details raised serious doubts about governance standards at the NYSE.

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Donaldson sent a letter to the compensation committee head - Carl McCall (McCall) asking for more details about how Grasso's compensation package had been decided. The misgovernance at NYSE came to light in August 2003 when the Council of Institutional Investors (CII), 4 published a report which highlighted the shortcomings in NYSE's governance practices. The Grasso episode provided more ammunition to the critics of NYSE, who were demanding greater transparency in its working. In September 2003, former Citigroup Co-CEO, John Reed (Reed) was appointed the new interim chairman and CEO of NYSE. Soon after taking over the charge, Reed announced that his first priority would be to reform the working of the exchange. On November 5, 2003, Reed announced proposed reforms in the governance practices of NYSE. The media, general public and industry sources welcomed the reforms saying that they were the step in the right direction. However, some were of opinion that more drastic changes should be brought in to ensure transparency in the operations of NYSE.

Background Note:
The history of the NYSE dates back to 1792 when the Buttonwood Agreement was signed by 24 New York-based stockbrokers and merchants. The agreement facilitated trading in securities between the signatories on a commission basis. In 1817, a formal organization - the New York Stock & Exchange Board (NYS&EB) was formed by brokers; the board also formulated rules and a constitution for conducting business. By 1824, the NYS&EB's annual trading volume had reached 380,000 shares and by 1835, the daily trading volume had increased 50-fold to 8,500,000 shares. By the 1850s, the NYS&EB had started formulating rules and regulations for listing companies. In 1853, the listing standards were formulated, and these made it mandatory for listed companies to provide complete information about outstanding shares and capital resources. In the late 1850s and early 1860s, the NYS&EB witnessed a turbulent period. In 1857, there was a sharp downward movement in trade due to the collapse of the Ohio Life Insurance & Trust Company. The NYS&EB registered a 8-10% price decline in a single trading session and by yearend, the decline stood at 45%. In 1863, the NYS&EB changed its name to the New York Stock Exchange (NYSE). In the following year, a Committee on Stock List was appointed to oversee the listing of new securities on the exchange, thus initiating supervision and controlling of listing policies by the NYSE. With the increase in trading volume, the NYSE introduced innovative methods for making trading more convenient. In 1867, for the first time, the stock ticker5 was introduced enabling investors to know the current prices of the stocks. In 1869, the NYSE abolished 'watering stocks'6 and introduced a new rule according to which all shares of companies listed on the NYSE had to be registered with banks or authorized agents. In 1872, the NYSE created the Specialist System (Refer Exhibit I for a note on the Specialist System). By the mid-1880s, the NYSE had also introduced telephone and paging systems to increase trading.

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Excerpts: The Working of NYSE

NYSE is defined as a "member-owned co-operative and self-regulatory organization that serves the public as the nation's principal securities market, its principal self-regulator and its principal source of governance standards." It comprises of three constituencies, viz., broker-dealer members, listed companies and the investing public. The specialist firms and floor brokers are grouped under broker-dealer members. The specialist firms employ specialists involved in the trading of stocks of particular companies. At NYSE, trading takes place at one central location - the trading floor (Refer Figure I) where both buyers and sellers compete to get best price for their clients. Usually, each stock is assigned a trading post, with specialists managing the auction process. NYSE has the authority to regulate securities firms dealing with public accounts in the US. The Enforcement Division oversees the working of listed companies...

Governance Structure at NYSE (Pre-reform)

NYSE's governance structure comprised five important elements: the Board of Directors (BoD), standing and advisory committees, a nominating committee, its professional executive management, and its 'not-for-profit' status.

BoD and Standing and Advisory committees

The 1,366 broker-dealer members of the exchange elected the BoD which consisted of 27 members (12 industry directors, 12 non-industry directors and 3 members of the office of the chairman) . (Refer Table I) No director was allowed to be on the board for more than three consecutive two-year terms. The NYSE constitution defined an industry director as "(1) an individual member, (2) an individual who is a principal executive, general partner or control person of a member organization, or (3) a principal executive of an organization whose "principal"subsidiary is a member organization."Non-industry directors did not belong to the securities industry...

NYSE Comes Under Flak

Over the years, the style of governance at NYSE has attracted a lot of criticism chiefly on account of 'misgovernance' and the role of specialists. Analysts pointed out that the governance structure at NYSE had failed to deliver results, and that the NYSE had failed to safeguard the interests of the general public.

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COMPOSITION OF THE BOARD

Analysts said that while NYSE demanded greater transparency in the operations of the companies it regulated, it did not itself maintain any transparency in its own working processes. The process of electing the NYSE board was not transparent and, in fact, the board was handpicked by the Chairman.

The Role of Specialists

The specialist system at the NYSE also attracted considerable criticism. In April 2003, the SEC initiated an investigation against trading violations committed by specialists. The specialists were alleged to be involved in front running. However, the NYSE refuted the charges and announced that SEC was inquiring into violation of the negative-obligation rule. But analysts pointed out that the objective of the inquiry remained the same, though the rules violated differed. The primary question which the NYSE needed to answer was whether its specialists purchased shares at lower price with an intention to sell them afterwards for profit...

The Final Assault- CEO Compensation

Finally, NYSE also faced increased criticism because it did not reveal its executive compensation figures. Under increasing pressure from the media and SEC, the NYSE announced its executive compensation figures in August 2003. These figures indicated that Grasso had been paid a lumpsum amount of $140 million for his services and that his employment contract had been extended upto the year 2007. The exchange revealed that Grasso would be receiving around $1.4 million as salary per year and a bonus of $1 million per year in the period 2003 to 2007...

The Clean-Up Exercise

Reed who took over as the interim chairman and CEO of NYSE in October 2003 initiated reforms at the exchange. He conducted interviews with the specialists, outside critics and experts on the kind of reforms to be initiated in the exchange procedures. Many suggested that NYSE should go the NASDAQ way by separating the regulatory function. Further, it was also suggested that the specialist system should be done away with, and the NYSE should opt for electronic trading. However, to the disappointment of many, Reed announced that he intended to keep the specialist system and would be focusing only on restructuring the NYSE board and bringing more transparency into the decision-making process of the exchange.

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