Building strong local leadership

Despite the rather grim picture I have painted, years of experience in running diverse businesses in India make me an optimist when it comes to the ability of a company, particularly a multinational company, to operate ethically. First, corruption in India may have peaked and plausibly on the decline. Second, corruption is a two-way street. It is convenient to blame greedy politicians and public officials but succumbing to corruption is a leadership choice. Companies that are determined to succeed the right way can indeed do so and there are plenty of examples of such firms. They must of course lay down clear policies, procedures with approval processes and stringent controls, regular internal audits of high-risk areas, and so on. However, these steps are necessary but insufficient. What really safeguards companies from corruption and fraud are soft factors namely strong local leadership, and a culture of compliance.

Too many foreign companies don't pay adequate attention to compliance, mainly because India contributes so little to their revenues. Companies usually allocate budgets for audits and compliance reviews in proportion to revenues, so India escapes the scrutiny it deserves. Business insignificance, combined with cultural and geographic distance, can lead to overdependence on local management, which is risky. The global headquarters must recognise that India, like China and Russia, is a high-risk country, and all the compliance functions must pay attention to the Indian organization. Companies usually underinvest in staffing compliance functions like finance, internal audit, and legal. That's penny wise and pound foolish behavior, given the cost of head count in India.

Having a strong finance and administration team in India is critical; the unit is usually the primary contact with bureaucracy. Administration managers who understand local laws and regulations, possess the skills to work with government officials, and can get things done without paying bribes are a blessing. It is also critical to ensure compliance with the law without taking shortcuts. Being lax or saving costs by being too clever will create vulnerabilities that will inevitably be exposed and exploited. Dodging taxes is a particularly sensitive area, as companies like Cadbury India (a unit of Kraft) have discovered. As of this writing, Cadbury India is under investigation after managers allegedly tried to use bribes to avoid paying excise duties. The reputational damage and distraction to the business are many times higher than the magnitude of the apparent evasion.

Few companies are prepared to handle fraud and corruption in India. Awareness levels are low; 51 percent of respondents in a recent survey in India were unaware of the US Foreign Corrupt Practices Act, and 65 percent didn't know of the UK Bribery Act. Only 35 percent of companies take legal action against employees, and a very small number place emphasis on codes of conduct, antibribery, and ethics training, according to the Ernst & Young Fraud Survey in 2012. That's a major risk, with the regulatory environment of corruption changing rapidly in India. In 2011, five bills - including the Lokpal Bill, the Judicial Accountability Bill, the Public Procurement Bill, and the Whistleblower Bill - were introduced in Parliament, and several laws such as the Prevention of Corruption Act and the Companies Bill are being amended.

Companies need to ensure that the basics are in place. Have they instituted a formal code of conduct that every employee has to recertify annually? Is there mandatory training on compliance, with appropriate laws and regulations for customer facing employees? Do managers insist on pre-approval for discounts, gifts, travel, and entertainment expenditures and for charitable contributions, or do they routinely approve expenses after the fact? How is the company's code of conduct communicated to customers, dealers, and partners? Do customers know the entertainment and travel reimbursement policies of the company? How does the company deal with a problem? Is investigation swift and punishment decisive and fair, and made public?

The tone local leadership sets is critical. "One thing we must appreciate is that in a hierarchical culture, bribery and corruption depend largely on the tone from the top," points out a leading fraud expert. Global companies must hold their country CEOs accountable for compliance with their policies and codes of conduct as well as Indian laws. A zero-tolerance policy is vital. Few companies discuss the character of leaders during the appraisal process; hitting the numbers is para­mount. However, companies must pay attention to the small things, like segregation of personal phone calls, appropriateness of business expenses, and the personal use of company assets. I have found a sense of entitlement in small things to be a predictor of bigger problems.

Reference checks are critical when hiring. I have been burned badly; in retrospect, I could have avoided so many mistakes by better and more personal due diligence. For instance, after we terminated a senior executive for channel stuffing just one year after hiring him, a distributor told us that the executive had a reputation in the industry for indulging in that practice. When we had to let go another senior leader for inappropriate conduct with female employees, it didn't come as a surprise to many in the industry.

Global companies must hold country managers and senior leaders accountable for creating the right culture in their Indian entities by walking the talk. Subroto Bagchi, An Indian CEO, who has a reputation for creating the right culture, comments:

We ask our people to persist and prevail, not take shortcuts. Whenever they get stuck, however small the matter, like a fire clearance for a building or an issue with the electricity board, our top management walks shoulder to shoulder with operating people to get things cleared including attending meetings with government officials. The message is simple: we will work alongside you. We will not hold it against you if a project gets delayed or we lose money; do what is right, not what is convenient. Over time, people will know what is acceptable here and what's not. Social memory is many times more effective than a bunch of policies.

By contrast, in a company that had to terminate a senior manager for a major fraud, it turned out that many employees were aware of his practices. When asked why they hadn't reported their concerns despite a widely advertised whistleblower policy, they said they didn't feel safe coming forward or felt it would be futile. The company learned a lesson on how an open and inclusive culture is critical.

CONQUERING THE CHAOS: WIN IN INDIA, WIN EVERYWHERE
AUTHOR: Ravi Venkatesan
PUBLISHER: Harvard Business Review Press
Price: $30
ISBN: 9781422184301.

Reprinted by permission of Harvard Business Review Press. Excerpted from Conquering the Chaos: Win in India, Win Everywhere. Copyright 2013 Harvard Business Publishing Corporation. All rights reserved.