V S Mahesh: Punishment and deterrence

Companies must be strict about employee crimes, or else they risk losing their customers' trust

One of the fastest growing sectors, and the key for a country to become an economic powerhouse, is that of professional services firms (PSFs). Financial services, IT services and their advisors – management consulting firms like Goldman Sachs and McKinsey – are major PSFs and, therefore, naturally in the limelight. It is for this reason that Rajat Gupta’s crime of insider trading, conviction and punishment have drawn the kind of publicity they have received.

Sadly, subjective issues – such as Mr Gupta’s personal history, the Indian roots of both the prosecutor and Mr Gupta, appeals from celebrities like Bill Gates and Kofi Annan for leniency in his punishment, and the court-room drama – have obfuscated what should have been the core issues: a relentless prosecutor proved that a crime had been committed, a very difficult task given the nature of insider trading. The judgment of a crime ought to focus only on the act and not on the perpetrator of crime. The objective of punishment is to deter others from falling into similar temptations of crossing the line.

One is saddened by the fall from grace of one more “good man” who has contributed a great deal to building educational and other socially important organisations. But that is no reason to avoid dealing with the core issues at hand. Rather than get enmeshed once again – like many before me in the past weeks – in the subjective aspects of the issue, let me dwell on the general problem of using punishment as a deterrent. For this purpose, I have chosen examples from easier-to-understand perspectives.

Those readers who were part of corporate India in the 1980s will remember how powerful trade unions had become by then, partly because of judgments by pro-labour courts that had made labour leaders feel that they could get away with all sorts of crimes. A senior human-resources executive I know personally was actually asked by his top management to withdraw his complaint against a union leader who had slapped a manager in his presence. When the HR manager refused to do so, he – and not the union leader – was shown the door.

It was during that time that I was part of a team in the Taj Group of Hotels that dealt with the growing menace of theft — of not only hotel property, but also hotel guests’ personal belongings. In our small world, the problem of guests’ belongings being stolen was a truly major issue, just as the failure to respect and preserve the trust of investors is in the financial services industry.

We began our crusade through a series of communications to all employees emphasising that there would be no mercy whatsoever in meting out the punishment of dismissal for those who were found guilty of the crime of theft. We had to establish in the minds of all employees that we would be fair in conducting enquiries and even-handed in our punishments, irrespective of the rank or power of the wrong-doer. Our unions took a long time to understand the firmness of our new resolve, given the company’s previous record of leniency. It took several dismissals before the message got through. Union general secretaries who had enjoyed enormous power earlier were subjected to the same rule as the rest. We withstood strikes, sabotage and negative publicity — with effigies of top management being burnt in full view of guests and the public. We paid a high price, but felt it was worth it.

To restate the point, our single objective was to establish in the minds of all employees that no leniency would be considered for anyone convicted of theft — irrespective of the power or pomp they had enjoyed prior to being found out. We succeeded. Theft was literally eradicated, and we tackled in the same manner several other discipline-related issues — for example, unauthorised absenteeism crashed from 10 per cent to less than two per cent. Punishment as a deterrent certainly worked.

It was not emotionally easy to implement such a policy. Let me give the profiles of two people we had to dismiss. A young management trainee from a premier institute was dismissed because he had “inadvertently” – as he claimed – carried in his pocket a hotel matchbox and ballpoint pen. A head waiter with a 40-year unblemished record, and whose son had been employed in a managerial capacity, was forced to resign after it was found that he tried to take out hotel soaps and shampoos worth Rs 30. As the executive with the final authority to approve their dismissals, I had to harden my heart to meet the objective of establishing in the minds of all employees that once proven, the perpetrator, whoever he may be, of theft, however small, had nowhere else to go but out.

Research findings have clearly established that customers’ choice of a financial service institution is critically dependent on how much they can “trust” the organisation to place customers’ interests above the organisation’s. Deliberate failure to maintain that trust is indeed a very serious crime — to the customer and to the organisation. The seriousness is not lessened – but actually heightened – if the one who crossed the line was a director on the board.

Here are three questions for the reader to ponder over. First, if the worst punishment for the once-powerful people found guilty were imprisonment in what T N Ninan dubbed “Club Fed” in his column last Saturday – so-called jails that are actually luxurious places with all the comforts – would it serve as an adequate deterrent for potential wrongdoers? Second, in India, where justice is most often delayed and denied, and perpetrators of crimes return to pursue active roles with greater powers after the shortest possible absence from the public eye, can we afford not to use punishment as a serious deterrent in those rare cases where criminal acts are indeed proven in a court of law? Third, if TV channels and newspapers carried images and reports of the once-high and mighty serving out rigorous imprisonment sentences for crimes committed by them – sharing cells with other criminals and breaking rocks – would that not serve as a strong deterrent for “wannabe” wrongdoers?

The writer, a former corporate executive, was the founder-director of the Centre for Service Management at the University of Buckingham, and is now MD of Chennai-based VSM Consulting Services.
mahesh@vsmahesh.com