Ethics of Paying Bribes

This material is part of the Giving Voice to Values curriculum collection (www.GivingVoiceToValues.org). The Aspen Institute was founding partner, along with the Yale School of Management, and incubator for Giving Voice to Values (GVV).

Now Funded by Babson College. Do not alter or distribute without permission. © Mary C. Gentile, 2010

1

The Real Cost of Paying Bribes (A)1

It was the middle of March 2001 and Ajitabh, the Head of Corporate Social Responsibility, was preparing for a meeting with the Managing Director of his organization: Higher Aims Education Solutions (HAES). HAES focused mainly on training underprivileged students across the country. Ajitabh had spent the week prior in discussions with government officials surrounding one of these training contracts. The training had been completed in November of 2000 but the payment had still not been received. As Ajitabh sat in his office on the morning of March 16th, he contemplated what he would say regarding the status of the government contract. He knew his Managing Director would want an update and a recommendation on the way forward since the payment had still not been released. Ajitabh was nervous because it was his first big assignment since joining HAES only three months prior and he was feeling the pressure to perform well. This was also the first government engagement for HAES and he knew the stakes were high since venturing into these contracts could mean a lot more visibility and more contracts for both the organization and his department. Higher Aims Education Solutions Higher Aims Education Solutions was a for-profit boutique education firm providing entrance exam training and preparation practice modules to students seeking college and post graduation admission. HAES was started by Mr. Devesh, 35 years ago, with the mission to “be a helping hand to aspiring students.” The organization had grown leaps and bounds, initially under his and

1 Developed by Amit Jain, Doctoral Student, Indian Institute of Management, Calcutta. This case was inspired by an actual experience but names and other situational details have been This case was inspired by an actual experience but names and other situational details have been changed, and interview sources left un-‐‑credited with permission, for confidentiality and teaching purposes.

This material is part of the Giving Voice to Values curriculum collection (www.GivingVoiceToValues.org).

The Aspen Institute was founding partner, along with the Yale School of Management, and incubator for Giving Voice to Values (GVV). Now Funded by Babson College.

Do not alter or distribute without permission. © Mary C. Gentile, 2010 2

later under his nephew’s, Mr. Sachin’s, leadership. Mr. Sachin took over the role of Managing Director twenty years ago when Mr. Devesh had very suddenly passed away. In 1999-2000 the small retail educational services organization, had a revenue base of around Rs.1.5 billion. But due to the recession of 2001 HAES, like many others in the industry, had experienced declining revenues. In fact, for the first time since its inception HAES showed “negative growth” with a 10% loss of revenue during the 2000-01 fiscal year. The 2000-01 financials were not looking very good with revenue being just under Rs. 600 million—far under their goals. HAES sold services directly to the student and charged an average of Rs. 20,000 per student. Its model was based on relatively low fees to attract large numbers of students. Therefore the number of students was a key metric for success. Its business development and marketing efforts focused on attracting individual students. Due to the declining revenues and changing market, the top management of the organization felt HAES needed to look at alternative revenue generating opportunities. This included potentially entering into “skill development training” and offering mainstream education by either establishing their own business schools or supporting the work of other business schools on a contract basis. While doing research into alternative revenue streams for HAES, Mr. Rai, one of the members of the senior management team, noted that both central and state government agencies offered training to individuals from disadvantaged communities to 1) help individuals increase their chances of admission into higher education institutes and 2) to help individuals apply for employment in the public sector. In fact, after further research HAES found that there were a number of welfare programs dedicated to these types of training as part of the current five-year government plan2. Since the training needed for these government contracts was well aligned with the training that HAES offered, Mr. Rai recommended that HAES look into bidding for these types of government contracts. Venturing into Government Contracts Getting into the business of government contracts was a challenge for the HAES Business Development team, as they had never worked on a Business-to-Business (B2B) level. Working in a B2B model required a lot of negotiation during both the procurement and payment processes. Navigating these government processes was new territory for the Business Development team and the documentation requirement by the government agencies was more

2 Five Year Plans are the development plans prepared by the central government. They started in 1951.




complicated. It included rigorous audits and public scrutiny that was different from what they had experienced when working as a student centered retail firm. Even with the steep learning curve, the management team still believed it was a worthy avenue to explore. The Business Development team started looking into opportunities at the state and the central government levels. With great efforts they received their first government contract. The contract was for Rs. 6 million and involved training an underprivileged group in a neighboring town. The contract outlined that the payment would be made after the training was provided and once the records were presented to the concerned nodal agency of the state government. The First Government Contract HAES took on the contract and provided the training by November 2000. At the conclusion of the training Mr. Hemang, the Head of Business Development for HAES at the time, submitted a formal request for payment to the required department as outlined in the contract. Mr. Hemang had handled the relationship and had visited the government department office a few times throughout the contract period. In December of 2000, shortly after finishing the training and submitting the paperwork, Mr. Hemang left HAES to pursue other opportunities. After Mr. Hemang’s departure the relationship was transferred to Ajitabh. It therefore became Ajitabh’s responsibility to collect the payment. Ajitabh’s Journey to HAES Ajitabh was a management graduate from one of the top business schools in India. After completing his management degree, he worked with various Indian and international financial organizations where he—along with working on business process reengineering and project management—spearheaded many corporate social responsibility (CSR) initiatives. He was a firm believer in the concept of ‘Doing Well by Doing Good’. He was always on the lookout for opportunities where he could work on CSR projects that were directly related to the core business of an organization. In addition, he had a passion for education and worked as a volunteer teacher with underprivileged students. It was during one of these volunteer teaching sessions where he had originally met Mr. Sachin. As they got to know each other, Ajitabh shared his views on CSR and eventually Mr. Sachin offered him a position with HAES to nurture the CSR initiatives through partnerships with the




third sector3. The role was very much in line with what Ajitabh believed but it was still a tough decision given that joining HAES meant a 50% reduction in pay. After careful deliberation, he decided to join HAES because he felt it would be a good opportunity to work on something he believed in. Joining HAES as Head of CSR Ajitabh joined HAES and started working on contacting various non-profit sector organizations to pursue potential partnership opportunities. He was quickly able to secure partnerships where HAES would help to train female students from low-income backgrounds. He also secured collaborations focused on training people with disabilities to better prepare for higher education admission.4 Both of these initiatives were with non-profit organizations and were not revenue generating for HAES. One of the challenges Ajitabh faced in this role was that other departments within HAES often did not see the value proposition of having a “non-profit” partnership arm, even though the efforts had the full support of Mr. Sachin. This was especially true of the Finance department whose members were often frustrated during meetings when Ajitabh or Mr. Sachin would discuss the merits of what they considered a non-revenue generating “cost center.” Mr. Sachin looked at these initiatives as opportunities to “do good” within the community and even if he could not put a number on the value they generated, he knew they generated value for HAES in the bigger picture. He was confident that these initiatives were good opportunities to demonstrate HAES’ abilities to other potential students or potential partners. The Finance department was more concerned about the bottom line and the revenue these types of initiatives failed to generate. From their perspective it was hard to put a value on these intangibles that Mr. Sachin and Ajitabh perceived were good for the business. They argued that from a true revenue generating standpoint CSR programs were either actually costs to the company (expenses, donation of time) or cost neutral (with the students and other nonprofits covering expenses) but never revenue generating. Taking Over Mr. Hemang’s Government Contract Soon after Ajitabh started at HAES, Mr. Sachin informed him that Mr. Hemang had left and that he needed Ajitabh to take over the final responsibilities of the first government contract. Mr.

3 The third sector is sometimes also called the voluntary sector, community sector, non-‐‑profit sector, "ʺnot-‐‑for-‐‑profit"ʺ sector or civic sector. In India this sector is commonly called the "ʺjoint sector"ʺ, and includes the industries run in partnership by the state and Private Sector. 4 There was no profit in either of these partnerships, but the costs were minimal. In the case of the partnership to train the women a nominal fees was charged to cover the direct cost. In the other case students were provided access to classroom lectures with no fees (the marginal cost of the classroom lectures was virtually zero). So in both cases the programs were considered cost neutral by HAES.




Sachin directed Ajitabh to collect all of the necessary information about the contract and determine the status of the payment. Although the majority of the CSR initiatives that Ajitabh had been pursuing were with the non-profit space and not the government, he believed the end goal and mission were the same: serving those that were underprivileged. Ajitabh also felt that this could be an interesting evolution for the CSR department since the government contracts were actually revenue generating. He was hopeful moving in this direction could further the CSR mission while demonstrating more tangible value to the Finance department since the revenue from these contracts would now fall under his budget. In fact, if he was able to successfully manage the process it would mean immediate revenue for HAES and also the possibility of future contracts with the government. According to Ajitabh’s calculation, if the relationships were properly maintained, these types of contracts would continue to be good business opportunities because the cost per student that the government offered allowed for HAES to still generate a profit while educating the same types of students that they were currently training for free or close to free in their CSR partnerships. Ajitabh saw opportunities to pool resources from his current collaborations, prevent price undercutting and provide more effective systemic training for those who needed it while offering the government a service they also needed under the 5-year plan. He knew that building these relationships would require his careful attention and focused efforts, but that the result would be perfectly aligned with what he had set out to accomplish as Head of Corporate Social Responsibility. After weighing all of the factors, he agreed that it would be a good fit to relocate Mr. Hemang’s “government contract” under the CSR department. Uncovering the Details of the First Government Contract Ajitabh went to meet with Mr. Hemang5 who explained that the payment discussion was “a bit sticky.” Mr. Hemang explained that it was clear that the government officials were not satisfied with the documents submitted by HAES and that overall the situation was a mess. Somewhat disheartened by the news, Ajitabh continued to research the situation and found that HAES’ records were not complete by government standards. Apparently, HAES had not kept the right records of the students being trained. The biggest issue appeared to be that there were no records demonstrating if the students had passed the admissions tests for which HAES had been training them. This data was supposed to be one of the metrics of success for the contract. To further complicate things, there had been a change within the government department as to who was handing this project and its contract. In his investigation, Ajitabh also learned that the original government officials had raised certain objections regarding the timing of the training. 5 Mr. Hemang had left on good terms and was still local so it was easy for Ajitabh to meet with him to discuss the contract.




According to the government officials, the timing of the training and the timing of the admissions examinations did not align (and therefore it may have been hard to capture the required data). According to Mr. Hemang these concerns had been resolved prior to the changing of the project officials on the government side, but there were no records that this conversation had been shared with the government officers who took over the project management. The government officials that took over were upset and felt there was a breach of contract. Ajitabh was not sure how a senior and experienced manager like Mr. Hemang could have missed this crucial point. Mr. Hemang had worked with government officials in his previous job and was surely aware that for government work, written documentation was always required. Yet, there did not seem to be any. The Bigger Roadblocks Ajitabh scheduled meetings with the government officials so that he could better understand the status of the payment and discuss ways to resolve any further issues standing in the way of the payment release. During one of those meetings, Ajitabh realized the officials were looking for kickbacks (i.e. bribes) from HAES in order for the payment to be released and were using the “documents not being in order” as leverage. When Ajitabh tried to continue the conversation without addressing the request for kickbacks, another official referenced other cases where even when organizations actually had everything in order they still needed to pay kickbacks in order to have payment released. Being so new to the government work, it was hard for Ajitabh to know if this was always the case or not. When talking with some of the more junior officers in the department it became clear that HAES was going to need to pay the senior officials a kickback of between 15% and 20% of the contract price. Ajitabh also learned from one of the junior officials that the officials at the state nodal agency would also require a kickback before releasing the “final completion report” to the central government. The final completion report from the state was a required step before the government agency could release the payment. In an effort to further understand what was really going on, Ajitabh met with the state officials at the nodal agency and found that before sending the report, they would do an inspection of the HAES branches where the training had been done. Conversations with state officials revealed the same story: that kickbacks were required at this level, as well, in order to submit a “passing report.” Ajitabh was at a loss. It appeared HAES was facing two layers of “unofficial payments” before it could receive its payment: to the officials at the state nodal agencies and to the government




officials. How could HAES and his CSR department focus on serving the underserved at a fair and reasonable price if kickbacks were required at multiple levels? Moving Forward Ajitabh knew that HAES had not fully met the requirements of the contract as it related to the necessary documentation and therefore requesting the full payment could be a challenge. But, he also knew that the organization cared a great deal about living its values and not succumbing to bribes. HAES was considered a community centered training organization that valued the welfare of its students more than profit and had been able to successfully use that as part of its value-proposition to potential clients. Its support to underprivileged students was well known and well respected in the communities where it operated. Since the training had already been delivered to the students and the costs had already been incurred on study materials and instructors, Ajitabh was not sure how HAES or Mr. Sachin would react. He was especially concerned since this was HAES’s first time working on a B2B model contract and knew that if it failed it would be hard to gain support for his plans for the evolution of the CSR work within the organization. The current financials were also at the forefront of everyone’s thinking since the entire organization was behind their goals for the year. The situation was also a challenge for Ajitabh from a personal perspective. His work had always been considered as “charity” by the Finance departments at the various companies where he had worked. Things were the same at HAES and this was finally an opportunity for him to show that doing good work could also be a revenue generator. He had spent a good amount of time in discussions with the officials and if this B2B pilot failed he was unsure of how it would impact his growth at HAES and his career in general. Paying the bribes was out of the question for him but so was failing with such large stakes. But, he had been inspired to come and work for Mr. Sachin because he believed he was a man of values and a businessman who understood the value of Doing Good. Ajitabh remembered a poignant conversation about HAES’ values that he had had with a former HAES employee, Ms. Varsha, when he was making his decision about whether to take the job. Ms. Varsha shared a story about a time when HAES had gotten a very good offer to be acquired by a big educational training organization but the board had refused the offer as they felt that the values on which HAES had been founded (i.e. serving the student) would be compromised in the deal. But, today’s environment was different and he was not sure if Mr. Sachin would be able to make the decision solely based on a commitment to values given the financial climate and other pressures. Since the financial details were very sensitive, Ajitabh did not consider discussing this matter with someone outside of HAES. But, since HAES was a small organization Ajitabh also feared sharing his concerns with an insider as these types of stories had a tendency to spread.




What should Ajitabh say? To whom? And how?

Last Revision: 3/18/14

Documents

Ethics of Paying Bribes