Globally Irresponsible Management: Three cases

GRLI 2006

Updated 04/2016

By Bernard Sionneau1

Three examples have been chosen in this short communication. They are meant to illustrate the social, environmental and human damage formerly caused by corporate strategies, as can be assessed according to the standards contained in the main texts founding the Global Compact (i.e. UNO Universal Declaration of Human Rights, ILO Declaration of Fundamental Principles and Rights at Work, Stockholm, Rio, Johannesburg Declarations and Agenda 212).

In the three following instances of corporate misdemeanour, the management of each company obviously never asked themselves what “the global consequences of their decisions” could be.

This may be called “managing irresponsibly”.

1 – Enron: from 1996 to 2001, Enron was considered one of the greatest “market performers” of its time and labelled “the most innovative corporation” by Fortune magazine. In the year 2000, The Financial Times called it “Energy Group of the Year” and The Economist labelled Kenneth Lay(CEO), “The energetic messiah”3. Less than a month before its downfall, AlanGreenspan, Chairman of the Federal Reserve Board got the “Enron Prize” from the James Baker III Institute for Public Policy (Rice University)4.

During that period, Enron was the reference company (“market maker”), an Energy trading entity which, though holding few real assets seemed to create value permanently, thanks to complex financial and fiscal operations5. The corporation was also a political heavyweight6. Having spent around 6 million dollars in lobbying activities during the 1990s to obtain the deregulation of the American energy market, Enron got deeply involved (largest donor) in the first presidential campaign of conservative republican candidate George W. Bush, a 20-year friend of its CEO, Kenneth Lay.

In a few words, until its “creative” accounting system was exposed, and the fraudulent character of its operations explained, Enron was portrayed as the perfect symbol of the “win-win” economy, a case-study for many essayists, consultants and market analysts, professors of economics or management. When the “great performer” crashed unexpectedly, the shock sent ripple effects throughout the world.

The fall of Enron, first, cast severe doubts about the new American model of “Turbo” or “Super-Capitalism” activated at the end of the 1970s7. To many people, the real issue was there.

A few years before, corporate and institutional America had explained the Asian crisis with such words as “crony capitalism”. Now, the label seemed to fit perfectly Enron’s operational mode. Not only did people discover that the firm’s leading position was the result of auditing and counselling malpractices (cf. Andersen’s LLP « accounting Tales ») laced with supervision vacancy. But they also learned that the heavyweights of multinational banking (J.P. Morgan Chase, Citigroup,Merrill Lynch, Barclays Bank, Bank of America, Deutsche Bank, CréditSuisse-First Boston)8 had been part of the fraud. As the official investigation revealed, these credit establishments contributed to maintain Enron’s stock at an unnatural high level, by helping the firm transfer part of its debt to the accounts of offshore subsidiaries.

The confidence crisis in market self-regulatory capacity was evoked by financial experts after the Enron scam, as it was during the 2001 bubble burst of the “Internet economy” (and before with the “junk bond mania” of the 1980s).

But much less was said about the “micro disasters” engendered by Enron’s employees’ losses. A short example will cast some light on that particular issue.

In December 2001, Mrs Digna Showers, an 18 years administrative assistant with the logistics department at Enron’s learned that she had half an hour to pack and leave the company9. The consequences of this dismissal were quite  brutal. Digna Showers,age 53, not only lost her job, which was the main source of income for her family, but she also lost her medical and life insurances, plus her retirement plan. The last item hurt particularly. Actually, over the years, Mrs. Showers had invested more than $400,000 in Enron stock through her 401(k)-retirement plan, ESOP10 and savings plan. She suddenly learned that those savings had been reduced to nil11.

Actually, it should be recalled that, while Enron employees lost all their stash money invested in Enron stock because their 401(k) pension plans where frozen during the time the company stock crashed, “on the day before Enron filed for bankruptcy, bonus checks for more than $55 million were written to company executives, on top of another $50 million in bonuses just weeks earlier12”.

The months following Enron’s downfall proved that managerial malpractice on a grand scale, was not the lot of one “stray corporation”. In the wake of Enron, the world learned about a host of illicit dealings and federal investigations in other big groups such as Qwest, Tyco, Xerox, Global Crossing, Imclone, Merck, Adelphia13, etc.

2 – Union Carbide: in the 1970s, Union Carbide India Limited (UCIL), a subsidiary of the American multinational corporation, Union Carbide, built a pesticide factory near a densely populated shanty neighbourhood of Bhopal. The move was meant to answer the pressures of the government of India, eager to reach national food sufficiency through what was then called a “green revolution”14.

Considering that India represented a huge untapped market for its pest control products, UCIL set the goal of turning out, each year, 5000 tons of two kinds of pesticides (Temik and Sevin).However, despite the initial enthusiasm of the local population who saw the promise of employment associated to a new activity, there happened to be no real market for UCIL’s products. Indian farmers, confronted to severe droughts and floods, were too poor to buy these15. As a consequence, the plant, which never reached full capacity, soon lost too much money and was forced to cease active production in the early 1980s.

Instead of removing its factory, and making sure to clean the site, UCIL lefton it vast quantities of dangerous chemicals. Three tanks, containing over 60 tons of methyl isocyanate (MIC), a particularly reactive and deadly gas, remained on the premises. As six safety systems had been installed to prevent a leak of MIC and since production had stopped, the management believed that no real threat remained. This proved to be wrong reasoning. Actually, the factory’s elaborate safety system had been progressively allowed to become inoperative16.

On the night of December 2 to 3 1984, one supervisor was left to attend to the controls of the Bhopal plant. As an employee flushed a pipe for maintenance, its corroding state associated with leaking valves, allowed water to enter the largest tank (E610) of non-cooled MIC. The uncontrolled reaction triggered by this contact, caused a violent explosion blowing the tank out of its sarcophagus and releasing a lethal gas mixture of MIC, hydrogen cyanide, mono methyl amine and other chemicals. Blown by the prevailing winds, this cloud settled over an area of 8 square miles. As the safety siren (meant to warn the community should an incident occur) was switched off to avoid a panic, it did exactly the contrary, as many started dying in horrible circumstances17, while as many were running for their lives. Half a million people were exposed to the deadly gas and the immediate body count numbered 8000 dead. But the sequels were even worse.

Bhopal’s inhabitants still suffer, today, from extreme forms of ailments caused by the accident and the subsequent pollution at the factory site. The list of theses ailments forms a horrendous catalogue: difficulty in breathing, brain- damage, gynecological disorders, recurrent fevers, recurrent anxiety and depression, blindness, tuberculosis, cancers, miscarriages and “monstrous births”18. Despite the magnitude of the human and environmental catastrophe (50,000 Bhopal citizens still can’t work due to their injuries and some don’t have enough strength to move), since the accident, the factory grounds have not been properly cleaned. As a result, toxic waste continues to poison the residents and the vicinity. Actually, different tests made between 1999 and 2002, have revealed that deadly elements like trichloroethene are contained in local ground and well water at abnormal high levels. Furthermore, medical analyses showed that chloroform, dichloromethane, trichlorobenzene, lead and mercury can be found in the breast milk of nursing women19.

3 – Citibank: in 1998, a special committee led by U.S. Senator Car Levin (D-Mich.) was mandated to investigate “Private Banking”- a particular service offered by big multinational banks to their wealthy customers – and its eventual role in the issue of “money laundering”20.

Thanks to this official enquiry, people soon realized that the darkest side of international finance was not contained solely in tax havens or offshore zones located in exotic places. Detailed case studies revealed that its main conduits happened to be located in the credit establishments of the world’s richest countries21. By the same token, one could also fathom the consequences of these banking operations on the development of struggling countries.

As Senator Levin explained to the press,in order to justify the motivations behind his subcommittee’s inquest: “America can’t have it both ways. We can’t condemn corruption abroad – be itofficials taking bribes or looting their treasuries – then tolerateAmerican banks making fortunes off that corruption22”.

“Private banking” is a very profitable service23 that multinational banks provide to wealthy patrons in order to help them manage vast amounts of money in secret accounts. Personal wealth is, in this very instance, a discriminating factor. As a matter of fact, in order to get that kind of service, clients are required to deposit a minimumof $1 million dollars. Once they have satisfied that basic requirement, they are offered the presence of a “one-on-one private banker”and receive as well the assurancet hat they will enjoy such adding-value services as “offshore accounts” with “code names”, “secret trusts” and “shell companies” (otherwise called “Private Investment Corporations – PICS); they will also take advantage                    of   their                   banks’      “concentration”                or   “suspense”                   accounts   and “correspondent banking” facilities. While these tools of secrecy can be used for legal money, the Senate Subcommittee pointed out that “they were also used to hold and move the wealth of criminals and corrupt government officials”.

During the investigation, the most famous names of American banking were mentioned for their involvement in illicit practices associated with “private banking”: Bank of New York, Bank of America andChase Manhattan were among the establishments reviewed by theSenate Subcommittee and presented as “Supplemental Case Histories” in the final report of 5 February 2001 24. However a name stood out among others: Citibank (Citigroup25), one of the biggest banks in the  United States, managing more than 100 billion dollarsof assets in 30 countries just for its private banking activity.

Actually, the hearings before the Senate permanent subcommittee on investigations established the involvement of Citibank in several unlawful private banking operations for the benefit of controversial figures connected to foreign political circles26.

In one instance, Citibank, through Cititrust, one of its subsidiaries, helped Raul Salinas, brother of Mexico’s former president, to move $87 million of illicit gains out of his country using aliases, offshore accounts and a complex system of shell corporations and trusts27. Another instance showed Citibank allowing Asif Ali Zardari, husband of the former prime minister of Pakistan, to use three Citibank private accounts to disguise $10 million in kickbacks of gold importing contract to Pakistan. A third case aided to understand how Citibank, since 1970, had helped Omar Bongo, the President of Gabon, to move $130 million through private bank accounts; it also revealed, in response to an investigation by the Office of the Comptroller of the Currency, that the primary source of these funds were Gabon government funds. A last example showed how Citibank assisted the sons of General Sani Abacha, former dictator of Nigeria, to move and hold over $110 million on private banking accounts, thanks to the activation of shell corporations28.

If the four above-mentioned instances disclosed the direct implication of the largest American bank into illegal practices associated with private banking, they also confirmed that these activities, owing to their profitability, had been considered “business as usual”.

The issue not only raised serious doubts about the advocated “self- regulating” capacities of these credit institutions, but they also attracted indirectly people’s attention to one reality: the plight of third-world societies and their populations – the wealth of which was plundered by unconcerned corrupt local elites thanks to the financial know-how of foreign banks.

A “conservative” evaluation of the national losses due to capital flights from poor countries (made possible through private banking practices and offshore zones), proposed $50 billion a year as a possible figure. This sum “is equivalent to sixt imes the estimated annual costs of achieving universal primary education, and almost three times the cost of universal primary health coverage”29.

The rapid assessment that was made above, of the human and ecological disasters generated by the policies crafted at Enron’s, Union Carbide’s and Citibank’s, allows one to conclude that:

• these firms’ behaviour was detrimental to clearly stated universal values contained in the Global Compact;
• these firms’ behaviour was thus detrimental to the pursuit and achievement of “common wealth” (both economic and societal).

Footnotes:

1 Senior Professor-HDR, Bordeaux Business School (now Kedge BS) in 2006, one of two representatives of BBS (with Laurence Harribey) in the initiative set commonly by EFMD and UNO Global Compact to train, with 20 other B. Schools and Corporate delegates from 4 continents, a new generation of “Globally Responsible Leaders”. 2 Cf. Claude Fussler, Aron Cramer and Sebastian van der Vegt (editors), Raising the Bar: Creating Value with the United Nations Global Compact, Sheffield UK: Greenleaf Publishing, 2004, pp. 19-39.

3 « Kenneth Lay: The energetic Messiah », The Economist, June 1st, 2000.

4 Ibrahim Warde, « Faiseurs de krach boursier », Le Monde Diplomatique, 28 août 2002.

5 Thanks to the creation of about 3000 “special purpose vehicles” (SPV) in offshore zones, Enron could hide its irrecoverable losses and avoided paying taxes between 1996 and 1999.

6 Thomas White, a high-ranking Enron executive for 11 years who headed Enron Energy Services (EES), was named Army Secretary in the first George W. Bush administration. White, also a former brigadier general, was nonetheless made to resign by Donald Rumsfeld on April 25, 2003. He was involved in a controversy over his former role as an executive with EES. During hearings before a Senate panel in July 2002, White was questioned about trading strategies in California’s electricity market, detailed in December 2000 Enron memos. The memos contained several schemes that critics said took advantage of California’s power crisis, including one that involved EES. White said repeatedly that he had played no part in manipulating California energy prices and knew nothing of other irregularities, in “Rumsfeld fired Army secretary Thomas White”, USA Today, 4/25/2003.

7 Cf. Edward N. Luttwak, Turbo-Capitalism: Winners and Losers in the Global Economy, New-York: HarperCollins, 1999; Robert B. Reich, Supercapitalism: The Transformation of Business, Democracy, and Everyday Life, New York: Alfred A. Knopf, 2007. In order to get a detailed explanation of the historical context and the main actors that made possible the transition from “Stakeholder” to “Shareholder” Capitalism in the U.S., Cf. also Jean-Marc Figuet and Bernard Sionneau, « Boosting, then Trampling the Moral Contract: How Financialized Globalization Gave Birth to Corporate Social Irresponsibility« , in Hubert Bonin &Paul Thomes editors, Old Paternalism, New Paternalism, Post-Paternalism (19th-21st Centuries), Brussels: Peter Lang, Editors:, pp.305-332.

8 Thierry Godefroy, Pierre Lascoumes, Le Capitalisme Clandestin : L’illusoire régulation des places offshore, Paris : La Découverte, 2004, p. 80.

9 « What went wrong at Enron? » and « Digna Showers lost her retirement savings and more », AFL-CIO, http://www.aflcio.org/corporateamerica/enron. Cf. also Martine Bulard, « Les retraités trahis par les fonds de pension », Le Monde Diplomatique, mai 2003, pp. 4-5.

10 An “Employee Stock Ownership Plan” (ESOP) is an employee benefit plan which makes the employees of a company, owners of stock in that company. Among the features that make ESOPs unique, as compared to other employee benefit plan: the fact that an ESOP is required by law to invest primarily in the securities of the sponsoring employer.

11 Enron employees lost all their savings invested in Enron stock because their 401(k) pension plans where frozen while the company stock crashed. It should be recalled that “On the day before Enron filed for bankruptcy, however, bonus checks for more than $55 million were written to company executives, on top of another $50 million in bonuses just weeks earlier”, in afl-cio, op.cit.

12 AFL-CIO, op. cit.

13 Pascal Boulard, « Crise de valeurs dans les milieux d’affaires », La Tribune, 17/09/2002.

14 Olivier Bailly, « Bhopal, l’infinie catastrophe », Le Monde Diplomatique, décembre 2004.

15 « What happened in Bhopal? », The Bhopal Medical Appeal & Sambhavna Trust, http://www.bhopal.org/whathappened.html .

16 Leaking gas could have been detoxified, but a vent gas scrubber was turned off; also a flare tower, designed to burn off gas, could not fulfil its role, as a connecting pipe had been removed for maintenance; more, the refrigeration system did not work as the Freon system destined to cool liquid MIC was shut down to save money on electricity bills and Freon was shipped to other plants; lastly, trained safety personnel were cut from twelve to six, in « Dow, Bhopal & corporate responsibility », Southeast Michigan Coalition for Occupational Safety and Health, (SEMCOSH) , see also “Bhopal Diagram”, http://www.semcosh.org/bhopal.htm .

17 Cf. the survivors’ testimonies, in « « What happened in Bhopal ? », op. cit.

18 Ibid.

19 Ibid.

20 “Private Banking and Money Laundering: A Case Study of Opportunities and Vulnerabilities,” S. Hrg. 106-428 (November 9 and 10, 1999), Minority Staff report at 872.

21 The first conclusion of the Minority staff report stated that : “U.S. correspondent banking provides a gateway for rogue foreign banks and their criminal clients to carry on money laundering and other criminal activity in the United States and to benefit from the protections afforded by the safety and soundness of the U.S. banking industry”, in op. cit.

22 “Levin says U.S private banks profit off foreign corruption”: Minority-led subcommittee investigation highlights four cases which illustrate weaknesses in private banking system”, November 9, 1999.

23 During the Subcommittee’s hearings, experts of the Federal Reserve declared that “private banking” generated huge revenues, twice as large as most traditional banking activities (in numerous cases, more than 1 million dollars a year per customer).

24 See “Supplemental Case Histories – 8, 9, and 10” in Minority Staff of the Permanent Subcommittee on Investigations. “Report on Correspondent Banking: A Gateway For Money Laundering”.

25 Citibank, subsidiary of Citicorp became Citigroup in 1998 after merging with Travelers Group.

26 Hearings before the Permanent Subcommittee on Investigations of the Committee on Governmental Affairs, United States Senate, One Hundred Sixth Congress, First Session, November 9 and 10, 1999.

27 For details, see « Raul Salinas et la Citibank », Thierry Godefroy, Pierre Lascoumes, op. cit, p. 61.

28 “Levin says U.S private banks profit off foreign corruption”, op. cit.

29 Oxfam GB Policy Paper, “Tax Havens, releasing the hidden billions for poverty eradication, cf. “The impact of financial                      havens           on                                 developing                                 countries               (part              3), http://www.oxfam.org.uk/what_we_do/issues/debt_aid/tax_havens.htm.

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