70.2K

Verified Solution

Link Copied!

n October 2010, Tom Chong was on his way to his office andthinking about several issues he would have to deal with in thecoming weeks. Chong was Jextra Stores (Jextra) country manager forthe Neighbourhood Markets Division in Malaysia. One issue involveda conversation with the mayor of Klang, a town near Malaysia’scapital city of Kuala Lumpur. Chong had been seeking to expand toKlang for some time. The mayor surprised Chong with an offer tohelp with land zoning if Jextra would help finance a new primaryschool (or at least Chong thought that was what he had been askedfor).

The second issue involved the job performance of Arif Alam,Jextra’s top-performing buyer. Alam, a buyer of fresh fruit andvegetables, consistently negotiated better contracts than Jextra’sfifteen other buyers and, Chong believed, better than Jextra’scompetitors. The contracts negotiated by Alam certainly contributedto the excellent financial performance of Jextra Malaysia.Nevertheless, Chong could not help wondering if there was more tothe picture than he was aware of. The retail industry in Malaysiawas notorious for buyers accepting money and gifts from suppliers.A few days ago, Chong had accidentally overheard two of hisaccounting employees speculating that Alam must be accepting gifts,or even taking bribes—how else could he get such goodcontracts?

Chong was not sure what to do. Should he con- front Alam? Or, touse one of his English colleague’s

favorite expressions, should he let sleeping dogs lie? Chongknew that his boss expected him to aggres- sively grow thebusiness, so perhaps it would be best to accept the mayor’s offerand deal with Alam later.

Jextra Malaysia

Jextra Stores, a large Asian retailer, was based in Hong Kongand was owned by Sim Lim Holdings, a large publicly tradedindustrial group. Sim Lim Hold- ings was traded on the Hong Kongand London stock exchanges. Jextra operated retail stores in HongKong, China, Philippines, Viet Nam, Malaysia, Thailand, andSingapore. The company operated supermarkets, hypermarkets, andconvenience stores.

Jextra entered Malaysia, a stable and prosperous nation of 28million multi-ethnic people, in 2005 and was very successful. Thecompany operated super- markets in Malaysia using the nameNeighbourhood Markets. There were now ten Neighbourhood Mar- kets,and breakeven had been reached quickly. Jextra was planning toenter the Malaysian convenience store sector in a few years.Although other Asian and European retailers were entering Malaysia,Tom Chong saw plenty of growth opportunities for super- markets,and his boss in Hong Kong had approved an aggressive five-yearinvestment strategy.

Tom Chong

Tom Chong, a Hong Kong native, had been in his posi- tion foreight months, and expected to remain there for another two to threeyears. Malaysia was Chong’s first assignment as country manager.Prior to moving to Malaysia, Chong held various positions incorporate headquarters in Hong Kong, and then moved to Malay- siaas finance director. After two years in finance, he moved into hiscurrent role as country manager for Neighbourhood Markets. His newassignment in Malay- sia was his first experience with realoperational issues and proft and loss responsibilities.

Chong reported to a Regional Operating Officer responsible forSingapore, Malaysia, and Thailand, and was in constant contact withthe CEO and the CFO of the Supermarket and Hypermarket Divisions ofJextra in Hong Kong. Chong was evaluated based on various financialmeasures, including Economic Value Added. As a country manager in ayoung market, the number of new stores opened was an importantelement in his overall evaluation, and a factor in deter- mininghis career prospects. In a fast-growing market like Malaysia, afailure to open new stores would be viewed negatively at corporateheadquarters. The number of new stores opened would also be afactor in determining his discretionary bonus. In recent years,Chong’s performance had been among the best for Jextra managers ofhis age and experience.

A New Store in Klang

Jextra was doing well in Malaysia and actively seeking toexpand. Chong and his team had identified a poten- tial site inKlang for a new Neighbourhood Market. Klang, a town located about30 km west of Malaysia’s capital, Kuala Lumpur, was growing and wasviewed as an attractive location for a new store. Although thepotential site was not zoned for retail and commercial purposes, ithad good road access and plenty of space for parking. Chong knewthat several other retailers were also interested in expansion inKlang, especially with the opening of a new highway connect- ingKlang to the southeastern edge of Kuala Lumpur.

At a recent meeting between Chong and the mayor of Klang:

Chong: As you know, we have identified Klang as one of the mostattractive cities in Malaysia for Jextra investment. We areinterested in opening a Jextra Neighbourhood Market there.

Mayor: We are pleased that you are considering our city for yournext investment. Klang is a growing community, and the new highwaymakes our city much more attractive as a place for families to liveand commute to the capital. Where does your investment analysisstand?

Chong: We have done some preliminary work. We have identifiedsome potential sites. There is one site of interest near the newsports arena, and we have had some conversations with your offcialssince the land is currently not zoned for commer- cial use.Unfortunately, our previous investments in Malaysia have allencountered diffculty with land development. Our newest store wasdelayed by more than eight months because of zoning issues. We hopethat will not be a problem in Klang.

Mayor: We have a unique community in Klang, and want to protectour cultural heritage. We scrutinize

all proposed real estate developments very carefully. With yourstore, perhaps we can help each other.

Chong: Can you be more specific?

Mayor: Our community is growing quite rapidly, and we have a lotof young families moving in. We des- perately need a new primaryschool. Without it, families may choose to live elsewhere. Peopledo not want to live in a city with inadequate school facilities.Unfortunately, our school budget is quite tight, and we may not beable to build the school for at least two years. If Jextra werewilling to consider supporting a primary school development fund, Iam sure I could speed up the land zoning process.

Chong: Interesting....Can you tell me a bit more about theprimary school project? Do you have any preliminary estimates ofthe cost?

Mayor: My Director of Schools has told me that we need about350,000 ringgit to make up a budget shortfall for a new primaryschool. Jextra’s support would greatly help the community. Also, ifyou were to build your store on the proposed site, road andelectricity developments would be necessary. A fly- over at theintersection of Jalan Mantin and Jalan Subang on the east side ofthe site would be nec- essary to ensure smooth traffic flow. Wewould, of course, expect Jextra to help pay for the flyover. Iunderstand one of your competitors in Shah Alam [a community closeto Klang] helped pay for a new fire truck when they entered themarket. This is quite normal for new investment in Malaysia.

Chong: Well, Mr. Mayor, thank you for your time. We willcontinue with our analysis, and certainly hope that we can dosomething that is good for Klang and good for Jextra.

With that, Chong left the meeting. The conversa- tion with themayor had caught him by surprise. The mayor’s zoning proposal wasunexpected, but could certainly speed up development. However,Chong was not sure what he asked for. Was he being asked to pay theentire 5 million ringgit or just a part of the cost? Would he payfor it before the pri- mary school was built, or after? Would hepay the city or a contractor? If he said no, would that mean adenial of the zoning change?

Chong made a few calls, and learned that the mayor’s sister wason the school board and was one of the major supporters of a newprimary school. Chong also learned that planning for the flyoverhad started several months before Jextra had ever expressed aninterest in the nearby site. In addition, Jextra had alreadydetermined that traffic to and from the store parking lot would berouted through the west side of the lot, using a lightly usedcommercial street and not on either of the roads close to theplanned flyover. Chong wondered about the mayor’s motives in askingJextra to pay for the flyover.

Jextra Business Conduct Code

Jextra’s Business Conduct Code was very clear: employees couldnot offer benefits to third parties in connection with businessmatters (see the Appendix for excerpts from the Code). If Jextrawere to contrib- ute to a primary school, the benefit would be acontri- bution to a school development fund, and the benefit wouldgo to the school and the community, not indi- viduals. Chong haddiscussed a hypothetical situation with a Malaysian friend who wasalso a lawyer (he did not reveal the specifics of the mayor’srequest). He was told that Malaysian law was unclear in the area ofbusiness payments for social purposes made spe- cifically forregulatory approval. He was also told that although not widespreadin Malaysia, the practice of businesses contributing to cityprojects was common in Klang and other areas around Kuala Lumpur,and the local mayor prided himself on being able to obtain thesepayments for schools and roads in particular.

Jextra’s corporate office in Hong Kong had a small group ofemployees that managed the Jextra Social Fund. The Jextra SocialFund provided funding for various social and educational programs,mainly in Hong Kong. One of the fund’s specific initiatives wasproviding university scholarships in Hong Kong for children oflower-income families. As Jextra expanded in Asia, the fund wasslowly looking at ways to contribute to more local programs.

However, Chong knew that recently there had been some concernsin the Philippines involving the Jextra Social Fund and some fundsfor a community center in a city in which Jextra planned to build astore. Chong did not know the details, but the rumors were thatmuch of the money went to local politicians instead of thecommunity center. Not long after the incident, Jextra’s countrymanager in the Philippines was transferred back to Hong Kong to aposition that looked like a demotion.

Legal in Malaysia?

Chong thought that the primary school contribution could beillegal in Hong Kong if it circumvented the

Jextra Social Fund. But, perhaps this was normal practice inMalaysia. Chong’s friend said that some local lawyers wouldprobably advise him to make the payments, but to keep the schooland flyover pay- ments independent, which would blur the line as towhether the behavior was indeed illegal. Complicating the issue wasthe question of the expected outcome from the primary schoolpayment. If the school pay- ment speeded up the developmentprocess, it could be legal; if it was necessary to make the paymentsolely as a prerequisite to obtaining the permit, it could beconsidered a bribe. If the payment was made after the store wasbuilt and went directly to a school board budget for futureoperating expenses, would that be illegal? Chong did not know theanswer to these questions.

Various scandals involving alleged bribes and cor- poratecontributions had contributed to the recent“retirement” of variouselected officials in Malaysia. Both state and federal politicianswere using “clean government” as part of their political platforms.The State Investment, Trade and Industry Committee Chairman saidthat his government would separate itself from the historicallytight ties between business, government, and political campaigncontributions. At the federal level, the government had promisedthat foreign direct investment in Malaysia would becometransparent, and that giveaways to foreign investors would stop(exactly what giveaways he meant were never specificallyidentified).

Chong knew that, in the last year, there had been severalforeign investors who were rumored to have helped fund differentgovernment programs in exchange for favorable treatment. So far,there was no evidence that any of these efforts were illegal oreven of much interest to voters and legislators. When a Europeanelectronics company opened a new plant in Malaysia, there were manyrumors that the company paid a substantial amount of money to agovernment“education fund.” Chong’s teammate from his football clubtold him confdentially that the company had paid 2.5 millionringgit to the fund, and that the fund was controlled personally bythe Industry and Development Minister, a well-known businessmanturned politician, whose wife was dean of the Communications Schoolat the Malaysian Institute of Technology.

Jextra’s Competitors and the

Mayor’s Offer

Chong was aware that Super-Value, one of Jextra’s competitors,was also actively looking at Klang for a new store. Would the mayormake the same offer to Super-Value as he had made to Jextra? If so,when would the offer be made, and would Super-Value be willing toaccept it? Perhaps Super-Value was inter- ested in the same site asJextra. Before Chong could even consider agreeing to the mayor’sprimary school request, he needed to think through the details. Howwould he get the money for the school? Would he identify it in theinvestment proposal, or try to hide it with other items? Should heget legal advice on his possible criminal liability in Hong Kong?What if he went ahead with the payment, and the money ended up notgoing to the school? If the press found out, Jextra and Chong couldbe in big trouble.

Perhaps the best approach would be to decline the mayor’s offerand work through regular channels to get the zoning approval. Ifthat was successful, he would worry about the fyover request later.On the other hand, he did not want to lose access to a prime retailsite, and his boss, who was aware of the Klang site, wanted anupdate on the project next week.

Category Management

A very simplified view of Jextra’s category manage- ment andbuying process is as follows. Category managers (CMs) wereresponsible for driving cate- gory direction and leading anoperationally efficient category team to deliver the budget withinthe frame- work of the corporate goals. A key area of responsi-bility for category managers was working with suppliers todetermine the products to order, together with their negotiatingprices. For a new supplier, establishing a relationship with acategory manager was crucial in getting its products listed byNeigh- bourhood Markets. Category managers negotiated contracts,rebates, equipment, placement, incentives, and other financial andlogistical arrangement for their category. Neighbourhood Markets inMalaysia had category managers for product lines such as fruits andvegetables, meat, frozen foods, and beverages. Product buyersmanaged the bundling of orders and actual buying from suppliers atthe negotiated prices. Over and above this organizational setup,there were few defined processes, leaving a fair amount of lee- wayto the category managers because they decided what to order andwhat not to order.

Arif Alam

Arif Alam was 32 years old, and had been with Jextra in Malaysiasince the company entered the market. He had worked his way up froma sales apprentice position to category manager for fruits andvegeta- bles. His responsibilities included building and man- agingcontacts with suppliers, listing suppliers and products,negotiating prices, and working closely with buyers to ensure thatthe supplier relationship was smoothly managed.

As Alam’s boss, Chong had a reasonable under- standing of howthe Malaysian buying process worked, but he did not know all thedetails, and cer- tainly was not involved in day-to-day activities.What Chong had learned over the past few months was that there wereample opportunities for CMs to exploit the system for personalgain. One typical scheme involved company samples and rewards. Mostsuppli- ers provided CMs with a large supply of product sam- plesthat could be sold on the grey market. CMs and their spouses oftentraveled extensively to product presentations of certain suppliers.These events usu- ally took place at luxury hotels, and often inresort set- tings. Since Alam was a CM for fruits and vegetables,he might be provided with other products, such as small applianceslike toasters or coffeemakers. Another typical scheme was forsuppliers to provide rewards tied to performance and sales. Thesecould range from household appliances to expensive jewelry andwatches. These rewards could be kept or sold. There were even caseswhere companies owned by relatives of CMs had to be paid bysuppliers in order for the suppliers to get their products sold byJextra.

Besides his suspicions that Alam was accepting gifts, or eventaking bribes, Chong had heard rumors about a scheme between Alamand his father-in-law. Alam referred suppliers willing to be listedfor a new product to his father-in-law who, as a side job, ran atrading agency that “established contact to Jextra Stores.” Theagency received a commission of 0.5 percent for all goods coveredby the agency agree- ment. It was rumored that Alam rarely listedsuppliers and products not covered by the agency.

Bribery

The bribery issue was particularly troubling. Bribery of retailbuyers was as old as the retail industry itself. The briberyprocess works as shown in the following exam- ple. A buyer who paid50 ringgit for a pair of blue jeans the previous year negotiates a45 ringgit price based on a larger order. Another clothesmakeroffers the same pants for 42 ringgit each. In order to retain thebig order, the first vendor matches the 42 ringgit price and givesthe buyer 2 ringgit for each pair of blue jeans. The bribe isundetectable, because the buyer sets up a phony company that servesas a middleman in the transaction. The vendor bills the retailerfor 42 ringgit a pair and funnels the 2 ringgit to the buyerthrough the dummy corporation, calling it “an agency commission.”After the deal is done, the vendor keeps the order and the retailerpays less for the pants than a year ago. The buyer looks goodbecause the price paid was lower than a year ago. The buyerbelieves,“I deserve the money because I am helping the com- pany.”For a few years, the retailer may benefit by hav- ing lower costs.Longer term, the retailer’s costs may increase because the buyerhas an obligation to the vendor and may end up payingless-competitive prices. The retailer may also end up withmerchandise that is inferior in quality and difficult to sellbecause it was purchased by a corrupt buyer.

Chong’s Decision

Chong had a dilemma. Although he suspected that Alam wasinvolved in “dirty” buying, how could he find out? His colleaguesmight know, but they could be involved in the same activities.Jextra was doing well and, as far as Chong knew, except forbribery, most of the behaviors were not criminal in Malaysia. Whatif he set up an investigation? If he found noth- ing, he couldalienate his people and lose personal credibility. He might findthat large parts of his prod- uct category management were engagedin similar actions. What should he do then? The whole busi- nessmight be at risk if he were to shut it down. He could lose his topCMs and disrupt supplier relation- ships. Plus, how would heactually investigate the CMs—hire an outside investigator? Talkwith suppli- ers? Find a disgruntled employee? Spy on hisemployees? This was all new to him.

Proving any of his suspicions would be difficult. Alam was arespected member of the team. Aside from rumors and hearsay, Chonghad no real evi- dence of bribery or kickbacks. Alam’s lifestyledid not seem out of the ordinary. Chong would need clear evidence,and an outside investigator would mean added cost. Theinvestigation could take months, or even years, and Chong might begone from Malaysia by the time the process was com- pleted. Inaddition, this would take a lot of his time, and he was alreadyworking almost 60 hours a week.

Chong needed to keep growing the business and meet his financialtargets. It was critical for him to deal with the mayor’s proposalappropriately and ensure that Jextra’s chosen site did not end upwith one of his competitors. Maybe he should wait before doinganything about Alam.

Appendix: Excerpts from Jextra’s Business Conduct Code

Summary

Jextra is an international company with a strong rep- utationfor providing quality products. We continually seek to deliver thebest results for the Company the highest return to ourshareholders, and the most beneficial service to our customers.

Ethical conduct is defined as conduct that is mor- ally correctand honourable. To maintain our valuable reputation and to build onour success, we must conduct our business in a manner that isethical as well as legal. This Business Conduct Code estab- lishesJextra’s commitment to following ethical busi- ness practices. Itdetails the fundamental principles of ethical business behaviour,and defines the responsibilities of all directors, officers,associates, and Company representatives.

Jextra is committed to conducting business lawfully andethically. Every associate is obligated to act at all times withhonesty and integrity. We expect you to bring good judgment and asense of integrity to all your business decisions. While it is notpossible to list all policies and laws to be observed, or allconflicts of interest or prohibited business practices to beavoided, this Business Conduct Code details the company’sexpectations for associate conduct, and helps associ- ates make theright decisions. Associates are expected to know the company’spolicies and comply with them.

Applicability

Associates who supervise others have an important responsibilityto lead by example and maintain the high- est standards ofbehaviour. If you supervise others, you should create anenvironment where employees under- stand their responsibilities andfeel comfortable raising issues and concerns without fear ofretaliation. If an issue is raised, you must take prompt action toaddress the concerns and correct problems that arise.

You must also make sure that each associate under yoursupervision understands our Code and the policies, laws, andregulations that affect our workplace. Most importantly, you mustensure that employees understand that business performance is nevermore important than ethical business conduct.

As a Jextra employee, you are expected to comply with both theletter and the spirit of our Code. This means you must understandand comply with all of the company policies, laws, and regulationsthat apply to your job, even if you feel pressured to do otherwise.Our Code also requires you to seek guidance if you have questionsor concerns, and to cooperate fully in any investigation ofsuspected violations of the Code that may arise in the course ofyour employment.

Bribery

It is illegal to pay or receive a bribe intended to influ- encebusiness conduct or behaviour. Our guideline goes beyond thestandard set by the law, and prohi- bits any activity that createsthe appearance of any- thing improper, anything that may embarrassthe company or anything that may harm our corporate reputation. Noassets of the company or other funds may be used to bribe orinfluence any decision by an officer, director, employee, or agentof another company, or any governmental employee or official.

It may be acceptable to entertain or provide minor gifts toguests or suppliers, as long as the expenses are reasonable,consistent with good business prac- tices, and do not appearimproper. Any gift, enter- tainment, or benefit provided must bemodest in scope and value. You should consult with your super-visor if you have any questions about whether any gift-givingactivity is appropriate. Never provide a gift, entertainment, orbenefit that contravenes any applicable law or contract term orthat is large enough to influence, or appear to influence, thereci- pient’s business decisions.

Associates should not accept money, gifts, or excessiveentertainment from any guest, contractor, or supplier at any time.For more information on gifts, entertainment, and related issues,see the Conflicts of Interest guidelines.

International laws strictly prohibit giving, promis- ing, oroffering money, or anything else of value, directly or indirectly,to officials of foreign govern- ments or foreign politicalcandidates in order to obtain or retain business or any improperbusiness advantage. Never give, promise, offer or authorize,directly or indirectly, any payments to government officials of anycountry.

Conflicts of Interest

Associates must avoid any situation in which their personalinterests conflict with the interests of Jextra. If a circumstancearises in which your interests could potentially conflict with theinterests of Jextra, it must be disclosed immediately to both yoursupervisor and Human Resources for review. Associates should bevigilant about recognizing potential conflicts. You must alwaysconsider whether your activities and associations with otherindividuals could negatively affect your ability to make businessdecisions in the best interest of the company or result indisclosing

nonpublic company information. If so, you may have a real orperceived conflict of interest. Below is a list of potentialconflicts of interest.

l Owning a substantial amount of stock in any com- petingbusiness or in any organization that does business with us.

l Serving as a director, manager, consultant, employee, orindependent contractor for any organisation that does business withus, or is a competitor—except with our company’s specific priorknowledge and consent.

l Accepting or receiving gifts of any value or favours,compensation, loans, excessive entertain- ment, or similaractivities from any individual or organization that does businessor wants to do business with us, or is a competitor.

l Taking personal advantage of a business opportunity that iswithin the scope of Jextra’s business—such as by purchasingproperty that Jextra is interested in acquiring.

Related Party Transactions

Employees and immediate family or household mem- bers may notserve as a supplier or customer of the Company, or otherwise engagein business dealings with the Company, without the written consentof a member of the Executive Management Team. You or a member ofyour immediate family or household may not accept businessopportunities, commissions, or advantageous financial arrangementsfrom a cus- tomer, supplier, or business partner of the Company.You may not purchase for personal use the goods or services of theCompany’s suppliers on terms other than those available to thegeneral public or estab- lished by Company policy. You may not takeadvan- tage of any business opportunity that you learn about in thecourse of your employment.

Questions:

1.What cross-cultural differences may be at play in theJextra case? What factors are motivating the key players in thiscase?

2. Regarding the requests for roads and schools, doesChong understand exactly what the Mayor has asked of him? Is hecorrect to assume that this may be a request for a bribe? What areChong’s options as to how to proceed? What are your concerns forChong going ahead with a contribution to the school? What are yourconcerns for Chong refusing to contribute?

3. Considering the need to be a manager with a globalmindset, what should Chong do with his suspicions regardingAlam?