Monday, February 13, 2012

A Foul Smell Coming From Avon

Heads have rolled at makeup supplier Avon, Inc. The FBI and US prosecutors are investigating allegations that executives at Avon violated the Foreign Corrupt Practices Act (FCPA). In 2005, while Avon was pursuing a license in China to conduct door-to-door sales, it is alleged that Avon executives bribed government officials in China as well as third party consultants. 

China is known for using bribes as a common business practice. However, in 1977, the US Justice Department enacted FCPA to prevent companies from using bribes while conducting business abroad. Nevertheless, since 1977, prosecutors have uncovered more than 40 cases that violated FCPA which totaled more than $2 billion in criminal penalties. You would think people have gotten the hint by now. 

What is amazing is that in 2005 an internal audit was done at Avon and questioned several hundred thousands of dollars paid to Chinese officials. Yet, it took until 2008 when an Avon employee wrote a letter to its CEO suggesting there may have been inappropriate business practices by Avon executives. Avon, in turn, conducted an internal investigation without reporting it to government officials. Now, there are questions as to whether or not Avon executives concealed the alleged bribes from its board.

This violation is serious. You can be prosecuted for knowingly ignoring or hiding acts of bribery.  As it stands, several Avon executives have been fired, including 3 in China. The Vice Chairman was fired this past January. In May, Avon fired the former head of global internal audit and security. The senior vice president responsible for operations outside the US resigned two days after being put on leave. And, most unfortunate, Andrea Jung, who has been esteemed as a great CEO of Avon for the past 12 years will step down as soon as the board finds her replacement. She will stay on as Chairman. 

While you cannot control the behavior of every individual in a corporation, there are many lessons to be learned from this. First, too many people live with the philosophy of ‘when in Rome, do as the Romans do.’ In this case, it would have been more effective to have something the enterprise stands for. If Avon embraced high integrity in all business practices, this could have been avoided or at least someone would have come forward before 2008. Standing for something tends to be more valuable than following what everyone else does.

Second, this is a clear reason for why succession planning has to be built into an organization’s strategy. In fact, the incumbent CEO should start succession planning the day he or she becomes CEO.

Third, of the many former CEOs I know from Fortune 1000s, they all seem to agree that 10 years is enough time for a person to serve as CEO. Avon’s CEO has been in her position for 12 years. And, because she has no apparent successor, she was not planning to step down anytime soon. Most retired CEOs I know feel that after 10 years you get stale. Or worst, you believe whatever you think is the truth and the people around you are reluctant to question you.

Without question, Avon has served a great purpose in society. It has empowered women when there were fewer opportunities for them. Now it is time for Avon to pay for their sins and usher in a new era of empowerment with a new and powerful leader.  

I welcome your comments below. 

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