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Avon stands as the world’s largest direct seller and one of many leading beauty
companies. The ethical issue that will be addressed in this Avon case study is bribery. Bribery is
the offering or taking of something of value to influence persons or gain an unfair advantage. It
is a form of corruption that sometimes occurs in dealings of international business. Bribery is a
serious issue because it “raises moral and political concerns, undermines good governance and
economic development, and distorts international competitive conditions” (OECD, 1997).
Bribery or corruption within the workplace is a very common issue today but, in many cases it
fails to surface that can leads to the direct and indirect impacts of bribery within Avon Products
Inc., in which employees were misallocating funds in order to obtain specific governmental
permission. According to chapter 10 of the strategic management textbook, bribery is an
offensive act and is defined by Black’s Law dictionary as the “offering, giving, receiving, or
soliciting of any item of value to influence the actions of an official or other person in discharge
of a public or legal duty”. Because of this ethical issue, Avon has been losing sales since 2007.
Avon got license for direct selling in countries like India, China and Brazil in the year
2006 and its sales increased by 12.7% in the period between the years 2007-2008. But, since
there was a change in government at countries such as India and China in the end of the year
2008, the sales started decreasing after the year 2008. An investigation team was set up in the in
the mid of 2008 – 2009 and it was found that some of the executive officials at Avon had bribed
the government officers at countries like China and India in order to get the license for direct
selling. In 2008, Avon encountered a bribery scandal in which a whistleblower reported to Avon
chief executive officer Andrea Jung that the company’s China unit was bribing government
officials and misallocating funds equaling up to several hundred thousands of dollars. The U.S.
Securities and Exchange Commission (SEC) immediately began to investigate the unethical act
and suspect Avon to be in violation of the Foreign Corrupt Practices Act (FCPA). In addition,
the Wall Street Journal previously also reported that U.S. prosecutors found suspicious
payments to Chinese officials and third-party consultants in a 2005 audit report, when Avon
was seeking a license to conduct door-to-door sales in China. Bribery scandal surrounding Avon
Products have brought the long-running case back into the global spotlight and drawn fresh
attention to fair competition in emerging markets.
It would seem that bribery is accepted in some countries more than others. But,
according to the Encyclopedia of Business Ethics and Society, it is all a matter of cultural
relativism. In our country, the exchange of gifts between business associates is considered
unethical and, in some cases, it is considered illegal. In other countries, business gift giving is a
culturally expected part of doing business and business relationship building. In China, for
example, relationship-based business is highly valued. An article by China Briefing states,
“treating government officials to business dinners and entertainment… is a common way for
businesses to manage their relationships with local authorities.” This means that this system of
social networks that facilitate business dealings try to build a good relationship between each
other besides trying to achieve a goal easily.
United States corporations are expected to uphold home ethical standards when
conducting business in other countries. However, some corporations unwisely follow the ancient
adage of “when in Rome, do as the Romans do.” In June 2008, an investigation began regarding
allegations of bribery in Avon’s China division. Avon employees paid some hundreds of
thousands of dollars to Chinese government officials and third-party consultant agencies in order
to obtain governmental permission to conduct direct sales in China. The bribery allegations
consisted of improper expenses for items like travel and entertainment. Eventually, the
allegations extended to other countries such as Brazil, Mexico, Argentina, India, and Japan.
Federal prosecutors found the questionable payments in a September 2005 draft internal report
by the company. It raised concern over Avon’s compliance with U.S. anti-bribery laws that bar
U.S. companies from paying bribes to foreign officials.
Currently, the U.S. Securities and Exchange Commission are investigating the case along
with the Federal Bureau of Investigation (FBI) and the Southern District of New York’s
Complex Frauds Unit in Manhattan. Throughout the investigation, the mentioned prosecutors
have evaluated personnel from different levels of management. As a result, they have either
been terminated from their positions or demoted. Charles Cramb, now former vice chairman at
Avon, was demoted to chief finance and strategy officer. China’s Avon President S.K. Kao was
terminated along with Jimmy Beh, China CFO; C.Q. Sun, head of corporate affairs at China; and
Ian Rossetter, head of global internal audit and security in New York. Even CEO Andrea Jung
was demoted during the investigation but, was demoted due to Avon’s financial performance and
not based on bribery allegations.
Monetary effects
The Avon bribery scandal has caused drastic changes in the company’s monetary
accounts. By combining investigation costs, drops in earnings, and losses in revenue, Avon has
incurred costs totaling to almost $250 million since 2009, displayed in Figure 1. The company’s
sales revenue dropped by 4 percent and net profits dropped by 15 percent (Anderson, 2012).
Investigation Costs
2011 $93.3
Year
2010
$95
2009
0 20 40 60 $59 80 100
Costs (million)
Since 2012, Avon has reported that the company’s stock is down by 7 percent since their
last quarterly earnings report. In addition, sales have dropped 40 percent since last year.
Employment
Due to the type of ethical issue being faced in this case, several people were involved and
therefore, either terminated from their positions or demoted. Also, in May 2008, 4 executives
were fired after being suspended the previous year.
Laws and regulations
Avon Products is expected to abide by the FCPA along with other regulations the
company itself has enforced. The Compliance Committee and senior management are assigned
to oversee that these regulations are enforced and associates comply accordingly. In 2010, Avon
established the Global Ethics and Compliance Council which was designed to further evaluate
day-to-day operations.
Indeed, Avon is guilty of bribing foreign officials in China, and therefore, has violated
the Foreign Corrupt Practices Act (FCPA). Avon failed to establish policies and procedures that
provided reasonable assurance that the business was adhering to FCPA provisions. The
Organization for Economic Cooperation and Development (OECD) adopted the
Recommendation of the Council for Further Combating Bribery of Foreign Public Officials in
International Business Transactions. Within this recommendation, the OECD Council gives
“Good practice Guidance” to companies on establishing effective internal controls, ethics, and
compliance programs or measures for preventing and detecting foreign bribery. The guide states
that companies should develop these practices on the basis of foreign bribery risks facing the
company. To ensure the continued effectiveness of the company, “such circumstances and risks
should be regularly monitored, re-assessed, and adapted as necessary.” Maintaining integration
and ethical value is a very important factor of every company, because when a company loses its
ethical value, the company gets to lose everything along with it and that includes its sales and
brand image. Avon is a best example of a company whose ethics had brought loss to the
company. We must also understand that though Avon lost its sales since 2006, it still did not get
bankrupted. Therefore, Avon might also be considered for a company that is financially stable
despite losing its ethical values.