The above comic strip illustrates the recent situation that took place in Alibaba.com; China’s largest e-commerce website which provides business-to-business (B2B) services by matching buyers and sellers. Suspicion of internal fraud started in 2009 when the number of complaints they received from global buyers were on the increase. Soon after that, the senior management launched an internal investigation and found that more than 2300 vendors used its website to defraud global buyers. The frauds usually involved vendors offering small quantities of electronics at attractive prices, with payments settled using “less reliable” methods. Even worse, 100 of the company’s 5000 salesmen, as well as some supervisors and managers, were either intentionally or negligently allowing the vendors to evade the company’s authentication and verification measures to form “fraudulent storefronts” for international customers. In order to uphold the company’s core value of integrity and be responsible for all the unethical acts, the chief of the board of director, Jack Ma, decided to make the issue public.
What are the causes of the unethical behavior?
Supervisor's influence
From Alibaba B2B’s 2010 3rd season report, Alibaba’s total income was up to 1.47 billion. The premium members are over 1,000,000, which increased 45.76% compared to last year which rose from 1.06 billion to 1.47billion. On the surface, everything is great. But behind this, it implied that the top management has a high expectation on employees' job performance. This pressure would further motivate employees to improve the sales performance artificially through fraudulent methods.
Lax enforcement
Although the Chinese government has a series of harsh penalties (lengthy jail terms and death sentences) imposed on the frauds, most law executors in China do not enforce the law.
Failure to handle affairs according to the law is also popular in the case of corruption in China. For example, nearly 80% of the 130,000-190,000 CCP members disciplined and punished by the CCP annually since 1982 got at most a warning. Only 20% were expelled from the party. Less than 6% were criminally prosecuted. In recent years, half of those convicted of corruption received suspended sentences and did not serve any jail time. (Pei, 2007)
Eventually, since the law implementation and reinforcement in China are weak, the risks and consequences of being caught are low.
High collectivism society
The concept of ranking is extremely important in China. As a result, many company posts weekly and monthly rankings for employee performance. Given that the Chinese culture emphasizes on collective thinking and blending in with the group, workers with low performances would be embarrassed by the posting and the pressure to avoid this unwanted attention is high. In the following chat, the Chinese rank lower than any other Asian country in the Individualism (IDV) ranking, at 20 compared to an average of 24.Therefore, in such working atmosphere, peer influences and pressure may become one of the major forces that lead some Alibaba’s sales representatives to cheat customers.
Ethical Approaches
This case illustrated different ethical approaches that can be used by parties to arrive at decisions.
Sales team’s ethical approach: Egoism
The sales team is practicing egoism. People who use this approach will assess the moral worth of a behavior by looking at its consequences. For example, an act is considered morally right if the result could maximize their self-interest. In this case, since the sales staff’s commission depended on the number and total dollar value of the transactions, they thought that their involvement in helping the vendors evade the company’s verification process is acceptable as they could gain more commission. To a certain extent, it reflects that employees value job performance and personal interest more than public interest.
The Chief of the Board of Director’s ethical approach: Moral rights
“We are just doing what we think is right. It’s that simple.” Alibaba.com said. This quote shows that the Board of Director used the Moral Rights approach when dealing with this ethical issue. “The moral rights approach concerns itself with moral principles, regardless of the consequences.” (Ltd) “Three values… respect for human dignity, respect for basic rights, and good citizenship…must be the starting point for all companies as they formulate and evaluate standards of conduct” (Donaldson, Oct 1996) Here, Alibaba.com focused on being a good citizenship by playing a role in supporting and protecting the healthy economic environment. This benchmark helped them reach the conclusion that the frauds are unacceptable and to reveal it to the public regardless of the consequences of such actions.
Consequences and Costs
Eventually, the internal investigation led by the Board of Director led to the discovery of the fraud in Alibaba. The company made it public and the top two executives resigned to show that they nonetheless take responsibility and that such acts won’t be tolerated. In other words, the company bore the cost of the fraud generated by its employees.
Negative company image
The revelations of fraud present a black mark to the company. The internal investigation revealed approximately 100 sales representatives, managers and supervisors, accounted for roughly 2%of Alibaba overall workforce, were either intentionally or negligently allowing fraudulent storefronts to appear on its international marketplace. Shortly after the fraud reached the public, the stock price fell and most analysts changed their recommendations to "sell". Also, the investment bank lowered Alibaba's credit rating. Worse still, buyers are more skeptical and are now asking for tighter terms to compensate for the increased risk. Therefore, the fraud not only put the company into a difficult fund raising situation, but also affects the daily business transactions.
Additional compensation cost
The CEO handed in her resignation, stating that she was taking responsibility for the actions of the individuals in the company and management gave financial compensation to global buyers/ victims of the fraud. According to the investigation, between late 2009 and 2010, a total of 2,326 Alibaba China Gold Suppliers were found to have committed fraud when selling goods to users. That represented 1.9% of the company’s total Gold Suppliers and the average claim per buyer came out to around $1,200. Although Alibaba said that the fraudulent actions won’t have a material effect on its financial results, the company did lose a proportion of money which originally could be better utilized for business expansion.
What are the implications of ethical leadership in this case?
This case highlighted some of the main leadership qualities needed in managing a business in a global context including integrity, responsibility, charisma, ability to draw empathy, and satisfy the interests of different/opposing stakeholders. Most importantly, the leader must be able to manage the organizational culture so that its values and beliefs are known by every employee, thus informing them of the accepted behaviors and appropriate actions that can be taken. The following guidelines for developing an organizational culture dealing with ethical issues were illustrated successfully by the case.
1.“Company’s leaders need to refer often to their organization’s credo and code of conduct, treat corporate values as absolutes and must themselves be credible, committed and consistent.” (Donaldson, Oct 1996)
In this case, the chief of the board of director and the former CEO have done a good job in upholding the company’s value and act as a role model for other employees and customers. Even though it’s predictable that the consequences of revealing frauds happened in the company would be a huge damage to company’s image, yet in order to protect the value of integrity and to show how important it is to be a responsible staff, Alibaba.com decided to reveal the frauds and the former CEO David Wei, who were not accused of wrongdoing, resigned to take responsibility.
2. “Design and implement conditions of engagement for suppliers and customers.” (Donaldson, Oct 1996)
Sometimes it is not a company’s actions but those of a supplier or customer that pose problems, so companies could determine their relationships by accessing whether the suppliers and customers still comply with their conditions of engagement when sometimes there are moral ambiguities. For instance, in this case, once Alibaba.com found that 2300 vendors used its website to defraud global buyers which was actually an act that violated the corporate value, Alibaba.com immediately broke off the relations with the vendors.
The above measures provide some guideline for a leader to follow if they encounter ethical issues, but actually a leader could take some preventive measures to avoid unethical behaviors happen.
1. Set attainable goals and provide guidance if needed
One of the tasks of a leader is to bring out the best in people, yet meeting overly aggressive financial or business objectives would be a cause for employees to commit unethical behavior. “Rather than setting an overly ambitious target of multiple, hard-to-achieve goals, it is better to focus on a plan with only one or two achievable goals per year.” (Byham, 2009) With sufficient training sessions and workshops to improve the skills of the workers, especially if the company uses a ranking system, this will provide workers with the support, knowledge, and opportunity to improve in an ethical way.
2. Job rotation
The company is strongly recommended to implement a job rotation program to educate their employees of the different facets of the company and gain a better overall understanding of what it is that they are doing and working towards.
Conclusion:
All in all, people are easily tempted to commit unethical behaviors by a lot of reasons like business pressure or coworker influence, yet with different values held by each individual, people could have arrive different decisions by using different ethical approaches. There is no right or wrong approaches to make ethical decisions, but at least the decisions made would not violate the basic human values like respect for human dignity, respect for basic rights, and good citizenship. Since the cost of unethical behavior is huge, it is advisable for all leaders to have code of conduct and commit to it all the time.
Bibliography
Byham, W. C. (2009). Developing the next generation of Chinese Business Leaders. China business review .
Culpan, T. (2011, February 24th). Alibaba's chief Lu wants to 'Fix Mistakes, Prevent Detours'. Retrieved February 24th, 2011, from Bloomberg business week: http://www.businessweek.com/news/2011-02-24/alibaba-s-chief-lu-wants-to-fix-mistakes-prevent-detours-.html
Donaldson, T. (Oct 1996). Values in Tension: Ethics Away from Home. Harvard Businee Review .
Ltd, P. L. (n.d.). Approaches to ethical decision making. Retrieved February 28th, 2011, from http://www.poznaklaw.com/articles/bizethics.htm
Pei, M. (2007). Corruption Threatens China's Future. Carnegie Endownment for International Peace , 4.
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