Business Ethics & Corporate Governance

A case study on Overstated Earnings:

Submitted To: Dr. Abhishek Ranga

Submitted By: Dhruv Barman (29) Rashi Yadav(69) Sakshi Sidana(76) Vithika Gupta(100)

PREFACE

This report is made by us to look at the ethical issues and corporate governance related to the case of Overstated Earning: Bausch & Lomb, which was held during the 1980s and 1990s. Our purpose is to find the major issues in the case and to conclude weather the practices are ethical or not by applying all the ethical tests on them. Our report contains summary, ethical issues involved in the case, ethical tests and its code of conducts framed there after by the management. We like to thank all our group members for their valuable contribution in forming this report.

ACKNOWLEDGEMENT

With an overwhelming sense of gratitude, we acknowledge the valuable guidance and consistent encouragement extended to us by Dr. Abhishek Ranga (professor) our mentor at Kirloskar Institute of Advanced Management Studies. We are thankful to him for their guidance and support which enabled us to accomplish this endeavor. Their technical acumen and years of experience have provided us with crucial inputs at critical stage.

EXECUTIVE SUMMARY

The case Overstated Earnings: Bausch & Lomb throws light on the malpractices and unethical policies followed by a 150 year old company. The case depicts how top management can pressurize middle level and lower level employees to achieve unrealistic targets and how this leads to many other problems. The company enjoys double digit growth for twelve years but in the end faade breaks down and the real face of the company is revealed. Company announces that its excessive distributor inventories would result in a significant reduction in their earnings and then comes the halt to the growth. SEC investigation reveals that company has dumped its products and faked it as real sales and this had led to two years unordered inventories with its distributors. SEC charged company for violation of federal securities law for over statement of earnings and Bausch and Lomb without admitting or denying agreed to cease and desist order. But company claimed that its top executives had no knowledge of all this and for which it was heavily criticized. Its employees testified that they were given a target number and they had to achieve it and they even said that they did 70% of shipments in the last three days of the month. Company also settled a shareholder lawsuit and finally Company tried to regain its reputation and analysts have said that company was not farsighted and through their overseas operations had lost major chunk of their revenues. Also the competitiveness in the field had increased and it will take time to regain its former reputation and image. We have analyzed various issues related to the case of which major ones are excessive pressure on middle-level management, overstatement of earnings, dumping of products which are not ordered, faking sales, unvigilant top management and also non disclosure of information. We performed various test and the results were that company was unethical. We identified various stakeholders and measured them on power interest grid to know which stakeholders to be satisfied, informed, monitored, etc. As the case dates back to 1994, company made a comprehensive code of conduct which was implemented properly as there had been no similar case with the company again and company is since been running successfully. So, to conclude we can say that company was unethical in its approach but it learned from its mistakes and later on re-established itself as a company offering high quality optical care.

Table of Content

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Introduction................................................................................. 1 Company Profile......................................................................... 2 -3 Case Facts................................................................ ................... 4 Ethical Issues.............................................................................. 5 Ethical Tests................................................................................ 6 -7 Shareholder Analysis.................................................................. 8 -9 Code of Conduct......................................................................... 10 -11 Conclusion.................................................................................. 12 Questions and Answers............................................................... 13 Bibliography................................................................................ 14 Appendix...................................................... ............................... 15

INTRODUCTION

Bausch & Lomb is the eye health company dedicated to Bringing Visionary Ideas to Eye Health. The company offers the worlds most comprehensive portfolio of eye health products, and has one of the oldest, best known and most respected health care brands in the world.

The company began in 1853 in Rochester, New York, as a small optical shop that grew to become a Multi-billion dollar corporation with approximately 13,000 employees worldwide, and with products available in more than 100 countries.

At Bausch & Lomb, its history of innovation continues today as it invents new materials, engineer new Technologies, and create pioneering ways to help people see well.

COMPANY PROFILE

In the 1900s, Bausch & Lomb produced the first optical quality glass made in America. Its sunglasses were used by military in world war I. Bausch & Lomb is also credited with developing the lens of the cameras that took the first satellite pictures of the moon. In 1971, Bausch & Lomb introduced the first soft contact lenses. As of April 2006, it was the largest global provider of eye care products. Bausch & Lomb product lines included vision care, Surgical and pharmaceuticals. Its vision care business manufactured and marketed soft and GP contact lenses, lens care products for soft and GP lenses, eye care products and vision accessories. The company offered the comprehensive line of products for ophthalmic surgery in the surgical Market segment. It developed and marketed prescription and over the counter drugs used to treat a wide range of eye conditions such as Glaucoma, eye allergies, Conjunctivitis and dry eye. The Bausch & Lomb name is one of the best known and most respected healthcare brands in the world and Bausch & Lomb leverages on this brand name. In 2004, it employed approximately 12400 people worldwide and its products were available in more than 100 countries. Its 2004, revenues were US $2.2 billion. In late 2004, Bausch & Lomb launched Renu moisture loc, its newest brand in the lens care segment. Bausch & Lomb is the eye health company dedicated to perfecting vision and enhancing life. They offer the worlds most comprehensive portfolio of eye health products and are proud that they are one of the oldest, best known and most respected healthcare brands in the world. They began in 1853 in Rochester, New York, as a small optical shop that grew to become a multi-billion dollar corporation with nearly 14,000 employees worldwide, and with products available in more than 100 countries. At Bausch & Lomb, their history of innovation continues today as we invent new materials, Engineer new technologies, and create pioneering ways to help people see better. Bausch & Lomb made entry into the Indian market in 1993. Over this time period Bausch & Lomb has changed the eye-care market with semi-soft and hard contact lenses giving way to soft contact lenses. Bausch & Lomb also pioneered laser surgery in India and has set new benchmarks in cataract surgery.

They market five broad categories of products: Contact Lenses Their offerings span the entire spectrum of wearing modalities and include such well-known brand names as PureVision, SofLens and Optima. Bausch & Lomb is the clear market leader in the Indian market in the contact lens category. Lens Care Their lens care products include the ReNu brand of lens care solutions and ReNu MultiPlus solution is the number one selling formula in the world. Cataract and Vitreoretinal Surgery They offer a full suite of products including intraocular lenses and delivery systems featuring the SofPort and Akreos brands of IOLs, the Millennium line of phacoemulsification equipment, and other surgical instruments and devices, including the Storz line of instruments. Refractive Surgery Their products for refractive laser surgery include the Zyoptix system for personalized vision correction (customized LASIK) and the Zyoptix XP and Hansatome brands of microkeratomes. Pharmaceuticals Their products treat a wide range of eye conditions including glaucoma, eye allergies, conjunctivitis, dry eye and retinal diseases. They offer proprietary and generic medicines available by prescription, over-the-counter eye drops and other medications. The Pharmaceuticals part of products is not launched in India as yet.

CASE FACTS

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Case dates back to 1980s and 1990s when Hong Kong division of Bausch and Lomb enjoyed double digit growth and revenues of about $ 100 million. In 1994 after twelve years of double digit growth company announced that excessive distributor earnings would result in significant reduction in earnings. Earnings declined by 54% to $88.5 million Faked sales of Ray Ban Sunglasses to real customers but dumped glasses at discount prices to gray markets Contact Lens Division shipped products that were not ordered to boost sales Other divisions also dumped lenses in the gray market SEC charged company for violation of federal securities law for over statement of earnings. Company settled charges without admitting or denying the allegations and agreed to cease and desist order, which is an order or request to halt an activity (cease) and not to take it up again later (desist); or else face legal action. Company emphasized that SEC found no evidence that top management knew of the overstatement of profits. Former employees testified they were given target number each year and no excuses were accepted Employees said that to meet targets they did 70% of their shipments in the last three days of the month Company settled a shareholder lawsuit over the overstatement of earnings for $42 million. After all this company began its climb back from tarnished image.

ETHICAL ISSUES

1. Top management induces tremendous pressure down the line on the employees to make numbers: The former employees stated that they were given a target number each year by operating units and no excuses were accepted. The employees were pressurised to make numbers and boost up the sales and so many times managers did their 70% shipments in the last three days of the month. 2. Unvigilant Senior Management: The senior management was unvigilant, as they were not aware of improper revenue recognition which was created by the huge target number given to the employees. 3. Over statement of earnings and profits: The SEC charged Bausch & Lomb with violation of federal securities law for over statement of earnings. 4. Excessive distributor inventories: The company was faking sales by shipping excessive inventory to the distributors. Also they shipped products that were never ordered. This resulted in a decline of 54% earnings to $88.5 million. 5. Faked sales to real customers by dumping glasses at discount prices to gray market: The Hong Kong unit was faking sales to real customers but then dumping the Ray Ban glasses at discount prices to gray market. 6. Shipping of products that were never ordered: The contact lens division of Bausch & Lomb shipped products that were never ordered to doctors in order to boost sales. 7. U.S., Latin American and Asian contact lens division also dump lenses on the gray market, forcing Bausch & Lomb to compete with itself. 8. Non disclosure of information: Company has not shown the data of these typical 14 years, from 1983 to 1997 on their website.

ETHICS TESTS

1) Smell test- applies to all issues. If any of the above stated ethical issues come in public eye, it will be a great matter of shame for the individual/company So it is unethical 2) Utility Test- It applies to the following issues Top management induces tremendous pressure down the line on the employees to make numbers- Employees were pressurized and they forced them to achieve the targets and thus unhappiness was bought to them Excessive distributor inventories- distributors were forced to accept the inventories and thus they were not happy So, it is unethical in this case. 3) Rights test- It applies to the issue Over statement of earnings and profits- Shareholders Right to Information was violated as earnings and profits were misleading and overstated. So, it is unethical in this case 4) Exceptions test- applies to all issues. In all the above stated issues, this test applies because if other companies will follow these practices it will be unethical So it is unethical. 5) Choices Test- It applies to following issues: Excessive distributor inventories- Distributors were left with no choice except to accept the dumped products and thus their right to choice was violated. So, it is unethical.

6) Justice Test- It applies to following issues: Top management induces tremendous pressure down the line on the employees to make numbers- Most of the burden to accomplish the burden was on middle level management while top executives only formed targets and took benefits of the profits. Excessive distributor inventories- Distributors had major burden as they had to maintain excess inventories and sell in gray markets while company for twelve years took advantage of overstated earnings. So it is unethical.

STAKEHOLDER ANALYSIS

Various Stakeholders in this case are: 1) EmployeesTop Executives- Low Interest-High Power Satisfy Company claimed that top executives had no information of overstated profits so that shows low interest while they had high power Middle Management- High Interest-Low Power Engage Middle management was asked to accomplish the unrealistic targets so they had high interest and so they used improper methods to achieve the targets while they had low power as they had no say in the targets and no excuses were allowed. 2) Distributors/Suppliers- High Interest-Low power Inform

Distributors had high interest as they had to sell the excess inventories which were dumped by the company while they had low power as they accepted these products for about 12 years while not retaliating. 3) Shareholders- High Interest-High Power Engage Shareholders had high interest as the companys profits affected them and they had high power as company had to settle a shareholder lawsuit over the overstatement of earnings for $42 million. 4) Government/SEC- High Interest-High Power Engage Securities & Exchange Commission had high interest as they look into the accounts of various giants as well as high power as they charged company with violation of federal securities law for overstatement of earnings.

CODE OF CONDUCT

After this case, the management of the company has formed the following code of conducts. To be successful, they must maintain an ethical culture A culture in which abiding by the law and company policies and behaving ethically are universally accepted as the way they conduct their business around the world. Together with their Cultural Drivers, their commitment to an ethical culture tells us how to get the right results the right way. Each of them contributes to their Companys culture by what they say and do every day. All employees, including temporary and contract employees, and our Board of Directors must make a personal commitment to promote and sustain an ethical culture at Bausch & Lomb. This means that each of them must:
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Set a good example by always abiding by the law, this Code and all other Company policies and procedures that apply to their jobs; Keep their promises and commitments and be accountable for their actions; Treat others the way they would want to be treated; Tell the truth, even when doing so may be difficult; Seek advice from managers, supervisors or other knowledgeable personnel when uncertain about the right course of action; Help each other get the job done right the first time and in a safe manner; and Exhibit the courage to question, challenge or report actions that are inconsistent with the law, this Code or Company policies and procedures.

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A commitment to an ethical culture also means that no matter how urgent the business need, we must never:
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Interpret high performance goals as direction or permission to overlook problems or do things the wrong way; Compromise our dedication to product quality and employee safety; or put others in a position in which they feel pressured to violate the law, this code or Company policy and procedures.

Words on paper in a code of conduct alone do not guarantee that an organization will operate ethically or be a great place to work. It is only when the people in an organization choose to take the words of their code seriously and join one another to bring those words to

life that such a document proves its true value. No matter what you do for the Company, you make a difference. Look for opportunities everyday to put the principles of this Code into practice. In so doing, you will continue to make Bausch & Lomb a company that we can all be proud of.

CONCLUSION

The case study of Bausch & Lomb teaches various lessons which can help in sustainable long run growth of a Company. It depicts the fact that targets should inspire yet they should be realistic and should be formed after a thorough discussion with the employees. An employer should recognize employees capabilities and should help him achieve the goals and even if the goals are not achieved he should show him his pitfalls. This can lead to a long term faith and loyalty among employees and long term growth of the company. It also depicts that company instead of forcing products on suppliers should develop a partnership leading to better sales and revenue. It also depicts that top management should be vigilant in its approach and also proper code of conduct should be made and also enforced strictly so that company grows ethically and sustainably. An ethical company goes long way as we have already seen in Texas Instruments Company case. These lessons are easy to learn but hard to followed but if implemented can lead to long run growth and better shareholder value.

QUESTIONS

1. What went wrong with the Bausch & Lomb culture? The company was not employee oriented rather it was goal oriented. Goal setting has been promoted as a powerful motivational tool but, goal setting can induce unethical Behaviour. Here the employees misrepresent their performance level when they had a Specific, challenging goal of making numbers. In 1993, Bausch and Lomb employees falsified financial statements to meet the earnings goals. 2. How was the company affected? Financially? Competitively? The company was affected both financially as well as competitively. There was a decline of 54% in the earnings to $ 88.5 million and sales were down to $1.9 billion. The company had to pay $ 42 million in order to settle the lawsuit over the overstatement of earnings. Bausch & Lomb tried to climb back from its tarnished image and tried to enter two week contact lens market but found that Johnson & Johnson had beat it there and had it fairly cornered. 3. Why are all those named in the consent decree former employees? All those who were the consent decree were named former because they left the job afterwards.

BIBLIOGRAPHY

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Course Material of BECG http://www.exed.hbs.edu/assets/Documents/goal-setting.pdf http://www.hotstocked.com/companies/b/bausch-lomb-inc-BOL-description57192.html http://business.nd.edu/Fanning_Center_for_Business_Communication/Management_ Communication_Case_Studies/ http://investing.businessweek.com/research/stocks/private/snapshot.asp?privcapId=19 095 http://www.bausch.com/en_US/downloads/corporate/ir/general/CodeofEthics_eng.pdf http://www.scribd.com/search?query=bauch+and+lomb+onover+rated+earnings http://www.scribd.com/doc/37279739/Bausch-and-Lomb-Case-Study http://www.bausch.in/ http://www.bausch.in/aboutus.aspx http://www.bausch.com/en_US/default.aspx

APPENDIX

Some of the incidences from the case which supports our conclusions are1. Hong Kong unit was faking sales to real customers but then dumping the glasses at discount price to gray market 2. The SEC charged Bausch & Lomb with violation of federal security law for over statement of earnings. 3. SEC found no evidence that top management knew of the overstatement of profits at the time it was made. 4. Former employees testified that they were given a target number each year by operating unit and no excuse were accepted. 5. The 148 year old company that has had a rugged climb back up and it has not yet reached its former levels of success in sales, revenues, or earnings.

Gray Market - A grey market or gray market also known as parallel market is the trade of a commodity through distribution channels which, while legal, are unofficial, unauthorized, or unintended by the original manufacturer. The ceased and desist order - A cease and desist (also called C & D) is an order or request to halt an activity (cease) and not to take it up again later (desist); or else face legal action. The recipient of the cease-and-desist may be an individual or an organization. In the U.S. the term is used in two different contexts. A cease-and-desist order can be issued by a judge or government authority, and has a well-defined legal meaning. In contrast, a cease-and-desist letter can be sent by anyone, although typically they are drafted by a lawyer. SEC - United States Securities and Exchange Commission