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SUBJECT: BUSINESS ETHICS AND CORPORATE GOVERNANCE

MARKS: 40 SEMESTER: 4
TIME: 2HRS BATCH: 32nd
CASE STUDY

1) Wockhardt Ltd Divergence Betwe en Precepts And Practices

(40*1=40marks)

(This case study is based on reports in the print and electronic media, and is
meant for academic purpose only. The author has no intention to sully the
image of the corporate or the executives discussed.)

COMPANY PROFILE

Wockhardt is a global, pharmaceutical and biotechnology company that has

grown by leveraging two powerful trends impacting the world of medicine
globalization and biotechnology. Its line of business includes manufacturing
and distribution of pharmaceutical products and dietetic foods;
biotechnology research; and provision of diagnostic medical services.
Wockhardt is a listed pharmaceutical company in India.

The company has a market capitalization of US $1.3 billion and an annual

turnover of US$285 million (INR billion). Wockhardt's pace of growth and
momentum permeates every mindset, system and technology within the
organization.
 The company has its headquarters in Mumbai, and has10 manufacturing
plants in India and the United Kingdom, subsidiaries in the United States,
United Kingdom and Brazil, majority owned companies in South Africa
and Mexico, marketing offices in Africa, Russia, Central and South east
Asia. Wockhardt has a strong track record in acquisition management, with
three successful acquisitions in the European market. These acquisitions
have strengthened Wockhardt's position in the high potential markets of the
United Kingdom and Germany, and have expanded the global reach of the
organization.

Aiding Wockhardt's globalization plans are its ten world class

manufacturing plants in India and United Kingdom, its dedicated complex
(comprising six facilities) at its Biotech Park, and its state-of-the-art
research laboratories.

Wockhardt is distinguished by a strong and growing presence in the

world's leading markets, with half of its revenue wing from Europe and the
United States. Wockhardt's market presence covers formulations,
biopharmaceuticals, nutrition products, vaccines and active pharmaceutical
ingredients (AP).

WOCKHARDT'S BUSINESS PHILOSOPHY

Wockhardt's business philosophy is Creating value by understanding

and communicating with its customers and business partners'. The
company's vision is' To be the most admired Indian Health Care Group'.
In order to pursue the above business philosophy and meet the challenges
for turning the vision into reality, the Board of Directors of Wockhardt as
adopted a Code of Business Conduct and Ethics for directors and senior
Management of the company. This code is intended to focus the board,
each director and each of the senior management personnel on areas of
ethical risk, provide guidance to help them recognize and deal with ethical
issues, provide mechanism to report unethical conduct, and help foster a
culture of honesty and accountability. Each director and senior
management personnel must comply with the letter and spirit of this code.

No code or policy can anticipate every situation that may arise. Accordingly,
the code is intended to serve as a source of guiding principles for directors
and senior management personnel. Directors and senior management
personnel are encouraged to bring questions about particular circumstances
that may involve one or more of the provisions of the code to the attention
of the Chairman of the Board of Directors.

Wockhardt's Code of Business Conduct and Ethics dwells on area with

conflicts of interest, misuse of corporate opportunities, compliance with
applicable laws, dealing with accounting complaints and maintaining
confidentiality of information Although Wockhardt Ltd says in the Code of
Business Conduct and Ethics that the company will follow ethical practices,
the following unethical practices are attributed to the company.

NON-COMPLIANCE OF FDA REGULATIONS

The Food and Drug Administration (FDA) in the United States makes it
compulsory for the companies to adhere to certain stipulations, and inspects
factories before allowing foreign pharma companies to export medical
drugs into the United States, and issues warning letters to pharma
companies, when there is non-compliance. According to FDAs
requirements: 'Written production and process control procedures are to
be followed and documented in the pharmaceutical company and
complete and accurate information about production batch is to be
included in the records.

However,'Wockhardt failed to comply with stipulations of FDA in its

manufacturing facility in Waluj in Aurangabad'. Hence the USFDA, the apex
regulator of the US pharmaceutical industry warned Wockhardt Ltd about
the same in its letter released on10 April 2006, referring to Wockhardt's
letter dated 21 February 2006, and said that a November2005 FDA
inspection of the pharmaceutical plant had found that' written production and
process control procedures were not always followed and documented Also,
the company was warned for not including complete and accurate
information about each production batch in its control records. Dozen so
FDA warning letters are issued every year. While most are resolved without
penalty, the FDA can also take other regulatory action.

UNETHICAL ISSUES RELATING TO BREAST-FEEDING REGULATIONS

In India, as in many other countries, aggressive marketing of breast

milk substitutes by commercial interests triggered campaigns for promotion
of breastfeeding. Moreover, the promotion of breast milk substitutes by
medical professionals challenged traditional breast-feeding practices. The
baby food industry cleverly sought to promote its products through health-
care facilities.
 In India, in the wake of global developments with regard to the
promotion of breast-feeding, The Infant Milk Foods and Feeding Bottles
Bill was passed in the Lok Sabha in1989.It was reintroduced in1991 but
lapsed again. In1992, the' Infant Milk Substitutes, Feeding Bottles and
Infant Foods (Regulation of Production, Supply and Distribution ) Act'
was finally passed. It came into force from 1August1993.The Act
expressly prohibits:

• Distribution of free samples of infant milk foods and feeding

bottles to mothers;
• Advertising to the public;
• Promotion in health care facilities;
• Distribution of gifts or samples to health workers;
• Promotion of words and pictures that idealizes bottle feeding;
• Advice to mothers by company sales staff;
• Financial assistance to health organizations or associations of doctors
to organize conferences, seminars, and soon; and
• Incentives to sales personnel retailers based on volume of sales.

The central government has authorized four voluntary organizations to

monitor the Act. These are the Central Social Welfare Board, the Indian
Council for Child Welfare, the Association for Consumers Action on
Safely and Health, and the Breast-feeding Promotion Network of India
(BPNI).Thus the Infant Milk Substitutes, Feeding Bottles and Infant
Foods (Regulation of Production, Supply and Distribution) Act,
1992explicitly prohibits distribution of free samples to mothers.
 However, WockhardtLtd, inspire of the1992 regulation went onto
distribute free samples, according to the study conducted by
UNICEFACASH. The study revealed that the incidence of free
samples prevailed allover India-it was highest in the country's capital,
New Delhi, followed by eastern, western and southern India. Seventy
two percent of the free samples were given by Nestle; other
companies that indulged in such illegal practices included Dalmia
Dairy (24percent),Wockhardt (19percent) and Raptokos
Brett(18percent).They even sponsored major events for professional
medical and nutrition bodies tow in their support. Large
commercially interests coupled with the teaching of formula milk
feeding in medical colleges became major barriers to the promotion
of breast-feeding.

VICTIMIZATION OF EMPLOYEES

On 8 May 003, more than 75,000 medical representatives from the

entire country participated in 50-day rally strike in Kerala under the
aegis of the Federation of Medical and Sales Representatives
Associations of India (FMRAI) protesting against the unethical policies
of pharmaceutical companies which (i) denied the fundamental trade
union rights of the members ; (ii) pursued policies that treated sales
promotion employees as vendible commodities and resorted to' hire and
fire;' and (iii) increased the work-load imposed on the workers.

However, it was found that Wockhardt Ltd had dismissed more than 77
medical representatives because of declining sales. It had also effected
large number of transfers of the sales promotion employees for the same as
on. All these anti labor activities of the company had nothing to do with
labor indiscipline, but related to unachievable sales targets.

The Wockhardt management with a view to preempting the strike,

issued an office order on 6February2003. It made it known that the
management would not in anyway have any truck with the FMRAI and
that' any response to FMRAI's call by an employee would be
considered an indisciplined act and appropriate action would be taken
against such respondents; the management would take firm action
against individuals who maintained any relationship whatsoever
directly or indirectly, with the FMRAI.'

Not satisfied with the threat, the circular also announced that the
company intended to employ some well known police officers incase
there was any violation of law and order, arrogantly assuming to itself
the powers of government and refusing to accept the rights of employees
for 'freedom of association'. FMRAI took up this matter and the various
acts of victimization of the employees by Wockhardt with the Labor
Department of the Government of lndia, but to no avail. The Federation
also took up all these matters with the National Human Rights
Commission. With no remedy insight, the Centre for Indian Trade Unions
(CITU) had approached the International Labor Organization (ILO) and
complained against Wockhardt Ltd. For violation of its labor standards and
the Indian government for being a mute witness to all these in fractions by
the company.
LACK OF SECURITY OF SERVICE TO WORKERS

Wockhardt Ltd has been increasingly squeezing the employees, particularly the
field workers. On the one hand, field workers are being thrown out of regular
employment with impunity while, on the other hand, casualization of field
workers Is on the rise, accompanied by low wages as well as poor working and
service conditions.

UNETHICAL SALES PRACTICES

Apart from indulging in violation of basic trade union rights of employees,

Wockhardt management also victimized the company's field workers, who had to
face medical practitioners, traders and the general public, when the company
resorted to several unethical trade practices. Concerned with this problem,
FMRAI wrote a letter the company's chairman and requested his personal
attention in the matter of unfair sales and marketing practices indulged by the
management and the terrible embarrassment faced by field work .But the
management resorted to recognition no of the ·on, discontinued its talk. With
FMRAI and went on victimizing the field workers on a large scale. The field
workers Wockhardt- Merind who are affiliated to FMRAI, went on strike
protesting against the management's anti labor polices-

MOTING HEALTH CARES SYSTEM THROUGH PROPERLY LABELLED SAMPLES

Infant food samples should conform labeling and every infant food should
comply with section 6 Rule7and 8of the1992 Act.However,Wockhardt distributes
free samples of 'Dexrice' to doctors promotin g it as delicious weaning food with
enriched vitamins. Even though samples of infant foods are permitted by law,
sample Of Dexrice, an infant food from Wockhardt do not conform to a labelling
requirements.

Wockhardt promotes' First Food', an instant milk cereal food with health claims
and the product label is not in conformity with the IMS Act. Wockhardt's' First
Food' comes with a health claim,' Every feed of First Food is fortified to provide
protein, vitamins, minerals which are essential for your baby's healthy growth'.

Wockhardts also promotes' Easum' weaning food baby cereal through doctors
and the message on the label reads,'...Easum Rice Moong Dal Cereal is simple
to digest first solid food for babies...'. The company uses a health claim to
influence mothers. The labeling requirements are not complete as laid down in
the IMSAct.

HARASSING COMPETITORS IN MATTRS OF CLINICAL TRIALS

A' non-existent 'NGO linked to a senior Wockhardt executive attempted to use

the Public Interest Litigation (PIL) route in the Supreme Court to derail the
launch of insulin by its rival, Biocon, and has focused the public attention on the
business of clinical trials.

The biotech regulator, Genetic Engineering Approval Committee (GEAC),

received a complaint against Hyderabad based Shantha Biotechnics in 2003. A
Bangalore-based non-governmental organization (NGO), Anikethan, alleged
that eight people had died in the clinical trials of streptokinase conducted by
Shantha Biotechnics.

As part of its routine processes GEAC sent the complaint to Shantha to seek
its comments. The query got splashed in news papers thus defaming Shantha
 .Shantha's comments on the issue were sent by the GEAC to the NGO. The mail
was returned as' addressee unknown'.

The publication Bio Spectrum, in an investigation some months later,

revealed that the unsuspecting NGO was used by some of Shantha's competitors
to make wild accusations and delay the approval of the product.

The competitor's name is still not known. The clinical trials data was
apparently' procured' from some of the agencies involved in the study.

Wockhardt had introduced an insulin drug in 2003 and has had limited market
success. Apparently, it feared the entry of another home based competitor.
Wockhardt has so far not refuted the connection and has so not clarified its use
of such ar use against a competitor

WINDING-UP PETITION

In the mean time, in March 2011 in a winding up petition filed against

Wockhardt by a group of three Foreign Currency Convertible Bond (FCCB)
holders led by the US based fund QVT was admitted by the Bombay High
Court. They were seeking recovery of their investments through sale of the
company's assets. The company was proceeded against for defaulting on there
payment of $110 million FCCB. However, a Division Bench stayed the
admission of the winding-up petition granting interim relief to the company.

CONCLUSION

The above instance shows the ethical practices by one of India's leading
pharmaceutical companies Wockhardt, reveals the divergence that exists
between precepts and practices. Unethical companies tend to use codes of
business conduct and ethics as a mask to show a human efface to the outside
world, while they adopt all kinds of unethical practices in their work place.
Consumers, employees, government and the society at large, get adversely
affected by the malpractices of these corporations that want to promote
themselves as the' most admired companies' to the outside world, mainly with
the intention of making fast money.

QUESTIONS

1. Summarise the case?(10 marks)

2. Discuss Wockhardt's business philosophy? (10 marks)
3. What are the alleged unethical practices of Wockhardt Ltd?
(10 marks)
4. How can you reconcile the wide divergences between the precepts
and practices of the company?(10 marks)