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INTRODUCTIONYou are members of the expert corporate culture management-consulting firm, ETHOS, which specializes in analyzing, repairing, and developing effective and ethical corporate and organizational cultures. ETHOS has just been hired by the board of directors of technology firm, PEAR, regarding the development, manufacture, and sale of a revolutionary new high tech product created by a joint venture (BESLA/PEAR) in which PEAR and its partner, BESLA, are equal partners.
BESLA/PEAR's new product — Alter/Ego — is an implantable smartphone on a chip designed and manufactured from 2014 through mid-2016 and sold to the public just in time for the 2016 year-end holidays. The first 2 million Alter/Egos sold out within one month of their introduction into the marketplace. Even though 2 million were produced, there were not enough devices available for the demand of the holiday season. However, just before the end of the year, several unverified reports of serious injuries to people who bought the new device began to surface, appearing to indicate that something had gone wrong. As of January 31, 2017, the manufacture and sale of Alter/Ego devices were discontinued pending further internal and external investigations.
The product failure crisis began to unfold in late December 2016, when reports of several cases of injuries allegedly sustained by Alter/Ego customers started to appear on social media, including video and photographs posted on Facebook and Instagram that showed injuries on people's temples. Additionally, starting in the last week of December 2016, multiple traditional media reports appeared in leading periodicals in China, the U.S., and Germany, where a majority of these products were sold over the holidays. Regulators in these countries are also said to be interested in getting to the bottom of these allegations, planning investigations, possible raids into BESLA/PEAR's offices and facilities. PEAR, BESLA, and BESLA/PEAR are all scrambling to deal with the mounting crisis.
Your assignment as ETHOS is to review the facts of this case as set forth below and to make recommendations to the board of directors of PEAR. Your recommendations should include an analysis of the events, and what (if anything) within the corporate culture of BESLA/PEAR and/or its partners may need to be addressed. Additionally, provide recommendations to BESLA/PEAR and its parent companies, as necessary, to restore their reputation and standing.
Founded on June 1, 2014, as a 50/50 joint venture, BESLA/PEAR has offices, facilities, and supply chain activity worldwide; most notably as follows:
- Research and development offices in Seoul, South Korea, and Berlin, Germany (also BESLA/PEAR's headquarters).
- Minority-owned design facilities in Vietnam (VietDez) and testing facilities in Brazil (IpanemaTest). BESLA/PEAR owns a direct 20% interest in each of these firms.
- Major supply chain-manufacturing contract with SUNLA to assemble and manufacture the first 2 million Alter/Ego devices. SUNLA is the leading Chinese technology device manufacturing company, with facilities throughout China.
Alter/Ego is a revolutionary product that is expected to surpass the current generation of Apple iPhones and other smartphones. Alter/Ego is a mini-supercomputer implanted into a person's temple (with optional wireless glasses) that acts similarly to a handheld device — as an additional "brain" for everyday life. Except that this new "brain" is actually located adjacent to the person's existing brain, responsive to voice commands and other biological signals. The five-year strategic business plan (2014-2019) adopted by BESLA/PEAR reveals that the first wave of Alter/Ego devices is to hit the global marketplace just in time for the holidays.
Joint Venture PartnersBESLA
BESLA is a mature (25 years in business), publicly traded on NASDAQ, hardware/software giant. They have developed artificial intelligence products embedded in everyday tools and objects and created the first self-driving motorcycle called iMoto. BESLA is headquartered in Silicon Alley, New York. BESLA has a formal ethics and compliance program within its legal department, with a part-time manager who reports to the general counsel (who also acts as the chief ethics and compliance officer for BESLA). As part of their program, BESLA has a code of conduct, an ethics helpline called the BeslaLine that is advertised on the company intranet, and requires a 30-minute annual online ethics and compliance training of all employees (20,000 worldwide). The training completion rates average around 60%. In the past two years, BESLA has dealt with and settled a series of sexual harassment and discrimination cases at its Silicon Alley headquarters which involved members of the executive team. The general counsel, April South, annually reports to the audit committee of the board on the state of the ethics and compliance program — her report is typically allotted 10 minutes on the agenda. The CEO and Founder of BESLA, Elan Jobe, a darling of the technology world, is renowned for his visionary ideas, although also considered by some to be the "bad-boy" of the tech-set because of his extravagant lifestyle and constant hob-knobbing with the rich and famous. The board of BESLA is comprised of luminaries of the corporate and U.S. governmental world, including a former U.S. secretary of state, three retired CEOs of Fortune 100 companies, two current CEOs of technology companies, and three retired former CFOs of Fortune 500 companies.
PEAR is an artificial intelligence and robotics software leader headquartered in London, UK, that owns a number of award-winning and cutting-edge software patents. More of a start-up company, PEAR was founded five years ago in London by two technology wiz kids — David Frick and John Frack (affectionately referred to as "Frick and Frack") — on the power of their revolutionary patents that deploy artificial intelligence to populate smartphones and much smaller devices. They are 50/50 100% owners of PEAR and are known as inseparable, creative visionaries who have put together a cohesive and much envied team of 4,000 technology stars at their firm. In 2013, in their second year, PEAR faced allegations of corruption and bribery in South Korea where it had developed a strategic partnership with a local software company. Though PEAR does not have a formal ethics and compliance program, an ethics and compliance manager, or a chief ethics and compliance officer, Frick and Frack and the company itself are well known for their culture of "ThinkGood", which has been profiled in the media and studied by organizational design experts.
The PEAR board is comprised of some of the best and brightest minds in the technology business and beyond. Indeed, their board and c-suite have been profiled in numerous magazines as the new paradigm of what corporate executive teams and boards should look like in the 21st century. Among their board members are six international stars of the tech and other non-tech sectors (from Asia and Europe), a former chief ethics and compliance officer of a Fortune 250 company, a current chief risk officer for a Fortune 100 technology company, a cyber-risk expert, and a well-known academic focused on corporate social responsibility.
BESLA/PEAR FIVE-YEAR STRATEGIC BUSINESS PLAN (2014-2019) SUMMARYThe five-year BESLA/PEAR Strategic Business Plan has the following principal components and deadlines:
- Vision: Alter/Ego will be the first and only meaningful wearable/implantable smart-chip to market by November 1, 2016 — it will be "the iPhone of implantables".
Market: The key markets starting on November 1, 2016 include:
- U.S. and North America — 500,000 devices
- European Union — 500,000 devices
- Asia Pacific (including China and Australia) — 500,000 devices
- Africa — 200,000 devices
- Latin America — 300,000 devices
- Sales/Revenue Target: By year-end 2016, BESLA/PEAR projects sales/gross revenue of US$1 billion (2 million devices sold at an average global retail price of $500 per device).
- Performance Incentives: Malcolm Smith, CEO of BESLA/PEAR, and his executive team stand to make substantial performance bonuses if they meet the above on-time targets for sales. Their performance bonus is reduced by 50% if delivery is delayed by 1-15 days, and 75% if delivery is delayed 16-30 days. If the devices are not in stores on or before December 1, 2016, there are no performance bonuses. Similarly, an additional production bonus scale rapidly descends if the number of devices produced does not equal the 2 million target, with bonuses disappearing if less than 1 million devices are produced on-time.
- By June 1, 2015 — Start-up and set-up of all offices, research and development facilities, and supplier and third party contracts.
- By December 31, 2015 — Full design and testing (including for quality and effectiveness) of the new product with animal and human testers.
- By April 1, 2016 — All technical and technological tests and product readiness to be completed, all supply chain elements in place, all manufacturing schedules planned and confirmed.
- By May 1, 2016 — All necessary regulatory approvals and governmental legal and regulatory compliance to be completed anywhere needed — in production markets and markets where the product will be sold.
- By October 1, 2016 — The first batch of Alter/Ego devices to be fully produced and ready for shipping.
- November 1, 2016 — Worldwide product launch including in the U.S. (for North America), Germany (for the European Union), and China (for Asia Pacific).
BESLA/PEAR CHRONOLOGY — JUNE 1, 2014 TO DECEMBER 31, 2016On June 1, 2014, two leading technology companies, BESLA and PEAR announce their new joint venture (BESLA/PEAR) to develop, produce, and sell an undisclosed cutting edge wearable technology, the details of which remain secret and confidential. Despite trying, leading tech magazines have not been able to crack the story. The CEOs of each company have known each other for several years and started conversations about collaborating years earlier.
The two companies create a joint venture project team of 300 employees ("Team X") to design, develop, and produce this secret new product — called "Alter/Ego". Team X consists of a multi-disciplinary team of people (some from BESLA, some from PEAR, and about 200 newly-hired employees), who are experts in fields of operations, computer engineering, health and medical, and supply chain and procurement. A majority of the team are digital design and computer scientists. They are located internationally in various offices and other locations (testing, labs, and manufacturing) with Berlin as the central hub for the project, its headquarters and largest location (100 employees).
By the end of 2014, the startup of BESLA/PEAR had set up new offices, facilities, and supply chain contracts worldwide.
From June 1, 2014 through November 1, 2016, BESLA/PEAR and its employees and subcontractors worked under a highly-disciplined project schedule, sometimes operating under high pressure to develop, deploy, test, and manufacture the new device, as per the strategic plan (see summary above). Everyone on the team knew that they would not be taking time off until the launch date, and that they needed to work flawlessly to get BESLA/PEAR up and running to ensure an on-time device delivery.
Early on, Malcolm Smith, BESLA/PEAR's CEO, made it clear to his executive team and employees generally that less essential, "cost-center", non-revenue-creating activities and functions (like audit, legal, ethics and compliance, human resources, and corporate social responsibility), would not be part of the initial launch of BESLA/PEAR. Instead, BESLA/PEAR would rely on the parent companies' functional experts if and when any issues came up, and in accordance with a predetermined and limited resource sharing cost schedule. PEAR's legal team was assigned to provide legal support to the product launch (supporting contractual and regulatory requirements) and BESLA's human resources department would be available for personnel issues (hiring and firing BESLA/PEAR employees and subcontractors).
In terms of an ethics and compliance program, BESLA/PEAR did not have a formal program or any clear information on its company intranet regarding codes of conduct, helplines, training or recommendations for problem-resolution. However, at the bottom of the human resources page, there was a reference to the websites of its parent companies for "more information on codes of conduct" with links to the home page of each parent company.
In the case of BESLA, their general counsel, April South, acts as the chief ethics and compliance officer, reporting to the audit committee of the BESLA Board on ethics issues once a year. In the case of PEAR, though there is no formal chief ethics and compliance officer, their general counsel, August North, reports to the audit committee of the PEAR Board every quarter on any material legal, ethics, compliance, regulatory, and corporate social responsibility issues that come up in the prior quarter. It is Mr. North's most recent quarterly report to the PEAR Board (January 2017) that led them to hire ETHOS for this corporate culture evaluation and recommendations.
Malcolm Smith is a former employee of BESLA who was the head of one of their most successful divisions having brought to fruition iMoto, the first global self-driving motorcycle program. To date, BESLA has been very successful in selling the iMoto especially to the Baby Boomer/Harley generation. They had a setback in late 2013 when an iMoto was involved in a fatal accident of the motorcyclist who was apparently watching a Harry Potter movie on the motorcycle's large video display while riding on the highway. There were allegations at the time of the accident of known imperfections in the software program that may have allowed such an accident to occur. Additionally, BESLA failed to file disclosures to the Securities and Exchange Commission and other appropriate governmental agencies at the time of the accident. Within two weeks of the accident, BESLA made an additional public stock offering; although, they did not disclose the accident until after the stock offering and then only when the media reported on this story. BESLA was severely criticized in the media and by regulators who eventually fined them $350,000 for the non-disclosure. Their CEO, Elan Jobe, made public statements at that time stating that while the death of the motorcyclist was tragic, "compared to the death rate of motorcyclists generally, the death of one iMoto user was immaterial".
By December 2015, the first Alter/Ego implantable chip prototypes were technically tested in various labs in Germany and South Korea, as well as tested on living subjects in Vietnam and Brazil with overall success, according to the records filed with the company and regulators. However, some quality issues apparently came up in early tests, involving skin rashes on both animal (pigs) and human test cases at the implant location. The minor rashes were explained away by the testers as an issue that had to do with the preparation lotion used to implant the chips on the temples of the pigs and the people. The records reflect that once the lotion was changed, no such skin rashes or other health issues occurred on either animals or people.
However, even after the reports that the lotion change resolved the issues, some BESLA/PEAR employees expressed concern on the implications especially of the human test cases. In particular, two BESLA/PEAR employees — Jessup Jones, a lab test manager, and Missy Greene, a computer engineer — came forward with their concerns at project team meetings in mid to late 2015. Their concerns zeroed in on two issues: (1) whether or not the lotion was the actual cause of the purported rash and, (2) whether the reporting done from the labs in Vietnam and Brazil was reliable or had been doctored.
Malcolm Smith reported monthly to the management board of BESLA/PEAR. He referenced some of the issues that arose during implant testing on animals and humans but, unbeknownst to the vast majority of BESLA/PEAR employees and subcontractors, he did not provide much detail around the testing issues, explaining that certain health and quality issues had come up but had been quickly fixed through the use of a new lotion, thus resolving the concern.
However, Jessup Jones and Missy Greene continued to be concerned about the hasty resolution of the issue and apparent inconsistency of the testing and expressed continuing concerns to their supervisor, Malcolm Smith, both at team meetings and privately. Since he was apparently ignored at these meetings, Jessup Jones also contacted the anonymous BeslaLine, reporting his concerns.
In addition to the quality issue referenced above, there had been persistent rumors about the conditions of the manufacturing sites located in South China owned by SUNLA, which had been reported in the press in prior years alleging human rights abuses of the workers there. Another technology company — SCHMOOGLE — which had used SUNLA for the manufacture of its extremely successful iMobile Phone over the past five years, had also been in the news as SUNLA had been accused of slave labor at its manufacturing sites in the past (until 2014). The allegations included harsh working conditions, 18-hour work days, no weekends or vacation time for the employees, jail-like dormitory conditions, and several cases of worker suicide on the premises. As a consequence of the serious nature of these allegations and its use of SUNLA over the years, SCHMOOGLE suffered serious reputational and financial damage and decided to switch to a new, lesser-known third party manufacturing provider in China in late 2014. These issues had been supposedly resolved at the time that BESLA/PEAR entered into its testing and supply contract with SUNLA in early 2015.
Despite rumors of other technical and logistical issues surrounding the final manufacturing of the Alter/Ego devices, 2 million were completed and delivered on November 1, 2016 to all markets worldwide. As a result, there was a big holiday season media splash celebrating the success of BESLA/PEAR and the leadership of Malcolm Smith, the now two-time successful leader of cutting edge new technology projects — the iMoto and the Alter/Ego.
This case was prepared for the Daniels Fund by Dr. Andrea Bonime-Blanc, Chief Executive Officer of GEC Risk Advisory, and a consultant to the Ethics & Compliance Initiative.
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