Corporate Risk Management Failure

Maruti's management focused on improving productivity; bring down the cost and increasing profitability of company in stiff market competition. In pursuit to profitability, productivity and cost reduction, management failed to consider sources of risk emanated from unhappy workforce, their aspiration and social-economic condition of the region.

When profits go up by 2,200% over nine years (MSIL's from 2001-02 to 2010-11), when CEO's pay goes up by 419% over four years (MSIL CEO's from 2007-08 to 2010-11), when you get a 400% increase in productivity with just a 65% increase in your workforce (from 1992-2000), when your workers' real wages increase by just 5.5% when the consumer price index rose by 50% (2007-11) , when a worker can lose nearly half his salary for taking a couple of days leave in a month - there is dysfunctionality .

Following risk management failure can be trace to the Manesar episode:

Management failed to see cloud in the sky. Last year, it witnessed three worker unrests/strikes over the management's refusal to recognize a union that was independent of the one at the Gurgaon factory. The violent incident at Manesar shows that the management has not learnt lessons from the last three strikes in 2011. The management did not help workers overcome the trust deficit that had survived their earlier unrest.

Like at many other manufacturing units, India's dysfunctional labor laws mean that regular and contract workers share the Manesar shop floor, doing the same work, but with regular workers being paid almost more than twice as much. This is, of course, not a formula for comfortable labor relations. Rather than hiring regular employees, now contract employees are preferred at the lower end of the job.

The fact that the contract employees, they would be doing jobs largely identical to those carried out by permanent workmen earning far more than them, doesn't help the situation either. The same wage for same job is not the rule of game at Maruti.

There is a fundamental asymmetry in management-worker relationships. Worker-management relations are marred by myopia on either side. The Manesar case has predictably begun to evoke a cry for 'reforms' of the country's 'outdated' labor laws.

Management refused to recognize the workers' union until the workers first agreed to form grievance and welfare committees.

Management was unwilling to implement the long-term wage settlement for casual workers and not just for permanent workers and reduce wage gap between the two.

The Suzuki management has shown great cultural insensitivity towards the workers. In an unusually harsh (for a Japanese official) public statement, Tamaki Tsukuda, minister (economic) in the Japanese embassy, says: "The management did not quite know how to deal with a new band of people representing the workers"; it wasn't aware of dealing with emotions among the workers.

Risk Management Actions and Corrective Measures

Company has well established Enterprise Risk Management (ERM) practice managed by Executive Risk Management Committee (ERMC). In addition to continuing existing best practices, management should improve in following aspects:

Labor relations

Concerning labor relations (especially how to handle Indian unions), there is much to be learned from non-Japanese companies operating in India. Most of American and European companies deal with much fewer strikes than their Japanese counterparts, though the reasons is not completely are unclear. One possible cause could