August 2, 2007
Home Depot Fires Purchasing Managers
Home Depot has fired four lower-level purchasing managers for allegedly taking cash kickbacks from Asian flooring suppliers in return for putting the vendors’ products on the DIY chain’s store shelves.
The retailer has declined to offer a more detailed explanation of the events that led to the firing of the employees because of an ongoing federal investigation into the case.
As a result of the firing, Home Depot has revamped its ethics policy.
“It’s a zero-tolerance policy. … The merchandising organization can’t accept anything,” Ron DeFeo, a spokesperson for Home Depot, told The Atlanta Journal-Constitution.
The case brings to forefront the length that some vendors are willing to go to secure shelf space in stores. While payments are often reserved for the retailer itself in the way of slotting allowances and/or other fees, the practice of attempting to guarantee space through gifts and/or direct payments to a purchasing executive is nothing new in the business.
Dan Bello, a marketing professor at Georgia State University, told The Journal-Constitution, “Lunches, dinners, even sporting events are all normal business interactions, but when the financial benefit becomes excessive, like a vacation in Honolulu, it overcomes the rational business decision. The purchasing agent is making decisions based on the magnitude of the kickback and not the merits of the product.”
Stephen Hoch, a professor of marketing at the University of Pennsylvania’s Wharton School, said the practice of accepting gifts from vendors is much less common today than in the past.
“I would be extremely surprised if this goes beyond a few renegade employees,” he said.
While retail companies increasingly prohibit employees from taking any gifts from vendors, globalization has caused some to amend policies.
Lowe’s, Home Depot’s main rival, made the decision to allow employees to accept gifts of up to $75 in value.
Chris Ahearn, a spokesperson for Lowe’s, said, “In some situations, especially in meeting people from other countries, it’s poor manners to not accept a token gift. They (company employees) still have to report it, but we changed the acceptance policy mainly to prevent awkward situations.”
Globalization, according to John Stanton, professor of food marketing at St. Joseph’s University, is likely to lead to an increasing number of awkward situations. “The standard practice in some countries is, ‘Who do I pay the money to?’ They don’t care if it’s the company or the individual buyer,” he said.
Discussion Questions: Do you see competition for shelf space and the growing number of international suppliers leading to more cases such as that at Home Depot? Is this type of activity still commonplace in retailing circles? What can retail companies do to prevent this from happening?
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In truly consumer oriented stores that succeed over the long run, shelf space and open to buy dollars go to the best products at the best prices and not to products that have to pay in order to get into the store. In the food business, buyers are no longer merchants and they no longer know how to seek out new and exciting products–they just know how to line pockets (either their own or their company’s)–but in other retail categories, stores are more exciting and grow at more rapid rates because this type of corruption (slotting fees) does not exist.
Does it still happen? Yes. Is it common place and widespread? I certainly doubt it. Is a zero-tolerance policy the best position to take and will that policy create awkward issues for buyers with foreign suppliers? Possibly, but if suppliers want to sell their goods to US based organizations, then they need to adapt to US retailer’s policies. Take out the uncertainty and personal perception of what’s OK and not OK (a zero-tolerance policy does that) and require business negotiations to center on one aspect of decision making, and that’s the shopper. If the policy is in place and someone breaks the rule, then discontinue ever doing business with them again and terminate the offending employees. It won’t take long for everyone to sign on.
I expect to see more of this as time goes on. While in the United States a personal payoff is illegal, this is not the way the rest of the world operates. Most American companies hid this by listing the expense as sales commission. Since most of the world does not have our standard of living, individuals work to improve their financial position. They view their employer as making enough money. The most common comment I have heard over the years is this is the way we do business in our country. Americans simply should not fall prey to this temptation.
The question is not whether or not the practice right or is it wrong, the article seems to ask whether or not this goes on and was Home Depot right in what it did. There are two points to consider here.
1. Our government has a law against this type of action.
2. The people at Home Depot not only broke the law but they also went against a major company policy. This policy was a statement of what behavior the company was willing to accept. Just as Home Depot may have a $25 gift policy and Lowe’s has a $75 gift policy it does not matter why, it is a point of what the company ethically thinks is correct.
It is great that HD is improving their ethics, but what about the suppliers? In a global environment, kickbacks like this are not uncommon. Perhaps the biggest question is why is the nation’s #2 retailer just now getting around to addressing ethics as a corporate policy? What about the ethics lessons of Enron, MCI, and others that created Sarbannes Oxley. As a stockholder and customer, my question is why wasn’t this done 5 years ago? This also brings to light the question, what else does HD need to address about their employees, community involvement, ethics, stakeholder communications and shareholder communications? How transparent is the organization and why is this just coming to light now, when there is a federal investigation underway?
Retailers can extend their no-gift policy to the vendors themselves. If you want to do business with us, you need to operate within the parameters that we set out. I think Lowe’s is right in allowing a small $75 gift, but where is the line drawn? I think buyers need to be above and beyond the whole gifting process and just look at the product and make buys accordingly. When I look at some of the merchandise on the shelf of some of the biggest retailers, I wonder how it got there and who made the decision to buy it?
Maybe we should handle bribes and kickbacks the way the Chinese do–execute the offender! That’s a zero-tolerance policy.
If you’re concerned that globalization will perpetuate bribes, kickbacks, “gratuities” or whatever you wish to call it, maybe it’s time more companies stood up and said “this is not the way we do business” and cultural idiosyncrasies be damned.
We should not accept gifting just because it is a culture in another country. Buying decisions should be made with the consumer in mind and not what’s in it for the buyer. Companies need to be certain that these rules are clearly spelled out for both the employees and the selling companies. Violators will be dealt with harshly, not execution Chinese style, but employees being fired and companies no longer allowed to sell to them. This is no different than any other kind of theft in my opinion and needs to be treated the same way. A zero-tolerance policy will correct the problem very quickly if it is enforced.
I am completely shocked that this level of corruption still exists. It has been my experience that shelf position and space had become a formal, line item, cost of doing business. If Nardelli allowed this huge revenue stream to go untapped while he watched Home Depot stock go down the tubes, he should be forced to return his severance package. Where did Home Depot find its management? From GE. GE isn’t into retail, they are a manufacturer. They know about selling to dictators and potentates, but I guess no one had ever dealt with shelf space and position. I think Home Depot should hire their next president from Kroger or Food Lion. Neither would let anything like this happen. Both would have shelf space and shelf position placed as line items in their internal category management objectives. Home Depot should fire these guy’s boss for not having control of the business.
I’ve spent 20+ yrs as a merchandising executive, up to GMM/VP level. The previous comment about the tip of the iceberg is correct. I was fortunate enough to work in Fortune 500 companies that made us sign conflict of interest agreements and have gift limits of $50, and allowed for “reasonable” vendor-paid meals with the caveat we were expected to reciprocate with senior level expense approval. It didn’t take much to enforce an ethics policy and understand you would be fired immediately for accepting bribes. I’ve worked for GMM/VP’s who were criminally prosecuted for accepting cash and collateral under the table. I haven’t seen that level of abuse in years.
However, I’ve been 6 yrs on the manufacturing side and have brought my ethical righteousness to a couple wholesale companies. I wouldn’t even allow my staff to have a supplier lunch if we weren’t in good business standing. It looks like the line is too gray for this younger generation of merchandising execs. Perks and trips still abound under the table on the manufacturing side and is definitely status quo in other countries. How can I tell my managers it is NOT okay to climb into the stretch limo Vendor A sent to take them to lunch—I guess they forgot to tell me about the transportation perk!
I’m sure I got the boot from one company years ago for blowing the whistle on a supplier who was hustling my young managers. The owner just called my CEO to complain about the new DMM. At least Home Depot made the action public. Maybe now the Good Ol’ Boy system will finally see some cracks in the amour.
With the retail consolidations come fewer wholesale opportunities. In order to succeed, you have to be a preferred supplier to the big guys and thus the pressure (and the willingness) to be dishonest exists.
Opportunities don’t occur often and if you aren’t a preferred supplier, you’ll consider doing almost anything to get in the door (or keep your competition away from your space).
In the wholesale business, they’ve been buying dinners, trips, cars for years – why would other retail domains be any different?
Let’s face it, the “good ol’ boy network” is still alive and well in retail supplier-buyer relationships. Whether it’s cash kickbacks, family trips to Disney, or fly fishing in Canada, even U.S. suppliers try to gain competitive edge with these kinds of perks.
While I agree with the comments so far about corporate policy and “zero-tolerance,” I believe nearly every company in the U.S. has some kind of ethics policy. These things often rely upon a form of “personal governance” and the decision not to do the wrong thing. As in the case of Home Depot, that process sometimes fails us.
I believe there is an additional safeguard we can deploy: modify the buying and negotiation process. If buyers, merchandisers, and category managers have to follow a process that includes some simple checks and balances, the risk is minimized. Additionally, there are tools that can be deployed to prevent the process from being ignored.
A combination of corporate policy, process improvement, and governance would virtually eliminate this issue.
NBA Commish David Stern recently addressed the media regarding the betrayal of a single, long-time referee. He asserted that the perpetrator was a “rogue,” and that it was very unlikely there were others. Rumors then began to surface about possible others and Sports Illustrated Magazine even published a description of how easy it would be for an NBA ref to manipulate a game to affect its point spread.
Corruption survives because we haven’t yet found and exposed it. That’s the nature of corruption. It’s hidden. So while trying not to sound like a conspiracy theorist, our not seeing it doesn’t mean it’s not there.
In the highly competitive business of wholesaling, competitors are often very familiar with each other. When they make competing sales presentations to a buyer, there’s usually little difference between them. Before making a decision, a competent buyer then seeks internal consultation, friends in the industry who know the suppliers, and any other information they can find. But if it’s still a coin toss, then it’s never a coin toss. Decisions are made on other criteria, all of which defy definition and measurability. We often call it “chemistry” or “previous relationships,” but they’re really judgment calls (like a referee). If buyers are allowed to use intangibles as part of their decisions, there’s always room for creatively-applied “incentives” from manufacturers. And, as we’ve seen with spying operations, various “disincentives” can also be used effectively (e.g., racy photographs).
My wholesaler friends tell me we’re seeing the tip of the buyer corruption iceberg.
If a supplier systematically pays commission-type bribes to buyers, you can bet that the cost is really paid by the retailer. It’s very hard to systematically compare costs and take formal commodity-type bids for every item in a retail store. And there’s a big difference between dealing with bribery when it’s discovered versus preventing bribery versus systematically attempting to discover it.
For example, the NRF has a program for retailers to exchange information about organized theft from retail stores and warehouses. How many retailers would agree to sign agreements that they’d stop dealing with firms sponsoring bribery, even if the bribery only took place at their competitors? How many retailers would test their buyers and purchasing agents, like random drug testing in other professions? How many retailers would act like certain law enforcement organizations, who deliberately test their members’ honesty by “accidentally” leaving unprotected wallets and cash around?
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In truly consumer oriented stores that succeed over the long run, shelf space and open to buy dollars go to the best products at the best prices and not to products that have to pay in order to get into the store. In the food business, buyers are no longer merchants and they no longer know how to seek out new and exciting products–they just know how to line pockets (either their own or their company’s)–but in other retail categories, stores are more exciting and grow at more rapid rates because this type of corruption (slotting fees) does not exist.
Does it still happen? Yes. Is it common place and widespread? I certainly doubt it. Is a zero-tolerance policy the best position to take and will that policy create awkward issues for buyers with foreign suppliers? Possibly, but if suppliers want to sell their goods to US based organizations, then they need to adapt to US retailer’s policies. Take out the uncertainty and personal perception of what’s OK and not OK (a zero-tolerance policy does that) and require business negotiations to center on one aspect of decision making, and that’s the shopper. If the policy is in place and someone breaks the rule, then discontinue ever doing business with them again and terminate the offending employees. It won’t take long for everyone to sign on.
I expect to see more of this as time goes on. While in the United States a personal payoff is illegal, this is not the way the rest of the world operates. Most American companies hid this by listing the expense as sales commission. Since most of the world does not have our standard of living, individuals work to improve their financial position. They view their employer as making enough money. The most common comment I have heard over the years is this is the way we do business in our country. Americans simply should not fall prey to this temptation.
The question is not whether or not the practice right or is it wrong, the article seems to ask whether or not this goes on and was Home Depot right in what it did. There are two points to consider here.
1. Our government has a law against this type of action.
2. The people at Home Depot not only broke the law but they also went against a major company policy. This policy was a statement of what behavior the company was willing to accept. Just as Home Depot may have a $25 gift policy and Lowe’s has a $75 gift policy it does not matter why, it is a point of what the company ethically thinks is correct.
It is great that HD is improving their ethics, but what about the suppliers? In a global environment, kickbacks like this are not uncommon. Perhaps the biggest question is why is the nation’s #2 retailer just now getting around to addressing ethics as a corporate policy? What about the ethics lessons of Enron, MCI, and others that created Sarbannes Oxley. As a stockholder and customer, my question is why wasn’t this done 5 years ago? This also brings to light the question, what else does HD need to address about their employees, community involvement, ethics, stakeholder communications and shareholder communications? How transparent is the organization and why is this just coming to light now, when there is a federal investigation underway?
Retailers can extend their no-gift policy to the vendors themselves. If you want to do business with us, you need to operate within the parameters that we set out. I think Lowe’s is right in allowing a small $75 gift, but where is the line drawn? I think buyers need to be above and beyond the whole gifting process and just look at the product and make buys accordingly. When I look at some of the merchandise on the shelf of some of the biggest retailers, I wonder how it got there and who made the decision to buy it?
Maybe we should handle bribes and kickbacks the way the Chinese do–execute the offender! That’s a zero-tolerance policy.
If you’re concerned that globalization will perpetuate bribes, kickbacks, “gratuities” or whatever you wish to call it, maybe it’s time more companies stood up and said “this is not the way we do business” and cultural idiosyncrasies be damned.
We should not accept gifting just because it is a culture in another country. Buying decisions should be made with the consumer in mind and not what’s in it for the buyer. Companies need to be certain that these rules are clearly spelled out for both the employees and the selling companies. Violators will be dealt with harshly, not execution Chinese style, but employees being fired and companies no longer allowed to sell to them. This is no different than any other kind of theft in my opinion and needs to be treated the same way. A zero-tolerance policy will correct the problem very quickly if it is enforced.
I am completely shocked that this level of corruption still exists. It has been my experience that shelf position and space had become a formal, line item, cost of doing business. If Nardelli allowed this huge revenue stream to go untapped while he watched Home Depot stock go down the tubes, he should be forced to return his severance package. Where did Home Depot find its management? From GE. GE isn’t into retail, they are a manufacturer. They know about selling to dictators and potentates, but I guess no one had ever dealt with shelf space and position. I think Home Depot should hire their next president from Kroger or Food Lion. Neither would let anything like this happen. Both would have shelf space and shelf position placed as line items in their internal category management objectives. Home Depot should fire these guy’s boss for not having control of the business.
I’ve spent 20+ yrs as a merchandising executive, up to GMM/VP level. The previous comment about the tip of the iceberg is correct. I was fortunate enough to work in Fortune 500 companies that made us sign conflict of interest agreements and have gift limits of $50, and allowed for “reasonable” vendor-paid meals with the caveat we were expected to reciprocate with senior level expense approval. It didn’t take much to enforce an ethics policy and understand you would be fired immediately for accepting bribes. I’ve worked for GMM/VP’s who were criminally prosecuted for accepting cash and collateral under the table. I haven’t seen that level of abuse in years.
However, I’ve been 6 yrs on the manufacturing side and have brought my ethical righteousness to a couple wholesale companies. I wouldn’t even allow my staff to have a supplier lunch if we weren’t in good business standing. It looks like the line is too gray for this younger generation of merchandising execs. Perks and trips still abound under the table on the manufacturing side and is definitely status quo in other countries. How can I tell my managers it is NOT okay to climb into the stretch limo Vendor A sent to take them to lunch—I guess they forgot to tell me about the transportation perk!
I’m sure I got the boot from one company years ago for blowing the whistle on a supplier who was hustling my young managers. The owner just called my CEO to complain about the new DMM. At least Home Depot made the action public. Maybe now the Good Ol’ Boy system will finally see some cracks in the amour.
With the retail consolidations come fewer wholesale opportunities. In order to succeed, you have to be a preferred supplier to the big guys and thus the pressure (and the willingness) to be dishonest exists.
Opportunities don’t occur often and if you aren’t a preferred supplier, you’ll consider doing almost anything to get in the door (or keep your competition away from your space).
In the wholesale business, they’ve been buying dinners, trips, cars for years – why would other retail domains be any different?
Let’s face it, the “good ol’ boy network” is still alive and well in retail supplier-buyer relationships. Whether it’s cash kickbacks, family trips to Disney, or fly fishing in Canada, even U.S. suppliers try to gain competitive edge with these kinds of perks.
While I agree with the comments so far about corporate policy and “zero-tolerance,” I believe nearly every company in the U.S. has some kind of ethics policy. These things often rely upon a form of “personal governance” and the decision not to do the wrong thing. As in the case of Home Depot, that process sometimes fails us.
I believe there is an additional safeguard we can deploy: modify the buying and negotiation process. If buyers, merchandisers, and category managers have to follow a process that includes some simple checks and balances, the risk is minimized. Additionally, there are tools that can be deployed to prevent the process from being ignored.
A combination of corporate policy, process improvement, and governance would virtually eliminate this issue.
NBA Commish David Stern recently addressed the media regarding the betrayal of a single, long-time referee. He asserted that the perpetrator was a “rogue,” and that it was very unlikely there were others. Rumors then began to surface about possible others and Sports Illustrated Magazine even published a description of how easy it would be for an NBA ref to manipulate a game to affect its point spread.
Corruption survives because we haven’t yet found and exposed it. That’s the nature of corruption. It’s hidden. So while trying not to sound like a conspiracy theorist, our not seeing it doesn’t mean it’s not there.
In the highly competitive business of wholesaling, competitors are often very familiar with each other. When they make competing sales presentations to a buyer, there’s usually little difference between them. Before making a decision, a competent buyer then seeks internal consultation, friends in the industry who know the suppliers, and any other information they can find. But if it’s still a coin toss, then it’s never a coin toss. Decisions are made on other criteria, all of which defy definition and measurability. We often call it “chemistry” or “previous relationships,” but they’re really judgment calls (like a referee). If buyers are allowed to use intangibles as part of their decisions, there’s always room for creatively-applied “incentives” from manufacturers. And, as we’ve seen with spying operations, various “disincentives” can also be used effectively (e.g., racy photographs).
My wholesaler friends tell me we’re seeing the tip of the buyer corruption iceberg.
If a supplier systematically pays commission-type bribes to buyers, you can bet that the cost is really paid by the retailer. It’s very hard to systematically compare costs and take formal commodity-type bids for every item in a retail store. And there’s a big difference between dealing with bribery when it’s discovered versus preventing bribery versus systematically attempting to discover it.
For example, the NRF has a program for retailers to exchange information about organized theft from retail stores and warehouses. How many retailers would agree to sign agreements that they’d stop dealing with firms sponsoring bribery, even if the bribery only took place at their competitors? How many retailers would test their buyers and purchasing agents, like random drug testing in other professions? How many retailers would act like certain law enforcement organizations, who deliberately test their members’ honesty by “accidentally” leaving unprotected wallets and cash around?