Sunshine Fashion: Fraud, Theft and Misbehavior among Employees

Sunshine Fashion was a Sino-Japanese venture, whose operations grown very quickly, from 1993, the year of establishment until 2008, when the company became the industry leader in the production of cashmere sweaters, and a high-end fashion brand in its domestic market. However, in 2008, company had faced serious fraud and misbehavior among its employees, causing the loss of more than 5% of total domestic sales estimated at between Rmb 9.3 million and Rmb 10.5 million. By 2010, Sunshine operated three factories in Shenzhen, Shanghai and Taiyuan province, with more than 200 sales counters in department stores and more than 1000 employees throughout the country. Sunshine’s retail operations were monitored and managed by 14 branch offices, making it difficult to establish and sustain an effective control system of the company. Also, Sunshine had franchised some of its retail points outside of the major cities. Although company remained cautious about it franchising practice, difficulties in operational and brand control still existed.

Theft and fraudulent behavior of employees could be a reflection of ineffective management system that is unable to establish proper control system that could prevent such misbehavior. Also, lack of engagement and motivation among employees can also be seen as a leading force for the ethical misconduct. Engaged employees reflect willingness to stay within the company, and go beyond their basic duties and responsibilities in order to achieve organizational objectives. Engaged employees not only contribute to the company trust and internal success, but also, as some research show to the annual rise of income and sales and overall revenues and profits of the organization. (DuBrin). Sunshine uses financial incentives and bonuses as a source of motivation, which is a natural motive for employees at any level; however the Sunshine’s problem is in its unclear bonus system with a serious problem of transparency regarding the link between the performance and pay. 2. What were the strengths and weaknesses of Sunshine´s current internal control system and, more importantly, what could Li propose to the management to improve the situation?

Having a decentralized management system, as one that Sunshine has can be very helpful in terms of facilitating the growth of the company or improving ownership focus, however decentralization often causes high agency costs and increases the chance for a company to become fragmented, followed by the possibility of managers to act in their own interest, instead of putting organizational objectives on the first place. Autonomy given to employees can often result in more efficient decision making process, but also involves more financial burden and often results in conflict of interests and inconsistency between manager’s behavior and organizational objectives. (Consulting) Although Sunshine implemented the RFID/ERP system that allowed the head office to receive updates on sales and inventories every four hours, information had to be entered manually by staff leaving space for manipulation and misbehavior by employees. (O’Conor)

Also the autonomy that Sunshine gave to managers regarding promotions, sales and discount policy came at the expense because branch managers took advantage of the discretion they had with regard to how much of a discount they wanted to give during promotions and store celebrations. Regardless of the barcode checking system, that allowed Sunshine to track price changes of the items in all stores, loss due to the changed barcodes was estimated at Rmb 1.5 million. (O’Conor) What Li, as a sales manager could do, is to propose changing its current management system that would prevent employee misbehavior and improve overall working environment. The biggest problem Sunshine has is in its poor controlling systems. Centralization of the company could help overcome these issues since companies that adopt centralized system usually experience less conflict that decentralized management systems.

Without close and constant monitoring, which is the case in Sunshine, autonomy often results in increased agency costs, employee misbehavior and ethical misconduct. Also, Li as a manager could change her leadership style to be more transformational which would increase employee commitment and engagement, and in the long run improve corporate culture and reduce misbehavior. Also, an effective ethics program is an important segment of every corporation. It is important, for every organization to establish an effective ethics program before any ethical misconduct occurs. However, in order to be effective, ethics program needs to be executed properly. Managers have to bear in mind that without adequate enforcement, ethics program becomes useless. It is Li’s managerial duty to fight for changes that could prevent future misbehavior in order to protect shareholder’s interests. “The program must be capable of reducing the opportunity that employees have to engage in misconduct” (Ferell). Li could also propose penalties for the workers who engage in such misbehaviour, which could include pay reduction or even demission.

3. What measures should the management undertake and how should the remedial measures be implemented? One of the most important measures every company should take is to establish an effective ethics program. Most large companies with more than 500 employees often set up ethics committees that help them ensure ethical behavior of employees. Such a committee that would include both top management and management representatives of all levels could help Sunshine to contribute to the improvement of ethical behavior of its employees and help prevent future misbehaviour. A good example of effective ethics program is one that Lockheed Martin Corporation has. Lockheed made ethics program mandatory, which includes all their employees (CEO included). Development of multiple channels for raising questions and concerns such as toll-free hotline or formal ethics office is also an important, if not integral component of every ethics program.

Also, making sure that reports are confident and anonymous can encourage many employees to actually use such tools. Leadership by example is also proven to be very effective when it comes to establishment of an effective ethics program- „If people throughout the firm believe that behaving ethically is “in” and behaving unethically is “out,” ethical behavior will prevail“(DuBrin). Sunshine could also switch from the external control strategy to the internal, which is based on the „belief that employees can be motivated by building their commitment to organizational goals“(DuBrin). To increase motivation and engagement of employees, which is an obvious problem for Sunshine, a company could revise its reward plans. Financial incentives are usually more effective when they are linked to performance, however, before deciding to implement such program management should investigate which incentives are most appealing to groups and individuals.

In order to reduce the loss caused by misbehavior and fraud, Sunshine could consider implementing so called profit-sharing plan, which is a „A method of giving workers supplemental income based on the profitability of the entire firm or a selected unit“. (DuBrin) 4. In what order should the recommended actions for Sunshine be implemented? The most important action that Sunshine should take is establishment of strong, efficient ethics program. The role that ethics program has in an organizational performance comes from the fact that not only employees are more engaged and committed to the organization, but also that external environment accepts organizations who value ethics and build their operations on principles and values.

Having an effective ethics program could help Sunshine’s employees become more engaged, motivated and committed to the organization, which would for sure have impact on overall success of the company. Also, having an effective monitoring system is out of a major importance, not only for Sunshine, but for every organization. Management needs to take into account IT system that could help them reduce misconduct and misbehavior of their employees, without making them threatened or controlled in a way that would produce counter effect. Also, changes in the management system are crucial for the Sunshine’s performance and overall success.

Works Cited
Consulting, Spero. Spero Consulting. 2008. Web. 6 November 2014. DuBrin, Ander J. Management Essentials, International Edition. Cengage Learning, 2011. O’Conor, Naele. Snshine Fashion: Fraud Theft and Misbehaviour Among Employees. Hong Kong, 2012. Document.