Session Outline

  • Corporate Governance

    Agency Theory, Board of Directors, Mechanisms

  • Strategy and Business Ethics

    Bad Apples vs. Bad Barrels, The MBA Oath

  • Business Models: Strategy in Action

    Razor-Razorblade, Subscription, Freemium, etc.

  • Dynamic Business Models

    Innovation, The Long Tail Concept

  • Implications for Strategic Leaders

Learning Objectives

1.

Explain the role of corporate governance and the principal-agent problem.

2.

Apply agency theory to explain governance mechanisms.

3.

Evaluate the board of directors as the central governance mechanism.

4.

Explain the relationship between strategy and business ethics.

5.

Use the business model framework to put strategy into action.

6.

Explain the long-tail concept and business model innovation.

Fundamental Question

At what precise moment does the startup mantra of "fake it 'til you make it" cross the invisible line into criminal fraud?

While ambition fuels innovation, the stories of Theranos, Wirecard, and Satyam reveal a dark pattern: the transition from optimistic projection to systemic deception. This analysis explores parallel corporate failures in Global and Indian contexts, where governance vacuums and charismatic leadership blinded stakeholders to reality.

Theranos: The Unraveling

The illusion began to crack in October 2015, when investigative reporter John Carreyrou of The Wall Street Journal published a bombshell report. Theranos's proprietary Edison device wasn't used for most tests; instead, they secretly ran samples on standard Siemens machines, often diluting blood to make it work—compromising accuracy.

The Whistleblowers

Tyler Shultz and Erika Cheung defied NDAs and legal threats to expose a culture of fear and data manipulation.

The Verdict

Elizabeth Holmes convicted on fraud. 11.25-year prison sentence. $452M restitution. $10B value dissolved.

Wirecard (Germany)

Global

The Missing Billions

Once a DAX 30 pride, collapsed in 2020 when auditors found €1.9B cash never existed. Exposed massive regulatory failure.

FTX (USA/Bahamas)

Global

The Governance Vacuum

Sam Bankman-Fried (SBF) misused $8B customer funds for Alameda Research. "Complete failure of corporate controls." 25 years prison.

Indian Case Studies: Riding the Tiger

Satyam Computers

The Enron of India

Chairman Ramalinga Raju confessed to inflating cash balances by ₹7,000 crore ($1.5B). Described it as "riding a tiger, not knowing how to get off without being eaten."

Ranbaxy

Data Fabrication

Systematically falsified data submitted to the FDA. Whistleblower Dinesh Thakur exposed the sale of substandard medication. Paid $500M fine in 2013.

GoMechanic

The Valuation Trap

Co-founder admitted to "errors in judgment" regarding financial reporting to secure SoftBank funding. Highlights the pressure for "hockey stick" growth.

Comparative Analysis of Failure

Company The Lie The Enabler The Outcome
Theranos Technology (Edison) did not work. Secrecy & High-profile Board 11.25 Years Prison (Holmes)
Wirecard €1.9B Cash did not exist. Complex subsidiary structure Insolvency & Arrests
FTX Customer funds were safe. Lack of Board/Audits 25 Years Prison (SBF)
Satyam Inflated Cash Reserves. Promoter Control Acquired by Tech Mahindra

First Principle Question

If you cannot watch your employees 24/7, how do you prevent them from lying or taking reckless risks?

This dilemma is the heart of Agency Theory. When contracts fail to align incentives, results are catastrophic.

1. Adverse Selection

"The Hidden Information Problem"

Occurs before the transaction. The agent hides critical flaws or risks to secure the deal.

Classic Example: The "Lemons Market" (Used Cars).

Real World (Global): Nikola Motors. Founder Trevor Milton rolled a non-working truck down a hill to fake a demo video. Investors bought a "lemon" stock based on hidden information.

Real World (India): TCS Recruitment Scam (2023). HR staff accepted bribes to hire unqualified candidates ("lemons") who looked like "peaches" on paper.

2. Moral Hazard

"The Hidden Action Problem"

Occurs after the transaction. Secure in the contract, the agent takes undue risks because they don't bear the full cost of failure.

Classic Example: Insurance (Reckless driving because you're insured).

Real World (Global): 2008 Financial Crisis. Banks took massive risks on subprime mortgages for bonuses, knowing the government ("The Principal") would bail them out.

Real World (India): PNB & Nirav Modi. Bank officials issued unauthorized guarantees (LOUs) for kickbacks, taking the risk while the bank bore the liability.

Case Study: The Rogue Agent (Waymo vs. Uber)

Moral Hazard

Star engineer Anthony Levandowski downloaded 14,000 confidential files from Waymo (Google) to build his own startup, Otto, which Uber then acquired.

The Failure Used Waymo resources to serve his own interest over his employer's.
The Outcome Sentenced to 18 months prison. Uber paid Waymo $245M.
The Lesson Without monitoring, agents will exploit assets for personal gain.
Feature Adverse Selection Moral Hazard
Timing Pre-Contract (Hiring/Lending) Post-Contract (Employment)
The Problem Hidden Information (Lying about quality) Hidden Action (Taking undue risks)
Solution Screening, Background Checks, Signaling Monitoring, Incentives (Stock Options), Audits

Fundamental Question

Is unethical behavior the result of a few rogue employees or a toxic culture?

While "bad apples" exist, research consistently points to the "Bad Barrel" (systemic pressure) as the common driver of widespread misconduct.

🛑 The "Bad Barrel" Examples

When the system is broken, good people make bad choices under pressure.

ICICI Bank (India)

Loan Scandal

Conflict of Interest: CEO Chanda Kochhar sanctioned large loans to the Videocon Group while her husband received investments from the same group. The culture allowed power to be centralized without checks.

Wells Fargo (Global)

Fake Accounts

Systemic Pressure: Employees opened millions of unauthorized accounts to meet extreme daily sales goals. The "barrel" punished those who didn't cheat.

✅ The "Good Barrel" Examples

A strong ethical culture encourages heroic behavior even in crisis.

Tata Group (India)

26/11 Response

Values in Action: Employees stayed to save guests during the terror attack. The company supported victims' families and street vendors, driven by the "Tata Code of Conduct."

Johnson & Johnson

Tylenol Crisis

Public Safety First: Voluntarily recalled 31 million bottles ($100M cost) after a poisoning incident. Prioritized the "Credo" over profit, building immense trust.

Summary for Students
Aspect Bad Apples (Few Individuals) Bad Barrels (Toxic Culture)
Focus Individual intent, personal greed. Systemic pressure, leadership tone.
Examples A single embezzler. VW, Wells Fargo, Enron, Satyam, ICICI.
The Fix Fire and punish the individual. Culture change, ethical leadership, new controls.
The Takeaway: While individuals are accountable, leaders must focus on building a "good barrel"—an environment where people feel safe doing the right thing.

VW Dieselgate: The School of Hard NOx

Under CEO Martin Winterkorn, VW bet its future on "Clean Diesel". Engineers faced an impossible "Iron Triangle": they could not maximize Performance and Fuel Economy while simultaneously meeting strict US Emissions Standards.

The Cheat

Engineers installed a "Defeat Device" (software). It detected when the car was being tested (based on steering lack of movement) and engaged pollution controls. On the road, it disabled them.

THE COST: $33 BILLION+ IN FINES

Global Parallels: Culture of Concealment

Boeing 737 MAX

Hid MCAS software to avoid pilot training costs. Result: 346 Deaths, $20B Loss.

Toyota (Daihatsu)

Admitted rigging safety tests for 64 models over 30 years. Modified doors/airbags specifically for crash tests.

Indian Case Studies: The "Jugaad" That Went Too Far

General Motors India (Tavera)

Hardware Cheat

Executives physically swapped high-performance engines into prototypes sent for government emission testing. Production cars were sold with different, non-compliant engines.

Outcome: 1.14 Lakh Recall, 35 Execs Fired.

EV Industry (FAME II Scandal)

Subsidy Arbitrage

Top EV makers imported critical parts from China but disguised them as Indian-made to claim ₹297 crore in "Make in India" subsidies.

Outcome: Subsidies Clawed Back.

Taxonomy of Cheating

Case The Mechanism The Rationalization The Outcome
VW Dieselgate Software Defeat Device "Physics makes it impossible to meet laws legally." $33B+ Cost
GM India Hardware Engine Swap "We need to sell the car now, fix it later." Market Exit
Boeing 737 Concealment of MCAS "Pilot training is too expensive for customers." 346 Deaths

Fundamental Question

Is your product the source of your profit, or merely the bait to capture a customer?

Business model innovation (better economics) builds empires, while product innovation just grabs headlines.

The Razor & The Blade: Bait and Hook

Selling a durable "platform" at a loss (Bait) to drive demand for a high-margin consumable (Hook).

Global: Nespresso

Global
  • The Bait: Stylish coffee machines sold at cost or licensed to partners.
  • The Hook: Proprietary coffee pods with ~85% gross margins.
  • The Lock-in: Patented capsule design forced users to buy only from Nespresso.

India: Eureka Forbes (Aquaguard)

India
  • The Bait: The Water Purifier unit (RO/UV).
  • The Hook: Annual Maintenance Contract (AMC) and filters.
  • The Lock-in: Fear of water-borne diseases drives recurring AMC fees (~₹599/year), contributing ~30% of total revenue.

Ultra-Low Cost: The Discounter's Edge

D-Mart (Avenue Supermarts)

India

Radhakishan Damani's "Everyday Low Cost" model.

  • Asset Ownership: Owns land/buildings to eliminate rent inflation.
  • Limited SKUs: Massive volume on fewer items = bargaining power.
  • The Payoff: Pays suppliers in days (vs. weeks) to secure cash discounts, passing savings to customers.

The Ecosystem Bundle: Monetizing the Wall

Bundling negatively correlated products creates a "walled garden" where perceived value exceeds the sum of parts.

Global: Amazon Prime

Global

Bundles logistics (Shipping) with entertainment (Video). Prime members spend significantly more due to the "sunk cost" psychology.

India: Jio's Digital Life

India

Entered with a Freemium/Loss Leader strategy to acquire 100M+ users. Now monetizing via the ecosystem: Fiber (Pipe) + Cinema (Content) + Mart (Commerce). Strategy: Connectivity is the low-margin gateway to high-margin services.

Food Tech: The Platform War

Feature Zomato (Aggregator) Swiggy (Logistics)
Core Strength Discovery & Marketing (Ad Revenue) Logistics & Operations (Delivery Fleet)
Expansion Strategy Acquisition (Blinkit for Quick Comm) Diversification (Instamart, Genie, Dineout)
Profit Driver Commissions + Ads + Gold Delivery Fees + Instamart + Swiggy One

Direct-to-Consumer (D2C) Subscription

India: Country Delight

Problem: Traditional dairy supply chains are fragmented, leading to adulteration and aged stock.

Solution: Full-stack Subscription Model. Delivering directly from farm to doorstep within 24-36 hours eliminates middlemen.

The Advantage: Subscription allows precise demand forecasting, reducing spoilage (a major cost in perishables) to <1%, compared to industry standard high waste.

The Long Tail

Selling less of more. Technology allows companies to sell small amounts of hard-to-find items to many people.

Dollar Shave Club

Disrupted Gillette using subscription model. Improved the business model, not the tech.

Advanced Simulation

The Boardroom Guardian: Grand Crisis

Navigate 10 levels of escalating corporate chaos. Will you become a Legend or a Disgrace?

Role
Independent Director
Reputation Score
100

Session is in Order

Welcome to the Board of TitanCorp. You face 10 critical quarters. From agency conflicts to hostile takeovers, every vote counts.

Survival Threshold: Score > 0.

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Governance Guardian AI

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