Avon Products Inc.’s shares dropped almost 8 percent Tuesday, the biggest decline since May 4, after disclosures the company has suspended four executives in the wake of an internal investigation into alleged bribery of Chinese government officials.
The scope of Avon’s internal investigation has widened to include other countries as well.
An Avon spokeswoman confirmed four employees have been placed on administrative leave, pending the outcome of the company’s internal investigation. The employees are S.K. Kao, general manager, Avon China; Jimmy Beh, the former head of finance in China, who serves in a sales development role in Malaysia; C.Q. Sun, head of corporate affairs, Avon China, and in the U.S., Ian Rossetter, vice president of finance, whose previous roles included head of internal audit and vice president of finance, Asia-Pacific.
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The suspensions were first reported on Tuesday by The Wall Street Journal.
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Shares of the direct seller decreased $2.77, or 7.97 percent, to close at $31.99 in New York Stock Exchange trading Tuesday.
Stifel Nicolaus analyst Mark Astrachan wrote in a research note Tuesday afternoon that, “The investigation could remain a source of overhang on [Avon] shares in the near-term as investors question the lack of company disclosure, response or scope, including countries involved, in our view.”
As Avon previously stated, in June 2008 the company launched a voluntary internal investigation — under the oversight of its audit committee and conducted by external counsel — of its China operations, focusing on compliance with the Foreign Corrupt Practices Act. The company said it also notified the U.S. Department of Justice and the U.S. Securities and Exchange Commission about the investigation.
A spokeswoman said Tuesday, “We believe that these were the appropriate actions to take for a company that is committed to ethical behavior. As we’ve said before, the investigation is ongoing and as such no conclusions have been reached at this time.”
Asked if Avon has widened the investigation to include other countries, the spokeswoman confirmed, “In the course of the investigation, we are conducting compliance reviews in additional countries.”
A spokesman at the Department of Justice declined to comment.
China generated $353.4 million, or 3.4 percent, of Avon’s total 2009 revenues of $10.38 billion, compared with $206.5 million in 2005. The country also accounted for $20.1 million, or 2 percent, of the firm’s operating profit of $1 billion in 2009.
The Chinese government banned direct selling in 1998, prompting Avon to shift to a retail strategy that relied on beauty boutiques. By late 2005, the Chinese government allowed Avon to begin a limited test of direct selling in certain areas. The government issued direct-selling regulations later that year, and Avon received a direct-selling license from China’s Ministry of Commerce in February 2006, according to the company.
Avon made mention of the internal investigation in its 2009 Annual Report, stating, “The investigation and compliance reviews, which started in China, are focused on reviewing certain expenses and books and records processes, including but not limited to travel, entertainment, gifts and payment to third-party agents and others, in connection with our business dealings, directly or indirectly with foreign governments and their employees.” It continued that any determination the company’s activities were not in compliance with existing laws or regulations could result in actions such as substantial fines and civil and criminal penalties.