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Ethics in international business


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international business ethics

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Ethics in international business

  2. 2. Introduction  Ethics - accepted principles of right or wrong that govern the conduct of a person, the members of a profession, or the actions of an organization  Business ethics are the accepted principles of right or wrong governing the conduct of business people  Ethical strategy is a strategy, or course of action, that does not violate these accepted principles
  3. 3. Importance of ethics in international business  First of all, Ethical behavior combined with skills and professionalism is able to ensure sustainable development, rather than a short- term profit, which brings disastrous results after a certain period of time. Ethical behavior ensures awareness and concern for the future and for the right way of action in each particular situation.  Secondly, Ethical behavior establishes a healthy and pleasant cooperation climate for all the parties involved in a deal, making them feel comfortable with each other.  Thirdly, Acting in accordance with moral values is crucial for deserving clients' attention and support and achieving a significant competitive advantage in a particular market segment.
  4. 4. Ethical Issues in International Business  The most common ethical issues in business involve  employment practices  human rights  environmental regulations  corruption  the moral obligation of multinational companies
  5. 5. • Employment Practices: If work conditions in a host nation are clearly inferior to those in a multinational’s home nation, should companies apply: - Home country standards - Host country standards - Something in between Human Rights: In developed countries, basic human rights such as freedom of association, freedom of speech, freedom of assembly, and freedom of movement, are taken for granted In other countries, these rights may not exist
  6. 6.  Environmental Pollution: Ethical issues arise when environmental regulations in host nations are far inferior to those in the home nation. Environmental questions take on added importance because some parts of the environment are a public good that no one owns, but anyone can despoil. The tragedy of the commons occurs when a resource held in common by all, but owned by no one, is overused by individuals, resulting in its degradation. Corruption In the United States, the Foreign Corrupt Practices Act outlawed the practice of paying bribes to foreign government officials in order to gain business. The Convention on Combating Bribery of Foreign Public Officials in International Business Transactions adopted by the Organization for Economic Cooperation and Development (OECD) obliges member states to make the bribery of foreign public officials a criminal offense
  7. 7.  Moral Obligations: Social responsibility refers to the idea that business people should take the social consequences of economic actions into account when making business decisions, and that there should be a presumption in favor of decisions that have both good economic and good social consequences . People argue that businesses need to recognize their noblesse oblige and give something back to the societies that have made their success possible. BP supports this notion, and has made it company policy to give back to the community. For example, in Algeria the company built two desalination plants to provide drinking water to residents in Salah.
  8. 8. Ethical Dilemmas  Managers often face situations where the appropriate course of action is not clear  Situations in which none of the available alternatives seems ethically acceptable  They exist because real world decisions are complex, difficult to frame, and involve various consequences that are difficult to quantify.
  10. 10. Philosophical Approaches to Ethics Straw men approaches There are four common straw men approaches:  The Friedman doctrine suggests that the only social responsibility of business is to increase profits, so long as the company stays within the rules of law.  Cultural relativism argues that ethics are culturally determined and that firms should adopt the ethics of the cultures in which they operate, or in other words, “when in Rome, do as the Romans do”.  The righteous moralist approach claims that a multinational’s home country standards of ethics should be followed in foreign countries.  The naïve immoralist asserts that if a manager of a multinational sees that firms from other nations are not following ethical norms in a host nation, that manager should not either .
  11. 11. Utilitarian and Kantian Ethics  Utilitarian approaches to ethics hold that the moral worth of actions or practices is determined by their consequences. Actions are desirable if they lead to the best possible balance of good consequences over bad consequences Problems with utilitarianism include measuring the benefits, costs, and risks of an action, and the fact that the approach fails to consider justice.  Kantian ethics are based on the philosophy of Immanuel Kant who argued that people should be treated as ends and never purely as means to the ends of others. People have dignity and need to be respected, they are not machines.
  12. 12. Rights theories Rights theories recognize that human beings have fundamental rights and privileges which transcend national boundaries and cultures . Rights theories establish a minimum level of morally acceptable behavior. Moral theorists argue that fundamental human rights form the basis for the moral compass that managers should navigate by when making decisions which have an ethical component. The Universal Declaration of Human Rights specifies the basic principles that should always be adhered to irrespective of the culture in which one is doing business. The declaration was prompted by the idea that some fundamental rights transcend national borders and cultures.
  13. 13. Justice theories Justice theories focus on the attainment of a just distribution of economic goods and services. A just distribution is one that is considered fair and equitable. One theory of justice that is particularly important was proposed by John Rawls who argued that all economic goods and services should be distributed equally except when an unequal distribution would work to everyone’s advantage.
  14. 14. Legal foundations of ethical behavior Laws varies from country to country as moral values varies from country to country. EXTRATERRITORIALITY: Home country governments may impose domestic legal and ethical practices on the foreign subsidiaries of companies headquartered in their jurisdictions. LEGAL JUSTIFICATION THEORY: An individual or a company can do anything that isn't illegal. Pro: The law is a good basis for ethical behavior as it embodies cultural values Con: legal justification for behavior may not be sufficient because not everything that is unethical is illegal.
  15. 15.  United National Global Compact, or the older UN Universal Declaration of Human Rights, would be put forward as an appropriate conduct guide for international business ethics. The United Nations Global Compact encourages business everywhere to advance and honor the internationally accepted human rights, to uphold the right of collective bargaining, to avoid being involved with human rights' abuses, to have no part in compulsory human labor, to do away with child labor, to support a caring and cautious approach to the environment, to reduce any kind of employment discrimination, to encourage the creation of technologies that are friendly to the environment, to encourage more significant personal environmental responsibility, and to work to stamp out corruption in all of its many ugly guises, such as bribery and extortion.
  16. 16. Ethics and Corporate Bribery
  17. 17. Corruption & bribery  Corruption is defined by the World Bank (2005) as ‘the extent to which public power is exercised for private gain, including petty and grand forms of corruption, as well as “capture” of the state by elites and private interests.’  Corporate corruption generally takes two forms: engaging in bribe-making, usually as a supplier of bribes, and violations of ethical and professional standards with the intent to deceive or defraud investors. With respect to bribes, corporate corruption could consist of a representative of the firm receiving bribes in order to make a decision advantageous to the bribe-maker, or as a bribe-giver, either to another private party or to a representative of a domestic or foreign government.
  18. 18. Causes of corruption  Personal Personal greed Decline of personal ethical sensitivity, No sense of service when working in public or private institutions Low awareness or lack of courage to denounce corrupt behavior  Cultural Cultural environments that condone corruption Lack of transparency, especially at the institutional level
  19. 19.  Institutional Regulations and inefficient controls. Slow judicial processes.  Organizational Lack of moral criteria in promotions Downplaying or reacting mildly to corruption charges
  20. 20. Corruption in the world
  21. 21. Whats being done about corruption??
  22. 22. 1. Hofstede scale : Low masculinity – less corruption. Cultures that are high on masculinity ( assertiveness, ambition, power etc) tends to be more competitive and ambitious. 2. High economic development- less corruption 3. High political and economic freedom- less corruption 4. Corruption tends to decline when information including internet communication becomes more accessible.  Transparency International- ‘Corruption is the abuse of entrusted power for private gain. It hurts everyone whose life, livelihood or happiness depends on the integrity of people in a position of authority’ - Business principles for Countering Bribery
  23. 23. OECD Convention  Organization for Economic Cooperation and Development- Initially signed in 1977- In 2007 SA became the 37th signatory and the first African member to enact anti bribery laws based on this convention.  It targets the supply side of corruption(activities of bribe seekers) in cross border deals. Eg: Suppose a European supplier of pharmaceuticals does a deal with a minister of health from a developing country that has received emergency funds from an aid agency to purchase urgently required medicines. Instead of agreeing on a purchase of new drugs, the minister and the supplier conspire to use the aid funds to purchase out-of-date drugs, which are far cheaper. The supplier consequently makes a handsome profit and places a portion of it in an offshore bank account set up by the minister. Many of those in the minister's country who are sick receive the old, less effective drugs and die
  24. 24.  Countries that have signed the convention are required to put in place legislation that criminalizes the act of bribing a foreign public official.  The OECD has no authority to implement the convention, but instead monitors implementation by participating countries.  Countries are responsible for implementing laws and regulations that conform to the convention and therefore provide for enforcement.  The OECD performs its monitoring function in a two-phased examination process. Phase I consists of a review of legislation implementing the conventions in the member country with the goal of evaluating the adequacy of the laws. Phase 2 assesses the effectiveness with which the legislation is applied.
  25. 25. International Chamber of Commerce  Private sector and demand side of cross border economics, where extortion by public officials is a favorite criminal practice  Tools:  ICC Ethics and Compliance Training Handbook  ICC Rules on Combating Corruption : The Rules assist enterprises to comply with their legal obligations and with the numerous anti- corruption initiatives at the international level.  ICC Guidelines on Gifts and Hospitality : The ICC Guidelines on Gifts and Hospitality provide guidance for companies on how to establish and maintain a policy relating to Gifts and Hospitality, based on the most recent international, regional and national rules, as well as on commercial best practice.
  26. 26.  ICC Third Party Guidelines : ICC Guidelines on Agents, Intermediaries and Other Third Parties voluntary guidelines provide companies with advice on how to choose and manage third parties.  Whistle blowing guidelines : ICC established a task force on this issue in order to prepare ICC guidelines in addition to the Whistle blowing chapter of the ICC Handbook  ICC Fighting Corruption Handbook : Fighting Corruption lays out the problems and offers practical solutions on how to attack commercial dishonesty at its source  ICC Anti-corruption Clause : The Anti-corruption Clause is a tool which will preserve trust between parties, deter corruption in the negotiation and performance of a contract, and preserve the sanctity of contracts.
  27. 27. UN Convention against Corruption  December 4, 2000 : The General Assembly recognized that an effective international legal instrument against corruption was desirable. United Nations Convention against Corruption entered into force on 14 December 2005.  The purposes of this Convention are:  To promote and strengthen measures to prevent and combat corruption more efficiently and effectively;  To promote, facilitate and support international cooperation and technical assistance in the prevention of and fight against corruption, including in asset recovery;  Develop and implement or maintain effective, coordinated anti-corruption policies that promote the participation of society and reflect the principles of the rule of law, proper management of public affairs and public property, integrity, transparency and accountability  Collaborate with each other and with relevant international and regional organizations through participation in international programmes and projects aimed at the prevention of corruption.
  28. 28. US Foreign Corrupt Practices Act  Outlaws bribery payments by US firms to foreign officials, political parties, party officials and political candidates.  Includes bribery by foreign firms operating in US territory. Not only companies registered in US but also any foreign company quoted on any stock exchange in the US.  FACILITATION PAYMENTS/speed money/grease money :  A facilitating payment is a payment made to a public or government official that acts as incentive for the official to complete some action or process expeditiously, to the benefit of the party making the payment.  The FCPA provides a narrow exception for facilitation payments. The exception applies only to payments made to foreign officials with the purpose to 'facilitate or expedite routine governmental action'.  The exception focuses on the purpose of payment rather than on its value. If not properly documented, it may violate the FCPA’S accounting provisions.
  29. 29. ENRON & TYCO INTERNATIONAL SCAM  ENRON  Granted government deregulation (Reduction or elimination of government power in a particular industry, usually enacted to create more competition within the industry).  Losses were not properly illustrated in the earnings report – prompted more and more investments.  New investors  Embezzlement of funds by Enron executives.  Corporation was reaching bankruptcy.  The loss sustained by investors exceeded $70 billion.  TYCO INTERNATIONAL  Top executives were accused of giving themselves interest-free or very low interest loans(sometimes disguised as bonuses) that were never approved by the Tyco board or repaid.  They were also accused of selling their company stock without telling investors.  Essentially, they concealed their illegal actions by keeping them out of the accounting books and away from the eyes of shareholders and board members.  1999- 2000 – accounting practices – “spring- loading"  By September of 2002, all three (Kozlowski, Swartz, and Belnick) were gone and charges were filed against them for failure to disclose information on their multimillion dollar loans to shareholders.  The SEC asked Kozlowski, Swartz, and Belnick to restore the funds that they took from Tyco in the form of undisclosed loans and compensations.
  30. 30. Sarbanes Oxley Act(SOX)  Enacted as a response to epidemic of well known corporate scandals involving such companies as Enron and Tyco International.  Focuses on corporate governance, financial disclosure and oversight of accounting and auditing practices.  Aims to protect shareholders and the general public from accounting errors and fraudulent practices in the enterprise, as well as improve the accuracy of corporate disclosures.
  31. 31. Industry Initiatives  In 2005, 50 multinational construction and natural resources companies signed “Zero tolerance pact” against extortion by bribery- World Economic Forum  Partnering against Corruption Initiative  the Partnering Against Corruption Initiative (PACI) was established to level the playing field among industry players and help consolidate industry efforts on the issue.  Today, PACI brings together over 140 companies from multiple industries and global locations, including industry leaders from multiple sectors, regardless of their size or affiliation with the World Economic Forum, to fight bribery and corruption.
  32. 32. PACI signatory companies include:  Accenture  Alcatel-Lucent  Deloitte  Deutsche Post DHL  Ernst & Young  SAS  Godrej & Boyce  KPMG International  Kuwait Petroleum Corporation  Microsoft Corporation  PricewaterhouseCoopers  Coca Cola  Thomson Reuters
  33. 33. Are Top Managers Responsible When Corruption is Afoot? : Siemens AG  In November 2006, police found 36000 documents to support allegations that Siemens regularly diverted funds filed under bogus consulting contracts into a network of “black accounts” for bribing officials in countries like Italy, Greece, Argentina and South Arabia, where Siemens was seeking lucrative public sector contracts  Later, company itself announced that it had uncovered over $570 million in suspicious payments since 1990s.  Managers insisted that corruption was endemic to the company’s culture & that they had acted with knowledge and approval of CEO Klaus Kleinfield and board chief Heinrich von Pierer.
  34. 34. Background:  Germany was slow to enact laws prohibiting bribery. Till 1999, it was allowed to write off overseas bribes as legitimate business expenses and till 2002, it was legal to bribe employees of foreign companies if the company was willing to absorb the cost without the tax break.  Siemens hung on to a corporate culture that was perfectly comfortable with bribery and other forms of corrupt behavior.  Kleinfield’s management style which boiled down to “fix, sell or close”. So employees did whatever they had to do to show profits. Counterpoint:  Siemens is a highly decentralized conglomeration with 11 business units run by separate boards as virtually independent operating entities.  When von Pierer was the CEO, he had authorized a strict company wide Code of Conduct and hired many compliance officers to enforce it.  Kleinfield had instituted a “zero tolerance” policy towards corruption.  Top management function doesn’t involve auditing the books and double- checking every suspicious double entry.  Neither Kleinfield nor von Pierer has been officially accused of any wrongdoing.
  36. 36. SUSTAINABILITY Sustainability means meeting the needs of the present without compromising the ability of future generations to meet their own needs while taking into account what’s best for both people and environment
  37. 37. GLOBAL WARMING AND THE KYOTO PROTOCOL  At the core of the international treaty called the Kyoto Protocol is the theory that global warming is a result of an increase in carbon dioxide  If carbon dioxide emissions are not reduced and controlled , rising temperature could have catastrophic consequences
  38. 38. THE KYOTO PROTOCOL  It was an extension of the UN Framework Convention on Climate Change of 1994  It was signed in 1997 to require countries to cut their green house gas emissions to 5.2 percent below 1990 levels between 2008 and 2012  By June 2007, 175 nations and regional economic organisations had ratified the protocol  The US (25%), initially signed the agreement but withdrew in 2001
  39. 39. NATIONAL AND REGIONAL INITIATIVES  Reduce emissions or buy credits from companies that have reduced emissions below target levels  MNE’s were forced to reconsider their global strategies  The EU has set a target of an 8 percent reduction from 1990 levels  The Germans set a target of 21 percent
  40. 40. COMPANY-SPECIFIC INITIATIVES  The companies need to face the task of adapting to different standards in different countries  The legal approach to responsible corporate behaviour says an MNE can settle for operating in accord with local laws  Ethical approach, urges companies to go beyond the law to do whatever is necessary and economically feasible to reduce green house gas emissions
  41. 41. ETHICAL DILEMMAS AND BUSINESS PRACTICES Industry specific Deal with issues that cross industries- To demonstrate how companies have to examine their ethical conduct as they spread internationally
  42. 42. ETHICAL DILEMMAS AND THE PHARMACEUTICAL INDUSTRY GlaxoSmithKline(GSK) 14.5% of revenues on R&D Sell drugs at a high price Patent expires, the drug becomes generic Protected by U.S patent
  43. 43. Tiered Pricing and other Price- Related Issues Companies charge a market price for products sold in industrial countries and a discounted price for products sold in developing country Drug maker Merck in 2007
  44. 44. Taking TRIPS for What Its Worth WTO Agreement on Trade Related Aspects of Intellectual Property Rights *Producing generic products for local consumption *Importing generic products from other countries
  45. 45. R&D and the Bottom Line Developing drugs are lot more expensive in developed countries Unlicensed generic drugs New patent protection law in 2005 with WTO guidelines
  46. 46. ETHICAL DIMENSIONS OF LABOUR CONDITIONS NGOs Individual investors Consumers Trade unions Governments Corporate investors(eg- pension funds Media Pressures for ethical behavior with respect to workers
  47. 47. OBJECTIVES OF ETHICAL TRADING INITIATIVE Employment is freely chosen Freedom of association and the right to collective bargaining are respected Working conditions are safe and hygienic Child labour shall not be used
  48. 48. Living wages are paid Working hours are not excessive No discrimination is practiced Regular employment is provided No harsh or inhumane treatment is allowed
  49. 49. CHILD LABOR There are two arguments for use of children in Indian carpet industry *There were better suited than adults *If they weren’t employed, they’d be even /worse off *In 1990s Bangladesh was pressured to stop employing child workers *ILO guidelines
  50. 50. What MNEs Can & Can’t Do  Swedish retailer IKEA *Helped working mothers *Bridge schools  In Thailand, the law permits people to work 84 hours a week in seven 12 hour shifts *Nike instituted a maximum workweek of 60 hours  Improvement in Chinese labour practices
  51. 51. CORPORATE CODE OF ETHICS Motivations for Corporate responsibility  Unethical and irresponsible behavior can result in legal headaches  Customer actions such as boycotts  Unethical behavior can affect employee morale  Bad publicity is going to cost the sales
  52. 52. Developing a code of conduct External code of conduct is a set of “guidelines, recommendations and rules issued by entities within society with the intent of affect the behavior of international business entities within society in order to enhance corporate responsibility Internal code of conduct
  53. 53. What Makes a Good Internal Code of Conduct ? It sets global policies with which everyone working anywhere for the company must comply It communicates company policies not only to all employees but to all suppliers and sub-contractors as well It ensure that the policies laid out in the code are carried out It reports the results to external stakeholders