ETHICS
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This document discusses ethics, corporate social responsibility, and sustainability in international business. It provides learning objectives on appreciating ethical behavior, recognizing ethical challenges, understanding CSR and sustainability, and knowing the role of corporate governance. It defines key concepts like ethics, corruption, bribery, and discusses examples of inappropriate corporate conduct abroad. It also addresses the value of ethical behavior, variation in ethical standards between countries, intellectual property, piracy/counterfeiting impacts, definitions of CSR and sustainability, and examples of sustainable practices by companies.
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ETHICS
- 1. 1Copyright © 2017 Pearson Education, Ltd. BUSINESS BY THABO MATHABELA ETHICS AND CSI
- 2. Learning Objectives 4.1 Appreciate ethical behavior and its importance in international business. 4.2 Recognize ethical challenges in international business. 4.3 Understand corporate social responsibility. 4.4 Understand sustainability. 4.5 Know the role of corporate governance. 4.6 Learn about a framework for making ethical decisions. 4-2Copyright © 2017 Pearson Education, Ltd.
- 3. Organizing Framework Copyright © 2017 Pearson Education, Ltd. 4-3
- 4. Key Concepts • Ethics are moral principles and values that govern the behavior of people, firms, and governments, regarding right and wrong. • Corruption is the abuse of power to achieve illegitimate personal gain. • Corruption is a major or severe concern in the global activities of a large proportion of MNEs. • Bribery is common and may take the form of grease payments, small inducements intended to expedite decisions and transactions, or gain favors. 4-4Copyright © 2017 Pearson Education, Ltd.
- 5. Inappropriate Corporate Conduct Abroad Examples: Firms may: ▪ Falsify or misrepresent contracts or official documents. ▪ Pay or accept bribes, kickbacks, or inappropriate gifts. ▪ Tolerate sweatshop conditions or abuse employees. ▪ Do false advertising or other deceptive marketing. ▪ Engage in deceptive or discriminatory pricing. ▪ Deceive or abuse intermediaries in the channel. ▪ Undertake activities that harm the natural environment. 4-5Copyright © 2017 Pearson Education, Ltd.
- 6. Corruption Perceptions Index Note: Countries with the highest scores have the lowest levels of corruption. Sources: Adapted from Corruption Perceptions Index 2014. Transparency International: The Global Coalition Against Corruption (2015), www.transparency.org. Copyright © 2017 Pearson Education, Ltd. 4-6
- 7. Improper Ethical Behavior May Result When: • Top management sets goals and incentives aimed at promoting good outcomes (e.g., profits) that instead encourage bad behaviors. • Employees overlook unethical behavior in others because of peer pressure or self-interest. • Managers tolerate lower ethical standards in value- chain activities performed by suppliers or third-party firms. • Unethical practices are allowed to accumulate in the firm slowly over time. • Bad means are justified by good ends. 4-7Copyright © 2017 Pearson Education, Ltd.
- 8. The Value of Ethical Behavior • Ethical behavior is simply the right thing to do. • Often prescribed within laws and regulations. • Demanded by customers, governments, and the news media. Unethical firms risk attracting unwanted attention. • Ethical behavior is good business, leading to enhanced corporate image and selling prospects. The firm with a strong reputation is advantaged in hiring and motivating employees, partnering, and dealing with foreign governments. 4-8Copyright © 2017 Pearson Education, Ltd.
- 9. Variation in Ethical Standards • Ethical standards vary from country to country. • Relativism is the belief that ethical truths are not absolute but differ from group-to-group; according to this perspective, a good rule is, “When in Rome, do as the Romans do.” • Normativism is a belief that ethical behavioral standards are universal, and firms and individuals should seek to uphold them consistently around the world. 4-9Copyright © 2017 Pearson Education, Ltd.
- 10. Variation in Ethical Standards (cont’d) • In China, counterfeiters may publish translated versions of imported books without compensating the original publisher or authors. • In parts of Africa, accepting expensive gifts from suppliers is acceptable. • In the United States, CEO compensation is often 100 times greater than that of low-ranking subordinates. • Finland and Sweden ban advertising aimed at children, but the practice is accepted in other parts of Europe. 4-10Copyright © 2017 Pearson Education, Ltd.
- 11. An Ethical Dilemma • Imagine you are a manager and visit a factory owned by an affiliate in Colombia, and discover the use of child labor in the plant. • You are told that without the children’s income, their families might go hungry. If the children are dismissed from the plant, they will likely turn to other income sources, including prostitution or street crime. • What should you do? Make a fuss about the immorality of child labor, or look the other way? 4-11Copyright © 2017 Pearson Education, Ltd.
- 12. The Pyramid of Ethical Behavior Copyright © 2017 Pearson Education, Ltd. 4-12
- 13. Intellectual Property • Intellectual property refers to ideas or works created by individuals or firms and includes a variety of proprietary, intangible assets: discoveries and inventions; artistic, musical, and literary works; and words, phrases, symbols, and designs. • Intellectual property rights are the legal claim through which proprietary assets are protected from unauthorized use by other parties, via trademarks, copyrights, and patents. 4-13Copyright © 2017 Pearson Education, Ltd.
- 14. Top Counterfeit Commodities Seized, United States Borders, 2014 Source: “Intellectual Property Rights Seizure Statistics Fiscal Year 2014,” Washington, DC: Homeland Security, U.S. Customs and Border Protection and U.S. Immigration and Customs Enforcement (2015), at www.cbp.gov/sites/default/ files/documents/2014%20IPR%20Stats.pdf. Copyright © 2017 Pearson Education, Ltd. 4-14
- 15. Piracy and Counterfeiting Affect: • International trade – exports of legitimate products must compete with trade in counterfeit goods. • Direct investment – firms avoid countries known for widespread intellectual property violations. • Company performance – sales, profits, and strategies are harmed. • Innovation – companies avoid doing research and development where piracy is common. • Tax revenues – pirates usually don’t pay taxes. 4-15Copyright © 2017 Pearson Education, Ltd.
- 16. Piracy and Counterfeiting Affect: (cont’d) • Criminal activity – often linked to organized crime. • The natural environment – intellectual property violators disregard environmental standards • National prosperity and wellbeing – ultimately, job prospects, prosperity, and moral standards in affected nations are harmed. 4-16Copyright © 2017 Pearson Education, Ltd.
- 17. Corporate Social Responsibility • Corporate social responsibility (CSR): Operating a business to meet or exceed the ethical, legal, commercial, and public expectations of customers, shareholders, employees, and communities. • Helps recruit and keep good employees. • Can help differentiate the firm and enhance its brands. • Cuts costs, as when the firm reduces packaging, recycles, cuts energy usage, and minimizes waste in operations. • Helps the firm avoid increased taxation, regulation, or other legal actions by local government authorities. 4-17Copyright © 2017 Pearson Education, Ltd.
- 18. Settings for CSR 4-18 Copyright © 2017 Pearson Education, Ltd.
- 19. Sustainability Meeting humanity’s needs without harming future generations. The sustainable firm pursues three types of interests: 1. Economic interests refer to the firm’s economic impact on the localities where it does business, such as regarding job creation, wages, and public works. 2. Social interests refer to how the firm performs relative to social justice, such as avoiding the use of child labor, sweatshops, as well as providing employee benefits. 3. Environmental interests refer to the extent of the firm’s impact and harm to the natural environment. 4-20Copyright © 2017 Pearson Education, Ltd.
- 20. Example: Foxconn Workers at a Foxconn factory in China, a leading supplier to Apple. Following charges about poor working conditions at Foxconn plants, Apple and Foxconn took steps to improve the work environment. Copyright © 2017 Pearson Education, Ltd. 4-21 Source: epa european pressphoto agency b.v./Alamy
- 21. Examples of Sustainable Practices • Beneficial agricultural practices that do no harm. • Water conservation. Clean water is scarce worldwide. • Air quality protection. • Reduced energy and fuel consumption. • Increased use of solar and wind energy. • Improved work processes that improve sustainability reduce costs and support the natural environment. 4-22Copyright © 2017 Pearson Education, Ltd.
- 22. Example: Coca-Cola As water grows scarce in much the world, some multinational firms are conserving their use of this critical resource. Coca-Cola, a major water consumer, conducts a water sustainability program to address shortages in India. Copyright © 2017 Pearson Education, Ltd. 4-23 Source: Tim Gainey/Alamy
- 23. Air Pollution in Selected Cities Source: World Bank, World Bank Development Indicators 2014, Washington DC: World Bank; World Bank, Clean Air and Healthy Lungs: Enhancing the World Bank’s Approach to Air Quality Management (Washington DC: World Bank, February 2015). Copyright © 2017 Pearson Education, Ltd. 4-24
- 24. Corporate Governance • The system of procedures and processes by which corporations are managed, directed, and controlled. • Provides the means through which firms undertake ethical behaviors, CSR, and sustainability. • Implementing appropriate conduct is challenging for MNEs, especially when operating in many countries. • A complicating factor is the use of third-party suppliers and contractors, some of whom may behave badly. • More firms incorporate ethics and CSR into their mission, planning, strategy and everyday operations. 4-25Copyright © 2017 Pearson Education, Ltd.
- 25. Embracing CSR and Sustainability • Develop closer relations with foreign stakeholders to understand their needs and jointly develop solutions. • Build capabilities to enhance the firm’s contribution to the local community and global environment. • Ensure diverse voices by creating organizations that employ managers and workers from around the world. • Develop global CSR standards and objectives, and that are communicated and implemented across the firm worldwide. • Train managers in global CSR principles and integrate these into managerial responsibilities. 4-26Copyright © 2017 Pearson Education, Ltd.
- 26. Ethical Standards for Corporate Governance This approach arguesthe best ethical action is the one that provides the most good or the least harm. It produces the greatest balance of good over harm to customers, employees, shareholders, the community, and the natural environment. This approach instructs the decision maker to choose the action that best protects and respects the moral rights of everyone involved. It is based on the belief that, regardless of how you deal with an ethical dilemma, human dignity must be preserved. This approach advises that everyone should be treated equally and fairly. Workers should be paid a fair wage that provides a decent standard of living, and colleagues and customers should be treated as we would like to be treated. This approach suggests that actions should be based on the welfare of the entire community or nation. It asks which action contributes most to the quality of life of all affected people. Respect and compassion for all, especially the vulnerable, should be the basis for decision making. This approach advocates that ethical actions should be consistent with certain ideal virtues that provide for the full development of our humanity. The most important virtues are truth, courage, compassion, generosity, tolerance, love, integrity, and prudence. Virtue Approach Common Good Approach Fairness Approach Rights Approach Utilitarian Approach Ethical Standards for Corporate Governance Copyright © 2017 Pearson Education, Ltd. 4-27
- 27. A Global Consensus • Various resources are available to assist managers, including: - United Nations “Global Compact” and “Declaration against Corruption and Bribery in International Commercial Transactions”. - The Global Reporting Initiative. - International Chamber of Commerce “Rules of Conduct to Combat Extortion and Bribery”. - The Organisation for Economic Co-operation and Development (OECD) antibribery agreement. 4-28Copyright © 2017 Pearson Education, Ltd.
- 28. Benefits of Corporate Governance • Increased employee commitment. • Increased customer loyalty and sales. • Improved reputation and brand image. • Reduced likelihood of government intervention. • Reduced business costs. • Improved financial performance. 4-29Copyright © 2017 Pearson Education, Ltd.
- 29. Ethical Connection 4-30Copyright © 2017 Pearson Education, Ltd. • Imagine you are a manager and visit a factory owned by an affiliate in Colombia, and discover the use of child labor in the plant. • You are told that without the children’s income, their families might go hungry. If the children are dismissed from the plant, they will likely turn to other income sources, including prostitution or street crime. • What should you do? Make a fuss about the immorality of child labor, or look the other way?
- 30. Framework for Making Ethical Decisions Copyright © 2017 Pearson Education, Ltd. 4-31
Editor's Notes
- Corporate governance is the system of procedures and processes by which corporations are managed, directed, and controlled. It provides the means through which firms undertake ethical behaviors, CSR, and sustainability. Ethics and appropriate behavior are essential in international business. Simply obeying the law is usually insufficient to ensure against violating standards of ethical behavior. This results because such standards vary around the world, which makes ethics a complex issue in international business.
- Ethics and appropriate behavior transcend all international business activities and figure prominently in management decisions about financial performance and competitive advantage. However, corruption is commonplace in many countries, especially those lacking transparent business systems. Most companies seek to ensure ethical practices in their international operations. The most advanced firms proactively emphasize not just ethical behavior, but also corporate social responsibility and sustainability. An integrated, strategic approach to ethical, sustainable, and socially responsible behavior provides firms with competitive advantages, including stronger relationships with customers, employees, shareholders, suppliers, and the communities where they do business.
- Global sourcing raises concerns about ensuring human rights and protecting the environment. Some companies operate sweatshop factories in which employees are children or work long hours for very low wages, often in harsh conditions. Many firms operate factories that generate much pollution. The use of third-party suppliers is challenging for firms like Nike and Philips, with thousands of partners that operate in a range of cultures and belief systems worldwide. Deceptive marketing practices in advertising and selling to induce people to buy their products. Marketers may make false claims about the qualities or effectiveness of a product. Advances in communications technologies allow fraudulent marketers to easily target victims in foreign countries. The transnational nature of such scams makes it difficult for law enforcers to catch and prosecute perpetrators. Defective or harmful products or packaging affect public health, safety, and natural environments. For example, millions of electronic products from cell phones to computers are discarded every year. Products that could be recycled end up in landfills. Excessive product packaging generates pollution, and consumes energy and natural resources. Excessive use of plastic packaging is wasteful. Because plastic does not easily decompose, the amount of plastic waste is steadily increasing on land and in the oceans.
- Corruption Perceptions Index The Index is an aggregate indicator that assembles data from sources over the previous two years. All data sources measure the overall extent of corruption (frequency and/or size of bribes) in the public and political sectors. All sources rank multiple countries, simultaneously. Evaluations that result in the Index are obtained from two groups: Country experts, both residents and non-residents, and business leaders. For a more detailed explanation of the Index, visit www.transparency.org/cpi
- ● Top management sets goals and incentives aimed at promoting good outcomes (e.g., profits) that instead encourage bad behaviors. For example, law and accounting firms often encourage employees to maximize the hours they bill for their services. Under pressure, some employees “pad” their hours or charge clients for work they didn’t do. ● Employees overlook unethical behavior in others because of peer pressure or self-interest. A manager may fail to complain about toxic waste discharged by a subsidiary because he doesn’t want to “rock the boat”. ● Managers tolerate lower ethical standards in value-chain activities performed by suppliers or third-party firms. Coffee producers sometimes ignore the poor working conditions of supplier farmers in Africa and Latin America. ● Unethical practices are allowed to accumulate in the firm slowly over time. When bad behavior is widespread throughout the firm, smaller infractions seem less noticeable. A corrupt environment usually fosters ongoing corruption. ● Bad means are justified by good ends. Pharmaceutical firms sometimes use unethical testing procedures in poor countries in order to validate of the effectiveness of new medications for disorders such as cancer and AIDS. The drugs help people, but may be developed through bad practice. SOURCE: Max Bazerman and Ann Tenbrunsel, “Ethical Breakdowns,” Harvard Business Review, April 2011, pp. 48-64
- Firms that behave unethically run the risk of criminal or civil prosecution, hurting their own reputations, harming employee morale and recruitment efforts, and/or exposing themselves to blackmailers or other unscrupulous parties
- An ethical dilemma is a predicament with major conflicts among different interests and in which determining the most appropriate course of action is confounded by a set of solutions that are equally justifiable, and often equally imperfect. Possible actions may be mutually exclusive: The choice of one automatically negates the other(s). The example on child labor is typical of the type of ethical dilemmas that employees often encounter in international business. Managers working abroad may be most exposed because they are caught between home country ethical norms and those encountered the foreign country.
- After complying with local law (the bottom of the pyramid), management should ensure that company activities follow high ethical standards (the middle). Occasionally laws in foreign countries conflict with, or fall short of, home-country laws. For example, in the United States, the Occupational Safety and Health Administration (OSHA) specifies numerous regulations regarding labor and employment conditions. As they expand abroad, most firms believe it is sufficient to comply with laws, regulations, and basic ethical standards. However, in addition, progressive MNEs now emphasize socially responsible behavior and sustainability (the top of the pyramid).
- Illicit use of intellectual property is another ethical violation, especially common in international business. Intellectual property refers to ideas or works created by individuals or firms and includes a variety of proprietary, intangible assets: discoveries and inventions; artistic, musical, and literary works; and words, phrases, symbols, and designs. Intellectual property may be stolen or copied illicitly. In Russia, software and movies produced by such firms as Microsoft and Disney often fall prey to counterfeiting; the assets are reproduced without compensating those who originally created them. Global brands—Rolex, Louis Vuitton, and Tommy Hilfiger, among others — fall victim to counterfeiting, eroding firms’ competitive advantages and brand equity. Johnson & Johnson discovered that counterfeiters were selling fake versions of its OneTouch test strips, used by diabetes patients in Canada and the United States. Criminals were promoting bogus versions of OneTouch, which diabetes sufferers use to monitor blood-sugar levels. Fake strips give false readings, which can be life-threatening if they cause patients to take too much or too little insulin, the drug used to treat diabetes. Trademarks are distinctive signs and indicators that firms use to identify their products and services. Copyrights grant protections to the creators of art, music, books, software, movies, and TV shows. Patents confer the exclusive right to manufacture, use, and sell products or processes. Intellectual property rights are not guaranteed in much of the world. Laws enacted in one country are enforceable only in that country and confer no protection abroad.
- Firms’ intellectual property often fall victim to counterfeiting. "Piracy" is equivalent to counterfeiting; it is the unauthorized production and selling of previously copyrighted works. The total value of internationally traded counterfeit and pirated products reached more than $1 trillion annually by 2014. The total value of domestically produced and consumed counterfeit and pirated products reached $600 billion annually by 2014. Counterfeiting and piracy hurt the world economy in various ways, especially regarding trade, foreign investment, employment, innovation, criminal activity, and the environment. At a micro level, counterfeiting and piracy harm company sales and pricing, and increase business costs. The brand value of heavily counterfeited goods can decline over time. Counterfeiting and piracy also reduce government tax revenues and the moral integrity of nations. The United States is the top target market for counterfeit and pirated goods. In 2011, U.S. Department of Homeland Security agents seized counterfeit and pirated products at U.S. borders with an estimated retail value of more than $1.1 billion. The Exhibit highlights the categories of illicit commodities seized. Among the most counterfeited goods are consumer electronics, footwear, and pharmaceuticals. In 2011, by far the largest single source of counterfeit products was China, which accounted for 62 percent of Homeland Security seizures. This was followed by Hong Kong, an administrative region of China, amounting to 18 percent of seizures. India represented just 3 percent of seizures, and all other countries accounted for the remaining 17 percent.
- Core CSR values include: Avoiding human rights abuses Upholding the right to join or form labor unions Eliminating compulsory and child labor Avoiding workplace discrimination Protecting the natural environment Guarding against corruption, and undertaking philanthropic efforts. Brazil’s Petrobras (www.petrobras.com) developed CSR programs aimed at reducing poverty and child labor, and promoting education for people with disabilities. In Africa, Petrobras has built hospitals and schools. In Colombia, it developed a program to train community health agents. In Nigeria, Petrobras cooperates with a local nongovernmental organization to provide HIV/AIDS prevention education. Motorola (www.motorola.com) has delivered more than 16 million low- cost mobile phones to people in fifty developing countries. It developed a mobile phone system for disease management in Africa, through which field health workers file patient reports and check drug areas deal more effectively with disease outbreaks, medicine shortages, and health maintenance.
- Core CSR values include: Avoiding human rights abuses in the various settings Upholding the right to join or form labor unions in the workplace Eliminating compulsory and child labor in the workplace Avoiding workplace discrimination Protecting the natural environment Guarding against corruption, and undertaking philanthropic efforts, to support communities Motorola (www.motorola.com) has delivered more than 16 million low- cost mobile phones to people in fifty developing countries. It developed a mobile phone system for disease management in Africa, through which field health workers file patient reports and check drug areas deal more effectively with disease outbreaks, medicine shortages, and health maintenance.
- As water grows scarce in many parts of the world, some multinational firms are taking a closer look at their use of this critical resource. Coca-Cola, a major water consumer, conducts a water sustainability program in India, where conflict over water use had begun to grow.
- Exhibit shows the level of air pollution in selected cities worldwide. Industrialization and other economic activity generate pollutants, which can affect human health, often causing heart and respiratory diseases. In the developing world, air pollution also results from burning dung, wood, and coal, which people use to meet basic energy needs. As indicated in the exhibit, poor industrializing countries tend to produce more air pollution. As nations advance economically, however, they usually develop regulations and technologies that reduce pollutants.
- Managers must make ethical behavior, CSR and sustainability a key part of their day-to- day pursuits. MNE activities generate harm and bring firms into contact with various activities—from R&D to manufacturing to marketing—that can pose various ethical dilemmas. Business executives should balance their obligation to shareholders with explicit contributions to the broader public good. Executives agree that generating high returns for investors should be accompanied by providing good jobs, supporting social causes in local communities, and going beyond legal requirements to minimize pollution and other negative effects of business.
- Ultimately, CSR and sustainability require the firm to go “deep, wide, and local.” Going deep means institutionalizing appropriate behavior into the organization’s culture so it becomes part and parcel of strategy. Going wide implies a continuous effort to understand how CSR and sustainability affect every aspect of the firm’s operations worldwide. Going local goes hand-in-hand with globalization. It requires the firm to examine its global operations to identify and improve specific local issues that affect customers, competitive position, reputation, and any other dimension that affects the firm’s operations worldwide. To make ethical practices, CSR, and sustainability succeed in the firm, it is important to undertake a systematic and ongoing process of education for employees, suppliers, and intermediaries alike. As the firm builds a track record of changes and successes, it will begin to build a culture of appropriate behavior in its operations worldwide. As they ply the waters of international business, addressing the moral integrity of strategic and daily operational decisions is a prime consideration for companies today.