Chapter 4

Ethics in International Business

 Ethics refers to 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.

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

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

For example, in the 1990s Nike found itself the center of a storm of protests when news reports
revealed that working conditions at many of its subcontractors were very poor. Typical of the
allegations were those detailed in a CBS News 48 Hours program that aired in 1996. The report
painted a picture of young women at a Vietnamese subcontractor who worked with toxic
materials six days a week in poor conditions for only 20 cents an hour. The report also stated that
a living wage in Vietnam was at least $3 a day, an income that could not be achieved at the
subcontractor without working substantial overtime. Nike and its subcontractors were not
breaking any laws, but this report, and others like it, raised questions about the ethics of using
sweatshop labor to make what were essentially fashion accessories. It may have been legal, but
was it ethical to use subcontractors who by Western standards clearly exploited their workforce?
Nike’s critics thought not, and the company found itself the focus of a wave of demonstrations
and consumer boycotts. These exposés surrounding Nike’s use of subcontractors forced the
company to reexamine its policies. Realizing that, even though it was breaking no law, its
subcontracting policies were perceived as unethical, Nike’s management established a code of
conduct for Nike subcontractors and instituted annual monitoring by independent auditors of all
subcontractors.

Human Rights

 In developed countries, basic human rights such as freedom of association, freedom of

 In other countries, these rights may not exist

One of the most obvious historic examples was South Africa during the days of white rule and
apartheid, which did not end until 1994. The apartheid system denied basic political rights to the
majority nonwhite population of South Africa, mandated segregation between whites and
nonwhites, reserved certain occupations exclusively for whites, and prohibited blacks from being
placed in positions where they would manage whites. Despite the odious nature of this system,
Western businesses operated in South Africa. By the 1980s, however, many questioned the ethics
of doing so. They argued that inward investment by foreign multinationals, by boosting the
South African economy, supported the repressive apartheid regime.

Several Western businesses started to change their policies in the late 1970s and early 1980s.
General Motors, which had significant activities in South Africa, was at the forefront of this
trend. GM adopted what came to be called the Sullivan principles, named after Leon
Sullivan, a black Baptist minister and a member of GM’s board of directors. Sullivan
argued that it was ethically justified for GM to operate in South Africa so long as two
conditions were fulfilled.
First, the company should not obey the apartheid laws in its own South African operations
(a form of passive resistance).
Second, that the company should do everything within its power to promote the abolition of
apartheid laws.
Sullivan’s principles were widely adopted by U.S. firms operating in South Africa.
The South African government ignored their violation of the apartheid laws, not wanting to
antagonize important foreign investors.

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

No one owns the atmosphere or the oceans, but polluting both, no matter where the pollution
originates, harms all. The atmosphere and oceans can be viewed as a global common from
which everyone benefits but for which no one is specifically responsible. In such cases, a
phenomenon known as the tragedy of the commons becomes applicable. The tragedy of the
commons occurs when individuals overuse a resource held in common by all, but owned by no
one, resulting in its degradation. The phenomenon was first named by Garrett Hardin when
describing a particular problem in 16th-century England. Large open areas, called commons,
were free for all to use as pasture. The poor put out livestock on these commons and
supplemented their meager incomes. It was advantageous for each to put out more and more
livestock, but the social consequence was far more livestock than the commons could handle.
The result was overgrazing, degradation of the commons, and the loss of this much-needed
supplement.

Corruption

 Some economists believe that in a country where preexisting political structures distort or
limit the workings of the market mechanism, corruption in the form of black-
marketeering, smuggling, and side payments to government bureaucrats to “speed up”
approval for business investments may actually enhance welfare

 Other economists have argued that corruption reduces the returns on business investment
and leads to low economic growth

A classic example concerns a well-publicized incident in the 1970s. Carl Kotchian, the president
of Lockheed, made a $12.5 million payment to Japanese agents and government officials to
secure a large order for Lockheed’s TriStar jet from Nippon Air. When the payments were
discovered, U.S. officials charged Lockheed with falsification of its records and tax violations.
Although such payments were supposed to be an accepted business practice in Japan (they might
be viewed as an exceptionally lavish form of gift giving), the revelations created a scandal there
too. The government ministers in question were criminally charged, one committed suicide, the
government fell in disgrace, and the Japanese people were outraged. Apparently, such a payment
was not an accepted way of doing business in Japan! The payment was nothing more than a
bribe, paid to corrupt officials, to secure a large order that might otherwise have gone to another
manufacturer, such as Boeing. Kotchian clearly engaged in unethical behavior, and to argue that
the payment was an “acceptable form of doing business in Japan” was self-serving and incorrect.

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

 Social responsibility can be supported for its own sake simply because it is the right way
for a business to behave

 Advocates argue that businesses need to recognize their noblesse oblige (honorable and
benevolent behavior that is the responsibility of successful companies) and give
something back to the societies that have made their success possible

Noblesse oblige is a French term that refers to honorable and benevolent behavior considered the
responsibility of people of high (noble) birth. In a business setting, it is taken to mean benevolent
behavior that is the responsibility of successful enterprises. This has long been recognized by
many business people, resulting in a substantial and venerable history of corporate giving to
society and in businesses making social investments designed to enhance the welfare of the
communities in which they operate.
However, there are examples of multinationals that have abused their power for private gain. The
most famous historic example relates to one of the earliest multinationals, the British East India
Company. Established in 1600, the East India Company grew to dominate the entire Indian
subcontinent in the 19th century. At the height of its power, the company deployed over 40
warships, possessed the largest standing army in the world, was the de facto ruler of India’s 240
million people, and even hired its own church bishops, extending its dominance into the spiritual
realm.

Power itself is morally neutral—how power is used is what matters. It can be used in a positive
way to increase social welfare, which is ethical, or it can be used in a manner that is ethically and
morally suspect. Some multinationals have acknowledged a moral obligation to use their power
to enhance social welfare in the communities where they do business. BP, one of the world’s
largest oil companies, has made it part of the company policy to undertake “social investments”
in the countries where it does business. In Algeria, BP has been investing in a major project to
develop gas fields near the desert town of Salah. When the company noticed the lack of clean
water in Salah, it built two desalination plants to provide drinking water for the local community
and distributed containers to residents so they could take water from the plants to their homes.
There was no economic reason for BP to make this social investment, but the company believes
it is morally obligated to use its power in constructive ways. The action, while a small thing for
BP, is a very important thing for the local community.

Ethical Dilemmas

 Ethical dilemmas are situations in which none of the available alternatives seems
ethically acceptable
  The ethical obligations of a multinational corporation toward employment conditions,
human rights, corruption, environmental pollution, and the use of power are not always
clear cut

From an international business perspective, some argue that what is ethical depends upon one’s
cultural perspective. In the United States, it is considered acceptable to execute murderers but in
many cultures this is not acceptable—execution is viewed as an affront to human dignity and the
death penalty is outlawed. Many Americans find this attitude very strange, but many Europeans
find the American approach barbaric. For a more business oriented example, consider the
practice of “gift giving” between the parties to a business negotiation. While this is considered
right and proper behavior in many Asian cultures, some Westerners view the practice as a form
of bribery, and therefore unethical, particularly if the gifts are substantial.

Managers often confront very real ethical dilemmas where the appropriate course of action is not
clear. For example, imagine that a visiting American executive finds that a foreign subsidiary in
a poor nation has hired a 12-year-old girl to work on a factory floor. Appalled to find that the
subsidiary is using child labor in direct violation of the company’s own ethical code, the
American instructs the local manager to replace the child with an adult. The local manager
dutifully complies.
The girl, an orphan, who is the only breadwinner for herself and her 6-year-old brother, is unable
to find another job, so in desperation she turns to prostitution. Two years later she dies of AIDS.
Meanwhile, her brother takes up begging. He encounters the American while begging outside the
local McDonald’s. Oblivious that this was the man responsible for his fate, the boy begs him for
money. The American quickens his pace and walks rapidly past the outstretched hand into the
McDonald’s, where he orders a quarter-pound cheeseburger with fries and a cold milk shake. A
year later, the boy contracts tuberculosis and dies.
Had the visiting American understood the gravity of the girl’s situation, would he still have
requested her replacement? Perhaps not. Would it have been better, therefore, to stick with the
status quo and allow the girl to continue working? Probably not, because that would have
violated the reasonable prohibition against child labor found in the company’s own ethical code.
What then would have been the right thing to do? What was the obligation of the executive given
this ethical dilemma?
There is no easy answer to these questions. That is the nature of ethical dilemmas—they are
situations in which none of the available alternatives seems ethically acceptable. In this case,
employing child labor was not acceptable, but given that she was employed, neither was denying
the child her only source of income. What the American executive needed, what all managers
need, was a moral compass, or perhaps an ethical algorithm, that would guide him through such
an ethical dilemma to find an acceptable solution.
The Roots Of Unethical Behavior

 There is no clear cut reason why managers behave unethically

The causes of unethical behavior are complex and reflect:

 Personal ethics

 Decision-making processes

 Organizational culture

 Unrealistic performance expectations

 Leadership

Figure : Determinants of Ethical Behavior

Personal ethics

 Personal ethics (the generally accepted principles of right and wrong governing the
conduct of individuals) influence business ethics

 Expatriates may face pressure to violate their personal ethics because they are away from
their ordinary social context and supporting culture, and they are psychologically and
geographically distant from the parent company
Decision-making processes

People may behave unethically because they rely on economic analysis when making decisions
and fail to ask the relevant question:

 Is this decision or action ethical?

Organizational culture

 Organization culture refers to the values and norms that are shared among employees of
an organization

 In firms with an organization culture that does not emphasize business culture, unethical
behavior may exist

Unrealistic performance expectations

 When the parent company sets unrealistic performance goals, managers may cut corners
or act in an unethical manner

 Organizational culture can legitimize unethical behavior or reinforce the need for ethical
behavior

Leadership

 Leaders help to establish the culture of an organization, and set the example that others
follow

 When leaders act unethically, subordinates may act unethically, too

To ensure ethical issues are considered in business decisions, firms should:

 favor hiring and promoting people with a well grounded sense of personal ethics

 build an organizational culture that places a high value on ethical behavior

 makes sure that leaders within the business not only articulate the rhetoric of ethical
behavior, but also act in manner that is consistent with that rhetoric

 put decision making processes in place that require people to consider the ethical
dimension of business decisions

 develop moral courage

Hiring And Promotion

 Businesses should strive to identify and hire people with a strong sense of personal ethics

 Companies should refrain from promoting individuals who have acted unethically

 Prospective employees should find out as much as they can about the ethical climate in
an organization prior to taking a position

Organization Culture And Leadership

To foster ethical behavior, businesses need to build an organization culture where:

 the business explicitly articulates values that place a strong emphasis on ethical behavior,
perhaps using a code of ethics (a formal statement of the ethical priorities a business
adheres to)

 leaders in the business give life and meaning to the code of ethics by repeatedly
emphasizing their importance, and then acting on them

 the business puts in place a system of incentives and rewards that recognize people who
engage in ethical behavior and sanction those who do not

Decision-Making Process

 Managers can also use a five step process to think through ethical problems:

Step1: Managers identify which stakeholders (the individuals or groups who have an interest,
stake, or claim in the actions and overall performance of a company) a decision would affect and
in what ways
  Internal stakeholders are people who work for or who own the business such as
employees, the board of directors, and stockholders

 External stakeholders are the individuals or groups who have some claim on a firm such
as customers, suppliers, and unions

Step 2: Managers determine whether a proposed decision would violate the fundamental rights of
any stakeholders

Step 3: Managers establish moral intent (the business must resolve to place moral concerns ahead
of other concerns in cases where either the fundamental rights of stakeholders or key moral
principles have been violated)

Step 4: The company engages in ethical behavior

Step 5: The business audits its decisions, reviewing them to make sure that they were consistent
with ethical principles

Ethics Officers

 To ensure ethical behavior in a business, a number of firms now have ethics officers

Ethics officers ensure:

 all employees are trained in ethics

 ethics is considered in the decision-making process

 the company’s code of conduct is followed Moral courage:

 enables managers to walk away from a decision that is profitable, but unethical

 gives an employee the strength to say no to a superior who instructs her to pursue actions
that are unethical

 gives employees the integrity to go public to the media and blow the whistle on persistent
unethical behavior in a company

 does not come easily and employees have lost their jobs when acting on this courage

Summary of Decision-Making Steps

 In the end, there are clearly things that an international business should do, and there are
things that an international business should not do

 But, not all ethical dilemmas have a clean and obvious solution.