Ethics in International Business

Course for management students

1. IN INTERNATIONAL BUSINESS

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. Importance of ethics in international business  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.  Ethical behavior establishes a healthy and pleasant cooperation climate for all the parties involved in a deal, making them feel comfortable with each other.  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. 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. • 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.  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.  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. 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.

9. The Roots of Ethical/ Unethical Behavior DECISION PERSONAL ETHICS MAKING PROCESS UNREALISTIC PERFORMANCE EXPECTATIONS LEADERSHIP SOCIETAL CULTURE ETHICAL BEHAVIOUR ORGANISATION CULTURE

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. 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. 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. 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. 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.  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. Ethics and Corporate Bribery

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. 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.  Institutional  Regulations and inefficient controls.  Slow judicial processes.  Organizational  Lack of moral criteria in promotions  Downplaying or reacting mildly to corruption charges

20. OECD Convention  Organization for Economic Cooperation and Development- Initially signed in 1977- In 2007 SA became the 37 th 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

21.  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.

22. 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.

23. 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.

24. ETHICS AND ENVIRONMENT

25. SUSTAINABILIT Y 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

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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

32. 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

33. 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

34. 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

35. 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