IIM-K IB-E 2021-22 AB S19-20 Ethical Aspects

Session 19-20
Ethical Aspects of International

Business
PGP 24 IB-E 2021-22 S19-20: Ethical

September 6, 2021 1
Aspects of International Business
Business Integrity
Business integrity refers to actual & perceived

adherence to ethical behaviour in business, so as
to be recognized as a socially responsible
organization

September 6, 2021 2
Business Integrity
While business integrity requires well-stated policies

& proactive actions from the organization, its
realization depends heavily on personal integrity of
employees.
Test of personal integrity:

How honest is one when no-one else is watching!

September 6, 2021 3
Ethical Issues: Examples
In 1972, Ray Kroc, McDonald’s’ founder made a

rare donation of $250,000 to Nixon's reelection
campaign and in return got a favorable legislation
that allowed companies such as McDonald's to
pay teenage employees 20 percent less than
federal minimum wages. Most observers consider
this a typical case of corporate influence on
lawmakers to enact legislation that serve their
selfish ends and harm society.
N Nayab•edited by: Jean Scheid•updated: 10/8/2014

September 6, 2021 4
Between 1986 and 1990, activists of London Greenpeace
distributed pamphlets with the title “What's Wrong with
McDonald's? Everything They Don't Want You to Know" and the
wordings “McDollars, McGreedy, McCancer, McMurder,
McProfits, McGarbage," alleging that McDonald's promoted
Third World poverty, sold unhealthy food, exploited workers and
children, tortured animals, and destroyed the Amazon rain forest.
McDonald's sued the group for libel. The court, however, held
McDonald’s guilty of exploiting children through advertising
tactics, serving dangerously unhealthy food, paying workers low
wages, indulging in union busting activities worldwide, and
ignoring animal cruelty perpetrated by its suppliers.

September 6, 2021 5
The World Health Organization found children in developing

countries who fed on Nestle’s infant-formula had mortality
rates five to ten times greater than that of breast-fed children.
The problem was Nestle’s sinister campaign of appointing
uniformed nurses to distribute the baby formula to poor
mothers for free, long enough for lactating mother’s milk to
dry up. The mother and child now became entirely dependent
on Nestle’s infant formula, and since most of them could not
afford the formula, they gave their children an insufficient
quantity of the formula. The formula also required clean
water, which most mothers could not access.

September 6, 2021 6
Nestle again made the news when they sued the
country of Ethiopia, one of the world’s poorest
countries, for six million dollars during the time
when it was in the midst of the worst drought in 20
years. Nestle wanted compensation for its stake in
the Ethiopian Livestock Development Company
(Eldico), which it obtained through an investment
in Schweisfurth, a German company. Ethiopia had
nationalized Eldico and sold it for a profit. Nestle
finally reached a settlement of $1.5 million with
Ethiopia, the maximum the government could
afford.

September 6, 2021 7
Deciding to spend $50 million on a new private

jet after taking $45 billion in taxpayer funds to
stay afloat, as Citibank did is a textbook
example of bad business ethics. To make
matters worse for CitiBank, CEO Vikram Pandit
lied to Congress that he received a
compensation of one million a year when the
actual figure was $11 million.

September 6, 2021 8
Wal-Mart regularly faces lawsuits from

employees accusing the company of forcing
them to work overtime without pay and denying
them health insurance. The allegations against
Wal-Mart are so numerous that it is a common
example for bad ethics.

September 6, 2021 9
Mattel has earned notoriety for manufacturing hazardous

toys. The company outsourced manufacturing to China
to cut costs, but the toys that came back were coated
with toxic lead paint and contained 180 times the legal
limit of lead content. The dolls also came with poorly
attached small magnets that could perforate the intestines
if swallowed. The dolls became a major hazard, and
Mattel had to recall them, and face public ire for its
unethical business conduct.

September 6, 2021 10
Integrity Issues
Neglect of business interests
Damage to consumer &/or social interests
Corruption & bribery
Self-gratification & nepotism
Compromising long-term interests
Exploitation of suppliers &/or employees

Integrity Issues:
Corruption as Economic Problem
Corruption leads to economic inefficiencies
Higher corruption is associated with lower growth
Corruption distorts market forces & provides undue

advantages to some
Corruption is an agency problem
In situations of high transaction costs, corruption

provides cost advantage to those involved

Corruption* Framework
Buying
Organization
Demand for
Agent
Corruption
Transaction
Supply of
Agent
Corruption
Supplying
Organization
* 2019 Transparency International’s India rank on Global Corruption Perception

Index was 80 (out of nearly 180 countries). Rank is worsening over years.
©2008-2021 P Rameshan
Corruption Market
Bribe/Commission
Rate Demand for Illegal/
Unethical Services
Supply of Illegal/
Unethical Services
a
P1 c
e = State of social tolerance

e Different societies may have different
Pe tolerance levels. Social tolerance
sustains corruption market.
d
P2 b
0 V1 Ve V2 Volume/Total Value
Example of State of Social Tolerance: Story in The Hindu (2021): of Corruption
In West Bengal, in the past people participated in the illegal commercial use of
government lands by CPM units as the latter distributed profit share to villagers as well.
However, villagers are upset with Trinamool Congress units, which replaced CPM in
those villages, as leaders of Trinamool are allegedly pocketing the entire profits
Corruption Market
Bribe/Commission
Rate Demand for Illegal/
Unethical Services
Supply of Illegal/
Unethical Services
a
P1 c
e = State of social tolerance

e Different societies may have different
Pe tolerance levels. Social tolerance
sustains corruption market.
d Demonetization, digitization &
P2 b
crackdown on black money shifted
tolerance expectation to left (V1)
0 V1 Ve V2 Volume/Total Value
of Corruption
©2008-2021 P Rameshan PGP 24 IB-E 2021-22 S19-20:

September 6, 2021 Ethical Aspects of International 15
Business
Transparency International
Framework
Commit Report
Assess Monitor
Plan Act

Ethical Values: P&G
Every employee is expected to know the laws & policies
that applies to their P&G activities & to conduct them
with uncompromising honesty & integrity
Where law is not explicit, their actions should satisfy the

following questions:
(1) Is this action the right thing to do?
(2) Would this action withstand public scrutiny?
(3) Will this action uphold P&G’s reputation as an
ethical company?
Company’s general rule is: No contact with competitors

Ethical Values: Roche
Roche has a zero tolerance policy towards corruption &

bribery
Any facilitation payments are forbidden unless such

payments can be qualified as permissible advantages

Ethical Values: Chevron
When in an ethical dilemma, the following questions
need to be addressed.
(1) Is it legal?
(2) Is it consistent with the company policy, including its
Human Rights policy?
(3) Is it consistent with the core Chevron values?
(4) If it’s made public, would I be comfortable?

Case 9
Ikea’s Global Sourcing Challenge

Were Its Indian Rugs Clean?

Discussion Question
Was Ikea’s business prone to ethical problems?
If yes, how?
If no, why?

Major Problems
Environmental Child Labour

Problems Problems
Regulations & TV Programme & ILO

Sales Drop Discussion
Working with Supply Clause & Third

Manufacturers Party Monitoring
Forestry & Rugmark &

Product Policy Initiatives
Ikea’s Rug Risk
Disruption to High business risk

supply & sales of Inaction
Growing industry- Global resistance

wide concerns to Child Labour

Solution Question
Is Indian rug business a misfit with Ikea’s

priorities?
If yes, why/how?
If no, why?

Ikea’s Indian Rug Context
Ikea’s Philosophy
Brand Evolution
Customer Sensitivity
Social angle

Ikea’s Cultural Influence
Strong Values & Investment in Supplier’s

Beliefs of Founder Capacity Development
Goal of Correcting Historical Policy of Strong

Business Distortions Support to Suppliers

Ikea’s Indian Rug Experience
Rug Outsourcing
Contract Provisions
Reported Violation
Organizational Risks

Context of Rangan Exports
Violation of Ikea’s
supply contract Frustration
German
Documentary

Indian Rug Dilemma
Small Segment Disproportionate

Headache
Time, Cost & Limited Profit

Reputation Issues Potential

Ikea’s Indian Rug Assessment
Discuss With Vendor If Proved Innocent, Continue
If Not Convinced, Probe

If Proved Innocent, Continue
Independently
If Guilty, Cancel Contract & Monitor & Mentor New Vendors to Avoid
Source from Better Vendors Future Violations
Or, Try to Develop a Direct,

If Not Possible, Exit Indian Rug Business
Compliant Supply Channel
Or Else, Join Rug Mark

Movement
©2018-2021 P Rameshan PGP 24 IB-E 2021-22 S19-20: Ethical

Actual Decision
Ikea began working with carpet weavers for addressing the
child labour problem as well as for improving their production
systems including looms. But, this had an earlier twist:
Ikea initially terminated the agreement with Rangan despite

Rangan’s strong claim of innocence (? Is it example of the
western inherent-bias that no easterners can be honest!!!)
The German TV documentary was later proved by German

police to be a false one; Ikea forced the producer to pay
compensation.
Rangan’s contract was subsequently reinstated; Ikea

apologized to Rangan & handed over the compensation
received. Rangan pledged to use it for setting up an school


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Session 19-20

Ethical Aspects of International

PGP 24 IB-E 2021-22 S19-20: Ethical

Business integrity refers to actual & perceived

PGP 24 IB-E 2021-22 S19-20: Ethical

While business integrity requires well-stated policies

Test of personal integrity:

PGP 24 IB-E 2021-22 S19-20: Ethical

In 1972, Ray Kroc, McDonald’s’ founder made a

N Nayab•edited by: Jean Scheid•updated: 10/8/2014

PGP 24 IB-E 2021-22 S19-20: Ethical

PGP 24 IB-E 2021-22 S19-20: Ethical

The World Health Organization found children in developing

PGP 24 IB-E 2021-22 S19-20: Ethical

PGP 24 IB-E 2021-22 S19-20: Ethical

Deciding to spend $50 million on a new private

N Nayab•edited by: Jean Scheid•updated: 10/8/2014

PGP 24 IB-E 2021-22 S19-20: Ethical

Wal-Mart regularly faces lawsuits from

N Nayab•edited by: Jean Scheid•updated: 10/8/2014

PGP 24 IB-E 2021-22 S19-20: Ethical

Mattel has earned notoriety for manufacturing hazardous

N Nayab•edited by: Jean Scheid•updated: 10/8/2014

PGP 24 IB-E 2021-22 S19-20: Ethical

Neglect of business interests

Damage to consumer &/or social interests

Corruption & bribery

Self-gratification & nepotism

Compromising long-term interests

Exploitation of suppliers &/or employees

PGP 24 IB-E 2021-22 S19-20: Ethical

Corruption leads to economic inefficiencies

Higher corruption is associated with lower growth

Corruption distorts market forces & provides undue

Corruption is an agency problem

In situations of high transaction costs, corruption

PGP 24 IB-E 2021-22 S19-20: Ethical

* 2019 Transparency International’s India rank on Global Corruption Perception

e = State of social tolerance

e = State of social tolerance

©2008-2021 P Rameshan PGP 24 IB-E 2021-22 S19-20:

PGP 24 IB-E 2021-22 S19-20: Ethical

Where law is not explicit, their actions should satisfy the

Company’s general rule is: No contact with competitors

PGP 24 IB-E 2021-22 S19-20: Ethical

Roche has a zero tolerance policy towards corruption &

Any facilitation payments are forbidden unless such

PGP 24 IB-E 2021-22 S19-20: Ethical

PGP 24 IB-E 2021-22 S19-20: Ethical

Ikea’s Global Sourcing Challenge

PGP 24 IB-E 2021-22 S19-20: Ethical

Was Ikea’s business prone to ethical problems?

PGP 24 IB-E 2021-22 S19-20: Ethical

Environmental Child Labour

Regulations & TV Programme & ILO

Working with Supply Clause & Third

Forestry & Rugmark &

Disruption to High business risk

Growing industry- Global resistance

PGP 24 IB-E 2021-22 S19-20: Ethical

Is Indian rug business a misfit with Ikea’s

PGP 24 IB-E 2021-22 S19-20: Ethical

PGP 24 IB-E 2021-22 S19-20: Ethical

Strong Values & Investment in Supplier’s