Ethics in International

Business

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 Ethics in International
Business
In December 2008, Siemens, the large German
electronics firm, agreed to pay US $ 1.6 billion in
fines to settle legal suits brought by the American
and German governments. The governments
asserted that Siemens had used bribes to win
contracts around the world. These were the largest
fines ever levied against a company for bribery,
reflecting the scale of the problem at Siemens.
Since 1999, the company had apparently paid some
US $ 1.4 billion in bribes. In Bangladesh, Siemens
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paid $5 million to the son of the prime minister to
 Cont’
In Nigeria, it paid US $ 12.7 million to various officials to
win government telecommunications contracts. In
Argentina, Siemens paid at least US $40 million in bribes
to win a US $1 billion contract to produce national
identity cards. In Israel, the company provided US $ 20
million to senior government officials in order to win a
contract to build power plants. In China, it paid US $ 14
million to government officials to win a contract to supply
medical equipments.

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 Cont’
Before 1999, bribery of foreign officials was not
illegal in Germany. Indeed bribes could be
deducted as a business expense under the hard-
to-German tax law. When the German law
changed in 1999, Siemens continued as before
but put mechanisms to hide what it was doing.
Money was transferred into trace bank accounts
in Switzerland. These funds would be used to
hire an outside consultant to help win a contract.
The consultant would in turn deliver the cash to
the ultimate recipient, typically a government
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 Cont’
Siemens had more than 2700 such consultants
worldwide. The rationale was “it was about
keeping the business alive and not jeopardizing
thousands of jobs overnight.” But the practice
left
behind angry competitors who were shut out of
contracts and local residents in poor countries
who
paid dearly for government services because
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 Cont’
The scheme began to collapse at Siemens
when investigators in several countries began
to examine suspicious transactions.
Prosecutors in Italy, Liechtenstein and
Switzerland sent requests for help to
counterparts in Germany, providing a list of
Siemens employees who were implicated in
making illegal payments. In late 2006, the
German police acted, raiding the company,
seizing data and arresting several executives.
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Shortly afterwards, the United States started
 Cont’
Since Siemens had a listing on the New York Stock
Exchange, it had to adhere to the Foreign Corrupt
Practices Act, which outlaws payments to
government
officials to win contracts. At the end of the day,
Siemens
not only had to pay US $1.6 billion in fines but also
committed to spending another US $ 1 billion to
improve
its
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internal compliance process while several
 Introduction
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.
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Ethical Issues in International Business
• Many of the ethical issues and dilemmas in international
business are rooted in the fact that political systems, law,
economic development and culture vary significantly
from nation to nation
• In the international business setting, the most common
ethical issues involve
1. - Employment practices
2. - Human rights
3. - Environmental regulations
4. - Corruption
5. - Moral obligation of multinational corporations

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 1. Employment Practices

• Ethical issues associated with employment

practices abroad include
- When work conditions in a host nation are
clearly inferior to those in a multinational’s
home nation, what standards should be applied?
- Home nation? host nation? or something in
between?
- While few would suggest that pay and work
conditions should be the same across nations,
how much divergence is acceptable

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 Cont’

For effective results :

Firms should establish minimal

acceptable standards that safeguard the
basic rights and dignity of employees and
audit foreign subsidiaries and sub
contractors on a regular basis
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 2. Human Rights

 Questions of human rights can arise in international

business because basic human rights still are not
respected in many Nations

 Rights that we take for granted in developed nations, such

as freedom of association, freedom of speech, freedom of
assembly, freedom of movement, and freedom from
political repression are by no means universally accepted

 The question that must be asked of firms operating

internationally is: ‘What is the responsibility of a foreign
multinational when operating in a country where basic human rights
are trampled on?’

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 Cont’
Role of MNC on human rights
Inward investment can be a force for economic,
political and social progress that improves the rights
of people

Limitation
Some governments are so repressive, investment
cannot be justified on ethical grounds

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3. Environmental Pollution

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Ethical issues arise when environmental regulations

in host nations are far inferior to those in the
home nation

 Developing nations often lack environmental

regulations, and according to critics, the result
can be higher levels of pollution from the
operations of multinationals than would be
allowed at home
 Cont’
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

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 4. Corruption

• Corruption has been a problem in almost

every society in history, and it continues
to be one today

• International businesses can, and have

gained economic advantages by making
payments to government officials
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 Bribes vs. Grease Payments
Definitions
 Grease Payments—Money
given for the purpose of getting
minor officials to do what they
are supposed to be doing.
 Bribes—Relatively large
amounts of money given for
the purpose of influencing
officials to make decisions or
take actions that they otherwise
might not take.
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Examples
 Money given to minor
officials (clerks, attendants,
customs inspectors) for the
purpose of expediting a project
 Money given, often to high-
ranking officials. Purpose is
often to get these persons to
purchase goods or services from
the bribing firm.
 Improving Global Business Ethics

Integrative Social Contract Theory (ISCT)

Hyper-norms – trans-cultural values including
fundamental human rights
Consistent norms - norms that are culturally specific,
but consistent with hyper-norms
Moral free space norms - strongly held cultural
beliefs in countries that are in tension with hyper-
norms
Illegitimate norms– those norms that are incompatible
with hyper-norms
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 Using ISCT: The Case of Bribery

Is bribery part of moral free space or is it an illegitimate

norm?
violates agent / principal contract

against law in all countries

violates political participation hyper-norm

violates economic efficiency hyper-norm

Conclusion: Bribery is an illegitimate norm

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 Cont’
Laws that addresses issues on corruption include:
1977- US Foreign Corrupt Practices Act
1997-(OECD) followed the U.S. lead and adopted the

Convention on Combating Bribery of Foreign

Public Officials in International

Outlawed the paying of bribes to foreign government

officials to gain business
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 5. Moral Obligations

• Multinational corporations have power that

comes from their control over resources and
their ability to move production from country
to country

• Moral philosophers argue that with power

comes the social responsibility for
corporations to give something back to the
societies that enable them to prosper and
grow
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 Cont’
Social responsibility refers to the idea that business
people should consider the social consequences of
economic actions when making business decisions

- Advocates of this approach argue that businesses

need
to recognize their noblesse oblige (benevolent
behavior that is the responsibility of successful
enterprises)
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 Ethical Dilemmas

-Managers must confront very real ethical dilemmas

- 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
- Ethical dilemmas are situations in which none of
the available alternatives seems ethically acceptable

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 The Roots of Unethical Behavior

Why do managers behave in a manner that is

unethical ?

Business ethics are not divorced from personal

ethics

Business people sometimes do not realize they

are behaving unethically because they fail to
ask if the decision is ethical
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 Cont’

The climate in some businesses does not encourage

people to think through the ethical consequences of
business decisions
Pressure from the parent company to meet unrealistic
performance goals that can be attained only by cutting
corners or acting in an unethical manner
-Leaders help to establish the culture of an
organization and they set the example that others
follow

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 Ethical Behavior

Decision
Personal making
ethics process
Ethical
Behavior

Organizational leadership
culture
Unrealistic
performance
goals

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 Philosophical Approaches to Ethics: Straw Man
Raised by business ethics scholars primarily to
demonstrate that they offer inappropriate
guidelines for ethical decision making in a
multinational enterprise

The Friedman Doctrine states that the only

social responsibility of business is to increase
profits, so long as the company stays within the
rules of law
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 Cont’

• Cultural Relativism believes that ethics are

nothing more than the reflection of a culture
(‘When in Rome, do as the Romans’) which
Romans?
• The Righteous Moralist claims that a
multinational’s home-country standards of ethics
are the appropriate ones in all countries
• The Naïve Immoralist asserts that if a manager
sees that firms from other nations are not
following ethical norms in a host country then
they should not either
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 Philosophical Approaches to Ethics:
Utilitarian
Utilitarian approaches to ethics hold that the
moral worth of actions or practices is
determined by their consequences

An action is judged to be desirable if it leads

to the best possible balance of good
consequences over bad consequences

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 Cont’
Problems with utilitarian approach

 First problem with utilitarianism is in measuring

the benefits, costs, and risks of an action

The second problem related to utilitarianism is that

it does not consider justice, so the minority will
always be at a disadvantage

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 Philosophical Approaches to Ethics:
Kantian
• Kantian ethics hold that people should be
treated as ends and never purely as means to
the ends of others
Why?
People are not instruments like a machine
People have dignity and need to be
respected

Kantian ethics are viewed as incomplete

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 Philosophical Approaches to Ethics: Rights
• Rights theories recognize that human beings
have fundamental rights and privileges which
transcend national boundaries and cultures
• Rights 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
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 Cont’
The notion that there are fundamental rights that transcend
national borders and cultures was the underlying
motivation for the United Nations Universal Declaration
of Human Rights
All human beings are born free and equal in dignity and
rights
They are endowed with reason and conscience and
should act toward one another in a spirit of brotherhood
Everyone has the right to work, to free choice of
employment, to just and favorable conditions of work,
and to protection against unemployment
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 Cont’
- Everyone, without any discrimination, has the
right to equal pay for equal work
- Everyone who works has the right to just and
favorable remuneration ensuring for himself
and his family an existence worthy of human
dignity, and supplemented, if necessary, by
other means of social protection
- Everyone has the right to form and to join trade
unions for the protection of his interests

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 Philosophical Approaches to Ethics:
Justice
• 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
- There is no one theory of justice
- Several theories of justice conflict with each
other in important ways
• Valid principles of justice are those with which
all persons would agree if they could freely and
impartially consider the situation
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 Cont’
- Impartiality is guaranteed by a conceptual
device called the veil of ignorance

- Under the veil of ignorance, everyone is

imagined to be ignorant of all of his or her
particular characteristics

• race, sex, intelligence, nationality, family

background, and special talents
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 Ethical Decision Making

•Five things that an international business

and its managers can do to make sure
ethical issues are considered
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
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 Cont’
 Make sure that leaders within the business
not only articulate the rhetoric of ethical
behavior, but also act in a manner that is
consistent with that rhetoric
 Implement decision-making processes that
require people to consider the ethical
dimension of business decisions
 Develop moral courage

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 Hiring Practices: A Job Seeker’s Audit

Is there a formal code of ethics? How are employees

educated about it? Is it enforced?
Are workers trained in ethical decision making?
e.g. are they trained to question authority when asked to
do something they think might be wrong?
Do employees have formal channels through which
they confidentially express concerns?
Is misconduct disciplined swiftly and justly?
Is integrity important to hiring?
Do employees believe senior leaders operate with
integrity?
How do leaders serve as models for ethical behavior
and integrity?
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 Organization Culture and Leadership

To foster ethical behavior, businesses need to

build an organization culture that values
ethical behavior
Three things that are needed to build an
ethical culture
Businesses must explicitly articulate values
that emphasize ethical behavior in a code of
ethics
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 Cont’
 Leaders in the business must give life
and meaning to those words by
repeatedly emphasizing their importance
and then acting on them
 Incentive and benefit systems, including
promotions, must reward people who
engage in ethical behavior and sanction
those who do not
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 Decision-Making Process
• According to experts, a decision is acceptable on ethical grounds
if a business person can answer yes to each of these questions:
Does my decision fall within the accepted values or standards
that typically apply in the organizational environment (as
articulated in a code of ethics or some other corporate
statement)?
Am I willing to see the decision communicated to all
stakeholders affected by it — for example, by having it reported
in newspapers or on television?
Would the people with whom I have a significant personal
relationship, such as family members, friends, or even managers
in other businesses, approve of the decision?
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 Decision-Making Process
Five-step process to think through ethical
problems
1.Business people should identify which
stakeholders a decision would affect and
in what ways

• Stakeholders are individuals or groups

that have an interest, claim, or stake in the
company
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 Cont’
2. Judge the ethics of the proposed strategic
decision, given the information gained in Step
1
3. Managers must establish moral intent

4. Implement the ethical behavior

5. Review the decision to make sure it was

consistent with ethical principles
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 Moral Courage
Moral courage enables managers to walk away
from a decision that is profitable, but unethical
• Moral courage gives an employee the strength
to say no to a superior who instructs her to
pursue actions that are unethical
• Moral courage gives employees the integrity to
go public to the media and blow the whistle on
persistent unethical behavior in a company
• Moral courage does not come easy and
employees have lost their jobs when acting on
this courage
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 Thank you

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