Ethics and Corporate Responsibility CHAPTER 8 Ethics and Corporate Responsibility AFP/GETTY IMAGES

Learning objectives LO 8.1 Be familiar with the ethical and corporate responsibility issues faced by international businesses. LO 8.2 Recognise an ethical dilemma. LO 8.3 Discuss the causes of unethical behaviour by managers. LO 8.4 Be familiar with the different philosophical approaches to ethics. LO 8.5 Know what managers can do to incorporate ethical considerations into their decision making.

Introduction Ethics refers to accepted principles of right and wrong that govern the conduct of a person, the members of a profession or the actions of an organisation. Business ethics are the accepted principles of right and wrong governing the conduct of businesspeople. Ethical strategy is a strategy, or course of action, that does not violate these accepted principles. Internet Extra: Consumers International (www.consumersinternational.org) is an organisation dedicated to protecting the rights of consumers worldwide. In doing so, it promotes ethical behaviour on the part of companies. Go to the site and click on one of the organisation’s current efforts. What are the issues that are being raised? How do they affect companies? Do you agree with the organisation’s position? Why or why not?

Ethical issues in international business Common ethical issues in international business: employment practices, human rights, environmental regulations, corruption, and the moral obligations of multinational companies. Ethical issues in international business are rooted in the fact that political systems, law, economic development and culture vary significantly from nation to nation. continued

Ethical issues in international business Major multilateral accords Table 8.1 Major multilateral accords continued

Ethical issues in international business Employment practices When work conditions in a host nation are clearly inferior to those in a multinational’s home nation, companies must decide which standards should be applied: those of the home nation, those of the host nation, or something in between. Human rights Basic human rights taken for granted in the developed world such as freedom of association, freedom of speech, freedom of assembly, freedom of movement, and so on, are by no means universally accepted. continued

Ethical issues in international business Environmental pollution Issues arise when environmental regulations in host nations are inferior to those in the home nation. Many developed nations have substantial regulations governing the emission of pollutants, but such regulations are often lacking in developing nations. Which country’s (host or home) regulations should multinationals follow? continued

Ethical issues in international business Environmental pollution GETTY IMAGES continued

Ethical issues in international business Bribery and corruption Bribery and corruption have been a problem in almost every society in history, and this remains the case today. There always have been and always will be corrupt officials. International businesses can and have gained economic advantages by making payments to those officials. In the United States, the Foreign Corrupt Practices Act outlawed the practice of paying bribes to foreign government officials in order to gain business. continued

Ethical issues in international business Bribery and corruption Facilitating payments are distinguished from bribes in that they are not payments businesses make to secure contracts they would not otherwise get or to obtain exclusive preferential treatment. The Organisation for Economic Cooperation and Development (OECD) adopted a Convention on Combating Bribery of Foreign Public Officials in International Business Transactions in 1997, which obliges member states to make the bribery of foreign public officials a criminal offence. continued

Ethical issues in international business Bribery and corruption The convention excludes facilitating payments made to expedite routine government action. Australia, New Zealand and some 34 other countries have signed the convention, six of which are not OECD members. Australia amended the Criminal Code Act 1995 (Cwlth) in 1999 (Criminal Code Amendment (Bribery of Foreign Public Officials) Act 1999, also called the Bribery Act) to make it an offence to bribe a foreign official. continued

Ethical issues in international business Bribery and corruption In New Zealand relevant domestic legislation includes the Crimes Act 1961 and the Secret Commissions Act 1910. While facilitating payments, or speed money, are excluded from both the Foreign Corrupt Practices Act and the OECD convention on bribery, the ethical implications of making such payments are unclear. In many countries, payoffs to government officials in the form of speed money appear to be part of life. continued

Ethical issues in international business Bribery and corruption Some economists suggest that the practice of giving bribes might be the price that must be paid to do a greater good. Other economists have argued that corruption reduces the returns on business investment and leads to low economic growth. Others suggest that corruption actually ‘speeds up’ approval for business investments and may actually enhance welfare. continued

Ethical issues in international business Moral obligations Social responsibility refers to the idea that businesspeople should take the social consequences of economic actions into account when making business decisions, and that there should be a presumption in favour of decisions that have both good economic and good social consequences. The right way for business to behave. Noblesse oblige: honourable and benevolent behaviour that is the responsibility of successful companies.

Ethical dilemmas Ethical dilemmas are situations in which none of the available alternatives seems ethically acceptable. The ethical obligations of a multinational corporation towards employment conditions, human rights, child labour, 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.

The roots of unethical behaviour Determinants of ethical behaviour Figure 8.1 Determinants of ethical behaviour continued

The roots of unethical behaviour Personal ethics Business ethics reflect personal ethics (the generally accepted principles of right and wrong governing the conduct of individuals). 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. continued

The roots of unethical behaviour Decision-making processes Businesspeople may behave unethically because they fail to ask the relevant question—is this decision or action ethical? Businesspeople may apply a straightforward business calculation to what they perceive to be a business decision, forgetting that the decision may also have an important ethical dimension. The fault lies in processes that do not incorporate ethical considerations into business decision making. continued

The roots of unethical behaviour Organisation culture In firms with an organisation culture (the values and norms that are shared among employees of an organisation) that does not emphasise business culture, unethical behaviour may exist. Unrealistic performance expectations Pressure from the parent company to meet performance goals that are unrealistic, and can only be attained by cutting corners or acting in an unethical manner, can cause unethical behaviour. continued

The roots of unethical behaviour Corporate governance and leadership Another root cause of corporate failure is poor corporate governance and unethical behaviour by the leadership. In Australia, the Australian Securities Exchange has identified eight essential corporate governance principles. In New Zealand, the Securities Commission has established the ‘Corporate Governance in New Zealand Principles and Guidelines’. Management Focus: Pfizer’s Drug-Testing Strategy in Nigeria Summary This feature raises questions as to whether pharmaceutical giant, Pfizer, acted ethically when testing a new drug. In 1996, Pfizer was seeking FDA approval for a new antibiotic. The company lacked the necessary test results to have the drug approved for children. The company saw an opportunity to quickly test the drug when an outbreak of bacterial meningitis hit a town in Nigeria. In 2003, two dozen Nigerian families sued Pfizer, arguing that their children either died or were injured as a result of the drug testing. They allege that Pfizer did not take the appropriate steps to properly test the drug and that the company acted in an unethical manner. Suggested Discussion Questions 1. Was Pfizer irresponsible when it tested its experimental drug in Nigeria? How could the company have acted more ethically? 2. Pfizer saw the bacterial meningitis outbreak in Nigeria as a means of quickly getting a large pool of sick children on whom to test its new antibiotic. Consider the dilemma facing pharmaceutical companies. In order to get FDA approval to introduce their new drugs, numerous studies must demonstrate the efficacy of the drugs, studies that, as the Pfizer example demonstrates, can be difficult to complete. Would you have been tempted to follow Pfizer’s strategy? If you waited, and completed the testing in the United States, what might be the effect on your company’s bottom line? Would you be acting in the best interests of your stakeholders by waiting, or by testing in Nigeria?

Philosophical approaches to ethics Four approaches to business ethics are commonly discussed in the literature: The Friedman doctrine Cultural relativism Righteous moralism Naive immoralism All of these approaches have some inherent value, but all are unsatisfactory in important ways. continued

Philosophical approaches to ethics The Friedman doctrine Economist Milton Friedman’s position is that the only social responsibility of business is to increase profits, so long as the company stays within the rules of law. Cultural relativism Cultural relativism is the belief 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’. continued

Philosophical approaches to ethics Righteous moralism The righteous moralist approach claims that a multinational’s home-country standards of ethics are the appropriate ones for companies to follow in foreign countries. Naive immoralism The naive immoralist asserts that if a manager of a multinational sees that firms from other nations are not following ethical norms in a host nation, the manager need not do so either. continued

Philosophical approaches to ethics Utilitarian and Kantian ethics Moral philosophers see value in utilitarian and Kantian ethics. 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. continued

Philosophical approaches to ethics Utilitarian and Kantian ethics Problems with the approach concern measuring the benefits, costs and risks of a course of action, and the fact that philosophy 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. continued

Philosophical approaches to ethics Rights theories Rights theories recognise that human beings have fundamental rights and privileges that transcend national boundaries and culture. Moral theorists argue that fundamental human rights form the basis for the moral compass that managers should navigate by when making decisions that have an ethical component. continued

Philosophical approaches to ethics Rights theories The idea that some fundamental rights transcend national borders and cultures was the underlying motivation for the UN’s Universal Declaration of Human Rights (which specifies the basic principles that should always be adhered to irrespective of the culture in which one is doing business). continued

Philosophical approaches to ethics 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 was set forth 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. continued

Philosophical approaches to ethics Justice theories Rawls formulates the difference principle, which is that inequalities are justified if they benefit the position of the least advantaged person. Impartiality is guaranteed by the veil of ignorance (everyone is imagined to be ignorant of all his or her particular characteristics) where people would agree that each person is permitted the maximum amount of basic liberty compatible with a similar liberty for others, and that once equal basic liberty is assured, inequalities in basic social goods are to be allowed only if they benefit everyone.

Ethical decision making in international business Managers should examine the applicable code of ethics, relevant national or international accords and laws. There are five other things that an international business and its managers can do to make sure ethical issues are considered in business decisions. continued

Ethical decision making in international business These are: Favour hiring and promoting people with a well-grounded sense of personal ethics. Build an organisation culture that places a high value on ethical behaviour, and make sure that leaders within the business not only articulate the rhetoric of ethical behaviour but also act in a manner that is consistent with that rhetoric. Put decision-making processes in place that require people to consider the ethical dimension of business decisions. Hire ethics officers. Develop moral courage. continued

Ethical decision making in international business Organisation culture and leadership Businesses need to build an organisation culture that places a high value on ethical behaviour. The business must explicitly articulate values that place a strong emphasis on ethical behaviour, perhaps using a code of ethics (a formal statement of the ethical priorities a business adheres to). Leaders should give life and meaning to the code of ethics by repeatedly emphasising and acting on it. The business should put in place a system of incentives and rewards that recognise people who engage in ethical behaviour and sanction those who do not. continued

Ethical decision making in international business Decision-making processes If a manager can answer ‘yes’ to the following questions, the decision is ethically acceptable: Does my decision fall within the accepted values or standards that typically apply in the organisational environment? Am I willing to see the decision communicated to all stakeholders affected by it? Would the people with whom I have significant personal relationships approve of the decision? continued

Ethical decision making in international business Decision-making processes A five-step process can also help managers think through ethical problems. Step 1 Businesspeople should 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 shareholders. External stakeholders are the individuals or groups who have some claim on a firm such as customers, suppliers and unions. continued

Ethical decision making in international business Decision-making processes Step 2 Managers need to determine whether a proposed decision would violate the fundamental rights of any stakeholders. Step 3 Managers need to 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). continued

Ethical decision making in international business Decision-making processes Step 4 The company should then engage in ethical behaviour. Step 5 The business must audit its decisions, reviewing them to make sure that they were consistent with ethical principles. continued

Ethical decision making in international business Ethics officers To ensure ethical behaviour in a business, a number of firms now have ethics officers. Moral courage It is important to recognise that employees in an international business may need significant moral courage.

Summary of main themes We examined the source of ethical issues in international business. International businesses face a range of ethical issues and dilemmas. Sometimes there is not an obvious solution. International managers faced with complex situations need to make the ‘best decision’ with ethical issues in mind. We discussed a range of philosophical approaches to business ethics.