Handout # 2 Cross-national Ethics And Social Responsibility 2-1

Student Learning Outcomes 1Concept of Ethics –Relationship with legality –Relationship with social acceptance 2Issues and Complications in Complying With Foreign Ethical Practices 3History Behind (FCPA) U.S. Foreign Corruption Practices Act The Impact of the FCPA on MNCs 5Social Responsibility in a Cross-national Context 2-2

2-2.1 Terms for Review MNCs—Multinational Corporations: Companies that establish subsidiaries in multiple foreign countries. Expatriate—PCN Parent Country National transferred from Headquarters to Subsidiary.

2-2.2 Global Skills In order for MNCs to remain competitive in the global marketplace, MNCs must hire and train people who possess international business skills And who are these people? I am glad you asked. People such as Management GCC students who study SM215 International Management.

ETHICAL BEHAVIOR Pages Determining the difference between right and wrong. –Is the action legal? –Is the action socially acceptable? Home Country and Host Country “rights” and “wrongs” may lead to a conflict. –consider bribery as an example 2-3

PAYOFFS 1Bribes—Bribery is a force exerted by a MNC or its Expat from a government official in the form of payment in (cash or gift) for the purpose of influencing unlawful action by a government official in order to obtain (start) or retain (keep) subsidiary business. 2Extortion—Extortion is a force exerted by an official seeking payment from an individual or corporation for an action to which the individual or corporation may lawfully be entitled. 2-4

2-4.1 Bribes Lubrication Bribes –This type of bribe is typically described as an illegal payment to facilitate, expedite, or speed routine government approvals to which MNC is legally entitled to. (grease to make the political wheels turn) –Italy known as “bustarella” –Recent Gov/Guam license story –Supplement incomes of minor clerks, agents

2.4.2 Bribes to White Collar Official Whit Bribes This refers to payments made to induce an official in a position of power to give favorable treatment to an MNC. Payment is intended to induce the official to do or not to do something in violation of his/her lawful duty or to give favorable treatment by assigning a contract, privilege…

2-4.3 Extortion Extortion is a force exerted by an official seeking payment from an individual or corporation for an action to which the individual or corporation may lawfully be entitled.

2-4.4 Extortion Case Korea Korean Finance Chairman of SK’s Democratic Republican Party demanded campaigned contributions (extorted) from American Chairman Expat from Gulf Oil 1 million, then raised demand to 10 million, then reduced to 4 million. 4 million to save 300 million in American investments in SK.

TO BRIBE OR NOT TO BRIBE? : FOUR BASIC QUESTIONS 1Legal Questions –What are the legal consequences in the parent (home) country? – How comprehensive is the law of the local (host) country? How is the law enforced? –Will the corporation be liable to its competitors for financial damages (such as unfair practice or restraint of trade)? –Will the company be held liable by stockholders in the host or parent country? 2Moral Questions –What is the company’s policy regarding payoffs? Will it cause any deviation from standard practice? –What is the custom in the host country? 2-5

3Economic Questions –How does the expected gain compare with the company’s total earnings? –Will the payoff trigger other host countries to make the same demand? –Will the payoff action cause retaliation from competitors? 4Personal Questions –Am I likely to be held personally for such action? –Does the company carry insurance to pay my legal fees if I am found guilty of violating a law? –How would my family and friends react to disclosure of such activity? Source: G.W. Gruenberg and Y. Kugel TO BRIBE OR NOT TO BRIBE? : FOUR BASIC QUESTIONS (continued) 2-6

THE U.S. FOREIGN CORRUPT PRACTICES ACT (FCPA) of 1977 Purpose of FCPA –To establish a worldwide code of conduct for any kind of payment by United States businesses to foreign government officials, official, political parties, and political candidates. –To require appropriate accounting controls for full disclosure of a firms’ transactions. Basic Provisions –It is a criminal offense for a firm to make payments to a foreign government officials, political party, party official in order to secure or retain business in another nation. –Sales commissions to independent agents are illegal if the business has knowledge that any party of the commission is being passed to a foreign official. –In addition to the antibribery provisions that apply to all businesses, all publicly held corporations that are subject to the SEC are required to establish internal accounting controls to ensure that all payments abroad are authorized and properly recorded. 2-7

2.7.1 FCPA of 1977 Ok to Bribe the “Little Person” –Government employees whose duties are essentially ministerial or clerical are excluded; –So expediting payments to persons such as customs agents and bureaucrats are permitted. –FCPA does not apply to small “lubrication bribes.”

2-7.2 FCPA Civil Enforcement SEC Securities Exchange Commission Civil Enforcement: recordkeeping & accounting provisions of FCPA Civil Penalties: Expats: $10,000; cannot be paid by the MNC

FCPA Criminal Enforcement U.S. Department of Justice 1988 Amendment—Criminal Penalties Expats: $10,000-$100,000; Prison Time: maximum five years MNCs-$2 million

COMPLAINTS FROM MNCS OVER THE FCPA Competitive disadvantage. The accounting burden of internal controls. FCPA forces them to become political tools of the U.S. government. Not clear enough with respect to the use of foreign subsidiaries to transact business. 2-8

Alternative Payoff Approach When the Expat must some sort of payment to obtain a favor, DO NOT PAY A PRIVATE INDIVIDUAL. Instead contribute to an institution Note: Bribe changes into a contribution…

Make Contributions to Institutions Build schools Build Hospitals Build Medical Clinics Build Birthing Centers Agricultural Projects

Contributions Contributions build positive public relation image for MNC Contributions receive favors and goodwill for MNC

CROSS-NATIONAL SOCIAL RESPONSIBILITY Social responsibility is a notion that corporations have an obligation to constituent groups in society other than stock-holders and beyond that are prescribed by law or union contracts. Corporate social responsibility therefore means that a firm’s actions must take into account not only the well-being of the stockholders but also the well-being of the community, the employees, and the customers. 2-10

CHALLENGE OF ETHICS AND SOCIAL RESPONSIBLITY Cultural Relativism –Cultural relativism holds that no culture’s ethics are any better than any other’s. There are no international “rights” or “wrongs.” –Problems: example: piracy of patents Universalism –The concept of universalism, is a rigid global yardstick which measures all moral issues ( for example, the FCPA). –Problems: example of Union Carbide What applies in the world? –As the integration of the global economy increases, effective international managers develop a better appreciation of the differences in the legal and cultural context of business ethics between the United States and other nations because the managers realize that universal application of ethics is not prevalent. 2-11