International Business8e

By Charles W.L. Hill

Chapter 4Ethics in International BusinessCopyright 2011 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

What Is Ethics?Ethics refers to accepted principles of right or wrong that governthe conduct of a personthe members of a professionthe actions of an organization Business ethics are the accepted principles of right or wrong governing the conduct of business peopleEthical strategy is a strategy, or course of action, that does not violate these accepted principles

Which Ethical Issues Are Most Relevant To International Firms? The most common ethical issues in businessinvolveemployment practiceshuman rightsenvironmental regulationscorruptionthe moral obligation of multinational companies

How Are Ethics Relevant To Employment Practices?Suppose work conditions in a host nation are clearly inferior to those in the multinationals home nationWhich standards should apply?home country standardshost country standardssomething in between

How Are Ethics Relevant To Human Rights?Basic human rights are taken for granted in developed countriesfreedom of associationfreedom of speechfreedom of assemblyfreedom of movementWhat are the responsibilities of firms in countries where basic human rights are not respected?

How Are Ethics Relevant To Environmental Regulations?Some parts of the environment are a public good that no one owns, but anyone can despoilThe 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 degradationWhat happens when environmental regulations in host nations are far inferior to those in the home nation?Is it permissible for multinationals to pollute in developing countries simply because there are no regulations against it?

How Are Ethics Relevant To Corruption?The U.S. 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 offenseBut, is it permissible for multinationals to pay government officials facilitating payments if doing so creates local income and jobs?

How Are Ethics Relevant To Moral Obligations?Social responsibility refers to the idea that managers should consider the social consequences of economic actions when making business decisions, and that there should be a presumption in favor of decisions that have both good economic and good social consequences it is the right way for a business to behaveAdvocates argue that businesses need to recognize their noblesse oblige - honorable and benevolent behavior that is the responsibility of successful companies give something back to the societies that have made their success possibleBut, are multinationals morally required to use their power to enhance local welfare?

What Are Ethical Dilemmas?Ethical dilemmas are situations in which none of the available alternatives seems ethically acceptableThe ethical obligations of a multinational corporation toward employment conditions, human rights, corruption, environmental pollution, and the use of power are not always clear cut

Why Do Managers Behave Unethically?Several factors contribute to unethical behavior includingPersonal ethics - the generally accepted principles of right and wrong governing the conduct of individualsexpatriates may face pressure to violate their personal ethics because they are away from their ordinary social context and supporting culture managers fail to question whether a decision or action is ethical, and instead rely on economic analysis when making decisions Decision-making processes - the values and norms that are shared among employees of an organization organization culture that does not emphasize business culture encourages unethical behavior

Why Do Managers Behave Unethically?Organizational culture - organizational culture can legitimize unethical behavior or reinforce the need for ethical behaviorUnrealistic performance expectations - encourage managers to cut corners or act in an unethical manner Leadership - helps establish the culture of an organization, and set the examples that others followwhen leaders act unethically, subordinates may act unethically, too

Why Do Managers Behave Unethically?Determinants of Ethical Behavior

What Are The Philosophical Approaches To Ethics?There are several different approaches to business ethicsStraw men approaches deny the value of business ethics or apply the concept in an unsatisfactory wayOthers approaches are favored by moral philosophers and are the basis for current models of ethical behavior

What Are The Straw Men Approaches To Business Ethics? There are four common straw men approachesFriedman doctrine - the only social responsibility of business is to increase profits, so long as the company stays within the rules of lawCultural relativism - ethics are culturally determined and firms should adopt the ethics of the cultures in which they operatewhen in Rome, do as the Romans do Righteous moralist - a multinationals home country standards of ethics should be followed in foreign countries Nave immoralist - 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 All approaches offer inappropriate guidelines for ethical decision making

What Are Utilitarian And Kantian Approaches To Ethics?Utilitarian ethics - the moral worth of actions or practices is determined by their consequencesactions are desirable if they lead to the best possible balance of good consequences over bad consequencesbut, it is difficult to measure the benefits, costs, and risks of an actionthe approach fails to consider justiceKantian ethics - (Immanuel Kant) - people should be treated as ends and never purely as means to the ends of others

What Are Rights Theories?Rights theories - human beings have fundamental rights and privileges which transcend national boundaries and cultures establish a minimum level of morally acceptable behaviorthe Universal Declaration of Human Rights specifies the basic principles that should always be adhered to irrespective of the culture in which one is doing businessMoral 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

What Are Justice Theories?Justice theories focus on the attainment of a just distribution of economic goods and servicesa just distribution is one that is considered fair and equitableJohn Rawls argued that all economic goods and services should be distributed equally except when an unequal distribution would work to everyones advantage impartiality is guaranteed by the veil of ignorance - everyone is imagined to be ignorant of all his or her particular characteristics

How Can Managers Make Ethical Decisions?To encourage ethical decision making, firms shouldHire and promote people with a well grounded sense of personal ethicsrefrain from promoting individuals who have acted unethicallyprospective employees should find out as much as they can about the ethical climate in an organization prior to taking a position Build an organizational culture that places a high value on ethical behaviorarticulate values that place a strong emphasis on ethical behavioremphasize importance of code of ethics - formal statement of the ethical priorities a business adheres to implement a system of incentives and rewards that recognize people who engage in ethical behavior and sanction those who do not

How Can Managers Make Ethical Decisions?Make sure that leaders within the business articulate the rhetoric of ethical behavior and act in a manner that is consistent with that rhetoricDevelop moral courageenables managers to walk away from a decision that is profitable, but unethical gives an employee the strength to say no to a superior who instructs her to pursue actions that are unethical gives employees the integrity to go public to the media and blow the whistle on persistent unethical behavior in a company

How Can Managers Make Ethical Decisions?Put decision making processes in place that require people to consider the ethical dimension of business decisionsask whether decisions fall within the accepted values of standards that typically apply in the organizational environment decisions can be communicated to all stakeholders affected by it if colleagues would approve of decisions

How Can Managers Make Ethical Decisions?Managers can also use a five step process to think through ethical problems: Step1: 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 stockholders external stakeholders are the individuals or groups who have some claim on a firm such as customers, suppliers, and unionsStep 2: Determine whether a proposed decision would violate the fundamental rights of any stakeholders

How Can Managers Make Ethical Decisions?Step 3: Establish moral intent - place moral concerns ahead of other concerns in cases where either the fundamental rights of stakeholders or key moral principles have been violated Step 4: Engage in ethical behavior Step 5: Audit decisions and review them to make sure that they are consistent with ethical principles

What Is An Ethics Officer?Ethics officers ensureall employees are trained in ethicsethics is considered in the decision-making processthe companys code of conduct is followedIn the end, there are clearly things that an international business should do, and there are things that an international business should not do But, not all ethical dilemmas have a clean and obvious solution

Review QuestionAll of the following except ____ contribute tounethical behavior by international managers.

a) Decision-making processesb) Leadershipc) Personal ethicsd) National culture

Review QuestionAccording to ________, a companys homecountry standards of ethics are the appropriate onesto follow in foreign countries.

a) the righteous moralistb) the nave immoralistc) the Friedman doctrined) cultural relativism

Review Question________ recognize that human beings havefundamental rights and privileges whichtranscend national boundaries and cultures.

a) Kantian ethicsb) Utilitarian approachesc) Straw mend) Rights theories

Review QuestionThe _____ suggests that everyone is imaginedto be ignorant of all his or her particularcharacteristics.

a) tragedy of the commonsb) veil of ignorancec) code of ethicsd) the Universal Declaration of Human Rights

Review QuestionWhat is a companys formal statement ofethical priorities called?

a) Mission statement b) Code of ethics c) Code of values d) Organizational culture

Review QuestionWhich is not an area where multinationalfirms are concerned about ethics?

a) Human rightsb) Trade regulationsc) Environmental regulationsd) Corruption

Welcome to International Business, Eighth Edition, by Charles W.L. Hill.

Chapter 4: Ethics in International BusinessSuppose youve been assigned responsibility for hiring people to work in your companys new factory in Mexico, where wages are considerably lower than they are in your country, and you dont have to pay benefits. Is your company is taking advantage of the situation. What should you do? Perhaps you should talk to your superiors about providing a more generous compensation package that would still be much lower than what youd pay in your home country. But, you worry that this could jeopardize your new position. So, you decide just to follow orders, even if youre not really comfortable with them. This is an example of an ethical dilemma. People involved in business run into ethical situations daily. In international business, they are often magnified because of differences in legal systems, political systems, economic systems, culture, and so on.Ethics refers to the 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. An ethical strategy then, is a course of action that doesnt violate these principles. Keep in mind that as we discuss ethics, there may be no right or wrong response, and so in some cases, we may raise more questions that we actually answer.

What are the most common ethics issues for companies? We usually think of issues that involve employment practices, human rights, environmental regulations, corruption, and the moral obligations of companies. Lets talk about each of these, beginning with employment practices.

Employment practices frequently present ethical dilemmas. Suppose, as we suggested earlier, work conditions in a host country are inferior to those in the home country. Which standards should you apply--the home country standards or the host country standards? Is it ok to employ minors to work a 50 hour week if it doesnt violate local laws? Do you have to supply safety gear to employees if its not required by law? Nike found itself in the midst of a huge controversy in the mid-1990s when it was reported that the working conditions at some of its sub-contractors were poor. While neither the subcontractor, nor Nike was actually breaking the law, there was strong reason to suspect that workers were being exploited. For example, in one factory in Vietnam, women were paid just 20 cents an hour, well below the living wage of $3 per day, to work with toxic materials six days a week. Nike was forced by public pressure to establish a code of conduct for all of its subcontractors, and implement a monitoring system to ensure that the code was followed. You might notice the similarities in this case to the Management Focus on making Apples iPOD.

You may not think much about your human rightsthings like freedom of association, freedom of speech, freedom of assembly, and so on are often taken for granted in developed countries. But, its important to remember that these freedoms are not respected in many countries. Think about the apartheid system that denied basic political rights to blacks in South Africa, for example, or the ongoing situation in the Darfur region of western Sudan where the Sudanese government has been accused of genocide by the U.S. and other countries. Should companies do business in countries with repressive regimes? Some people argue that the presence of multinational companies actually helps bring change to these countries. Some people believe that change is occurring in China for example, because investments by multinationals are helping to raise living standards. Others, however, argue that some countries like Myanmar, which has one of the worst human rights records in the world, are so brutally repressive that no investment can be justified. In fact, many companies left the country in the mid-1990s because of its dismal human rights. Even so, some companies, like Unocal, ignore these issues as the Management Focus in your text outlines.

The state of the environment is currently a hot topic, especially the irreversible damage that manmade pollution is causing. Because many countries are establishing strong environmental regulations to try to limit further damage, companies are having to adopt costly, new measures to abide by the laws. So, new regulations are forcing your company to take costly steps to stay within the law. You know that these regulations havent been imposed in some other countries, particularly those that are lesser developed. Should you shift your production to another country where the laws dont exist, or are only loosely enforced? Your first response might be that the moral and ethical thing to do is to stay home and adopt the costly compliance measures. But, you might worry that competitors that dont take the high road will have an advantage. This brings up a phenomenon called the tragedy of the commons. It occurs when a resource held in common by everyone, like the ocean or the atmosphere, is overused by individuals, and degraded. What are the social consequences of this? If everyone else is pumping pollutants into the ocean, should you do otherwise?

Is it necessary to be ethical when dealing with corrupt government? This is something firms have to consider. Corrupt governments have always been around, and its important for international companies to consider their effect on company strategies. At what point does gift giving become bribery for example? Well, from a government perspective, bribery shouldnt be allowed. In the U.S., the Foreign Corrupt Practices Act, which was passed in 1977, outlaws the paying of bribes to foreign government officials in order to gain business. The act does allow for facilitating or grease payments which are basically payments that are made to speed up standard procedures. The Organization for Cooperation and Development, or OECD, passed a similar measure in 1997, which obligates member states to make bribery of foreign public officials a criminal offense.Despite laws like these, bribery continues to be a common practice for some firms as the Opening Case on Siemens illustrates. In fact, some economists believe that in certain cases speed payments, or payments made to speed up approval for business investments, can be justified if they enhance public welfare by creating jobs, and so on. Others argue however, that corruption is a little like gamblingits hard to stop! If you do it once, youre likely to do it again.

What are the moral obligations of companies? Do companies have a responsibility to take into account the social consequences of their actions when they make business decisions? Should companies always choose the path that has both good economic and good social consequences? You might answer yes,--firms have a social responsibility simply because its the right way to operate. Many people believe that companies need to recognize their noblesse oblige and give something back to the societies that have made their success possible. Other companies, however, dont share this view. Robert Murdoch, founder and CEO of News Corporation probably used the power of his company to gain access to the Chinese market, and acted in an unethical way in doing so. As part of the deal, News Corporation suppressed media content that was critical of China.

Sometimes, it can very difficult for companies to decide how to behave in some situations. Managers will be influenced by their personal ethics, and cultural perspective, which may or may not be appropriate in a given situation. For example, gift giving in many Asian countries is considered proper behavior, but some Western countries see it as a form of bribery. Should you forgo the practice even if you offend your host? Similarly, while child labor may violate your corporate policies, it may be acceptable by law in some countries. Does this mean your company should immediately fire all employees who are minors? Perhaps, but what if the minor is the main bread winner for the family?These are examples of ethical dilemmas, or situations in which none of the available alternatives seems ethically acceptable. Doing the right thing, or even knowing what it is, can be difficult!

Why do managers behave unethically?The causes of unethical behavior are complex and reflect personal ethics, decision-making processes, leadership, performance expectations, and organizational culture. Lets look at each of these.Decisions at work are influenced by an individuals personal ethics. Personal ethics are derived from parents, from schools, from religion, from the media, and so on. So, when a person has strong personal ethics, she is likely to have strong business ethics. What happens though, when you take a manager out of his environment? Expatriate managers, or managers who are working abroad, often face pressure to violate their personal ethics. Imagine that youre surrounded with people who hold to a different set of values. You may be encouraged to adopt a behavior that you otherwise wouldnt. For example, if bribery is common, you might feel that in order to meet performance goals, its acceptable for you to use bribery as well, even though youd never consider bribery at home. Sometimes, you get so caught up in what youre doing that you forget to ask whether a decision or action is unethical.Pfizer, the maker of many pharmaceutical products, failed to ask relevant questions when it made the decision to run experimental drug trials on children in Nigeria. The company was trying to get a new drug to market, but first needed a large sample of sick children to test it on. When an epidemic hit Nigeria, Pfizer saw its chance. Only later did it question whether it was right to test an experimental drug on children whose parents probably didnt realize what was going on, or who didnt have alternative treatment options. You can learn more about this case in the Management Focus in your text.

Some companies, however, dont emphasize ethical responsibility, and so, may in fact promote unethical behavior. A firms organizational culture refers to the values and norms that are shared among its employees. If ethical behavior is encouraged, the company is likely to act in an ethically responsible way. On the other hand, organizational cultures like the one at Enron, which was fraught with deception and greed, can ultimately lead to a companys demise! Sometimes, companies unwittingly promote unethical behavior by setting unrealistic performance expectations. Companies that do this may push employees to cut corners or act in other unethical ways. Think again, about the decisions made at Pfizer because of the push to get the new drug to market for example. Finally, regardless of any policies a company might maintain, actions speak louder than words. A companys leaders must set an example by demonstrating strong ethics. You already know that Kenneth lay, former CEO of Enron, did just the opposite, and in fact promoted unethical behavior within his organization.

Here you can see the determinants of ethical behavior.

Now that weve talked about different types of unethical behavior and why it occurs, lets move on to explore some of the philosophical approaches to business ethics. Youll notice that some approaches deny the value of business ethics or apply the concept in an unsatisfactory way, and that others are favored by moral philosophers and form the basis for current models of ethical behavior.Well start with what we call straw men approaches which are raised by business scholars mainly to demonstrate that they offer inappropriate guidelines for ethical decision making in multinational firms. There four straw men approaches. The Friedman doctrine argues that the only responsibility of business is to increase profits. Friedman claimed that as long as the firm stayed within the letter of the law, ethics didnt enter the equation. So, in other words he would argue that its not the responsibility of a company to take on social expenditures beyond whats mandated by law, and whats required to run a business efficiently. So, Friedman would advocate the use of child labor, as long as it wasnt prohibited by law. Similarly, he would argue that a company could dump pollutants into a river, again as long as there wasnt a law against it. Friedman did suggest that companies stay away from fraud and deception though. Cultural relativism is the belief that ethics are culturally determined and that firms should adopt the ethics of the cultures in which they operate. In other words, when in Rome, do as the Romans do. So, if a culture supports slavery, the approach would suggest that companies adopt slavery, too. Again, you might recall the actions of Siemens in the Opening Case.The righteous moralist takes the opposite perspective from cultural relativism, and claims that a multinationals home country standards of ethics are the appropriate ones for companies to follow in foreign countries. While initially you may think this is the right approach, following it can create problems. For example, suppose you decided that since you pay your employees $15 per hour at home, you should pay employees the same wage to do the job wherever they may be located. Well, youve just eliminated a key reason for making an investment in a developing countrylower wages! If you dont make the investment because it doesnt save you money, then you wont bring new jobs to the developing country - jobs that could be very beneficial to the country!Finally, the nave immoralist argues that if a manager of a multinational company sees that firms from other countries are not following ethical norms in a host country, that manager should ignore the norms as well. You might think back to your elementary playground and the old adage that two wrongs dont make a right. Just because another country is paying off drug lords doesnt mean you should do it, too!

The utilitarian and Kantian approaches to ethics, in contrast to the straw men approaches, are considered valuable. The utilitarian approach holds that the moral worth of actions or practices is determined by their consequences. In other words, carefully weigh all of the social benefits and costs of a business decision, and only pursue those choices where the benefits clearly outweigh the costs. Many companies use this notion when they develop cost-benefit analyses and risk assessments before making decisions. So, rather than simply looking at the additional profits drilling for oil in Alaska might bring, a company would also consider the damage that would occur to the eco-system.Kantian ethics suggests that people should be treated as ends, and never as means to the ends of others. What does this mean? It means that people shouldnt be employed in sweatshops because thats essentially the same as treating people as cogs in a machine-- not as conscious moral beings with dignity.

Now, lets move on to rights theories, which recognize that human beings have fundamental rights and privileges that transcend national boundaries and culture. According to this approach, managers are compelled to respect these rights when they make decisions. The UN has legitimized rights theories with its Universal Declaration of Human Rights which specifies the principles that should always be adhered to regardless of the culture in which one is doing business. This approach would argue that its unethical to employ child labor in sweatshop factories, or pay less than subsistence wages.

Justice theories focus on the attainment of a just distribution of economic goods and services, where a just distribution is one that is considered to be fair and equitable. John Rawls is credited with arguing that economic goods and services should be distributed equally except when an unequal distribution would work to everyones advantage. Rawls argued that impartiality is guaranteed by the veil of ignorance where everyone is imagined to be ignorant of all of his or her particular characteristics, and that inequalities are justified only if they benefit the least advantaged person.From a business perspective, managers might ask whether their policies in foreign markets would be considered just. Would they, for example, adopt a policy of paying subsistence wages to employees working in sweatshop factories where they were exposed to toxic materials? Probably not! So, if a decision seems unjust, its probably unethical.

How can managers be sure they operating in an appropriate and ethical manner? Sometimes it can be hard to figure out whats right. However, there are five things that managers can do to be sure that ethical issues are considered when decisions are made. First, firms should favor hiring and promoting people with well grounded personal ethics. While it may seem obvious that you should hire people with a strong sense of business ethics, it can be hard to know whether a person fits this category. So, businesses often require references, or give prospective employees tests as a way of finding out more about individuals. Its also important for individuals to find out about the ethics of a prospective employer. You might ask, for example, whether a firm has a formal code of ethics, or how senior managers are viewed, and so on. Second, firms should try to build an organizational culture that places a high value on ethical behavior. To develop this, firms need to articulate values that place a strong emphasis on ethical behavior. Some firms do this by establishing a formal code of ethics. Once a code has been developed, leaders need to emphasize it and act on it. Companies can encourage employees to adopt the code by offering incentives and rewards to employees who behave in an ethical manner.

Third, firms should make sure that leaders articulate the rhetoric of ethical behavior and act in a manner that is consistent with that rhetoric. The fourth thing managers can do is develop moral courage. Companies can strengthen the moral courage of employees by committing themselves to not retaliate against employees who exercise moral courage, say no to superiors, or otherwise complain about unethical actions. For example, consider the following extract from Unilevers code of ethics: Any breaches of the Code must be reported in accordance with the procedures specified by the Joint Secretaries. The Board of Unilever will not criticize management for any loss of business resulting from adherence to these principles and other mandatory policies and instructions. The Board of Unilever expects employees to bring to their attention, or to that of senior management, any breach or suspected breach of these principles. Provision has been made for employees to be able to report in confidence and no employee will suffer as a consequence of doing so.

Finally, firms should put decision making processes in place that require people to consider the ethical dimension of business decisions.How can ethics be incorporated into decision making processes? One way is to use a moral compass. So, for example, if a manager can answer yes to any of the following questions, the decision would be considered ethical.One, does my decision fall within the accepted values of standards that typically apply in the organizational environment? Two, am I willing to see the decision communicated to all stakeholders affected by it? Three, would the people with whom I have significant personal relationships approve of the decision?

Theres also a five step process that managers can use to think through ethical issues. The first step requires managers to identify which stakeholders a decision would affect and in what ways. Stakeholders are individuals or groups that have an interest in the actions and overall performance of a company. They include internal stakeholders who are the people that work for or who own the business like employees, the board of directors, and stockholders, and external stakeholders or the individuals or groups that have some claim of the firm such as customers, suppliers, and unions. Next, managers need to determine whether a proposed decision would violate the fundamental human rights of any stakeholders.

Then, managers must establish moral intent. So, firms have to place moral concerns ahead of other concerns when the fundamental rights of stakeholders or key moral principles have been violated. In step four, managers engage in ethical behavior. Finally, the business audits its decisions, and reviews them to be sure theyre consistent with ethical principles.

Another way to promote ethical behavior is to hire an ethics officer to oversee ethical issues. This type of person might be responsible for training employees to be aware of ethical issues, or for auditing decisions that have already been made. Finally, its important to recognize that employees may need significant moral courage. This will empower employees to say no to superiors who ask employees to take actions that are unethical, or to blow the whistle on unethical behavior. All of these steps can help foster an ethically responsible firm. But remember, as weve mentioned before, sometimes there are no good answers to an issue. Managers must simply try to make sense of the situation and make a balanced decision.

Now, lets see how well you understand the material in this chapter. Ill ask you a few questions. See if you can get them right. Ready?

All of the following except ____ contribute to unethical behavior by international managers.

a) Decision-making processesb) Leadershipc) Personal ethicsd) National culture

The answer is d.

According to ________, a companys home-country standards of ethics are the appropriate ones to follow in foreign countries.

a) the righteous moralistb) the nave immoralistc) the Friedman doctrined) cultural relativism

The answer is a.

________ recognize that human beings have fundamental rights and privileges which transcend national boundaries and cultures.

a) Kantian ethicsb) Utilitarian approachesc) Straw mend) Rights theories

The answer is d.

The _____ suggests that everyone is imagined to be ignorant of all his or her particular characteristics.

a) tragedy of the commonsb) veil of ignorancec) code of ethicsd) the Universal Declaration of Human Rights

The answer is b.

What is a companys formal statement of ethical priorities called?

a) Mission statement b) Code of ethics c) Code of values d) Organizational culture

The answer is b.

Which is not an area where multinational firms are concerned about ethics?

a) Human rightsb) Trade regulationsc) Environmental regulationsd) Corruption

The answer is b.