Interorganisational Ethics - Standards of Behaviour

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ABSTRACT. The traditional basis for advocatingethical business conduct has been morality defined inphilosophical or religious terms. However, fairnessand moral obligation have provided little incentive for anything like universal ethical business behavior.

The idea that good ethics is good business as anincentive is looked upon with skepticism by thosewith bottom line responsibility. However, if managerswere aware of the extent to which certain businessbehaviors impose significant costs on individual trans-actions and relationships, a valid incentive would exist.

The need for such standards has intensified withthe fundamental shifts in business philosophy, struc-ture, and practice along with profound changes inproduct markets and supply sources. The universalstandards, ISO 9000 for product and service quality,and ISO 14000 for environmental issues were createdand implemented to cope with problems in their respective areas and they provide a model which can

be adapted to the realm of ethics.

Introduction

Imagine a scenario in which a Canadian manu-facturer of machine tools is seeking to outsourcestamped, high impact plastic enclosures for itsnew line of robotics. The company, with little

experience in foreign sourcing, sent its chief purchasing executive to visit potential vendors inseveral newly industrialized countries in order to invite bids. A bid was received from a Koreanfirm which was, clearly, technically qualified andwas also the low cost bidder. A contract wasnegotiated and received authorized signaturesfrom both parties. Then the relationshippromptly began to come apart at the seams.Why? Because of a failure to take account of interorganizational (IO) ethics.

IO ethics is a concept conceived to help closethe gaps that are likely to exist in the trust rela-tionships between any organizations doing or considering doing business together. Theseinclude connections between a firm and itssuppliers and customers, and embraces relation-ships involving non-profit organizations andgovernmental units. The concept also includesany firms with which the company has, or maydevelop, direct affiliations such as mergers, acqui-sitions, joint ventures, outsourcing relationships,strategic alliances, and partnerships. In

addition, it includes complementors; thosecompanies that are or may become related toanother organization through trade associations,buying groups, research consortiums and other direct or indirect connections (Brandenberger and Nalebuff, 1996). 1 Trust, in turn, is thecomplex of business behaviors that organizationsmutually rely upon as a basis for committing to,entering, and sustaining a business relationship.

Interorganizational Ethics:Standards of Behavior Jerold B. Muskin

Journal of Business Ethics24 : 283297, 2000. 2000 Kluwer Academic Publishers. Printed in the Netherlands.

Jerold B. Muskin is Professor Emeritus, Drexel Universi ty(1967present). Formerly: Professor of Marketing,Director, Masters Programs, College of Business, Drexel University (19921995). Government service: Chief,Motor Carrier Policy Group, Interstate Commerce Commission (197879); Consultant, U.S. Senate

Commerce Committee (1980); Consultant, U.S.Congress Office of Technology Assessment (198586).Private sector: Management positions, Consolidated Freightways (195863); Private consultant (196378 and 1980prsent). Education: Temple University,Ph.D., Economics, 1976 (Dissertation, The Economicsof Federally Imposed Aircraft Noise Regulations);Northwestern University, MBA (1958); LehighUniversity, AB (1952). Publications: Various publica-tions on public policy and transportation issues.


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Violations or fear of violations of IO ethics arecostly intrusions on business activity. Unaccept-able risk exposure or the time and expense of developing risk reducing information stopdesirable business relationships from developingor cause delays to occur while assurances of acceptable business conduct are sought.

Concerns about IO ethics deal only withthose adverse business behaviors that can imposeeconomic costs on the parties to the activitiesconducted between organizations. This meansthat issues of morality, corporate social responsi-bility, official corruption, and those ethicalmatters that might apply within the firm itself lieoutside this approach. While those are of obviousimportance to the firm, they are issues that are

confronted through different interventions (i.e.,by boards of directors, professional groups, andgovernmental action).

Generally, where the IO ethics issue is raised,it is treated in terms of morality. For example,Donaldson (1996), 2 settling on universal corevalues; (i.e., morality) as the universal ethicalcriterion, says:

. . . Lying about product specifications in the actof selling may not affect human lives directly, butit . . . is intolerable because it violates the trust that

is needed to sustain a corporate culture in whichcustomers are respected.

Confronting lying about product specifications ineconomic terms would seem to be a more robustway of gaining support for universal standards.While trust is a moral issue it is, in this case, aneconomic issue and can therefore be approachedobjectively analytically.

Several contemporary developments under-score the need for the prompt, assured nature of trust between suppliers and customers. Amongthese are the increased pace of business activity,the heightened level of competition, globaliza-tion, outsourcing, and just-in-time manufac-turing and inventory practices. Partnering andthe related concept of value chain managementare two recent business concepts involving buyer-seller bonding that are highly trust dependent.Indeed, the philosophy of business in many firmsis shifting from adversarial to trust relationships.For a culture of trust to become widespread and

entrenched in the business culture, clean costs(i.e., costs that are not burdened with taintedcosts those imposed by unethical IO behavior)must prevail.

The organizing principle of this article is thatachieving the clean cost condition depends, inpart, on the identification and wide acceptanceof prescribed standards for a list of IO ethicalbehaviors. Models for establishing and gainingcompliance with standards in other facets of business activity exist and provide analogs for IOethics. These are the international standards for quality (ISO 9000) and environment (ISO 14000)established by the Geneva-based InternationalOrganization for Standardization. This article willconclude with a discussion of the relevance of

these models for IO ethics and the recommen-dation that an international standard for IO ethicsalong those lines be developed and then adoptedby a broad base of buyers and sellers.

I. The Foundations of Business EthicsI. (Why firms behave as they do)

The term corporate culture has become wellaccepted as an amalgam of beliefs, attitudes andbehaviors that distinguish firms as employers,suppliers, customers, competitors, and commu-nity members. The principal facet of corporateculture to be treated is the nature of the stan-dards which an organization applies in its dealingswith customers, suppliers, and those others withwhich they might affiliate and the consistencywith which the standards are applied. Integrity,the term which might seem to apply here (rather than the nature and consistency of standards)is avoided because it is a culture laden term.

To behave with integrity in one culture may

be to violate standards of integrity in another.Dunfee and Nagayasu (1993) 3 cite a situationwhich demonstrates this. An American companyattempted to put the number of directors on aboard of a Japanese firm that reflected its degreeof ownership customary; a practice in the U.S.The attempt was rejected. The owner of theAmerican company claimed that the rejection. . . epitomized unfair Japanese corporate tactics,[while] his behavior was no doubt seen as

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unethical in the eyes of the Japanese businesscommunity, because of the group normativelogic.

This example grew out of the authors dis-cussion of the four concentr ic circles paradigmcharacteristic of Japanese business culture. Thefour circles represent (1) family, (2) fellows or close associates, (3) a combination of open com-petition and long-term give-and-take and (4) theworld. In this visualization of Japanese businessbehavior, Managers tend to view the inner circles as operation bases supported by coopera-tive behavior while the outer [circles] are seenas battle-grounds of intense competition.

This insight into the cultural basis for JapaneseIO business behavior in which firms are treated

differentially based on their cultural distance fromthe core firm seems to relate closely to a bio-logical basis for differential treatment based ongenetic distance. Naturalist, Loyal Watson(1995), 4 provides convincing evidence that aparallel to the four concentric circles exists innature. The biological paradigm is, according toWatson, . . . (1) be nasty to outsiders, (2) benice to insiders, and, (3) cheat whenever possible. All of these are, according to Watson,intended to assure the sustainability and enhance-ment of the core unit; the gene pool or, in thisdiscussion, the organization.

Fukuyama (1995) 5 cites Gordon Reddingsevaluation of the nature of business structure inHong Kong. The following quote states this issuevery nicely:

The key feature would appear to be that you trust your family absolutely, your fr iends and acquain-tances to the degree that mutual dependence hasbeen established and face invested in them, Witheverybody else you make no assumptions abouttheir goodwill. You have the right to expect their politeness and their following of social proprieties,but beyond that you must anticipate that, just as

you are, they are looking primarily at their own,i.e., their familys best interest. To know your ownmotives well is, for the Chinese more than most,a warning about everybody elses.

To characterize certain intercultural behaviors asfailures of integrity is to open oneself to the crit-icism of moral imperialism. Nor is this stance

one of ethical relativism. Cultures develop valuesimportant to their stability from their historiesand environmental circumstances (Fallows,1995). 6 Values, the concept of integrity which ishigh among them, are among the very things thatcause distinctive cultures to exist.

The value system existing within the organi-zation underlies its culture. Whether a firmdemonstrates good citizenship or competitiverapacity reflects the collective beliefs of those inwhose hands behavioral choices are placed. Thevalue system of the organization is imposed at thetop and expressed hierarchically (if sometimeswith distortion), down through the layers of management. Of course, the faith and consis-tency with which the value system-based

behaviors are applied depends on the extent towhich those values are shared and enforced. If the values are not basic to those in whose handsthe firms decisions and actions are placed, thecommitment with which those values are trans-mitted and enforced will undermine that faithand consistency. The determination of what isethically acceptable and necessary is likely tobe influenced by the values and rules of thedominant culture of the community with whichthe firm is associated.

But there are other determinants of valuesystems that operate within an organization.Baron (1995) 7 notes, for example, that LeviStrauss, a privately owned firm, has integratedthe core values of the Haas family into its internalpolicies and earned a reputation for adherence toethical principles and concern for its stake-holders.

A comment regarding the premise thateconomic outcomes, rather than morality, is themeasure of IO ethical behavior is appropriatehere. Levi Strauss withdrawal of production

capacity from China because of the failure of itssuppliers there to observe that U.S. firmsemployment and other standards has been cele-brated as an example of moral responsibility as,indeed, it should be. But, as Baron notes:

Implementation of this strategy means higher costsand some deterioration in competitiveness. For some Levi Strauss executives, the higher costs aresimply the price of abiding by its ethical princi-

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ples. For others, the costs are the price of protecting its brand name from adverse publicityabout its suppliers practices.

If human rights and other violations of moralvalues that are embraced by links in the valuechain are likely to have costly consequences, theyshould be subjected to the proposed universal IOstandards because of their economic conse-quences as well as coming under scrutiny of boards of directors, governments, and industrygroups because of their offense to moral values.

Likewise, the profession in which executivesreceived their education and professional devel-opment can be expected to affect the values theybring to the organizations behavioral code.

Burton (1990)8

cites the substantial differencesbetween lawyers and engineers codes of ethicsin describing a conflict over negotiations con-cerning violations of environmental standards.Engineers, Burton points out, are bound by acode of professional ethics that calls for usingtheir knowledge and skill for the enhancementof human welfare. The code further calls for their being honest and impartial, and servingwith fidelity the public, their employers andclients. There is nothing in either theAmerican Bar Associations Model Code of Professional Responsibility or Model Rules of Professional Conduct, Burton goes on to say,that binds attorneys in their negotiatingbehavior to anything like the engineers obliga-tion. The principal professional obligation of theattorney is to the client and in negotiatingsituations (1) to effectively represent the clientsinterests and, (2) to faithfully fulfill the clientswishes, at least insofar as their fulfillment doesnot assist clients in conduct that the lawyer knows to be illegal or fraudulent.

Burton continues, This is the discontinuityproblem in a nutshell: Different codes, differentclient allegiances, and resultant dysfunctionalnegotiation. This conclusion could be extendedto explain the dysfunction in any businessrelationship that results from disparate behavioralcodes.

II. Contemporary conditions calling forII. universal ethical standards to existII. between organizations

The globalization phenomenon is perhaps themost obvious of the reasons for establishing andadopting universal, IO ethical standards. Legallyimposed standards vary from country to countryallowing business practices that are defined andenforced in one country to be observed as ethicaloptions in another. National and even regionalcultural differences that affect business practiceexist. These may rise out of historical experi-ences, the religious teachings and convictions, or the family, political and economic structuresdominant in those countries or region

(Fukuyama, 1995).9

The result is often thatcertain behaviors that are sanctioned in onecountry or region may be proscribed in others.

An illustration of differences in nationalculture and law arose from a conflict over intellectual property between IBM and itsstrategic partner, Fujitsu (Badaracco, 1995). 10

During the course of the agreement Fujitsuincorporated IBM proprietary computer codeinto its own product. U.S. law would haveallowed IBM to recover damages and barredFujitsu from further violation of IBMs rights.When submitted to arbitration, however, the caseturned on a fundamental difference in thebusiness culture (incorporated into the law) of the two countries. (Note also that Koreanpractice all but prohibits arbitration and, wheninvoked in Korea, is very time consuming,expensive, and, when concluded, probably favor-able to the Korean side.) (DeMente, 1994) 11

Monopoly intellectual property rights, Badaraccoexplains, are granted in the U.S. to encouragecompanies to innovate. In Japan, innovation is

seen as a public good to be applied to broadenthe advance of technology by all. The innovator may receive royalties but does not have sole claimto the technology. IBM was granted royalties butFujitsu was permitted to continue to employ theIBM code.

As Fallows (1995) 12 points out, Japanesepractice has traditionally been to methodicallylearn and adopt foreign industrial practice whilestubbornly forbidding access to their own



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technologies. Fallows cites contemporaryevidence of this in noting the behavior of

Japanese firms participating in strategic allianceswith American firms involved in the manufac-ture of flash memory chips:

Could the American company learn [Japanesemanufacturing techniques] from the partnership. . . ? In principle they could, especially by studying

Japanese manufactur ing techniques. In real ity,however, reciprocal learning was unlikely; the U.S.business system arranged to send information out,and the Japanese system to take it in.

Fallows notes that Hitachi, offering courses to itsAmerican employees to allow them to improvethemselves, excluded Japanese language courses

from the offer.That such arrogation of intellectual property

is not unusual behavior is inferred in a seminalarticle on core competence (Prahaladad andHamel, 1990). 13 Here the authors discuss a firmsgoal of entering into strategic alliances; gainingaccess to, and then incorporating knowledge of their partners core competencies into their own products and processes later to terminate therelationship with the ally. The authors quotean official of a technology purloining firm assaying From an investment standpoint, it wasmuch quicker and cheaper to use foreign tech-nology. There wasnt a need for us to developnew ideas.

Another globalization issue is that of multi-nationals; those business organizations thatoperate across national borders but, as a matter of business principle, have no nationality.While such a firms headquarters may be in HongKong, it could as well be in San Francisco or Zurich. Are its business values British? Asian?American? Swiss? If a particular venue becomes

economically, morally, politically or legallyuncomfortable it can move. Leadership of firmsengaged in international business, are drawnincreasingly from many nations and thereforefrom many cultures adding to the problematicnature of anticipated business practices.

Such developments as just-in-time (JIT), totalquality management/continuous improvement(TQM/CI), and outsourcing have contributed toraising the trust requirement to a new level. The

degree of customer dependency in each of thesecases is of such a magnitude that, in the absenceof trust, the customer would either be in theposition of having to provide the product or service itself (vertically integrate) or would bedenied the business opportunity anticipated bythe arrangement with the supplier. Deliveries thatare not on time, every time, according to spec-ifications can be disastrous for the customer com-mitted to JIT. Customers that rely on arrivingmaterials entering their production stage withoutinspection (a standard TQM/CI requirement)can, if this expectation is not met, incur sub-stantial costs including loss of their customers ondown the value chain.

Outsourcing contractors must not only

perform according to expectations but, becausetheir personnel are entrusted with sensitivecustomer information, high trust is essential. Atthe same time, the customer should not exploitthe situation in which it becomes very familiar with the suppliers personnel by hiring themaway. Ethical performance between supplier andcustomer is always important. The unified valuechain concept; the virtual corporation inwhich all the supplier-customer links, fromextractive through disposal processes, are har-monized, is utterly dependent on ethical buyer-seller performance.

Electronic data interchange (EDI) is a tech-nological development of recent vintage. Thevery purpose of this computer-to-computer technique is to share information directly andelectronically between buyer and seller. Theinformation may include design changes, prices,unit costs, material availabilities, lead times inproduction, forecasts, financial transactions, andcapacity availability. The sensitive, proprietarynature that some of the information may have

can make both parties vulnerable to one another and to the informations being insufficientlyprotected from those outside the relationship.The need for trust on both sides is clear.

The evolving business relationship that bestexemplifies the shift occurring in managementphilosophy is that of partnering. In this model,(and unlike the Japanese keiretsu or the Koreanchaebol forms in that the partnering firms arefinancially and managerially autonomous) com-



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panies create environments in which theyfunction as a single entity for the joint domaincovered by the partnering agreement. Theyestablish common goals within the defined rangeof their agreement and may engage in jointproduct and process design, and in joint facilitylocation decisions, may assist in the financing of partners capital investments, may exchange per-sonnel, and otherwise function in a unified way.

Singular features of partnering are (1) asupplier is likely to commit major portions of itsproduction to its customer partner and acustomer may commit to single sourcing,(2) gains are shared equally without regard to therelative size or power of the companies and risksare shared equitably, (3) the partnering agree-

ments may or may not be contractual and,(4) the critical point here; partnering depends on,indeed, is defined as, a long-term relationshipbased on trust. In these latter three respectspartnering represents a distinct departure from

joint ventures, strategic alliances, and out-sourcing.

Adding to the powerful impact of the shift tocollaborative relationships between firms (andfeeding its growth) is the awareness of some com-panies that the real competition is frequently notbetween firms at the same level of supply. Rather,the real competition is at the level of finaldemand of the entire value chain. For thoseorganizations that accept this reality, the logicalchannel structure for them to become part of isthe unified value chain in which the trust andother dimensions of the partnering model holdsway throughout the value chain.

Fundamental shifts in corporate cultures are yet other factors calling for an increased emphasison trust that can be universalized by a set of shared standards. Pursuing a goal of racial,

gender, and cultural diversity has put Honeywellin a position in which . . . Ethics awarenesstraining has been a growing preoccupation. . . .(Singer, 1993). 14 Also, as with many organiza-tions, Honeywell has sought greater employeeempowerment, transferring issues to thepeople in the company who are closest to theproduction process on the one hand and thecustomer on the other. As a result, the companyhas found itself with fewer checkers and

watchers, a more diverse workforce, and newlyempowered employees who are being asked tomake decisions that they didnt make before.The article also presents a shift that representsan intensification rather than a basic change inthe setting for ethical response:

. . . Honeywell, like other concerns, faces growingeconomic pressures: global competition, moredemanding customers, the need to provide morecomplex responses for customers. . . . Such anenvironment oftenpresents dangers. The competitive

pressures which drive people to do things that are wrong become stronger.(emphasis added)

III. The concept underlying the

III. standards to be applied

Technology and the development of collabora-tive business principles are reducing the barriersto the kind of business relationships that can liftaggregate business performance. This prospectwould be advanced by reducing the tainted coststhat exist in business conduct and lead to theincreased tangible costs of organizations with anexisting relationship. But tainted costs are not theonly burden inflicted on firms and value chains(and also on industries as well as regional andnational economies). There are also transactioncosts and opportunity cost consequences (to bediscussed later).

Entering into any business relationshipdepends on the net benefits expected from therelationship. The anticipated effects of the con-nection on production, distribution, and man-agerial/administrative costs are, of course,important considerations. Likewise, long-termmarket results expected from the relationshipsuch as sales volumes, profit margins, and market

position are factors that will determine (1)whether the relationship should be entered intoand (2) the extent to which the firm will commititself. The firm will also consider the likely effectof the relationship on the value of its assets.These include intellectual property, brand equity,and corporate reputation as well as the effect onits personnel and its capital assets.

The functional, technical, and operationalaspects of these elements can be positively or



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negatively affected by the managerial and tech-nical competence and the complementaryresources of the firm targeted for a relationship.These are standard matters confronted by anyfirm in deciding whether to do business withanother firm. Due diligence requires that theresponsible managers assess the factors to providebest estimates of the outcomes.

The evaluation process may be straightforwardwith respect to the managerial prowess, resources,and technical capabilities of the subject firm.Industry reputation, accounting records, andpublished information as well as direct discussionsand observation can be employed to determinethe extent to which the prospective associationshould be made. Indeed, to handle broad based

concerns with uncertainties regarding productand service performance, the internationalproduct quality standards, ISO 9000 series, as of 1995, had been adopted by an estimated 127 000firms around the world; over 10 000 in the U.S.alone (Morrow, 1997). 15

Increased material and operating costs, lower revenues, and reduced asset values attributableto the relationship entered under the faultypresumption of clean costs are tangible costs (i.e.costs that immediately appear on the books of account) imposed on the firm. To this should beadded the projected lost earnings from the assetsthat have been lost or otherwise reduced in value.These assets would include personnel that hadbeen lured away, impaired product and firmimage, and loss of profit and market positionformerly assured by intellectual property status,reduced brand equity values, and impairment of other assets.

Transaction costs reflect the value of resourcescommitted by the firm to unearthing the infor-mation needed to produce the clean bill of

health. The costs of preparing, negotiating, andmonitoring contracts that might deal with IOethical issues or arbitrating or litigating conflictsover such issues also fall within the transactioncost category. These are transaction costs in thesense that entry into a business relationship,whether it is a simple, one-time purchase of aproduct, a long-term supply arrangement or acorporate merger, is a transaction.

Lost benefits over time, including the foregone

profits and market position that result fromdeferring entry into a desirable business rela-tionship; entering into such a relationshipgradually; of failing to enter the relationshipaltogether because of insufficient informationregarding IO ethics all fit under the opportunitycost definition. Had the trust question beennullified in advance, the preferred option mayhave been to enter the relationship immediately.However, the less preferred option, deferral, isfollowed because of the need to avoid the riskinherent in an untested relationship. The differ-ence in profit between the preferred option andthe option selected because of lack of immedi-ately available, valid information is opportunitycost.

Both firms, being subject to deferral, wouldincur opportunity costs. In fact, each, beingunfamiliar with the other, might well bechecking one another out. Further, a desirablerelationship that is not taken up without delayhas effects on the entire value chain, and, if of sufficient scale, the economic region or nation.Those losses are also opportunity costs that, liketangible costs and transaction costs, would beavoided if the required information were alreadyavailable. If the inquiry reveals adverse informa-tion, the only cost incurred will be the infor-mation cost component of transaction cost.

All three categories of cost at the firm andvalue chain levels are relevant for developing,evaluating, and using information to engage inIO transactions. National governments might, for example, consider the magnitude of these costsin confronting endemic ethical violations andofficial corruption recognizing that they impair economic development.

IV. Interorganizational (IO) behaviorsIV. candidate for standard setting

The behaviors listed here are first defined interms of the domains of concern in the proposedstandards setting context. Examples of such ethicsviolations or discussions of the applicable prin-ciples are presented followed by indications of thecosts likely to imposed on the various partiesaffected by the violations. The examples, of



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course, are only suggestive of the kinds of costimposing behaviors which may be encounteredin dealings between organizations.

Conflict of interest. (Definition An affiliationmaintained by one person in an organizationwith another person or organization that has thepotential of causing unmerited benefits to flowto one or another of the organizations or toeither person.)

In the opening scenario, a robotics manufac-turer awarded a contract to a Korean plasticsmanufacturer which was associated with achaebol, a fact unknown to the Canadian firm.To extend the scenario, another member of thechaebol was also a robotics manufacturer. Given

Korean firms disregard for intellectual propertyas a matter of business culture (DeMente, 1994), 16

the Korean plastics manufacturer passed thedesigns and timetables received from theCanadian firm to its robotics producing affiliate.As one result of this, the Canadian firm lost itsfirst to market profit and long term marketshare opportunity because the Korean roboticsfirm reverse engineered the product from theCAD/CAM software the Canadian firm hadprovided to its affiliate and responded with itsown advanced version quickly. Denied the flowof profits and the technological leadershipposition it would otherwise have received, thevictims profitable growth was stunted. TheKorean plastics manufacturer, as a consequence,wound up providing enclosures to both theCanadian firm and its chaebol affiliate until theCanadian firm discovered the linkage.

Bribery. (Definition Any form of payment [or other valuable, extra-business consideration]offered or demanded as part of a transaction that

may result in unmerited, negative businessconsequences for others directly or indirectlyconnected to the transaction. Buyers or sellersmay exact or offer bribes which may take theform of kickbacks, gifts, favors, and other suchinducements to engage in behavior that iscounter to normal business obligations or economic reasonableness.)

The customer, faced with a stockout situationand industry-wide shortages in a product

category, offers a supplier a premium price for immediate delivery of a sizable order. Acceptingthe order under these conditions resulted in thesuppliers other customers being placed back inthe queue with adverse cost and revenue conse-quences. If the supplier were to demand such apayment, it would either be inducing thecustomer to (1) accept a lower margin,(2) diminish its product or service quality in anattempt to retain its profit margin, or (3) chargea higher price than it would charge in theabsence of the bribe. The suppliers standing withthe customers whose shipments have beendelayed in the tight market described is also likelyto be damaged. All of these bribe induced actionsand their outcomes impair the market perfor-

mance of all of the firms and the value chains of which they are a part.

Misrepresentations of various types.(Definition Any purposefully misleading or false statement or action engaged in by one party beneficial to itself but resulting in business behavior harmful toanother party. The term applies to withholdinginformation that, if revealed, would inducebehavior different from that brought about bymisrepresentation.)

The American corporate icon, Coca Cola, wascaught with its hand in the cookie jar (Harris,1996). 17 Coke was shown to be engaging inpipeline stuffing, a practice by which, in order to show high quarterly sales and profits to theinvestment community, a company will overloadits customers with inventory. Sales and profitfigures misrepresent actual demand leading toovervalued securities. When the supplier is con-fronted with its customers inability to acceptmore shipments and, consequently, sales drop,security values drop penalizing the investors. But

this isnt the point here. As the author of thatarticle states:

But at bottom it [pipeline stuffing] is a dumbbusiness tactic even if it does keep the share pricehigh. To stuff a pipeline is to force someone, perhapsa wholesaler that must eat the costs because it isdependent on the company for a lot of business,to carry an inventory that is bigger than necessary.And that ties up capital and raises costs. If theinventory is perishable, it can also harm relations



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with customers as that unneeded inventory turnsstale and buyers turn to competitors. (emphasisadded)

The use of the term force in the quote estab-lishes this behavior as an example of another unethical practice: exploitation of relative power,discussed later.

Appropriation of intangibles.(Definition Anyunauthorized taking of ideas, information,designs, processes, secrets, or other intangiblesconsidered proprietary by the originally pos-sessing party. The definition is not limited tothose items protected or protectable by intellec-tual property rights applying in any jurisdiction

and may include such activities as industrialespionage, reverse engineering by an organiza-tion with which a relationship exists or is beingconsidered, or subversion of information sourcessuch as employees and agents.)

The earlier mentioned discussion of Fujitsusappropriation of IBMs computer code andNECs incorporating elements of their strategicalliance associates core competencies would fitunder this rubric. The situation is one in whichthe act is proscribed in one companys jurisdic-tion while condoned in the other. Even wheresuch appropriations are illegal (and the law isenforced) in both jurisdictions or both com-panies are in the same legal jurisdiction, viola-tions impose significant costs on all the partiesthrough the direct and indirect costs of negotia-tion, arbitration, litigation, and penalties. Suchprotective documents as confidentiality agree-ments and agreements not to compete are costlyand time consuming to execute, monitor, andenforce.

In most companies, particularly those with a

high technological or design component or where marketing proficiency is a major differen-tiating factor, proprietary information abounds.R&D intentions and achievements, patented,copyrighted, and secret processes as well aspricing and promotional intentions are critical tothese firms. Providers of supposedly undifferen-tiated products and services ranging from bulksulfur to window cleaning services are exposedto the possibility of losing market advantage if

competitors gain access to cost-price informa-tion, capacity availability, delivery/service dates,and financial status.

A firms intangible assets are resources in as reala sense as its tangible assets. They are simplymore transportable and easier to appropriate.Appropriation of tangible resources are charac-terized as a violation of the law in nearly every

jurisdiction in which a market economy exists.Intangible assets are often the core of a companysability to establish and then maintain a sustain-able, preferred position in the market place or merely to survive at an acceptable level of profitability. Their loss can impose damages thatinclude wasted expenditures, lost customers,revenues, and profitability; failed market intro-

ductions; lost security values; and the costs of regaining ownership of the assets and compen-sation for their loss.

Disavowal or non-performance of agreements.(Definition Parties to a business transactioneach have certain expectations regarding theperformance of the others. Where verbal or written commitments reflecting these expecta-tions of the business arrangement fail to beobserved, unless substitute provisions are satis-factorily negotiated in advance, a violation of anagreement exists. Even though no specific agree-ment may have been made, certain expectationsof performance, such as timely delivery of products or services of acceptable quality, andprompt, complete payment, are part of the com-mercial code [written or unwritten and enforcedor not enforced] in all exchange economies.)

The Canadian firm in the introductoryscenario is without recourse through any attemptit might make to get termination of the appro-priation of its intellectual property or restitution

of losses or rights it might claim based onenforcement of existing contractual provisionswith its Korean supplier (DeMente, 1994). 18

Exploitation of relative power.(Definition Usingbuying, market, financial, or other sources of power that induces behavior contrary to thereasonable interests of the party exposed to thepower. Here, even the application of legitimatepower, i.e. power granted by contract or con-



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vention, or earned by expertness or relativestatus where used in a manipulative or coerciveway, may be considered unethical.)

Aware that a prospective supplier has cash flowproblems and underutilized facilities, a largecustomer waves a big order under the suppliersnose. The price demanded by the customer barely covers the suppliers out-of-pocket costsand the contract, with substantial penalty provi-sions, calls for a completion date that preventsthe supplier from accepting other business. Thesupplier, perhaps unwisely, but in hopes of arescue or perhaps of future, remunerative businessfrom the customer, accepts the order. Shortlyafter completing contract, the supplier declaresbankruptcy. The customer goes on to the next

needy victim. And then the next.The cost implications of this behavior are the

loss of earnings and asset values of the nowdefunct or financially impaired businesses. Other customers of those suppliers (indeed, the valuechains of which they were a part) are confrontedwith fewer sourcing options as well as thereduced innovation and higher prices that areassociated with reduced competition in a field.When the customers vulture-like proclivitiesbecome widely known, it may become moredifficult to find takers but the costs of theethics violations have already been imposed.

Whipsawing of price or conditions.(Definition Inviting proposals, quotations or bids for thepurpose of inducing present [or other prospec-tive] suppliers to give concessions to retain [or gain] business rather than giving serious consid-eration to placing business with whichever organization provides the objectively preferredresponse. Such requests are also made to checkup on the prices and conditions being applied

by the current supplier. Such practices may berecognized as legitimate as long as they are notused repeatedly, frivolously, or manipulatively.

The costly consequences are that the firms thatrespond without a chance of succeeding on themerits incur the expenses of the resources com-mitted to the response as well as the opportunitycosts associated with profitable efforts foregonedue to the effort. In addition, the currentsupplier may be forced into price and condition

concessions to protect its position from com-petitors offering an initial, low ball price andconditions meant to get into the account. Thecurrent suppliers compliant reaction will cut intoits profitability each time the ploy is exercisedand could result in its abandonment of thebusiness harming the customer.

Body snatching. (The practice of hiring keypersonnel of suppliers or customers unless theemployment offer is cleared with the currentemployer in advance of any contact. A further criterion that might make this an acceptablepractice is that the current employer not besubjected to any manner of pressure to approvethe contact because of the relative power position

of the job proffering organization. This alsoconforms to the exploitation of relative powerissue covered earlier.)

The purchasing manager for a mid-level steelservice center is approached by the regional salesmanager of a major international metalsproducer, the service centers largest supplier of product, and offered a sales position with a sig-nificantly more lucrative compensation packagethan she presently enjoys. After some delibera-tion and without discussing the offer with her present employer, she accepts the offer andtenders her resignation. Her employer is in noposition to counter the offer or inform her thatshe was about to be designated as its vice presi-dent-materials management with significantlybroader responsibilities and much higher com-pensation. The firms CEO rejects these asoptions because of his concern that these actionswill compromise its position with the metalscompany during a long term product shortagephase.

This is the third raid the supplier has made

on its customer in the last two years. Bothprevious events resulted in less qualifiedemployees being moved into the empty slots withnegative effects on the profitability of the firm.With the most recent occurrence, the plannedreorganizing of the companys managementstructure had to be deferred until a suitablereplacement could be recruited or developedinternally. Because of these key personnel losses,service quality, the principal competitive appeal



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in this business, falls with consequent effects onreputation, market position, revenues, and unitcosts.

Market Displacement. (Definition MarketDisplacement occurs when one member in thesupply chain engages in subverting practices thatdisplaces another member from its primaryposition in the minds of its customers.)

A nationwide automotive parts distributor approaches a leading automotive belt (fan belts,etc.) manufacturer with a proposal that wouldmake the manufacturer its principal source of belts. The manufacturers brand has long domi-nated the OEM market but it had not pursuedsales vigorously in the after-market. This

proposed arrangement, management reasoned,would give it a good beachhead in that marketand consummated the deal with the distributor.The initial, joint promotional program com-mitted to in the agreement succeeded very welland soon the distributor had doubled its shareof the belt market in its service areas with thesubject manufacturer providing almost all of theproduct.

Sales and margins for the manufacturer wereso good that it did not establish a separate depart-ment or marketing program for the after-market.It did, however, extend its line beyond its OEMlist to cover the universe of belts required in themarket. In addition, it acquired, equipped, andstaffed additional facilities to handle the increasedsales already experienced and anticipated for thefuture.

After five years of solid growth in sales volumeand profits, the manufacturer experienced asudden drop in orders. The distributor was nowmarketing a line of automotive belts produced for its label in a country with materially lower pro-

duction costs using designs and processes of themanufacturer which were no longer patent pro-tected. The distributors sales message was thatthese belts were the performance equivalent of the line that customers had been buying fromthem with satisfaction for years but now, for two-thirds the price.

Perhaps this behavior cannot be faulted onlegal grounds given the lack of a contract, nor,perhaps, under certain circumstances, on ethical

grounds. In this case, the charge of unethicalbehavior can be made. The manufacturer foundthat the distributor had been following a patternin which it chose leading manufacturers in severalof its most important product categories withwhich to enter into distribution arrangementsoffering them large margins and volumes. Then,as with the belt manufacturer, a large jointmarketing effort would launch the distributor asa dominant factor in its market areas for theproduct category. The distributor, on the strengthof its suppliers attributes, would become pri-marily identified with the product. At that pointthe distributor would introduce its private label.

Unit costs rise because of the now under-utilized facilities and equipment acquired to

handle the business. The unsold belts held ininventory add to the (unproductive) assets side of the balance sheet, are sold at a loss or are writtenoff affecting earnings. The loss in revenue is afurther blow to the earnings statement. All of these create a diminished return on investmentfor the manufacturer. A further blow might alsohave occurred involving the morale of manage-ment. Recriminations might have beenexchanged over the failure to anticipate this typeof behavior from the distributor and for nottaking steps to protect the company from theuncertainties inherent in such an arrangement.Management, by failing to accept the informa-tion costs associated with risk avoidance, incurredthe almost certainly higher tainted and opportu-nity costs.

Commitments beyond ability to perform.(Definition Both suppliers and customers should be able torely on acceptable performance standards fromthose organizations with which they deal. Theacceptance of responsibility to perform extends

beyond the firm making the commitment toinclude those direct and ancillary organizationsrelied upon by that firm to satisfy the commit-ment [J. Jackson, 1992 19 and Durand et al.,1997 20]. If there is a degree of uncertaintyregarding performance, this should be specificallystated at the time of commitment.)

A biomedical instrumentation start-upcompany was stymied in its development effortsby a seemingly intractable technical problem



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involving optics. The start-ups literature searchindicated that there was a company that haddeveloped a solution to a problem similar to theone being experienced. Discussions with thatcompany lead to an agreement that it wouldproduce the required technology for the start-up company. The start-up was assured that thesolution would be supplied in an acceptable timeframe as the company had recently achieved theneeded technological breakthrough.

Repeated delays and deliveries of devices thatfailed to perform impaired the continued exis-tence of the start-up. Of course, the agreementwas terminated. Failure to perform came atsubstantial cost to both organizations. If thesupplier had indicated that there was uncertainty

involved, the start-up may have taken another path to its problems solution. As it was, thestart-up was utterly dependent on the suppliersperforming according to expectation.

One need not accuse the supplier of mis-representation in this case. (For example, doingR&D for its own account by having its customer paying for expected useful output.) Its ethicalfailure was, more likely, its insufficiently evalu-ated and,therefore,irresponsibly expressed tech-nical capability.

Favoritism. (Definition This behavior includesany activity [such as cronyism or nepotism]carried on by an organization which, knowingly,because of a family, friendship, ethnic or other non-business relationship favors a less economi-cally meritorious customer or supplier over oneof greater economic merit [A. M. Porter,1996]. 21)

Manufacturer A was the principal supplier of office equipment and store fixtures to a large andexpanding retail grocery chain headquartered in

an adjacent EU member nation. The manufac-turer gained its position with its customer over many years by continually innovating productsand processes which it made available to thatcompany often before its other customers, byholding responsive inventory levels, and byaccepting deferred payment of invoices duringperiods in which the grocery chain was enduringadverse financial conditions.

Sales records revealed that over the period of

the past three years, its business volume had beenshrinking and this at a time of growth for thecustomer when the manufacturer had introducedseveral major new products which the customer had adopted ahead of its competitors to its greatadvantage. The volume decline was in its highmargin product lines. Inquiry showed that thesales decline occurred shortly after the ownersnephew was employed as managing director of the organization of which manufacturer As chief competitor was a subsidiary.

A, without the profit justification for providingexemplary service of various types to thatcustomer was incurring an outright loss in pro-viding that level of service to the customer. HadA redirected those efforts to other market oppor-

tunities, it could have created compensatingprofits. A finally withdrew from the account. Thegrocery chain, faced with the withdrawal of Ashighly favorable offering, lost that source of itssuccess and incurred the costs of recreating arelationship with another supplier probablyinferior to A.

V. Conclusion: Universal standards forV. interorganizational ethics: conceptsV. and processes

Trust is a characterization that is earned over time. Trustworthiness is a reputation that comeswith demonstrated consistency of ethical perfor-mance tested under circumstances in whichdisappointing behavior is possible but positivebehavior occurs. In the absence of trust or itsunreliable surrogates; laws and contracts, theacceptance of possible negative outcomesbecomes the basis for business relationships. Allof the alternatives to trust are costly. The concept

presented here is that organizations can minimize the effects of tainted, opportunity, and transaction costs byrequiring compliance with a set of universal ethical standards. Further, this outcome can be achieved at minimal cost.

The universal product quality standard, ISO9000, gained popularity initially as a result of theECs intention to eliminate commercial hurdlesbetween its member countries. The single marketplan would, it was feared, be harmed by disparate



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product and service qualities seen to exist withinthe national markets of the countries involved.ISO 9000 is now, in the 10+ years since itspublication, accepted as a standard for manufac-turing, service, and administrative practicethroughout much of the world. For customer organizations, ISO 9000 is a means of assuringproduct and service quality standards betweenfirms without regard to national boundaries.Supplier firms see certification under ISO 9000as a way to differentiate its products from itscompetitors as well as a way of improving pro-ductivity performance within the organization.

The international standard series for environ-mental management, ISO 14000 published in1996, is composed of management, documenta-

tion, and operating practices whose implemen-tation are intended to help assure that processesinvolving the manufacture, storage, transporta-tion, distribution and disposal of materials withpotentially harmful environmental consequencesare carried out in environmentally benign ways.Certification under ISO 14000, as with ISO9000, have cost reduction, and market acceptanceeffects. Companies throughout the world haveimmense liability exposure for imposing envi-ronmental insults whether locally or over wideregions and this exposure exists throughout theproducts unified value chain. Improperlyprocessed, labeled, packaged or formulatedproducts moving between organizations holdgreat potential for inflicting harm internal or external to the organization. The imposition of environmental regulations are spreading through-out the world. ISO 14000 certification is a wayfirms have of complying with such regulations.There are clear parallels between the basis for universal ethical standards and for environmentalstandards.

There are many similarities between the ISO9000 and ISO 14000 standards (S. L. Jackson,1997). 22 According to Jackson, all managementsystems, whether focused on quality, safety, or theenvironment, share certain core elements,including:

Policy; Document control; Records management;

Corrective action; Management review for continual improve-

ment; Control of critical operations; Training; Internal audits; Defined organization and responsibilities; Defined and documented standard practices.

Both universal standards demand the com-mitted involvement of executive managementand require significant employee involvement.Policies, processes, and procedures designed toassure the level of performance committed tomust be documented and verified by an ISOcertified third party auditor in order to comply

with the requirements for certification under theuniversal standard. A suppliers particular qualitystandards may deviate from the ISO prescribedstandards for individual customers (and may beeither more or less stringent) based on contractprovisions. Continuing internal and externalaudits are required in order to assure the level of conformity needed for recertification. (Environ-mental standards must, however, conform as aminimum, to applicable laws in the jurisdictionsin which products are processed, through whichthey are transported, in which they are stored, or where disposal occurs.)

The adoption of an ISO series for IO ethicswould call for a set of management systemscommon to the elements listed in the just refer-enced Jackson article. Emphasis, as in bothexisting universal standards, is placed on execu-tive commitment and employee involvement. If different ethical standards seem appropriate to theparties to a business relationship, provisions for side agreements might be provided.

The one significant conceptual difference

between ethical standards and the ISO standardsalready in place is that the latter are unidirec-tional. Quality standards commit a supplier tomeet the customers expectations. Environmentalquality requirements imposed by a governmentalbody impose the obligation on all producerswithin its jurisdiction. On the other hand, whereethical behavior is the issue, the flow of obliga-tion is two-way. The performance expectationsrequire mutual trust. Ethical violations may be



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perpetrated by either the supplier or thecustomer. It would seem unacceptable for one of the parties to require conformity to ethicalstandards without committing to ethical standardsitself.

The broad acceptance of a method for uni-versal business facilitation provided by the ISO9000 series of standards provides a solid basis for similar acceptance for an ethics standard servingthe purpose of international and domesticbusiness facilitation. Both ISO 9000 and ISO14000 provide tested models for the develop-ment, implementation, and monitoring of standards for the conduct of business affairs.Evidence that the benefits that apply to thecertification and continuous monitoring of

performance under the standards outweigh thecosts is provided by ISO 9000s adoption rate andthe anticipated acceptance rate of ISO 14000.

If the adoption of an ethics standard com-parable to the existing quality and environmentalstandards is determined to be unacceptable byan empowered international body or its adoptionis deferred, some options are available to orga-nizations which see the concept as important totheir success. The approach parallels actions takenby some organizations in adopting TQM/CI and

JIT practices unilaterally, and, in some cases,dealing only with suppliers that adopt thosestandards.

1. Incorporate IO ethics standards into itscode of ethics. This will provide an internalcontrol mechanism and, if publicized andfollowed, will provide evidence of trustworthi-ness to its suppliers and customers. Further, thisaction might encourage other organizations toadopt standards unilaterally or, perhaps, observethem informally.

2. Adopt ethical standards themselves and

require that its current and prospective suppliersand/or customers adopt and enforce those stan-dards.

3. Take the lead in promoting the adoption of a code of IO ethics by industry groups and tradeassociations. This action could be limited to themembers within the groups or extended to arequirement that the standards be required of suppliers and/or customers.

4. Trading blocs could require the adoption

of the standards by all organizations within thebloc engaged in cross-border trade. Again, thiscould be limited to suppliers or include thosefirms importing goods and services from nationswithin the bloc. The bloc authority might alsorequire that suppliers and/or customers fromoutside the bloc conform to the standards whendealing with their member nations. The parallelto the creation and adoption of ISO 9000 by theEC and the subsequent diffusion of that universalstandard is clear.

Is the time for the creation and adoption of auniversal standard for IO ethics here? Trust ishard won and costly when misplaced. Sup-planting trust with contracts is not always possibleand is costly when that which is agreed to is

violated. The continuous shift in the principlesunder which business operates and rapid growthof cross-border enterprise point to the need for a reliable surrogate for trust. The history of businessreveals that the marketplace fails as a guarantor of trust-worthy behavior between organizations even within asingle national culture. Even less does the market have the capacity to yield an ethical business environment

for a globalized economy.

Notes

1 The term, coined to represent the range of com-plementary, interorganizational relationships that lieoutside the standard buyer-seller arrangements andbusiness affiliations, is developed and analyzed inA. M. Brandenberger and B. J. Nalebuff: Co-opetition(Doubleday, New York, 1996), pp. 1122.2 T. Donaldson: 1996, Values in Tension: EthicsAway from Home, Harvard Business Review 74 (5)(September-October), 53543 T. W. Dunfee and Y. Nagayasu: 1993, GlobalBusiness Ethics and Japanese Economic Morality, in

T. W. Dunfee and Y. Nagayasu (eds.), Business Ethics: Japan and the Global Economy (Kluwer AcademicPublishers, Dordrecht), pp. 9, and 3540.4 L. Watson: 1995, Dark Nature: A Natural Historyof Evil (HarperCollins, New York), pp. 4876.5 F. Fukuyama: 1995, Trust (The Free Press, New

York), p. 75.6 See Fallows discussion of Japans reaction to per-sistent Western nations incursions on other Asiannations autonomy and the effects it has had on Japansnational values and behaviors. J. Fallows: 1995,



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Looking at the Sun (Vintage Books, New York), pp.72116.7 D. P. Baron: 1995, The Nonmarket StrategySystem, Sloan Management Review 37 (1) (Fall), 76.8 L. Burton: 1990, Ethical Discontinuities in Public-

Private Sector Negotiation, Journal of Policy Analysisand Management 9(1) (Winter), 23389 F. Fukuyama: 1995, Trust (The Free Press, New

York), pp. 2532.10 J. L. Badaracco: The IBM-Fujitsu Conundrum,in W. M. Hoffman, J. B. Kamm, R.E. Frederick andE. S. Petry (eds.), Emerging Global Business Ethics(Quorum Books, Westport Conn.), pp. 798811 Note also that Korean practice all but prohibitsarbitration and, when invoked in Korea, is very timeconsuming, expensive, and, when concluded,probably favorable to the Korean company. B. L. DeMente: 1994, Korean Etiquette & Ethics in Business(NTC Business Books, Lincolnwood, IL), pp. 8990.12 J. Fallows, op. cit., pp. 416420.13 C. K. Prahaladad and G. Hamel: 1990, The CoreCompetence of Corporations, Harvard BusinessReview 68 (3) (May-June), pp. 80 and 8384.14 A. W. Singer: 1993, Honeywell Talkes Its OwnEthics Message Overseas, Ethikos 6(6) (May/June), 3.15 M. Morrow: 1997, ISO 9000 RegistrationGrowth Around the World, in R. W. Peach (ed.),The ISO 9000 Handbook , 3d edition (Richard D.Irwin, Chicago), pp. 689691.16 B. L. De Mente, op. cit., pp. 6364.17 F. Harris: 1996, At Coke, Less Fizz Than Meetsthe Eye, New York Times (sec. 3, Oct 27), 1.18 B. L. De Mente, op. cit., pp. 6567.19 In establishing the ability to perform, as an ethicalissue, the author points out that while the firm whichis directly responsible may itself be trustworthy(competent to deliver), it cannot be relied upon if the firms it relies upon are not, in turn, trustworthy.

An organization must, in Jacksons terms, have therequisite motivation to be competent themselvesas well as have the requisite skill to select otherswhich are likewise competent. See: J. Jackson: 1992,Preserving Trust in a Pluralist Society, in J. Mahoney

and E. Vallance (eds.), Business Ethics in a New Europe (Kluwer Academic Publishers, Dordrecht), pp. 3032.20 The requirement exists, for organizations con-forming to ISO 9000 standards, that they must,among other things, have mechanisms in place toassure that they can meet all the requirements. . . .It should also be remembered that fulfillment of requirements often goes beyond initial deliverables andextends into product support on a medium- or long-term basis. See: I. Durand, A. Cormaci and R.Goult: 1997, A Basic Guide to Implementing ISO9000, in R. W. Peach (ed.), The ISO 9000 Handbook ,3d edition (Richard D. Irwin, Chicago), p. 227.21 A. M. Porter: 1996, Buylines: Ethical DangersMultiply, Purchasing (Oct 17), p. 20. Due to anincrease in face time (occasioned by the era of supplier partnering) . . . friendship now competeswith bribes, kickbacks, and other gross acts of fraudas one of the greatest threats to procurement per-sonnel.21 S. L. Jackson: 1997, Integrating ISO 9001 andISO 14001, in R. W. Peach (ed.), The ISO 9000 Handbook, 3d edition (Richard D. Irwin, Chicago), p.496.

Drexel University,Department of Marketing,

College of Business and Administration,32nd and Chestnut Street,Philadelphia, PA 19104,

U.S.A.E-mail: [email protected]


Interorganisational Ethics - Standards of Behaviour

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