Stakeholders (Internal & External)

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opening case

T oys for children are made in numerous countries and then exported to buyers throughout the world. In some countries, such as the United States, certain protection exists to make sure that toys are safe for children. The U.S. Consumer Product Safety Commission (CPSC) regularly issues recalls of toys that have the potential to expose children to danger such as lead or other heavy metals. For example, lead may be found in the paint used on toys and in the plastic used to make the toys. If ingested (e.g., chil- dren chewing on toys), lead is poisonous and can damage the nervous system and cause brain disorders. Lead is also a neurotoxin that can accumulate in both soft tissue and bones in the body.

For these reasons, lead was banned in house paint, on toys marketed to children, and in dishes or cookware in the United States in 1978. In addition, in an agreement between China’s General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) and CPSC, the Chinese agreed to take immediate action in 2007 to eliminate the use of lead paint on Chinese manufactured toys that are exported to the United States. With China’s prominence as a toy manufacturing country, this agreement was a step toward making safe products for children.

Still, lead continues to be a hazard in a quarter of all U.S. homes with children under age 6. In fact, a wide range of toys and children’s products, including many market-leading and reputable brands, often contain either lead or other heavy metals (e.g., arsenic, cadmium, mercury, antimony, or chromium). Estimates exist that suggest that one-third of Chinese toys contain heavy metals. This is a major problem given that China manufactures 80 percent of the toys sold in the United States. Researchers from Greenpeace and IPEN conducted a study by buying 500 toys and children’s products in five Chinese cities. They tested the products with handheld X-ray scanners and found that 163 of the toys were tainted with heavy metals above the norm (32.6 percent). “These contaminated toys not only poison children when chewed or touched, but can enter the body through the air they breathe,” said Ada Kong Cheuk-san at Greenpeace.

While lead in the paint on toys has not been eliminated, the focus on cleaning up lead in the paint has been given front-page coverage ever since the agreement to eliminate it in 2007. It is certainly not gone,

Making Toys Globally

Ethics, Corporate Social Responsibility, and Sustainability

–continued

128 Part Two National Differences

but at least more and more people are paying attention. Several organizations—both governmental and private—are examining lead-based paint in toys on a continual basis. For example, The New York Times and Consumer Reports recently found that dangerous products for children are still widely available. The Ecology Center has created a website called HealthyStuff.org that contains a database of toys and other products that have been tested for dangerous chemicals.

While lead in paint seems to be in focus, the use of lead in plastics has not been banned! Lead is used to soften the plastic and make it more flexible to allow it to go back to its original shape after children play with the toys. Plus, lead may also be used in plastic toys to stabilize molecules from heat. Unfortunately, when the plastic is exposed to sunlight, air, and detergents, for example, the chemical bond between the lead and plastics breaks down and forms dust that can enter the human body. Another unfortunate part about lead is that it is invisible to the naked eye and has no detectable smell. This means that children may be exposed to lead from toys (and other consumer products) through normal playing activity (e.g., hand-to-mouth activity). As everyone with children knows, children often put toys, fingers, and other objects in their mouth, exposing themselves to lead paint or dust.

Children are also more vulnerable to lead than adults; there is no safe level of lead for children. The worldwide toy industry has published a voluntary standard of 90 ppm for lead in toys, which, of course, is greater than a ban on lead in paint used for toys and in the materials used to make the toys (such as plastics). But since 2007, the world has at least seen stricter standards—either voluntary or regulated standards—that make it safer for children to play with newly purchased toys. The CPSC in the United States, the European Union, and China’s AQSIQ are actively monitoring and seemingly enforcing stricter standards. But, according to Scott Wolfson of the CPSC, many toy manufacturers have been violating safety regulations for almost 30 years. So, are toys safer now than they were before 2007, and are they really safe to play with throughout the world? And, what do we do with old, antique toys? • Sources: M. Moore, “One Third of Chinese Toys Contain Heavy Metals,” The Telegraph, December 8, 2011; P. Kavilanz, “China to Eliminate Lead Paint in Toy Exports,” CNN Money, September 11, 2007; U.S. Centers for Disease Control and Prevention, www.cdc.gov/nceh/lead/tips/toys.htm, accessed March 8, 2014; and “U.S. Prosecutes Importers of Toys Containing Lead, Phthalates,” AmeriScan, February 26, 2014.

Introduction The opening case describes the thriving toy manufacturing business and ethical concerns that exist in toy production. Total sales of toys worldwide are estimated to be about $85 billion annually according to the Toy Industry Association’s data, with the U.S. do- mestic toy market being around $21 billion. It is a large industry, especially in North America, Europe, and Asia; each of these regions has between $23 billion and $24 billion in toy sales annually.1

As noted in the opening case, there is some evidence that some companies and countries are less ethical in their toy manufacturing. While the worldwide toy industry has published a voluntary standard of 90 ppm for lead in toys, it is, after all, a voluntary standard and not a regulation that can be enforced worldwide. And while the U.S. Consumer Product Safety Commission and China’s General Administration of Quality Supervision, Inspection and Quarantine agreed that toys exported from China to the United States will no longer contain lead in paints, no such agreement exists for other materials such as plastics used in toy production, nor does the regulation appear to be working as effectively as it might.

Chapter Five Ethics, Corporate Social Responsibility, and Sustainability 129

Perhaps some toy manufacturers have been violating safety regulations for almost 30 years and many will continue to do so in the future; time will tell, assuming we can track the ingredients in the materials being used to make toys. But, what we do know is that about a third of the toys that are exported out of China are tainted with heavy metals above the norm. Unfortunately, it is not illegal to use lead, for example, in plastics at this time; it is an ethical issue—and usually a voluntary one—that some companies tackle ethically and others choose to side-step given the large size of market opportunities in the toy industry. A basic question then is: Can it be considered unethical to manufacture toys that include heavy met- als that are bad for children to ingest and come in contact with when using the toys in their proper way?

Ethical issues like the ones in the toys example arise frequently in international business, often because business practices and regulations differ from nation to nation. With regard to lead pollution, for example, what is allowed in Mexico is outlawed in the United States. These differences can create ethical dilemmas for businesses. Understanding the nature of an ethical dilemma, and deciding the course of action to pursue when confronted with one, is a central theme in this chapter. Ethics serves as the foundation for what people do or not, and ultimately what companies engage in globally. As such, companies’ involvement in cor- porate social responsibility practices and sustainability initiatives can be traced to the ethical foundation of its employees and other stakeholders such as customers, shareholders, suppli- ers, regulators, and communities.2

The term ethics refers to accepted principles of right or wrong that govern the conduct of a person, the members of a profession, or the actions of an organization. Business ethics are the accepted principles of right or wrong governing the conduct of businesspeople, and an ethical strategy is a strategy, or course of action, that does not violate these accepted principles. This chapter looks at how ethical issues should be incorporated into decision making in an international business. The chapter also reviews the reasons for poor ethical decision making and discusses different philosophical approaches to busi- ness ethics. Then, using the ethical decision-making process as platform, we include a series of illustrations via Management Focus boxes throughout the chapter, including issues related to Apple Computers, Myanmar, Daimler, and corporate social responsibil- ity. The chapter closes by reviewing the different processes that managers can adopt to make sure that ethical considerations are incorporated into decision making in interna- tional business.

Ethical Issues in International Business Many of the ethical issues in international business are rooted in the fact that political systems, law, economic development, and culture vary significantly from nation to nation. What is considered normal practice in one nation may be considered unethical in another. Because they work for an institution that transcends national borders and cultures,

Business Ethics Accepted principles of right or wrong governing the conduct of businesspeople.

Ethical Strategy A course of action that does not violate a company’s business ethics.

LO 5-1 Understand the ethical issues faced by international businesses.

Module on International Ethics

globalEDGE provides more than 60 interactive educational modules for businesspeople, policy officials, and students. These modules focus on issues pertinent to international business and include a case study or anecdotes, a glossary of terms, quiz questions, and a list of references when applicable. The combination of the text and the free globalEDGE online course modules serves as an excellent resource to prepare for NASBITE’s Certified Global Business Professional Credential (with top- ics focus on management, marketing, supply chain management, and

finance). Achieving the industry-leading NASBITE CGBP credential as- sures that employees are able to practice global business at the pro- fessional level required in today’s competitive environment. As related to Chapter 5, check out globalEDGE’s online module on international ethics at globaledge.msu.edu/reference-desk/online-course-modules. View the questions in the module as a quick-test on your understand- ing of the main issues in international ethics and your readiness to achieve the CGBP credential.

130 Part Two National Differences

managers in a multinational firm need to be particularly sensitive to these differences. In the international business setting, the most common ethical issues involve employment practices, human rights, environmental regulations, corruption, and the moral obligation of multinational corporations.

EMPLOYMENT PRACTICES When work conditions in a host nation are clearly inferior to those in a multinational’s home nation, which standards should be ap- plied? Those of the home nation, those of the host nation, or something in between? While few would suggest that pay and work conditions should be the same across nations, how much divergence is acceptable? For example, while 12-hour workdays, extremely low pay, and a failure to protect workers against toxic chemicals may be common in some less devel- oped nations, does this mean that it is okay for a multinational to tolerate such working conditions in its subsidiaries there or to condone it by using local subcontractors?

In the 1990s, Nike found itself in the center of a storm of protests when news reports revealed that working conditions at many of its subcontractors were very poor. Typical of the allegations were those detailed in a 48 Hours program that aired in 1996. The report painted a picture of young women who worked with toxic materials six days a week in poor conditions for only 20 cents an hour at a Vietnamese subcontractor. The report also stated that a living wage in Vietnam was at least $3 a day, an income that could not be achieved at the subcontractor without working substantial overtime. Nike and its subcontractors were not breaking any laws, but this report, and others like it, raised questions about the ethics of using sweatshop labor to make what were essentially fashion accessories. It may have been legal, but was it ethical to use subcontractors who, by Western standards, clearly exploited their workforce? Nike’s critics thought not, and the company found itself the focus of a wave of demonstrations and consumer boycotts. These exposés surrounding Nike’s use of subcon- tractors forced the company to reexamine its policies. Realizing that even though it was breaking no law, its subcontracting policies were perceived as unethical, Nike’s management established a code of conduct for Nike subcontractors and instituted annual monitoring by independent auditors of all subcontractors.3

As the Nike case demonstrates, a strong argument can be made that it is not okay for a multinational firm to tolerate poor working conditions in its foreign operations or those of subcontractors. However, this still leaves unanswered the question of which standards should be applied. We shall return to and consider this issue in more detail later in the chap- ter. For now, note that establishing minimal acceptable standards that safeguard the basic rights and dignity of employees, auditing foreign subsidiaries and subcontractors on a regu- lar basis to make sure those standards are met, and taking corrective action if they are not up to standards are a good way to guard against ethical abuses. For another example of prob- lems with working practices among suppliers, read the accompanying Management Focus, which looks at working conditions in a factory that supplied Apple with iPods.

HUMAN RIGHTS Questions of human rights can arise in international business. Basic human rights still are not respected in many nations. Rights taken for granted in de- veloped nations, such as freedom of association, freedom of speech, freedom of assembly, freedom of movement, freedom from political repression, and so on, are by no means uni- versally accepted (see Chapter 2 for details). One of the most obvious historic examples was South Africa during the days of white rule and apartheid, which did not end until 1994. The apartheid system denied basic political rights to the majority nonwhite population of South Africa, mandated segregation between whites and nonwhites, reserved certain occupations exclusively for whites, and prohibited blacks from being placed in positions where they would manage whites. Despite the odious nature of this system, Western businesses oper- ated in South Africa. By the 1980s, however, many questioned the ethics of doing so. They argued that inward investment by foreign multinationals, by boosting the South African economy, supported the repressive apartheid regime.

Several Western businesses started to change their policies in the late 1970s and early 1980s.4 General Motors, which had significant activities in South Africa, was at the forefront

Chapter Five Ethics, Corporate Social Responsibility, and Sustainability 131

of this trend. GM adopted what came to be called the Sullivan principles, named after Leon Sullivan, a black Baptist minister and a member of GM’s board of directors. Sullivan argued that it was ethically justified for GM to operate in South Africa so long as two conditions were fulfilled. First, the company should not obey the apartheid laws in its own South Afri- can operations (a form of passive resistance). Second, the company should do everything within its power to promote the abolition of apartheid laws. Sullivan’s principles were widely adopted by U.S. firms operating in South Africa. Their violation of the apartheid laws was ignored by the South African government, which clearly did not want to antagonize impor- tant foreign investors.

After 10 years, Leon Sullivan concluded that simply following the principles was not suf- ficient to break down the apartheid regime and that any American company, even those ad- hering to his principles, could not ethically justify their continued presence in South Africa. Over the next few years, numerous companies divested their South African operations, in- cluding Exxon, General Motors, Kodak, IBM, and Xerox. At the same time, many state pen- sion funds signaled they would no longer hold stock in companies that did business in South Africa, which helped persuade several companies to divest their South African operations. These divestments, coupled with the imposition of economic sanctions from the United States and other governments, contributed to the abandonment of white minority rule and apartheid in South Africa and the introduction of democratic elections in 1994. Thus, adopt- ing an ethical stance was argued to have helped improve human rights in South Africa.5

Making Apple’s iPod

In mid-2006, news reports surfaced suggesting there were systematic labor abuses at a factory in China that makes the iPhone and iPod for Apple Computer. According to the reports, workers at Hongfujin Preci- sion Industry were paid as little as $50 a month to work 15-hour shifts making the iPod. There were also reports of forced overtime and poor living conditions for the workers, many of them young women who had migrated from the countryside to work at the plant and lived in com- pany-owned dormitories. The articles were the work of two Chinese journalists, Wang You and Weng Bao, employed by China Business News, a state-run newspaper. The target of the reports, Hongfujin Pre- cision Industry, was reportedly China’s largest export manufacturer with overseas sales totaling $14.5 billion. Hongfujin is owned by Fox- conn, a large Taiwanese conglomerate, whose customers (in addition to Apple) include Intel, Dell, and Sony Corporation. The Hongfujin fac- tory is a small city in its own right, with clinics, recreational facilities, buses, and 13 restaurants that serve the 200,000 employees.

Upon hearing the news, Apple management responded quickly, pledg- ing to audit the operations to make sure Hongfujin was complying with Apple’s code on labor standards for subcontractors. Managers at Hongfu- jin took a somewhat different tack; they filed a defamation suit against the two journalists, suing them for $3.8 million in a local court, which promptly froze the journalists’ personal assets pending a trial. Clearly, the manage- ment of Hongfujin was trying to send a message to the journalist com- munity—criticism would be costly. The suit sent a chill through the Chinese journalist community because Chinese courts have shown a ten- dency to favor powerful, locally based companies in legal proceedings.

Within six weeks, Apple had completed its audit. The company’s report suggested that although workers had not been forced to work

overtime and were earning at least the local minimum wage, many had worked more than the 60 hours a week allowed for by Apple, and their housing was substandard. Under pressure from Apple, management at Hongfujin agreed to bring practices in line with Apple’s code, commit- ting to building new housing for employees and limiting work to 60 hours a week.

However, Hongfujin did not immediately withdraw the defamation suit. In an unusually bold move in a country where censorship is still common, China Business News gave its unconditional backing to Wang and Weng. The Shanghai-based news organization issued a statement arguing that what the two journalists did “was not a violation of any rules, laws, or journalistic ethics.” The Paris-based Reporters Without Borders also took up the case of Wang and Weng, writing a letter to Apple’s then CEO, the late Steve Jobs, stating, “We believe that all Wang and Weng did was to report the facts and we condemn Foxconn’s reaction. We therefore ask you to intercede on behalf of these two jour- nalists so that their assets are unfrozen and the lawsuit is dropped.”

Once again, Apple moved quickly, pressuring Foxconn behind the scenes to drop the suit. Foxconn agreed to do so and issued a “face- saving” statement saying the two sides had agreed to end the dispute after apologizing to each other “for the disturbances brought to both of them by the lawsuit.” The experience shed a harsh light on labor condi- tions in China. At the same time, the response of the Chinese media, and China Business News in particular, point toward the emergence of some journalistic freedoms in a nation that has historically seen news organizations as a mouthpiece for the state.

Sources: E. Kurtenbach, “The Foreign Factory Factor,” Seattle Times, August 31, 2006, pp. C1, C3; Elaine Kurtenbach, “Apple Says It’s Trying to Resolve Dispute over Labor Conditions at Chinese iPod Factory,” Associated Press Financial Wire, August 30, 2006; and “Chinese iPod Supplier Pulls Suit,” Associated Press Financial Wire, September 3, 2006.

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132 Part Two National Differences

Although change has come in South Africa, many repressive regimes still exist in the world. Is it ethical for multinationals to do business in them? It is often argued that inward investment by a multinational can be a force for economic, political, and social progress that ultimately improves the rights of people in repressive regimes. This position was first dis- cussed in Chapter 2, when we noted that economic progress in a nation could create pres- sure for democratization. In general, this belief suggests it is ethical for a multinational to do business in nations that lack the democratic structures and human rights records of devel- oped nations. Investment in China, for example, is frequently justified on the grounds that although China’s human rights record is often questioned by human rights groups, and al- though the country is not a democracy, continuing inward investment will help boost eco- nomic growth and raise living standards. These developments will ultimately create pressures from the Chinese people for more participative government, political pluralism, and freedom of expression and speech.

There is a limit to this argument. As in the case of South Africa, some regimes are so re- pressive that investment cannot be justified on ethical grounds. Another example would be Myanmar (formerly known as Burma). Ruled by a military dictatorship for more than 45 years, Myanmar has one of the worst human rights records in the world. Beginning in the mid-1990s, many Western companies exited Myanmar, judging the human rights violations to be so extreme that doing business there cannot be justified on ethical grounds. (In con- trast, the accompanying Management Focus looks at the controversy surrounding one com- pany, Unocal, which chose to stay in Myanmar.) However, a cynic might note that Myanmar has a small economy and that divestment carries no great economic penalty for Western firms, unlike, for example, divestment from China. Interestingly, after decades of pressure from the international community, in 2012 the military government of Myanmar finally acquiesced and allowed limited democratic elections to be held.

ENVIRONMENTAL POLLUTION Ethical issues arise when environmental regulations in host nations are inferior to those in the home nation. Many developed nations have substantial regulations governing the emission of pollutants, the dumping

Early morning smog hangs over office towers in Shanghai, China. Companies are faced with ethical decisions in moving to host nations where environmental regulations are less stringent.

Chapter Five Ethics, Corporate Social Responsibility, and Sustainability 133

Unocal in Myanmar

A number of years ago, in 1995, Unocal, an oil and gas enterprise based in California, took a 29 percent stake in a partnership with the French oil company Total and state-owned companies from both Myanmar and Thailand to build a gas pipeline from Myanmar to Thai- land. At the time, the $1 billion project was expected to bring Myanmar about $200 million in annual export earnings, a quarter of the country’s total. The gas used domestically would increase Myanmar’s generating capacity by 30 percent. This investment was made when a number of other American companies were exiting Myanmar. Myanmar’s govern- ment, a military dictatorship, had a reputation for brutally suppressing internal dissent. Citing the political climate, the apparel companies Levi Strauss and Eddie Bauer had both withdrawn from the country. How- ever, as far as Unocal’s management was concerned, the giant infra- structure project would generate healthy returns for the company and, by boosting economic growth, a better life for Myanmar’s now 53 mil- lion people. Moreover, while Levi Strauss and Eddie Bauer could easily shift production of clothes to another low-cost location, Unocal argued it had to go where the oil and gas were located.

However, Unocal’s investment quickly became highly controversial. Under the terms of the contract, the government of Myanmar was con- tractually obliged to clear a corridor for the pipeline through Myanmar’s tropical forests and to protect the pipeline from attacks by the govern- ment’s enemies. According to human rights groups, the Myanmar army forcibly moved villages and ordered hundreds of local peasants to work

on the pipeline in conditions that were no better than slave labor. Those who refused suffered retaliation. News reports cited the case of one woman who was thrown into a fire, along with her baby, after her hus- band tried to escape from troops forcing him to work on the project. The baby died and she suffered burns. Other villagers reported being beaten, tortured, raped, and otherwise mistreated when the alleged slave labor conditions were occurring.

In 1996, human rights activists brought a lawsuit against Unocal in the United States on behalf of 15 Myanmar villagers who had fled to refugee camps in Thailand. The suit claimed that Unocal was aware of what was going on, even if it did not participate or condone it, and that awareness was enough to make Unocal in part responsible for the al- leged crimes. The presiding judge dismissed the case, arguing that Unocal could not be held liable for the actions of a foreign government against its own people—although the judge did note that Unocal was indeed aware of what was going on in Myanmar. The plaintiffs ap- pealed, and in late 2003 the case wound up at a superior court. In 2005, the case was settled out of court for an undisclosed amount. Unocal itself was acquired by Chevron in 2005.

Sources: Jim Carlton, “Unocal Trial for Slave Labor Claims Is Set to Start Today,” The Wall Street Journal, December 9, 2003, p. A19; Seth Stern, “Big Business Targeted for Rights Abuse,” Christian Science Monitor, September 4, 2003, p. 2; “Trouble in the Pipeline,” The Economist, January 18, 1997, p. 39; Irtani Evelyn, “Feeling the Heat: Unocal Defends Myanmar Gas Pipeline Deal,” Los Angeles Times, February 20, 1995, p. D1; and “Unocal Settles Myanmar Human Rights Cases,” Business and Environment, February 16, 2005, pp. 14–16.

management FOCUS

of toxic chemicals, the use of toxic materials in the workplace, and so on. Those regula- tions are often lacking in developing nations, and according to critics, the result can be higher levels of pollution from the operations of multinationals than would be allowed at home.

Should a multinational feel free to pollute in a developing nation? To do so hardly seems ethical. Is there a danger that amoral management might move production to a developing nation precisely because costly pollution controls are not required and the company is, therefore, free to despoil the environment and perhaps endanger local peo- ple in its quest to lower production costs and gain a competitive advantage? What is the right and moral thing to do in such circumstances: pollute to gain an economic advan- tage, or make sure that foreign subsidiaries adhere to common standards regarding pol- lution controls?

These questions take on added importance because some parts of the environment are a public good that no one owns but anyone can despoil. No one owns the atmosphere or the oceans, but polluting both, no matter where the pollution originates, harms all.6 The atmosphere and oceans can be viewed as a global commons from which everyone benefits but for which no one is specifically responsible. In such cases, a phenomenon known as the tragedy of the commons becomes applicable. The tragedy of the commons occurs when a resource held in common by all, but owned by no one, is overused by individuals, re- sulting in its degradation. The phenomenon was first named by Garrett Hardin when describing a particular problem in sixteenth-century England. Large open areas, called commons, were free for all to use as pasture. The poor put out livestock on these com- mons and supplemented their meager incomes. It was advantageous for each to put out more and more livestock, but the social consequence was far more livestock than the

134 Part Two National Differences

commons could handle. The result was overgrazing, degradation of the commons, and the loss of this much- needed supplement.7

Corporations can contribute to the global tragedy of the commons by moving production to locations where they are free to pump pollutants into the atmosphere or dump them in oceans or rivers, thereby harming these valuable global commons. While such action may be legal, is it ethical? Again, such actions seem to violate basic societal notions of ethics and corporate social re- sponsibility. This issue is taking on greater importance as concerns about human-induced global warming move to center stage. Most climate scientists argue that human industrial and commercial activity is increasing the amount of carbon dioxide in the atmosphere; carbon dioxide is a greenhouse gas, which reflects heat back to the earth’s surface, warming the globe; and as a result, the average temperature of the earth is increasing. The accumulated scientific evidence from numerous data- bases supports this argument.8 Consequently, societies around the world are starting to restrict the amount of carbon dioxide that can be emitted into the atmosphere as a by-product of industrial and commercial activity. However, regulations differ from nation to nation. Given this, is it ethical for a company to try to escape tight emission limits by moving production to a country with lax regulations, given that doing so will contribute to global warming? Again, many would argue that doing so violates basic ethical principles.

CORRUPTION As noted in Chapter 2, corruption has been a problem in almost ev- ery society in history, and it continues to be one today.9 There always have been and always will be corrupt government officials. International businesses can and have gained economic advantages by making payments to those officials. A historical and classic example concerns a well-publicized incident in the 1970s. Carl Kotchian, the president of Lockheed, made a $12.6 million payment to Japanese agents and government officials to secure a large order for Lockheed’s TriStar jet from Nippon Air. When the payments were discovered, U.S. of- ficials charged Lockheed with falsification of its records and tax violations. Although such payments were supposed to be an accepted business practice in Japan (they might be viewed as an exceptionally lavish form of gift-giving), the revelations created a scandal there too. The government ministers in question were criminally charged, one committed suicide, the gov- ernment fell in disgrace, and the Japanese people were outraged. Apparently, such a payment was not an accepted way of doing business in Japan! The payment was nothing more than a bribe, paid to corrupt officials, to secure a large order that might otherwise have gone to another manufacturer, such as Boeing. Kotchian clearly engaged in unethical behavior—and to argue that the payment was an “acceptable form of doing business in Japan” was self- serving and incorrect.

The Lockheed case was the impetus for the 1977 passage of the Foreign Corrupt Practices Act in the United States, discussed in Chapter 2. The act outlawed the paying of bribes to foreign government officials to gain business. Some U.S. businesses immedi- ately objected that the act would put U.S. firms at a competitive disadvantage (there is no evidence that has occurred).10 The act was subsequently amended to allow for “facilitating payments.” Sometimes known as speed money or grease payments, facilitating payments are not payments to secure contracts that would not otherwise be secured, nor are they pay- ments to obtain exclusive preferential treatment. Rather they are payments to ensure re- ceiving the standard treatment that a business ought to receive from a foreign government,

Foreign Corrupt Practices Act U.S. law regulating behavior regarding the conduct of international business in the taking of bribes and other unethical actions.

Should the United States Have Jurisdiction over Foreign Firms? The Foreign Corrupt Practices Act (FCPA) is not just imposed on U.S. companies with operations globally. It also has jurisdiction over foreigners operating in the country. Settling a FCPA inves- tigation, Siemens—Europe’s largest engineering company and the largest electronics company in the world—was fined $800 million by the U.S. Department of Justice and the U.S. Securities and Exchange Commission. Together with various penalties imposed in Germany, Siemens’ home country, the penalties total $1.6 billion. The settlement involved at least 4,200 allegedly corrupt payments totaling some $1.4 billion over six years to foreign officials in numerous countries. Meet- ings, negotiations, and bank account transfer were taking place in the United States between Siemens and officials from other countries. Is it appropriate that the U.S. government can use the FCPA to investigate and fine foreign companies doing business in other countries?

Sources: U.S. Department of Justice, www.justice.gov/opa/pr/2008/December/ 08-crm-1105.html, accessed March 9, 2014; “Siemens: A Giant Awakens,” The Economist, September 10, 2010; and J. Ewing, “Siemens Settlement: Relief, But Is It Over?” BusinessWeek, December 15, 2008.

Chapter Five Ethics, Corporate Social Responsibility, and Sustainability 135

but might not due to the obstruction of a foreign official. The accompanying Management Focus looks at what happened when the German company Daimler ran afoul of the Foreign Corrupt Practices Act (FCPA).

In 1997, the trade and finance ministers from the member states of the Organization for Economic Cooperation and Development (OECD) followed the U.S. lead and adopted the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.11 The convention, which went into force in 1999, obliges member-states and other signatories to make the bribery of foreign public officials a criminal offense. The convention excludes facilitating payments made to expedite routine government action from the convention.

While facilitating payments, or speed money, are excluded from both the Foreign Cor- rupt Practices Act and the OECD convention on bribery, the ethical implications of making such payments are unclear. From a pragmatic standpoint, giving bribes, although a little evil, might be the price that must be paid to do a greater good (assuming the in- vestment creates jobs where none existed and assuming the practice is not illegal). Sev- eral economists advocate this reasoning, suggesting that in the context of pervasive and cumbersome regulations in developing countries, corruption may improve efficiency and help growth! These economists theorize that in a country where preexisting political structures distort or limit the workings of the market mechanism, corruption in the form of black-marketeering, smuggling, and side payments to government bureaucrats to “speed up” approval for business investments may enhance welfare.12 Arguments such as this persuaded the U.S. Congress to exempt facilitating payments from the Foreign Cor- rupt Practices Act.

Convention on Combating Bribery of Foreign Public Officials in International Business Transactions An OECD convention that establishes legally binding standards to criminalize bribery of foreign public officials in international business transactions and provides for a host of related measures that make this effective.

Corruption at Daimler

In 1998, Daimler, one of the world’s largest manufacturers of automo- biles, purchased the Chrysler Corporation for what was a reported $38 billion. Soon afterward, a former Chrysler auditor identified suspicious payments being made by subsidiaries. For example, in 2002 Daimler’s Chinese subsidiary paid $25,000 to a Texas company listed at a resi- dential apartment complex in Houston. The auditor suspected that such payments were bribes and reported the issue to the U.S. Securities and Exchange Commission (SEC), which then teamed up with the U.S. De- partment of Justice (DOJ) and began an investigation.

The investigation took eight years. During that time, investiga- tors uncovered a pattern of corruption so widespread that an SEC official described it as “standard operating practice at Daimler.” In the case of the $25,000 payment, the Texas company was a shell organization established to launder the money, and the payment was to be passed on to the wife of a Chinese government official who was involved in contract negotiations for about $1.3 million in commercial vehicles. In another case, bribes were given to secure the sale of passenger and commercial vehicles to government enti- ties in Russia. Daimler overcharged for the cars on invoices and passed the overpayments to bank accounts in Latvia controlled by the Russian officials responsible for the purchase decision. In certain cases, Daimler made bribes from “cash desks,” allowing employees to take out large amounts of currency to make pay- ments to foreign officials.

In total, the investigation uncovered hundreds of such payments in at least 22 countries that were linked to the sale of vehicles valued at $1.9 billion. The SEC stated, “The bribery was so pervasive in Daimler’s decentralized corporate structure that it extended outside of the sales organization to internal audit, legal, and finance departments. These departments should have caught and stopped the illegal sales prac- tices, but instead they permitted or were directly involved in the com- pany’s bribery practices.”

Threatened with court proceedings in the United States, in 2010 Daimler entered into a consent decree with the SEC under which it agreed to pay $185 million in criminal and civil fines. While subsid- iaries of Daimler in Germany and Russia pleaded guilty to corruption charges, the corporate parent and the Chinese subsidiary will avoid indictment so long as they live up to an agreement to halt such practices.

Some 10 years after Daimler bought Chrysler (some say it was a merger of equals) and became a target of the SEC because of a Chrysler employee’s whistleblower actions, Daimler sold off Chrysler in 2007 to Cerberus Capital Management for $6 billion, and the name was changed to simply “Daimler AG.” Since Chrysler’s bankruptcy filing in the United States in 2009, the company has been controlled by Italian automaker Fiat.

Sources: A. R. Sorkin, “Daimler to Pay $185 Million to Settle Corruption Charges,” The New York Times, March 24, 2010; and “Corruption: Daimler Settles with DoJ; SEC Wades in: Germany Next,” Chiefofficers.net, March 25, 2010.

management FOCUS

136 Part Two National Differences

In contrast, other economists have argued that corruption reduces the returns on busi- ness investment and leads to low economic growth.13 In a country where corruption is common, unproductive bureaucrats who demand side payments for granting the enterprise permission to operate may siphon off the profits from a business activity. This reduces businesses’ incentive to invest and may retard a country’s economic growth rate. One study of the connection between corruption and economic growth in 70 countries found that corruption had a significant negative impact on a country’s growth rate.14 Another study found that firms that paid more in bribes are likely to spend more, not less, man- agement time with bureaucrats negotiating regulations, and that this tended to raise the costs of the firm.15

Given the debate and the complexity of this issue, we again might conclude that gen- eralization is difficult and the demand for speed money creates a genuine ethical dilemma. Yes, corruption is bad, and yes, it may harm a country’s economic develop- ment, but yes, there are also cases where side payments to government officials can re- move the bureaucratic barriers to investments that create jobs. However, this pragmatic stance ignores the fact that corruption tends to corrupt both the bribe giver and the bribe taker. Corruption feeds on itself, and once an individual starts down the road of corruption, pulling back may be difficult if not impossible. This argument strengthens the ethical case for never engaging in corruption, no matter how compelling the bene- fits might seem.

Many multinationals have accepted this argument. The large oil multinational BP, for example, has a zero-tolerance approach toward facilitating payments. Other corporations have a more nuanced approach. For example, Dow Corning used to formally state a few years ago in its Code of Conduct that “in countries where local business practice dictates such [facilitating] payments and there is no alternative, facilitating payments are to be for the minimum amount necessary and must be accurately documented and recorded.”16 This statement recognized that business practices and customs differ from country to country. At the same time, Dow Corning allowed for facilitating payments when “there is no alterna- tive,” although they were also stated to be strongly discouraged. More recently, the latest version of Dow Corning’s Code of Conduct has removed the section on “international busi- ness guidelines” altogether, so our assumption has to be that the company is taking a stron- ger zero-tolerance approach at this time.

Dow Corning may have simply realized that the nuances between a bribe and a facilitat- ing payment are very unclear in interpretation. Many U.S. companies have sustained FCPA violations due to facilitating payments that were made but did not fall within the general rules allowing such payments. For example, in 2008, the global freight forwarder Con-way paid a $300,000 penalty for making hundreds of what could be considered small payments to various Customs Officials in the Philippines. In total, Con-way distributed some $244,000 to these officials who were induced to violate customs regulations, settle disputes, and not enforce fines for administrative violations.17

Ethical Dilemmas The ethical obligations of a multinational corporation toward employment conditions, human rights, corruption, and environmental pollution are not always clear-cut. There may be no agreement about accepted ethical principles. From an international business perspective, some argue that what is ethical depends on one’s cultural perspective.18 In the United States, it is considered acceptable to execute murderers, but in many cultures this is not acceptable—execution is viewed as an affront to human dignity, and the death penalty is outlawed. Many Americans find this attitude very strange, but many Europe- ans find the American approach barbaric. For a more business-oriented example, con- sider the practice of “gift- giving” between the parties to a business negotiation. While this is considered right and proper behavior in many Asian cultures, some Westerners view the practice as a form of bribery, and therefore unethical, particularly if the gifts are substantial.

LO 5-2 Recognize an ethical dilemma.

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Chapter Five Ethics, Corporate Social Responsibility, and Sustainability 137

Managers often confront very real ethical dilemmas where the ap- propriate course of action is not clear. For example, imagine that a visiting American executive finds that a foreign subsidiary in a poor nation has hired a 12-year-old girl to work on a factory floor. Appalled to find that the subsidiary is using child labor in direct vio- lation of the company’s own ethical code, the American instructs the local manager to replace the child with an adult. The local manager dutifully complies. The girl, an orphan, who is the only breadwinner for herself and her 6-year-old brother, is unable to find another job, so in desperation she turns to prostitution. Two years later she dies of AIDS.

Had the visiting American understood the gravity of the girl’s sit- uation, would he still have requested her replacement? Perhaps not! Would it have been better, therefore, to stick with the status quo and allow the girl to continue working? Probably not, because that would have violated the reasonable prohibition against child labor found in the company’s own ethical code. What then would have been the right thing to do? What was the obligation of the executive given this ethical dilemma?

There are no easy answers to these questions. That is the nature of ethical dilemmas— they are situations in which none of the available alternatives seems ethically acceptable.19 In this case, employing child labor was not acceptable, but given that she was employed, neither was denying the child her only source of income. What this American executive needs, what all managers need, is a moral compass, or perhaps an ethical algorithm, to guide them through such an ethical dilemma to find an acceptable solution. Later, we will outline what such a moral compass, or ethical algorithm, might look like. For now, it is enough to note that ethical dilemmas exist because many real-world decisions are complex, difficult to frame, and involve first-, second-, and third-order consequences that are hard to quantify. Doing the right thing, or even knowing what the right thing might be, is often far from easy.20

The Roots of Unethical Behavior Examples abound of managers behaving in a manner that might be judged unethical in an international business setting. Why do managers behave in an unethical manner? There is no simple answer to this question because the causes are complex, but some generalizations can be made (see Figure 5.1).21

PERSONAL ETHICS Societal business ethics are not divorced from personal ethics, which are the generally accepted principles of right and wrong governing the conduct of individuals. As individuals, we are typically taught that it is wrong to lie and cheat—it is unethical—and that it is right to behave with integrity and honor and to stand up for what we believe to be right and true. This is generally true across societies. The personal ethical code that guides our behavior comes from a number of sources, including our parents, our schools, our religion, and the media. Our personal ethical code exerts a profound influence on the way we behave as businesspeople. An individual with a strong sense of personal ethics is less likely to behave in an unethical manner in a business setting. It follows that the first step to establishing a strong sense of business ethics is for a society to emphasize strong personal ethics.

Home-country managers working abroad in multinational firms (expatriate managers) may experience more than the usual degree of pressure to violate their personal ethics. They are away from their ordinary social context and supporting culture, and they are psycho- logically and geographically distant from the parent company. They may be based in a cul- ture that does not place the same value on ethical norms important in the manager’s home country, and they may be surrounded by local employees who have less rigorous ethical standards. The parent company may pressure expatriate managers to meet unrealistic goals

Ethical Dilemma A situation in which there is no ethically acceptable solution.

LO 5-3 Identify the causes of unethical behavior by managers.

Child labor is still common in many poor nations.

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138 Part Two National Differences

that can only be fulfilled by cutting corners or acting unethically. For example, to meet cen- trally mandated performance goals, expatriate managers might give bribes to win contracts or might implement working conditions and environmental controls that are below minimal acceptable standards. Local managers might encourage the expatriate to adopt such behav- ior. Due to its geographic distance, the parent company may be unable to see how expatriate managers are meeting goals or may choose not to see how they are doing so, allowing such behavior to flourish and persist.

DECISION-MAKING PROCESSES Several studies of unethical behavior in a business setting have concluded that businesspeople sometimes do not realize they are behaving unethically, primarily because they simply fail to ask, “Is this decision or action ethical?”22 Instead, they apply a straightforward business calculus to what they perceive to be a business decision, forgetting that the decision may also have an important ethical dimension. The fault lies in processes that do not incorporate ethical considerations into business decision making. This may have been the case at Nike when managers originally made subcontracting decisions (see the earlier discussion). Those decisions were probably made based on good economic logic. Subcontractors were probably cho- sen based on business variables such as cost, delivery, and product quality, but the key managers simply failed to ask, “How does this subcontractor treat its workforce?” If they thought about the question at all, they probably reasoned that it was the subcon- tractor’s concern, not theirs.

To improve ethical decision making in a multinational firm, the best starting point is to better understand how individuals make decisions that can be considered ethical or unethical in an organizational environment.23 Two misnomers must be taken into account. First, too often it is assumed that individuals in the workplace make ethical decisions in the same way as they would if they were home. Second, too often it is as- sumed that people from different cultures make ethical decisions following a similar process (see Chapter 4 for more on cultural differences). Both of these assumptions are problematic. First, within an organization there are very few individuals who have the freedom (e.g., power) to decide ethical issues independent of pressures that may exist in an organizational setting (e.g., should we make a facilitating payment or resort to bribery?). Second, while the process for making an ethical decision may largely be the same in many countries, the relative emphasis on certain issues are unlikely to be the same. Some cultures may stress organizational factors (e.g., Japan) while others stress

5.1 FIGURE Determinants of Ethical Behavior

Ethical Behavior

Unrealistic Performance

Goals

Leadership

Decision-Making Processes

Organization Culture

Societal Culture

Personal Ethics

Chapter Five Ethics, Corporate Social Responsibility, and Sustainability 139

individual personal factors (e.g., the United States), yet some may base it purely on opportunity (e.g., Myanmar) and others base it on the importance to their superiors, for example (e.g., India).

ORGANIZATION CULTURE The climate in some businesses does not encourage people to think through the ethical consequences of business decisions. This brings us to the third cause of unethical behavior in businesses—an organizational cul- ture that deemphasizes business ethics, reducing all decisions to the purely economic. The term organizational culture refers to the values and norms that are shared among employees of an organization. You will recall from Chapter 4 that values are abstract ideas about what a group believes to be good, right, and desirable, while norms are the social rules and guidelines that prescribe appropriate behavior in particular situations. Just as societies have cultures, so do business organizations. Together, values and norms shape the culture of a business organization, and that culture has an important influence on the ethics of business decision making.

The Management Focus on corruption at Daimler, for example, strongly suggests that paying bribes to secure business contracts was long viewed as an acceptable way of doing business within that company. It was, in the words of an investigator, “standard business practice” that permeated much of the organization, including departments such as auditing and finance that were meant to detect and halt such behavior. It can be argued that such a widespread practice could have persisted only if the values and norms of the organization implicitly approved of paying bribes to secure business.

UNREALISTIC PERFORMANCE GOALS A fourth cause of unethical be- havior has already been hinted at—pressure from the parent company to meet unrealistic performance goals that can be attained only by cutting corners or acting in an unethical manner. In the Daimler case, for example, bribery may have been viewed as a way to hit challenging performance goals. The combination of an organizational culture that legiti- mizes unethical behavior, or at least turns a blind eye to such behavior, and unrealistic performance goals may be particularly toxic. In such circumstances, there is a greater than average probability that managers will violate their own personal ethics and engage in unethical behavior. Conversely, an organization culture can do just the opposite and rein- force the need for ethical behavior. At Hewlett-Packard, for example, Bill Hewlett and David Packard, the company’s founders, propagated a set of values known as The HP Way. These values, which shape the way business is conducted both within and by the corporation, have an important ethical component. Among other things, they stress the need for confidence in and respect for people, open communication, and concern for the individual employee.

LEADERSHIP The Hewlett-Packard example suggests a fifth root cause of unethical behavior—leadership. Leaders help to establish the culture of an organization, and they set the example that others follow. Other employees in a business often take their cue from business leaders, and if those leaders do not behave in an ethical manner, they might not either. It is not just what leaders say that matters, but what they do or do not do. What message, then, did the leaders at Daimler sent about corrupt practices? Presumably, they did very little to discourage it and may have encouraged such behavior.

SOCIETAL CULTURE Societal culture may well have an impact on the propensity of people, and organizations, to behave in an unethical manner. One study of 2,700 firms in 24 countries found that there were significant differences among the ethical policies of firms headquartered in different countries.24 Using Hofstede’s dimensions of social culture (see Chapter 4), the study found that enterprises headquartered in cultures where individualism and uncertainty avoidance are strong were more likely to emphasize the importance of be- having ethically than firms headquartered in cultures where masculinity and power distance are important cultural attributes. Such analysis suggests that enterprises headquartered in a country such as Russia, which scores high on masculinity and power distance measures, and

Organizational Culture The values and norms shared among an organization’s employees.

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140 Part Two National Differences

where corruption is endemic, are more likely to engage in unethical behavior than enter- prises headquartered in Scandinavia.

Philosophical Approaches to Ethics In this section on philosophical approaches to ethics in the global marketplace, we look at several different approaches to business ethics. Basically, all individuals adopt a process for making ethical (or unethical) decisions. This process is based on their personal philosophical approach to ethics—that is, the underlying moral fabric of the individual.

We begin with what can best be described as straw men, which either deny the value of business ethics or apply the concept in a very unsatisfactory way. Having discussed, and dis- missed the straw men, we then move on to consider approaches that are favored by most moral philosophers and form the basis for current models of ethical behavior in interna- tional businesses.

STRAW MEN Straw men approaches to business ethics are raised by business ethics scholars primarily to demonstrate that they offer inappropriate guidelines for ethical deci- sion making in a multinational enterprise. Four such approaches to business ethics are com- monly discussed in the literature. These approaches can be characterized as the Friedman doctrine, cultural relativism, the righteous moralist, and the naive immoralist. All these ap- proaches have some inherent value, but all are unsatisfactory in important ways. Neverthe- less, sometimes companies adopt these approaches.

The Friedman Doctrine The Nobel Prize–winning economist Milton Friedman wrote an article in The New York Times in 1970 that has since become a classic straw man example that business ethics scholars outline only to then tear down.25 Friedman’s basic position is that “the social responsibility of business is to increase profits,” so long as the company stays within the rules of law. He explicitly rejects the idea that businesses should undertake social expenditures beyond those mandated by the law and required for the effi- cient running of a business. For example, his arguments suggest that improving working

LO 5-4 Describe the different philosophical approaches to ethics.

“When in Rome, Behave Like a Swede,” Really? You would think that as one of the authors of this book is from Sweden, it seemed convenient to revise the ancient proverb “when in Rome, do as the Romans” to “when in Rome, behave like a Swede.” But, instead this slightly reworded saying was coined in an article in The Economist. As just one example, IKEA, the Swedish furniture giant, as mentioned in the article, has gone to great lengths to fight corruption worldwide. In that spirit, the argument is for the case that doing the right thing is smart business. But we all know—even the Swedish author of this book (!)—that the global marketplace can be a jungle: It’s eat or be eaten. Now if we go back to the ancient proverb, the meaning of it basically suggests that we should behave as those around us and conform to the culture in the foreign society in which we are doing business. So, what is your preference: Do you prefer “when in Rome, do as the Romans” or “when in Rome, behave like a Swede”?

Sources: “The Corruption Eruption,” The Economist, April 29, 2010; “Ethical Busi- ness Ethics,” May 6, 2010, http://ethicalbusinessethics.blogspot.com/2010/05/ when-in-rome-should-you-do-as-romans-do.html, accessed March 9, 2014.

conditions beyond the level required by the law and nec- essary to maximize employee productivity will reduce profits and are therefore not appropriate. His belief is that a firm should maximize its profits because that is the way to maximize the returns that accrue to the owners of the firm, its shareholders. If the shareholders then wish to use the proceeds to make social investments, that is their right, according to Friedman, but managers of the firm should not make that decision for them. He states:

In a free-enterprise, private-property system, a cor- porate executive is an employee of the owners of the business. He has direct responsibility to his em- ployers. That responsibility is to conduct the busi- ness in accordance with their desires, which generally will be to make as much money as possi- ble while conforming to the basic rules of the soci- ety, both those embodied in law and those embodied in ethical custom. The key point is that, in his capacity as a corporate executive, the manager is the agent of the individuals who own the corporation or establish the eleemosynary institution, and his primary responsibility is to them.26

Although Friedman is talking about social responsibility and “ethical custom,” rather than business ethics per se, many business ethics scholars equate social responsibility

Chapter Five Ethics, Corporate Social Responsibility, and Sustainability 141

may not require that a multinational firm stop using child labor in that country, but it is still immoral to use child labor because the practice conflicts with widely held views about what is the right and proper thing to do. Similarly, there may be no rules against pollution in a less developed nation and spending money on pollution control may reduce the profit rate of the firm, but generalized notions of morality would hold that it is still unethical to dump toxic pollutants into rivers or foul the air with gas releases. In addition to the local conse- quences of such pollution, which may have serious health effects for the surrounding popu- lation, there is also a global consequence as pollutants degrade those two global commons so important to us all—the atmosphere and the oceans.

Cultural Relativism Another straw man often raised by business ethics scholars is cultural relativism, which is the belief that ethics are nothing more than the reflection of a culture—all ethics are culturally determined—and that accordingly, a firm should adopt the ethics of the culture in which it is operating.28 This approach is often summarized by the maxim when in Rome, do as the Romans. As with Friedman’s approach, cultural relativism does not stand up to a closer look. At its extreme, cultural relativism suggests that if a culture sup- ports slavery, it is okay to use slave labor in a country. Clearly, it is not! Cultural relativism implicitly rejects the idea that universal notions of morality transcend different cultures, but, as we argue later in the chapter, some universal notions of morality are found across cultures.

While dismissing cultural relativism in its most sweeping form, some ethicists argue there is residual value in this approach.29 We agree. As we noted in Chapter 3, societal values and norms do vary from culture to culture, and customs do differ, so it might follow that certain business practices are ethical in one country but not another. Indeed, the facilitating payments allowed in the Foreign Corrupt Practices Act can be seen as an acknowledgment that in some countries, the payment of speed money to government officials is necessary to get business done, and if not ethically desirable, it is at least ethically acceptable.

The Righteous Moralist A righteous moralist claims that a multinational’s home- country standards of ethics are the appropriate ones for companies to follow in foreign countries. This approach is typically associated with managers from developed nations. While this seems reasonable at first blush, the approach can create problems. Consider the following example: An American bank manager was sent to Italy and was appalled to learn that the local branch’s accounting department recommended grossly underreporting the

Cultural Relativism The belief that ethics are culturally determined and that firms should adopt the ethics of the cultures in which they operate.

Righteous Moralist One who claims that a multinational’s home-country standards of ethics are the appropriate ones for companies to follow in foreign countries.

Are Human Rights a Moral Compass? The Universal Declaration of Human Rights (UDHR) was adopted by the United Nations General Assembly on December 10, 1948, in Paris, France. The Preamble of UDHR starts by stating that “Whereas recognition of the inherent dignity and of the equal and inalienable rights of all members of the human family is the foundation of freedom, justice and peace in the world . . . .” The day on which UDHR was adopted, December 10, is known as “International Human Rights Day,” and this day is also used to award the Nobel Peace Prize annually. One human right that we discuss in the text is the right to free speech and, by the same token, we have an obligation to respect free speech. But, are there issues, situations, or reasons where free speech should not be granted?

Sources: “The Universal Declaration of Human Rights,” United Nations, www. un.org/en/documents/udhr, accessed March 9, 2014; “The Offi cial Site of the Nobel Prize,” www.nobelprize.org/nobel_prizes/peace, accessed March 9, 2014.

with ethical behavior and thus believe Friedman is also ar- guing against business ethics. However, the assumption that Friedman is arguing against ethics is not quite true given his viewpoints associated with “ethical custom” and his state- ments about engaging in open and free competition without deception or fraud:

There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say that it engages in open and free competition without decep- tion or fraud.27

In other words, Friedman states that businesses should be- have in a socially responsible manner, according to ethical custom, and without deception and fraud.

Critics charge that Friedman’s arguments do break down under examination. This is particularly true in international business, where the “rules of the game” are not well estab- lished and differ from country to county. Consider again the case of sweatshop labor. Child labor may not be against the law in a developing nation, and maximizing productivity

142 Part Two National Differences

bank’s profits for income tax purposes.30 The manager insisted that the bank report its earn- ings accurately, American style. When he was called by the Italian tax department to the firm’s tax hearing, he was told the firm owed three times as much tax as it had paid, reflect- ing the department’s standard assumption that each firm underreports its earnings by two- thirds. Despite his protests, the new assessment stood. In this case, the righteous moralist has run into a problem caused by the prevailing cultural norms in the country where he was doing business. How should he respond? The righteous moralist would argue for maintain- ing the position, while a more pragmatic view might be that in this case, the right thing to do is to follow the prevailing cultural norms because there is a big penalty for not doing so.

The main criticism of the righteous moralist approach is that its proponents go too far. While there are some universal moral principles that should not be violated, it does not al- ways follow that the appropriate thing to do is adopt home-country standards. For example, U.S. laws set down strict guidelines with regard to minimum wage and working conditions. Does this mean it is ethical to apply the same guidelines in a foreign country, paying people the same as they are paid in the United States, providing the same benefits and working conditions? Probably not, because doing so might nullify the reason for investing in that country and therefore deny locals the benefits of inward investment by the multinational. Clearly, a more nuanced approach is needed.

The Naive Immoralist A naive immoralist asserts that if a manager of a multina- tional sees that firms from other nations are not following ethical norms in a host nation, that manager should not either. The classic example to illustrate the approach is known as the drug lord problem. In one variant of this problem, an American manager in Colombia routinely pays off the local drug lord to guarantee that her plant will not be bombed and that none of her employees will be kidnapped. The manager argues that such payments are ethically defensible because everyone is doing it.

The objection is twofold. First, to say that an action is ethically justified if everyone is doing it is not sufficient. If firms in a country routinely employ 12-year-olds and make them work 10-hour days, is it therefore ethically defensible to do the same? Obviously not, and the company does have a clear choice. It does not have to abide by local practices, and it can decide not to invest in a country where the practices are particularly odious. Second, the multinational must recognize that it does have the ability to change the prevailing practice in a country. It can use its power for a positive moral purpose. This is what BP is doing by adopting a zero-tolerance policy with regard to facilitating payments. BP is stating that the prevailing practice of making facilitating payments is ethically wrong, and it is incumbent upon the company to use its power to try to change the standard. While some might argue that such an approach smells of moral imperialism and a lack of cultural sensitivity, if it is consistent with widely accepted moral standards in the global community, it may be ethi- cally justified.

UTILITARIAN AND KANTIAN ETHICS In contrast to the straw men just discussed, most moral philosophers see value in utilitarian and Kantian approaches to busi- ness ethics. These approaches were developed in the eighteenth and nineteenth centuries, and although they have been largely superseded by more modern approaches, they form part of the tradition upon which newer approaches have been constructed.

The utilitarian approach to business ethics dates to philosophers such as David Hume (1711–1776), Jeremy Bentham (1748–1832), and John Stuart Mill (1806–1873). Utilitarian approaches to ethics hold that the moral worth of actions or practices is determined by their consequences.31 An action is judged desirable if it leads to the best possible balance of good consequences over bad consequences. Utilitarianism is committed to the maximization of good and the minimization of harm. Utilitarianism recognizes that actions have multiple consequences, some of which are good in a social sense and some of which are harmful. As a philosophy for business ethics, it focuses attention on the need to weigh carefully all the social benefits and costs of a business action and to pursue only those actions where the benefits outweigh the costs. The best decisions, from a utilitarian perspective, are those that produce the greatest good for the greatest number of people.

Naive Immoralist One who asserts that 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.

Utilitarian Approaches to Ethics These hold that the moral worth of actions or practices is determined by their consequences.

Chapter Five Ethics, Corporate Social Responsibility, and Sustainability 143

Many businesses have adopted specific tools such as cost–benefit analysis and risk assess- ment that are firmly rooted in a utilitarian philosophy. Managers often weigh the benefits and costs of an action before deciding whether to pursue it. An oil company considering drilling in the Alaskan wildlife preserve must weigh the economic benefits of increased oil production and the creation of jobs against the costs of environmental degradation in a frag- ile ecosystem. An agricultural biotechnology company such as Monsanto must decide whether the benefits of genetically modified crops that produce natural pesticides outweigh the risks. The benefits include increased crop yields and reduced need for chemical fertiliz- ers. The risks include the possibility that Monsanto’s insect-resistant crops might make mat- ters worse over time if insects evolve a resistance to the natural pesticides engineered into Monsanto’s plants, rendering the plants vulnerable to a new generation of superbugs.

The utilitarian philosophy does have some serious drawbacks as an approach to business ethics. One problem is measuring the benefits, costs, and risks of a course of action. In the case of an oil company considering drilling in Alaska, how does one measure the potential harm done to the region’s ecosystem? The second problem with utilitarianism is that the philosophy omits the consideration of justice. The action that produces the greatest good for the greatest number of people may result in the unjustified treatment of a minority. Such action cannot be ethical, precisely because it is unjust. For example, suppose that in the in- terests of keeping down health insurance costs, the government decides to screen people for the HIV virus and deny insurance coverage to those who are HIV positive. By reducing health costs, such action might produce significant benefits for a large number of people, but the action is unjust because it discriminates unfairly against a minority.

Kantian ethics is based on the philosophy of Immanuel Kant (1724–1804). Kantian ethics holds that people should be treated as ends and never purely as means to the ends of others. People are not instruments, like a machine. People have dignity and need to be re- spected as such. Employing people in sweatshops, making them work long hours for low pay in poor work conditions, is a violation of ethics, according to Kantian philosophy, because it treats people as mere cogs in a machine and not as conscious moral beings that have dignity. Although contemporary moral philosophers tend to view Kant’s ethical philosophy as in- complete—for example, his system has no place for moral emotions or sentiments such as sympathy or caring—the notion that people should be respected and treated with dignity resonates in the modern world.

RIGHTS THEORIES Developed in the twentieth century, rights theories recog- nize that human beings have fundamental rights and privileges that transcend national boundaries and cultures. Rights establish a minimum level of morally acceptable behavior. One well-known definition of a fundamental right construes it as something that takes pre- cedence over or “trumps” a collective good. Thus, we might say that the right to free speech is a fundamental right that takes precedence over all but the most compelling collective goals and overrides, for example, the interest of the state in civil harmony or moral consen- sus.32 Moral theorists argue that fundamental human rights form the basis for the moral compass that managers should navigate by when making decisions that have an ethical com- ponent. More precisely, they should not pursue actions that violate these rights.

The notion that there are fundamental rights that transcend national borders and cul- tures was the underlying motivation for the United Nations Universal Declaration of Human Rights, adopted in 1948, which has been ratified by almost every country on the planet and lays down basic principles that should always be adhered to irrespective of the culture in which one is doing business.33 Echoing Kantian ethics, Article 1 of this declara- tion states:

All human beings are born free and equal in dignity and rights. They are endowed with reason and conscience and should act towards one another in a spirit of brotherhood.

Article 23 of this declaration, which relates directly to employment, states:

1. Everyone has the right to work, to free choice of employment, to just and favorable conditions of work, and to protection against unemployment.

Kantian Ethics The belief that people should be treated as ends and never as means to the ends of others.

Rights Theories A twentieth-century theory that recognizes that human beings have fundamental rights and privileges that transcend national boundaries and cultures.

Universal Declaration of Human Rights A United Nations document that lays down the basic principles of human rights that should be adhered to.

144 Part Two National Differences

2. Everyone, without any discrimination, has the right to equal pay for equal work. 3. Everyone who works has the right to just and favorable remuneration ensuring for

himself and his family an existence worthy of human dignity, and supplemented, if necessary, by other means of social protection.

4. Everyone has the right to form and to join trade unions for the protection of his interests.

Clearly, the rights to “just and favorable conditions of work,” “equal pay for equal work,” and remuneration that ensures an “existence worthy of human dignity” embodied in Article 23 imply that it is unethical to employ child labor in sweatshop settings and pay less than sub- sistence wages, even if that happens to be common practice in some countries. These are fundamental human rights that transcend national borders.

It is important to note that along with rights come obligations. Because we have the right to free speech, we are also obligated to make sure that we respect the free speech of others. The notion that people have obligations is stated in Article 29 of the Universal Declaration of Human Rights:

1. Everyone has duties to the community in which alone the free and full develop- ment of his personality is possible.

Within the framework of a theory of rights, certain people or institutions are obligated to provide benefits or services that secure the rights of others. Such obligations also fall on more than one class of moral agent (a moral agent is any person or institution that is capable of moral action such as a government or corporation).

For example, to escape the high costs of toxic waste disposal in the West, in the late 1980s several firms shipped their waste in bulk to African nations, where it was disposed of at a much lower cost. In 1987, five European ships unloaded toxic waste containing dangerous poisons in Nigeria. Workers wearing sandals and shorts unloaded the barrels for $2.50 a day and placed them in a dirt lot in a residential area. They were not told about the contents of the barrels.34 Who bears the obligation for protecting the rights of workers and residents to safety in a case like this? According to rights theorists, the obligation rests not on the shoul- ders of one moral agent, but on the shoulders of all moral agents whose actions might harm or contribute to the harm of the workers and residents. Thus, it was the obligation not just of the Nigerian government but also of the multinational firms that shipped the toxic waste to make sure it did no harm to residents and workers. In this case, both the government and the multinationals apparently failed to recognize their basic obligation to protect the funda- mental human rights of others.

JUSTICE THEORIES Justice theories focus on the attainment of a just distribution of economic goods and services. A just distribution is one that is considered fair and equi- table. There is no one theory of justice, and several theories of justice conflict with each other in important ways.35 Here, we focus on one particular theory of justice that is both very influential and has important ethical implications. The theory is attributed to philoso- pher John Rawls.36 Rawls argues that all economic goods and services should be distributed equally except when an unequal distribution would work to everyone’s advantage.

According to Rawls, valid principles of justice are those with which all persons would agree if they could freely and impartially consider the situation. Impartiality is guaranteed by a conceptual device that Rawls calls the veil of ignorance. Under the veil of ignorance, ev- eryone is imagined to be ignorant of all of his or her particular characteristics, for example, race, sex, intelligence, nationality, family background, and special talents. Rawls then asks what system people would design under a veil of ignorance. Under these conditions, people would unanimously agree on two fundamental principles of justice.

The first principle is that each person be permitted the maximum amount of basic liberty compatible with a similar liberty for others. Rawls takes these to be political liberty (e.g., the right to vote), freedom of speech and assembly, liberty of conscience and freedom of thought, the freedom and right to hold personal property, and freedom from arbitrary arrest and seizure.

Just Distribution A distribution of goods and services that is considered fair and equitable.

FOCUS ON MANAGERIAL IMPLICATIONS

MAKING ETHICAL DECISIONS INTERNATIONALLY What, then, is the best way for managers in a multinational firm to make sure that ethical considerations figure into international business decisions? How do managers decide on an ethical course of action when confronted with decisions pertaining to working conditions, human rights, corruption, and environmental pollution? From an ethical perspective, how do managers determine the moral obligations that flow from the power of a multinational? In many cases, there are no easy answers to these questions—many of the most vexing ethi- cal problems arise because there are very real dilemmas inherent in them and no obvious correct action. Nevertheless, managers can and should do many things to make sure that basic ethical principles are adhered to and that ethical issues are routinely inserted into in- ternational business decisions.

Here, we focus on seven actions that an international business and its managers can take to make sure ethical issues are considered in business decisions: (1) favor hiring and promot- ing people with a well-grounded sense of personal ethics; (2) build an organizational culture and exemplify leadership behaviors that place a high value on ethical behavior; (3) put deci- sion-making processes in place that require people to consider the ethical dimension of business decisions; (4) institute ethical officers in the organization, (5) develop moral cour- age; (6) make corporate social responsibility a cornerstone of enterprise policy; and (7) pur- sue strategies that are sustainable.

LO 5-5 Explain how managers can incorporate ethical considerations into their decision making.

Chapter Five Ethics, Corporate Social Responsibility, and Sustainability 145

The second principle is that once equal basic liberty is ensured, inequality in basic social goods—such as income and wealth distribution, and opportunities—is to be allowed only if such inequalities benefit everyone. Rawls accepts that inequalities can be just if the system that produces inequalities is to the advantage of everyone. More precisely, he formulates what he calls the difference principle, which is that inequalities are justified if they benefit the position of the least-advantaged person. So, for example, wide variations in income and wealth can be considered just if the market-based system that produces this unequal distri- bution also benefits the least-advantaged members of society. One can argue that a well- regulated, market-based economy and free trade, by promoting economic growth, benefit the least-advantaged members of society. In principle at least, the inequalities inherent in such systems are therefore just (in other words, the rising tide of wealth created by a market- based economy and free trade lifts all boats, even those of the most disadvantaged).

In the context of international business ethics, Rawls’s theory creates an interesting per- spective. Managers could ask themselves whether the policies they adopt in foreign opera- tions would be considered just under Rawls’s veil of ignorance. Is it just, for example, to pay foreign workers less than workers in the firm’s home country? Rawls’s theory would suggest it is, so long as the inequality benefits the least-advantaged members of the global society (which is what economic theory suggests). Alternatively, it is difficult to imagine that man- agers operating under a veil of ignorance would design a system where foreign employees were paid subsistence wages to work long hours in sweatshop conditions and where they were exposed to toxic materials. Such working conditions are clearly unjust in Rawls’s framework, and therefore, it is unethical to adopt them. Similarly, operating under a veil of ignorance, most people would probably design a system that imparts some protection from environmental degradation to important global commons, such as the oceans, atmosphere, and tropical rain forests. To the extent that this is the case, it follows that it is unjust, and by extension unethical, for companies to pursue actions that contribute toward extensive deg- radation of these commons. Thus, Rawls’s veil of ignorance is a conceptual tool that contrib- utes to the moral compass that managers can use to help them navigate through difficult ethical dilemmas.

test PREP Use LearnSmart to help retain what you have learned. Access your instructor’s Connect course to check out LearnSmart or go to learnsmartadvantage.com for help.

Hiring and Promotion It seems obvious that businesses should strive to hire people who have a strong sense of personal ethics and would not engage in unethical or illegal behavior. Similarly, you would not expect a business to promote people, and perhaps to fire people, whose behavior does not match generally accepted ethical standards. However, actually doing so is very difficult. How do you know that someone has a poor sense of personal ethics? In our society, we have an incentive to hide a lack of personal ethics from public view. Once people realize that you are unethical, they will no longer trust you.

Is there anything that businesses can do to make sure they do not hire people who subse- quently turn out to have poor personal ethics, particularly given that people have an incentive to hide this from public view (indeed, the unethical person may lie about his or her nature)? Businesses can give potential employees psychological tests to try to discern their ethical predispositions, and they can check with prior employees regarding someone’s reputation (e.g., by asking for letters of reference and talking to people who have worked with the pro- spective employee). The latter is common and does influence the hiring process. Promoting people who have displayed poor ethics should not occur in a company where the organiza- tion culture values the need for ethical behavior and where leaders act accordingly.

Not only should businesses strive to identify and hire people with a strong sense of per- sonal ethics, but it also is in the interests of prospective employees to find out as much as they can about the ethical climate in an organization. Who wants to work at a multinational such as Enron, which ultimately entered bankruptcy because unethical executives had estab- lished risky partnerships that were hidden from public view and that existed in part to enrich those same executives?

Organization Culture and Leadership To foster ethical behavior, businesses need to build an organization culture that values ethi- cal behavior. Three things are particularly important in building an organization culture that emphasizes ethical behavior. First, the businesses must explicitly articulate values that emphasize ethical behavior. Many companies now do this by drafting a code of ethics, which is a formal statement of the ethical priorities a business adheres to. Often, the code of ethics draws heavily upon documents such as the UN Universal Declaration of Human Rights, which itself is grounded in Kantian and rights-based theories of moral philosophy. Others have incorporated ethical statements into documents that articulate the values or mission of the business. For example, the food and consumer products multinational Unilever has a code of ethics that includes the following points:37

Employees: Unilever is committed to diversity in a working environment where there is mutual trust and respect and where everyone feels responsible for the performance and reputation of our company. We will recruit, employ, and promote employees on the sole basis of the qualifications and abilities needed for the work to be performed. We are committed to safe and healthy working conditions for all employees. We will not use any form of forced, compulsory, or child labor. We are committed to working with employees to develop and enhance each individual’s skills and capabilities. We respect the dignity of the individual and the right of employees to freedom of associa- tion. We will maintain good communications with employees through company-based information and consultation procedures.

Business Integrity: Unilever does not give or receive, whether directly or indirectly, bribes or other improper advantages for business or financial gain. No employee may offer, give, or receive any gift or payment which is, or may be construed as being, a bribe. Any demand for, or offer of, a bribe must be rejected immediately and reported to management. Unilever accounting records and supporting documents must accu- rately describe and reflect the nature of the underlying transactions. No undisclosed or unrecorded account, fund, or asset will be established or maintained.

It is clear from these principles that among other things, Unilever will not tolerate substan- dard working conditions, use child labor, or give bribes under any circumstances. Note also

Code of Ethics A business’s formal statement of ethical priorities.

146 Part Two National Differences

the reference to respecting the dignity of employees, a statement that is grounded in Kan- tian ethics. Unilever’s principles send a very clear message about appropriate ethics to man- agers and employees.

Having articulated values in a code of ethics or some other document, leaders in the busi- ness must give life and meaning to those words by repeatedly emphasizing their importance and then acting on them. This means using every relevant opportunity to stress the impor- tance of business ethics and making sure that key business decisions not only make good economic sense but also are ethical. Many companies have gone a step further, hiring inde- pendent auditors to make sure they are behaving in a manner consistent with their ethical codes. Nike, for example, has hired independent auditors to make sure that subcontractors used by the company are living up to Nike’s code of conduct.

Finally, building an organization culture that places a high value on ethical behavior re- quires incentive and reward systems, including promotions that reward people who engage in ethical behavior and sanction those who do not. At General Electric, for example, the former CEO Jack Welch has described how he reviewed the performance of managers, di- viding them into several different groups. These included over-performers who displayed the right values and were singled out for advancement and bonuses and over-performers who displayed the wrong values and were let go. Welch was not willing to tolerate leaders within the company who did not act in accordance with the central values of the company, even if they were in all other respects skilled managers.38

Decision-Making Processes In addition to establishing the right kind of ethical culture in an organization, businesspeo- ple must be able to think through the ethical implications of decisions in a systematic way. To do this, they need a moral compass, and both rights theories and Rawls’s theory of justice help provide such a compass. Beyond these theories, some experts on ethics have proposed a straightforward practical guide—or ethical algorithm—to determine whether a decision is ethical.39 According to these experts, a decision is acceptable on ethical grounds if a busi- nessperson can answer yes to each of these questions:

• Does my decision fall within the accepted values or standards that typically apply in the organizational environment (as articulated in a code of ethics or some other corporate statement)?

• Am I willing to see the decision communicated to all stakeholders affected by it—for example, by having it reported in newspapers, television, or social media?

• Would the people with whom I have a significant personal relationship, such as family members, friends, or even managers in other businesses, approve of the decision?

Others have recommended a five-step process to think through ethical problems (this is another example of an ethical algorithm).40 In step 1, businesspeople should identify which stakeholders a decision would affect and in what ways. A firm’s stakeholders are individuals or groups that have an interest, claim, or stake in the company, in what it does, and in how well it performs.41 They can be divided into internal stakeholders and external stakeholders. Internal stakeholders are individuals or groups who work for or own the business. They include primary stakeholder such as employees, the board of directors, and shareholders. External stakeholders are all the other individuals and groups that have some direct or indirect claim on the firm. Typically, this group comprises primary stakeholders such as customers, suppliers, governments, and local communities as well as secondary stake- holders such as special interest groups, competitors, trade associations, mass media, and social media.42

All stakeholders are in an exchange relationship with the company.43 Each stakeholder group supplies the organization with important resources (or contributions), and in ex- change each expects its interests to be satisfied (by inducements).44 For example, employees provide labor, skills, knowledge, and time and in exchange expect commensurate income, job satisfaction, job security, and good working conditions. Customers provide a company with its revenues and in exchange want quality products that represent value for money. Communities provide businesses with local infrastructure and in exchange want businesses

Stakeholders The individuals or groups that have an interest, stake, or claim in the actions and overall performance of a company.

Internal Stakeholders People who work for or own the business such as employees, directors, and stockholders.

External Stakeholders Individuals or groups that have some claim on a firm such as customers, suppliers, and unions.

Chapter Five Ethics, Corporate Social Responsibility, and Sustainability 147

that are responsible citizens and seek some assurance that the quality of life will be improved as a result of the business firm’s existence.

Stakeholder analysis involves a certain amount of what has been called moral imagina- tion.45 This means standing in the shoes of a stakeholder and asking how a proposed decision might impact that stakeholder. For example, when considering outsourcing to subcontrac- tors, managers might need to ask themselves how it might feel to be working under substan- dard health conditions for long hours.

Step 2 involves judging the ethics of the proposed strategic decision, given the infor- mation gained in step 1. Managers need to determine whether a proposed decision would violate the fundamental rights of any stakeholders. For example, we might argue that the right to information about health risks in the workplace is a fundamental enti- tlement of employees. Similarly, the right to know about potentially dangerous features of a product is a fundamental entitlement of customers (something tobacco companies violated when they did not reveal to their customers what they knew about the health risks of smoking). Managers might also want to ask themselves whether they would allow the proposed strategic decision if they were designing a system under Rawls’s veil of ignorance. For example, if the issue under consideration was whether to outsource work to a subcontractor with low pay and poor working conditions, managers might want to ask themselves whether they would allow such action if they were considering it under a veil of ignorance, where they themselves might ultimately be the ones to work for the subcontractor.

The judgment at this stage should be guided by various moral principles that should not be violated. The principles might be those articulated in a corporate code of ethics or other company documents. In addition, certain moral principles that we have adopted as members of society—for instance, the prohibition on stealing—should not be violated. The judgment at this stage will also be guided by the decision rule that is chosen to assess the proposed strategic decision. Although maximizing long-run profitability is the decision rule that most businesses stress, it should be applied subject to the constraint that no moral principles are violated—that the business behaves in an ethical manner.

Step 3 requires managers to establish moral intent. This means the business must resolve to place moral concerns ahead of other concerns in cases where either the fundamental rights of stakeholders or key moral principles have been violated. At this stage, input from top management might be particularly valuable. Without the proactive encouragement of top managers, middle-level managers might tend to place the narrow economic interests of the company before the interests of stakeholders. They might do so in the (usually errone- ous) belief that top managers favor such an approach.

Step 4 requires the company to engage in ethical behavior. Step 5 requires the business to audit its decisions, reviewing them to make sure they were consistent with ethical prin- ciples, such as those stated in the company’s code of ethics. This final step is critical and often overlooked. Without auditing past decisions, businesspeople may not know if their decision process is working and if changes should be made to ensure greater compliance with a code of ethics.

Ethics Officers To make sure that a business behaves in an ethical manner, firms now must have oversight by a high-ranking person or people known to respect legal and ethical standards. These in- dividuals—often referred to as ethics officers—are responsible for managing their organiza- tions ethics and legal compliance programs. They are typically responsible for (1) assessing the needs and risks that an ethics program must address; (2) developing and distributing a code of ethics; (3) conducting training programs for employees; (4) establishing and main- taining a confidential service to address employees’ questions about issues that may be ethical or unethical; (5) making sure that the organization is in compliance with govern- ment laws and regulations; (6) monitoring and auditing ethical conduct; (7) taking action, as appropriate, on possible violations; and (8) reviewing and updating the code of ethics periodically.46 Because of these broad topics covered by the ethics officer, in many busi- nesses ethics officers act as an internal ombudsperson with responsibility for handling

148 Part Two National Differences

confidential inquiries from employees, investigating complaints from employees or oth- ers, reporting findings, and making recommendations for change.

For example, United Technologies, a multinational aerospace company with worldwide revenues of more than $30 billion, has had a formal code of ethics since 1990.47 United Technologies has some 450 business practices officers (the company’s name for ethics offi- cers). They are responsible for making sure the code is followed. United Technologies also established an ombudsperson program in 1986 that lets employees inquire anonymously about ethics issues. The program has received some 60,000 inquiries since 1986, and more than 10,000 cases have been handled by an ombudsperson.

Moral Courage It is important to recognize that employees in an international business may need significant moral courage. Moral courage enables managers to walk away from a decision that is profit- able but unethical. Moral courage gives an employee the strength to say no to a superior who instructs her to pursue actions that are unethical. Moral courage gives employees the integrity to go public to the media and blow the whistle on persistent unethical behavior in a company. Moral courage does not come easily; there are well-known cases where individu- als have lost their jobs because they blew the whistle on corporate behaviors they thought unethical, telling the media about what was occurring.48

However, companies can strengthen the moral courage of employees by committing themselves to not retaliate against employees who exercise moral courage, say no to superi- ors, or otherwise complain about unethical actions. For example, consider the following excerpt from Unilever.com “Our Principles”:

Any breaches of the Code must be reported in accordance with the procedures speci- fied by the Chief Legal Officer. The Board of Unilever will not criticize management for any loss of business resulting from adherence to these principles and other manda- tory 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 confi- dence and no employee will suffer as a consequence of doing so.49

This statement gives permission to employees to exercise moral courage. Companies can also set up ethics hotlines, which allow employees to anonymously register a complaint with a corporate ethics officer.

Corporate Social Responsibility Multinational corporations have power that comes from their control over resources and their ability to move production from country to country. Although that power is con- strained not only by laws and regulations but also by the discipline of the market and the competitive process, it is substantial. Some moral philosophers argue that with power comes the social responsibility for multinationals to give something back to the societies that en- able them to prosper and grow. The concept of corporate social responsibility (CSR) re- fers to the idea that businesspeople 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 social consequences.50 In its purest form, cor- porate social responsibility can be supported for its own sake simply because it is the right way for a business to behave. Advocates of this approach argue that businesses, particularly large successful businesses, need to recognize their noblesse oblige and give something back to the societies that have made their success possible. Noblesse oblige is a French term that refers to honorable and benevolent behavior considered the responsibility of people of high (noble) birth. In a business setting, it is taken to mean benevolent behavior that is the re- sponsibility of successful enterprises. This has long been recognized by many businesspeople, resulting in a substantial and venerable history of corporate giving to society, with busi- nesses making social investments designed to enhance the welfare of the communities in which they operate.

Corporate Social Responsibility (CSR) Refers to the idea that businesspeople 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 social consequences.

Chapter Five Ethics, Corporate Social Responsibility, and Sustainability 149

Power itself is morally neutral; how power is used is what matters. It can be used in a positive way to increase social welfare, which is ethical, or it can be used in a manner that is ethically and morally suspect. Managers at some multinationals have acknowledged a moral obligation to use their power to enhance social welfare in the communities where they do business. BP, one of the world’s largest oil companies, has made it part of the company pol- icy to undertake “social investments” in the countries where it does business.51 In Algeria, BP has been investing in a major project to develop gas fields near the desert town of Salah. When the company noticed the lack of clean water in Salah, it built two desalination plants to provide drinking water for the local community and distributed containers to residents so they could take water from the plants to their homes. There was no economic reason for BP to make this social investment, but the company believes it is morally obligated to use its power in constructive ways. The action, while a small thing for BP, is a very important thing for the local community. For another example of corporate social responsibility in practice, see the Management Focus feature on the Finnish company, Stora Enso.

Sustainability As managers in international businesses strive to translate ideas about corporate social respon- sibility into strategic actions, many are gravitating toward strategies that are viewed as sustain- able. By sustainable strategies, we mean strategies that not only help the multinational firm make good profits, but that also do so without harming the environment while simultaneously ensuring that the corporation acts in a socially responsible manner with regard to its stake- holders.52 The core idea of sustainability is that the organization—through its actions—does not exert a negative impact upon the ability of future generations to meet their own economic needs and that its actions impart long-run economic and social benefits on stakeholders.53 A company pursuing a sustainable strategy would not adopt business practices that deplete the environment for short-term economic gain because doing so would impose a cost on future generations. In other words, international businesses that pursue sustainable strategies try to ensure that they do not precipitate or participate in a situation that results in a tragedy of the commons Thus, for example, a company pursuing a sustainable strategy would try to reduce its carbon footprint (CO2 emissions) so that it does not contribute to global warming.

Nor would a company pursuing a sustainable strategy adopt policies that negatively affect the well-being of key stakeholders such as employees and suppliers because managers would recognize that in the long run, this would harm the company. The company that pays its em- ployees so little that it forces them into poverty, for ex- ample, may find it hard to recruit employees in the future and may have to deal with high employee turnover, which imposes its own costs on an enterprise. Similarly, a com- pany that drives down the prices it pays to its suppliers so far that the suppliers cannot make enough money to in- vest in upgrading their operations may find that in the long run, its business suffers poor-quality inputs and a lack of innovation among its supplier base.

Stora Enso, profiled in the Management Focus fea- ture, is in essence pursuing sustainable strategies be- cause, through its actions, it is trying to make sure that forest resources are well managed and available for future generations and that the communities with which it interacts benefit from its presence and will, therefore, support the company going forward. For another exam- ple, consider Starbucks. Starbucks has a goal of ensuring that 100 percent of its coffee is ethically sourced. By this, it means that the farmers who grow the coffee beans it purchases use sustainable farming methods that do not harm the environment and that they treat their employees

Sustainable Strategies Strategies that not only help the multinational firm make good profits, but that do so without harming the environment, while simultaneously ensuring that the corporation acts in a socially responsible manner with regard to its multiple stakeholders.

150 Part Two National Differences

Is Sustainability Bad for Profits? Most customers prefer that the companies they buy products and services from engage in business-focused sustainability practices. Eighty-three percent of the respondents in the Public Opinion Survey on Sustainability said that they think companies should try to accomplish their performance goals while also try- ing to improve society and the environment. At the same time, multinational firms are overwhelmed about the varied stake- holder needs they face. And, the Global Reporting Initiative, with its some 80 equally important sustainability indicators, is not giving companies a clear set of sustainability proprieties. Mean- while, sustainability executives in companies have not exactly been elevated to the importance levels of other top managers. If you had to pay more for a product, like gasoline for your auto- mobile, how much more would you be willing to pay to buy from a highly rated sustainability-oriented company —5 percent, 10 percent, 25 percent, 40 percent?

Sources: J. Epstein-Reeves, “The Pain of Sustainability,” Forbes, January 18, 2012; “Consumers Expect Action from Companies on Sustainability,” Second Annual Public Opinion Survey on Sustainability, http://dowelldogood.net/?p5940, accessed March 9, 2014; and “Global Reporting Initiative,” www.globalreporting. org, accessed March 9, 2014.

well and pay them fairly. Starbucks agronomists work directly with farmers in places like Costa Rica and Rwanda to make sure that they use environmentally responsible farming methods. The company also provides loans to farmers to help them upgrade their produc- tion methods. As a result of these policies, by 2012, some 93 percent of Starbucks coffee beans were ethically sourced.

An important aspect of the sustainable strategies pursued by both Stora Enso and Star- bucks is that they have helped both companies to gain a competitive advantage and, there- fore, make more money for their shareholders. In the case of Starbucks, for example, its ethical sourcing policies send a powerful signal to its customers about the kind of company Starbucks wants to be. This resonates well with the company’s customer base and strength- ens the Starbucks brand, resulting in more store traffic and higher sales and profits. So even though it may cost Starbucks some money up front to shift to an ethical sourcing policy, the benefits in terms of a more powerful brand outweigh the costs. For another example of a multinational that is pursuing a sustainable strategy, see the Management Focus feature about sustainability at Umicore, a Belgian company.

The basic point here is that well-crafted sustainable strategies can be good for sharehold- ers, the environment, suppliers, local communities, employees, and customers. Business

Corporate Social Responsibility at Stora Enso

Stora Enso is a Finnish pulp and paper manufacturer that was formed by the merger of Swedish mining and forestry products company Stora and Finnish forestry products company Enso-Gutzeit Oy in 1998. The company is headquartered in Helsinki, the capital of Finland, and it has approximately 29,000 employees. In 2000, the company bought Con- solidated Papers in North America. Stora Enso also expanded into South America, Asia, and Russia. By 2005, Stora Enso had become the world’s largest pulp and paper manufacturer as measured by produc- tion capacity. However, the North American operations were sold in 2007 to NewPage Corporation.

Stora Enso has a long-standing tradition of corporate social respon- sibility on a global scale. As part of the company’s section on “Global Responsibility in Stora Enso,” the company states that, “for Stora Enso, Global Responsibility means realizing concrete actions that will help us fulfil our Purpose, which is to do good for the people and the planet.” Stora Enso continues to state that:

Our purpose “do good for the people and the planet” is the ultimate reason why we run our business. It is the overriding rule that guides us in all that we do: producing and selling our renewable products, buying trees from a local forest-owner in Finland, selling electricity generated at Stora Enso Skoghall Mill, or managing our logistics on a global scale.

Interestingly, Stora Enso also asserts that it realizes that this statement is rather bold and perhaps not even fully believable. But, the company suggests that it makes the company accountable for its actions; that is, setting its purpose boldly in writing. At the same time, Stora Enso posi- tions the company as though it has always been attending to the “so- cially responsible” needs of doing good for the people and the planet. It illustrates this by maintaining that it has created and enhanced com- munities around its mills, developed innovative systems to reduce the use of scarce resources, and maintained good relationships with key

stakeholders such as forest-owners, their own employees, govern- ments, and local communities near its mills.

Tracing to its past and reflecting on its future, Stora Enso has ad- opted three lead areas for its Global Responsibility Strategy: People and Ethics, Forests and Land Use, and Environment and Efficiency. For people and ethics, the company focuses on conducting business in a socially responsible manner throughout its global value chain. For for- ests and land use, it focuses on an innovative and responsible ap- proach on forestry and land use to make it a preferred partner and a good local community citizen. For the environment and efficiency, the focus is on resource-efficient operations that help the company achieve superior environmental performance related to its products.

While a number of companies have corporate social responsibility statements incorporated as part of their websites, annual reports, and talking points, Stora Enso also presents clear targets and performance goals that are assessed by established metrics. Its overall operations are guided by corporate-level targets for environmental and social performance, aptly named Stora Enso’s Global Responsibility Key Per- formance Indicators (KPI). Targets are publicly listed in a document ti- tled “Targets and Performance” and include two to five basic categories of measures for each of the three lead areas. For People and Ethics, the dimensions cover health and safety, human rights, eth- ics and compliance, sustainable leadership, and responsible sourcing. For Forests and Land Use, the dimensions cover efficiency of land use and sustainable forestry. For Environment and Efficiency, the dimen- sions cover climate and energy, material efficiency, and process water discharges. The “Targets and Performance” document also lists per- formance in the prior year, targets in the current year, and strategic objectives related to each dimension.

Sources: “Global Responsibility in Stora Enso,” www.storaenso.com/Rethink-Site/ Responsibility-Site, accessed March 9, 2014; K. Vita, “Stora Enso Falls as UBS Plays Down Merger Talk: Helsinki Mover,” Bloomberg Businessweek, September 30, 2013; and M. Huuhtanen, “Paper Maker Stora Enso Selling North American Mills,” USA Today, September 21, 2007.

management FOCUS

Chapter Five Ethics, Corporate Social Responsibility, and Sustainability 151

152 Part Two National Differences

need not be a zero-sum game, where increasing the returns to one stakeholder group (e.g., shareholders), requires the imposition of costs on other stakeholder groups (e.g., the environment, suppliers, employees). As the examples we have given illustrate, it is possible to pursue sustainable strategies that result in a positive-sum game where all stakeholders benefit. To be sure, pursuing such strategies may impose some short-term costs on the multinational as it increases investments in better environmental practices, better employee working conditions, and safer products, and as it requires suppliers to adopt similar policies, but, in the long run, there is good evidence that all stakeholders can benefit from such an approach and, indeed, that such an approach may help the com- pany to compete more effectively in the global market place. Good ethical practices are good for business!

Sustainability at Umicore

In introducing Umicore as the most sustainable multinational firm in the world for 2013 on its “Global 100 Index,” Doug Morrow, vice presi- dent of research at Corporate Knights, a Toronto-based media com- pany, said that sustainability is “recognizing that a corporation’s long-term interests are intellectually and financially consistent with resource efficiency, proactive health and safety practices, and respon- sible leadership.” “Sustainability is when what is good for a company is also good for the planet, and vice-versa,” added the editor-in-chief of Corporate Knights, Toby Heaps.

Umicore N.V., formerly Union Minière until 2001, is a multinational materials technology company headquartered in Brussels, Belgium. The company was founded in 1989 as a merger of four companies in the mining and smelting industries. Subsequent to the merger, Umicore reshaped itself to focus on technology-related businesses such as re- fining and recycling of precious metals along with the manufacturing of specialized products from precious metals. As a solid and respected company, Umicore has been included as a component of Belgium’s benchmark “BEL20” index since its inception in 1991 (BEL 20 is the benchmark stock market index of Euronext Brussels, the Brussels Stock Exchange).

Umicore’s core business areas are Catalysis, Energy Materials, Per- formance Materials, and Recycling. Catalysis is involved with abate- ment of global automotive emissions and production of compounds for use in chemicals, life science, and pharmaceutical industries. The

materials produced by Energy Materials can be found in a number of applications used in the production and storage of clean energy. Per- formance Materials applies its technology and know-how to the unique properties of precious and other metals (to achieve safer products). Recycling treats complex waste streams containing precious and other nonferrous metals.

Across these four business areas, Umicore clearly defines its sustain- ability objectives and goals, which address market orientation, multiple stakeholders, and corporate social responsibility. The company’s finan- cial objective is to achieve double-digit revenue growth, with the goal of generating an average return on capital employed of more than 15 per- cent annually. Such a goal is market-oriented with a clear, bottom-line financial expectation for performance. For corporate social responsibility, the focus is on two issues. Environmentally, Umicore focuses on reducing its carbon footprint by 20 percent, reducing the impact of metal emis- sions on water and air by 20 percent, and investing in tools to better un- derstand and measure life cycles of its products. Socially, Umicore focuses on achieving zero lost-time accidents, reducing body concentra- tions of metals to which employees have exposure, and individual em- ployee development. Umicore also takes a strong stand in its stakeholder management, stating that all of its sites are expected to identify key stakeholders and engaging with the local community.

Sources: J. Smith, “The World’s Most Sustainable Companies,” Forbes¸ January 23, 2013; Umicore’s Sustainability, www.umicore.com/sustainability, accessed March 9, 2014; and J. Martens, “Umicore Gains After Maintaining Profit Forecast: Brussels Mover,” Bloomberg Businessweek, July 30, 2013.

management FOCUS

business ethics, p. 129 ethical strategy, p. 129 Foreign Corrupt Practices Act, p. 134 Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, p. 135 ethical dilemma, p. 137 organizational culture, p. 139

cultural relativism, p. 141 righteous moralist, p. 141 naive immoralist, p. 142 utilitarian approach to ethics, p. 142 Kantian ethics, p. 143 rights theories, p. 143 Universal Declaration of Human Rights, p. 143

just distribution, p. 144 code of ethics, p. 146 stakeholders, p. 147 internal stakeholders, p. 147 external stakeholders, p. 147 corporate social responsibility, p. 149 sustainable strategies, p. 150

Key Terms

Chapter Five Ethics, Corporate Social Responsibility, and Sustainability 153

Summary

This chapter discussed the source and nature of ethical is- sues in international businesses, the different philosophical approaches to business ethics, and the steps managers can take to ensure that ethical issues are respected in interna- tional business decisions. The chapter made the following points:

1. The term ethics refers to accepted principles of right or wrong that govern the conduct of a person, the members of a profession, or the actions of an organization. Business ethics are the accepted principles of right or wrong governing the conduct of businesspeople, and an ethical strategy is one that does not violate these accepted principles.

2. Ethical issues and dilemmas in international business are rooted in the variations among political systems, law, economic development, and culture from nation to nation.

3. The most common ethical issues in international business involve employment practices, human rights, environmental regulations, corruption, and social responsibility of multinational corporations.

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

5. Unethical behavior is rooted in poor personal ethics, societal culture, the psychological and geographic distances of a foreign subsidiary from the home office, a failure to incorporate ethical issues into strategic and operational decision making, a dysfunctional culture, and failure of leaders to act in an ethical manner.

6. Moral philosophers contend that approaches to business ethics such as the Friedman doctrine, cultural relativism, the righteous moralist, and the naive immoralist are unsatisfactory in important ways.

7. The Friedman doctrine states that the only social responsibility of business is to increase profits, as long as the company stays within the rules of law. Cultural relativism contends that one should adopt the ethics of the culture in which one is doing business. The righteous moralist monolithically applies home- country ethics to a foreign situation, while the naive

immoralist believes that 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.

8. Utilitarian approaches to ethics hold that the moral worth of actions or practices is determined by their consequences, and the best decisions are those that produce the greatest good for the greatest number of people.

9. Kantian ethics state that people should be treated as ends and never purely as means to the ends of others. People are not instruments, like a machine. People have dignity and need to be respected as such.

10. Rights theories recognize that human beings have fundamental rights and privileges that transcend national boundaries and cultures. These rights establish a minimum level of morally acceptable behavior.

11. The concept of justice developed by John Rawls suggests that a decision is just and ethical if people would allow it when designing a social system under a veil of ignorance.

12. To make sure that ethical issues are considered in international business decisions, managers should (a) favor hiring and promoting people with a well- grounded sense of personal ethics; (b) build an organization culture and exemplify leadership behaviors that place a high value on ethical behavior; (c) put decision-making processes in place that require people to consider the ethical dimension of business decisions; (d) establish ethics officers in the organization with responsibility for ethical decision- making; (e) be morally courageous and encourage others to do the same; (f) make corporate social responsibility a cornerstone of enterprise policy; and (g) pursue strategies that are sustainable.

13. Multinational corporations that are practicing business-focused sustainability integrate a focus on market orientation, addressing the needs of multiple stakeholders, and adhering to corporate social responsibility principles.

Critical Thinking and Discussion Questions

1. A visiting American executive finds that a foreign subsidiary in a less developed country has hired a 12-year-old girl to work on a factory floor, in violation of the company’s prohibition on child labor. He tells the local manager to replace the child and tell her to go back to school. The local manager tells the American

executive that the child is an orphan with no other means of support, and she will probably become a street child if she is denied work. What should the American executive do?

2. Drawing upon John Rawls’s concept of the veil of ignorance, develop an ethical code that will (a) guide

Bitcoin is an open-source, peer-to-peer digital currency introduced to the world on January 3, 2009, by developer Satoshi Nakamoto. The crypto- currency is based on a protocol and software that allows instant peer-to- peer transactions and worldwide payments with minimal costs. In its few years of existence, bitcoin has seen unprecedented media coverage, a rollercoaster ride of epic spikes and epic plunges, and adopters from major retailers to lemon stands (e.g., Amazon, Target, Victoria’s Secret, and Whole Foods). Bitcoin has also been covered by numerous major

news organizations (e.g., ABC, CNBC, Forbes, Fox News, Reuters) as the most popular form of virtual currency.

At the same time, ethical concerns exist with this new digital currency. The coupling of no regulations, virtually free movement of value, and a Ponzi scheme–like system have led renowned economist Paul Krugman to suggest that “bitcoin is evil.” At the basic level, Krugman says that “to be successful, money must be both a medium of exchange and a reasonably stable store of value.” He continues to say that “it remains completely

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154 Part Two National Differences

the decisions of a large oil multinational toward environmental protection and (b) influence the policies of a clothing company in their potential decision of outsourcing its manufacturing operations.

3. Under what conditions is it ethically defensible to outsource production to the developing world where labor costs are lower when such actions also involve laying off long-term employees in the firm’s home country?

4. Do you think facilitating payments (speed payments) should be ethical?

5. A manager from a developing country is overseeing a multinational’s operations in a country where drug trafficking and lawlessness are rife. One day, a representative of a local “big man” approaches the manager and asks for a “donation” to help the big man provide housing for the poor. The representative tells the manager that in return for the donation, the big man will make sure that the manager has a productive

stay in his country. No threats are made, but the manager is well aware that the big man heads a criminal organization that is engaged in drug trafficking. He also knows that that the big man does indeed help the poor in the rundown neighborhood of the city where he was born. What should the manager do?

6. Milton Friedman stated in his famous article in The New York Times in 1970 that “the social responsibility of business is to increase profits.” Do you agree? If not, do you prefer that multinational corporations adopt a focus on corporate social responsibility or sustainability practices?

7. Reread the Management Focus on Unocal, and answer the following questions: a. Was it ethical for Unocal to enter into a partnership

with a brutal military dictatorship for financial gain? b. What actions could Unocal have taken, short of not

investing at all, to safeguard the human rights of people affected by the gas pipeline project?

Use the globalEDGE website (globaledge.msu.edu) to complete the following exercises:

1. Promoting respect for universal human rights is a central dimension of many countries’ foreign policy. As history has shown, human rights abuses are an important concern worldwide. Some countries are more ready to work with other governments and civil society organizations to prevent abuses of power. Begun in 1977, the annual Country Reports on Human Rights Practices are designed to assess the state of democracy and human rights around the world, call attention to violations, and—where needed—prompt needed changes in U.S. policies toward particular countries. Find the latest annual Country Reports on Human Right Practices for the BRIC countries (Brazil, China, India, and Russia), and

create a table to compare the findings under the “Worker Rights” sections. What commonalities do you see? What differences are there?

2. The use of bribery in the business setting is an important ethical dilemma many companies face both domestically and abroad. The Bribe Payers Index is a study published every three years to assess the likelihood of firms from 28 leading economies to win business overseas by offering bribes. It also ranks industry sectors based on the prevalence of bribery. Compare the five industries thought to have the largest problems with bribery with those five that have the least problems. What patterns do you see? What factors make some industries more conducive to bribery than others?

Research Task http://globalEDGE.msu.edu

Chapter Five Ethics, Corporate Social Responsibility, and Sustainability 155

unclear why bitcoin should be a stable store of value.” Joining in the dis- cussion, Charlie Stross, the British writer of science fiction, says that “bit- coin looks like it was designed as a weapon intended to damage central banking and money issuing banks, with a Libertarian political agenda in mind—to damage states’ ability to collect tax and monitor their citizens’ financial transactions.”

What is the difference between bitcoin and normal currency, such as the U.S. dollar? Bitcoin is an unregulated peer-to-peer digital currency that is not backed by any other commodity such as gold or silver. Bitcoins exist almost entirely in the digital, online world, although some bitcoins have actually been privately minted. The U.S. dollar, like many other stable cur- rencies, are paper or coin currency issued by a national reserve–type bank (in the United States, it is the Federal Reserve Bank). This means that dol- lars are really Federal Reserve Notes that are printed or minted at the U.S. Bureau of Engraving and Printing. The dollar is so-called fiat money, which means that dollars derive their value from the U.S. government regulation or law. Interestingly, the United States decided in 2014 that bitcoins will be taxed as property, not currency, for International Revenue Services (IRS) purposes. The IRS defined bitcoin as a “convertible currency that can be used as a medium of exchange, a unit of account, and/or a store of value.”

Technically, Bitcoin with a capitalized “B” refers to the technology and network associated with the currency, while bitcoin with a lower case “b” refers to the actual currency. The philosophy underlying the bitcoin is complete mistrust in authority or control—basically a perfectly stateless, market-based approach, with no country or region-level bank interven- tion. It is also very technical. Bitcoins are generated through a process called “mining.” The mining process involves adding transaction records to bitcoin’s public ledger of past transactions, which is called the block chain (i.e., a chain of blocks). Bitcoin nodes use the block chain to identify legitimate bitcoin transactions. Even in today’s high-tech world, the min- ing process is intentionally designed to be resource-intensive and diffi- cult. This means that the number of blocks found daily by miners remains relatively steady. So, basically, in order to “mine” a bitcoin, a person has to solve a complex mathematical problem using substantial computa- tional power. There’s a twofold reason for this: It controls the supply of bitcoins and incentivizes people to maintain the underlying infrastructure that keeps bitcoins in place.

A unique feature of the bitcoin is that the number of new bitcoins that are created is intentionally halved every four years until the year 2140,

when it will wind down to zero. So, starting in 2140, no more bitcoins will be added into virtual circulation and they will have reached their maximum of 21 million. Perhaps most people will not worry about the year 2140 just yet, but it does mean that there is, technically, a finite supply of bitcoins. Such a finite number has the potential to adversely affect the value of bit- coins. Economist John Quiggin argues that this has resulted in “the finest example of a pure bubble.”

Perhaps more remarkably, bitcoins do not have any real value per se (cf. gold, silver), which means that the coin’s value depends on classical demand-and-supply economics, leading many financial experts to liken bitcoins to a Ponzi scheme, similar to Krugman’s viewpoint. A Ponzi scheme is a fraudulent investment operation that returns payment to its investors from capital paid by new investors rather than from profit earned (Charles Ponzi was born in Italy but became known in the early 1920s as a swindler in North America for his unusual money-making scheme).

Bitcoins have also been the subject of scrutiny by various governments because of concerns that they can be used for illegal activities. Some say the cryptocurrency is unethical because it is allegedly used to buy illegal drugs and guns and to pay for other illegal activities. Additionally, given its unique code, once stolen, bitcoins cannot be returned, and there is no cen- tral bank or agency that can help catch thieves. But, bitcoins have also attacked the cost of moving money around and have successfully created a simple measure of value that can be very efficiently moved around at virtually no cost.

Sources: P. Krugman, “Bitcoin Is Evil,” The New York Times, December 28, 2013; U. Goyal, “Bitcoin and the Future of Money,” Informilo, June 5, 2013; and D. Leger, “IRS: Bitcoin Is Not a Currency,” USA Today, March 25, 2014.

CASE DISCUSSION QUESTIONS 1. Do you think bitcoins are approaching being unethical monetary

instruments without technically carrying a value similar to “real” money?

2. If bitcoins are used to buy drugs, firearms, or other products that are considered illegal in the country in which the bitcoins are being used, does that make bitcoins unethical?

3. Do you think the bitcoin system is “evil” as Paul Krugman suggests? Is it similar to a Ponzi scheme?

4. Do you think that bitcoins were created as a weapon intended to damage central banking and money-issuing banks?

Endnotes

1. Toy Industry Association Inc. and the NPD Group, 2012. www.toyassociation.org, accessed March 8, 2014.

2. T. Hult, “Market-Focused Sustainability: Market Orientation Plus!” Journal of the Academy of Marketing Science, 39, pp. 1–6, 2011; and T. Hult, J. Mena, O. C. Ferrell, and L. Ferrell, “Stakeholder Marketing: A Definition and Conceptual Framework,” AMS Review, 1 (2011), pp. 44–65.

3. S. Greenhouse, “Nike Shoe Plant in Vietnam Is Called Un- safe for Workers,” The New York Times, November 8, 1997; and V. Dobnik, “Chinese Workers Abused Making Nikes, Reeboks,” Seattle Times, September 21, 1997, p. A4.

4. R. K. Massie, Loosing the Bonds: The United States and South Africa in the Apartheid Years (New York: Doubleday, 1997).

5. Not everyone agrees that the divestment trend had much in- fluence on the South African economy. For a counterview see S. H. Teoh, I. Welch, and C. P. Wazzan, “The Effect of So- cially Activist Investing on the Financial Markets: Evidence from South Africa,” The Journal of Business 72, no. 1 (January 1999), pp. 35–60.

6. Peter Singer, One World: The Ethics of Globalization (New Haven, CT: Yale University Press, 2002).

156 Part Two National Differences

7. Garrett Hardin, “The Tragedy of the Commons,” Science 162, no. 1 (1968), pp. 243–48.

8. For a summary of the evidence, see S. Solomon, D. Qin, M. Manning, Z. Chen, M. Marquis, K. B. Averyt, M. Tignor, and H. L. Miller, Eds., Contribution of Working Group I to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change (Cambridge, UK: Cambridge University Press, 2007).

9. J. Everett, D. Neu, and A. S. Rahaman, “The Global Fight against Corruption,” Journal of Business Ethics 65 (2006), pp. 1–18.

10. R. T. De George, Competing with Integrity in International Business (Oxford, UK: Oxford University Press, 1993).

11. Details can be found at www.oecd.org/corruption/ oecdantibriberyconvention.

12. B. Pranab, “Corruption and Development,” Journal of Eco- nomic Literature 36 (September 1997), pp. 1320–46.

13. A. Shleifer and R. W. Vishny, “Corruption,” Quarterly Journal of Economics, no. 108 (1993), pp. 599–617; and I. Ehrlich and F. Lui, “Bureaucratic Corruption and Endogenous Economic Growth,” Journal of Political Economy 107 (December 1999), pp. 270–92.

14. P. Mauro, “Corruption and Growth,” Quarterly Journal of Economics, no. 110 (1995), pp. 681–712.

15. D. Kaufman and S. J. Wei, “Does Grease Money Speed up the Wheels of Commerce?” World Bank policy research working paper, January 11, 2000.

16. Detailed at http://ethics.iit.edu/ecodes/node/3436, accessed March 8, 2014.

17. B. Vitou, R. Kovalevsky, and T. Fox, “Time to Call a Spade a Spade. Facilitation Payments and Why Neither Bans Nor Exemption Work,” http://thebriberyact.com/2011/02/03/time- to-call-a-spade-a-spade-facilitation-payments-why-neither- bans-nor-exemptions-work, accessed March 8, 2014.

18. This is known as the “when in Rome perspective.” T. Donaldson, “Values in Tension: Ethics Away from Home,” Harvard Business Review, September–October 1996.

19. De George, Competing with Integrity in International Business.

20. For a discussion of the ethics of using child labor, see J. Isern, “Bittersweet Chocolate: The Legacy of Child Labor in Cocoa Production in Cote d’Ivoire,” Journal of Applied Man- agement and Entrepreneurship 11 (2006), pp. 115–32.

21. S. W. Gellerman, “Why Good Managers Make Bad Ethical Choices,” in Ethics in Practice: Managing the Moral Corporation, K. R. Andrews, Ed. (Cambridge, MA: Harvard Business School Press, 1989).

22. D. Messick and M. H. Bazerman, “Ethical Leadership and the Psychology of Decision Making,” Sloan Management Review 37 (Winter 1996), pp. 9–20.

23. O. C. Ferrell, J. Fraedrich, and L. Ferrell, Business Ethics, 9th ed. (Mason, OH: Cengage, 2013).

24. B. Scholtens and L. Dam, “Cultural Values and International Differences in Business Ethics,” Journal of Business Ethics, 2007.

25. M. Friedman, “The Social Responsibility of Business Is to In- crease Profits,” The New York Times Magazine, September 13, 1970. Reprinted in T. L. Beauchamp and N. E. Bowie, Ethical Theory and Business, 7th ed. (Englewood Cliffs, NJ: Prentice Hall, 2001).

26. Ibid., p. 55.

27. Ibid., p. 55.

28. For example, see Donaldson, “Values in Tension: Ethics Away from Home.” See also N. Bowie, “Relativism and the Moral Obligations of Multination Corporations,” in T. L. Beau- champ and N. E. Bowie, Ethical Theory and Business, 7th ed. (Englewood Cliffs, NJ: Prentice Hall, 2001).

29. For example, see De George, Competing with Integrity in International Business.

30. This example is often repeated in the literature on interna- tional business ethics. It was first outlined by A. Kelly in “Case Study—Italian Style Mores,” in T. Donaldson and P. Werhane, Ethical Issues in Business (Englewood Cliffs, NJ: Prentice Hall, 1979).

31. See Beauchamp and Bowie, Ethical Theory and Business.

32. T. Donaldson, The Ethics of International Business (Oxford: Oxford University Press, 1989).

33. Found at www.un.org/Overview/rights.html.

34. T. Donaldson, The Ethics of International Business.

35. See Chapter 10 in Beauchamp and Bowie, Ethical Theory and Business.

36. J. Rawls, A Theory of Justice, rev. ed. (Cambridge, MA: Belknap Press, 1999).

37. Found on Unilever’s website at www.unilever.com/aboutus/ purposeandprinciples/ourprinciples/default.aspx.

38. J. Bower and J. Dial, “Jack Welch: General Electrics Revolu- tionary,” Harvard Business School Case 9-394-065, April 1994.

39. For example, see R. E. Freeman and D. Gilbert, Corporate Strategy and the Search for Ethics (Englewood Cliffs, NJ: Prentice Hall, 1988); T. Jones, “Ethical Decision Making by Individuals in Organizations,” Academy of Management Review 16 (1991), pp. 366–95; and J. R. Rest, Moral Development: Advances in Research and Theory (New York: Praeger, 1986).

40. Ibid.

41. See E. Freeman, Strategic Management: A Stakeholder Approach (Boston: Pitman Press, 1984); C. W. L. Hill and T. M. Jones, “Stakeholder-Agency Theory,” Journal of Management Studies 29 (1992), pp. 131–54; and J. G. March and H. A. Simon, Organizations (New York: John Wiley & Sons, 1958).

42. Hult, Mena, Ferrell, and Ferrell, “Stakeholder Marketing.”

43. T. Hult, “Market-Focused Sustainability: Market Orientation Plus!” Journal of the Academy of Marketing Science, 39, pp. 1–6, 2011; and Hult, Mena, Ferrell, and Ferrell, “Stakeholder Marketing.”

44. Hill and Jones, “Stakeholder-Agency Theory”; and March and Simon, Organizations.

45. De George, Competing with Integrity in International Business.

Chapter Five Ethics, Corporate Social Responsibility, and Sustainability 157

46. OFerrell, Fraedrich, and Ferrell, Business Ethics.

47. The code can be accessed at United Technologies website, www.utc.com/profile/ethics/index.htm.

48. C. Grant, “Whistle Blowers: Saints of Secular Culture,” Journal of Business Ethics, September 2002, pp. 391–400.

49. “Our Principles,” Unilever’s website, www.unilever.com/ aboutus/purposeandprinciples/ourprinciples/default.aspx, accessed March 9, 2014.

50. S. A. Waddock and S. B. Graves, “The Corporate Social Per- formance–Financial Performance Link,” Strategic Management Journal 8 (1997), pp. 303–19; and I. Maignan, O. C. Ferrell, and T. Hult, “Corporate Citizenship: Cultural Antecedents and Business Benefits,” Journal of the Academy of Marketing Science, 27 (1999), pp. 455–69.

51. Details can be found at BP’s website, www.bp.com.

52. T. Hult, “Market-Focused Sustainability: Market Orientation Plus! Journal of the Academy of Marketing Science, 39 (2011), pp. 1–61.

53. M. Clarkson, “A Stakeholder Framework for Analyzing and Evaluating Corporate Social Performance,” Academy of Man- agement Review, 20 (1995), pp. 92–117; R. Freeman, Strategic Management: A Stakeholder Approach (Marshfield: Pitman Publishing, 1984); T. Hult, J. Mena, O. Ferrell, and L. Ferrell, “Stakeholder Marketing: A Definition and Conceptual Framework,” AMS Review, 1, pp. 44–65, 2011.

learning objectives

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6-1 Understand why nations trade with each other.

6-2 Summarize the different theories explaining trade flows between nations.

6-3 Recognize why many economists believe that unrestricted free trade between nations will raise the economic welfare of countries that participate in a free trade system.

6-4 Explain the arguments of those who maintain that government can play a proactive role in promoting national competitive advantage in certain industries.

6-5 Understand the important implications that international trade theory holds for business practice.