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Chapter 7 Corruption and Ethics in Global Business

Introduction to Global Business

Explain briefly the meaning of ethics.

Describe how ethics and economic progress are connected.

Describe briefly the function of corporate social responsibility (CSR).

Recount the events in some of the more famous corporate financial scandals.

Explain how ethics can be taught.

Explain how internal controls can facilitate ethical behavior and help prevent financial impropriety.

After studying this chapter, you should be able to:

Philosophical Principles of Ethics

Imperative Principle

Generalization Argument

Utilitarian Principle

Do what is right.

Do what is right, but filter action by considering consequences.

Do what produces the greatest good.

What Is Ethics?

Ethics

The branch of philosophy that addresses the values pertaining to human behavior, with regard to the “rightness” and “wrongness” of actions and to the “goodness” and “badness” of the intent and results of such actions

Integrity

Adherence to moral and ethical principles; soundness of moral character; honesty. As a practical matter, a person of integrity knows what is right and has the courage to do it.

EXHIBIT 7.1 BASIC STEPS IN ETHICAL DECISION MAKING

Define all the facts and circumstances, including who, what, where, when, and how. Identify the people affected by the situation and their rights and obligations. Identify the alternative decisions and consequences. Make the decision: determine the right thing to do and then do it.

EXHIBIT 7.2 THE BBB CODE OF BUSINESS PRACTICES

Build Trust: Establish and maintain a positive track record in the marketplace. Advertise Honestly: Adhere to established standards of advertising and selling. Tell the Truth: Honestly represent products and services, including clear and adequate disclosures of all material terms. Be Transparent: Openly identify the nature, location, and ownership of the business, and clearly disclose all policies, guarantees, and procedures that influence a customer’s decision to buy. Honor Promises: Abide by all written agreements and verbal representations. Be Responsive: Address marketplace disputes quickly, professionally, and in good faith. Safeguard Privacy: Protect any data collected against mishandling and fraud, collect personal information only as needed, and respect the preferences of customers regarding the use of their information. Embody Integrity: Approach all business dealings, marketplace transactions, and commitments with integrity.

Ethics in Business and Society

For ethical business activity to occur, mutual trust, fair dealings, and honest communication are essential.

Ethics and economics

Unethical behavior (e.g., inside information) destroys fair investment markets.

Commonly-shared positive ethical values regarding respect for individuals, their lives, their property, and their freedoms promote individual integrity and doing the “right thing.”

Corruption Perceptions Index (CPI) is published each year by Transparency International, providing metrics to the potential corruption risk for most of the world’s countries.

EXHIBIT 7.3 FCPA VIOLATIONS AND CORRUPTION PERCEPTIONS INDEX FOR SELECTED COUNTRIES

What Is Corporate Social Responsibility?

Corporate social responsibility (CSR)

A company’s obligations to society, including the welfare of people and places affected by company activities

CSR mandates that a company should try to:

Provide quality products or services

Provide an appropriate return on investment to the company’s stockholders

Treat its employees with dignity and respect

Take care of the environment

Meet its legal obligations

Deal fairly with suppliers, lenders, and other business parties

Rules, Policies, and Guidelines

Making an ethical choice:

Follow legal rules

Apply the formal ethical policies of your organization

Use your moral intuition to answer the following:

What would your mother or father say if you acted in that way?

How would you feel if you saw your situation described in the newspaper?

Does the situation “smell” bad?

Would you use your behavior as a marketing tool?

Rules, Policies, and Guidelines (continued)

Two principles that can help you make an ethical decision:

The principle of consistency—considering what would be the consequences if everyone made the same choice that you are about to make

The principle of respect—choosing the alternative that treats people with the greatest respect

EXHIBIT 7.4 STEPS TO ENSURE INTEGRITY AT EXXONMOBIL

A substantial majority of the Board of Directors are nonemployees. The Board Audit Committee is empowered to investigate any matters brought to its attention and has 100 percent nonemployee membership. An independent internal audit staff assesses compliance with policies and procedures and evaluates control effectiveness in about 300 audits conducted annually around all business units. Steps are taken to assure the independence of both internal and external auditors. Employees regularly review and discuss expectations and are encouraged to raise questions or concerns. Violations are promptly reviewed, communicated upward, and acted upon.

Financial Scandals: Enron

Enron Corporation

Was a major global provider of electricity, natural gas, pulp and paper, and communications services

Used innovative and misleading accounting in “cooking its books” to avoid disclosing unprofitable operations, including mark to market accounting practices

The Enron scandal was a key event leading the U.S. Congress to pass a new federal securities law for financial accounting and reporting transparency, the Sarbanes–Oxley Act of 2002, often referred to as SOX.

Financial Scandals: WorldCom

WorldCom

Used fraudulent accounting methods to manipulate earnings to present a false image of growth and prosperity to prop up the firm’s stock price

Underreported “line costs” as assets rather than expensing them and fraudulently overstated revenues

Internal auditors eventually discovered the fraud and the firm filed for bankruptcy protection which wiped out the investments of stock and bond holders.

Financial Scandals: Vivendi

Vivendi

Was a French-based multinational corporation with operations in music, television and film, publishing, telecommunications, the Internet, and video games

Used fraudulent accounting methods for several years to hide cash flow, liquidity, and financial obligation problems to boost its apparent financial performance to enhance its stock price and make several acquisitions

The fraud was discovered by the company’s board of directors.

The CEO was required to resign and pay a fine of $1 million.

Vivendi further paid a fine of $50 million.

Financial Scandals: Parmalat

Parmalat

An Italian-based multinational corporation specializing in dairy and food products

Used risky derivatives and purchase of its own debt to disguise losses in several of its new international acquisitions

Was placed under control of a commissioner by the Italian government after the firm collapsed into bankruptcy when it could not pay of its debt and make its bond payments

Other Financial Scandals

Other significant financial scandals include:

Teapot Dome scandal

Resulted from the secret leasing of Teapot Dome oil reserves to a businessman who paid Secretary of the Interior Albert Fall hundreds of thousands of dollars in zero-interest loans

Ponzi scheme

A fraud in which money received from later investors is used to provide returns to earlier investors, thus giving an appearance of a profitable investment

First perpetrated by Charles Ponzi during the 1920s

Can Ethics Be Taught?

Fundamentals of Ethics Education:

Personal integrity

Responsibility of business in society

Ethical decision-making

Ethical leadership

Corporate governance

EXHIBIT 7.5 HOW DO YOU MEASURE SUCCESS?

Many people think of fame and fortune when they measure success. However, at some point in life, most people come to realize that inner peace and soul-deep satisfaction come not from fame and fortune, but from having lived a life based upon integrity and noble character. President Lincoln put it this way: “Honor is better than honors.” At a Congressional Hearing on ethics in July 2002, Truett Cathy, founder of Chick-Fil-A, quoted Proverbs 22:1: “A good name is more desirable than great riches; to be esteemed is better than silver or gold.” In the final analysis, living an honorable life really is more satisfying than fame and fortune. How do you measure success?

EXHIBIT 7.6 ETHICS IN BUSINESS AND SOCIETY: SELECTED QUOTATIONS

“Associate with men of good quality, if you esteem your own reputation; for it is better to be alone than in bad company.” (George Washington) “Honor is better than honors.” (Abraham Lincoln) “To educate a person in mind and not in morals is to educate a menace to society.” (Theodore Roosevelt) “A good name is more desirable than great riches; to be esteemed is better than silver or gold.” (King Solomon) “To see what is right and not to do it is want of courage.” (Confucius) “It has become dramatically clear that the foundation of corporate integrity is personal integrity.” (Sam DiPiazza, CEO of PricewaterhouseCoopers) “A people that values its privileges above its principles soon loses both.” (Dwight D. Eisenhower) “It is high time that the ideal of success should be replaced by the ideal of service.” (Albert Einstein)

Internal Controls

Internal controls

A system of rules and procedures designed to ensure the accuracy and reliability of financial and accounting information

Internal control procedures

Preventing accidental errors and irregularities (intentional misrepresentations)

Identifying errors and irregularities for corrective action

Foreign Corrupt Practices Act

Foreign Corrupt Practices Act (FCPA) of 1997

Applies to U.S. firms and to foreign firms that engage in business in the United States

Consists of two parts:

An anti-bribery provision

A requirement to maintain an adequate internal control system over financial books and records

Foreign Corrupt Practices Act (continued)

Corporate financial scandals of the early 2000s have led to new regulatory measures, including

Sarbanes–Oxley Act (“SOX”) of 2002

Increased the prison sentence for fraud to 25 years

Established 20-year sentences for destroying, altering, or fabricating records in federal investigations, or any scheme to defraud shareholders

Requires that the chief executive officer and chief financial officer of a publicly traded corporation must certify that its financial statements accurately present the firm’s financial condition and results of the firm’s operations

Computer Security of Accounting Information

Basic threats to computer security

Natural disasters

Dishonest employees

Disgruntled employees

Persons external to the organization

Accidental errors and omissions

ethics

integrity

Corruption Perceptions Index (CPI)

corporate social responsibility (CSR)

mark to market accounting

Ponzi scheme

internal controls

Foreign Corrupt Practices Act (FCPA)

Key Terms