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Business Ethics and Sustainability

International Business: Ethical Perspectives

International Perspectives

The MBA is amongst the most recognised of all university qualifications. Many refer to it as a type of managerial global passport because its value, as a management qualification, is recognised and understood by organisations all over the world.

We also need to recognise that business is not necessarily practiced in the same way in different countries but is to a large extent culture specific.

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International Ethical Perspectives

Donaldson and Dunfee (1999 p. 47) identify that ‘the importance of cultural differences to business are highlighted by Kluckhorn, Hofstede, Hamden-Turner and Trompenaars, yet the ethical implications remain largely unexplored”.

Sanyal and Guvenli (2009) acknowledge that national cultures may influence behaviour within organisations which In turn influences the ethics of business executives within that culture.

RMIT University©*

Challenges of International Context

The ethical challenges that managers and leaders face when working in different cultures, with different laws and standards are significant.

What is more striking is that many managers and leaders simply do not understand these challenges and are unaware of some of the legal frameworks that cover international business.

Managers make the mistake of either assuming that business is handled in the same way as in their own country or that the practices and business cultures of other countries need to be followed- even if t contradicts organisational policy or home country laws.

Challenges of International Context

KPMG’s 2011 Global Anti-Bribery and Corruption survey of 214 executives in the US and the UK showed that more than 70 % of the respondents (73% in UK and 70% in the US) agree that there are certain regions/countries in the world where business cannot be done without indulging in bribery and corruption.

Challenges of International Context

McDonald (2015) highlights a number of ethical issues as a result of working in an international context

Rights – human rights and associated labour standards.
Duty of care – associated with the protection of labour standards.
Respect – for culture and associated traditions, intellectual property, as well as respect for the environment and the impact that a company’s operations might have on ecological, social and financial infrastructures in the countries within which they operate.
Transparency – openness in transactions and the avoidance of bribery.
Equity – address power inequities in international trade and open access to markets on a more just and fair basis.
Honesty – honesty is important for the building of trust when dealing across cultures.
Objectivity – not being swayed by factors that could create, or be viewed as, conflicts of interest.

Transnationals and Country Options

Carroll and Buchholz (2015) suggest that a multinational corporation (MNC) or multinational enterprise (MNE) seeking to establish itself in a new country faces two major challenges:

Achieving corporate legitimacy in an unfamiliar society.
Differing philosophies between MNCs and host countries

MNCs, Home and Host Countries

Sanyal and Guvenli (2009) note that when organisations establish a business presence in foreign countries, they may adopt an ethnocentric approach whereby they utilise their existing organisational values and practices based on their home country’s practices or a polycentric approach which seeks to adapt company approaches to the local practices of host countries.

Perlmutter (1969) originally identified three international orientations that can be used to categorise an organisation’s approach to their international operations- or key international appointments, and in the later 1970s added a fourth:

Ethnocentric: international operation managed by expats

Polycentric: international operation managed by locals but they stay in country

Geocentric: international operation managed by best person- irrespective of background

Regiocentric: international operation managed by someone from the region- assumed like culture

Approaches to Global Ethics

The most common approach used by organisations to deal with differing cultures and ethics, is to establish a consistent framework within the organisation that it applied wherever their organisation operates.

Global Codes of Conduct or Ethics is the extension of ethics framework with clear policies related to acceptable behaviours and non-acceptable behaviours examined in Unit 8

The issue is the extent to which such frameworks are compliance or aspirational in nature and whether they are imposed across all locations with no variation or with adaption to reflect local issues.

Global Ethical Frameworks-

Georges Enderle has identified four types of approach, each of which is analogous to a posture taken historically by nation-states

Foreign Country Type : organisation conforms to local customs, assuming that what prevails as morality in the host climate is an adequate guide

Empire Type: this organisation applies domestic concepts and theories without making any serious modifications. Empire-type companies export their values in a wholesale fashion—and often do so regardless of the consequences

Interconnection Type: this type of organisations regard the international sphere as differing significantly from the domestic sphere, and one in which the interconnectedness of companies transcends national identities. In this model, the entire notion of national interest is blurred

Global Type: this type of organisations views the domestic sphere as irrelevant. From this vantage point the citizens of all nations, whether they are corporate or individual citizens, must become more cosmopolitan. The nation-state is vanishing, and in turn, only global citizenry makes sense.

Advantages & Disadvantages

Sanyal and Guvenli (2009) identify a polycentric approach as the creation of new values and practices adapting to local practices of the host country .

It has the clear advantage of allowing employees to engage in business activity with confidence that they are consistent with accepted practice.
The disadvantage is that these practices may be inconsistent with the organisation’s values and policies in other countries.
It may also be a high risk strategy when such practices are deemed illegal in the home country. i.e. foreign corrupt practices legislation
This is an example of ethical relativism and may create difficulties for organisations when they are ask to justify their actions

Ethnocentric approach Absolutism

Sanyal and Guvenli (2009) identify an ethnocentric approach as companies using their existing organisational values and practices, primarily based on their home country’s practices.

It has the clear advantage of not increasing costs through the creation of new policies and procedures.
Existing employees already be inculcated and able to apply the ethics framework in the new location.

The disadvantage is that the existing ethics framework, designed on home country’s values may not translate effectively to the host country causing cultural conflicts.
This strategy would be an example of ethical absolutism.

Culture, Custom, Ethics & Etiquette

The relevance of the relativist debate to bribery and corruption should be evident.

It is clear that practices that are termed bribery and corruption and seen as unethical in one country can be seen as consistent with the norms of another and thus ethical.

Anecdotally managers often justify the paying of bribes and facilitation payments claiming that the practice and expectation is part of the values set or national culture.

Corruption

Multiple definitions/perceptions of meanings of corruption:

“Political corruption” is “an act by a public official (or with the acquiescence of a public official) that violates legal or social norms for private or particularistic gain” (Gerring & Thacker, 2005).

Corruption used in economic literature is individual behavior by public officials in which they unlawfully enrich themselves by the misuse of the power entrusted to them” (Welsch, 2004).

Transparency International’s (2000,p 1) definition fits both the public and private context: “the misuse of public power for private benefit.”

Ashford and Anand (2003, p. 2) define it as “the misuse of authority for personal, subunit, and/or organizational gain”.

The use of public office for private gain’ (World Bank)

Types of Corruption

Bribes: payments to public officials to persuade them
to do something (quicker, smoother or more favorably).

Collusion: secret agreement between contractors to increase profit margin

Fraud: falsification of records, invoices etc.

Extortion: use of coercion or threats. E.g. a payment to secure / protect ongoing service – (cf. collusive corruption where both sides benefit)

Favoritism/Nepotism in allocation of public office

‘Grand’corruption: high level, political corruption

‘Petty’ corruption: corruption in public administration and/or during implementation or continuing operation and maintenance

Causes of Corruption

Harberger, (1988) and Charap and Harm (1999) suggest that corruption is a form of distorted social behaviour.

They propose that it is caused by peoples inability to cope with rapid change-

The rigid structures of organisation and society- i.e. legal systems, social norms, etc., are out of sync with the changing social and economic modernization.

Corruption emerges in response to these rigid structures

The ethical-moralist perspective is that corruption is a political and policy choice.

Corruption exists wherever there are corrupt officials and policy makers

It is the intersect of the moral values and socio-economic behaviour of the relevant context - i.e. northern and southern Italy

What is Bribery?

The UK’s Bribery act defines the action as giving or receiving a financial or other advantage in connection with the "improper performance" of a position of trust, or a function that is expected to be performed impartially or in good faith.

Bribery does not have to involve cash or an actual payment exchanging hands and can take many forms such as a gifts, lavish treatment during a business trip o.r tickets to an event

Types of Bribery

Source: McDonald (2015)

Illegal gratuity	Giving or receiving something of value after a transaction is completed, in acknowledgement of some influence over the transaction
Extortion	Demanding a sum of money (or goods) with a threat of harm (physical or business) if demands are not met
Kickback	A portion of the value of the contract demanded as a bribe by an official for securing the contract
Commission/fee	Used by a company or individual to obtain the services of an agent/agency for assistance in securing a commercial contract

Cost of Corruption

According to TI’s 2008 Bribe Payers Survey, one-quarter of the more than 2,700 business executives surveyed blamed private sector corruption for impeding the operations and growth of their businesses.

Such findings discredit the notion that corrupt acts give businesses a competitive advantage and benefit the bottom-line.

World Bank Institute Global Governance Director Daniel Kaufmann estimates that annual worldwide bribery to be about US $1 trillion ( does not include the extent of embezzlement of public funds (from central and local budgets), or from theft (or misuse) of public assets) and does not account for the significant losses in investment, private sector development, and economic growth to a country, or to the increases in infant mortality, poverty and inequality - all resulting from corruption and misgovernance.

Cost of Corruption

In 2011, Dow Jones conducted a State of Anti-Corruption Surveyof 300 companies globally. It discovered major losses of business as a result of corruption specifically when dealing in international markets.
The number of cases where companies faced losses due to unethical or corrupt practices quadrupled, from 10 percent in 2009 to 40 percent in 2010.
More than 40 percent, or over 120 companies, lost business to their competitors due to corrupt practices.
In 2011, corruption in Egypt caused losses worth US$6 billion.
In 2010, a telecom corruption scam in India involving the government came as a shocking revelation, as it involved over 500 million mobile phone users. The corruption resulted in losses of over US$40 billion for the India government
(KPMG, 2011)

Corrupt Countries

Least Corrupt

Denmark 90 Finland 90

New Zealand 90 Sweden 88

Singapore 87 Switzerland 86 Australia 85 Norway 85 Canada 84 Netherlands 84

Most Corrupt

Haiti 19

Venezuela 19 Iraq 18 Turkmenistan 17 Uzbekistan 17 Myanmar 15 Sudan 13 Afghanistan 8 Korea (North) 8 Somalia 8

Transparency International 2012 survey identified the following:

Corrupt Countries

Least Corrupt

Denmark 92 New Zealand 91

Finland 89

Sweden 87

Norway 86

Switzerland 86 Singapore 84

Netherlands 83

Luxembourg 82 Canada 81

Most Corrupt

Somalia 8 Korea (North) 8

Sudan 11 Afghanistan 12

South Sudan 15

Iraq 16 Turkmenistan 17

Uzbekistan 17

Libya 18

Eritrea 18

Yemen 19

Transparency International 2014 survey identified the following:

Corrupt Countries

Bribe least

1 Netherlands

1Switzerland

3 Belgium

4 Germany

4 Japan

6 Australia

6 Canada

8 Singapore

8 UK

10 USA

Bribe most

28 Russia

27 China

26 Mexico

25 Indonesia

23 UAE

23 Argentina

22 Saudi Arabia

19Turkey

19 India

19 Taiwan

Transparency International 2011 Bribe payers survey identified the top 28 economies and found the following:

Accepted Practices?Custom, Ethics & Etiquette

If corruption and bribery are in fact damaging businesses and society, why do many managers and organisations continue to engage in the practice?

Donaldson and Dunfee suggest that some companies, whilst recognizing that cultural differences exist, simply accept these as the way business is conducted in a host country, thus engage in corrupt practices.

They argue that this strategy is a “mistake because it exposes the company (and its brand names) to corruption and public affairs disasters, and because it misses the opportunity to find the glue that cements morale and cooperative strategy”(1999 p. 46).

Categories of Authentic Global Norms

Illegitimate Norms incompatible with Hypernorms

Is Bribery Unethical?

Donaldson and Dunfee (1999) put forward several arguments supporting the unethical nature of bribery

1. From the standpoint of the bribe recipient, the acceptance usually violates a micro-social contract specifying the duties of the agent.

2. Bribery is typically not an authentic norm.

"Corruption is condemned and proscribed, by each of the major religious and moral schools of thought. Buddhism, Christianity, Confucianism, Hinduism, Islam, Judaism, Sikhism, and Taoism each proscribe corruption. Adam Smith and David Ricardo condemned corruption, as did Karl Marx and Mao Tse Tung.”

3. Bribery may violate the hypernorm supporting political participation as well as the efficiency hypernorm.

The political decision making process is undermined by bribery with the risk that politicians, officials etc., make decisions on the basis of self rather than public interest.
Corrupt agents exact money from firms. Corruption affects the number of firms in a free-entry equilibrium, and in turn increases costs relative to profits. In contrast, "the degree of deep competition in the economy increases with lower overhead costs relative to profits; and with a tendency towards similar cost structures."

Corrupt Individuals?

An intriguing finding is that corrupt individuals tend not to view themselves as corrupt. For example, individuals convicted of white collar crimes tend to acknowledge their errant behavior but nonetheless deny criminal intent and the label of criminal (Benson, 1985; Cressey, 1953).

Furthermore most individuals engaged in corrupt acts tend not to abandon the values that society espouses; they continue to value fairness, honesty, integrity and so forth, even as they engage in corruption (Sykes & Matza, 1957)

So how do such individuals pull off this difficult act of willingly engaging in corruption while not perceiving themselves as corrupt and not jettisoning the values that may impede corruption?

Corrupt Individuals?

Geis and Meier (1979) contend that the answer is that the legal process is lenient on white collar crimes and that offenders hold other highly respectable roles – such as community leader and good provider – that bolster their self-concept.

Corrupt individuals deny the identity implications of their actions is through the use of rationalizing ideologies. These ideologies help distance individuals and groups from the aberrant moral stance implied by their actions and perhaps even forge “a moral inversion, in which the bad becomes good” (Adams & Balfour, 1998, p. 11).

T l- Building Organisational Integrity

Transparency International states that the concept of integrity in companies refers to a holistic approach of doing business that involves the management, employees and shareholders in adopting actions and standards that provide for an effective defence against corruption and abuses.

When a company has ‘high integrity’, conduct on the part of directors, management and employees is characterised by adherence to globally-recognised ethical standards, compliance with both the spirit and letter of the law and regulations, and promotion of responsible core values (e.g. honesty, fairness and trustworthiness).

T l- Building Organisational Integrity

Ethical leadership, anti-corruption compliance systems and regulatory oversight are the principal ingredients for corporate integrity that insures correct behaviours and processes are in place-

TI advances a framework around four interdependent elements:

Norms and cultures (e.g. codes of conduct, ethics and corporate citizenship);

Governance (e.g. compliance systems, corporate governance and whistleblowing);

Public rules and regulations (e.g. regulatory oversight and law enforcement); and

Broader checks and balances (e.g. rating agencies, investors, employees, media and civil society watchdogs).

International Legislation

The most influential initiative that addresses global business activities is the OECD convention on combating bribery of foreign public officials in international transactions that went into effect in 1997.

Article 1 obligates each signatory nation to make it a criminal offense ``for any person intentionally to offer, promise, or give any undue pecuniary or other advantage whether directly or through intermediaries, to a foreign public official‘’ to obtain or retain business or ``other improper advantage‘’

It is not, however, illegal under the OECD bribery in international Convention to make small ``facilitation'’ payments. Such payments are made to induce public officials to perform non-discretionary routine functions such as issuing licenses and permits.

(Pacini, Swingen & Rogers, 2002)

The US FCPA

The 1977Foreign Corrupt Practices Act is a US federal law that is known primarily for two provisions

1. the accounting transparency requirements under the Securities Exchange Act, and 2. bribery of foreign officials.

Its anti-bribery stipulations prohibit issuers, domestic concerns or any person from using interstate commerce in a corrupt manner, or from offering money or anything of value to a foreign official, foreign political party or candidate for political office, with the aim to influence the conduct of the foreign official in a way that it violates his/her duty, or to secure any unauthorized advantage in order to obtain or retain business.

(KPMG, 2011)

The US FCPA

A violation of the FCPA consists of five “elements.” That is, a person or organization is guilty of violating the law if the government can prove the existence of:

a payment, offer, authorization, or promise to pay money or anything of value
to a foreign government official (including a party official or manager of a state-owned concern), or to any other person, knowing that the payment or promise will be passed on to a foreign official with a corrupt motive for the purpose of:
influencing any act or decision of that person,
inducing such person to do or omit any action in violation of his lawful duty, securing an improper advantage, or
inducing such person to use his influence to affect an official act or decision in order to assist in obtaining or retaining business for or with, or directing any business to, any person

The US FCPA- Penalties

Individuals: up to five years’ imprisonment for each violation, or up to 20 years for certain willful violations.

Corporations and other business entities: up to $US 2 million for each violation, individuals as much as $US 100,000.

The maximum fine may be increased to $US 25 million for corporations and $US 5 million for individuals in the case of certain willful violations.

Under the alternative Fines act, all criminal fines, including those imposed under the FCPA, may be increased to twice the gain obtained by reason of the offense or twice the loss to any other person.

The US FCPA- Penalties

Two recent examples of major companies and the cost of bribery:

Hewlett-Packard – The US Securities and Exchange Commission charged the Palo Alto, California based technology company with violating the FCPA when subsidiaries in three countries made improper payments to government officials to obtain or retain lucrative public contracts. H-P agreed to pay $108 million to settle the SEC charges and a parallel criminal case. (4/9/14)

Alcoa - SEC charged the global aluminum producer with violating the FCPA when its subsidiaries repeatedly paid bribes to government officials in Bahrain to maintain a key source of business. Alcoa agreed to pay $384 million to settle the SEC charges and a parallel criminal case. (1/9/14)

http://www.sec.gov/spotlight/fcpa/fcpa-cases.shtml

The UK Bribery Act

The UK Bribery Act received assent on 8 April 2010 and goes well beyond simply criminalising conduct covered under the OECD Convention.

It is now among the strictest legislation internationally on bribery.
Notably, it introduces a new strict liability offence for companies and partnerships of failing to prevent bribery.
The introduction of this new corporate criminal offence places a burden of proof on companies to show they have adequate procedures in place to prevent bribery.
The Bribery Act also provides for strict penalties for active and passive bribery by individuals as well as companies.
(http://www.transparency.org.uk/our-work/bribery-act)

The UK Bribery Act

It targets general and commercial bribery offences by creating the following four criminal offences:

Offering, promising or giving a bribe (active bribery)
Requesting, agreeing to receive or accepting a bribe (passive bribery)
Bribing a foreign public official in order to obtain or retain business or an advantage in the conduct of business
Failing to prevent bribery engaged in on behalf of a commercial organisation.

The penalties for individuals under the Act include imprisonment for up to 10 years or a fine up to the statutory maximum.

A corporation found guilty of not preventing bribery is subject to unlimited fines.

The UK Bribery Act

UK Bribery Act applies to companies doing business overseas.

Companies registered in the UK can commit an offence under section 7 of failure to prevent bribery if an employee, subsidiary, agent or service provider (‘associated persons’) bribes another person anywhere in the world to obtain or retain business or a business advantage.
A foreign subsidiary of a UK company can cause the parent company to become liable under section 7 when the subsidiary commits an act of bribery in the context of performing services for the UK parent unless it was acting entirely on its own as it would not then be performing services for the UK parent.

Foreign companies with operations in the UK are also subject to this legislation.

Australian Legislation

Australia’s “Foreign Corruption Provisions: Section 11.5(1) and 70.2(1) of the Criminal Code Act 1995, applies to Australian citizens, residents and companies who bribe or attempt to bribe a Foreign Public Official.

They can be prosecuted under Australian law even though the actions happen outside Australia.

Under Section 70 of the Criminal Code 1995 Amendment (Bribery of Foreign Public Officials) Act 1999, Bribery involves:

Providing, offering or arranging a benefit
The benefit is not legitimately due
With an intention to influence a Foreign Public Official (FPO) in their official duties
With the motive to gain or retain business or a business advantage

Australian Legislation

It is also an offence to:

• Attempt to offer a bribe
• Help any person to offer a bribe
• Get another person to offer a bribe
• Encourage/urge another person to offer a bribe
• Conspire/secretly plan with another person to offer a bribe

Possible Penalties:

Individuals: a maximum 10 years imprisonment and/or maximum $1.1 million in fines
Companies: Fines the greater of $A11 million or 3 times the value of the benefit or 10% of annual turnover if a value cannot be determined.

The A&NZ Context

The 2010 KPMG survey found 50% of the respondents said they were aware of the relevant Australian and New Zealand anti-bribery legislation.
20%of respondents who stated they were not aware of this legislation, operated in jurisdictions outside of Australia and New Zealand.
Most respondents (84 percent) stated that they had not taken advice to determine whether foreign anti-bribery and corruption legislation applied, even though 20 percent of these organisations operated outside of Australia and New Zealand.
2% admitted making ‘facilitation payments’ to government officials overseas. The ‘facilitation payments’ in question may or may not be illegal under the relevant Australian or New Zealand laws, although a majority of the organisations concerned did not have policies or procedures for checking the legality of such payments.

Little in house training in anti-corruption legislation has been identified to prepare managers in international contexts

Other Initiatives

United Nations Convention Against Corruption (UNCAC)
On October 31, 2003, the United Nations General Assembly adopted the UNCAC by resolution 58/4. The convention came into force in December 2005 and its objectives were as follows:

– To promote and strengthen measures to prevent and combat corruption more efficiently and effectively

– To promote, facilitate and support international cooperation and provide technical assistance in the prevention of and fight against corruption, including asset recovery

– To promote integrity, accountability and proper management of public affairs and public property

International Anti- Bribery and Fair Competition Act - Americas
Incorporated in 1998, this act was formed to amend the Securities Exchange Act of 1934 and the Foreign Corrupt Practices Act of 1977, and thereby improve the competitiveness of American business and promote foreign commerce. Under the act, it is illegal for a US citizen or corporation to influence, bribe or seek advantages from a public official of another country.

Other Initiatives

Global Organization Against Corruption (GOPAC)

GOPAC is an international network of parliamentarians who are dedicated to promoting good governance and combating corruption. The body was formed in 2002 at a conference hosted by the Canadian House of Commons and Senate, and currently has over 400 members around the world, organized into regional and national chapters.

EU Anti-Corruption Policy

This policy reviews the EU’s progress in tackling corruption and suggests improvements to drive the efforts. The focus is to reduce all forms of corruption, at every level, in all EU countries and institutions and even outside the EU. The policy also aims to identify possible areas where the EU can take future initiatives in the fight against corruption.

(KPMG, 2011)