4 Managing Ethical and Social Responsibility Challenges in Multinational Companies

Learning Objectives Know the definitions of international business ethics and social responsibility Understand some basic principles of ethical philosophy relevant to business ethics Understand how social institutions and national culture affect ethical decision making and management

Learning Objectives Understand the implications of using ethical relativism and ethical universalism Identify the basic principles and consequences of the U.S. Foreign Corrupt Practices Act Understand how international agreements affect international business ethics

Learning Objectives Understand the differences among economic, legal, and ethical analyses of business problems Develop skills in international decision making with ethical consequences

International Business Ethics Ethics deal with the “oughts” of life Although business decision making is dominated by economics, they also have consequences for people International business ethics: unique ethical problems faced by managers operating across national boundaries International business ethics is concerned with ethical dilemmas in international contexts

International Business Ethics More complex as different cultures do not agree on what one “ought” to do Ethical dilemmas seldom have clear/unambiguous answers MNCs often have power and assets that are equal to foreign governments, raising more ethical concerns over the use of such power

Corporate Social Responsibility Idea that businesses have a responsibility to society beyond making profits Concerned with ethical consequences of company policies and procedures Must take into account the welfare of other constituents in addition to stockholders

Exhibit 4.1a: Areas of Ethical and Social Responsibility Concerns for the Multinational Company

Exhibit 4.1b: Areas of Ethical and Social Responsibility Concerns for the Multinational Company

Primary and Secondary Stakeholders Primary Stakeholders: directly linked to a company’s survival and include customers, suppliers, employees, and shareholders Secondary Stakeholders: less directly linked to the company’s survival and include the media, trade associations, and special-interest groups

Ethical Philosophy Two ways to consider ethical decision making Traditional ethical philosophy Contemporary philosophy

Basic Systems of Ethical Reasoning Teleological ethical theory Morality of an act or practice comes from its consequences Utilitarianism: what is good and moral comes from acts that produce the greatest good for the greatest number of people

Deontological Ethical Theory Actions have a good or bad morality regardless of the outcomes they produce

Moral Languages Basic ways that people use to make ethical decisions and to explain their ethical choices Six basic ethical languages: Virtue and vice Self-control Maximizing human welfare Avoiding harm Rights and duties Social contract

National Differences in Business Ethics and Social Responsibility National culture and social institutions affect ethical behavior and social responsibility

Exhibit 4.2: A Model of Institutional and Cultural Effects on Business Ethics Issues and Management

Messner and Rosenfeld Anomie Theory Argue that specific national culture and social institutions affect ethics National cultures: high achievement, high individualism, high universalism, high materialism are all related to higher deviance Social institutions: high industrialization, capitalist systems, lower family breakdown, and highly accessible educational systems should all encourage deviance

Exhibit 4.3: Cultural Variations in Acceptance of Ethically Suspect Behaviors: Some Examples

Questionable Payments and Bribery Bribes or gifts to expedite government actions or to gain advantage in business deals In many countries, people routinely offer gifts of bribes US is unique in the world in its extensive legal control over the management of ethical behavior

Questionable Payments: Implications Corruption and bribery can have devastating effects on societies Companies routinely use poorer-quality products or materials to cover for the bribe, thus resulting in inferior products with poor quality Corruption can also result in collusion among firms, resulting in even higher prices

Questionable Payments: Implications Charge higher prices to cover for price of bribes Result in higher public spending Undermines competition Inefficient allocation of resources Discourage entrepreneurship Affects economic development

Questionable Payments To understand the level of corruption in countries, multinational companies can rely on the Corruption Perception Index (CPI) CPI developed by Transparency International, gives an idea of the perceived levels of corruption within countries Bribe Payers Index developed by Transparency International, estimates extent of bribes accepted by public officials from companies

Exhibit 4.4: The CPI for Selected Countries

Exhibit 4.5: Bribe Payers Index

U.S. Foreign Corrupt Practices Act (FCPA) Forbids US companies from illegal payments or gifts to officials of foreign governments for the sake of getting or retaining business

U.S. Foreign Corrupt Practices Act (FCPA) Does not prohibit some forms of payments that may occur in international business Payments made under duress to avoid injury or violence are acceptable Small payments to encourage officials to do legitimate and routine jobs If payments are lawful in a country “Grease” payments do not seek illegal ends, but used to speed up normal business

U.S. Foreign Corrupt Practices Act (FCPA) Tricky component is the reason-to-know component Firms are liable for bribes even if bribes are made by agents of company Companies use local agents, as have “local know how” in conducting business Liable if common knowledge that agents use part of their fees to bribe officials to commit illegal acts If no knowledge, no reason to expect illegal agent behavior, then company is not held liable

Toward Transnational Ethics Ethical convergence: growing pressure to follow the same rules in managing ethical behavior and social responsibility Globalization dramatically increases contact among people from different ethical and cultural systems

Four Basic Reasons for Ethical Convergence The growth of international trade and trading blocks Interaction between trading partners increases pressures to imitate business practices Varied cultural background employees require common standards An increasing number of business watchdogs

Prescriptive Ethics Suggested guidelines for the ethical behavior of MNCs Three moral languages should guide MNCs Avoiding harm Rights and duties Social contract These three are the easiest to specify in written codes Also most appropriate in heterogeneous cultures And work irrespective of national backgrounds

International Ethics Guideline Sources The United Nations Universal Declaration of Human Rights The United Nations Code of Conduct on Transnational Corporations The European Convention on Human Rights The International Chamber of Commerce Guidelines for International Investment

International Ethics Guideline Sources The Organization for Economic Cooperation and Development Guidelines for Multinational Enterprises The Helsinki Final Act The International Labor Office Tripartite Declarations of Principles Concerning Multinational Enterprises and Social Policy

Exhibit 4.7: A Code of Conduct for the Multinational Company (sample)

Two Basic Rationales for the Code of Conduct for the Multinational Basic deontological principles dealing with human rights History of experiences in international business interactions However, despite the existence of extensive agreements, multinationals may not always follow ethical principles. Codes may not be easily enforceable Safe guides to ethical management in foreign countries

The Ethical Dilemma in Multinational Management: How Will You Decide? Ethical relativism vs. Ethical universalism Ethical relativism: each society’s view of ethics must be considered legitimate and ethical Ethical universalism: basic moral principles that transcend cultural and national boundaries Difficulty in following either ethical relativism or universalism

Convenient Relativism Companies have a higher responsibility than ethical relativism However, some companies use the logic of ethical relativism to behave any way they please Use the excuse of differences in cultures, or convenient relativism Similarly, moral universalism can lead to problems of cultural imperialism

Individual Ethical Decision Making for the Multinational Manager Forms of analyses Economic analysis: focuses on what is the best decision for a company’s profits Legal analysis: focuses on only meeting legal requirements of host and parent countries Ethical analysis: goes beyond focusing on profit goals and legal regulations

Exhibit 4.8: Decision Points of Ethical Decision Making in Multinational Management

Exhibit 4.8 (continued): Decision Points of Ethical Decision Making in Multinational Management

Individual Ethical Decision Making Purely ethical issues must be weighed against economic and legal analyses May begin analysis at different points However, multinational managers are guests in other nations Ethical decision making must go beyond legal constraints

Individual Ethical Decision Making There is no single accepted ethical theory that managers can use to resolve all ethical dilemmas Generally accepted philosophical theories can be used as guides, however Such ethical analyses can help raise managers’ awareness of ethical issues Helps clarify reasons behind ethical choices

Conclusion Chapter provides background on business ethics Multinational managers face ethical dilemmas similar to their domestic counterparts Challenges are magnified by the complexity of working across different countries and cultures National contexts influence ethics in organizations Decision models sensitizes awareness of ethics issues Despite some convergence, ethical differences exist