Global Business Management (MGT380) Lecture # 29

1. Global Business Management (MGT380) Lecture #29

2. Ethics in International Business

3. Learning Objectives • To understand the ethical issues faced by international business • To recognize an ethical dilemma • To identify the causes of unethical behavior by managers

4. Recap of the last lecture • A global mindset may be the fundamental attribute of a global manager i)cognitive complexity ii) cosmopolitan outlook • A global mindset is often acquired early in life from • a family that is bicultural ii) living in foreign countries iii) learning foreign languages as a regular part of family life • Training focuses upon preparing the manager for a specific job • Management development is concerned with developing the skills of the manager over time ---gives the manager a skill set and reinforces organizational culture • Cultural training - fosters an appreciation for the host country's culture • Language training - an exclusive reliance on English diminishes an expatriate's ability to interact with host country nationals • Practical training - helps the expatriate and her family ease themselves into day-to-day life in the host country • But, studies show only about 30% of managers sent on one- to five-year expatriate assignments received training before their departure

5. Management development programs increase the overall skill levels of managers through • ongoing management education ii)rotations of managers through jobs within the firm to give them varied experiences • Evaluating expatriates can be especially complex • typically, both host nation managers and home office managers evaluate the performance of expatriate managers • But, both types of managers are subject to unintentional bias i) home country managers tend to rely on hard data when evaluating expatriates ii) host country managers can be biased towards their own frame of reference • To reduce bias in performance appraisal • more weight should be given to an on-site manager's appraisal than to an off-site manager's appraisal ii)a former expatriate who has served in the same location should be involved in the process

6. Two key issues on compensation • How to adjust compensation to reflect differences in economic circumstances and compensation practices • How to pay expatriate managers • A compensation package has five components • Base salary- normally in the same range as the base salary for a similar position in the home country-can be paid either in the home currency • Foreign service premium - extra pay the expatriate receives for working outside his country of origin • Various allowances- hardship, housing, cost-of-living, education • Tax differentials- may have to pay income tax to both the home country and the host-country governments no reciprocal tax treaty exists • company usually covers extra tax assessments • Benefits – many firms provide the same level of medical and pension benefits abroad that employees receive at home

7. Introduction • Ethics - 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 business people • Ethical strategy is a strategy, or course of action, that does not violate these accepted principles

8. Suppose you’ve been assigned responsibility for hiring people to work in your company’s new factory in Guatemala. Wages in Guatemala are considerably lower compared to your country, and you don’t have to pay benefits either. You’re beginning to wonder if your company is taking advantage of the situation. What should you do? • You might respond that you should talk to your superiors about providing a more generous compensation package that would still be much lower than what you’d pay in your home country. But, you might be worried that this could jeopardize your new position. So, you might decide just to follow orders, even if you’re not really comfortable with them. This is an example of an ethical dilemma. People involved in business run into ethical situations daily. In international business, they are often magnified because of differences in legal systems, political systems, economic systems, culture, and so on. • Ethics refers to the 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 business people. An ethical strategy then, is a course of action that doesn’t violate these principles.

10. Ethical Issues in International Business • The most common ethical issues in business involve • employment practices • human rights • environmental regulations • corruption • the moral obligation of multinational companies

11. Employment Practices Question: When work conditions in a host nations are clearly inferior to those in a multinational’s home nation, what standards should be applied? • The standards of the home nation? • The standards of the host nation? • Something in between?

12. Employment practices are a frequent source of ethical dilemma for companies. Suppose, as we suggested earlier, work conditions in a host country are inferior to those in the home country. Which standards should you apply--the home country standards or the host country standards? Is it ok to employ minors to work a 50 hour week if it doesn’t violate local laws? Do you have to supply safety gear to employees if it’s not required by law? • Nike found itself in the midst of a huge controversy in the mid-1990s when it was reported that the working conditions at some of its sub-contractors were poor. While neither the subcontractor, nor Nike were actually breaking the law, there was strong reason to suspect that workers were being exploited. For example, in one factory in Vietnam, women were paid just 20 cents an hour, well below the living wage of $3 per day, to work with toxic materials six days a week. Nike was forced by public pressure to establish a code of conduct for all of its subcontractors, and implement a monitoring system to ensure that the code was followed. • Apple found itself in the middle of a similar type of controversy when a supplier making the iPod was accused of labor abuses. You can learn more about the situation and Apple’s response in the Management Focus in your text.

13. Human Rights Question: What is the responsibility of a foreign multinational when operating in a country where basic human rights are not respected? • Basic human rights taken for granted in the developed world such as freedom of association, freedom of speech, freedom of assembly, freedom of movement, and so on, are not universally accepted

14. Environmental Pollution Question: Should a multinational feel free to pollute in a developing nation if doing so does not violate laws? Answer: • When environmental regulations in host nations are far inferior to those in the home nation, ethical issues arise • The tragedy of the commons occurs when a resource held in common by all, but owned by no one, is overused by individuals resulting in its degradation

15. Corruption Question: Is it ethical to make payments to government officials to secure business? Answer: • In the United States, the Foreign Corrupt Practices Act outlawed the practice of paying bribes to foreign government officials in order to gain business • The Convention on Combating Bribery of Foreign Public Officials in International Business Transactions adopted by the Organization for Economic Cooperation and Development (OECD) obliges member states to make the bribery of foreign public officials a criminal offense

16. Suppose you are dealing with a corrupt government. Should you still try to act in an ethical manner? Corrupt governments have always been around, and it’s important for international companies to consider their effect on company strategies. At what point does “gift giving” become bribery for example? • Well, from a government perspective, bribery shouldn’t be allowed. In the U.S., the Foreign Corrupt Practices Act, which was passed in 1977, outlaws the paying of bribes to foreign government officials in order to gain business. The act does allow for facilitating or grease payments which are basically payments that are made to speed up standard procedures. The Organization for Cooperation and Development, or OECD, passed a similar measure in 1997, which obligates member states to make bribery of foreign public officials a criminal offense. • However, some economists believe that in some cases speed payments, or payments made to speed up approval for business investments, can be justified if they enhance public welfare by creating jobs, and so on.

17. Corruption • Some economists suggest that the practice of giving bribes might be the price that must be paid to do a greater good • In countries 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 actually enhance welfare • However, other economists have argued that corruption reduces the returns on business investment and leads to low economic growth

18. Moral Obligations Question: Do multinationals have a responsibility to give back to the societies that enable them to grow and prosper? Answer: • Social responsibility - the idea that business people should take the social consequences of economic actions into account when making business decisions, and that there should be a presumption in favor of decisions that have both good economic and good social consequences

19. So, what are the moral obligations of companies? Do companies have a responsibility to take into account the social consequences of their actions when they make business decisions? Should companies always choose the path that has both good economic and good social consequences? • You might answer yes--firms have a social responsibility simply because it’s the right way to operate. Many people believe that companies need to recognize their noblesse oblige and give something back to the societies that have made their success possible. BP supports this notion, and has made it company policy to give back to the community. So, in Algeria for example, the company built two desalination plants to provide drinking water to residents in Salah. • Other companies, however, don’t share this view. As the Management Focus in your text points out, Robert Murdoch, founder and CEO of News Corporation probably used the power of his company to gain access to the Chinese market, and acted in an unethical way in doing so. As part of the deal, News Corporation suppressed media content that was critical of China. Google has been accused of chosing a similar path in China, much to the annoyance of some of its stakeholders.

20. Ethical Dilemmas • Managers often face situations where the appropriate course of action is not clear • Ethical dilemmas - situations in which none of the available alternatives seems ethically acceptable • they exist because real world decisions are complex, difficult to frame, and involve various consequences that are difficult to quantify

21. The Roots of Unethical Behavior Question: Why do managers behave in an unethical manner? Answer: • Managerial behavior is influenced by • Personal ethics • Decision making processes • Organizational culture • Unrealistic performance expectations • Leadership

22. The Roots of Unethical Behavior Figure 4.1: Determinants of Ethical Behavior

23. Personal Ethics • Business ethics reflect personal ethics (the generally accepted principles of right and wrong governing the conduct of individuals) • Expatriates may face pressure to violate their personal ethics because • they are away from their ordinary social context and supporting culture • they are psychologically and geographically distant from the parent company

24. An individual’s personal ethics will influence the decisions she makes on the job. Personal ethics are derived from parents, from schools, from religion, from the media, and so on. So, when a person has strong personal ethics, she is likely to have strong business ethics. • What happens though, when you take a manager out of his environment? Expatriate managers, or managers who are working abroad, often face pressure to violate their personal ethics. Imagine that you’re surrounded with people who hold to a different set of values. You may be encouraged to adopt a behavior that you otherwise wouldn’t. For example, if bribery is common, you might feel that in order to meet performance goals, it’s acceptable for you to use bribery as well, even though you’d never consider bribery at home.

25. Decision Making Processes • Studies show that business people may behave unethically because they fail to ask the relevant question—is this decision or action ethical? • decisions are made based on economic logic, without consideration for ethics

26. Sometimes, you get so caught up in what you’re doing that you forget to ask whether a decision or action is unethical. So, when Nike made the decision to purchase from certain suppliers, it probably only looked at the bottom line. That made sense, and so the decision to move forward was made. Only after the consequences of the decision were revealed did the company stop to explore the ethics of the situation. • The big pharmaceutical company, Pfizer failed to ask relevant questions when it made the decision to run experimental drug trials on children in Nigeria. The company was trying to get a new drug to market, but first needed a large sample of sick children to test it on. When an epidemic hit Nigeria, Pfizer saw its chance. Only later did it question whether it was right to test an experimental drug on children whose parents probably didn’t realize what was going on, or who didn’t have alternative treatment options.

27. Organizational Culture • Unethical behavior may exist in firms with an organization culture- the values and norms that are shared among employees of an organization - that does not emphasize business ethics • Values and norms shape the culture of a firm, and that culture influences decision making

28. Unrealistic Performance Expectations • Pressure from the parent company to meet performance goals that are unrealistic, and can only be attained by cutting corners or acting in an unethical manner can cause unethical behavior • Sometimes, companies unwittingly promote unethical behavior by setting unrealistic performance expectations. Companies that do this may push employees to cut corners or act in other unethical ways. Think again, about the decisions made at Pfizer because of the push to get the new drug to market for example, or the recent accusations of improper practices at BP.

29. Leadership • If a firms leaders fail to act in an ethical manner, other employees may not act ethically • actions speak louder than words • Finally, regardless of any policies a company might maintain, actions speak louder than words. A company’s leaders must set an example by demonstrating strong ethics. You already know that Kenneth lay, former CEO of Enron, did just the opposite, and in fact promoted unethical behavior within his organization.

30. Philosophical Approaches to Ethics • There are several approaches to business ethics including • Straw men • the Friedman doctrine • cultural relativism • the righteous moralist • the naïve immoralist • Utilitarian and Kantian • Rights theories • Justice Theories

32. Summary of the lecture • Ethics - 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 business people • Ethical strategy is a strategy, or course of action, that does not violate these accepted principles • The most common ethical issues in business involve i) employment practices ii) human rights iii) environmental regulations iv) corruption v) the moral obligation of multinational companies • Basic human rights taken for granted in the developed world such as freedom of association, freedom of speech, freedom of assembly, freedom of movement, and so on, are not universally accepted

33. Corruption: In the United States, the Foreign Corrupt Practices Act outlawed the practice of paying bribes to foreign government officials in order to gain business • The Convention on Combating Bribery of Foreign Public Officials in International Business Transactions adopted by the Organization for Economic Cooperation and Development (OECD) obliges member states to make the bribery of foreign public officials a criminal offense • Managers often face situations where the appropriate course of action is not clear • Ethical dilemmas - situations in which none of the available alternatives seems ethically acceptable • they exist because real world decisions are complex, difficult to frame, and involve various consequences that are difficult to quantify • Business ethics reflect personal ethics (the generally accepted principles of right and wrong governing the conduct of individuals) • Expatriates may face pressure to violate their personal ethics because • Organizational Culture