CHAPTER 2

Ethics and the Strategic Determination

Ethics in the 21st Century

The global process was first begun as domestic companies following the traditional product life-cycle theory pioneered new markets for sales expansion after reaching plateaus in their originating market. Via limited historic entrance vehicles, first export and later the licensing route allowing for the transfer of distinctive core competencies, firms first expanded their revenue-growth imperative overseas. The companion use of importing cheaper raw materials and components for local home-market production was initially utilized as firms tended to keep their prime activities and secondary operations concentrated in their headquarters or country. A restrictive international strategy was practiced. However, in this era of globalization international companies are driven to make fuller use of the extreme global value chain in order to remain competitive, both at home and abroad. They are therefore highly motivated to establish their primary and supportive activities in numerous geographical locations in order to create and sustain value creation. Too often, globalization, whether in ancient times or in the modern era, is characterized as a race to the bottom by companies, a contest to see who can source or make what is cheapest by cutting corners with little or no regard for the ethical consequences.

Today’s globalization race is not a commercial fad nor an economic trend but a permanent alteration in the global business landscape. The process of modern globalization, having its roots in ancient trade, is a change in substance but not in form. It is an alteration in the extended geographical radius upon which the procedure is practiced, with the effect that more markets and therefore more people around the world are drawn into the circle. John H. Dunning, in the role of editor of a collection of essays titled Making Globalization Good, describes the current process from a variety of viewpoints. An anthropologist sees it as “the connecting of individuals and institutions across the globe,” while economists would define it as the creation of a global market “referring more specifically to the flow of goods, services and assets across national boundaries.”¹ The critics of globalization, commenting on its potentially negative consequences, view the phenomenon in a narrower sense as the spread of capitalism, which they would describe as “a better instrument for the creation of wealth than it is for the equitable distribution of its benefits.”² Perhaps globalization is simply a new world system as Thomas Friedman postulates in The Lexus and the Olive Tree.³ It may have no moral significance as it is a mechanism, a progressive natural occurrence embraced by mankind as a tool toward a material end.

However, with the expanded use of foreign-subsidiary production facilities, offshore joint-party manufacturing ventures, and alternative sourcing from third-party contractors in foreign countries that offer the most cost-efficient labor pools, new strategic directions are under way that are forcing firms to engage in a world of diversified people and their ethical differences. Today, such overseas expansion has begun to encompass a wider array of firm activities, including outsourcing of back-office functional services and even the primary development of value creation, research and development (R&D) via global alliances, and establishment of satellite laboratories in global centers of excellence. Such practices bring companies into contact with an increasing multitude of different values and beliefs, which generate varying moral practices.

In the development of such ambitious international-supply programs and other global service renderings, the added baggage of ethics and social responsibility has begun to grow and seems to be a natural accompaniment to overseas expansion. As a new criterion for country and partnership evaluation, ethical conduct may no longer be an auxiliary consideration but an integral part of a firm’s strategic planning process. Whether such corporate strategy is an international one, a multinational series of country-specific entrances, or a global or fully integrated transnational involvement, firms must begin to internally dialogue and decide whether or not they should incorporate a workable code of conduct collateral to such strategic preparation. If an affirmative decision is made, they need to test their strategic decisions against a set of agreed principles—be they signatories to existing compacts or ones of their own construction.

All the tactical tools to engage a worldwide corporate strategy and facilitate its successful operational effect will bring the organization into direct periodic contact with third-party foreign individuals. Whether partnering via joint ventures, alliances, and licensing; using independent distributors, agents, and franchises; engaging new employees in a greenfield or brownfield direct foreign investment; or developing relationships with arm’s-length contractors for offshore manufacturing or service outsourcing, the prudent application of the firm’s ethical determination and resulting conduct will be tested.

The alien entities that international firms encounter will possess their own separate, inherent, corporate ethical culture that reflects the specific moral compass of their individual societies. Potential conflicts could appear when questions of ethical choice emerge. The decisions that firms make in advance of such possible contested issues may also be challenged by other stakeholders in the firm such as consumers, public-interest groups, stockholders, and other institutions. The perceptions and opinions of these parties could also affect the business operations and financial outcomes of companies. It follows, therefore, that the ethical choices of firms may include a wide array of interested onlookers. Hence, the context in which these ethical decisions are made may go beyond the immediate parties affected, with the added judgment of a wider constituency. As the activities of firms globalize at an increasing rate, their managers will have to integrate themselves into varying societies. As social behavior and attitudes, the framers of moral conduct, are embedded in a particular milieu of a nation, it is a given that differences in ethical decision making will arise. Working with people whose unique and distinctive cultural values and beliefs, the underpinnings of moral applications, vary around the world requires firms to recognize such differences. Failure to consider such wide variations could result in costly misunderstandings and business problems that not only extend to internal operations but also can deeply affect corporate external profiles via perceptions of impropriety by customers and other stakeholders. Ignoring or mishandling diversified approaches to ethical and social responsibility issues for a global corporation is emerging as a key consideration in the strategic planning process. Mismanaging ethical matters might render otherwise successful enterprises and their activities ineffective and troubled.

There is a dangerous supposition taking place in the world. It is wrong to assume that, with the advent of modern globalization and its related progress toward more uniform commercialization standards with increased shared, homogeneous consumer needs and demands, the formation of a global society with shared ethics is beginning to take hold. The world is still more tribal than universal, with individual national state systems imposing varying political and economic differences as well as continued splinters of cultural and religious values. Societies remain diverse; hence, the dispersed reasoning of ethical issues will remain a problem for MNCs as they segregate their value-creating activities around the globe while trying to integrate such competitive advantages on a global scale.

Moral behavior is still fragmented, and balancing right and wrong is a difficult process. In the modern era of commercial globalization, operating across and between such boundaries of differences therefore involves navigating a complex set of ethical dilemmas. When effectively approached with careful consideration and made part of the criteria in the development of corporate strategy, ethics can serve as a value-creating ingredient and, alternately, a deflection of value reduction. Although the development of corporate codes of conduct, which provide guidelines for dealing with ethical and social responsibility issues, is clearly an area of increasing vigilance for global firms, it is a most difficult subject to present. Morals, because they are so deeply tied to personal interpretation and individualized emotional application, are hard to discuss and present objectively. Ethical conduct deals with decisions and interactions on an individual level, whereas social responsibility presents issues that are broader in scope, tend to affect more people, and normally reflect a pooling of decision makers resulting in a general stance taken by a company. Corporate social responsibility (CSR) goes beyond legal obligations and compliance regulations. It is associated with a firm’s commitments to investors, customers, suppliers (and their networks), and the community at large and their general welfare—a collection of stakeholders. It is more externally and socially directed, as opposed to ethics, which is internal and personal to the practitioner. There is a considerable overlap and integration between the two decency motivators of judgmental actions even though their differences may be of scope and degree.

The idea that the current global-economic system, in its modernized enlarged form, must begin to adjust to social needs with additional moral responsibility is a theme emerging in the academic field. In new editions of textbooks on international business and management,⁴ the authors are presenting whole chapters on the subject as opposed to including such issues under cultural differences and political or legal environments, while also offering instructional cases to supplement conceptual development. Renowned international scholar John H. Dunning, whose work has previously been mentioned, concludes that the challenges in the coming global society require an adjusted institutional-structural design to support a new moral science. He notes such changes need to be brought about not only by multinational firms but also by the combined work of nongovernmental organizations (NGOs), national governments, and supranational agencies. But as Jonathan Doh observes in his review of Dunning’s book, the essays offer a “persuasive argument for what is wrong, some general principles that could guide an improved form of GC [global capital], but little in the way of specific guidelines as to who must do what to achieve this transformation.”⁵

For ethics to be successfully applied by firms at the initial planning process and to make them later applicable in the field where they are truly tested, they must be presented with clear, consistent, coherent, and complete language—a most difficult task given the various, diffuse areas of input used to construct them.

Because ethical determinants are influenced by religious indoctrination and subject to the pressures of one’s peers, the subject also becomes one of strong cultural sensitivity and subjective group rationalization. Nevertheless, it is a subject worthy of inspection, as the decisions and actions or nondecisions and nonactions that flow from its considered application affect the performance of global entities. And it all starts with the strategic planning process.

Integrating Ethics in the Strategic Planning Process

Strategy determines firm performance and as such it profoundly affects the success or failure of a commercial enterprise. The simple object of strategy is value creation that allows firms to achieve sustainable competitive advantage. Most of the literature on strategy offer models of evaluation, or SWOT (strengths, weaknesses, opportunities, and troubles) analyses, that focus on how companies can (a) leverage firm core strengths, making effective use of firm resources and competencies; (b) brace or shore up weaknesses; (c) take advantage of opportunities; and (d) avoid troubles. Such analysis is traditionally conducted within the context of specific industries or business segments. International strategy adds the dimension of conducting firm activities in multiple geographic centers or national markets that offer diversified value-added benefits. While the use of a global strategy has certainly been magnified in the 20th century due to rapid advances in technology, it could be argued that cross-border trade was the imperative for an international strategy. Such an idea has been part of the commercial process since ancient trade routes were first used to obtain rare and exotic products from foreign lands. Today, the economic value of an international strategy to gain access to the riches of new territories has become a sophisticated search for value creation beyond merely unique and exceptional merchandise. In the current era of globalization, firms look for suppliers of low-cost raw materials and components, cheap and efficient labor, and pockets of specialized technology, as well as learning-curve opportunities. One of the key original motives for exploring foreign sites was to take advantage of low-cost indigenous labor pools in underdeveloped countries in order to gain a competitive advantage over domestic rivals. This international strategic initiative has been expanded to include offshore sourcing for traditional, routine back-office support functions. More recently there has been a trend to place R&D activities in global centers of excellence where developmental costs are lower. Collateral to the movement abroad of the R&D function is that firms want new, innovative techniques and product designs to be placed closer to the production sites so that the time frame to incorporate revolutionary ideas into the final manufacturing process and then through the channels of distribution is shortened.

In many new textbooks and revisions of old ones devoted to the study of strategy, the opportunities of operating in a global arena have begun to emerge. While most traditional works on the subject are devoting separate chapters to globalization and its effect on the external context that strategy is developed within, the ethical imperative as an implication for managers to appreciate in the process seems to be lacking. Much of the literature on international business has just begun to paint an outline of how firms should respond to globalization and the strategic gains to be had from such consideration. The prime advantages of market and production factors are emphasized. Increasing market size, as firms expand beyond the home country into the greater consuming world, is a key driver for firms to globalize. Utilizing location advantages by moving into low-cost manufacturing sites due to an abundance of cheap labor pools in emerging nations is the other side of the globalization coin. When taken together they form the perfect motive for firms to internationalize their strategies. If the additional advantages of receiving a greater and faster return on capital investment while improving economies of scale and moving up the learning curve are added to the motivational equation, the incentive to develop a global strategy is only magnified.

Once companies identify the aforementioned basic impetus to go global, they are traditionally presented with a series of corporate business-level strategies to choose from—international, global, multidomestic (also called multinational), or transnational. A key consideration in choosing from such alternative strategies is the extent to which the industry requires a greater degree of local responsiveness versus a need for low cost and global integration of operations. This normal process of strategic determination is followed by the selection of modes of entry or tactical tools used to cross into national territories as previously noted—exporting, licensing, strategic alliances including joint ventures and franchising, turnkey and management contracts, acquisitions, or greenfield subsidiary creation. The advantages and disadvantages of such market-entrance methods follow the initial corporate design stage in the strategic decision-making paradigm. Management problems and risks are usually presented next, focusing on political and economic matters that could have a negative effect on the firm’s efforts to globalize its activities. Collateral to such analysis are differences in institutional, governmental, and cultural conditions around the world. Further evaluation tends to focus on the effects of a firm’s marketing mix on the corporate strategy and the entry mode(s) selected. The unintended consequences of the moral global deployment of a firm’s assets and the company’s organizational ethical positioning in an expanded world are seldom included in the evaluation process. This may be because traditionally firms operated in a single domestic environment and tended to share the same moral mind-set and resultant ethical indoctrination. Hence, historic strategic models and procedures never required such additional considerations be applied to them. When firms began to expand beyond their borders and looked around for new strategic models to base their decision upon, the constructors of new planning and evaluation methodology for global operations just followed suit and never introduced an ethics factor. They may have simply viewed the expanded geographical territory as additional space to leverage the resources and capabilities of companies applying basic tools of strategic decision making across a wider market of nations. While barriers and differences were noted that could affect operational decisions, impede performance improvement, and perhaps limit opportunities for value creation, the ethical component was overlooked.

Whichever market tactical-entry method is chosen or whatever value-producing activity is transferred overseas, companies need to recognize that it will be carried out with the use of foreign citizens and in the framework of alien environments. Such simple realization means that different ethical conditions will be encountered. However, the internationally integrated strategic decisions firms must consider when operating across and within national boundaries rarely include a reference to the varied value and belief systems that form the resultant ethical issues global firms will face.

Take the simple example of Nike. Their founding strategy involved creating a more competitive market positioning in the United States by using “low-cost, high-quality athletics-shoe production in Japan. As costs increased in Japan they moved to other low-cost producers in Korea, Taiwan, Indonesia, and Thailand… to maintain… competitive advantage.”⁶ From the outset the Nike strategy embraced the global location advantage factor. This key cost driver provided the tactical imperative for continuing country-entry decision making with respect to their manufacturing operations.

At the heart of Nike’s location advantage strategic imperative was the use of indigenous low-cost labor in emerging nations along with lax governmental regulations on employment practices and the desire of such governments to provide employment for their unskilled citizens. Yet such a visionary strategic imperative never included an ethical factor concerning the treatment of potential workers. Low cost was the critical feature, with such key intent trumping all other collateral issues that impacted the decision.

If Nike had incorporated in their original strategic decision-making process an ethical ingredient, many of their posttactical moves might have avoided the numerous problems that later haunted their envied successful growth and tainted the firm’s position as the world’s number-one athletic apparel maker. Their poster-boy image as the very embodiment of the term sweatshop might have been avoided, as would all their costly and very public efforts to defend such operational activities with third-party contractors accused of violating basic labor rights and taking undue advantage of their workers. The conventional mechanisms used to construct corporate strategy need to introduce an ethical factor in such analysis, especially for firms contemplating any type of offshore or cross-border activities to create value. The basic SWOT initiative, to measure a company’s relative positioning, as a prerequisite for strategic determination might include an ethical component in its inventory of measured elements.

Corporate Strengths

An initial evaluation of a company to gauge its inherent properties and hence the platform upon which its strategic plan can be generated is the SWOT analysis. It begins with an examination of the firm’s core competencies—its strengths. It is a given that a good name supports and amplifies the strengths of a company. Being perceived by all stakeholders as a moral institution is a strength often not viewed as a core competency, but it is.

Sometimes overlooked in the analysis is that a company’s key strength may stem from a strong connection to social issues and human rights objectives. Take, for example, the Body Shop, an English retail-franchise chain specializing in skin-care products and toiletries. It promotes itself as a champion of nature, using natural ingredients in its products and thereby acting as a preserver and caretaker for the global environment. They see the world as their garden and stress their adherence to community trade, supporting the producer’s whole community and not just the growers themselves, to affect real social change. These are the key strengths, or proprietary competences, upon which the company was strategically built. Collateral to this moral imperative is their announced strategic desire to “passionately campaign for human and civil rights.”⁷ Such image positioning gave the enterprise a value-added perception among consumers from its inception. The company’s statement of values in an undated corporate literature release states,

An image and reputation of a doer of good deeds, a wise and charitable patriarch like the Wizard of Oz, may result in a meritorious reward bestowed on companies that practice and announce their moral initiative. While such desire may have at its core a real moral conviction, the commercial result was to place the company in a most enviable position vis-à-vis its beauty-industry competitors. A case can be made that a “social-accountability audit” is not just morally correct but in the end can add economic strength and magnify core competencies.⁹

Amanda Tucker, director of business compliance at Nike, has stated, “If you work with factories to make them better places of employment, quality improves, productivity goes up, there’s less waste and you retain workers longer.”¹⁰ These are strengths every commercial entity would like to have in its arsenal of competitive advantages. Global firms have begun to covet the banner of caring and protection in a remake of their public persona. British Petroleum (BP), in a desire to strengthen its image as environmentally friendly, changed the company logo, a valued asset, to a softer emblem with the all-important shade of green incorporated into the symbol.¹¹

Walmart openly portrays its support for social programs in local communities with television commercials evidencing the activities of their employees on behalf of charities and welfare programs to enhance the company’s appearance as a socially conscious neighbor. Positioning a company as a contributing caretaker of the earth and the general society is an intangible firm asset and a positive creator of an image that only enhances the company’s reputation as the type of organization both consumers of products and users of services want to associate with.

Corporate Weaknesses

If one accepts that the portrayal of a company as a moral do-gooder is a positive driver, it logically follows that any opposite indictments of poor conduct may result in a drag effect on a firm, a weakness holding it back from a smooth, uncontested path. Negative publicity attacking an organization’s ethical conduct can become a permanent stigma. A firm is weakened by any continuing perception by consumers of moral wrongdoing. Take the alleged violations of labor conditions and the long-lasting saga of Nike. In 1990, a photo published in Life magazine of a 12-year-old Pakistani boy stitching a logo-embossed soccer ball, captioned by a statement revealing that such effort took a whole day with the child being paid $0.60, has always plagued the company. This pictorial portrayal and the accompanying caption resulted in public condemnation that still haunts Nike today. It has become a proverbial thorn in their side, a stigma placed on their brand name and hence a weakness directly traceable to their questionable ethical actions.

Twelve years later, Nike’s spokesman at a seminar on corporate responsibility at the American Graduate School of International Management was still pressed to outline the company’s plans to monitor working conditions throughout their 900 overseas factories. Even though they utilize 86 compliance officers as opposed to just three staffers in 1996, their ongoing actions are still subject to constant review and comment. The shame of past deeds remains with the accused and dogs their existence forever.

Nike still is viewed as a poster child for unethical treatment, and the label continues to plague the company as noted by a civil action brought against them quickly reaching the U.S. Supreme Court. Many legal scholars felt that a decision on the matter would have far-reaching implications not only in California but also across the country and around the world. A plaintiff suing Nike alleged that the company made false and misleading statements pertaining to its ethical activities, in essence denying participation in foreign sweatshops. Via news releases, full-page ads in major newspapers, and letters to editors, Nike commented on its own moral conduct. Under California state law an action was brought, citing violation of the law prohibiting unlawful business practices. Nike countered by claiming their statements fall under the protection of the First Amendment—free speech. The state court concluded that a firm’s public statements about its operations have the effect of persuading consumers to buy their products and as such equate to advertising. By sustaining and promoting a company’s reputation, the consuming public is motivated; hence, such commentary is part of the sales-solicitation process. The majority court opinion summarized its finding by stating that

Statements by a business enterprise to promote or even defend its own sales and profits are factual representations about its own products and its own operations; therefore, the business has a duty to speak truthfully about such issues. Such case precedent could present a minefield of potential danger for commentary by global firms as to their ethical behavior. It would effectively elevate statements on human rights treatment to a corporate marketing theme, not affording company spokespeople the shield of public debate via free speech. If the appeal was upheld by the U.S. Supreme Court, commercial entities will be hard pressed to defend any allegations of human rights abuses and would have to be more proactive, assuring that their worldwide activities from the start are well defended by construction of specifically defined and properly implemented codes of conduct. (While it should be noted that this case was settled by the parties before final determination by the court, the arguments presented at the state level should be well noted by global companies in drafting their responses to allegations of ethical misconduct.)

Allegations of inappropriate activities by global companies are always popping up. Some arise via a highly publicized legal route while others are dramatically portrayed by television investigative news programs. Still other incidents find their way to websites devoted to such reports, as the self-appointed watchdogs of corporate improprieties are always on the prowl for questionable behavior. While such possibilities could fall into the threats category of the SWOT analysis, they have at their heart a weakness for firms that fail to shore up their outstanding ethically deficient areas. Partnering with the wrong party, operating in a country with a repressive government, and even not having a qualifying corporate process for the public venting of pronouncements are all inherent weaknesses. In essence, firms, by not paying careful attention to their ethical stance, can make themselves vulnerable to such potential assaults.

Corporate Opportunities

The analysis of a firm’s opportunities may include strengthening its human rights reputation with consumers, especially in industries that watchdog groups have targeted for inspection, such as clothing manufacturers in regard to maintenance of sweatshop conditions. Companies that are involved with oil and mineral extraction or the potential chemical polluting of the environment might be wise to consider public dissemination indicating that they are taking a lead from the bad publicity fallout of the Exxon Valdez incident. In 1989, an ExxonMobil oil tanker making its way to California ran aground and began spilling oil, with significant quantities of its cargo of 1.26 million barrels entering the environment. Following the incident and the inability to contain the widespread devastation, the company took a defensive position. Its chairman, Lawrence Rawl, was very suspicious of the media and reacted accordingly by shunning interviews and responding he had no time for that kind of thing. The company simply provided no evidence that they cared about what happened, appearing quite indifferent to the environmental destruction. The immediate consequence of their response—beyond the financial cleanup repercussions and fines of over $5 billion—was a loss of market share, slipping from the largest to the third-largest oil company in the world. Even more important was the damage to their reputation that, although hard to quantify, resulted in the symbolic entrance into the language of the name Exxon Valdez as a synonym for corporate arrogance and massive environmental damage. Even when Rawl decided to do a television interview and was asked about the plans of his company to explain their cleanup activities and other strategic planning moves to prevent further catastrophes, he responded that such areas of responsibility were not in the purview of the chairman. The company lost an opportunity to be socially reactive and morally proactive in responding to the crisis and perhaps take an industry leadership position that might have resulted in a strategic competitive advantage in the mind of consumers. The event was a wake-up signal for the general public as it provided the first major skirmish in the battle between environmentalists and MNCs that still exists today. The United Nations (UN) Global Compact, international labor accords, or the slew of other recognized charters on such issues, including environmental matters as well as industry-specific proclamations, are proactive opportunistic imperatives for firms to consider. Being perceived as a caretaker of the community is a value-added benefit to companies that raise their positive perceptions across a wide group of stakeholders. It can be a definitive opportunity that all global firms might wish to pursue.

Corporate Threats

The threat of an allegation of ethical impropriety or poor moral judgment is a reality for many global companies in today’s politically correct society. The National Labor Committee (NLC), a public watchdog and advocacy organization, is continuously on patrol for misconduct in regard to worker rights. One of their unique methods is to focus on celebrities who license their well-known names to further the marketing recognition of various consumer goods as such a technique results in faster public awareness. In 1996, the NLC publicized the sweatshop conditions of contracted Honduran women working on the clothing line of television personality Kathie Lee Gifford. The negative publicity generated by the extensive news coverage damaged the sales of the designer collection. It also severely injured Ms. Gifford’s public persona and overshadowed her repeated statements that she personally had nothing to do with the offensive actions taken by the unknown suppliers of her licensed partners.

In December 2004, the NLC resurfaced with yet another attack on celebrities, targeting the Olsen sisters, Mary-Kate and Ashley. The activist group claimed they failed to qualify their position for supporting paid maternity leaves for Bangladeshi working women manufacturing their trademarked line for the Walmart retail chain. Failing to respond to NLC’s request that the twins said they never received, they were issued a statement noting their vendors comply with rigorous safety and health standards. This pronouncement did not allay organized protests adjacent to the university the sisters attended in New York. While this incident was reported in a few publications that deal with the lives of Hollywood personalities, it does not seem to have adversely affected the large consumer adolescent following that purchases the products these two celebrities endorse. The ability, however, of activist groups to force commentary on ethical practices, even without allegations of deliberate worker injury, is a specter hanging over all commercial endeavors. It potentially cannot only affect individuals and their manufacturing operations but also reach up and into the channels of trade that support such endeavors, tarnishing any association with a company.

The potential threat at any time from any avenue of concern of an accusation of human rights infringement or environmental damage is the ethical sword of Damocles that menacingly hangs over the head of all commercial entities. It is, however, a more pronounced concern for global corporations as their worldwide exposure brings them into contact with such possibilities on a daily operational basis. The threat can strike over any issue, be it of a concrete nature or a mere desire to reaffirm a human rights position.

Porter’s Five Forces Infused with Ethical Considerations

Strategic analytical programs like Porter’s Five Forces may also require an update to include an ethical element.

To evaluate the state of competition in an industry and the ultimate profit potential in terms of return on invested capital, managers use the collective strength of five forces as a diagnostic tool. The five forces are the bargaining power of (a) suppliers and (b) buyers; the threat of (c) potential entrants and (d) substitute products; and the (e) rivalry among existing firms.¹³

Supplier strength in an industry may be affected by adherence to human rights matters. A consolidation or narrowing may take place with those being anointed with a factory-inspection verification shrinking the pool of potential suppliers in an industry adding to their bargaining strength in the industry. The additional criteria used to evaluate the competencies of suppliers may be some type of certification process proving that they comply with a set of universally established standards in respect to their treatment of the labor force. Those not able or willing to pass such a test may fall out of the supplier pool for selected industries.

Final consumers may become more conscious of the social responsibility and moral obligations of available intermediary trade merchants that deal in products or services the industry offers. Such attitude may lessen the number perceived as sensitive to proper ethical practices, thereby increasing buyer power in the industry. Pressure may be exerted by general consumers on their retailers to become purveyors of merchandise that carries a label noting their manufacturer observes good ethical practices. Stores that have such a policy may be more limited than ones that do not, creating a consolidation in retail channels of trade. A more limited segmentation of retailers for the industry to sell to may emerge.

New entrants to a particular industry may find that additional capital is needed to offset costs associated with making sure their startup factories comply with more stringent and up-to-date social initiatives. Industry newcomers may find that existing members have been able to gain a competitive advantage and strong current positioning via economies of scale due to previous weak enforcement of human rights violations. Those firms wishing to enter the industry may face closer examination of their ethical principles than those currently operating in them. In the end, such concerns may limit the threat of new entrants and consolidate power in existing industry participants.

The search for substitutes might intensify, as it is fueled by the consuming public’s need to move away from morally tainted industries and the products they produce. Those that are perceived as potentially harmful to the environment, such as logging industries in the rainforests or woodlands, strip mining operations that devastate the surrounding land, or chemical plants that pollute the atmosphere, may find their products susceptible to consumers switching to more environmentally friendly substitutes.

Rivalries in selected industries may also become more intense as firms position themselves with a stronger, pronounced ethical code of conduct, each trying to prove to the public their attention to such matters. Competition may differentiate itself not by product attributes or low cost but by the added value of being ethical, proactive, or at least sensitive to such issues.

Country Scanning with an Ethical Infusion

Global environmental scanning following the adoption of a corporate strategic plan could require omission of countries whose human rights records are questioned. Nations that are signatories to Organisation for Economic Co-operation and Development (OECD) guidelines have signified their intention to abide by principles to govern multinational operations in their territory. Adherence to such principles of acceptable conduct may create a more moral environment for global corporations to house themselves within.

The energy-extraction industry, which must often partner with national governments in the exploration of resources, has come under investigation for joint venturing with repressive and corrupt administrations. An often-cited example is the regime of Equatorial Guinea, wherein the ruling family has supposedly enriched themselves at the expense of the human rights of their citizens vis-à-vis deals with ExxonMobil and other global oil firms. Reports from this country indicate that the government has granted these companies what amounts to eminent-domain rights over valued oil resource lands. Such governmental fiat has allowed these firms to displace local tribes without compensation and even treat the labor extracted from these areas as virtual slaves. Equally disturbing, and the subject of in-depth examination due to a very publicized court case, were the allegations leveled against Unocal. It involved the firm’s compliance in the mistreatment of workers and their forced labor in the construction of an oil pipeline as an investment partner with the Myanmar government. In 1996, a U.S. civil court action was brought under the Alien Tort Claims Act (ATCA) of 1789 by local citizens, with the prime allegation against Unocal citing they not only were aware of such human rights violations by the government but also directly benefited from them. The suit alleged that Unocal turned a blind eye to atrocities (rape, murder, forced labor, and wholesale destruction of villages) committed by military forces protecting the construction of the company’s $1.2 billion gas pipeline across the country.

Possibly prompted by the continuing lawsuit and the resultant publicity, the company announced in 2003 the adoption of new corporate principles covering fundamental rights of workers, including freedom from discrimination in employment, elimination of child labor, freedom of association, and collective bargaining by employees. The move to such reforms was welcomed by Amalgamated Bank, a key investor in Unocal and prime sponsor of the investor lead resolution. Amalgamated itself, even in its passive role of investor, had come under public criticism for the questionable activities of a company they merely invested in. Unocal continued to deny any allegations of complicity in the longstanding legal action, citing that the alleged atrocities, if true, were in fact carried out by their quasi-governmental partner and not Unocal. They, nonetheless, reached an agreement in principle to settle the matter in December 1993. Concluded a year later, Unocal agreed to pay compensation to the villagers affected while also funding general education and living condition improvements. It should be further noted that although the U.S. government banned corporate involvement by American firms in Myanmar in 1997, Unocal continues to operate in the country via a waiver provision that excluded contracts predating the enactment of the prohibition. Unocal has weathered strong public criticism for continuing involvement with this country’s repressive regime that their initial strategy in the early 90s never anticipated or planned for.

It is noteworthy to appreciate that the obscure 1789 ATCA grants federal jurisdiction over suits alleging commission of a tort on an alien. A tort is a wrongful act that results in injury to another person, their property, or their reputation and for which the injured party is entitled to compensation. The act does not speak of human rights violations but actions brought under its jurisdictional provision have been painted with such emotionally charged rhetoric. The act was originally enacted to afford legal protection for American ship owners against marauding pirates. It has surfaced, however, as a modern-day instrument to increase corporate accountability for international operations, especially with respect to foreign-citizen grievances when global firms partner or act with foreign national governments in a commercial endeavor. The actual act is produced here.

The Torture Victim Protection Act of 1991 (H.R. 2092/Public Law No. 102-256) expanded the historic ATCA by defining the elements of the actual damage caused by the alleged actions of responsible parties. The actionable offenses are “civil action[s] for recovery of damages [result] from an individual who engages in torture or extrajudicial killing.” The definition of an individual is one “who, under actual or apparent authority, or color of law, of any nation” subjects another to such aforementioned treatment. It qualified the relative standings of the parties involved and the tort committed.

The risk of being attacked for even historic unethical indulgences seems like a constant threat lurking in the shadows for multinational companies. The New York Times reported on November 27, 2003, that the Ford Motor Company was named in a criminal complaint accusing the automaker of aiding in the suppression and torture of workers during Argentina’s Dirty War from 1976 to 1983. Their subsidiary is said to have allowed the government to set up a detention center on factory grounds and allowed nearly two dozen workers to be rounded up and kidnapped off their premises. Ford was further charged with supporting the military by producing trucks and vehicles to round up dissidents and carry them off to prison and presumed murder. General Motors and Daimler came under a similar allegation for their relationship with the historic apartheid South African government and their supply of vehicles to the repressive regime in the 1970s. It seems that ethical conduct does not have a public statute of limitations.

Mobil Oil found itself the target of a similar allegation to the one posed to Ford Motor Company. Investigative reports have questioned the company’s knowledge, and perhaps tacit complicity, in regards to actions of the Indonesian army and other government-sponsored human rights abuses that allegedly took place in proximity to their joint ventured (35 percent ownership) operations with the state-owned monopoly Pertamina. Reports indicated that a processing plant was used as a torture site and company machinery was used to dig graves for Muslim separatist guerillas executed by the military.

A case in Switzerland was recently allowed to proceed wherein the litigants claimed that IBM helped the Nazis 68 years ago to commit genocide by providing them with punch card machines that enabled the methodical tracking and killing of Gypsies. A similar allegation against IBM has also surfaced in South Africa regarding the company’s information-processing systems being used to enforce historic governmental apartheid policies. Caterpillar, a supplier of specialty armored bulldozers to Israel, has been sued by relatives of an American activist killed during military operations directed at the demolishing of Palestinian homes using such machines. The legal action alleges that the firm knew the purpose of the specially constructed equipment and its potential danger to individuals in the proximity of their use. A separate suit was brought in Israel against the state and military segments for the actual incident, which they defend as an accident. The company received criticism over the sale, with UN human rights official Jean Ziegler expressing “deep concern” in a letter sent to Caterpillar chief executive officer (CEO) Jim Owens. Activist groups have claimed the action was in direct contravention of the firm’s corporate responsibility policy. Given the company’s wide global revenue stream and the growing percentage coming from many developing nations, such adverse publicity directed at their ethical conduct may have prompted Caterpillar to state on its website that it “shares the world’s concern over the Middle East and certainly have compassion for those affected by political strife.” Further comments by the company, and a defense used by other firms alleged to have indirectly assisted questionable governmental actions, is that they have neither the legal rights nor the means to police individual use of their equipment once sold. They argue that such alleged legal responsibility would be equivalent to indicting a car manufacture as a criminal accomplice or placing civil liability on them for a purchaser’s use in a robbery getaway or vehicular death, standards that have not yet been applied in case precedents to date. The court of public opinion, however, may still view such actions as repugnant and immoral.

While civil suits of this nature may be troublesome, the initial strategic decision to place the firm in the middle of an emotionally charged global issue with moral overtones is a matter that companies like Caterpillar might have considered in their earlier stages of decision making. If ethical considerations were a factor placed in the ongoing strategic-planning evaluation process, perhaps the incidents encountered by these global companies might have been avoided.

In March 2005, a federal judge dismissed a lawsuit brought against U.S. chemical companies, including firms such as Dow Chemical and Monsanto, accusing them of participating in war crimes during the Vietnam War. The plaintiffs (the suit was brought on behalf of millions of Vietnamese) alleged that the companies’ supply to the American government of the defoliant Agent Orange resulted in illness, birth defects, and deformities of those innocent civilians exposed to the poisonous substance. Even the supply of a product via a sales transaction with one’s own domestic government has legal consequences that flow from ethical strategic decisions that may run to the heart of a company’s business. Certainly both chemical firms knew of the eventual use of their supplied products.

The perception of a government as amoral with respect to its relations with its own citizens plays an important role in strategic selection of nations for entrance, as well as the choice of regime partnering for multinational firms. Guidance for multinational companies in developing a model for corporate codes to deal with repressive governments may be found in the International Council on Human Rights Policy statement. It addresses four actionable areas that may result in companies being considered as complacent in human rights abuses.

1.Directly or indirectly assist the perpetrators of human rights abuses.

2.Go into joint ventures with a government where it might be reasonably foreseen that the government, or its agencies, is likely to commit human rights abuses in carrying out its part of the agreement.

3.Benefit in any way from human rights violations.

4.Maintain silence or inaction in the face of human rights violations.

The Porter Diamond Model presents four interlinked components to determine the competitive advantage of nations contributing to the successful development and growth of selective industries in their respective countries.¹⁴ One of the criteria is factor endowment, a nation’s position to offer human, physical, knowledge, and capital resources as well as infrastructure systems. A prime factor of production is the ability to offer an effective and efficient labor force necessary to compete in a given industry. Beyond evaluating quality of workmanship, inherent skill, and labor cost, the element of ethical treatment of workers may be a required adjunct to such investigated determinants. The direct investment by U.S. firms in foreign manufacturing sites has increased in the last 20 years, while subcontracting work abroad, a difficult figure to quantify, has most certainly expanded at an amazing rate. The large emerging nations of China, Indonesia, and Malaysia and even small countries like the Mariana Islands, as well as the developing markets of Singapore, South Korea, and Taiwan have benefited from offshore production. But activist groups like the NLC periodically issue reports on conditions in factories in such countries, noting the use of girls in the age group of 17 and below (sometimes as young as 10 to 14) and 25 being pressed to work 60 to 90 hours per week for less than $0.20 per hour. They are denied normal bathroom and work breaks, placed in overcrowded mandatory dormitories, and fed a poor diet they are required to pay for, while operating unsafe machinery. Incidents of sexual harassment and even rape by managerial personnel have also been alleged. Many watch-dog groups have periodically accused well-known U.S. clothing designer labels and retailers of utilizing such facilities via subcontractors, forcing companies to defend their knowledge of and compliance with such alarming conditions. Such exposure is forcing more and more firms to adapt active codes of conduct with verification procedures when engaging the indigenous workforce. Armed with a workable code to begin with, many companies might have altered their strategic plans, revised tactical decisions, and alleviated these situations.

Porter also asserts a “final value”—that of government as an improvement to or detraction of national competitive advantage. Regime policies toward the workforce, be they citizens or imported aliens, may influence the managerial decision to enter a country on an foreign direct investment (FDI) or joint-venture basis as well as with third-party contractual manufacturing.

Just operating in a country that oppresses the freedom of speech can produce an ethical dilemma down the road. The 2006 entrance decision by Google into China was made in full acknowledgment of existing state censorship laws, enacted under the realm of national security, that would require its domestic search engine to purge specific subjects and not offer user access to banned topics. Citing such requirements, as well as allegations of cyber espionage resulting in the infiltrations of Gmail (Google’s e-mail service) accounts of human rights dissidents, Google announced in January 2010 that it was considering halting its cooperation with Chinese governmental Internet censorship and effectively closing down its operations. Varying estimates place the current value of its Chinese operations between $300 million and $600 million, a small percentage of the firm’s approximately $22 billion in worldwide revenue. In four years, the company was able to achieve a one-third share of China’s 340 million web users, with the local firm Baidu holding the majority of the market.

While now been praised for taking a higher moral ground and reemphasizing their nearly evaporated ethical standards, Google is attempting to repair its image, which was tainted by being a complacent partner to Chinese autocratic, repressive policies in respect to curtailing civil rights and civil liberties. This belated realization may be a reaction to worldwide watchers, as policy and practices in one market in the era of globalization influence the way consumers, advocacy groups, and governments view companies as favorable or unfavorable in other markets. Google knew full well the governmental prerequired operational conditions, but initial rhetoric indicated that even a government-filtered search engine was better than none at all. Perhaps this was a rationalized ethical position, but at some point management had to be aware that their decision would be critically challenged. Knowing the host country’s political environment and using it to evaluate the extent of ethically based considerations inherent in a targeted entry market requires that such a component be placed in the strategic decision-making process on par with other valued qualitative and quantitative measurement variables. Whether there exist restrictions on human rights and free speech would be a core issue to a global information delivery system such as Google. If such functional promise is compromised in one country, the value of its global service is diminished, with its perception as providing quality, reputable performance worldwide called into question. Not considering this underlying issue in its global strategic plans has resulted in a current ethical dilemma for Google. It impacts its future revenue stream in China, the unrecoverable loss of historic investment assets in the country, as well as potential damage to its reputation and image in other global markets, which can have negative financial implications attached to it.

Such critical decision making may require the introduction of a strategically induced ethical quotient beyond the traditional risk factors of governmental intervention, social unrest or disorder, and expropriation, as defined and qualified by public opinion of a government. An investigation of global consumer perceptions as regards the key markets that a company plans to associate itself with, no matter what the extent or form such contact takes, may come into play in the strategic decision-making construction.

Guarding Reputations in Volatile Arenas

The reputation of a company takes years to build and is an intricate part of a firm’s marketing effort to induce the buying public to support its products and services. Trademarks have been measured as to their proprietary value in surveys of the top 100 brand names in the world by BusinessWeek magazine and the annual reports they have published for last nine years.

Corporate names, on the other hand, are often given an intangible assessment known as goodwill as referenced in accounting terminology in takeover transactions—one company buying out the other. Essentially, goodwill is reputation, an estimation of the esteem attributed by the public to a company. It is made up of many contributory factors. Objectively it can be classified as to the quality of products and services offered, cost-price benefits as perceived by consumers, and other tangible values such as being a leader in technology. Subjectively one’s reputation is also tied to meritorious conduct that produces favorable repute as judged by the general public. Damage to the objective criteria can be corrected; for example, a bad product is pulled from the marketplace and refunds are offered. The injury to subjective criteria is more difficult to reverse as it destroys years of construction as opposed to reacting to a singular event. In the subjective arena affecting reputation, the most volatile element is the potential allegation of human rights violations. An allegation of ethical misconduct where people are concerned strikes a strong emotional chord. When such charges are leveled at a company within the context of a specific statute like the ATCA, public sensitivity is increased because personal injury is alleged and the conduct is perceived as bordering on a criminal act even though the act allows only for civil action. The global resource-extraction industry tends to be most vulnerable as their operational activities, in order to accomplish their strategic goals, must be partnered with foreign governments in order to secure such rights. As earlier noted, many companies have been accused of being complicit in human rights violations because of their commercial relationships with not only repressive governments but also the quasi-military actions of nations.

Paul Tarr, writing in Business Ethics magazine,¹⁵ proposes a set of guidelines based on a case authored by Gare A. Smith exemplifying an approach taken by BP in the operation of a gas pipeline project known as Baku-Tbilisi-Ceyhan to proactively shield firms from charges under the ATCA. He sets out seven practical steps to combat charges of human rights violation and to protect a firm’s valuable reputation. A summary of his points with explanatory comment follows:

1.Establish governing standards. At the outset companies are prompted to work with the host government and major stakeholders to erect governing standards for projects—including mechanisms for addressing human rights and environmental concerns—that not only encompass local laws but also inject global standards that go beyond domestic regulatory requirements. Firms have a marked tendency to initially consider the commercial aspects of the association, but such new direction places ethical issues in the strategic forefront of negotiations.

2.Engage key stakeholders. Extend an invitation for interested parties such as NGOs, community organizations, and all associates, including third-party contractors, supply-chain participants, and institutions financing the project to be consulted in the process. Such extended contacts allow firms to see broader issues and, if handled properly, could alleviate criticisms from such groups in the future.

3.Be transparent. Periodically volunteer updates with a wide dissemination via a website devoted to project news. Provide such information early in the project development and throughout the process, using disclosure as a shield against potential problems.

4.Create supplemental legal frameworks. As legal systems in developing countries are often not sophisticated nor do they conform to the regulatory laws of advanced nations, create a supplementary set of technical, legal, and fiscal policies to govern the specific project that acts as an ancillary agreement between the parties as to corresponding rights and obligations. This is the next step to point 1.

5.Set security guidelines. The parties should commit to the Voluntary Principles on Security and Human Rights, a compact negotiated by the U.S. and UK governments and several global oil companies in 2000. This document defines corporate aiding and abetting of violations by state security forces while also setting out the proper conduct expected from security personnel.

6.Establish monitoring. Firms should create independent verification committees, with outside members, to monitor compliance with the principles set forth in prior points and hear grievances in connection with the project. Again, an expansion of interested parties to oversee operations could deflect the appearance of wrongdoing by a firm and add credence to the transparency factor, point 3.

7.Create philanthropic programs. Companies should contribute to local communities impacted by the project as part of a social responsibility program. Such efforts should consist of stimulus for economic opportunities for local business along with other charitable benefits that touch the social, health, and educational needs of the region’s citizens. In essence, a good neighbor policy that incorporates the policies of NGOs and other recognized international developmental agencies should be implemented.

While these seven steps were targeted to improve and sustain the reputations of the global extraction industry partnering with governments, specifically oil and gas companies, the guidance offered is a valuable tool for all firms to consider.

Foreign National Labor Practices

By their action or inaction, nations that condone mistreatment of labor and permit sweatshop conditions to exist or foster debt bondage of a foreign workforce could find themselves on the list of reprehensible countries. For instance, Taiwan by law allows factories to charge foreign workers for room and board with little or no inspection of how the law is applied to wage deduction. South Korea allows foreign workers to be considered trainees and therefore exempt from minimum-wage and overtime-pay guidelines. Chinese domestic migrant citizen workers are forced to surrender their prized travel documents permitting them to move from their residential province to that of employment to their employers. The result is to restrict their movement in the provinces they work in and literally force them to be confined to factory compounds.

Countries like Myanmar and others accused of government-sponsored forced-labor conditions could be boycotted by multinational firms that do not wish to run the risk of public condemnation. Nations may find that their attractiveness as low-cost producing centers or even those containing an abundance of the positive attributes of Porter’s Diamond Model in the global value chain may have their destinations as a prime location resource for global firms diminished by a failure to assure human rights protection within their borders.

The Ethical Push from Other Sources

The Influence of NGOs

NGOs are composed of nonprofit organizations whose prime agenda is social change via political influence. They provide social and humanitarian service in highly politicized cross-national contexts and are an emerging modern force in policing global moral standards. These organizations are composed of individuals and donors committed to the promotion of a particular (set of) issue(s) through advocacy work or through operational activities whereby services are delivered. To the public at large they are seen as watchdog groups that bring attention to questionable or unethical practices of global commercial entities, celebrities who trademark their names on products, and repressive governments. Such groups have emerged from a variety of avenues. Traditional primary organizations whose names are publicly recognized like the International Red Cross tend to operate in the open with a consistent agenda of humanitarian concern. Splinter groups like the bands of protesting advocates of the antiglobalization movement that disrupted the 1999 Seattle World Trade Organization meetings often arise against the backdrop of emotional awareness.

Crossbreed organizations like Save the Children and CARE mix their charitable efforts with public dissemination of their causes. Labor groups such as the NLC target commercial misconduct of the world’s workforce and promote employee rights. Quasi-NGOs composed of industry companies in an alliance network aim to pool resources to offer education and instructional guidance in dealing with similar social issues around the world.

From whatever background these NGOs materialize, they have begun to develop as third players in the global socioeconomic system along with national governments and multinational enterprises. Beyond their introduction on the world stage containing a separate and pronounced vision to promote social change, they are also seen as mediators between business interests and authoritative governmental direction. Their emerging influence as new actors in the global drama has prompted the worldwide consuming audience to place a greater emphasis on their pronouncements, as they are viewed as having a bit more accountability and legitimacy than their corresponding rivals whose agendas are suspect. Their ability to sway public opinion and draw greater attention to global human rights issues and environmental concerns is a strong reason for commercial institutions to pay attention to them. Companies would be wise to consider the effect of NGOs on their strategic decisional plans, as the specter of their presence will not diminish in the future. Firms might even find it valuable to take some direction from their codes of conduct. When it comes to globally recognized NGOs, none is more widely known and respected as a socially responsible organization, primarily cited for humanitarian efforts in the face of disaster relief, than the International Red Cross and Red Crescent Movement. The introduction to their own code of conduct recognizes that agencies, whether experienced or newly-created, can make mistakes, be misguided and sometimes deliberately misuse the trust placed on them and as such they are susceptible to internal and external pressures. Given such a consideration, these venerable organizations encourage other NGOs around the world to consider abiding by their published code of socially responsible conduct. Their guiding principles may serve as a good reference guide that could assist many global commercial firms in the construction of the underlying tenets that their own codes of conduct should contain. Although their code contains 10 operating principle commitments customized to their special activities, those pertaining to universal commercial interests have been extracted and are presented in the following list.

1.Aid is given regardless of race, creed, or nationality of the recipients and without adverse distinction of any kind. Aid priorities are calculated on the basis of need alone.

2.Aid will not be used to further a particular political or religious standpoint.

3.We shall endeavor not to act as instruments of governmental foreign policy.

4.We shall respect culture and custom.

5.Ways shall be found to involve program beneficiaries in the management of relief aid.

6.We hold ourselves accountable to both those we seek to assist and those from whom we accept resources.

7.In our information, publicity, and advertising activities, we shall recognize disaster victims as dignified human beings, not hopeless objects.

Growing Ethical Awareness from Additional Avenues

A special advertising section in Fortune magazine headlined “Corporate America’s Social Conscience”¹⁶ devoted space, normally used to promote products, services, and government incentive programs, to issue a suggestion to executives to develop “a list of commandments imbedded into the corporate mission statement that guides an organization down a moral path so it can rise to the challenges of today’s global economy.” The mere fact that the subject of ethics is directed to such a wide dissemination level is a testament to the subject’s importance.

A key quotation as printed in the advertisement from Andrew Savitz, a partner in PricewaterhouseCoopers, seems to sum it up: “They [U.S. companies] realize that just one insult to their reputation can cause significant damage to their business.” The linkage of acceptable morality to commercial success by admonishing firms to consider ethical behavior in the global strategic planning process has begun. It is also interesting to note that a 2005 television commercial created a new corporate title, that of chief courage officer admonishing firms to appoint a corporate moral administrator who dares to steer companies in an ethical direction. Both advertisements may be indicative of a trend to place the subject of proper conduct by commercial entities via their strategies and tactical actions in the public light.

Perhaps the precursor to such integration of ethics and strategy is the inclusion of a viable policy embedded in a firm’s mission statement. A corporate vision that recognizes to some degree the organization’s social responsibility across their operational environment and relationships with all stakeholders may serve as a compass to help navigate ethical global decision making. Providing a beacon of morality, the signal sent by the corporate mission statement may light the way for the company ship. It helps to set and adjust the firm’s strategic sails and makes sure they move the firm in an acceptable ethical direction.

While it may be hard to extract the specific quantitative value in terms of sales loss or gain provisioned on perception of the ethical standards of a company, surveys have shown that good corporate citizenship is on the mind of American consumers. Ranked on issues of importance of potential buyers of products and users of company services, environmental pollution and human rights were numbered 1 and 4, respectively. Consumer response indicated that in the past, corporate citizenship was seen as something unique, a differentiator for business and their brands. Increasingly, however, the public is viewing corporate citizenship as an expectation, and companies are seeing it as an opportunity, demonstrating that doing good is a smart, pragmatic business strategy for doing well.

The Trust and Transparency Factor

As noted earlier, for nine years BusinessWeek magazine has published a survey of the “100 Best Global Brands,” a list prepared by Interbrands to determine brand value, a key corporate asset.¹⁷ This 2009 collateral title to the ranking of companies is titled “The Great Trust Offensive,” as such consideration describes a new prime criteria customers use in evaluating their perception and hence support of brand names. Of the top 10 brands, eight are American, with one each from Finland and Japan. Coca-Cola leads the pack, a position the company has occupied for many years, followed by IBM, Microsoft, GE, and Nokia.

The term trust is difficult to define, and in fact the BusinessWeek article itself does not specify its meaning. It seems to be made up of a number of contributing elements. But what is most evident is that consumers have a basic distrust of business organizations as a whole. Such a feeling may be a subset of a general public distrust of all institutions, whether governmental, religious, or commercial—an idea that has been circulating in the late 2000s. The article cited a phone survey conducted over the summer of 2009 by the Edelman public relations firm, showing that 44 percent of Americans trusted business, as opposed to 58 percent in the fall of 2007.

The trust factor is, however, a meaningful component, says Larry Light, CEO of brand consultancy Areature, as it “drives profit margins and share price.”¹⁸ In the words of Mary Dillon, global chief marketing officer of McDonald’s (number 6 on the list and up from number 8 last year), “Trust and transparency [are] more important to us than ever.”¹⁹ It seems that in the latest economic crisis consumers, the ultimate judge of company behavior, have placed blame not only on the financial sector but also on business in general. They are distrustful of businesses’ motivational intent.

Although not specifically singled out in the article, consumers seem to be saying that proper ethical conduct is what they expect from the companies behind the leading brands, that companies should be open and honest in all their dealings. Their sales and marketing efforts should not be misleading but provide true consumer benefits; their financial integrity should not damage their stakeholders and their far-flung global activities should take into account environmental concerns of the planet—these are just a few of the areas consumers are concerned with. In essence, there is an underlying desire by the public for firms to operate with a moral conscience in order to achieve and sustain brand recognition. A firm’s reputation can easily be tarnished by inappropriate or bad behavior or even by the perception that the firm hasn’t been forthright (the transparency factor) in responding to allegations of misconduct.

What we are seeing is an ethical imperative injected into the consumer purchasing decision. While price and quality, innovation, and customer support are important parts of the consumer motivational puzzle, a new piece has been added. Companies would be wise to heed this often overlooked part and incorporate it in the strategic planning process.

A Specter of Change: Potential Employee Inquiries

Even potential managers, the future constituency of corporations, have morality on their minds. In a survey of “The Best B-Schools,” the importance of incorporating ethics in MBA (master of business administration) programs was one of the key criteria in the rating system of the top business programs²⁰ and this measurement index continues today. Other studies polling graduating students and those seeking better employment situations have increasingly cited the desire to seek firms that have good track records with respect to ethical conduct. Kelly Services Inc., a firm devoted to the global placement of employees, in a survey released in October 2009,²¹ concluded that firms benefit in attracting top talent by the perception of their ethical and social responsibility actions by potential candidates. The extensive workforce survey covered 100,000 people in 34 countries with 90 percent of respondents in the study saying they would be more likely to work for an organization they viewed as acting ethically and in a socially responsible manner. The survey further reported that 50 percent of those in the 18 to 65 age bracket, presumably coming from differing cultural, ethnic, and national backgrounds, would even forgo a pay increase or a promotion to work for a company that possessed a good reputation in the communities in which it operated.

Rushworth M. Kidder, president and chair of the Institute for Global Ethics, outlined a series of questions that potential interviewees could use to distinguish those firms that really practice ethics from those that have the external trappings but not the internal substance. His article²² came on the heels of Martha Stewart’s conviction for stock-trading violations, the Marsh & McLennan accusation of unethical conduct, Citigroup setting aside $5.2 billion to cover costs arising from its alleged role in numerous questionable deals, and the Enron financial scandal—a time when public opinion of executives and the commercial sector was negative. Kidder makes two assumptions in putting forth a path of inquiry to uncover the real inner workings of corporate ethical systems. First, potential employees are so deeply concerned with the issue that they turn the proverbial tables on the interviewer and in essence interview the company. He reasons that new personnel in a firm have a vested interest in joining companies with a good ethical track record as morally careless CEOs could be “lugged off to jail,” thereby damaging one’s career due to exposure to “unethical subcultures” or placing one’s retirement in jeopardy due to being caught up in a “vortex of scandal and bankruptcy.” He places a measurable value on the inquiries, a point many interviewees may not consider, but fails to stress that individual distress upon being involved or associated with unethical practices may also come into play—the personal factor. Second, he assumes one is interviewing with a firm that already has in place a code of conduct, an ethics office, or a designated department to oversee stated principles, as well as a large international operation across which ethical conduct is required to be enforced. Kidder avoids commenting on the fact that if no such programming exists to begin with, this may be an indication of the firm’s ethical positioning, hence it might be one to be avoided or questioned as to why it doesn’t exist.

Kidder’s five questions are rated in order of their intricacy and the required density to answer, and as such offer a good insight into how firms really approach the matter. His initial inquiry generally gauges the surface issues that permeate the organization and exert control over its basic activities. His follow-up gets more specific: He asks if their personnel see their code principles as a general statement of intent or if actual compliance enforced. The next question is a bit more philosophical as it tries to determine how diversity in the world affects code language. Is it based on home-country values that are then projected on the world (ethical imperialism) or does it take into account differences (cultural relativism), the when in Rome approach? An example of an individual’s corporate loyalty via a lie versus truth telling to an associate about potential company downsizing that affects him is used to illustrate reaction to a moral dilemma in the framing of the fourth question. The final inquiry deals with whistle-blowing policy, questioning company policy that while morally correct may also be damaging to the firm.

One may agree with the areas covered by the Kidder model or may choose to create their own line of ethical inquiry when being interviewed. Either way, the concept of integrating ethical content alongside other employment concerns at the outset of employment seems like a new and valid consideration that may begin to impact the subject of ethics as practiced by MNCs.

Historically, it was normally in the purview of the employer to query candidates on their values and moral stance so that honest employees would be hired. Today, the interview wheel has rotated 180 degrees, with the prospective entrant raising such issues of the company. Such reversal of the question-and-answer interview session may be attributable to changes in general public opinion.

Golin/Harris International, a public relations firm providing professional counsel and strategic communications programs to clients around the world, is a leader in both reflecting and formulating the attitudes and outlooks of the public at large. Their vision for global firms is that good deeds are in fact good business. As such they take a social marketing approach, advising their clients of the value of positive social action to build trust relationships with their stakeholders. In a number of surveys, the importance of a firm’s public persona in regard to the perception by consumers of their positive communal social actions is well indicated. Many statistics indicate that a majority of Americans were inclined to begin or enlarge their relationships with companies practicing good social citizenship, an increasing trend in the past years. A large number of consumers feel that corporate citizenship, led by such indicators as environmental pollution, conservation of resources, and enforcement of equal human rights, were instrumental in establishing a trust relationship with commercial entities, a prime motivator of the patronage they afforded them.

The reputation of a company in its international dealings is important. How stakeholders view the ethical activities and operational decisions of firms has a direct bearing on image perception, which in turn translates to relationship building, a necessary ingredient in a successful enterprise.

Ethics: The Impetus Toward Lawful Regulations

The old saying there ought to be a law, heard when people perceive an ethical injustice committed against them, may never have been truer than with the enactment of the U.S. Sarbanes–Oxley Act. The outrage within the investment community and general shareholding public of the breach of fiduciary duty by executives at a number of large U.S. companies swept the country like a firestorm and pushed Congress into immediate legislation. The climate of ethical indifference, as exemplified by the outright misleading financial statements issued by top managers at firms like Enron and WorldCom, grabbed the attention of commercial institutions both in America and abroad. It again illustrated what many critics of business have long proclaimed: Corporations are led by individuals with suspect moral standards; a point noted earlier in the text as regards the ancient trading or merchant class. On the other hand, such events and the resulting public pressure, which in this case resulted in a new regulation, heightened civic awareness, especially in the United States, of the ethical conduct of corporations. Some observers have commented that these scandals of executive office improprieties are an American phenomenon, as is the obsession with ethical conduct in the commercial sector no less than the political arena. Citizens of foreign countries with longer histories than the United States seem to be more accepting of such conditions, discounting such behavior as part of the process. They are not outraged to the extent American culture exhibits and accuse Americans as being a bit too self-righteous. Testing such theory might make for an interesting investigation. Given, however, the economic influence of U.S. multinational enterprises on the global market (they dominate the Fortune 500’s largest world companies) and the fact that the American marketplace is still the world’s largest, appreciating the current environment of the U.S. community is appropriate even for offshore firms that compete with U.S. firms either overseas or in the U.S. domestic arena. Knowing the ethical baggage that may accompany American firms abroad or appreciating the climate in which American consumers view commercial behavior just increases their own learning curve in regard to competitive actions and market reactions. Whether such current attentiveness as shown in the United States is a fleeting trend or evidence of a more permanent desire for firms to be ethically transparent in the future is a judgment for all global commercial entities to make. How these aforementioned examples are perceived and treated by companies around the world could affect their strategic planning, internal and external operations, and perhaps their assessment of the need for precise ethical direction—a code of conduct.

Global Branding and Social Responsibility Revisited

The enviable value of erecting a sustainable global brand is part of the overall corporate strategy of all firms in today’s world of globalization. (Note earlier references to BusinessWeek magazine, which every year devotes a front cover and an extensive article to evaluation of the top global brands and their value to the enterprises built upon their worldwide acceptance.) Based on such a survey an article in the Harvard Business Review²³ found that a key criterion in the next generation of global branding is social responsibility. As reviewed by Nick Wreden for MarketingProf.com, the article shows that global consumer focus groups cite three dimensions of global brands. The first two qualities signaling quality and positive international attributes were symbolic of a worldwide cultural sharing of common product perceptions. The third, however, indicated that global consumers demand more from global brands, specifically that they represent vehicles for social responsibility, a proactive characteristic. When the companies behind these global brands fail to live up to consumer expectations in regard to ethical practices, they are deeply tarnished, as they are held to a higher standard. The article also identifies four consumer segments, or how world brands are judged. The largest segment, some 55 percent of respondents, characterized brands as “global citizens.”

This label identifies global brands in terms of quality and as guardians of consumer heath, the environment and worker rights. When the study was evaluated to determine strategies for future global branding, two interwoven implications were offered. Both evolve around the perception of a firm as being active in local communities as socially responsible citizens to negate their image as uncaring and only interested in themselves and their profit motive. The establishment of a global brand and the resulting benefits have an ethical and social responsibility component that companies need to appreciate in their marketing strategy.

The handling of the CSR issue is itself a growing business. PR News in late 2009 published a 200-plus-page book, retailing at $399, titled a Guide to Best Practices in Corporate Social Responsibility (Vol. 2).²⁴ PR News’ logo includes the phrase “Building the bridge between PR and the bottom line.” Such pronouncement recognizes that incorporating a CSR element into the marketing mix and using it as a contextual expansion of adverting through public relations proactive activities wins friends and influences people, in the end becoming a valuable contributor to profit generation. One of the book’s chapter subheadings, “Shades of Green: Integrating CSR to Improve Business Performance,” well states the concept and the financial linkage. Other specific tactics are identified, such as the expanded use of traditional cause marketing and cause branding and the support of social issues to enhance reputation and brand equity. Companies are advised that by practicing good CSR by partnering with NGOs they gain added leverage with consumers. Firms have learned that cross promotions incorporating company or specific-brand advertising with social responsibility issues help sell products and services. Whether it is a direct appeal such as announcing a donation to a charitable institution with every purchase or support by sponsoring a specific social cause through their activities (e.g., a walk, a run, or an event), the coupling allows the image of a socially acceptable foundation to rub off on the business. Using pronouncements of going green, an axiom for protecting the environment, blankets a commercial institution with vaulted values enhancing its reputation with the general public.

Also covered is communicating during a crisis to help defray the loss of the CSR asset. Other subchapter sections include how to globalize the message, as well as how to maintain social responsibility in a social-media world. The book provides planning steps and the incorporation of strategy into the process, using sets of diagnostic decision-making tools. The publisher’s preface to the book admonishes firms for being behind the eight ball and promotes consideration of a global initiative or a local outreach program, whether philanthropic or environmental. The elevation of CSR on the global horizon as a more important element in the strategic process of firms has arrived. The beneficial marriage of CSR to corporate strategy is well evidenced by CRO magazine acting as chief sponsor of a November 2009 case-study webinar billed as “The Seven Secrets of Brand Strengthening via NGO Partnering.” The web broadcast presentation focused on leveraging environmental social responsibility leadership to strengthen reputation with customers and stakeholders. By joining with NGOs that support actions to alleviate illegal logging and trade in forestry products, a positive CSR image could be gained by companies, enhancing their competitive advantage with the consuming public—a clear reference to cause marketing and cause branding as previously noted.

What is unique about CSR is the ability of firms to orchestrate with tactical, strategic moves to effectively use it as a value-creating resource. Firms can more easily be proactive in their pursuit of a CSR label than they can with ethics. By stage managing marketing efforts to take advantage of a social responsibility issue, firms can get out in front and actively promote the CSR allegiance factor. Ethics, however, are more difficult to control as it usually takes a negative episode to bring the matter to the forefront. While having a code of conduct in place may help to defray or create a handle for managing an ethical dilemma, the process tends to be reactionary instead of proactive as with CSR matters. Ethical concerns emerge and firms need to be in a strong reactive position to confront them with the proper policies in place. But even with programs to counter allegations of ethical misconduct, constant vigilance aligned with inspection and verification must be employed; CSR cause marketing does not require these added activities. Practicing good ethics is a semipassive value producer; it is expected. However, acting unethically, even to a small perceived degree, can result in a great negative value impact.

Environmental Issues

In Collapse by Jared Diamond,²⁵ the Pulitzer Prize–winning author explores the fundamental reasons behind the decline, collapse, and eventual disappearance of societies due to self-inflicted ecological damage resulting in ecocide. He makes a most passionate case for modern man to learn from the mistakes of his ancestors in order to preserve the earth for future generations of mankind and not just to prevent the loss of rare and exotic animal, insect, and plant species. He concludes that man has a choice and that such choice is built around ethical decision making and the moral culpability of managers of today’s controlling elite, the transnational corporation. Global firms, by virtue of their sheer size, multinational reach, and influence, may well be the anointed guardians of the world’s environment. No other earthly entity, national government, super transgovernmental body, or NGO has the ability or the corresponding duty to equitably consider this issue.

There is no doubt that many domestic firms in developed nations, faced with costly regulatory-compliance laws in regard to the preservation of the local environment, have fled to foreign countries to conduct their operations. Because many emerging nations have neither stringent regulatory guidelines in place nor the financial and organizational resources to police and enforce the laws designed to prevent the rape of the environment, multinational firms find them attractive offshore alternatives. Instead of eliminating the dumping of toxic chemicals in rivers and streams by carting them off to safe and approved deposit sites or spending money to retard the polluting of the atmosphere by the emission of dangerous gases, it is simply easier and more cost efficient to locate such activities in global areas where no rules are in place. In fact, it might be argued that developing countries encourage such consideration to receive the foreign investment that global firms bring with them, mortgaging future environmental damage for the interim financial rewards that such immediate FDI activities afford them.

Because many countries do not have laws in place to negate or limit damage to the environment, a fundamental question of ethics comes into play. As morality is an issue that falls outside the legal avenues of punishable conduct, how should firms act in an environmentally lawless society where they have the ability to make their own decisions on this matter? Should they take a proactive stance and import regulatory statutes from other jurisdictions? And if so, whose rules do they follow, as countries around the world have different standards? Should they follow the most restrictive or most lenient ones? Should they choose to replicate their actions under the guidelines enacted and enforced by their own home-country governments? Should they feel free to do nothing and possibly dirty the host country’s environment and jeopardize the health of its citizens for the sake of lowering expenses in order to sustain a competitive advantage over industry rivals? Or should they take a neutral semiactive position, deciding to follow some basic, acceptable control methods requiring minimal expenses while passing on other, more stringent and costly capital investments? The objectivity of the right or wrong of these ethical issues may dictate the degree of responsiveness by multinationals, a gray issue and not a black-or-white criterion.

These issues are quasi-hidden ethical dilemmas because, unlike direct actions that may immediately bring harm to employees on the job, causing the arousal of public watchdog groups in the labor or general human rights arenas, the danger of such actions is not always so evident. Environmental damage may occur over such a prolonged period of time that not until actual physical illness of the neighboring inhabitants—crops, animals, or humans—is confirmed does the physical danger surface. It may take sophisticated technical equipment to detect and experts to verify the destructive effects of an environmental injury and then link them to the serious illness they might have initially engineered.

One of the key elements behind such ethical questions may be the degree of knowledge and therefore resultant responsibility that multinationals may possess. If a company has reasonable knowledge that their production or manufacturing processes use or emit toxic chemicals commonly considered dangerous to the health and well-being of those potentially coming into contact with such substances, is there a predetermined duty to act responsibly and take appropriate actions to minimize or eliminate such potential damage? This simple test of public accountability might cause companies to take the proper ethical stand and institute the required internal and external actions. Certainly, among many industries such facts are easily recognizable, and these entities should be held to a higher standard of ethical behavior that should be inherent in the development of their global strategic planning operations and reflected in their corporate codes of conduct.

Many worldwide industries, like logging in primitive rain forests, open-pit mining operations, raw chemical production, and whale and dolphin harvesting, are internationally recognized as potentially damaging the national or territorial fragile, balanced environment, with effects that are felt on a global scale. Whether or not a specific host nation has regulated such activities, a higher authority, the common unified global initiative coupled with worldwide public opinion, has already placed such commercial activities on the danger list. Companies whose operational activities are already publicly acknowledged as potentially harmful need to take notice and consider acting in a socially responsible manner worldwide.

Bribery

Bribery is a subset of corruption, which itself is the abuse of entrusted power for private gain. It is considered an unethical activity and in numerous nations an illegal act. Parties to the bribe are guilty of harming the economic and social development of the society in which it takes place. The process distorts markets, stifles commercial growth, and destroys free market competition, often leading to monopolistic higher pricing and inferior quality of the product or service offered. It robs the local citizenry of proper control and value for their resources, be they asset land or people. The bribery problem has been combated by global conventions and national laws. Commercial institutions would be well advised to consult such declarations and instill such provisions in their own codes of conduct. Fundamental principles like those orchestrated in the 2003 UN Convention against Corruption and the 1997 OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions are a good place to start. The UN Convention compels signatory governments, in accordance with their own legal systems, to develop and maintain anticorruption policies by passing criminal laws and establishing administrative enforcement agencies to effectively police governmental officials and the private commercial sector. Articles detailing the acts of bribery, the trading of influence, and the resultant undue advantage are noted but not exactly specified, so latitude in interpretation of its principles allows sovereign nations to construct their own detailed provisions. The OECD convention asks that subscribing parties adopt similar prohibitions as prescribed in the UN declaration. A host of regional, governmental, and associational guidance is also provided by the Organization of American States (OAS) and the Council of Europe.

Many individual countries have enacted their own laws on the issue, the most notable of which is the U.S. Foreign Corrupt Practices Act, which is covered later in the text. While private sector institutions cannot sign on to these sovereign governmental decrees, they are a valuable template source for constructing international accepted definitions and standards regarding involved parties and their nonpermitted activities for inclusion in company codes of conduct. In the private sector, the International Chamber of Commerce (ICC), the World Economic Forum through its Partnering Against Corruption Initiative (PACI), and Transparency International (TI) have all initiated supplementary, voluntary frameworks on the issue for companies to follow. Consulting such conventions and documents allows companies to incorporate into their own codes of conduct universally accepted and applied principles of ethical behavior in respect to their engagements with their own and foreign governmental bureaucracies.

Beyond adherence to such compliance principles, it is equally critical that governments, businesses, and civil societies along with NGOs assist each other in the battle against corruption in all forms. The addition of multinational banks as policing agents for such illicit cash flows has also been suggested as indirect alliance of partners in the fight. The key, however, is for MNCs to incorporate policies against corrupt activities into their strategic planning and place specific language prohibiting it in all its forms into their own individual codes of conduct with applicable monitoring of their employees and association partners for any violations. Furthermore, they should commit to sharing information on corrupt officials with respective governments, NGOs, and even within their competitive industries.

Masked Bribery: Government to Government

While the use of bribery by MNCs or extortion by foreign government ministers for such payments or favors tends to the norm in many cultures, one should not overlook the fact that unscrupulous governments can offer incentives to other governments that benefit the private commercial interests of their domestic enterprises. These offset initiatives are harder to detect and more difficult to combat, but they are worthy of mentioning when discussing the subject, as a potential or perceived conflict of ethical interest might arise. An example of indirect influence peddling by a government to allow for the undue advantage of its state-owned commercial agencies and perhaps private sector recipients was the issue of scholarships from the Chinese Education Ministry to study in China secretly awarded to the children of nine top officials, including the president’s daughter, in Namibia. China has been aggressive in courting entrance into many African nations to receive rights for mineral-resource exploration as well as to place their state and private companies in a position to garner trade deals. They are not alone in this commercial endeavor, as numerous countries harbor the same goal for their respective home industries with underdeveloped nations on the African continent. The actions of China—influencing no-bid contracts, receiving lucrative trading rights for strategic import and export products, as well as getting approval of residence and work permits for their own citizens by issuance of the noted scholarships to decision-making officials in Namibia—illustrates a type of corruption, government to government, not technically covered in any of the aforementioned conventions.

While it may be reported as a new wrinkle in unethical global practices, nations have always used their influence to gain commercial advantages in foreign countries. Whether it’s the outright granting of most-favored-nation status to lower import tariffs or direct economic assistance packages, as well as a host of other enticing incentives, the idea is not new. Governments have in their stable of agencies and ministries numerous ways to indirectly pressure and sway foreign governments. In 2009, the United States extended for another year a duty-free importation program, first implemented in 1976, to 132 developing countries covering over 3,400 types of products. Such grants can act as a quid-pro-quo to such nations to give American firms competitive leverage in their respective markets—which is, essentially, indirect bribery.

In the aforementioned example, China used a unique influential conduit and just got caught. Historically, companies went abroad on the heels of the national interests of their respective home governments and used the political-diplomatic links established to launch their private enterprises. European exploration was an alliance of sovereign royalty houses and merchant traders, and it was blessed by religious orders. Early trading companies were granted chartered rights to operate in government-controlled colonies. The Dutch East India and British East India companies, although private investment vehicles, were deeply tied to their respective home governments as the national economies of their home markets were interwoven with the foreign interests of both companies. In the era of modern globalization, the influence of governments to promote the strategic plans of their homegrown commercial institutions cannot be overlooked. Their potential actions as straw men in the bribery area raise ethical concerns, and as such MNCs should be careful to neither directly nor indirectly benefit from such actions.

Further Thoughts on Bribery

Almost every textbook on international business and management devotes a section to bribery because it is normative practice, a fact of life in many cultures. For expatriate managers and the organization in general, it is a troublesome issue as from a relativist viewpoint it seems appropriate, while a strict moralist would interpret the action as wrong. The act of bribery falls into a number of categories that international commercial firms tend to experience in their domestic and global operations. The first class of bribery is the gift consideration to show respect and gratitude to a person in a relationship. It is common in Western societies to offer business associates presents on Christmas and birthdays, with other cultures following suit. The tradition in Japan, and practiced by other civilizations, of offering introductory gifts of appreciation upon first greeting commercial guests is an accepted custom. Within this context social meals and other entertainment occasions that provide opportunities to pursue business interests in more informal environments are a business expense recognized in the tax codes of numerous countries.

The second class of bribery is the facilitation, or grease-the-palm payments, that are offered to lesser governmental employees to assist in the efficient and expedient processing of routine bureaucratic actions, such as document registration or timely clearance of imported shipments. Such payments are considered tips or rewards for good service and in many countries are viewed as a normal business disbursement. Bribes in this arena are seen as a device for augmenting the salaries of government-service personnel when the local government cannot afford to provide adequate compensation for such normal and required activities. Those who study the economies of developing countries have often commented that such underground nonreported income contributes to and helps sustain the financial stability and even growth of such markets.

Perhaps the third class, and the one that begins to cross the ethical line, is the intermediary fee, or middleman payment, to agents, consultants, and business facilitators to help in commercial connections. In many countries, this is viewed as a regular expense when professional organizations are utilized to help establish a local relationship. But such payments often serve as obscured conduits to government officials, with payment masked by a straw man pass-through. Political contributions to national parties, the fourth class, while on the face are not illegal, are in many countries akin to extortion payments with the promise of preferential treatment or freedom from inspection implied in the receipt. They are made under the guise of responsible democratic action but may be due to intimidation and threat of reprisals. The fifth class of bribery is outright cash payments to influential governmental administrators to receive a contract or generous tax ruling, rig a bidding process, or cause difficulties to a competitor; these may be coupled with exorbitant gift giving that takes the form of purchased assets for others to entice a quid pro quo action. Vacations (or vacation homes), cars, shopping sprees, tuition for children, medical procedures, or even charitable contributions to favorite organizations are basically disguised cash payments. Such deflected or semiobscured personal assistance is illustrated by the following situation. During protracted negotiations for mining rights in an African nation, a member of the MNC team was approached during a social break by a government minister involved in the discussions. The official had a personal matter and he asked his executive friend to help. It seems his son, enrolled in a French university, needed tuition assistance. His own country’s foreign exchange rules did not allow him to send such funds abroad. Could the foreign company loan his son the money and he would guarantee its repayment? Such scholarship assistance would be warmly welcomed by him and he would not forget the act of kindness that their relationship produced. What does the company do? Other forms of preferential treatment, while outside the specific class of bribery, are nonetheless questionable ethical practices. Preferential treatment targets important buyers, often taking the form of special discounts or promotional activities, first-launch rights for a new product or line, or simply tagging advertisements with their store identification to keep them happy. Such activities may also involve assisting the family members of clients in achieving their personal community or business projects.

Many books, however, treat the subject matter within a more narrow reference with discussion of the American lead initiative and the passing of the Foreign Corrupt Practices Act in 1977. The act is reproduced on the following page because it is an attempt by a sovereign nation to construct a code of acceptable and unacceptable conduct for prescribed actionable offenses outside of its territory and by parties who may not be citizens—in essence a universal borderless ethical instrument.

The simplified direction of the act is that it outlawed the paying of bribes directly or indirectly via agents to foreign government officials to obtain a commercial reward—(a) mentioned previously—and provided penalties to both the company and the individuals convicted of violating its prohibition section. The law does, however, recognize that it does not pertain to “facilitating or expediting payments” to “expedite,” speed up, or improve the efficiency of “routine,” standard actions or processes that a business would normally receive from a foreign government authority—(b) mentioned previously.

Protests from a number of U.S. firms operating abroad followed the enactment of the law, as they felt such prohibition would place them at a competitive disadvantage with foreign companies whose host countries did not have an equally effective statute governing their actions. It has even been mentioned that in some countries the paying of bribes as outlawed by the act can be taken as a legal business expense, which fueled the complaints of American firms. No precise surveys exist to prove the contention that the act specifically damaged U.S. enterprises, but rumors persist around this initially controversial legislation.

Twenty years later, the member states of the OECD adopted a convention on the bribery of foreign governmental officials. Its provisions mirror, to a degree, the American act with its criminal considerations while also excluding payments designated as routine facilitations. Although the document became active in 1999, each member nation must take individual action to incorporate it into their respective country’s body of laws. Corruption through bribery is still a problem, as the practice can have the effect of destroying a level commercial playing field and providing an unfair advantage—both moral considerations. It may also impede the ability of a country to prosper and advance when its governmental administrative personnel award lucrative contracts not to the most qualified or the most cost effective but to those who reward them. If such ineffective public servants add to the cost of governmental service projects by demanding bribes, such additional expenses are a drain on the public funds as the beneficial entities just add the costs back into the bid quotation. Even beyond bribes to elected or appointed governmental officials, global firms may make such payments to those in opposition to such institutions. The U.S. Department of Justice recently announced it was investigating a report that a subsidiary of the Chiquita banana company made cash payments to a Colombian terrorist organization when they came under pressure to ensure the safety of their local employees. Such reports of multinational firms offering substantial payments to opposition parties, no less revolutionary groups, often emerge in developing countries throughout the world.

While the public official category of the bribery issue has technically been made moot by legal mandates in many countries, it does not alleviate the need to further examine the morality of enticing commercial associates by the offering of monetary inducements. A fine line exists between lucrative entertaining and outright cash payments. If an executive offers two front-row tickets to a world-class event for a prospective global client or buyer, it tends to be viewed as an entertainment expense, both ethically acceptable and tax deductible. But if the cash equivalent was placed in an envelope and slipped into the pocket of the associate, the payment might be hidden in corporate accounts as petty cash, but the action itself might be labeled a bribe. The danger in such a case is evident. Corruption breeds corruption and may end up injuring commercial entities because they may be lulled into a false sense of competitive security when in fact their products and services are not being sold based on the quality and price of performance or inherent sustainable company competencies but on misleading pretenses. Firms would be wise to consider this potential masking of the effectiveness of their sales activities and institute a policy of prohibiting payments, gifts, or exorbitant entertaining by anyone in order to obtain or retain business. Bribery is therefore an issue that needs to be addressed in a firm’s code of conduct as its culturally induced inconsistencies, seen as alternating values of right and wrong, are part of the ethical equation.

Traditional Cultural Relationship Obligations

Collateral to the bribery issues is a matter often found in national cultures—the rewarding of special relationships via preferential treatment. While cash payments are not normally associated with such practice, reciprocal obligations and family ties play an important part in how business is conducted in many global societies. In England, the old boy network in the halls of exclusive clubs greases the rails of commercial transactions in the country. The practice of guanxi, or connections, in China is the way deals are made. The custom “incorporates an element of graft” but it can help “get things done faster and more efficiently if used properly.”²⁶ In strong family-oriented societies, commercial transactions with relatives often reveal that special discounts, unique promotional tools, or limited inventory not offered to others is reserved for them. In India and South America, it is not uncommon to find that employee vacancies are normally filled by those whose family members already work for an organization. The American idea of hiring the most qualified is replaced by a different, socially induced imperative: The employment of those with whom one has already established a record of loyalty and trust; hence, a family relative or close friend. While such practices tends to be prohibited or frowned upon in the United States, the acceptance abroad of this alternative hiring criteria is a cultural bend in the ethical road that must be appreciated and acknowledged.

The Ethical Linked Identity Factor

Global commercial entities have always been identified with their home-nation origins; sometimes benefiting from the symbolic allegiance and sometimes regretting such labeling. Foreign-embedded businesses have always been viewed as national flag carriers, and whenever local citizens demonstrate against the policies of their home-country governments, they run the risk of being symbolically attacked. The lesson for MNCs is not to get embroiled in their home government’s malfeasance. They could be labeled as beneficial co-conspirators even if they neither engineered nor directly participated in the unethical activity, such as in the case of the aforementioned masked bribery. Perceived immoral conduct does not follow an even, logical path back to the initiator, as once unleashed, innocent bystanders can get pulled into its flow. While MNCs, with the exception of state-owned companies, do not directly partner with their home governments when going abroad and may not be prone to the bribery charges by their governments, they do carry with them a linked national identity that can affect their international operations. On the global, political front, countries themselves have behavioral traits evolve into reputations and images that are connoted with their home country institutions that are born in such environments. Therefore, American, as well as Chinese, British, and Japanese firms, are considered as representatives of their national home country when engaged in foreign commerce. The global public attaches the repute and general ethical positioning of countries to their international commercial envoys. Foreign citizens often see a specific nation’s MNC as an economic conduit for the political policies of their home governments, whether warranted or not. When countries are accused of unethical conduct, such visions are associated with the MNCs who originate from them, and guilt by association may evolve. MNCs are always vulnerable to displays of anger or contempt by the local citizenry for the real or perceived immoral actions of their home countries. Boycotts of the goods of a specific country may be orchestrated to show displeasure, but in some cases, outright protests and violence may be inflicted against the property and even the employees of their foreign subsidiaries along with their domestic, host-country, joint-venture partners. Especially susceptible to such actions are product-branded lines and franchisees whose marketing programs are built on or emphasize a connection to a foreign country—Colombian coffee and French wine are promoted with a home-field advantage over foreign competition. The trademarked beverage Coca-Cola is deeply associated with American tastes and cultural identification even when the company has gone to great lengths over time to present the drink as a domestic choice. McDonald’s restaurants, even with local menu adaptations, remain as an icon of American service ingenuity—the fast-food industry. Japanese and German cars still contain the allure of their nations’ precision engineering skills, first demanded in the home market, as a selling point in going abroad in spite of localized production. Whether the association is classified as a tangible or an intangible property, a linkage to the home countries of MNCs is part of their image. MNCs may therefore find that they may be called upon to renounce or distance themselves from the actual or perceived unethical conduct of their home nation so that their private reputation and appearance abroad is not damaged. This is a difficult dilemma, as ethical judgment may be demanded of an MNC regarding the actions of their home government, which exercises legal jurisdiction over their headquarters. By being critical of their home governments, they risk possible domestic governmental or consumer backlash, but if they take a defensive position, they could jeopardize their foreign operations. During the period of apartheid in South Africa, a number of embedded companies were prodded by their home countries’ foreign policy to pull out and thereby exert economic pressure on the existing local government to change their immoral activities. Many MNCs did leave, while the American company General Motors remained. While their decision was criticized, it resulted in the creation of the Sullivan Principles, the grandfather of modern-day codes of conduct for global commercial institutions (covered in Chapter 5).

Firms are caught in the middle when these issues arise and need to consider their responses even when the unethical accusation is not specifically directed at them but rather symbolically placed on them. As much as MNCs would like to stay out of this arena, avoid guilt by association, and lay low, they may be compelled to address these accusations. This is a matter best decided by the CEO with the advice and consent of the board of directors. It should not be handled by local embedded managers, as the issue transcends local political and societal considerations and is a consideration found in neither international conventions nor corporate codes of conduct.

Managerial Reflections

1.Ethical determinations have emerged as a stronger issue in the modern era of globalization. Will firms as they enter more emerging markets be faced with additional challenges?

2.SWOT analysis, usually a precursor to strategic planning, needs to have an ethical component, while Porter’s Five Forces industry evaluation requires a new element in the mix. How can moral-based contingencies be incorporated into these assessment models?

3.Market-entry considerations need to be infused with an ethical determination. What investigatory mechanisms are available for such a process beyond the arena of public opinion?

4.Be aware of the ATCA, a law whose original intent has been expanded for U.S.-based civil liability suits to impact foreign territory. Do civil liability insurance policies cover such potential risks?

5.Foreign labor laws, especially in emerging nations, tend to be lenient compared to those of developed countries. What exactly are sweatshop conditions and unethical labor practices? How does one balance traditional, acceptable local practices, domestic regulations, and economic conditions against pressures from outside critical agencies?

6.The sustainability of corporate reputations and the value of global brand names seem to be more susceptible to allegations of ethical misconduct. Are consumers genuinely concerned about this issue or is quality and value still their prime concern? Can companies promote their ethical qualities and social responsibility in their marketing programs, and if so, how?

7.Companies do gain a competitive cost advantage by placing operations in environmentally lax countries. Whose regulations should control: those of more restrictive developing nations or those of the foreign country? Should economic development precede environmental concerns?

8.Bribery in many countries is an acceptable form of business expense and part of the cultural relationship way of life, a form of client gratification. Is the U.S. Foreign Corrupt Practices Act an American legal encroachment on the rest of the world?