CHAPTER 5 GLOBAL BUSINESS ETHICS Global Business Ethics
CHAPTER 5 GLOBAL BUSINESS ETHICS
Global Business Ethics PRISMS 1. Should business be amoral (values-neutral)? 2. Are lobbying & campaign contributions a form of bribery? 3. Do the benefits of industry deregulation outweigh the costs? 4. Which is more important: Profit maximization or avoidance of conflict of interest?
5. Who should pick corporate board members? 6. Is capitalism any good without good people? 7. What do you do when the regulators have to be regulated? 8. Has the exception become the rule in American business? 9. Do most powerful capitalist nations lack a sense of community?
10. Is business ethics more legal or moral? 11. Should American business be more heavily regulated? 12. Is the business community too flawed to police itself? 13. Can private capitalism also serve the public interest?
Capitalism is no better than the capitalists, who are seldom better than their culture. As a nation goes, so goes capitalism.
“Judaism, Christianity and Islam all affirm the right of individual ownership and private property, but there are moral limits imposed on absolute private ownership of wealth and property. Each of these religious traditions affirm that we are not individuals alone but exist in community—a community that makes claims upon us. The notion that “it is all mine” is a violation of these teachings and traditions. ”
ETHICS & CAPITALISM
BUILT-IN WEAKNESSES OF AMERICAN CAPITALISM THAT SPAWNED THE NEW MILLENNIUM BUSINESS SCANDALS 1. Profit maximization, single stakeholder capitalist ideology 2. Lobbying & campaign contributions 3. Deregulation (belief that markets adequately regulate themselves) 4. Cultural emphasis on short-term performance 5. Runaway individualism triumphing over community 6. Amoral business operations (belief in the justness of the marketplace)
SO IS CAPITALISM TRUSTWORTHY? 1. Capitalists, not capitalism, determine the social values & behavior of business. Whatever capitalists want capitalism to do, it will do. 2. Most capitalist business leaders are honest, well-intentioned people who try to do the right things in the right way. However, should the system sustaining capitalism be perverted by misguided politics or profiteering, society pays a price & capitalism gets a black eye.
3. Business walks a thin line between serving the interests of society & exploiting society. When business & political leaders step onto the wrong side of the line, business & capitalism are thrown out of kilter, diminishing society’s trust in capitalism & democracy. 4. The bigger question from the standpoint of global business is whether or not the world’s trust in capitalism & democracy has also diminished.
THE ETHICAL STAKES OF GLOBAL CORPORATIONS 1. Global corporations, the most powerful non-governmental entities on earth, are subject to even less ethical accountability than purely domestic companies. 2. Global companies can sometimes be nonpatriotic soldiers of fortune that place economic self-interest over the needs of entire nations & citizens. 3. Furthermore, global corporations cater to government officials throughout the world in the pursuit of power & business opportunity.
4. Additionally, global corporations are backed by the most powerful nations in the world and, to a significant extent, by global government organizations. 5. Thus, the potential for ethical misconduct or socially irresponsible behavior is even higher in global business than in domestic business— more power is involved & more people are affected. 6. Many people in the world, especially in developing nations, have serious reservations about Enron-era capitalism. Can Americans blame them?
FOREIGNERS ELECTING AMERICAN CANDIDATES? In 2010, the U. S. Supreme Court ruled for the first time that foreigners may make campaign contributions to American political candidates. “The more complicated questions is how to treat U. S. subsidiaries of foreign companies or American corporations that are controlled by foreigner investors. ”
LEGAL BUSINESS BRIBES America’s financial sector spent more than $5 B in lobbying & campaign financing in support of industry deregulation (which was the prime cause of the 2008 subprime mortgage scandal). Of the $5 B, accounting firms spent $155 M on campaign contributions & $383 M on lobbying; brokerage forms spent $513 M on campaigns & $600 M on lobbying. Corporations covered all their political bases, giving 55% of the $$$ to Republicans & 45% to Democrats.
1. Just since the year 2000, 642 business defendants in 290 separate cases of federal whitecollar crime, with 250 guilty verdicts 2. CEOS of 25 different companies indicted 3. 59 suits filed over two years against Wall Street brokerage firms due to alleged conflict of interest research opinions
4. “In 2001 alone, 270 corporations fraudulently “restated” the numbers in their financial statements. From 19972001, a total of 1, 089 companies apparently did so. All told, these transactions have cost investors billions of dollars. It increasingly appears that the economic “boom” of the 1990 s may have been a house of cards built on fraud. The Pied Piper of the bull market and the elusive dream of endless profits put the economy and the culture into an addictive state of financial irresponsibility. ”
THE NEW ERA OF AMERICAN BUSINESS SCANDALS 1. Savings & Loan industry wipeout in the 1980 s 2. Accounting manipulation scandals of the early 2000 s 3. Mutual funds scandals of the 2000 s
4. Wall Street global mortgages & derivatives scandals of the late 2000 s 5. Executive pay corruption of the 2000 s 6. 2000 s systematic disassembling of business regulatory agencies & conflict-of-interest appointments of corporate executives as agency heads
7. Unprecedented corporate influence peddling via megacampaign contributions to federal & state politicians during the 2000 s 8. Corporations electing to pay the damages of fraudulent practices instead of engaging in socially responsible business practices: Toyota, BP, investment banks
9. Late 2000 s scandals involving the government clean-up of business damage to consumers & the environment: Hurricane Katrina, British Petroleum oil spill 10. In an 18 -month period in 2010 -2011, federal investigators convicted 36 investment “entrepreneurs, ” including those fronting large hedge funds (“country clubs” of high-risk, high-return investments) with insider trading (using predatory fraud & deception to steal millions from major investors).
HOW THE BUSINESS SCANDALS OF THE NEW MILLENNIUM ARE UNIQUE 1. The majority of them involved flagrant mutual cooperation between corporate executives, board members, CPA firms (regulators), politicians, & lobbyists—the entire financial infrastructure of America. 2. U. S. capitalism has rotted from within as the institutional infrastructure designed to safeguard shareholders has been systemically perverted & stockholders made victims of “drive-by shootings. ”
“Profit-maximizing capitalism & market deregulation have pressured executives to deliver quick returns on investments & to focus on strictly short-term performance. Faced with mounting pressures to make record profits & to take advantage of relaxed regulations, record numbers of executives haven’t been able to resist the unethical temptations to engage in or tolerate corrupt practices. ”
How long does it take for an amputated arm to grow back? (Once a system has broken down, can it be repaired and made “like new” again? )
AMERICAN ECONOMIC & SOCIAL EXPLOITATIVE SYSTEMS (right click on title & select “open hyperlink”)
“We live with cultural pressures unrelentingly focused upon free market competition and consumption, as if the meaning of life is compete, consume, and die. ”
C 21 ETHICAL LESSONS
“We live with cultural pressures unrelentingly focused upon free market competition and consumption, as if the meaning of life is compete, consume, and die. ”
THE 21 st CENTURY UNETHICAL ALLIANCE OF CAPITALISM Self-serving CEOs + “Insider” boards (hand-picked by executives) + Unethical accounting firms + Irresponsible politicians
1. How could BIGCPA think it was ethical to audit their own consulting clients? (The auditing divisions wanted to help the consulting divisions succeed) 2. Why didn’t the establishment attempt to block BIGCPA’s conflict of interest strategy? (Politicians were getting campaign contributions for deregulating the financial services industry)
3. Why didn’t business schools set the record straight? (They wanted jobs for their accounting majors) 4. Why did corporate boards look the other way at accounting fraud? (Because they were “lapdog” boards chosen by corporate executives for their “goodole-boy” loyalty & support)
IS THE AMERICAN GOVERNMENT PART OF THE SOLUTION OR PART OF THE PROBLEM? 1. Deregulation of the energy & financial services industries in the 1990 s (including brokerage & currency exchange firms that surfaced in the financial scandals after 2000) 2. Under-funding of the Securities and Exchange Commission & IRS 3. Slimy campaign contributions by financial service companies
ENRON’S POLITICAL MATRIX “Enron turned the art of lobbying into a science through an ingenious software program it called the Matrix. Like the one in the movie, Enron’s matrix sought to control Washington politicians with a simple computer program. Every time a new piece of legislation or change in government policy loomed on the horizon, Enron programmers would log the info into their “matrix” to estimate the financial impact of on Enron’s operations. If the results were not to Enron’s liking, their well-funded lobbyists in Washington would swoop in like marauding Huns. ”
What do you do when the regulators have to be regulated?
“Over-scheduling fits right in with the mass consumer mentality. I’m busy, therefore I am, seems to define us. In order to validate our existence, we fill our lives with a lot of things to do and a lot of stuff to consume. ”
LAP Dog Boards “Good ole boy” rubber stamp boards chosen by company executives to avoid accountability for their performance
EXECUTIVE VIDEO-GAMESTERS Many of the financial wheeler/dealers involved in the recent corporate scandals may have been driven by the mentality of video gamesters or computer hackers seeking to see just how far “creative” corporate finance could be taken—an experiment in pushing the boundaries of corporate finance & greed to unheard of levels.
1. ELITE EXECUTIVES The difference between the compensation of corporate chief executive officers (CEOs) and the pay of factory workers is gaping and growing steadily in the United States. In 2001, executives of surveyed corporations in the United States made more than $11 million—some 350 times as much as the average factory worker (vs. 16 to 1 in Japan & 4 to 1 in Sweden. 2. Today, the U. S. gap is at least 10 times greater than the differential in other industrial nations, where tax laws and cultural norms have prevented huge increases in executive pay. 3. The average executive compensation of $11 million in the United States compares with the average pay of factory workers of $31, 260.
The difference between the compensation of American corporate chief executive officers (CEOs) and the pay of factory workers is large & getting wider. In 2001, executives of surveyed corporations in the United States made more than $11 million— 350 times as much as the average factory worker’s $31, 260 annual pay. And this earnings differential grew more than fivefold between 1990 and 2001. In 2007, execs made 179 times more than “rank and file” workers. If the minimum wage had grown as fast since 1990, the minimum wage would now be almost $23 per hour.
Between 1994 and 2007, executives pay increased $90 for every dollar gained by lower level workers. Today, the U. S. top-tobottom pay gap is at least 10 times greater than the differential in other industrial nations, where tax laws and cultural norms have blocked huge increases in executive pay.
Bonuses received by executives in America’s 100 largest corporation rose 46% from 2003 -2004. The median bonus was $1. 4 M
NEW SEC MANDATES FOR REPORTING EXEC PAY In an effort to more clearly and fully inform stockholders of the true compensation of executives, the Securities and Exchange Commission has mandated that the following information must be disclosed in annual reports of executive pay: salary, bonuses, stock awards, stock option gains, non-equity incentive plans, & misc. compensation. The new law makes it more difficult for corporations to hide unauthorized, hidden, or fraudulent forms of exec. pay.
SOX TO THE RESCUE?
1. The Sarbanes-Oxley Act (SOX) of 2002 mandated rules of accountability for corporate executives, boards, & regulators that used to be taken for granted. The very concept of business professionalism assumed that executives were honest and looking out for company stockholders; assumed that boards were holding executives accountable; and assumed that financial regulators were holding corporations accountable. In the post. Enron era, these assumptions are no longer valid. 2. The newly created Public Company Accounting Oversight Board (PCAOB) is nothing more than a regulator for the regulators. Who will regulate the PCAOB?
3. Under SOX regulations: (1) Auditors are prohibited from doing non-auditing work for clients; (2) Companies must establish independent audit committees; (3) Boards can’t make loans to executives; (4) Top executives must certify accounting reports upon their release [the infamous section 404; & (5) Employee “whistle-blowers” are extended more job security. 4. “Some studies have concluded that the costs of SOX (in the millions annually for most companies) far outweigh the gains & that SOX is especially burdensome for smaller companies. ”
THE 3 PILLARS OF AMERICAN CAPITALISM 1. Short-term profit (& operations efficiency) maximization 2. Corporation serves stockholder interests only 3. Values neutrality (business doesn’t decide what products are good, the marketplace does)
NEW IDEOLOGICAL QUESTIONS IN THE WAKE ON THE ENRON ERA 1. Have the Enron era ethics scandals soured the world’s attitude on the American “laissez faire” (individualist) capitalist system? 2. Does C 21 American capitalism lack a sense of community? 3. Does short-term profit maximization/single stakeholder capitalism promote unethical business behavior? 4. Should the American business system be more heavily regulated?
WW III: THE NEW MILLENNIUM'S EMERGING IDEOLOGICAL WARFARE 1. GAC (Global Anti-Growth Coalition) vs. Western capitalism 2. Many developing nations (the vast majority of the global population) feel victimized by the exporting of individualistic, laissez faire capitalist values
WORLD CITIZENS ADMIRE AMERICA’S FREEDOM AND TECHNOLOGY, BUT NOT ITS SOCIAL VALUES: % who feel the spread of American values is bad for the world: 54% 67% 71% 84% of of Canadians Germans the French Egyptians
THE GLOBAL CORRUPTION INDEX 1. According to the Transparency Index, the most respected index of global corruption, Chad is the most corrupt nation to do business in, followed by Bangladesh, Turkmenistan, Myanmar, Haiti, & Nigeria. Other nations high on the corruption list include Kenya, Indonesia, Venezuela, Cambodia, Russia, Ecuador & Bolivia, & the Philippines. 2. Among the least corrupt are the Scandinavian nations, Singapore, Australia, Britain, Canada, Germany & the USA (ranked 17 th from the top).
DOING YOUR ETHICS HOMEWORK 1. Negative impacts awareness report: Look at damage that could result unintentionally in developing nations (eliminating jobs with technology, putting domestic firms out of business, etc. ) 2. Ethics operating environment report: Know how business is conducted in developing nations & “look before you leap. ” 3. Don’t go where you ain’t appreciated (so you can play by your own ethical rules rather than the often corrupt rules in non -institutional cultures. ).
ADVICE FROM LIZ MARAIST, ETHICS COMPLIANCE OFFICER FOR J. RAY MCDERMOTT 1. To successfully comply with Sarbanes-Oxley, every company should have a code of conduct for the following areas: conflict of interest; entertainment & gifts; procurement integrity; antitrust compliance; worker safety; environmental protection; integrity of records; data security & privacy. 2. The following actions promote successful implementation of corporate ethics programs: 24 hour employee ethics advisory hotline; transparent discussion/training regarding ethical issues the company wrestles with; grass-roots monitors of ethical practices; consistent & timely follow-up on all ethics problems.
Don’t violate “arbitrary” laws (“everybody’s doing it. ”) Just because you can get away with it, doesn’t mean you should try
ARBITRARY LAWS (unethical activities corporations know are illegal but sometimes engage in because “everybody else does it”) 1. Inside stock trading 2. Sweat shops 3. Polluting 4. Bribery 5. Using black market currency 6. “Social dumping” (manufacturing in nations with lax enforcement of laws designed to regulate business)
ARTITRARY ETHICS 1. Don’t obey laws no one else obeys. 2. Cheat when other cheat. 3. You don’t have to break laws you helped get passed to benefit yourself. 4. Giving money to politicians is legal, but not ethical. 5. Boards are the ultimate goodold-boy network (fat cats helping each other get fatter).
1. In today’s ethically schizophrenic culture, you have to know what your ethical standards are & assertively stand up for them when necessary. 2. Most professionals today resort to following external professional codes of ethics rather than internalized convictions 3. Most institutions go by the letter of the law rather than the spirit of the law. 4. Americans tend to value pragmatism (cutting ethical corners to get ahead) over principle (doing the right thing).
What justice should look like: Restitution Ethics Policy Felons pay back their victims through work restitution programs
Jail is the easy, gutless way out. Imagine if the $20, 000+ annual cost of each inmate in Texas prisons could be used for the restitution of crime victims
We are too flawed to police ourselves—Triangulation is mandatory: (A) The government watching regulators watching companies (B) Employees watching their companies (C) The media watching the government & companies
3 APPROACHES TO SOCIALLY RESPONSIBLE GLOBAL INVESTING 1. Screening: Eliminating investments in global companies that engage in exploitative competitive behavior 2. Shareholder advocacy: Investing in companies for the purpose of influencing its global behavior 3. Community investing: Investing in local communities that are typically bypassed by institutional investors
Do the USA & West have any responsibilities to help alleviate AIDS & other epidemic diseases in Africa? How does ideological capitalism (profit/efficiency maximization + commitment to stockholders only) keep American pharmaceuticals from donating the drugs?
It’s not the company’s $$ to give away. It belongs to stockholders.
Merck pharmaceuticals did recently donate large amounts of a drug to stop “river blindness” (blindness spread by parasitical worms), helping to save the sight of 600, 000 west Africans.
The head of the World Council of Churches recently advocated that developing countries violate drug patents and copyrights if that is the only way people with AIDS and other virulent diseases can survive. International trade rules require WTO member nations to enforce drug patents, which usually drives up the price of these drugs beyond the reach of most of the world’s population. Nations which violate patents face economic sanctions from the WTO.
1. Blackmarketing of products made in developing nations (Do you know where your clothes were made? ) 2. The perverted MBA mentality of turning business into a video game of fast track career building, or the hacker’s mentality of “What can I get away with? ” 3. Amoral values neutrality: corporations don’t take a stand on how worthwhile their products are —it leaves this up to the marketplace.
THE CHALLENGE OF A LIFETIME 1. What will you do if you are an ethical person working in a corrupt system? 2. It all depends on how important your career is to you.
CAPITALISM’S MISSING INGREDIENT: COMMUNITY
1. Invisible capitalism impacts invisible vulnerable communities (home owners, the “working man, ” middle class retirees living off meager Social Security, etc. ) 2. Profit-seeking is intentional; benefiting communities is unintentional 3. Large corporations seek autonomy, not interdependency (accountability) 4. Business feeds off consumerism, which feeds off debt (financial services), which ruins community 5. Greed ultimately kills community
LETTER TO THE EDITOR. Let’s call the $700 billion banking bailout plan just what it is — pure and simple theft. Stock market investors know the risks when they get involved. The investors who were fooled by the greedy investment bank CEOs should be the ones to foot the bill for the bailout plan, not taxpayers like me. The politicians who have openly stolen are thieves and don’t deserve to be re-elected. And since the rest of the industrialized world is being affected, additional bailout money will have to come from other nations to keep the US from damaging their economies. US sovereignty is being compromised by all of this indebtedness.
“ACES” Anti-Community Exploitative Systems (right click on title & select “open hyperlink”)
CHANGING CAPITALISM TO BENEFIT A CHANGING WORLD
A FEASIBLE ALTERNATIVE CAPITALIST IDEOLOGY? 1. Profit “satisficing, ” not maximizing 2. Dual bottom lines: Profit for stockholders + service to non-stockholders 3. Smaller companies = accountable capitalism
1. Tax-funded state colleges & universities have little latitude in spending money on anything but state-mandated budgeted items. Private universities, however, are free to spend as they please, because they operate according to their own priorities. 2. As the only independent school in the Big 12, Baylor University has autonomous control over its own decision-making, giving it the opportunity to spend on worthy community-outreach projects if it so chooses—without state restrictions. Baylor is free to serve whom it pleases.
THE IDEALISTIC SOLUTION: WORK FOR OR START A PRIVATE COMPANY 1. Staying private enables you to play by your own rules instead of catering to whatever the fickle marketplace wants. 2. Private companies don’t have to maximize profit in the short run & serve only stockholders.
BUILT-IN ETHICAL ACCOUNTABILITY IN SMALL BUSINESS Unlike large, impersonal corporations, smaller companies must build a personal bond with their customers based on mutual trust & respect. Unethical behavior has no place in this relationship, because it destroys trust. Thus, small companies must enter into an accountability partnership with their various stakeholders (customers, financers, suppliers, etc. ) which reduces the likelihood of unethical or exploitative business behavior. Large corporations are less accountable because of their economic power over stakeholders and capacity to conduct business in a largely anonymous, impersonal capacity.
“We live with cultural pressures unrelentingly focused upon free market competition and consumption, as if the meaning of life is compete, consume, and die. ”
ETHICAL BUSINESS IS SUSTAINING & BUILDING COMMUNITY
ETHICAL BEHAVIOR IS NOT DEFINED AS: 1. Obeying the law 2. Doing what others do 3. Maintaining a standard 4. Being nice 5. Making money legitimately
ETHICAL BUSINESS PROFESSIONALS STRIVE TO: 1. Maximize the positive community impacts of business behavior 2. Minimize negative impacts of business behavior
3 CONCEPTS OF BUSINESS ETHICS 1. Legalistic 2. Imaging 3. Communitybuilding
#1 LEGALISTIC ETHICS
Laws Courts Trials & Suits Lawyers PR Media
THE LEGALISTIC ETHICS GAME • Use the system for self gain • Abuse the system • Letter of the law • Loopholes • Litigation
• Lawyers • Plea bargaining • PR • Time off for good behavior • Recycle back into the system & replay
MOST COMMON LEGALISTIC ETHICAL TENSIONS • Defining ethical behavior legally • Proving legal breaches • Neutralizing the influence of vested interests
• Measuring the damage done by legal infractions • Tolerating lax ethical standards in many industries • Amoral capitalism
#2 IMAGING: False facades
• High social status of company • Hologram public image • PR good works • Insider awards • PR coup for your company • Maintenance of community violations in your company
THE IMAGING ETHICS GAME • Advertising & PR imagebuilding • Join self-aggrandizing elitist groups • Engage in publicized visible good works • Receive “community” awards from fellow elitists • Recycle & repeat
MOST COMMON IMAGING ETHICAL TENSIONS • Self-focus > community focus • Using the system for self-gain rather than changing the system • Inconsistencies between company image & community practices
#3 COMMUNITYBUILDING ETHICS
Community = all those directly & indirectly affected by the pursuit of self-interest
CAPITALISTS ETHICALLY AFFECT: • National governments • Markets • Industries • Corporations • Executives • Employees • Consumers • Economic communities • Social communities
MOST COMMON COMMUNITY ETHICS OBSTACLES • Impersonal marketplace, profit maximization, stakeholder minimization • Amoral MBA mentality • Political power of corporations • Industry oligopolies
• Colonialism & turbocapitalism • VAC dominance by a few private interests • Uninformed consumers • National protectionism • Trade wars
COMMUNITY ETHICS COMMITMENTS • Commitment to multiple corp. constituents • Accountability to stakeholders • Profit satisficing in a multiple-gain system
• People before profit • Others before self • Sustainable incomes • Long-term profit > short -term • Closed stock ownership to maintain idealistic values
“Deregulated global business allows corporations to wander the globe in search of ever lower wages and laxer environmental standards. ”
INDIA’S TATA GROUP: GLOBAL COMMUNITY CAPITALIST
The India-based Tata Group is a highly diversified global company that specialized in making small, affordable cars for developing nations. Founded in 1868 & controlled by charitable trusts, Tata “has long insulated employees from the greed that is sweeping the corporate world. ” This stems from a unique multicultural operating approach:
1. Buying companies in the global marketplace to improve their operations, not subject them to cost-cutting. 2. Forming a new multinational management community board to lead the acquired company made up of its executives combined with Tata executives. 3. Cultural differences between Tataaffiliated companies across the globe are smoothed over via tolerance of cultural differences & a culturallyaccommodating professional environment.
HOW TO BE LEGALLY UNETHICAL
It is possible to be legally (obeying the law) unethical (harming community) simply by using existing imperfect exploitation systems that are legal, such as: 1. Buying political influence via large financial contribution to political action campaigns & lobbying. 2. Allowing top executives to pick their own board members. 3. Paying workers minimum, but not sustainable, wages. 4. Taking advantage of business deregulation that reduces corporate responsibility towards community stakeholders.
5. Using predatory, but legal, competitive tactics, such as price wars, buying out competitors, & selling below cost. 6. Off shoring manufacturing & closing domestic plants. 7. Engaging in highly leveraged business growth 8. Outsourcing illegal business behaviors at home, such as pollution, to foreign nations where such practices are unregulated. 9. Personal workaholism and neglect of dependents (family).
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