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Full-text source: WilsonSelectPlus Can multinational businesses agree on how to act ethically?. Author: Berenbeim, Ronald E. Source: Business and Society Review no98 (1997) p. 24-8 ISSN: 0045-3609 Number: BBPI97091789 Copyright: The magazine publisher is the copyright holder of this article and it is reproduced with permission. Further reproduction of this article in violation of the copyright is prohibited.   IN HIS DISSENT in Lochner v. New York (1905), Oliver Wendell Holmes gave definitive expression to the belief that it is possible to construct a workable system for governing a diverse community. In words that presaged nearly a century of constitutional change, he thundered that "a constitution is made for people of fundamentally differing views." Pressing the argument further, Justice Holmes insisted that societies can and must avoid the pitfalls of ideology to construct a system of rules and processes for governing people of many cultures, religions, and yes, even "values" can be added to that list. What else is a constitution but a system designed and built to function in that way? The foundation of Holmes' boundless confidence in constitutionalism was his belief that a self-governing community derives its laws naturally through experience. Earlier, in his Harvard series of lectures on The Common Law, Holmes argued that "the life of the law has not been logic: it has been experience. The felt necessities of the time, the prevalent moral and political theories, intuitions of public policy, avowed and unconscious, even the prejudices which judges share with their fellow men, have had a good deal more to do than the syllogism in determining the rules by which men should be governed.". These words have considerable resonance for companies competing in a global economy. A workable consensus regarding business principles, practices, and procedures that are applicable to situations that arise in radically different societies is now viewed as a matter of "felt necessity." It is also evident after a half-century of ideological warfare that a successful effort to reach agreement on common principles of business conduct will be derived more from "experience" than from the application of "prevalent moral and political theories" (or) "intuitions of public policy.". A corollary to that proposition is that governments are limited in their ability to promote agreement regarding global standards of business conduct. In contrast, practitioner commissions have, within the last decade, enjoyed demonstrable success in encouraging serious discussion and formulation of guidelines for best practices. For example, the response to the Cadbury and Vienot corporate governance reports suggests that a committee of peers may have greater potential than a governmental commission to generate interest and incentives for companies to focus on best practices. In its search for global business ethics principles, practitioners and interested parties should examine four subjects: 1) standards of conduct for the business professional; 2) global standards of corporate conduct; 3) essential host country conditions for profit-making activity; and 4) protocols for operating in host countries where minimal standards are not met. STANDARDS OF CONDUCT FOR THE BUSINESS PROFESSIONALThe first step in the articulation of global business ethics principles is the recognition that ethical decision making is a key responsibility for a growing percentage of the work force. The complexity of tasks and issues confronted, the diversity of cultures in which companies engage in business (within and outside the borders of their own countries), the need for continuous learning, and limited supervision challenges individual workers to be moral legislators. Even as work has developed a larger ethical component, the institutions to which society looks to develop the moral imagination have diminished in importance. In the United States, the town meetings and voluntary associations that de Tocqueville so admired have ceased to play the vital role that they once did in helping people to become morally articulate. While it is worth noting that we live in an era of religious revival (nowhere more evident than in the United States), it is primarily in the office that people are confronted with the choices that will enlarge or diminish their moral capacity. Within the last 10 years, business institutions have begun to acknowledge a role that they did not welcome and with which they were not at first entirely comfortable. Corporations are learning organizations and ethical literacy is part of their curriculum. Employees have responded in a curious way. No doubt many of them resent the new demands of ethics training and review of conduct statements, but, at the same time, the professional associations in functional specialties such as human resources and purchasing to which many belong have developed statements of professional conduct and accountability. In addition, a growing number of corporate employees are already subject to the well-established ethical requirements of law, accounting, and increasingly, medicine. Despite the influx of workers trained in traditional professions, the most common professional degree for managers remains the Master of Business Administration (MBA). As a result of curriculum changes, recent and prospective graduates of leading business schools are now well versed in legal and ethical methodologies for resolving problems on a case-by-case basis. At a minimum, the current expectation is that an MBA can recognize an ethical problem and the interests affected by the outcome, has acquired the analytical skills necessary to deal with this kind of conflict, and can apply methodologies to formulate a rule for dealing with recurring situations. Senior executives and most of the people that their companies are recruiting are now comfortable with the language of ethics. Of the four major subject matter areas in the search for global ethics principles, it is easiest to reach a consensus on standards of individual accountability. After all, it is a fairly undemanding exercise for companies to tell their employees that they are expected to act in accordance with the highest standards of honesty and care and that they will suffer severe consequences if they do not. The challenge is to make these exhortations meaningful. Companies that do not have ethical performance standards, criteria for the political or legal environments in which they do business, and protocols for operating in countries where the environment makes it difficult to function ethically will force employees to choose between complying with ethical requirements or achieving business performance objectives. In addition, many of these employees will belong to professional associations that have their own proposed rules of conduct which may, in certain instances, raise serious questions regarding individual business decisions. While such situations cannot be avoided, there is a need to discuss how the risk of conflict can be minimized. GLOBAL STANDARDS OF CORPORATE CONDUCTAll major business enterprises (even those that do not pursue business outside the home country) now compete in a global arena. Efforts to develop global standards of corporate conduct have achieved some degree of consensus with respect to appropriate subject matter (e.g., corruption, environmental responsibility, product safety and quality), but, of course, the actual standards with respect to these areas are a matter of serious debate. The most difficult analytical problem in this area (and a critical element in determining standards) is the issue of accountability to stakeholders. The requirement (or lack thereof) to balance competing stakeholder claims is a critical issue because, with the exception of corruption, the growing consensus as to appropriate subject matter reflects an implicit acknowledgement of stakeholder claims other than those of the shareholder. In this discussion the law creates more confusion than clarification. Jurisdictions vary considerably in their prescriptions to officers and directors for the balancing of stakeholder claims. For example, in the United States alone, there are states that have stakeholder statutes that permit varying degrees of consideration of the economic impact on local communities of the sale of the company. Other states, notably Delaware, where a significant number of U.S. companies are incorporated, have no such statues. And, of course, U.S. law and that of other countries differ considerably with regard to the obligations of officers or directors to show moral restraint in situations where maximizing profit may inflict injury on nonshareholders who have an important relationship of dependency with the company. Ultimately, widespread acceptance of corporate conduct standards will depend in significant measure on the degree of acceptance accorded to the emerging corporate governance model for global companies. The interest in a global corporate governance template is driven in large measure by the need for uniformity in standards of board accountability, performance measures, and disclosure requirements in world capital and consumer markets. Unavoidably, the demand for corporate accountability to investors will also generate a broader discussion as to whether corporate acknowledgement of nonshareholder interests remains primarily a matter of strategic necessity or rises to the level of a moral, or even legal imperative. In comparison with the analytical difficulties of formulating global standards, issues encountered in implementation and monitoring are somewhat less formidable, but they are by no means easy. The fundamental problem is simply stated. Companies have legislative and enforcement mechanisms for the development and implementation of rules of conduct. As processes go, legislation is malleable; enforcement is oppositional. Legislative success requires inclusion and mutual forbearance to achieve a consensus that is somewhat less than each individual party had hoped to obtain. Legislation is an effective method (perhaps the most effective) for reconciling conflicting cultural norms and giving expression to them in a single rule. In contrast, enforcement demands obedience and, significantly, in this context, a willingness on the part of community members to report the infractions of others. Indeed, there may be no historical example of effective enforcement of a rule that did not have a substantial degree of voluntary compliance combined with a significant amount of citizen cooperation in identifying rule breakers. A law that can be enforced through voluntary compliance alone is unnecessary. Alternatively, where significant member or citizen cooperation in enforcement is not forthcoming, the state or organization would lack the means or the will to obtain compliance because it would require nothing less than tyranny to do so. The foregoing formula exposes the difficulty that global companies encounter in the promulgation and enforcement of rules. No matter how inclusive a company's legislative process is, it is not representative in any real sense. In addition, enforcement of rules of conduct for global enterprises invariably requires compliance systems in cultures where there is intense hostility regarding the need for any citizen involvement in the identification of wrong-doers. If the employees also think that the rule is pointless, the compliance effort is doomed. ESSENTIAL HOST COUNTRY CONDITIONS FOR PROFIT-MAKING ACTIVITYNo company can hope to comply with the rules for itself or its employees in environments where the absence or the breaking of such rules is a necessary condition of profit-making activity. You cannot say to a country manager, "Don't do this, don't do that, now here are your goals for Country X where all of our competitors do this and that. I don't want to hear any excuses if these objectives are not met." Under those circumstances, either rules will have to be broken or ambitious goals will not be achieved. The way to avoid this kind of impossible situation is to build a consensus among practitioners for enforceable rules and follow with an effective enforcement strategy. The example of the Foreign Corrupt Practices Act (FCPA) is a case in point. Although it would be more satisfying to punish the person who demands the bribes than the company that pays it, obtaining legal prohibitions in the major industrial countries and targeting the companies that bribe rather than the local citizens who demand payment is likely to have greater impact. Of course, both efforts are needed, but success is possible by focusing primarily on the supply side. After all, if no one paid bribes, before long, insistence on them would become less frequent. Still, there may be practices that are so endemic (in some countries, bribery may be one of them) that they endanger a company's profit-making activity. There are two reasons why a country's failure to meet threshold legal and political requirements can compromise the profitability of a venture:. First, the absence of the fundamental elements of a civil society such as an independent judiciary, enforceability of contracts, and protection of intellectual property deprives companies of the minimal assurance that functioning capitalism requires to assure the reliability of transactions. Second, the credibility and legitimacy of companies that aspire to global stature is significantly undermined when they do business in countries where the local regimes engage in conduct that traduces the rights of their people. To cast the matter in a more positive light, some companies are now more sensitive regarding human rights issues. It is an open question as to whether these concerns rest on principle or on a belief that such high-profile public statements are a source of competitive advantage in other markets where the company does business. Regardless of the motive, there does seem to be some movement in the direction of corporate standards for host country moral minimums. Just exactly what these minimums are with respect to due process and human rights protections is open to discussion. There does, however, appear to be a growing acceptance that they do exist. The formulation of minimal standards has been further complicated by the argument that such initiatives show insufficient respect for host country cultures -- or, as the proponents like to say, "values." One could just as easily argue that these self-appointed advocates also show a lack of respect for the complexity and richness of their own civilizations. In the case of Asia, the most prominent instance in which this specious argument has been advanced, the authoritarian interpretation of Asian tradition has been challenged by Amartya Sen and Simon Leys who have recently demonstrated what one would have thought a likely point that no one else had the wit to make -- Confucian Analects are at least as contradictory as Platonic Dialogues. One example will suffice: "When Zilu asks him 'how to serve a prince, Confucius replies: 'Tell him the truth even if it offends him. ". Still, there is something even more odious about the rhetoric of "Asian values." Its condition for acceptance is the very patronizing attitude that it criticizes. No American would regard a country's current government as the apotheosis of its civilization. Is the Italian government the distilled essence of the culture that gave us Dante, Michelangelo, and Verdi? Even the Italian prime minister, one of the more estimable individuals to hold that post in some years, would make no such claim. Of course it is important to recognize and respect the disparate values of the many different communities in which a company does business. Arguably, the best way to do so is through participation of representative members of all affected communities in a global effort to achieve consensus on minimum standards and to identify areas of difference in which it is important for companies to demonstrate awareness, flexibility, and tolerance with regard to local beliefs and customs. PROTOCOLS FOR OPERATING IN COUNTRIES WHERE MINIMUM STANDARDS ARE NOT METBoth corporations and their critics have tended to regard withdrawal as the only appropriate response where host countries fail to meet minimum civil law or human rights requirements. When confronted with the alternative of pulling out of or remaining in a country which the company has already identified as offering a good business opportunity, the argument often evolves into a debate over whether withdrawal or continued engagement is the most effective way to pressure rogue political regimes into more acceptable behavior. More often than not, converting the discussion into a choice between sanctions and engagement results in the wrong argument about the wrong issues. Even countries that attempt these exercises in sovereign behavioral modification usually wind up confronting the stubborn fact that the course of a nation's history is seldom affected (except possibly at the margins) by external forces. Sea changes in political, economic, and legal systems are invariably the product of internal rather than external pressures. Rather than limiting the potential responses to the two extremes of sanctions and engagement, sophisticated global companies now look at a broader range of issues in assessing the prospects that a host country offers for business success. If appropriate weight is given to factors such as the honesty of local officials, the enforceability of contracts, protections for intellectual property, and the rights of local citizens, it is likely that fewer companies will have to choose between withdrawal or continued participation in an unattractive host country. They simply will not be there in the first place. For those companies that do find themselves in a host country that fails to meet minimal standards, the focus should be on the company's needs and not the outcome that is most likely to bring about an improved situation. The important questions to ask are whether the weakness of civil society endangers prospects for profit in the host country market; or, if being tethered in the public mind to repressive host country regimes will have an impact on profitability in other markets. Finally, as a growing number of companies have mounted efforts to define core principles, decision makers must ask whether continued engagement in certain countries will breed a lack of respect for those principles and, in so doing, will weaken the company's institutional fabric. THE SEARCH FOR GLOBAL BUSINESS ETHICS PRINCIPLES: PROSPECTS FOR SUCCESSUntil recently, we have not thought much about global business ethics principles because it was not necessary to do so. For nearly 50 years the cold war limited opportunities in much of the world for U.S., Canadian, European, and Japanese companies. It was difficult to find a corporation that could claim to be truly global. The cultural factors that Justice Holmes would acknowledge are unavoidable considerations in the formulation of general principles for "people of fundamentally differing views" were safely ignored in authoritarian countries whose rulers were guided by the prospect of their personal gain and the West's strategic and geopolitical priorities. For example, 30 years ago, most, if not all, U.S. and European companies had limited business prospects in what was then known as Czechoslovakia and enjoyed highly favorable opportunities in Iran. Today, there is no East or West as such. Achieving some degree of consensus regarding the Czech Republic's business conduct standards and those prevalent in the rest of the advanced industrial world is not a matter of serious concern. At the same time, after nearly two decades of isolation, the day may be at hand when global companies can again compete in Iran. And the terms of Iran's reemergence requires careful thought. The Iranian example underscores the importance of global business conduct principles. Business practice now plays a critical role in defining the terms of engagement between nations. The effort of global companies to reach consensus regarding the rules that govern their competition will go a long way in determining how effectively the world of the twenty-first century can accommodate people of fundamentally differing views. Added material. Ronald E. Berenbeim is director of Global Business Ethics Principles Working Group at The Conference Board.

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