Globalization and Business Ethics

Business ethics is a well-institutionalized academic field, which deals with the moral dimension of business activity. In the context of international business, it means the treating of moral questions of international cultures and countries. International business should be sensitive to the environment and not just selfish for its own profits. Ethically, safety comes first and the profit comes last. The various issues that ethics target are diverse environmental concerns, animal welfare issues, labor practices, fair trade, health concerns, genetic modification, patenting of genes, cloning etc. International business is both more exposed to a variety of ethical conditions as well as in a position to exploit business ethics due to the sheer size an international company has. The end result of an ethical judgment entails its authenticity from being morally correct. But moral correction itself is a relative concept and is based upon the cultural perceptions as well as traditions. The international market and business arena can be ethically segmented into the die hard, the dont cares, and the various groups in between. Companies all around the world are coming under scrutiny from governments, shareholders, customers, trade unions, human-rights groups, and others to prove that their activities are conducted in ethical ways.

Globalization refers to the shift towards a more integrated and interdependent world economy. Globalization has brought a lot of people into contact with the world by declining the barriers of the free flow of goods and services, since the World War II and the dramatic technological change and development in recent years mainly in the past three decades. This development has made the people around the world to be connected to each other. Information and money flow quicker than ever. Products produced in one town are available to the rest of the world. It becomes much easier for anyone to travel, communicate and do business internationally. Free flow of goods and service s has produced many opportunities for business. This whole phenomenon has been called globalization.

Relevance of Globalization for Business Ethics

Globalization as defined in terms of the de-territorialization of economic activities is particularly relevant for business ethics, and this is evident in three main areas – culture, law, and accountability.

1. Cultural Issues

As business becomes less fixed territorially, so corporations increasingly engage in overseas markets, suddenly finding themselves confronted with new and diverse, sometimes even contradicting ethical demands. Moral values, which were taken for granted in the home market, may get questioned as soon as corporations enter foreign markets. For example, attitudes to racial and gender diversity in Europe may differ significantly to those in Middle Eastern countries. Similarly, Chinese people might regard it as more unethical to sack employees in times of economic downturns than would be typical in Europe. Again, whilst Europeans tend to regard child labour as strictly unethical, some Asian countries might have a more moderate approach. Consider the case of Playboy, the US adult magazine, which had to suspend its Indonesian edition and vacate the company premises in 2006 in the wake of violent protests by Islamic demonstrators – even though the Indonesian edition was a toned down version that did not show nudity. The reason why there is a potential for such problems is that whilst globalization results in the deterritorialization of some processes and activities, in many cases there is still a close connection between the local culture, including moral values, and a certain geographical region. For example, Europeans largely disapprove of capital punishment, whilst many Americans appear to regard it as morally acceptable. Women can freely sunbathe topless on most European beaches, yet in some states of America they can get fined for doing so – and in some Muslim countries would be expected to cover up much more. This is one of the contradictions of globalization: on the one hand globalization makes regional difference less important since it brings regions together and encourages a more uniform ‘global culture’. On the other hand, in eroding the divisions of geographical distances, globalization reveals economic, political, and cultural differences and confronts people with them.

It has been said that countries exhibit very different views on the makeup of business ethics. These differences are regarded as based largely in cultural diversity. For example, Japan is considered to have an entirely different set of guidelines than the United States because the cultures of these two countries come from entirely different origins. However, if business ethics are based only in culture then businesses’ global interactions should instigate much more conflict than currently exists. The basic cultures of Japan and the United States have very little common ground, therefore their views on business ethics would come from entirely opposite directions. Compromising a culture’s moral values can be considered extremely difficult; it is much more likely that those same values would try to be imposed upon the other party. With each culture imposing its values on the other, the result would be adamant conflict. However, the rapid growth of global business paints this picture of conflict as false. Businesses can only expand quickly in global markets by being empathic to the needs, perspectives, and accepted procedures of their foreign counterparts and partners. Therefore, business ethics is not entirely based on the culture from which it is derived. It is based more on a basic human moral understanding that transcends international boundaries. Up to present, ethics have evolved through isolated pockets due to the limited scope of global communications. Today’s close communication and cooperation of companies worldwide will have an evening out effect. Business ethics will eventually drive toward one general definition. What exactly constitutes that definition is yet to be determined. The certainty is that the definition will be fluid in nature and change as new principles are accepted and implemented. To know where we are headed we must understand how ethical business practices evolved. Although business ethics is a relatively new study the concept has been around since commerce began. For instance, a blacksmith earned his reputation by treating his employees well and his customers fairly. As his reputation grew so did the size of his business. While this is a simplistic example it is meant to show that the concept of fair business practices has existed and contributed to the success of enterprises long before business ethics became an established study. Prior to today’s multiple innovations in worldwide communications, business morals in each separate geographical area evolved on their own. Without much influence from the outside world, ethical behaviour was influenced by what was important to the society. What was significant to the society created expectations of fair business practices that have carried through the years? What do societies consider important?

Culture and ethics are interrelated and intertwined in such a way that it makes it difficult to know which factor guiding / motivating the behavior is arising from a given situation. Is it the cultural vision of his/her ethics or is it the ethical vision of his/her culture that guides someone to do or not do certain things. Trompenaar’s survey questioning people’s reaction to a given situation shows that cultures with more emphasis on human relationships and loyalty (particularists) scored lower than those that emphasized obeying rules (Universalists).

Lying was more prominent in cultures stressing human relationships, whereas it was less prevalent in cultures stressing rules. Telling the truth is an ethical value that appears in this context. One could say, people in cultures emphasizing human relationships would most likely lie to protect the relationship; whereas, people in cultures putting a greater value on rules would lie less in order to abide by the rule.

2. Legal Issues

A second aspect is closely linked to what we said previously about the relation of ethics and law. The more economic transactions lose their connection to a certain regional territory, the more they escape the control of the respective national governments. The power of a government has traditionally been confined to a certain territory, for example: French laws are only binding on French territory, UK laws on UK territory, and so on. As soon as a company leaves its home territory and moves part of its production chain to, for example, a third world country, the legal framework becomes very different. Consequently, managers can no longer simply rely on the legal framework when deciding on the right or wrong of certain business practices. If, as we said earlier, business ethics largely begins where the law ends, then deterritorialization increases the demand for business ethics because deterritorialized economic activities are beyond the control of national (territorial) governments. For example, global financial markets are beyond the control of any national government, and the constant struggle of governments against issues such as child pornography on the internet shows the enormous difficulties in enforcing national laws in deterritorialized spaces.

A behavior may be perceived as ethical to one person or group but might not be perceived as ethical by another. Further complicating this dichotomy of behavior, laws may have been legislated, effectively stating the government’s position, and presumably the majority opinion, on the behavior. As a result, in today’s diverse business environment, one must consider that law and ethics are not necessarily the same thing. Though law often embodies ethical principles, law and ethics are far from co-extensive. The law does not prohibit many acts that would be widely condemned as unethical. And the contrary is true as well. The law also prohibits acts that some groups would perceive as ethical. For example lying or betraying the confidence of a friend is not illegal, but most people would consider it unethical. Yet, speeding is illegal, but many people do not have an ethical conflict with exceeding the speed limit. Law is more than simply codifying ethical norms. Establishing a set of ethical guidelines for detecting, resolving, and forestalling ethical breaches often prevents a company from getting into subsequent legal conflicts. Having demonstrated a more positive approach to the problem may also ensure that punishment for legal violations will be less severe.

An example is the manufacturing practices of Nike, one of the largest manufacturers of athletics sportswear in the world. Nike produces the majority of its goods in South East Asia. Despite the profits of the Nike organization, its foreign workers are paid substandard wages and work long hours in appalling conditions. In 1996, the entry-level wage at one of these factories was $2.20 a day. Labor groups estimate that a livable wage in Indonesia is about $4.25 a day. Compare this with the pay of one of Nike’s celebrity promoters, Michael Jordan, who gets $20 million a year to promote Nike sneakers. Jordan’s compensation alone is more than the annual income of 20,000 workers who make Nike shoes.

Nike’s manufacturing practices are not illegal. There is nothing that says a company cannot take its manufacturing operations outside the United States. And as long as the company is meeting the minimum wage standards of the host country, there is nothing illegal about paying low wages. However, most Americans would look at these practices as unethical, especially considering the profits of Nike and their spending on celebrity promoters.

Clearly, there is a relationship between law and ethics, and this relationship is important in management. Managers must evaluate not only what is legal, but what they, their employees, and society consider ethical as well. Important here is that companies must also consider what behaviours their customers will and will not accept. The news is full of stories regarding the ethical issues with which companies are being confronted, such as the practices of Nike, as outlined above. No company wants to be forced to defend itself over ethical issues involving wages, the environment, working issues, or human relations.

Managers play a vital role in a company’s legal and ethical performance. It is in part their responsibility to ensure that their employees are abiding by Federal, State, and Local laws, as well as any ethical codes established at the company. But most importantly, the managers must provide a positive example to their employees of proper behaviour in light of laws and ethical codes.

Certainly, policies and procedures will never be developed to satisfy everyone, but the establishment of Codes of Ethics will at least provide a framework for ethical behavior, and allow customers to evaluate the type of company with whom they are doing business. With this knowledge, employees and customers must decide whether or not they are willing and able to conform to these Codes, as well as to the laws that have been enacted. Managers cannot simply limit their decisions to following the law. They must also consider the ethics of their employees and customers.

3. Accountability Issues

Taking a closer look at global activities, one can easily identify corporations as the dominant actors on the global stage: MNCs own the mass media which influences much of the information and entertainment we are exposed to, they supply global products, they pay peoples’ salaries, and they pay (directly or indirectly) much of the taxes that keep governments running. Furthermore, one could argue that MNCs are economically as powerful as many governments. For example, the GDP of Denmark is about the same as the turnover of General Motors. However, whereas the Danish government has to be accountable to the Danish people and must face elections on a regular basis, the managers of General Motors are formally accountable only to the relatively small group of people who own shares in the company. The communities in the US, Brazil, or Germany that depend directly on General Motors’ investment decisions however have next to no influence on the company and, unlike a regional or national government, General Motors is, at least in principle, not accountable to these constituencies. What this means is that the more economic activities get deterritorialized, the less governments can control them, and the less they are open to democratic control of the affected people. Consequently, the call for direct (democratic) accountability of MNCs has become louder during the last years, evidenced for example by the anti-globalization protests that we mentioned before. Put simply, globalization leads to a growing demand for corporate accountability. The corporate community has been shocked to attention by the recent corporate governance meltdowns. The silver lining is that these scandals are resulting in better financial oversight and more focused attention on the ethics of directors, officers, auditors and others. But while promises of increased ethical conduct focus the public’s attention, self-scrutiny and accountability are also essential.

Ethics is easier in concept than in application. Codes of ethics are not new. Nor are efforts to encourage ethical corporate practices. In 1991, Congress enacted the U.S. Federal Sentencing Guidelines. These guidelines had a major impact on corporate America and were an effort to positively induce companies to prevent unethical activity by providing mitigation of some punishment and reductions of fines for companies that proactively made a good faith effort to take steps to prevent unethical activity. Congress used the stick and the carrot approach to provide an incentive for companies to create or modify their ethics programs–good behavior is rewarded when companies involve themselves in crime controlling actions. Elements of an effective compliance program under the Guidelines include a code of conduct or ethics; oversight by high-level personnel; due care when delegating authority; effective training and communication; auditing and monitoring and reporting mechanisms; enforcement of disciplinary mechanisms; and appropriate response after detection.  Five years later, a court case provided another wake-up call. In 1996, a court in Delaware held a board of directors responsible for the unethical and illegal actions of the organization and its employees. This case caught the attention of corporations and led some companies to institute compliance and reporting structures.

Of course, the Sarbanes-Oxley Act of 2002 has gotten the most attention recently. Sarbanes-Oxley was enacted in response to the conduct of corporations such as World Com, Enron and Arthur Andersen. While Sarbanes-Oxley largely affects only publicly traded companies, it has led to a trickledown effect. Its requirement that all publicly held corporations disclose whether or not they have a code of ethics for its Chief Financial Officers have led privately held companies and non-profit corporations to enact codes of ethics. The trend is that more companies are adopting and using codes of ethics.

There are several benefits of a formal ethics policy. As described above, there are legal benefits in the form of reduced fines and penalties. However, an ethical working environment is another important benefit. A formal ethics policy can lead to decreased job dissatisfaction, decreased pressure to violate ethical standards, improved communication, increased trust in management, greater consistency in decision-making, and fewer violations of law and regulation, just to name a few. Pragmatically, it is often true that good ethics equals good business. Consumers, employees, and vendors lose trust in companies which engage in unethical activities. Companies that promote trust, honesty, integrity, fairness and respect generally have an easier time attracting quality employees.

Less observable, a strong ethical environment can encourage conversations about ethical issues, questions, and gray areas. It can also provide a comfortable environment for employees to seek guidance and raise concerns. When given the opportunity to communicate expectations and requirements, a company can proactively influence its employees and officers to avoid unethical conduct and violations of law. A formal ethics policy reminds employees and officers what the company deems the right thing to do.

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