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Why an international code of ethics would be good for business Essay

Many international business training programs present a viewpoint of cultural relativism that encourages business people to adapt to the host country’s culture. This paper presents an argument that cultural relativism is not always appropriate for business ethics; rather, a code of conduct must be adapted which presents guidelines for core ethical business conduct across cultures. Both moral and economic evidence is provided to support the argument for a universal code of ethics. Also, four steps are presented that will help ensure that company ethical standards are followed internationally.

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Copyright Kluwer Academic Publishers Group Jan 1998 [Headnotel ABSTRACT. Many international business training programs present a viewpoint of cultural relativism that encourages business people to adapt to the host country’s culture. This paper presents an argument that cultural relativism is not always appropriate for business ethics; rather, a code of conduct must be adapted which presents guidelines for core ethical business conduct across cultures. Both moral and economic evidence is provided to support the argument for a universal code of ethics. Also, four steps are presented that will help ensure that company ethical standards are followed internationally.

Introduction

In many executive training seminars for international business, executives are taught to honor customs in other countries and “Do as the Romans Do.” The emphasis on international business training is on learning how other cultures do business and adapting to their way of business (Wines and Napier, 1992; Paige and Martin, 1983). To some companies, adapting to foreign cultures often requires ethical compromises. That is, companies may conduct international business operations in a manner that is

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contrary to its standards of conduct in U.S. operation. In fact, some of the conduct in international operations may run contrary to the basic tenets of capitalism. The issue that arises is whether it is possible to successfully conduct business in those countries where cultural issues require ethical compromises that could significantly affect business operations.

Cultures hold significant variations in language, nonverbal communication, and social custom. Anthropologists, historians, and sociologists are intrigued by these differences. Many business people feel that culture differences between countries can make or break business operations between and within particular countries. Business people also discover that cultural norms for doing business in one country often conflict with codes of ethics and other business standards established in the United States. Even divisions within a company can be at odds. A domestic subsidiary may observe that a foreign subsidiary is operating successfully using tactics not permitted within the firm’s domestic code of ethics.

A manager for a U.S. title insurer provides a typical example. He complained that if he tipped employees in the U.S. public recording agencies for expediting property filings, he would be violating the company’s code of ethics, and could be charged with violations of the Real Estate Settlement Procedures Act, RICO statutes, and state and federal antibribery provisions. Yet that same type of practice is permitted, as well as recognized and encouraged, in other countries as a cost of doing business. Paying a regulatory agency in the United States to expedite a licensing process would be bribery of a public official. Yet many businesses maintain that they cannot obtain such authorizations to do business in other countries unless such payments are made. Socalled “grease” or facilitation payments are permitted under the Foreign Corrupt Practices Act, so they are classified as legal; however, the issue that remains is whether such payments are ethical (Fadiman, 1986).

Consider three other examples. In India a I 0year old works 12 hours a day weaving a rug. In Honduras 15yearold girls work 80 hours per week producing Liz Claborne sweaters. In Bangladesh there are production quotas for nineyearolds working in shoe factories (Quindlen, 1994). Within these countries’ cultures and legal standards, such work schedules and quotas are acceptable. But in the U.S., all three examples would be violations of labor law and contrary to commonly accepted standards of ethics and social responsibility.

An inevitable question arises when national custom and culture in one country clash with ethical standards and moral values adopted by a firm whose primary operations is in another country. Should individual national cultures or should company ethics codes control the firm’s ethical decisions for international operations? Typical business responses to the question of whether cultural norms or company codes of ethics should guide international business operations are: Who am I to question the culture of another country?

Who am I to impose my country’s standards on all the other nations of the world? Isn’t legality the equivalent of ethical behavior? The attitude of businesses is one that permits ethical deviations in the name of cultural sensitivity. Many businesses fear that the risk of offending business people in other countries is far too high to impose its business ethics standards on them.

However, from an economic standpoint as well as from the viewpoint that businesses operate best within certain defined standards, the rote response of cultural imperialism
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is a shortsighted approach to international business. A culturally imperialistic perspective may prove costly to individual companies as well as an entire national business economy. The purpose of this article is to present an argument supporting a universal framework for ethical operations in international business and offer suggestions for ensuring compliance with that universal orientation.

The ethical roots of business: trust and other values

Previous work in the area of crosscultural differences has focused on issues of consistency (Berliant, 1982), international codes of ethics (Schollhammer, 1977), human rights (Donaldson, 1989) and global ethics (Buller, Kohl and Anderson, 1991); however, the successful commercial operations are dependent upon the ethical roots of business. What is this ethical root? TRUST. Nobel Laureate Kenneth Arrow has noted: “. . . a great deal of economic life depends for its viability on a certain limited degree of ethical commitment. Purely selfish behavior of individuals is really incompatible with any kind of settled economic life” (Arrow, 1973). A look at the three major players in all of business establishes that basic trust is a key component in their willingness to interact.

The three parties are the risktakers, the employees and the customers. Risktakers those furnishing the capital necessary for production are willing to take a risk based on the assumption that their products will be judged by customer value. Employees are wiling to work in production, to offer input, skills and ideas in exchange for wages, rewards and other incentives. Consumers or customers are willing to purchase products and services as long as they are given value in exchange for their ftimishing, through their payment, costs and profits to the risktakers and employers. To the extent that the interdependency of the parties in the system is affected by factors outside of their perceived roles and control, the intended business system does not function on its underlying assumptions. When the players are uncertain about the underlying assumptions, their willingness to participate is questioned or, at a minimum, the cost of participation is affected.

Ethics in the capitalistic system

The business system is, in short, an economic system, endorsed by society, which allows risk takers, employees and customers each to allocate scarce resources to competing ends. To the extent that the allocation is based on factors other than the interdependency of these parties with their basic assumptions, the notions of the capitalistic economic system are undermined in favor of systems based, not on value, but on facilitation payments, personal connections and factors other than price, quality, and demand. The purpose of regulating behaviors through legal and ethical standards is to correct and adjust any means of allocation that is not based on the strict interdependence of risktakers, employees and customers. A study of the Russian Commodity Exchange in which legal enforcement of standards are essentially nonexistent, indicates this laisszfair market works because free market principles of full and complete information for trading commodities
are followed (Kolosov, Martin and Peterson, 1993).

Many examples in the U.S. statutory scheme illustrate how regulation has been used to reinstate the basic tenets of the free market assumptions made by economic players. For example, the Securities Exchange Act of 1934 made insider trading a criminal act. Those who have access to nonpublic information, whether it is obtained through their positions (officer or director) or through bribery (paying insiders for nonpublic

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information) are market participants who are making sales and purchases based on information not available to other investors/risktakers. If investors/risktakers’ perceptions are that there can never be an equitable trading environment for a free market, they are unwilling to invest in such a market. The 1934 Act was thus a correction or adjustment to market practices to restore the interdependent trust necessary for a free market.

Another example of federal regulation used to restore equity for all those involved in the free market, or to reinstate market trust, are the antitrust laws such as the Sherman Act. This act prevents monopolistic practices beyond just building a better mousetrap which consumers are drawn to under the basic tenet of value. Labor laws evolved to control treatment of employees because, as a critical part of the economic flow, they needed to be rewarded appropriately and not taken advantage of or oppressed in order to reduce operating costs.

Labor legislation recognized that fairness to employees was required if the economic system was to survive. Rebellion by employees because of unfair treatment has toppled both economic systems and governments. For example, the treatment of workers in Poland not only initiated change in the workplace, it initiated change in the political, economic and social structure of the Eastern European countries. The issues of child labor, minimum wages and maximum hours were the focus of 1930s labor legislation in the United States due to an everdeclining standard of living, the outcry of the public and their demand for legislative response
(Bassiry and Jones, 1993).

While the roots of business are primarily economic, even an economic system cannot survive without recognition of some fundamental values. Values here are not defined in the same sense of moral standards or moral norms, which may be culturespecific (Donaldson, 1989). Rather values, as defined here, relate to the equitable means of distribution of benefits and costs or values inherent in a viable economy (Frederick, 1988). Some of the inherent, indeed universal, values built into the capitalistic economic system described earlier are that: (1) the consumer is given value in exchange for the funds expended; (2) employees are rewarded according to their contribution to production; and (3) the risktakers are rewarded for their investment in the enterprise in the form of a return on that investment.

Adam Smith developed his model of a marketdriven, consumerbased economic system as an alternative to those systems (mercantilism and others) in which political structures determined supply of goods and services rather than having the structure of the system respond to market forces (Bassiry and Jones, 1993). Smith’s model of a capitalistic economy involved decentralized decisionmaking. Smith also recognized certain universal battles such as no privileges for producers based on political influence, a strong work ethic and, occasionally, government protection for workers.

Beyond just these basic values of capitalism and the freeflow of labor and commerce is the notion that, to a large extent, all business is based on trust. The decision to extend credit, regardless of the credit terms or the level of background check, is still, after all, dependent upon the debtor’s honoring the obligation to repay. A consumer commits to purchase on the presumption that a seller can produce. A company invests in plant and equipment on the belief that it will be able to compete. If these assumptions are removed by means of either intended or unintended government intervention in the form of controlling market access, basic assumptions of a system based on business trust are removed. The tenets for doing business are dissolved as an economy moves toward a system in which one individual can control the market in


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