5th Issue (Sep 1996)

Editorial

One of the proponents of this thinking is the Centre for Applied Ethics, established last year under the Department of Humanities of Fudan University in Shanghai. In early August, it held a Colloquium on Civil Society and Spiritual Civilisation and invited the Hong Kong Ethics Development Advisory Committee Chairman, Mr Herbert Liang, to make a presentation titled How Business Ethics Can Contribute to Hong Kong's Successful Transition into 1997. An audience of renowned researchers in China and from other parts of the world heard Mr Liang and Hong Kong Ethics Development Centre (HKEDC) Secretary Miss Phoebe Chan explain how HKEDC promotes business ethics in Hong Kong and how its work is helping to maintain the territory's economic success to 1997 and beyond.

In his presentation, Mr Liang said: "Hong Kong's success is attributed to a variety of factors: its advanced information technology, its well-developed legal system, its strategic geographical location, its sophisticated infrastructure and its highly efficient and productive labour force. Above them all is Hong Kong's ability to provide a level-playing field for business investment."

Mr Liang stressed to his Chinese counterpart that "international business is moving towards articulation of common values and standards of conduct". He encouraged the Fudan Centre to promote business ethics not only to serve the market economy but also to meet the "pressing need for global ethics in a global economy," as in the case of the HKEDC.

At the Colloquium, Mr Wu Xinwen, the head of research work on enterprise ethics at Fudan University, revealed the findings of a survey on ethical perceptions of business people in East China. Mr Wu said an overwhelming majority of the 800 business people in 59 enterprises surveyed believed high ethical standards are advantageous to them. Ninety-two per cent (92%) of the respondents strongly disapproved of business activities that ignored ethical considerations, while 87% approved of institutionalising ethical codes or norms for business activities.

And to meet the pressing need for global ethical standards, HKEDC Executive Secretary Mrs Catherine Chui attended the First World Congress of Business, Economics and Ethics in Japan a week before the Shanghai Colloquium. The result she brought back is the Principles for Business of the Caux Round Table, which is an unprecedented global initiative created by business leaders in the US, Japan and Europe. The Principles enshrined two basic ideals : kyosei (a Japanese concept that means living and working together for the common good) and human dignity. The world congress also launched an Asia-Pacific Business Ethics Network to strengthen links among Asia-Pacific ethics promotion institutes.

In September, Mrs Chui will make a presentation at the annual conference of the Ethics Officer Association in Seattle in the United States. She will also visit ethics promotion institutes in the West Coast.

Lastly, the HKEDC Deputy Executive Secretary will attend an executive development course, Managing Ethics in Organisations, at the Bentley College in Boston in the United States. With this series of overseas trips, the Centre will be better equipped to partner Hong Kong business leaders to meet international demands for business integrity and place itself even more prominently on the world ethics map.

Global Ethics In Global Economy

However, in the quest for foreign business, there are cultural and ethical minefields. An investor will encounter different styles of practice, different standards of business behaviour and different cultures. They all lead to ethical questions like:

• Shall I offer bribes or "kickbacks" in order to enter a foreign market and obtain a contract?
• Shall I comply with labour rules that contradict those of my country?
• Shall I follow standards of practice that conflict with local customs?

• Are we going to stray from our principles?
• Are we going to tolerate principles that are lower than global norm?

However, there is a hen-and-egg question. On one hand, some managers in international business said they were compelled to follow the norms in host countries and resort to bribery. On the other hand, native executives countered that foreign corporations perpetrated the culture of corruption.

The major problem of international business ethics is bribery. No single country allows businessmen to offer and government officials to accept bribes for deals. Corruption is a two-way street. Corrupt activity will never take place if there is no offer and acceptance. That decision to perpetrate it lies with the individual.

Many business managers said that their companies strictly uphold the principle against any form of bribery. They would choose to give up commercial contracts if they were asked to pay bribes or "kickbacks" to secure them.

One's ethical behaviour should be consistent around the world. There must be equal compliance with laws and ethical principles both at home and abroad.

"An ethical code of conduct for a company would help," said Dr Lily Chiang, a member of the Hong Kong Ethics Development Advisory Committee. Pointing out that the distinction between East and West was becoming blurred, Dr Chiang said, "International standards and globally accepted conception of values must be followed in order to achieve any success in this very competitive business world."

"Apart from building up the ethical culture of a company, a good conduct code will also help enhance Hong Kong's image of fairness in international business."

In addition, the company's conduct code should be strictly and consistently followed everywhere. An international code of business ethics is possible and necessary for the global corporation. Both worldwide commonality and local distinctiveness can be accomplished without sacrificing ethical values or integrity in the conduct of global business. Corruption can be deterred with a strong standard of conduct, properly trained employees, an internal system of control, and guidelines for dealing with ethical dilemmas. The most important thing is, no matter where you are, the business decision you take must reflect the right moral and ethical values. As a test, ask yourself whether the decision you take could end up as an embarrassing headline in a mass-selling magazine, or a scandal sheet, or a newspaper expose.

Tips for a global code of conduct:

• Set a uniform standard of ethics for operations worldwide
• Set it as high a level as possible
• Implement it strictly and consistently
• Disseminate it fully to all employees

Should Multinationals Practice Abroad What They Practise at Home?

An economic rationale for a multinational's (MNC) imposing universal ethical standards can be based on the following argument:

1. Certain ethical commitments are believed by the management of a MNC to provide the MNC with a competitive advantage.
2. These ethical commitments which provide a durable competitive advantage abroad tend to be knowledge-based, to be embodied in individual employees or firm routines, and to be characterized by high asset specificity.
3. Highly specific assets, for example ethical commitments, associated with high return should not be diluted.
4. If ethical commitments vary among subsidiaries, these assets will be diluted due to the phenomenon of cognitive dissonance.
5. Therefore, a MNC should have common ethical commitments in all its subsidiaries.

The second premise simply describes some of the characteristics of the ethical commitments of a corporation, what I shall now call the ethical climate of a corporation. An asset with these characteristics is hard to duplicate and thus is a source of competitive advantage. That is why having a code of ethics is not sufficient for an ethical climate. Written codes are easy to copy. Yet experience shows that a firm without a good ethical climate cannot achieve one by copying the code of ethics of another firm. It is extremely difficult for one firm to re-create the environment of moral reflection and action that characterizes the ethical climate of another firm.

Since this asset resides in the heads of corporate personnel and in the routines of the firm, it is hard to reduce the asset to writing; moreover it would be impossible to convey to an outside buyer with adequate confidence the full value of the asset. An ethical climate cannot be bought or sold. This fact by the way helps explain why corporations with good ethical climates establish subsidiaries abroad rather than sell the asset. With respect to moral climate, the MNC can exploit the asset only if they establish a subsidiary.

Diluted assets lose their value. Premise four points out how ethical assets lose their value. Cognitive dissonance is a well established psychological concept. If a MNC has one set of ethical standards in the home country and different ethical commitments in host countries, cognitive dissonance will be created. Corporate stakeholders will not know which values, beliefs, and behaviours really represent the MNC. The ethical climate of the MNC will become confused and the ethical climate which had been an asset that provided competitive advantage will be diluted. To prevent the negative consequences of cognitive dissonance, the moral climate of the MNC should include standards that are applied universally, i.e., in both the home country and in host country subsidiaries. Thus if the MNC exceeds the legal requirements with respect of the environment at home, it should do the same abroad.

I realize that this analysis may seem counter-intuitive. Suppose the home country norms vary widely from host country norms. Wouldn't a MNC be likely to fail if it practised home country norms that were at wide variance with those in the host country? Quite possibly. Customers may not buy their product. When such situations occur the MNC must consider how important its ethical climate asset really is. If that asset truly is important, then it would be better for the MNC not to do business in that country than to dilute its ethical climate asset. Conventional wisdom might consider the recent action of the Levi Strauss Company to exit China and Burma because of human rights violations there to be extremely foolish. After all they are leaving one of the major markets in the world. Levi Strauss recognizes that it cannot maintain a commitment to basic human rights and thereby to its basic moral integrity while simultaneously done business in a country that commits human rights violations. Levi Strauss places a high value on its reputation as a socially responsible MNC. This argument, however, does not apply to a MNC that does not consider being seen as socially responsible to be an asset.

My analysis of the argument is now complete : there is a good business justification for a MNC to have the same ethical climate abroad as it has at home. Its reputation as a socially responsible MNC is a valuable asset and should not be lightly given up.

But are these universal ethical climates really ethical? The only universalism defended thus far is firm specific. I have shown that a MNC should have a universal moral climate at home and abroad. I have not shown that the MNC's moral climate is truly moral. To make the distinction between the two views of universalism clear, consider the following illustration. Firm specific universalism would be satisfied if a business consistently bribed both at home and abroad. Philosophical universalism would reject this behavior as immoral. All MNCs should have an ethical climate that forbids bribery. How can I insure that MNCs adopt the moral climate that is consistent with the demands of every day morality?

To fill that gap in the argument, I appeal to the concept of "market morality". By "market morality", I mean a morality that the vast majority of firms would attempt to practise, because, other things being equal, adopting those moral practices are either necessary for economic survival or give one a competitive advantage that enhances firm success. What I am claiming is that, other things being equal, firms will be driven by market forces to adopt those ethical commitments which are necessary for economic success or provide competitive advantage.

I can illustrate the power of market morality by discussing the issue of bribery. Before continuing it should be noted that bribery is distinct from both extortion and facilitating payments.

In a country where bribery is not the norm, bribery is always economically inefficient. When bribery influences a transaction, the decision is not based on the grounds of quality and lowest price. However, the issue facing most MNCs is how to behave in countries where bribery is the norm. If nearly everyone accepts and pays bribes in a given country, no one company can get a niche as a non-bribe giver or bribe taker since most firms would not do business with it. However that situation moves the inefficiency argument to a higher level. A culture where bribery is the norm will be at a competitive disadvantage versus a non-bribing culture - other things being equal. The culture will not be engaged in efficient terms of trade. As a December 6, 1993 Business Week article pointed out bribery hinders economic development. Corruption has inflated Italy's outstanding government debt by 15% or about $200 billion. As a result of Italy's recent crackdown on corruption, bids for public works projects are coming in at 40% below cost estimates1. Efficient producers who are competing on price and quality want bribery stopped. Both General Electric Co. and Boeing Company are providing financial support for Transparency International dedicated to combatting corruption2. Thus it is no accident that every multi-national business code of ethics has an anti-bribery statute within it. As genuine competitive markets develop bribery will decrease. In those markets, being a non bribing firm provides a competitive advantage. (This efficiency argument works against extortion as well as bribery; facilitating payments present a more complex issue.)

I believe that honoring contracts and avoiding discriminatory practices are also part of market morality, but I cannot make these arguments here. In conclusion so long as the morality of the market is embodied in the ethical climate of the multinational firm we can be sure that the standards of the multinational really are moral. Of course, not all ethical conduct provides a competitive advantage and some ethical issues need to be regulated by institution outside the market.

Training and Seminars

The next HKEDC-organised training seminar is for sales and marketing executives, scheduled for early next year. The seminar will include panel discussion about ethics in personal selling, promotions and international marketing. Interested parties can contact HKEDC for further details. Tel : 2587 9812.

Publications

Two more resource portfolios on professional ethics, will soon be available to university lecturers teaching on law, architecture, engineering and surveying. Each portfolio has three parts : teaching materials, case studies and support materials. The two portfolios are developed by the HKEDC under the series Ethics in Management - A Resource Portfolio For Hong Kong Universities which was launched in October last year.

Consultancy

ICAC On the Net

(E-mail address for the HKEDC is hkedc@chevalier.net)