1/5/2013

BY: KIRAN DOULTANI AND PRAJAKTA TANKHIWALE

BUSINESS ETHICS AND
MULTINATIONAL
COMPANIES

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Introduction to ethics
Ethics, also known as moral philosophy, is a branch of philosophy that involves systematizing,
defending, and recommending concepts of right and wrong conduct. The term comes from the
Greek word ethos, which means "character". Ethics is a complement to Aesthetics in the
philosophy field of Axiology. In philosophy, ethics studies the moral behavior in humans, and
how one should act
The basic concepts and fundamental principles of right human conduct. It includes study of
universal values such as the essential equality of all men and women, human or natural rights,
obedience to the law of land, concern for health and safety and, increasingly, also for the natural
environment.


Business ethics

"Business Ethics" can be defined as the critical, structured examination of how people &
institutions should behave in the world of commerce. In particular, it involves examining
appropriate constraints on the pursuit of self-interest, or (for firms) profits, when the actions of
individuals or firms affects others.
The examination of the variety of problems that can arise from the business environment, and
how employees, management, and the corporation can deal with them ethically. Problems such
as fiduciary responsibility, corporate social responsibility, corporate governance, shareholder
relations, insider trading, bribery and discrimination are examined in business ethics.






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BUSINESS ETHICS A TOOL TO TAKE ORGANISATIONS
GLOBAL
Business ethics is now, more than ever, becoming an important requirement for doing business in
the global marketplace. With the global business interest in India growing and Indian companies
making aggressive moves in the global arena through organic growth, mergers and acquisitions,
it is imperative that Indian companies must play and be seen to be playing by the rules of the
international business world. In a global business scenario that is fast becoming very sensitive to
ethical practices and conduct, a company can ignore business ethics only at its own peril. The
shape of things to come can be understood by reviewing a recent survey of Global 2000
companies that found that more than 35 per cent of them have ethics officers to enforce ethics
and compliance management and promote ethical behavior in their organizations. Most Fortune
500 companies have set up ethics offices. Research suggests that companies with a clear
commitment to ethical conduct outperform those that do not
Many Indian organizations are under enormous pressure to operate, grow, and succeed in a
highly competitive and challenging global economy. They routinely deal with other companies
in the global marketplace as customers, suppliers, partners or competitors. In such an
environment, Indian enterprises small, medium, and large that wish to have any role in the
international arena, need to have sound ethics and governance policies and procedures in place
since global customers, suppliers, and partners are increasingly beginning to demand
demonstrable proof that such ethics and governance processes and systems are at work in the
companies they associate with in any manner. Just as quality management system certification
and capability maturity models (ISO 9001, CMM, etc.) became minimum requirements for
establishing credibility of operations of companies during the last two decades, ethics and
governance policies and processes are becoming the next wave sweeping the global
marketplace. Indian organizations that view themselves as players in the global arena must think
globally not only in terms of size of operations, quality, cost, and delivery processes, talent as
well as best practices; but also in terms of focusing organizational efforts towards conformance
to acceptable ethical standards






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Components of a Companys ethiCs poliCy
The first phase in building an ethical corporate culture is to develop a formal ethics programme
that includes the following features:
The code of ethics must have statements that are relevant and that define expectations regarding
employees behavior that is needed to guide them in their day to-day decision-making. The code
of ethics must be derived from the organizations core values, which in turn must be derived
from the core purpose and broad mission of the organization, as well as the beliefs of the
founders/key top managers of the organization.
Ethics statements must not be created solely as compliance documents, rulebooks or public
relations material. Issues related to legal and regulatory matters need to be addressed, but more
crucially, ethics statements must communicate the importance of ethical behavior and the
companys core values such as integrity, trustworthiness, honesty, and transparency.
Ethics statements must be in plain, easy to understand language. Generic ethics statements that
read like they belong to any company anywhere do not resonate with employees. Including
things that are unique to the business would make the statements more relevant to the
organization. Standards must be laid out that lucidly state what can and cannot be done by an
employee in a given situation. However, providing a rule for every situation would be virtually
impossible and therefore the employee must be allowed to use his personal judgment, which
must be consistent with the ethical standards of the organization.
In matters where temptation to behave unethically is the strongest, the ethics codes must present
specific direction about ethical behavior. For example, if bribery is unacceptable, then the code
of conduct must clearly describe situations that would be considered unethical in the company
(such as offering bribe to public officials, or bribing an employee of a customer firm, etc.). It
must comprehensively describe situations that would be considered a violation of the code of
ethics. Specifying what an employee must do when he confronts ethical uncertainties, encounters
ethical misconduct, or when he is being pressured into committing ethical misconduct, are an
essential part of the code of ethics. Since it is the top managers of the company who define the
code of ethics, they must make definitive and often tough choices on what is acceptable and what
is not acceptable.
Finally, the code of ethics drawn up must be benchmarked with the codes of ethics of best
practice companies in the world on a continual basis.

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STEPS THAT INDIAN COMPANIES MUST TAKE TO
DEVELOP AN ETHICS POLICY
Establishing a code of ethics: In most Indian companies, ethics is seldom formally addressed
as an important management agenda. It is dealt with on a case-to-case basis as and when
problems arise. While instincts alone may have sufficed in the past to address ethical issues, in
todays complex and demanding global business environment, a well defined code of ethics, as
described above, acts as a behavioral compass for employees, helping them to make decisions
within the business, legal and ethical boundaries.
Communicating the code: While drawing up the code of ethics is a significant task in itself, it
jus marks the beginning of the journey to build an ethical culture. The organization must have
processes to effectively communicate, implement, and update its code of ethics. At a minimum,
this includes the following steps:
- Making sure that every employee has a copy of the code of ethics or access to the same.
- Ensuring there is no ambiguity in understanding the code of ethics. The document should have
adequate number of diverse examples about the codes deployment and utility.
- Conducting training programmes to allow employees to review the codes provisions, to
understand how the provisions apply to the individuals specific job responsibilities, to inform
the specific behaviors and decision making processes the organization would like the employee
to use when confronting ethical challenges, etc. Ultimately, training efforts must result in
employees feeling an increased level of confidence and comfort when actually having to make
ethical business decisions.
- Communicating the policy repeatedly: Starting all meetings by highlighting the code of ethics
is a good way to bring ethics to the centre stage of the organizations working.
- Creating a habit of routinely talking about ethics at all levels: If an employee or a team in the
company chooses to do something right even though it is difficult to do so, capturing such
instances and using them as living examples to illustrate desired behavior goes a long way in
reinforcing what is an ethically acceptable behavior in the organization. Using organizational
newsletters to communicate such instances and stories of ethical conduct to everyone in the
company is another powerful tool to reinforce ethical behavior in the organization.
Going public with the ethics statements: Going public with the companys code of ethics
would demonstrate to employees the commitment of the organization towards its stated values
and ethical standards. It would enable customers, vendors, and other stakeholders to know what
to expect when interacting with the companys employees, making it easier for the companys
employees to follow the codes. Moreover, circulating these codes helps to build trust and loyalty

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among various external stakeholders such as suppliers, customers, partners, governmental
agencies, etc., and differentiates the company from its competitors.
Establishing robust processes for handling ethical issues: Establishing and making
widely known processes which the employee can use for bringing up matters of ethics for
resolution are an essential part of ethics implementation. This includes taking swift and
fair action on reported violations, after due investigation of the allegation. The processes
should be transparent and encourage an on-going dialogue to enable individual
employees to understand the ethics policy better and help them to take ownership of the
same. Mature management processes that allow employees to challenge the policies in a
positive spirit to ensure their continued relevance through periodic review and
reevaluation are essential. At the same time, there should be processes to track and come
down hard on cynics.
Providing support structures: Mechanisms for reporting violations such as ethics hotlines
and mailboxes must be instituted. The reporting mechanism must be secure, confidential, and
available to all employees. Someone senior with high credibility should handle this hotline, with
direct reporting to the CEO; alternatively, it could be the CEOs office itself.
Reviewing the codes: It is essential to review the ethics codes at regular intervals to meet the
changing needs of the organization, marketplace, and regulations











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areas of moral concern for
multinationals{THIRD WORLD COUNTRIES}
The moral challenge for businesses here in the United States it difficult enough when
balancing ones profit interests against the needs of employees, consumers, governments and
special interest groups. The moral challenge is even more intense for multinational companies
who need to live up to moral expectations both in the US and in host foreign countries. In
developed countries, the moral expectations of the host country are as stringent as our own. With
third world host countries, though, the moral expectations often more lax, and multinationals are
tempted to lower their standards when situations permit. In this chapter we will look at three
areas of moral concern for multinationals: bribery, influencing foreign governments, and
exploiting third world countries.

1. Bribery in Third World Countries.
When we think of moral dilemmas that multinationals face we usually think of the pressure on
companies to bribe government officials in third world countries. Although bribery of
government officials also takes place in the United States, it is rare and severely punished. By
contrast, bribery happens with greater frequency in third world countries, and there is a feeling
that it is normal practice to bribe government officials. We may succinctly define a bribery as
condition in which a person, such as a government offical, agrees to be paid to act as dictated by
an interested party, rather than doing what is required of him in his official employment. What is
central to the notion of a bribe is that an agreement is made, even if the act itself is never
performed and the payment is never made. It is also central that the person being bribed
implicitly agreed to abide by the rules of his government, organization, or legal system. We need
to distinguish bribery from extortion, which is where an official requires payment to perform his
otherwise normal duties. For example an agent of the FDA may extort a company by approving
of a product that passes approval standards anyway. Extortion has a victim, whereas bribery has
no victim. We also need to distinguish bribery from gift giving, which includes neither implicit
nor explicit agreements, even if the giver intends the gift as an inducement. An official may
accept a gift innocently, and sometimes genuine friendships are formed that involves exchanging
gifts. Further, gift giving in foreign countries is often part of a needed business ceremony. To
avoid doing wrong, the receiver of a gift needs to be confident that he remains impartial in
conducting his official duties. In some occupations, such as law enforcement, established codes
often forbid gifts since it is too important to risk losing impartiality through gift giving.
Although few business people publicly defend bribing officials in third world countries,
there is a common attitude within multination organizations that condones bribery on several
grounds. First, there are strictly financial considerations. Payoffs can prevent delays that might

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otherwise throw a company into financial ruin. In a truly capitalistic environment, we need an
even playing field, and if foreign businesses engage in bribery and US firms do not, then US
firms will be at a competitive disadvantage and will ultimately lose to foreign business. Second,
there are practical considerations owing to what appears to be the universal nature of bribery in
third world countries. Often foreign government officials are so corrupt that it is virtually
impossible to do business without playing by the unspoken rules.
Americans in particular are nave about his, as seen from the fact that, in middle east
countries, American companies are involved in bribery scandals twice as often companies from
other countries. The US government also takes oversees bribery seriously. Under US law, the
Foreign Corrupt Practices Act of 1977 establishes that, if caught bribing, a company may be
subject to a 1 million dollar fine, and executives may be subject to $10,000 in fines and five
years in prison. These penalties are so severe that critics contend that it restricts ordinary well-
intentioned business activity because of the fear business people might have of entering a gray
area of activity that is actually legal. In any event, it is reasonably clear that the legal penalties of
international bribery outweigh the possible business benefits.
A dramatic example of bribery naivete involves the Lockheed Corporation, which in the
1970s was caught offering a quarter of a billion dollars in bribes overseas. The US government
commissioned the company to design a hybrid aircraft, but, after one crashed, the government
canceled orders. Lockheed received other contracts based on bids that they made that were far
lower than the cost of producing the project. As a consequence, they lost money on the projects.
They tried to move into the commercial jet aircraft market by making planes with engines built
by Rolls Royce. Rolls Royce went bankrupt, and Lockheed lost 300 million in canceled orders.
They believed that the solution to their financial woes was to expand their oversees sales. To get
the contracts, they made a series of payoffs to middlemen from various countries, including the
Netherlands, Japan, Saudi Arabia, Iran, Italy, and Spain. Still on the verge of bankruptcy, they
requested a loan of 200 million dollars from the US government, which meant opening their
records for scrutiny. Government investigators discovered the extent of Lockheeds bribery.
They also discovered that Lockheed offered bribes that totaled 10 times more than the bribes
made by other US companies. Lockheeds chairman and president were forced to resign.
However, to avoid compromising national defense the US government chose not to cancel its
contracts with Lockheed.






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2. Endorsing, and Influencing Foreign Governments.
Whether in the US or in foreign countries, big businesses have an intimate relation with
governments. Businesses lobby for fewer regulations, lighter taxes, governmental subsidies, and
access to natural resources. Businesses also depend on government offices, such as law
enforcement agencies, court systems, permit offices, and transportation networks. So, when a US
company sets up base in a foreign country, its interaction with government creates the possibility
for unpleasant situations. Multinationals often locate in countries with repressive right wing
governments since these tend to be more politically stable. By doing so, they implicitly support
these governments, which would otherwise not be supported by socially conscious people. At the
other end of the spectrum, sometimes multinationals find themselves in left wing countries that
are hostile to the businesss capitalistic interests. In these cases, the business might be tempted to
oppose or even undermine that government, irrespective of the benefit that local people derive
from that governments left-wing policies. Between these two extremes, there is the normal
course of doing business in developing countries, which involves the normal lobbying efforts
that we have here in the US. This involves at least attempting to influence governments of third
world countries.
3. Exploiting Third World Countries.
Critics frequently accuse multinational corporations of exploiting the resources and workers of
third world countries. Agricultural businesses often take the best land and use it for export crops,
which diminish the amount of good land that the locals can use for their own food needs. Drug
companies and hazardous chemical industries take advantage of more lax safety regulations,
which often results in disaster. Mining industries exploit the wealth of the country for only a few
rich landowners. Since many of these natural resources are in finite supply, developing countries
have little hope of relying on them for future security once they are used up. Banks and financial
institutions do not hire the local people, yet these businesses benefit by bringing in local money.
Manufacturing and service industries introduce poverty to many areas by attracting more people
to a factory than they can employ. They typically pay much less to third world employees than to
Americans, which suggest a double standard of labor value. If they pay wages to third world
employees that are higher than what indigenous businesses can pay, then they attract the best
workers, which hurt employers in surrounding businesses. Also, all of the above types of
businesses destroy the local culture by introducing an American climate.
Case that illustrates the disastrous effects of exploiting third world countries. In 1984, a
pesticide factory owned by Union Carbide in Bhopal India exploded killing 2,500 people and
injuring and additional 300,000 people. With a population of 700,000 people, Bhopal is the
capital of Madhya Pradesh, one of Indias poorest and least developed states. The city is
geographically divided between rich and poor sections, with the factory located in the poor
section. Although it was a multinational, Indian investors owned almost half of the shares of the
Indian plant, and Indians operated the plant. The active ingredient for the pesticide was stored in

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600 gallon tanks. The size of the tanks themselves was a problem. Larger tanks are economically
efficient since they hold more gas, but they pose greater risks in case of a tank leak. For his
reason, regulations in Germany required a similar Union Carbide plant in that company to
restrict its tank size to 100 gallons. The tank that exploded in the Indian plant was supposed to be
refrigerated to zero degrees centigrade; instead the refrigeration unit was not working and it was
at room temperature. Although the Indian factory had safety features to prevent disasters, several
of the safety systems were not functioning. The temperature alarm was shut down; the gas
scrubber was shut off, which was supposed to neutralize escaped gas; and a flare tower was out
of service, which was supposed to burn escaped gas.
The explosion started when someone added water to a 600 gallon tank of the chemical,
perhaps done as an act of sabotage by a disgruntled employee. The temperature in the tank rose
in a chain reaction, and the tank blew up. A fog of the gas drifted through the streets of Bhopol,
killing people on the spots that they stood. Long term medical problems for the survivors
included respiratory ailments and neurological damage. The Indian government quickly arrested
plant managers and eventually spent 40 million on various disaster relief projects. Union Carbide
Stock plummeted with losses totaling almost a billion-dollars; Union Carbide sales were also
impacted for several years. The company eventually paid half a billion dollars to victims.
Although the US parent company acted quickly and compassionately to the disaster, the tragedy
raised serious questions about the parent companys views on safety in third world countries.
Even though Indians ran the Bhopal plant, Union Carbides laissez-faire policy of decentralizing
subsidiaries was not appropriate in matters of safety. The tragic lesson is that multinational
should follow U.S. safety standards worldwide, and should not give cost cutting the highest
priority


4. Cultural Relativism and Universal Moral Principles.
The above-discussed problems of interference in foreign government, bribery, and exploitation
all raise a range of ethical questions, perhaps the most important is whether companies should
adopt the attitude that When in Rome, do as the Romans. This is the issue of cultural
relativism, namely, whether moral values vary from society to society. Cultural relativism
implies that moral values are completely defined by cultural contexts, and there is no universal
standard of morality that applies to all people at all times. As long as we stay within our own
cultural environment, this is no problem since we simply act morally as our society dictates.
However, multinationals face the problem of relativism directly by placing one foot in the moral
context of American culture, and another foot in the moral context of a foreign culture. Driven
by the profit motive, multinationals will be tempted to adopt the least costly moral principles that
a given cultural context will allow.

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Business ethics and mncs
Companies operating in foreign countries find that understanding and complying with
variant laws, managing employees far from headquarters, serving customers and relating to
suppliers and partners in multiple jurisdictions can introduce significant challenges to
developing shared corporate values and realizing a truly global culture.
Multinational companies are challenged with three key issues: how to foster a culture of ethical
conduct in all countries of operation; how to engage a global workforce in understanding and
adopting its corporate values; and how to meet the web of complex legal and compliance
obligations that may exist in all its locations. While each of these issues can be examined
independently, the solutions require a systematic, holistic approach that reflects a corporate wide
commitment to responsible conduct.
Global ethics and standards exist in various forms and realities. These ethics include basic
human interactions: respect for differences, trust that our counterparts will work with us in a
truthful manner, honesty in communication with others, and expectations that each of us will
keep our word and maintain credibility.
The essence of global ethics and professional standards is based on self-understanding, tolerance
of differences, appreciation for the unique, and curiosity of the unknown. Without the personal
quest for experiencing new frontiers, and working with other professionals who have their own
perceptions of us and ours of them, our professional life would be mundane.
i. Promoting a global corporate culture
How does a multinational company create a unified culture that adheres to a high level of
business behavior in all global operations while respecting its local workforces and their
traditions? Many companies have found the answer lies in following an approach that
implements global principles based on corporate values, while allowing for local policies based
on cultural traditions. The advantages of this approach are multiple. On one hand, global
principles reinforce the values the company seeks to promote in its corporate culture to instill
universal standards of business conduct. On the other hand, local policies demonstrate respect for
cultural differences among its global workforces. Consider the issue of business gifts, for
example. The company might establish the global principle that employees cannot accept gifts
that appear to unduly influence business relationships, based on corporate values of integrity and
honesty. In some locations, this may translate into a ban on gifts beyond those of de minimus
value, but in other locations where business gifts are legal and customary as a sign of
respect for customers, such as in Asia, the local policy would allow for gifts within culturally
relevant guidelines that still respect the company's values. This distinction between global
principles and local policies can be applied to many business practices throughout the company's
operations.

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Two elements are critical to balancing global principles and local policies: a corporate
wide code of conduct with guiding principles and the involvement of local offices in
developing local policies.
ii. Establishing a corporate-wide code of conduct
The clearest way to establish uniform principles is by crafting a strong values-based corporate
code of conduct. Such a document spells out for all employees the fundamental principles
that guide day-to-day interactions and decisions. Values are universally applicable, are easy to
remember and far more inspiring than a set of rules. To increase the relevancy of the code, it
should be put into the local languages via culturally accurate, relevant translations. To reinforce a
uniform global character, some companies publish their code of conduct as a single booklet with
sections for each language of their workforce.

iii. Involving local offices in local policies
To demonstrate sensitivity to local traditions, companies should allow their international
business units to supplement the companywide code of conduct with local policies as necessary.
To develop these, the local business unit managers and people from various functional areas,
such as human resources, legal, finance and audit, might become involved. Enlisting the support
of these local functions is important in shaping acceptable policies and dispelling notions that
people at the home office dictate standards of behavior without respecting cultural differences.

iv. Engaging global employees in ethics and compliance
Disseminating the company's principles and policies and achieving buy-in can happen only if the
company inspires employees to feel as if they are owners and guardians of the company's values
and culture. This task requires developing local leadership as well as engaging employees
through education, communication and tools that equip them with the ethics and compliance
knowledge and skills needed in their specific jobs. Recommendations for actively engaging
global business units and local workforces include: establish a local presence; develop local
ethics and compliance leadership; educate all employees; and build culturally responsive
reporting systems.




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v. Establishing a local presence by forming a corporate-wide ethics and compliance
committee
As much as possible, companies need to take a local approach when conveying the
importance of ethics and compliance. This can best be accomplished by establishing a presence
in each location, by either installing satellite ethics and compliance offices or "deputizing" local
VPs or general managers to be in charge of the ethics and compliance initiatives in their
locations. Some multinational companies form a corporate-wide ethics and compliance
committee whose members are the heads of the global business units, each tasked with the ethics
and compliance oversight in their location.
Thus, local offices are effective for three reasons:
(1) They can be more sensitive to the local cultural traditions and work with headquarters to
formulate and approve any necessary policies that differ from corporatewide principles.
(2) Their immediate presence helps ensure that local risks are more quickly identified and
communicated to headquarters.
(3) In providing the home office with an on- the-scene ally, a local ethics and compliance
official can clarify any problems that arise, participate in investigations and develop more
effective responses to violations. If having a local presence is not possible, those in charge of
ethics and compliance at the company's headquarters must make regular site visits to each
operating location to develop first-hand insights into the culture, build leadership commitment,
determine the best methods to enlist employees and assess potential ethical risks in that location.
Having a local presence can assist relations with work councils commonly found in most
European countries. Practice has shown the best way to enlist work councils in ethics and
compliance is to approach them early and ask for their support. Rather than perceiving them as
opponents protecting their membership, engage them as partners in building an ethical and
legally compliant corporate culture that creates mutually beneficial rewards. Companies report
that establishing a cooperative mindset rather than an adversarial relationship with their
European work councils goes a long way to reducing friction over ethics and compliance
initiatives.
vi. Educating all employees in their first language
Employees at every level need clear, precise information to understand the laws and regulations
that apply to their jobs and, more important, to understand the corporate values they should adopt
in the workplace. Educational efforts must help all employees learn how to go beyond mere
compliance by being able to respect not just the letter of the laws affecting their jobs, but the
spirit of the laws that should inspire their behavior as stewards of the company's culture.

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In global companies, the most effective education is often best accomplished using online
courses that can easily reach employees living in different cultures and working in
different time zones. Educating a global workforce must be done in engaging and culturally
relevant ways. In general, this means that global companies must make efforts to educate
employees in their first language and tailor the ethics and compliance education to those laws
and issues that impact an employee's actual job.
vii. Building culturally responsive reporting systems
Effective engagement also includes giving all global employees access to reporting non-
compliant conduct. This includes having an anonymous telephone helpline, a website, or both.
Global companies must make these available during reasonable time periods at each location,
rather than the time period at headquarters. Also, translators should be available for phone
lines and the websites should be written in the employees' first language.


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CHALLENGES FOR MNCS
Every company doing business abroad faces numerous legal and ethical issues. The
multinational corporation (MNC) faces legal issues raised by home country laws, host
country laws, regional regulations or directives, bilateral and multilateral treaties, and
international standards and certications. Ethical issues become entwined in various legal
options, and local customs and norms add another layer of complexity to the question of how to
act both legally and ethically in an unfamiliar environment.
This chapter offers general guidance on these complexities. We contend that MNCs are wise to
focus on four kinds of ethical challenges: these are (1) bribery, competition, cronyism and public
governance as they relate to supporting competitive market capitalism; (2) human rights issues;
(3) environmental issues; and (4) social equity issues. While failure to focus on these can result
in signicant legal and reputational consequences, paying proper attention to them can improve
corporate performance and enhance the functioning of economies that embrace capitalism.
After a brief summary of international law and the market system, this chapter reviews the four
main ethical challenge areas for MNCs. Each challenge area should receive careful deliberation
by multinational managers who wish to maintain a companys legal and reputational balance.
International Law
The salient features of international law are relatively simple: companies operating
internationally are subject to bilateral and multilateral treaties ratied by nations involved in
global trade, and also are subject to the specic laws of the host countries where they operate.
When companies do business in host countries, they also may be required to obey the laws of
their home nations: In addition to the right to make and enforce laws within their territory, all
nation-states reserve the right to make and enforce laws that apply to its citizens (or nationals),
wherever they may be located or do business. For MNCs based in the United States, this means
that U.S. antitrust, anti-bribery, and equal employment opportunity laws often apply to their
operations abroad.
When U.S. companies do business internationally they often nd that host country laws and
regulations are far more lenient in areas of environmental protection, human rights, and health
and safety labor standards than they are in the United States. To some managers, this warrants a
morally relativistic approach of When in Rome, do as the Romans do. However, when an
MNC is introducing a new type of enterprise in a host country, there may be no local standards
or customs to follow. Moreover, when MNCs doing business in developing nations with
relatively weak regulatory regimes fail to follow widely recognized standards of labor standards,
environmental care, and human rights, they can generate local antagonismregardless of

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legalitiesas well as adverse reactions from non-governmental organizations (NGOs) and
others, resulting in reputational loss, or even their ability to operate within a given host country.
Also, failing to give serious deliberation to such ethical challenges can result in criminal
prosecution, either in the MNCs home country or host country. In other cases, civil lawsuits
may create signicant liability or, at the least, prove to be unprotable distractions.
The Market System and International Law
Capitalism has many forms and variations. But in all of its manifestations, some concept of a
free market stands at the center: that is, individuals and business organizations exchange
goods, services, and various forms of payment with minimal government restrictions. Where
people freely transact business with adequate information, the market is said to deliver an
optimal mix of goods and services to society. The ethics of such a system depend on the
application of such notions as free will, consent, choice, rationality, competition, merit, and due
diligence. Economists posit that a perfectly competitive market would have an absence of
negative externalities, an adequate supply of public goods, and many buyers and sellers with
few barriers to market entry. Negative externalities are the costs imposed on people who have
not freely chosen to assume them, such as bystanders who suffer ill-effects from pollution. The
public goods essential to a properly functioning free market system include a state sponsored
system of dispute resolution (courts and established legal rules), a system of titles for various
kinds of property (real and personal), and a physical infrastructure that can support the
movement of goods across interstate and international borders. Barriers to entry can be public
(such as tariffs, or public subsidies that make it more difcult for new technologies or
competitors to emerge), or private (such as monopolies and cartels that deliberately restrain
competition).
For many reasons, including politics and human nature, governments even in most developed
nation-states have not completely aligned their policies and practices with these basic principles
of perfectly competitive markets. Economists call this market failure. Even in the United
States, where there is a relatively sound legal and physical infrastructure for business, there
remain signicant instances of anti-competitive behavior, negative externalities, subsidies that
distort competition, and lack of adequate information (or information asymmetries, in which
sellers generally have more information than buyers).
And international law offers even greater opportunities for companies to engage in protable acts
that violate the principles underlying free market systems. In sum, both in the domestic and
international context, the principles of the perfectly competitive system that economists prize are
often subverted in practice: a rm may monopolize an entire industry and exercise its market
power to throttle potential competition, divide up a market with a competitor, or x prices with
one or more competitors so as to wrest the maximum prot from unsuspecting consumers. For
example, some pharmaceutical companies market drugs approved for one use for another

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(unapproved) use, or provide nancial incentives to doctors to prescribe drugs that may not be
the most ef-cacious.
Because even the myriad U.S. fair trade laws, in addition to U.S. antitrust and European
competition laws, cannot put a stop to all such practices, below we explore how pro t-seeking
actions by MNCs can undermine the capitalist system through political and market
manipulations, bribery, and tax evasion. In the areas of environmental protection, human rights,
and social equity, we show how legal systems provide numerous opportunities for MNCs to
prot while generating negative externalities, infringing human rights, or neglecting important
social needs in various host countries. Put positively, we argue that when corporations engage in
fair competition, encourage sound public governance, respect human rights and community
values, and protect the natural environment, they can create lasting value for themselves and for
the system we call capitalism.
MNCs and Human Rights
While human rights is a an amorphous concept, there are a number of notable international
treaties, conventions, and court decisions that signal where businesses should take special notice
of the rights of their employees and the people in the communities in which they operate. For
example, all members of the United Nations have ratied a number of important international
human rights agreements (conventions), including the Universal Declaration on Human Rights
(1948), the International Covenant on Economic, Social and Cultural Rights (1966), the
International Covenant on Civil and Political Rights (1966), The International Convention on the
Elimination of All Forms of Racial Discrimination (1965), and the Convention on the Rights of
the Child (1989). In addition, many companies have agreed to voluntary codes of conduct with
regard to human rights, such as the Equator Principles and the European Parliaments Code of
Conduct for European enterprises operating in developing countries.
Even if such conventions and guidelines didnt exist, businesses would nd that respecting
human rights is necessary to protect their overseas investments. For example, Talisman Energy
Inc., a Canadian oil company, sought to expand internationally in the 1990s and cast its eyes
toward the relatively new oilelds of Sudan, acquiring the African holdings of Arakis Energy.
Because oil production in Sudan consistently exceeded expectations, Talisman quickly became
Canadas top producing oil and Gas Company. However, Talismans stock price did not reect
this success; it declined 11 percent in the rst weeks
after the company entered Sudan, and was unsteady throughout March 2003, when it sold its
share in the countrys oilelds. The disconnect between the success of Talismans Sudan oil
operations and its rapid exit from the country lay in its failure to recognize the need for a social
license to operate in the developing world. While Talisman had a legal license from the
government to operate, it ignored the needs and concerns of the Sudanese people in the oil
concession areas. Talisman needed some of those people to be moved from their homelands in

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order to drill. The Sudanese government used this as an opportunity to increase its efforts to
displace the non-Muslim population in the countrys South, many of whom were killed or
maimed as the government burned everything to ensure that the Christians and Animists would
not return to the area. Most southern Sudanese drew a connection between this displacement and
Talismans access to the oilelds.
In addition to the displacement, revenues from the oileld benetted the Muslim population in
northern Sudan rather than the local population, and the Sudanese government used a large part
of those revenues to beef up its military, purchasing several helicopter gunships that were then
used to attack villages and drive people out of the oil concession area. The government never
took seriously the proposals to have the companys oil revenue placed in a trust fund to be
administered by non-governmental institutions on behalf of the people.
As part of its operations, Talisman constructed roads into the oil concession area, and built an
airstrip (used primarily for helicopters). As the governments actions against the population in
the area increased, it began to use the infrastructure built by Talisman for its military operations.
The roads facilitated military access to southern Sudan, resulting in more violence over a larger
expanse of the country. The government also used Talismans airstrip to launch helicopter
attacks on villages in the south. That Talisman appeared to have sanctioned all of the
abovewhether true or notmade the company appear complicit in the governments human
rights abuses, and led many southern Sudanese to view Talismans operations as legitimate
targets for physical attack.
Talisman also was attacked legally, sued by an NGO for aiding and abetting Sudans alleged
genocide in Southern Sudan. The lawsuit was ultimately dismissed, but the time and expense
involved in litigating, coupled with the subsequent negative publicity, damaged both Talismans
reputation and its bottom line. Heres the lesson: Today, a MNC cannot rely on the traditional
model of foreign direct investment in which local governments take whatever political or legal
actions they see t in their own territory, while companies mind their business.
Moreover, not all MNCs escape legal liability for human rights violations.
MNCs and Environmental Integrity
There are only a few binding international environmental treaties. Instead, most environmental
standards and regulations vary considerably from nation to nation; and for the global
commons, regulatory standards are rare. The Montreal Protocol, which effectively limits
emissions of chlorouorocarbons (CFCs) into the stratosphere, is a notable exception. Thus,
corporations are tempted to take advantage of lenient standards, or lack of enforcement, in host
countries, with the result that companies often put prot above planet.
It is evident that existing laws, national and international, have not adequately addressed the
entire range of environmental problems that plague the planet. Corporations thus may prot by:

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overshing the oceans with drag nets, trading in endangered species or taking them for
scientic research (killing of whales by Japanese and Norwegian crews), using the black
market to trade in CFCs, engaging in bio-piracy, creating and selling products spawned by new
technologies onto the market before an adequate risk/benet assessment has been accomplished,
depending on heavy use of fossil fuels (and opposing any limits to those activities), using
chemicals or industrial processes in developing countries in ways that would be forbidden in
developed nations, and destroying tropical forests for highly marketable wood (teak, mahogany).
MNCs are able to engage in such activities because there is no strong regulatory oversight. When
such activities are challenged in courts, companies often work overtime to defend their actions.
For example, a U.S.-based oil company that pollutes large areas of land in another country may
be subject to tort litigation, either on the basis of negligence (breach of a general duty of care) or
intentional tort (nuisance or trespass). That has been the case with Texacos oil drilling activities
in Ecuador, which allegedly spilled 16.8 million gallons of oil directly into the environment, and
left behind 600 open waste pits. If the allegations are true, such spills amount to some six million
gallons more than the amount of oil spilled by the Exxon Valdez in Alaska in 1989. In 1993, a
group of Ecuadorian citizens in the Oriente region led a class action lawsuit in U.S. federal
court against Texaco and, in 1994, Peruvian citizens living downstream from the Oriente region
also led such a suit. Both complaints alleged that, between 1964 and 1992, Texacos oil
operations polluted the rainforests and rivers in Ecuador and Peru, resulting in environmental
damage and damage to the health of those who live in the region. Both lawsuits were dismissed
by a U.S federal court in 2002 on forum non conveniens grounds (meaning that the U.S. court
found that Ecuador was a more appropriate venue for litigating the claims). In achieving this
dismissal, Texaco argued that the Ecaudorian courts were available and adequate to hear the
case and, in 2003, the trial was moved to a ramshackle court in Lago Agrio, a nondescript,
dusty town near Colombias lawless frontier.
The Ecuadorian litigation was in the form of a class action suit brought against Chevron, which
had aquired Texaco. Judicial inspections by a courtappointed scienti c team of the contaminated
sites began in August 2004. In early 2008, a purportedly independent expert recommended to the
court that Chevron pay $7 to 16 billion in compensation for the pollution. In 2008, Chevron
reportedly lobbied the U.S. Government to end trade preferences with Ecuador over the lawsuit.
In 2009, Chevron accused the Ecuadorian judge of bias, claiming that he had been bribed, and
offering secretly videotaped footage as evidence. Even as the judge offered to recuse himself,
Chevron made application for arbitration of the dispute under the rules of a U.S.-Ecuador
investment treaty.
For their part, Chevrons website brings up a number of reasons why it is not legally, morally or
nancially responsible. By contrast, the documentary lm Crude, released in fall of 2009,
claims that Texaco spent three decades systematically contaminating one of the most bio-diverse
regions on Earth, poisoning the water, air, and landeffectively creating a death zone area the
size of Rhode Island. Increased rates of cancer, leukemia, birth defects, and a multiplicity of

20

other health ailments have devastated the indigenous population and irrevocably impacted their
traditional way of life.
While there may be legal arguments in Chevrons favor, the company does not claim to have
been a careful steward of the Ecuadorian environment; instead, it blames the damage on the State
oil company, Petroecuador, which still drills in the area. Chevron also argues that the legal-
political system in Ecuador is now tilted to the left since the election of Rafael Correa, a U.S.-
educated economist who has called the devastation a crime against humanity, and who
supports the plaintiffs in the case. But in gaining dismissal in U.S. court under the doctrine of
forum non conveniens in 2003, the company took the position that Ecuadorian courts provided
an adequate and available judicial forum that would best serve both private and public
interests. However, once the Ecuadorian court seemed headed toward a multi-billion dollar
judgment, Chevron switched grounds and argued that Ecuadorian courts were inadequate. The
company also has tried to enlist U.S. diplomatic pressure, challenged the presiding judges
fairness, and requested arbitration in Europe to avoid a judgment from the Ecaudorian court.
In a similar situation, U.S. fruit and chemical companies argued repeatedly throughout the 1990s
that Central American courts were adequate to deal with claims from banana workers made
sterile by DBCP (a pesticide banned in the U.S. but used in Honduras, Nicaragua, and
elsewhere). When U.S. courts ruled that worker plaintiffs could just as well sue in their home
countries, the fruit and chemical companies did not expect that Nicaraguas legal system then
would take the cases of Nicaraguan plaintiffs, allow class actions, and actually impose
substantial penalties. When it did, the companies convinced the U.S. Department of State to exert
pressure to undo what the Nicaraguan legislature and courts had done, and have resisted
enforcement of Nicaruaguan judgments in the United States.
In short, multinational companies are prone to use political in uence and legal compliance
as strategies to modify their moral responsibilities, whether those relate to the environment,
human rights, or the health of workers abroad. For environmental issues in particular, it is
undoubtedly tempting for rms to seek short-term economic bene ts by damaging the natural
environment when they can do so legally. But here again, such a strategy ignores the social
license aspect of doing business abroad, affects company reputation in negative (if hard to
measure) ways, and risks large damage awards in foreign courts. An eventual judgment against
Chevron from the courts of Ecuador in the billions of dollars would be a non-trivial sum in
anyones accounting. In contrast, there are often market advantages that accrue to those MNCs
who infuse their strategies with a realistic understanding of the environmental problems their
operations create. Thats good business.



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Bibliography
Review of International Comparative
Management
utm.edu
enterpriseethics.org
vikalpa.com