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Chapter 03 - Ethics and Social Responsibility

Chapter 3: Ethics and Social Responsibility

Learning Objectives and Chapter Summary


1. EXAMINE ethics in international management and some of the major ethical issues
and problems confronting MNCs in selected countries.

Ethics is the study of morality and standards of conduct. It is important in the study
of international management because ethical behavior often varies from one
country to another. Ethics manifests in the ways societies and companies address
issues such as employment conditions, human rights, and corruption. A danger in
international management is the ethical relativism trapWhen in Rome, do as the
Romans do.

2. DISCUSS some of the pressures on and action being taken by selected


industrialized countries and companies to be more socially responsive and
environmentally to world problems.

During the years ahead, multinationals likely will become more concerned about
being socially responsible. NGOs are forcing the issue. Countries are passing laws
to regulate ethical practices and governance rules for MNCs. MNCs are being
more proactive (often because they realize it makes good business sense) in making
social contributions in the regions in which they operate and in developing codes of
conduct to govern ethics and social responsibility. One area in which companies
have been especially active is pursing strategies that blend environmental
sustainability in business objectives.

3. EXPLAIN some of the initiatives to bring greater accountability to corporate


conduct and limit the impacts of corruption around the world.

MNCsin conjunction with government and NGOsare also contributing to


international development assistance and working to ensure that corporate
governance practices are sound and efficient.

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Chapter 03 - Ethics and Social Responsibility

The World of International Management: GEs Imagination: Strategic


CSR
1. Summary:
This vignette demonstrates the changing focus of corporations from the traditional
emphasis on supply and demand models to now include social and environmental
responsibilities and obligations. GE, like many other corporations, realized that
environmental and social practices can yield a strategic advantage, which in the
long term will produce positive financial results.

2. Suggested Class Discussion:

1. What effect will a corporations emphasis on environmental responsibility have


on its financial performance in both the short term and long term? Does this
contradict the notation of maximizing the wealth of its investors?

2. What is the perception of corporate initiatives to become more environmentally


friendly? Should these types of behaviors be widely publicized? Do you agree
with GEs critics who claim that the company has not gone far enough with its
commitment to be socially and environmentally responsible?

3. Related Internet Sites:

General Electric: { http://www.ge.com/}.


Business Week: {http://www.businessweek.com}.

Chapter Outline with Lecture Notes and Teaching Tips

Ethics and Social Responsibility


1) The ethical behavior of business and broader social responsibilities of corporations have
become major issues in the United States and all countries around the world. Ethical
scandals and questionable business practices have received considerable media attention
and aroused the public's concern about ethics in international business and attention to the
social impact of business operations.

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Chapter 03 - Ethics and Social Responsibility

Ethics and Social Responsibility in International Management

1) Ethics is the study of morality and standards of conduct.

Teaching Tip: The Institute for Global Ethics is an independent, nonprofit organization
dedicated to elevating public awareness and promoting the discussion of ethics in a global
context. The site provides links to a variety of ethics related material and is available at
{http://www.globalethics.org/}. Another excellent site is the Carnegie Council on Ethics
and International Affairs at {http://www.cceia.org/}.

Ethics Theories and Philosophy

1) There are a range of ethical theories and approaches around the world.
a) Kantian philosophical traditions argue that individuals and organizations have
responsibilities based on a core set of moral principles that go beyond those of narrow
self interest.
b) Aristotelian virtue ethics focus on core, individual behaviors and actions and how they
express and form individual character.
c) Utilitarianism favors the greatest good for the greatest number of people under a given
set of constraints.
d) Eastern philosophy views the individual as part of rather than separate from nature.
Teaching Tip: There is a fascinating web site dealing with global business ethics at
{http://www.globalethics.org}. One of the ongoing features of the site is a set of "ethical
dilemmas" that companies face in conducting business both domestically and overseas.
This site is well worth a visit to obtain interesting material for classroom discussion.

Human Rights

1) Human rights issues often come into question when dealing with MNCs as there is
currently no universally adopted standard.
a) Womens rights can be considered a subset of human rights as women continue to
strive for equality in the workplace. While the number of women in the workplace has
increased substantially worldwide, most are still experiencing the effects of a glass
ceiling, meaning that it is difficult, if not impossible, to reach the upper management
positions.
b) Japan may have more troubles than any other countries, but the glass ceiling is
pervasive throughout the world. Today, women earn less than men for the same job in
the United States, though a lot of progress has been made in this regard.
c) France, Germany, and Great Britain have seen an increase in the number of women
not only in the workforce but also in management positions.

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Chapter 03 - Ethics and Social Responsibility

Labor, Employment and Business Practices

1) Political, economic, and cultural differences emphasize how difficult it is to establish a


universal foundation of employment practices. It does not make much sense to
standardize compensation packages within an MNC that spans both developed and
undeveloped nations.
a) China continues to attract criticism for its questionable labor practices that include
long work weeks, low pay, and the use of child labor. The suicide of several Chinese
factory workers in 2010 brought renewed attention to the problems.

Environmental Protection and Development

1) Conservation of natural resources is another area of ethics and social responsibility in


which countries around the world differ widely in terms of their values and approach.

2) The Environmental Kuznets Curve (EKC) hypothesizes that the relationship between per
capital income and the use of natural resources and/or emission of wastes increase with
income.

Globalization and Ethical Obligations of MNCs


1) How much responsibility do MNCs have in changing these practices?
a) One reason phenomenon in response to globalization has been to offshore not just
low-cost labor-intensive practices, but to transfer a large percentage of current
employees of all types to foreign locations.

Reconciling Ethical Differences across Cultures


1) Most MNCs try to adhere to a code of ethical conduct while doing business around the
world, but make some adjustments to respond to local norms and values.

2) The Integrative Social Contracts Theory (ISCT) attempts to navigate a moral position that
does not force decision makers to engage exclusively in relativism versus absolutism.

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Chapter 03 - Ethics and Social Responsibility

Corporate Social Responsibility and Sustainability

1) Corporate social responsibility (CSR) can be defined as the actions of a firm to benefit
society beyond the requirements of the law and the direct interests of the firm.
a) Nongovernmental organizations (NGOs) are private, not-for-profit organizations that
seek to serve societys interests by focusing on social, political and economic issues
such as poverty, social justice, education, health, and the environment.

2) Civil Society, NGOs, MNCs, and Ethical Balance: The emergence of organizational
civil society and NGOs has dramatically altered the business environment globally and the
role of MNCs within it.

3) Response to Social Obligations: Agreements and codes of conduct are established for
MNCs to maintain a minimum level of social and environmental standards, both locally
and globally. Examples include the UN Global Compact, Global Reporting Initiative, and
ISO14000. These approaches ay also contribute to rising standards in the developing
world through the transfer of best practices to local firms.
a) Fair trade is an organized social movement and market-based approach that aims to
help producers in developing countries obtain better trading conditions and promote
sustainability.

4) Sustainability: In the boardroom, the term sustainability may first be associated with
financial investments or the hope of steadily increasing profits, but for a growing number
of companies, this term means the same to them as it does to an environmental
conservationist.

Corporate Governance

1) Corporate governance the system by which business corporations are directed and
controlled.

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Chapter 03 - Ethics and Social Responsibility

Corruption

1) Government corruption is a pervasive element in the international business environment.


Recently publicized scandals in Russia, China, Pakistan, Lesotho, South Africa, Costa
Rica, Egypt, and elsewhere underscore the extent of corruption globally, especially in the
developing world.
a) The Foreign Corrupt Practices Act (FCPA) The FCPA makes it illegal for U.S.
companies and their managers to attempt to influence foreign officials through
personal payments or political contributions.
b) Organization for Economic Cooperation and Development (OECD) This marked a
victory for the United States, which outlawed foreign bribery two decades previously
but had not been persuade other countries to follow its lead.

Teaching Tip: Transparency International is a nonprofit organization, based in Berlin,


Germany, that monitors business corruption worldwide. The site is particularly
interesting because it provides a European point of view in regard to business ethics.
The site is available at {http://www.transparency.de/}. You can also explore the
Transparency International at {http://www.transparency.org/}.

International Assistance

1) Recently identified top priorities for development assistance include diseases,


malnutrition, subsidies and trade, sanitation and water, government, migration, and
climate (see Table 3-2 in the text).

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Chapter 03 - Ethics and Social Responsibility

The World of International Management - Revisited

Questions & Suggested Answers

1. Do governments and companies in developed countries have an ethical


responsibility to contribute to economic growth and social development in
developing countries?

Answer: Governments and companies in developed countries cannot possibly avoid


taking part in or having an impact on the economic and social development of
developing countries. If they decide to evade their social responsibilities and choose
to have no impact, they will inevitably cause harm, as most developing countries
are not ready yet to reap the full benefits of global economic measures and market-
oriented economic systems and practices. Since richer governments and MNCs can
no longer assume an observer role, their only alternative is to contribute.
Moreover, contributing to economic growth and social development in developing
countries is likely to also bring short-term benefits to the governments and
companies of developed countries, in terms of reputation and political acceptance,
as well as long-term benefits, in terms of profits and global economic growth.

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Chapter 03 - Ethics and Social Responsibility

2. Are governments, companies, or NGOs best equipped to provide this assistance?

Answer: None of these groups has a superior advantage over the others. However,
each is likely to be best equipped for certain roles and types of assistance. As we
progress toward more capitalism and free markets, MNCs are most likely to have
the financial resources and necessary tools to implement and publicize best
practices in social responsibility. More focused forms of assistance are likely to be
implemented by MNCs, such as those in the area of workplace standards. On the
other hand, NGOs possess the credibility and the global spread necessary for
addressing the needs of diverse stakeholders. Local governments are likely to
assume the role of adapting and overseeing coordination and application of
resources at the individual country level.

3. Do corporations have the responsibility to use their best ethics and social
responsibility when they do business in other countries, even if those countries
practices are different?

Answer: Answers may vary. Organizations have the obligation of being impartial in
implementing their business practices globally. In other words, corporate values and
standards should be established and followed, and taking advantage of cross-
country differentials in ethical practices should be avoided. The interests of various
stakeholders should guide decisions in grey areas. In general, with the increased
global awareness of ethical concerns, and the likely eventual local litigation and
global initiatives regarding the most pressing ethical issues, it seems to make better
business sense, both economically and politically, for organizations to be proactive
in their socially responsible initiatives.

4. How can companies leverage their ethical reputation and social and environmental
responsibility to improve business performance?

Answer: Being green is a new buzz word in business. Companies want to be


perceived as being socially and environmentally friendly. Accordingly, companies
are actively publicizing their efforts to be socially responsible and protect the
environment. Most students will probably recognize that consumers who value
such efforts are more likely to buy products from these companies rather than from
companies that are less socially and environmentally friendly. Business
performance may also improve simply because the processes involved in being
green can actually be more efficient.

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Chapter 03 - Ethics and Social Responsibility

Key Terms

Corporate governance
Corporate and social responsibility (CSR)
Ethics
Fair trade
Nongovernmental organizations (NGOs)
Sustainability

Review and Discussion Questions

1. How might different ethical philosophies influence how managers make decisions
when it comes to offshoring of jobs?

Answer: The Kantian approach would suggest that offshoring decisions be made in
accordance with a set of principles that measure the decision against core tenets
such as corporate code of conduct. The virtue theory would suggest that offshoring
decisions consider the effect of the decision on the community and other social
variables. The utilitarian approach would suggest that the benefits and costs of the
decision should be measured to ensure that the benefits outweigh the costs. The
eastern philosophical approach would suggest that broader, longer-term, more
integrative view that considers the impact of the decision on humans and also on
the environment.

2. What lessons can U.S. multinationals learn from the political and bribery scandals
in recent years, such as those affecting contractors doing business in Iraq
(Halliburton) as well as large MNCs such as Siemens, HP, and others? Discuss
two.

Answer: Despite efforts by governments to establish limits, bribery continues to be


a problem around the world. However, this may start to shift as new methods of
enforcement give governments more power. Siemens for example, recently paid a
record fine for its unethical behavior. In addition, many stockholders are
expressing their displeasure with the unethical behavior of firms by refusing to
make investments in companies engaged in corrupt activities. Companies may also
note that U.S. companies are still winning contracts in countries where bribes are
common, even though they are unable to pay bribes themselves.

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Chapter 03 - Ethics and Social Responsibility

3. In recent years, rules have tightened such that those who work for the U.S.
government in trade negotiations are now restricted from working for lobbyists for
foreign firms. Is this a good idea? Why or why not?

Answer: Prohibiting those who represent the U.S. government in trade negotiations
from working as lobbyists for foreign firms can minimize the conflict of interest
that could occur with such rules. It would seem that an individual who is engaged
in both roles would naturally support trade policies that would improve the lot of
the firm that he or she is lobbying for. By restricting this type of situation, trade
negotiations can be on a more level playing field.

4. What are some strategies for overcoming the impact of counterfeiting? Which
strategies work best for discretionary (for instance, movies) versus nondiscretionary
(pharmaceutical) goods?

Answer: Counterfeiting continues to be a problem in many countries and especially


in China where for example, up to 90 percent of the Windows operating systems in
use are pirated copies. A key issue in resolving the problem is establishing clear
definitions and laws against the practices. Cultural relativism also comes into play
as what may be perceived as unethical in the United States, is acceptable behavior
in China.

5. Why are MNCs getting involved in corporate social responsibility? Are they
displaying a sense of social responsibility, or is this merely a matter of good
business? Defend your answer.

Answer: Multinational corporations (MNCs) are getting involved in corporate


social responsibility to build a positive public image. A proactive approach to
management is paramount to establishing social responsibility and demonstrating a
commitment to the stakeholders of the organization. It is important to have a
commitment to your customer mix and be involved in the community for
management and operating employees. An investment in the community is an
objective to which MNCs must commit. A long-range strategy should incorporate
social responsibility to develop such projects as to safety and accident free work
environments, recycling of products, environmental concerns, etc. A proactive
approach to corporate social responsibility can improve market share and profits in
the long run.

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Chapter 03 - Ethics and Social Responsibility

Internet Exercise: Social Responsibility at Johnson & Johnson and


HP
Suggestion for Using the Exercise

1. Many firms, in addition to Johnson & Johnson and HP, are very proactive in terms
of social responsibility initiatives. Ask your students to search the web and find at
least three additional examples of firms that are heavily involved in social
responsibility initiatives. These initiatives are often referred to in a company's
home page on the Internet.

In The International Spotlight: Saudi Arabia


Questions & Suggested Answers

1. What are some current issues facing Saudi Arabia? What is the climate for doing
business in Saudi Arabia today?

Answer: The Gulf War probably did not help Saudi Arabia. Even though it
received help from the U.S., the whole region has suffered. The same applies to the
U.S.-led war in Iraq. On the economic front there is a shortage of Saudi skilled
workers for all types of jobs, and as a result, Saudi Arabia is forced to hire outsiders
who often have little patience or respect for Islamic customs. As Saudi schools and
universities graduate more technicians and professionals, there is a move by the
government to release some of the foreigners and develop and fund new projects in
order to provide full employment for their own newly educated people.

Many aspects of the Saudi economy appear vibrant, particularly in areas outside of
the petroleum sector. For example, exports to Saudi Arabia are on the upswing, and
many Saudi Arabian businesses are eager to seek out new U.S. firms to operate in
an attractive market. It seems that the market potential in Saudi Arabia is in areas
where U.S. firms in particular have distinct advantages. For example, there is high
demand in the Saudi market for anything in the medical sector, high-tech
agricultural equipment, computers, and service sector operations and maintenance.
A big challenge for Saudi Arabia and the Western world is in preserving a stable,
long-term market for the tremendous oil reserves of the country. The Saudi
government is currently encouraging privatization and joint ventures, and invites
competitive imports like automobile dealerships. Saudi Arabia will continue to
maintain good relations with the U.S., Japan, and Europe for mutual trade benefits
and continued development.

2. Is it legal for Auger's firm to make a payment of $100,000 to help ensure this
contract?

Answer: It is not legal under U.S. law for the firm to make such a payment.

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Chapter 03 - Ethics and Social Responsibility

American law strictly forbids such action even though it is being carried out in a
foreign environment. Even if Auger believes the minister, it is against the law for
the company to take any such action to increase the potential of winning the
contract.

3. Do you think other firms are making these payments, or is Auger's firm being
singled out? What conclusion can you draw from your answer?

Answer: This is a difficult question to answer. From what Auger's Saudi friend said
toward the end of the case, it is likely that other firms are not making payments
similar to the one being asked of Auger. Rather, his firm is being singled out.
Why? One reason may be that the company is going to get the contract and the
minister (and/or those he represents) would like to shake them down now before the
announcement is made. A second reason may be that the decision will take quite a
while and the minister (and/or those he represents) feels that this is a good time to
take advantage of the firm. In any event, there is no proof that the minister is
telling Auger the truth.

4. What would you recommend that Skyblue do?

Answer: The company cannot and should not pay the money. There are two
reasons for this. First, it is illegal. Second, even if Auger was willing to break the
law, why should he? There is no proof that paying this money will have any value
in helping ensure the contract. In short, the company is probably being lied to by
the minister. It would be better off obeying the law and letting the chips fall where
they may.

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Chapter 03 - Ethics and Social Responsibility

You Be the International Consultant: It Sounds A Little Fishy


Questions & Suggested Answers

1. If Scherer finds out that the French company has been paying its largest customer
$10,000 a month, should Brattle back out of the deal? If Brattle goes ahead with
the deal, should it continue to make these payments?

Answer: Brattle needs to do some research into how bribes, etc. are handled within
the French culture and where the law stands with regard to them. Unlike the U.S.,
bribes are customary in many countries. If they are in France, Brattle faces a
dilemma. If the Lyon firm has been showing acceptable profits over the past
several years, after the payments have been made to customers and charity, the
profits should be no different after the sale. It is a touchy issue legally too. Such
payments may be illegal and yet eyes are averted to French businesses that do it.
Would they also be ignored if an American firm paid them? Probably not. Bribery
is illegal in the U.S. and therefore Brattle cannot pay bribes and should back out.

2. If Scherer finds out that the customer has been making up the story and no such
payments were actually made, what should she do? What if this best customer says
he will take his business elsewhere?

Answer: Certainly, a conference with the French firm is called for to clarify just
what is going on. If this customer did not get such payments in the past, it is trying
to solicit a bribe through withholding of business.
Brattle needs to find out how much business the firm does with the potential
subsidiary, how much business is directed to the subsidiary, and whether it could
actually direct business away from Brattle. Once Scherer has actual figures and
information regarding what percent of sales this firm accounts for, he can make
some decisions. If the firm is not as powerful as he thinks, he can choose to ignore
the payment issue. If the firm is very important to annual revenues, he will have to
sit down and explain that he is unable to pay bribes and attempt to persuade the
customer that he will compete on the basis of price and service.

3. If Brattle buys the French subsidiary, should Scherer continue to give $5,000
monthly to the local community? Defend your answer.

Answer: Any firm doing business has obligations to the community it does business
in. The $5000 a month civic and charity donations in France are no different than
what is expected of U.S. firms to give to the United Way, and the multitude of other
organizations that ask for donations or sponsorship. If Brattle added up what his
firm gives annually in the U.S., he might be surprised what the total comes to. In
the U.S., five percent of profits donated to such causes are tax deductible. Brattle
should investigate French law to see if the donations are tax deductible. Even if
they are not, continuing them is advisable. Showing support for the community is

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Chapter 03 - Ethics and Social Responsibility

important.

Brief Integrative Case 1.1: Colgates Distasteful Toothpaste


1. Identify the major strategic and ethical issues faced by Colgate in its partnership
with Hawley and Hazel.

Answer: Colgate made the decision to acquire fifty percent of Hawley and Hazel as
a way to quickly get a large share of the Asian market without having to build its
own plant. Strategic issues included increased growth, sales activity, and profits.
The ethical issue confronting Colgate was that it promoted the brand label Darkie
toothpaste in foreign markets. The use of Al Jolson to promote the product brand
Darkie had ethical and legal repercussions for Colgate and Hawley and Hazel.
This campaign was widely criticized in the United States, and Colgate was forced
to develop a strategy to repair the damage it suffered with consumer perceptions of
the product brand Darkie toothpaste. Colgate proposed that the brand name be
changed to Darlie, Darbie, Hawley, or Dakkie, and that a new logo be developed
that included a dark, nondescript silhouette and a well-dressed black man.

2. What do you think Colgate should have done to handle the situation?

Answer: Colgate should have been more aware of the implications of the product
and its marketing campaign from the start. Once the problem became apparent,
Colgate should have moved quickly to make changes to both the product name and
the promotional campaign associated with it.

3. Is it possible for Colgate and Hawley and Hazel to change the toothpastes
advertising without sacrificing consumer brand loyalty? Is that a possible reason
for Colgates not responding quickly to domestic complaints?

Answer: The promotional mix along with the advertising must be changed to
reflect a more positive image of the product brand. Sales promotions, advertising,
public relations, and personal selling efforts must be pursued to recapture market
share and growth in the future. A reactive strategy is not the solution however a
more proactive approach should have been pursued by management. These types
of issues must be pursued and anticipated to accommodate the needs of the
consuming public. This can be related to the Firestone case where a combative
strategy was utilized and would not be recommended.

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Chapter 03 - Ethics and Social Responsibility

4. In the end, was a no management rights clause good for Colgate? What could
have happened during the negotiations process to get around this problem?

Answer: The no management rights clause was not right for Colgate. As part of
negotiations, Colgate should have maintained management rights to make any
decisions relevant for their marketing strategy of this product brand. It is important
to maintain management rights when acquiring a competing firm. Colgate should
have maintained a social responsibility with an ethical code policy to be enforced
with all subsidiaries.

Brief Integrative Case 1.2: Advertising or Free Speech? The Case of


Nike and Human Rights
1. What ethical issues faced by MNCs in their treatment of foreign workers could
bring allegations of misconduct in their operations?

Answer: These issues include, but are not limited to the following:
wage rates and benefits
working conditions such as job security, workplace safety, temperature,
ventilation and other standards, working hours, breaks, vacations, worker
compensation and unemployment benefits
discrimination against women, older workers, cultural and religious
minorities
human rights violations such as child and prison labor
environmental standards

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Chapter 03 - Ethics and Social Responsibility

2. Would the use of third party independent contractors alleviate or insulate MNCs
from being attached, and would such use be a good defensive shield against charges
of abuse of their employees?

Answer: As is the case in the United States, the independent contractor status can
only be supported through clear, legally defensible criteria, such as the amount of
control the contractor has over the tasks to be achieved, the method the contractor
is paid, the freedom of the contractor to work on other contracts simultaneously,
and so on. Legally, these criteria are not likely to apply to the foreign workers of
companies like Nike, who tend to have limited control over their performance,
work long, fixed hours on company premises, and be paid on an hourly or piece
rate. Therefore, it would be illegal to classify these workers as independent
contractors, which exposes MNCs to more problems.

Moreover, even if MNCs find a legal loophole to continue to classify their foreign
workers as independent contractors, this will not shield their public image and
reputation from public scrutiny and criticism for acting unethically and evading
their social responsibilities, including paying these workers fair wages and
protecting them with benefits, unemployment, and social security-type provisions,
which independent contractors are not eligible for.

3. Do you think statements by companies that describe good social and moral conduct
in the treatment of their workers part of the image those companies create and
therefore are part of their advertising message? Do consumers judge companies and
base their buying decisions on their perceptions of corporate behavior and values?
Is the historic made in question (e.g. Made in the USA) now being replaced by
the made by inquiry (e.g. Made by Company X or for Company X by Company
Y)?

Answer: Since awareness and expectations of corporate social responsibility are on


the rise, good social and moral conduct will be an increasingly important criterion
in consumers purchasing decisions. Therefore, it is legitimate to consider these
statements as advertising messages. Moreover, companies have found that their
ethical conduct is also associated with profitability. Reaping economic benefits
from socially responsible actions would justify their classification as promotional
activities. For the truly socially responsible organization, these changes represent
tremendous opportunities for long term success and competitiveness in global
markets. Only companies that attempt to adhere to the letter, rather than the spirit of
these shifting trends is likely to face increased litigation costs and reputation
challenges.

It is not likely that consumers will completely displace their emphasis on where
products are made. Quality standards across countries are likely to continue to
shape purchasing decisions, reinforcing the idea of purchasing products made in
countries that emphasize quality. Prestigious associations of some products or

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Chapter 03 - Ethics and Social Responsibility

ingredients with certain countries are also likely to persist (e.g. Italian leather,
Brazilian coffee, Egyptian cotton, etc.). However, there is likely to be an integration
of where a product is made with which company is making it and how it is being
made, as viewed in Nike and many other cases.

4. Given the principles noted in the case, how can companies comment on their
positive actions to promote human rights so consumers will think well of them?
Would you propose a company (a) do nothing, (b) construct a corporate code of
ethics, or (c) align itself with some of the universal covenants or compacts prepared
by international agencies?

Answer: There are two sets of interrelated considerations involved in this issue:
ethical considerations and communication issues. The bottom line response with
regard to communication issues is that companies should emphasize truthfulness in
all of their communications, regardless of whether they are for public relations,
advertising, shareholder reporting, regulation compliance, or any other purposes.
The natural outcome of communicating socially responsible actions will usually be
good publicity.

On the other hand, the above alternatives address approaches in dealing with ethical
considerations, which should be shaped by the organizations pre-established
corporate values and codes of conduct, and informed by consequences of past
actions, future forecasts, changes in the external and internal corporate
environment, actions, initiatives and interests of diverse global stakeholders, and
others. In other words, good publicity should be a by-product, rather than the goal,
of ethical conduct and corporate social responsibility.

5. What does Nikes continued financial success, in spite of the lawsuit, suggest about
consumers reactions to negative publicity? Have American media and NGOs
exaggerated the impact of a firms labor practices and corporate social
responsibility on its sales? How should managers of an MNC respond to such
negative publicity?

Answer: Nikes continued financial success despite its scandals involving


sweatshops indicates that either its customers have very short memories or that they
simply do not care as much about Nikes ethics as they do about the companys
products. Most students will probably agree that the actions of media and NGOs to
publicize unethical behavior by companies is probably beneficial because it may
prompt other companies to think about how their actions affect all stakeholders, and
encourage consumers to think about their own ethical standards before they buy.
Most students will probably agree that companies should address negative publicity
either with a statement defending their actions, or an acknowledgement of
wrongdoing and a plan to make amends for doing so.

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Chapter 03 - Ethics and Social Responsibility

In-Depth Integrative Case 1.1: Student Advocacy and Sweatshop


Labor: The Case of Russell Athletic
1. Assume that you are an executive of a large U.S. multinational corporation
planning to open new manufacturing plants in China and India to save on labor
costs. What factors should you consider when making your decision? Is labor
outsourcing to developing countries a legitimate business strategy that can be
handled without risk of running into a sweatshop scandal?

Answer: Many U.S. companies today are shifting production to countries like
China and India in order to capitalize on the lower wage rates in those countries.
When making the decision to open manufacturing operations in a foreign country,
companies need to consider the risks involved by assessing factors such as the
political, legal, and economic environments. Companies also need to act in an
ethical and socially responsible manner wherever they operate. Therefore,
companies need to recognize that just because regulations on labor or
environmental issues are not as defined or enforced as they are in developed
countries does not mean that the rights of labor should be ignored, or that it is
acceptable to damage the environment. Companies should respect the rights of all
stakeholders when making decisions. In fact, some students may suggest that
companies maintain the same standards in their foreign operations as they do in
their domestic ones. Companies that choose to outsource to other companies must
ensure that the company doing the work follows a similar set of corporate values
and standards. To avoid problems like sweatshop scandals, many companies today
do surprise inspections of the companies making their products, or work directly
with the companies to ensure that they are following appropriate policies.

2. Do you think that sweatshops can be completely eliminated throughout the world in
the near future? Provide an argument as to why you think this can or cannot be
achieved?

Answer: Most students will probably suggest that it would be very difficult to
eliminate all sweatshop operations. Victims of sweatshop situations are there
because they have no alternatives. Because there will always be people who need
to work regardless of how harsh the conditions, sweatshops will continue to exist.
However, the propensity of sweatshops can be greatly diminished if governments
put appropriate regulations in place, and then enforce them. Organizations like
United Students Against Sweatshops can also help eradicate sweatshops by
publicizing violations and shaming companies in action.

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Chapter 03 - Ethics and Social Responsibility

3. Would you agree that in order to eliminate sweatshop conflicts large corporations
such as Russell Athletic should retain the same high labor standards and regulations
that they have in the home country (for example, in the U.S.) when they conduct
business in developing countries? How hard or easy can this be to implement?

Answer: While it can be easy to suggest that companies develop a set of standards
and then stick with them regardless of where in the world they operate, it may also
be a bit nave. The situation in some countries can demand different approaches.
For example, while most companies would probably avoid child labor, a company
that acquires a plant in a country where children are forced to work simply to help
their family survive could actually do more harm by firing the children, than by
allowing them to continue to work.

4. Do you think that the public and NGOs like USAS should care about labor
practices in other countries? Isnt this a responsibility of the government of each
particular country to regulate the labor practice within the borders of its country?
Who do you think provides a better mechanism of regulating and improving the
labor practices: NGOs or country governments?

Answer: This question will probably generate a fair amount of debate among
students. Some students will argue that it is because governments are failing to
insist that companies operate in a socially responsible and ethical way that
organizations like USAS have emerged. Other students may suggest that if
companies are following local laws, organizations like USAS should not be
permitted to harass the companies simply because the local laws do not uphold the
loftier standards that may exist in another country. Most students will probably
agree that NGOs like USAS can be very successful at getting organizations to be
ethical and socially responsible, and may in fact be more effective than country
governments.

5. Would you agree that Russell Athletic made the right decision by conceding to
USAS and union demand? Isnt a less expensive way to handle this sort of
situation simply to ignore the scandal? Please state your pros and cons regarding
Russells decision to compromise with the workers union and NGOs as opposed to
ignoring this scandal.

Answer: Russell Athletic capitulated to the demands of USAS only after the
organization threatened the companys profits by getting schools and universities to
suspend their contracts with the company. Some students may suggest that Russell
Athletic should have reconsidered its decision much earlier in the process. In doing
so, the company could have avoided much of the negative publicity it received.
Other students however, will probably argue that by conceding to the USAS Russell
Athletic may have paved the way for other organizations to act like the USAS, and
that in the long run, actions by NGOs like this could hamper the ability of
companies to make their own strategic decisions.

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Chapter 03 - Ethics and Social Responsibility

In-Depth Integrative Case 1.2: Pharmaceutical Companies,


Intellectual Property, and the Global AIDS Epidemic
1. Do pharmaceutical companies have a responsibility to distribute drugs for free or at
low cost in developing countries? What are the main arguments for and against
such an approach? What are the advantages and disadvantages of giving drugs for
free versus offering them at low no-profits prices?

Answer: Organizations in general have the social responsibility to be good citizens,


both in the countries in which they operate, as well as in the world in which they
exist. Whenever economically feasible, organizations are ethically compelled to use
their competitive advantage to benefit all their stakeholders, not only their
shareholders. If it is not threatening to the organizations future survival, then this
social responsibility may imply incurring some losses, as is the case with drugs.

The main arguments for this approach are not only ethical and humanitarian
concerns, but also prospects of long term global development that are likely to
amount to long term prosperity for all involved. Arguments against such approaches
primarily include economic and intellectual property concerns. (The next question
provides further details.)

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Chapter 03 - Ethics and Social Responsibility

2. What are the principal arguments of pharmaceutical companies that oppose making
exception to IPR laws for developing countries? What are the arguments by NGOs
and others for relaxing IPR laws?

Answer: Pharmaceutical companies spend tremendous amounts of money, time and


effort in developing drugs. Strict IPR laws are their only way to recoup these
investments, which may threaten their survival in the future. Moreover, it may
reduce the incentives for research and development in the industry, hurting patients
from both developed and developing countries. Moreover, pharmaceutical
companies worry that these apparently humanitarian exceptions may surmount to a
cascading trend of further exceptions and compromises for many drugs that may
not be as critical, as well as a price-diminishing trend in developed markets in an
effort to reduce unjustifiable price differentials. Further concerns are that cheaper
drugs may eventually be imported into developed markets, competing with their
own highly priced products.

NGOs and others perceive pharmaceutical companies as greedy and solely


motivated by economic outcomes. They argue for the tremendous impact of
differential treatment on the health conditions and economic development of poorer
countries. They also argue that without these exceptions, the alternative will not be
for patients from developing countries to buy the more expensive products, but to
further spread the disease or to die, which will not bring any benefits for
pharmaceutical companies.

3. What impact would you expect South Africas decision to levy duties on drug
imports from Western nations to have on the international distribution of drugs to
South Africa?

Answer: Any protectionist measure from either side is likely to hinder the process
of making these drugs available to where they are most needed. However, such
pressures by South Africa may also pressure pharmaceutical companies to relax
their efforts, as their operations in South Africa become less profitable, and allow
for local production of these products. In the meantime, revenues from these duties,
paid by richer patients, may be used to make the drug available for poorer patients
through public programs.

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Chapter 03 - Ethics and Social Responsibility

4. In June 2002, the WTO extended the transition period during which least-developed
countries (LDCs) had to provide patent protection for pharmaceuticals. In your
opinion, was this an appropriate change in policy or a dangerous precedent? What
could be some of the negative ramifications of this resolution? What about the
effects for other industries?

Answer: In this situation, such action may have been warranted, but there is no
guarantee that it will not be used as a precedent by other industries. Negative
ramifications may include delayed enforcement of IPR in many developing
countries, reducing the global incentives for research, development, innovation and
creativity. In the pharmaceutical industry, this may result in slowed drug inventions
and production, and consequently lower-quality healthcare and reduced human
welfare in general. The same may occur in other vital industries. It is unlikely, but
still possible for this incident to be used as precedent in clearly distinct industries
such as entertainment for example, but may grey areas remain to be explored, such
as food products, weapons, etc.

5. Given the initiatives announced by global development and aid organizations and
among pharmaceutical companies themselves, was it necessary to relax IPR rules in
order to ensure that adequate supplies of AIDs medications would be available for
distribution in the developing world?

Answer: Apparently, these actions were still necessary. The price of the
medications continued to be beyond the reach of many patients. Generic drug
producers were still able to supply the drugs at lower prices, which would help
patients and conserve the budgets of various humanitarian funds.

It seems that not all market-oriented approaches are equally applicable in


developing countries. Moreover, IPR rules are the best proof that the market may
not be the most efficient vehicle. If drug production were to be left for the market,
then generics would have competed freely with patented products. Thus, one
protectionist measure may have to be balanced with another, before market
mechanisms may achieve their full potential.

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Chapter 03 - Ethics and Social Responsibility

6. What role do MNCs have in providing funding or other assistance to international


organizations such as the Global Fund?

Answer: MNCs are likely to be the primary sources of financial resources in


tomorrows economies, especially as government control continues to decrease in
material significance (although not necessarily in political or regulatory
importance). Hence, the role of MNCs is likely to increase. Moreover, such
initiatives are likely to increase in power and influence due to the impact of
socially-conscious shareholders, who are also likely to pose strong pressures over
organizational decision makers to become active contributors. The powerful impact
of highly-informed, empowered, vocal customers is also likely to steer competitive
pressures against companies that that are not active contributors in ethical
initiatives. Finally, with the increased visibility of both ethical and unethical
organizations, and the realized outcomes in terms of profitability, reputation and
long term competitiveness, it is starting to become more economically sound for
MNCs to increase their financial and social commitments to ethical endeavors.

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