Research

Straight and narrow: Steering an ethical course through international waters

For Marianne Jennings, a healthy market economy depends on four pillars — business, investors, government and customers. Each relies on the others in a symbiotic relationship that leads to mutual benefit and smooth operations. But when ethical lines are crossed, even in just one of the four areas, everyone is at risk. "If one of these [four groups] falls, the system falls," said Jennings, a professor of legal and ethical studies at the W. P. Carey School of Business, during a recent speech in Mexico City.

2007-04-25

For Marianne Jennings, professor emeritus of marketing at the W. P. Carey School, a healthy market economy depends on four pillars — business, investors, government and customers. Each relies on the others in a symbiotic relationship that leads to mutual benefit and smooth operations. But when ethical lines are crossed, even in just one of the four areas, everyone is at risk. "Everybody has to be corruption free," said Jennings, a professor of legal and ethical studies at the W. P. Carey School of Business.

"If one of these [four groups] falls, the system falls." Delivered during a speech at an event hosted jointly by El Instituto Tecnológico Autónomo de México (ITAM) and the W. P. Carey School of Business in Mexico City, the message was a poignant one for the W. P. Carey MBA Mexico City students, alumni and other business leaders in attendance. The reason? Corruption is widely cited as one of Mexico's core problems, with studies showing it costs the nation billions of dollars annually.

According to experts, the deeply rooted practice has discouraged investment, perpetuated inequality, and led to mass migration and a perennially underperforming job market. The problem is not unique to Mexico, with most of the developing world plagued by corruption. As these nations, from Argentina to Zimbabwe, face the task of curbing the practice, multi-national corporations are simultaneously challenged with keeping their moral compass steady — even in places where kickbacks and bribes are deeply woven into the fabric of daily life.

Before entering this environment, companies must weigh potential profits against the cost of doing business in the country, Jennings said in a subsequent interview, noting that corruption's price tag isn't fixed and frequently increases over time. "[Companies] always present it as an either-or conundrum — to bribe or not to bribe," she said. "Well, there isn't a country in the world where it isn't illegal and that's for good reason, because it fundamentally undercuts economic development."

From damaging to catastrophic

For companies that have allowed their standards to slide after global expansion, the results have ranged from simply damaging to catastrophic. In March, banana producer Chiquita Brands was fined $25 million by the United States Justice Department for paying off leftist guerrillas and paramilitary groups in Colombia.

The company also admitted to paying Colombian terrorists to protect employees at profitable plantations in conflicted areas. In 2005, international petroleum firm BP was indicted after an explosion at its Texas City Refinery killed 15 workers and injured 170 others. U.S. regulators have blamed the accident on poor safety standards and cost-cutting measures.

Additional hazards in developing nations include legal ambiguities and a lack of regulatory muscle from weak central governments. This was illustrated in northern Mexico on Feb. 19, 2006, when 63 workers died from a blast in the Pasta de Conchos coal mine, run by mining giant Grupo México, which also operates in Peru and the United States. The company has been accused of failing to fix unsafe conditions — conditions that government inspectors claimed complied with regulations.

In addition to the temptation to engage in forbidden practices, Jennings added that corporations operating in countries where corruption is rampant don't always get a "fair shot" at entering the market. A recent example is NBC-Universal and its frustrated efforts, via its Spanish-language station Telemundo, to create a new network to compete with Mexico's broadcasting duopoly, Televisa and TV Azteca. While Telemundo may still get the chance to compete in selected regional markets, it has faced numerous obstacles, including a synchronized defamation campaign against its Mexican partner, directed by its rivals.

Additionally, Telemundo had its studios temporarily shut down by armed federal police after TV Azteca filed charges against a television host and former employee, now on Telemundo's payroll. TV Azteca said the actor had violated an exclusivity clause, and argued the action was perfectly legal. As a result, filming of the show, a reality program directed at teens, was forced from Telemundo's Mexico City studios to Miami.

Avoiding ethical collapse

The good news, according to Jennings, is that the guidelines for avoiding crises rooted in ethical dilemmas are uniform, whether the company is operating in Des Moines or Dubai. "Most people think [ethical standards] are different across the world, but my response is pretty fairly typical," she said.

"Name me one person who enjoys having fraud committed on them. Name me one person who really enjoys being taken advantage of — culture doesn't interfere with the very basic standards, and that's what I focus on, the true virtue ethics." Jennings outlines these guidelines in detail in her book, "The Seven Signs of Ethical Collapse: How to Spot Moral Meltdowns in Companies … Before It's Too Late." She also gave an overview of these key indicators to her Mexico City audience. They are:

• Pressure to Maintain Numbers: While most companies want consistent growth, recent collapses such as Enron and WorldCom were characterized by unrealistic demands from the top for uninterrupted, spectacular growth.
• Fear and Silence: Jennings said that employees always notice when ethics are compromised. Problems arise, however, when they are too scared of losing their jobs or being punished to speak out.
• Young 'Uns and the Bigger-than-Life CEO: Iconic leaders often surround themselves with managers that are too attached to their lifestyle and trappings to challenge questionable decisions. Jennings' text-book case: former Tyco CEO Dennis Kozlowski, currently jailed for embezzlement. He famously sought out managers that were like him: "Smart, poor and [wanting] to get rich."
• Weak Boards: Companies in crisis are often accompanied by boards that are unable to make the tough choices because their members are out of touch, or beholden to other members.
• Culture of Conflicts: Conflicts of interest, such as the hiring of family members and loans to executives, are another recipe for corporate disaster, Jennings said. Her case in point: Adelphia, where co-founder John Rigas hired his sons to occupy key posts. At the end of the day, they were unable to challenge dad's tactics.
• Innovation like no other: Successful companies often reach the top by being pioneers. This shouldn't lead these firms to think that universal standards — such as honest, old-fashioned accounting — are beneath them.
• Goodness in some areas atones for evil in others: Jennings said that many companies justify questionable practices or number-crunching by pointing to charitable projects — a risky practice that can lead to greater moral decay over time.

In addition to watching out for these seven warning signs, Jennings pointed to policies that expressly forbid the payment of bribes as a way to ensure a company's ethical behavior overseas. Proctor & Gamble, for example, has a protocol set up for employees to follow when faced with demands for a bribe, she said.

Ongoing challenges

For companies operating abroad, initial efforts to maintain ethical standards are fairly straightforward — employees are instructed not to pay bribes, lie or steal, for example. "The first wave is just inculcating those very basic ideas of who we are and how we do business," Jennings said. It's the second wave of ethical tests — such as the hiring of family members to management posts — that presents the subsequent challenge, she said.

For example, hiring practices that would be viewed as nepotism in the United States may be simple self-preservation techniques in other nations: Family are hired because it is assumed they can be trusted and won't steal from the business. In addition to these ongoing pressures, firms must also realize when they enter a new country that their reputation, even if it's well-established at home, starts at zero.

Engaging in corrupt practices can taint their brand in the long run, while enforcing ethical behavior will increase standing over time, Jennings said. Meanwhile, for the nations in which these companies operate, the immediate task that remains is to reduce the inequality that corruption produces. Speaking with Jennings in Mexico City, Carlos Alcérreca, head of the ITAM's Management and Accounting Department, said that one way to achieve this is through competent management.

ITAM partners with the W. P. Carey School in delivering this executive MBA program, which awards a degree from each institution. "We Latin Americans face a challenge in closing this [income] gap," said Alcérreca, adding; "It is fundamental to have excellent company management if we want competitive companies in our country."

Bottom Line:

• Fundamental ethics remain the same across international boundaries, regardless of local culture or customs.
• Corrupt practices such as paying bribes to government officials in return for licenses or market access represents an enormous strain on the economy of developing nations.
• Companies' ethical violations abroad have resulted in massive fines, damage to reputation, or even disaster and the loss of life.
• Jennings' presentation was part of an annual speaker series hosted jointly by El Instituto Tecnológico Autónomo de México (ITAM) and the W. P. Carey School of Business. The two institutions partner to deliver the W. P. Carey MBA Mexico City. Previous speakers include Edward Prescott, W. P. Carey Chair and 2004 Nobel Laureate in Economics, and Buck Pei, associate dean, W. P. Carey MBA China.

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