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CHAPTER 5
Ethics and Social
Responsibility in International
Business
Chapter Objectives
After studying this chapter, students should be able to:
1. Describe the nature of ethics.
2. Discuss ethics in cross-cultural and international contexts.
4. Discuss social responsibility in cross-cultural and international contexts.
6. Discuss how organizations manage social responsibility across
borders.
7. Identify and summarize the key regulations governing international
ethics and social responsibility.
LECTURE OUTLINE
OPENING CASE: BP Safety First or Profits First
The opening case discusses BP, the explosion of the Deepwater Horizon oil drilling
platform in the Gulf of Mexico, together with some other situation where it would appear
that BP placed a greater emphasis on lowering costs and increasing profits in lieu of
safety.
Key Points
• On April 20, 2010, the Deepwater Horizon, a drilling rig operating in the Gulf of
Mexico exploded, killing 11 and injuring 17.
• BP had the contract to complete an exploratory well in the mile deep water in the
Macando Project.
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• After the Deepwater Horizon incident, the Board of directors replaced CEO John
Browne.
CHAPTER SUMMARY
Chapter Five focuses on ethics and corporate social responsibility. It starts by working
its way through definitions of ethics and then focuses on ethics in business. From there,
it moves to a discussion of the social responsibilities that organizations have toward their
stakeholders, the natural environment, and general social welfare. The chapter
NATURE OF ETHICS AND SOCIAL RESPONSIBILITY IN INTERNATIONAL BUSINESS
• Ethics is defined as “an individual’s personal beliefs about whether a decision,
behavior, or action is right or wrong.” Ethical behavior usually refers to behavior that
conforms to generally accepted social norms. Unethical behavior describes behavior
that does not conform to generally accepted social norms.
• These definitions suggest the following generalizations:
• Individuals have their own personal belief systems about what constitutes ethical
and unethical behavior.
• Common cultural contexts usually lead to similar views on ethical and unethical
behavior.
• Individuals are able to rationalize behavior based on circumstances.
ETHICS IN CROSS-CULTURAL AND INTERNATIONAL CONTEXTS
Ethical behaviors are discussed in the context of how organizations treat their
employees, how employees treat their organizations, and how employees and their
organizations treat other economic agents. Figure 5.1 (which depicts these
relationships) should be introduced here.
How an Organization Treats Its Employees
• Hiring and firing. In some countries, ethical and legal guidelines suggest that hiring
and firing decisions should be based solely on an individual’s ability to perform the
job. In other countries, it is perfectly legitimate to give preference to some individuals
based on gender, ethnicity, age, or other factors.
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How Employees Treat the Organization
• Conflicts of interest. A conflict of interest occurs when a decision potentially benefits
the individual to the possible detriment of the organizations. For example, in some
cultures, giving and receiving gifts from suppliers is acceptable, while in others it is
not.
• Secrecy and confidentiality. In many cultures, there are laws restricting the
How Employees and the Organization Treat Other Economic Agents
• Bribery, pricing, financial disclosure, and advertising practices are all areas where
practices vary from one culture to another. In all these instances, managers may be
confronted with accusations of unethical behavior.
MANAGING ETHICAL BEHAVIOR ACROSS BORDERS
Even though ethics reside in individuals, many companies try to manage the ethical
behavior of their employees by clearly specifying what the company considers to be
ethical or unethical. This clear specification often takes the form of ethical guidelines or
codes, ethics training, organizational practices, and/or corporate culture.
Guidelines and Codes of Ethics
• Codes of ethics are written guidelines that detail how employees are to treat
Ethics Training
• Given that it is probably impossible to foresee all potential ethical dilemmas and
cover them in a code, some multinational corporations address ethical issues
proactively, by offering employees training on how to cope with ethical dilemmas. For
expatriates in particular, it is important that they receive some training in the
business practices and values of the society where they are stationed.
Organizational Practices and the Corporate Culture
• Organizational practices and corporate culture contribute to establishing the ethical
climate of the firm. If top leaders in a firm behave in an ethical manner and violations
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VENTURING ABROAD
Siemens Pays and Pays and Pays
This section provides background information on Siemens AG, a German-based
manufacturer of sophisticated technology, and provides information for firms considering
whether they should pay a bribe to secure a lucrative contract.
SOCIAL RESPONSIBILITY IN CROSS-CULTURAL AND INTERNATIONAL CONTEXTS
Social responsibility is the set of obligations an organization undertakes to protect and
enhance the society in which it functions. Ethics relates to individual employees. Social
responsibility relates to the organization itself.
AREAS OF SOCIAL RESPONSIBILITY
Organizations may exercise social responsibility toward their stakeholders, toward the
Organizational Stakeholders
• Organizational stakeholders are those people and organizations that are directly
affected by the practices of an organization and that have a stake in its performance.
Main stakeholder groups include customers, employees, and investors.
Organizations that are socially responsible try to treat all the groups with fairness and
honesty.
The Natural Environment
• Not long ago, many organizations indiscriminately dumped sewage, waste products
from production, and trash into streams and rivers, into the air, and onto vacant land.
General Social Welfare
• Some argue that, in addition to treating their stakeholders and the environment
responsibly, business organizations should also promote the general welfare of
society. This can be done through philanthropy, taking a role in public health and
education, and attempts to correct social inequities (such as global poverty). Much
remains to be done in this area.
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MANAGING SOCIAL RESPONSIBILITY ACROSS BORDERS
BRINGING THE WORLD INTO FOCUS
Should Firms Practice Corporate Social Responsibility?
This section highlights the debate of whether firms should engage in socially responsible
activities. Some argue that firms are granted a license to operate by society and
therefore owe society something in return. They often claim that firms need to pay
attention to three bottom lines: economic performance, social performance, and
Approaches to Social Responsibility
Some people advocate a greater social role for organizations, while others argue that
the role is already too large. Likewise, firms adopt a wide range of positions on social
responsibility. Most of these positions can be incorporated into four different “stances”
(use Figure 5.2 here).
• Obstructionist Stance. These are organizations that do as little as possible in the
area of social responsibility and would try to hide or cover up any behavior that might
be criticized by outsiders.
• Defensive Stance. These firms are one step removed from the obstructionists.
They see their responsibility as being to play by the rules – that is, to obey the law
• Accommodative Stance. These firms not only meet legal and ethical requirements
but also will go beyond them in selected instances. They might match employee
• Proactive Stance. These are firms that truly take to heart the arguments in favor of
corporate social responsibility. They view themselves as citizens in a society and
Managing Compliance
• Legal Compliance is the extent to which the organization conforms to regional,
national, and international laws.
• Ethical Compliance is the extent to which the members of the organization follow
basic ethical (and legal) standards of behavior.
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Informal Dimensions of Social Responsibility
In addition to the formal dimensions of managing corporate social responsibility listed
above, leadership, organizational cultures, and how an organization responds to whistle-
blowers also shape people’s perceptions of the organization’s stance on social
responsibility.
• Organization Leadership and Culture. When top management at firms like
Johnson & Johnson for years provide a consistent message to employees about the
Evaluating Social Responsibility
Organizations that are serious about social responsibility track their efforts to ensure
they are producing appropriate results. Many organizations choose to conduct formal
evaluations of the effectiveness of their social responsibility efforts through routine
collection of information in the form of a corporate social audit. This audit, usually
undertaken by top-level managers, evaluates the firm’s social performance and makes
suggestions for improvement.
DIFFICULTIES OF MANAGING CSR ACROSS BORDERS
Different countries have different expectations as far as corporate behavior. What is
socially acceptable behavior in one country may not be acceptable in another.
Furthermore, corporations play very different roles in the political process of individual
countries. Dutch CSR experts Tulder and Van der Zwart suggest that the interplay
among the state, the market, and civil society lead to three regional behaviors toward
CSR.
• The Anglo-Saxon approach views the state, market, and civil society as separate,
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REGULATING INTERNATIONAL ETHICS AND SOCIAL RESPONSIBILITY
The Foreign Corrupt Practices Act, passed by the U.S. Congress in 1977, prohibits
U.S. firms from paying or offering to pay bribes to any foreign government officials so
that they may influence the officials’ actions or policies in order to gain or retain
The Anti-Bribery Convention of the Organization for Economic Cooperation and
Development was developed in and ratified by Canada in 2000. A total of 33 other
countries have ratified it since then. Its centerpiece mandates jail time for those
convicted of paying bribes.
The International Labor Organization (ILO) has become the major watchdog for
monitoring working conditions in factories in developing countries. ILO inspections of
factories in developing countries helps multinational corporations looking for responsible
business partners in developing countries and helps certify that overseas operations of
MNCs are performing responsibly.
EMERGING OPPORTUNITIES
Conflict Diamonds
Smuggled diamonds have helped finance some of the bloodiest civil wars in Africa.
Peace in some of these wars will only be possible if trade in these “conflict diamonds”
can be stopped. The diamond industry (that likes to project an image of love and
carrying a certificate of origin from countries outside the conflict zones.
CHAPTER REVIEW
1. What is ethics?
According to the chapter, ethics is an individual’s personal beliefs about whether a decision,
2. Distinguish between ethical and unethical behavior.
Ethical behavior refers to behavior that conforms or is consistent with generally accepted
3. What role does culture play in the formation of ethics?
4. How do organizations attempt to manage ethical behavior across borders?
5. What is social responsibility?
6. What is the difference between ethics and social responsibility?
7. Identify the major areas of social responsibility for international business.
The first area is behaving responsibly toward organizational stakeholders (customers,
8. What are the four general approaches a firm can take with regard to social responsibility?
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Obstructionist organizations are those that do as little as possible in the area of social
9. What is a whistle-blower?
10. Identify and briefly summarize representative laws and regulations that attempt to address
international ethics and social responsibility.
The text highlights three laws and one organization designed to promote ethical and socially
QUESTIONS FOR DISCUSSION
1. While people from the same culture are likely to have similar views of what constitutes
ethical versus unethical behavior, what factor or factors would account for differences within
a culture?
2. Is it valid to describe someone as having “no ethics”? Why or why not?
3. People from which countries would likely have similar ethical beliefs as people from
England? Why?
This question offers a great opportunity to integrate the material from Chapter Four with the
material in Chapter Five. To the extent that individual ethics is affected by culture, people
4. Under what circumstances is a code of ethics most and least likely to be effective? Why?
5. What do you think is most likely to happen if the ethical behaviors and decisions of a new
team of top managers of a firm are inconsistent with the firm’s long-entrenched corporate
culture?
6. Do you think social responsibility for a multinational corporation is something best managed
locally or globally?
7. Do multinational businesses ever do socially responsible things that are clearly of no benefit
whatsoever to themselves?
8. What are the dangers or pitfalls that might be encountered if a multinational business
attempts to be socially responsible, but only in ways that provide direct benefits to its
profitability?
9. Under what circumstances, if any, might you see yourself as a whistle-blower? Under what
circumstances, if any, might you keep quiet about illegal acts by your employer?
10. Do you think there should be more or fewer attempts to regulate international ethics and
social responsibility? Why?
This question seeks students’ opinions and has no right or wrong answer. At the heart of
this question is the issue of who gets to set the rules. Some students may argue that rules
11. Consider the plight of Mary, the Filipino woman discussed in this chapter (page 125). In
response to the inquiries of Fortune’s reporter, Motorola issued a statement saying it “has a
strict policy of adherence to the laws and labor practices in the countries where it operates,
in addition to a rigorous code of conduct.” Is this an adequate response? In your opinion,
what responsibility does Motorola have to workers like Mary? Defend your answer.
Students’ answers will vary widely, though almost all will likely feel that Motorola’s response
is inadequate. Nailing down what Motorola’s responsibility should be, however, is much
12. Consider the following scenarios:
• To assist the sale of your products in a particular foreign market, it is suggested that you
pay a 10 percent commission to a “go–between” who has access to high-ranking
government officials in that market. You suspect, but do not know, that the go-between
will split the commission with the government officials who decide which goods to buy.
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Should you do it? Does it make a difference if your competitors routinely pay such
commissions?
• You have a long-standing client in a country that imposes foreign exchange controls.
The client asks you to pad your invoices by 25 percent. For example, you would ship the
client $100,000 worth of goods but would invoice the client for $125,000. On the basis of
your invoice, the client would obtain the $125,000 from the country’s central bank. The
client then would pay you $100,000 and have you put the remaining $25,000 in a Swiss
bank account in the client’s name. Should you do it? Would it make a difference if your
client is a member of a politically unpopular minority and may have to flee the country at
a moment’s notice?
Both these questions will force students to wrestle with their own code of ethics. They are
BUILDING GLOBAL SKILLS
Essence of the exercise
Students are to identify an industry of personal interest that includes several large multinational
companies. They are then to examine the Web sites of the main firms in order to determine
similarities and differences across the firms in terms of their ethical conduct and social
responsibility.
Answers to the follow-up questions:
1. Symbolically, what potential role does the Internet serve in helping to promote ethical
conduct and social responsibility as evidenced by the Web sites you visited?
2. Which firm has the most effective Web site vis-à-vis ethics and social responsibility? In your
opinion, what makes it the best?
3. Which firm has the least effective Web site vis-à-vis ethics and social responsibility? In your
opinion, what makes it the worst?
4. How do the Web sites affect your view of each company from the standpoint of a potential
investor? A potential employee? A potential supplier?
5. If asked, what advice might you offer to each company to improve its attention to ethical
conduct and social responsibility as reflected by its Web site?
CLOSING CASE
A Pipeline of Good Intentions
The closing case describes the difficulties and risks associated with developing the Doba basin
oil field in southern Chad. The case fits well with a discussion of corporate social responsibility
as well as with a discussion of political risk.
Key Points:
• Often the discovery of oil in a poor country has led to increases in poverty and social
problems. This phenomenon is sometimes referred to as the “oil curse.”
• Oil was discovered in southern Chad (Africa) in the 1990s. Chad is a very poor
country plagued by civil wars, dictatorships, and invasions by foreign powers. Chad
is also landlocked, meaning that a pipeline through neighboring Cameroon had to be
built to allow for the shipping of Chad’s oil.
• The governments of Chad and Cameroon, the World Bank, and a consortium of oil
companies agreed on funding terms for the pipeline project, as well as on how the
government of Chad would spend the proceeds from the transportation and sale of
the oil.
Case Questions
1. What is the oil curse? Why do you think it develops?
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The “oil curse” is the phenomenon that occurs when poor countries discover oil and
2. Why was the World Bank’s participation in the Chad-Cameroon pipeline critical?
3. Does the World Bank have a right to demand that sovereign countries like Chad
spend their oil revenues in ways the World Bank deems appropriate?
4. If the World Bank and Chad’s government fail to settle their dispute over
amendments to the Petroleum Revenue Management Law, what should the
consortium do? Should they make funds available to Chad’s government in defiance
of the World Bank’s wishes?
This is a discussion question without a clear right or wrong answer. The best way to
5. Subsequent to the signing of the pipeline agreement, world oil prices have increased
substantially. Given the abject poverty of Chad, should oil companies offer to
increase the royalties paid to Chad’s government once its dispute with the World
Bank is settled?
If the payments to Chad are based on a percentage of the revenue from the sale of
CASE 1:
A Rat in My Soup
This case is a humorous account of a visit by an American reporter to the
Luogang Economic Open Zone in Guangdong, China. The American visits
a couple of restaurants and comments on their menu – specifically the
variety of rat dishes available.
Key Points:
• Culinary preferences vary widely, even within China.
• The spirit of competition and capitalism is alive and well in China.
• We are all vulnerable to culture shock.
• Humor is sometimes an important asset in international travel.
Case Questions
1. Although the American who wrote this story visited Luogang’s restaurants voluntarily,
many international business practitioners working abroad involuntarily confront things
they find odd or offensive. Suppose you had been invited by a very important
customer to the New Eight Sceneries Wild Flavor Food City restaurant. What would
you have done, if, like the author, you had been invited to pick out your dinner in the
shed behind the restaurant?
2. Cultural values play an enormous role in shaping attitudes toward food. Are there
any foreign foods commonly available in your home country that you or your friends
simply won’t eat?
3. Are there any aspects of your home culture that foreign visitors might find offensive?
If so, what are they?
4. What measures can you take to protect your foreign guests from aspects of your
home culture that they might find offensive?
CASE 2:
The Oil Curse
This case ties in well with the closing case of Chapter Five. This case focuses
on Nigeria, Africa’s largest oil producer, where oil was discovered in 1958, and
the various political, economic, and environmental issues created by the oil
exploration.
Key Points:
• Oil revenues account for 95 percent of Nigeria’s exports, 20 percent of its GDP, and
65 percent of the government’s revenues.
• Local citizens have benefited little from the oil boom.
• Foreign companies have come under repeated attacks from local groups stealing oil
and kidnapping employees.
Case Questions
1. Assess the political risks facing foreign oil companies operating in the Niger delta.
Should they shut down operation in the area until security improves?
2. What is the responsibility of Western oil companies like Royal Dutch Shell and
Chevron to the local community?
3. What responsibility does a company like Fred Olsen Energy have to its employees?
In the case of kidnappings motivated by profit, should a company pay ransom?
4. Is the discovery of oil a blessing or a curse?