by Danielle Collazo, Featured Contributor
Corporations operating on a global scale face a multitude of challenges within various regions. In corruption-friendly and developing nations, MNCs must overcome the hurdle of maintaining ethical business practices, which is especially difficult when profit margins are thin and competitors are willing to engage in unethical business deals. MNCs can overcome the internal and external moral challenges they face when leadership implements and adheres to ethical codes of conduct designed to protect the company’s integrity and long-term sustainability.
Malcom Salter of the Harvard Business Review discusses that while some unethical activity may not be unlawful in certain regions, involvement in such “undermines a company’s legitimate processes and core values.” MNCs seeking to maintain their core values on a global basis need to create a culture in which the code of ethics is both practiced and preached and is seen as more valuable than meeting quarterly revenue targets. In order to maintain high ethical standards, MNCs should focus on long-term business strategies and avoid succumbing to an “end justifies the means” business mentality to appease shareholders. Closing out a quarter is not an end, but rather a benchmark in the company’s big picture.
MNCs will struggle to retain market share when competing with domestic players, as the latter can gain traction by building strong “relationships” with decision makers based on what is perceived in Westernized nations as bribery. MNCs have to remember that one country market is just a small piece of their corporation, and risking the company’s reputation to unethically win a deeply discounted government tender in an underdeveloped nation is bad for the big picture and the long term. While each nation presents its own unique set of obstacles and opportunities for an MNC, the external environment in less regulated countries tends to foster unethical business practices in the forms of corruption and disregard for human rights, and may facilitate loopholes for less transparent financial operations.
In one study conducted by the U.S. Business Roundtable Institute for Corporate Ethics, CEOs agreed that “effective company management in the context of today’s short-term investor expectations” was a top ethical concern. By comparison, in Latin America, only 18% of local business executives believe that anti-bribery laws have a positive effect on businesses, and 70% of ex-Latin America-based MNCs (n=200) believe that they have lost contract bids to their competitors that engaged in corruption (Tillen and Ellis, 2009). Executives are continuously faced with difficult decisions to balance fair business transactions and shareholder expectations.
Corruption in the form of bribery may appear to be the only way a business can win a tender in relationship-based nations, but the consequences of these illegal agreements leave companies in a worse off position. Consider these points:
- Winning a tender through bribery leaves an MNC with a tight operating budget and can lead to producing low-quality products at a higher price
- Acts of bribery can backfire as the terms of illegal agreements are non-enforceable so MNCs may not see payments for overrun costs
- Money paid to win these tenders may support corrupt governments that engage in harmful acts on citizens or to produce deadly weapons
- Bribery can affect a company’s reputation, wherein products may not be properly inspected by governments engaging in bribery acts, and recalls and quality control checks can be overlooked.
Another key ethical factor in operating an MNC is human rights laws. Key components of human rights defined by the UN require MNCs to pay mind to the physical safety of workers, freedom to practice given rights (fair trials, free speech, discrimination-free workplaces), education, and subsistence. While some safety risk is inevitable in some industries and professions, MNCs have an obligation to prevent unnecessary risks through measures such as making sure there are appropriate fire escapes, ensuring machinery is in a safe condition, and investing in the appropriate repairs and protection (e.g., goggles) for workers.
In many developing countries, there are no laws to protect workers, which allow global manufacturers to have their products made in factories with no regard to human rights (e.g., extremely low pay, exposure to toxins, unsafe buildings, child labor). The level to which businesses choose to engage in ethical manufacturing is dependent upon many factors. While one MNC alone cannot change human rights around the world, each company has the power of choice when deciding on which third-party contractors it does business with. Therefore, MNCs should seek to manufacture products at ethical facilities in order to protect their reputation, and conduct due diligence to avoid supporting manufacturers that violate human rights.
The importance of transparency in financial reporting for MNCs is vital for the global economy, as well as individual nations in which MNCs operate. According to the Organization for Economic Co-operation and Development (OECD), over 60% of world trade is conducted by MNCs, thereby making their actions a critical factor for the financial markets, economic stability, and overall economic growth. One way for MNCs to offer a high level of transparency is to follow the OECD’s recommendations for Country-by-Country Reporting (CCR), found here.
Currently, companies report financial data on product lines and divisions, but there is no requirement for geographic data detail, which creates a loophole enabling corporations to transfer revenue into tax havens or engage in low-profit tender bids to offset losses in other nations. In addition to curtailing tax evasion activity, through CCR reporting, investors have a better indication of the geographic breakout of MNC revenue and its related risks. This allows stakeholders to make more informed decisions about the company’s outlook based on the environments in which it operates (i.e., unstable governments, war zones, regions with flat growth, etc.). MNCs that wish to uphold the highest level of ethics could take the opportunity to use CCR reporting voluntarily, which could put pressure on its competitors to do the same.
In order for a company to accomplish an all-encompassing policy for global business ethics, leadership has to make a commitment to refrain from engaging in unethical business transactions such as bribery and contracting with unethical companies. Once those two factors are eliminated from its practices, full transparency of its financials can be made publicly available, as the company will have nothing to “hide.” For long-term sustainability of an MNC, the best strategy is to do what’s best for the corporate vision. When leaders focus on acting in the best interest of the company – but really what is best, not what seems ideal for the MNC’s short-term position – it will in turn benefit all stakeholders.
Tillen, J., & Ellis, M. (2009). Confronting Corruption in Latin America. World Trade, 22(2), 8.
Williams, R. (2012, June 12). How Competition Can Encourage Unethical Business Practices | Psychology Today. Retrieved from http://www.psychologytoday.com/blog/wired-success/201206/how-competition-can-encourage-unethical-business-practices