Business ethics and gray areas

The issue of business ethics at multinational companies has been raised after a recent series of bribery cases. Multinational companies pursuing projects in many countries are torn between different regulations and business practices.

Since the business culture differs from region to region and from country to country, it is difficult for multinational companies to maintain consistent business activities.

Recognizing the differences, the US Foreign Corrupt Practices Act (FCPA) defines the legal boundaries for giving gifts to business clients.

In the case of US-based Avery Dennison, shoes valued at $500 were offered to managers and employees at a meeting. While such gift giving is considered general business practice in China, it can be viewed as a bribe in other countries.

The spread of bribery cases is attributed to a vague distinction between gifts and bribes, and the perception that bribes lead to orders.

Bill George, a professor at Harvard Business School, said that businesses should comply with the strictest ethics standards, since ethics and competitiveness are compatible. If regions apply different standards, corruption would pervade, leading to the collapse of morals, according to George.

He claimed that companies' performance and a corruption level of a country where companies do business are irrelevant. Companies, in the worst-case scenario, would be better off withdrawing from a region rather than corrupt themselves, in George's opinion.

Under the Paris-based Organization for Economic Cooperation and Development (OECD) Convention on Combating Bribery of Foreign Public Officials in International Business Transactions in 1997, countries enacted and implemented laws to prevent corruption.

Action vs ethics

With more intense competition among companies, it is more tempting to avoid action than risk business ethics. In the past 10 years, multinational companies used bribes to secure business in emerging markets where there are not sufficient regulations on bribery cases. Multinational companies think that benefits exceed the punishment they risk.

Business ethics is a business culture that should be nurtured over the long term among CEOs. However, most CEOs stress short-term performance, since their tenure may be short. Shareholders' interest and performance-oriented culture are also the obstacles to nurturing business ethics.

With localization of multinational companies, there are many cases where multinational companies are at odds over the FCPA or other regulations.

Avery Dennison found out that the contractor it acquired in Indonesia in 2005 had paid $100 to each of three tariff workers and a tax worker on a regular basis, and continued to pay them. On the surface, it appeared to be illegal bribery. But in some regions in Indonesia, offering some money under the name of supporting business trips is a common, implicit practice.

Gray areas

There are gray areas over what constitutes a bribe, and direct linkages with alleged bribes and contracts might be difficult to prove.

Criteria on the amount of cash, product value, and whether it was for reward are vague. When there is a significant gap between the time spent offering bribes and the time of signing a contract, evidence is weak to prove that the bribe is offered to sign a contract. In the case of Germany's Siemens AG, a poor response to suspected malfeasance probably contributed to fines.

In 2003, KPMG warned the president and CFO of Siemens that there was a problem with bank account during its audit, but Siemens did not take any follow-up measures. Siemens had a number of cases related to minor fines and rumors about bribery in Germany in November 2006.

Chinese companies listed overseas need to strengthen their supervision on sensitive commercial activities, and pay attention to the FCPA and other laws. With an increasing number of Chinese companies listed in overseas markets, most countries judge the fairness of transactions between companies based on the standard set by the FCPA. No Chinese company has been sued on bribery charges by the US Securities and Exchange Commission (SEC), according to the data.

Even though the FCPA and OECD have no enforcement power, it is inevitable that sued companies would have their reputation tarnished. Companies sued by the SEC ended up paying some fine, but for a long time, they were also stigmatized as illegal companies.

The author is a researcher with Samsung Economic Research Institute (China). The views expressed here are his own.

(China Daily 11/23/2009 page2)