LESSON 9.

0: CORPORATE GOVERNANCE AND ETHICS IN INTERNATIONAL

ORGANIZATIONS

LEARNING OUTCOMES

By the end of the lesson the student you should be able to;
 Identify the environmental, social and governance factors
 Explain ethical practices in global organizations
 Differentiate the Standards of conduct for international business
 Explain the Ethical challenges faced by international businesses

OUTLINE

9. Corporate governance and Ethics in International organizations

Global Ethics

The growth of international business urged the multinational corporations to develop universal
ethical standards.

One fundamental reason underlying this fact may be the continious search for new competitive
advantages by multinational companies (MNCs).

Ethical capabilities can be an important source of sustainable advantage in addition to strategic,

technological, financial, and organizational capabilities as source of competitive advantage.

Ethical capability is defined as “an organization's capability to identify and respond effectively to
ethical issues in a global context”

Global ethics and standards appear in different forms and realities and these ethics and standards
cover basic human interactions; respect of different, trust with counterparts and uprightness.

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Corporate Governance

Corporate governance is the mechanism by which companies are rationalized, directed, controlled
and monitored. Corporate Governance coordinates different types of stakeholders such as
shareholders, directors, managers, employees, creditors, customers, global environment and the
rest of the society to enhance corporate performance and wellbeing as a common goal. Openness,
integrity and accountability are the key elements of Corporate Governance for any corporate entity.

Major Considerations of a System of Corporate Governance

Major considerations of a system of corporate governance in international organizations are:

 how successfully companies formulate the rational; the reason for existence & future
direction
 how effectively corporate decisions are made; guidelines and procedures
 how well the board on behalf of shareholders appraise managers’ decision making, and
monitor the execution
 how fruitfully the different stakeholders are facilitated to protect their interests

Accordingly, the objectives of corporate governance are:

 To build up an environment of trust and confidence amongst those having competing and
conflicting interest
 to enhance shareholders value and protect the interest of the other stakeholders by
enhancing the corporate performance and accountability

Objectives of Corporate Governance

Corporate Governance tries to overcome agency costs associated with the separation of ownership
and control by addressing the following issues:

 Align the interests of managers and shareholder

 Preventing managers from pursuing own interests
 Prevent high and excessive executive pay
 Avoiding abuse of power

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Essential Governance Principles

Companies need to:

a) Lay solid foundations for management and oversight by recognising and publishing the
respective roles and responsibilities of board and management.
b) Structure the board to add value by having a board of an effective composition, size and
commitment to adequately discharge its responsibilities and duties.
c) Promote ethical and responsible decision-making by actively promoting ethical and
responsible decision-making.
d) Safeguard integrity in financial reporting by having a structure to independently verify and
safeguard the integrity of the company’s financial reporting.
e) Make timely and balanced disclosure by promoting timely and balanced disclosure of all
material matters concerning the company.
f) Respect the rights of shareholders through respect of the rights of shareholders and
facilitating the effective exercise of those rights.
g) Recognise and manage risk by establishing a sound system of risk oversight and
management and internal control.
h) Encourage enhanced performance through fair review and active encouragement by
enhanced board and management effectiveness.
i) Remunerate fairly and responsibly by ensuring that the level and composition of
remuneration is sufficient and reasonable and that its relationship to corporate and individual
performance is defined.
j) Recognise the legitimate interests of stakeholders by recognising legal and other obligations
to all legitimate stakeholders.
k) Making Corporate Governance rating mandatory for listed companies.

The Need for Good Corporate Governance

Currently Good Corporate Governance both at the domestic level and in international business has
taken a centre-stage because of various factors such as:

a) Global Business deregulation

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The liberalization and de-regulation world over gave greater freedom in management and at the
same time enhanced their scope of responsibilities.

b) Increased market competition

The competitive players in the market have increased brings in its wake weakness in standards of
reporting and accountability.

c) Complex global market environment

Market conditions are increasingly becoming complex in the light of global developments like WTO,
removal of barriers/reduction in duties.

d) Increased lack of transparency and disclosures

The failure of corporates due to lack of transparency and disclosures and instances of falsification of
accounts/embezzlement and the effect of such undesirable practices in other companies

e) Increasing role of foreign investors

It is the increasing role of foreign institutional investors in emerging economies that has made the
concept of corporate governance a relevant issue today.

In the increasingly close interaction of the economies of different countries lies the process of
globalisation. This involves the rapid migration of four elements across national borders. These are
physical capital in terms of plant and machinery; financial capital; technology and labour.

Aspects of Good Corporate Governance

Good Corporate Governance is a formal system of Accountability and Control of ethical and
socially responsible decisions and use of resources.

The following are the chief characteristics of Good Corporate Governance:

 Participatory
 Consensus Oriented
 Accountable
 Transparent

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  Responsive
 Effective and Efficient
 Equitable and Inclusive and
 Follows the Rule of Law

Key issues in Corporate Governance

 Generally, the most important element of any governance system is considered to be the
board of directors (BODs), which is responsible for the governance of the respective firms;
however, it should be noted that the board is only one element in the governance structure.
 From the recent past, there has been a concentrated attention on the behavior of BODs
following a series of well-publicized corporate failures and scandals.
 Issues of ethical concerns which have come out are:
 Excessive CEO power ,
 Frauds ,
 Insider trading
 Misleading of shareholders ,
 Executive remuneration and perks
 Such practices as the milking of pension funds, greenmail, use of golden parachutes,
poison pills,
 The heart of the matter of governance is how to achieve a balance between essential power
of companies and their proper accountability. Cadbury (1992) argued for “clearly accepted
division of responsibilities at the head of a company, which will ensure a balance of power
and authority, such that no individual has unfettered powers of decision”.
 BOD accountability consist of two relationships, first, the accountability of boards to
shareholders and second, accountability of both to society (wider responsibility).
 BODs are appointed by the shareholders and all members of the board are legally obliged
to act in the best interest of shareholders.
 Among others, BODs have a primary duty to the company, a duty of care, a fiduciary duty
and a duty to act within one’s power within the company.

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  As experienced through the range of corporate failures during the financial crisis, most of
such boards are passive, largely perform a ceremonial in function, and mainly limited to
rubberstamping management policies and decisions;
 On the other hand there are highly proactive boards involved in strategic decision making
and strong in monitoring the executive management, and ensure the company acts in the
best interest of the shareholders.

The key roles and responsibilities of the BODs include;

a) Determining the future direction of the firm – developing policy and formulating strategy
(strategic plan, financial objectives, adequacy of the system to law, etc.)
b) Monitoring executive management – Management supervision in order to save and preserve
the owner’s interests
c) Ensuring accountability
d) Evaluate (board processes, performance etc.)
e) Select and appoint key management personnel

The Board is presented mainly as a legal fiction, highly dominated by management, making it
ineffective in reducing the agency problems between management and shareholders. On this
background there seems to be ethical issues such as;

a) inability of BODs to harmonize agency problems,

b) failure to safeguard invested capital,
c) excessive managerial remuneration,
d) abuse of managerial perks, and
e) pursuing range of diversification strategies for the individual benefits of top managers (not
in view of the firm)

Importance of Corporate Governance and Business Ethics in International Business

Corporate governance and business ethic are clearly intertwined. Business ethics covers the whole
spectrum of interactions between firms, individuals, society and the state. Business ethics is
primarily concerned with those issues not covered by the law, or where there is no definite consensus
on whether something is right or wrong. Both these aspects: help to build good brand image for the

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company. Once there is a brand image, there is greater loyalty, once there is greater loyalty, there
is greater commitment to the employees, and when there is a commitment to employees, the
employees will become more creative.

From an ethical point of view, having stakeholder representatives on the board, ensures that their
rights and legitimate expectations will be respected.

A board that replicate the firm’s internal and external stakeholders foster their commitment in
contributing to value creation.

Internal and external stakeholder representatives also bring information to the board and will be able
to provide important resources to assist the firm in creating and sustaining competitive advantage.

However, along with the developments, some reforms have been proposed to enhance the
stakeholder engagement and social responsibility of the firm.

Among those, mandatory disclosure of information and enhanced stakeholder representation are
notable

Ethics in managing an organisation are vital for long term survival. It is defined as disciplined dealing
with what is good and what is bad and what are moral duties and obligations. As far as business
ethics are concerned, a minimum code of ethics has to be practiced in competition, public relations
and social responsibilities.

Globalization A Key Context for Business Ethics

Globalization” refers to the growing interdependence of countries resulting from the increasing
business on integration of trade, finance, people, and ideas in one global marketplace

During the past few decades, the globalization process has progressively eroded the relevance of
territorial bases for social, economic and political activities, processes and relations.

As business became less fixed territorially, corporations increasingly engaged in overseas markets,
suddenly finding themselves confronted with new and diverse, sometimes even contradicting ethical
demands. Moral values, which were taken for granted in the home market, may get questioned as
soon as corporations enter foreign markets.

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There is a great resemblance between the unethical behaviors manifested by the transnational
corporations, and companies with international activity, on the markets of these nations, frequently
resorting to: corrupting various officials of the host states (in order to obtain governmental facilities),
disrespect to the human rights, offering false information regarding the financial status of the
company and fraudulent publicity (on the basis of spreading this information), using underage
employees, informational piracy, industrial espionage, wasting natural resources, sexual
discrimination, deliberate pollution etc.

From a managerial perspective, the ethical problems manifested in the arena of international
business represent real ethical dilemmas for the contemporary managers as they generate, at least
on a short term, a conflict between the organizational economic performance (evaluated by
measuring the turnover, the costs and the profits) and its social performance (evaluated by
measuring the ethical responsibilities to the people outside or inside the organization)

Unethical Business Practices in International Business

Some of the key unethical business practices in international business include:

 Abusive or intimidating behavior

 Accurate but incomplete disclosures
 Discrimination against protected class
 Misrepresentations
 Receiving or offering bribes or incentives
 Sexual and other harassment
 Theft or fraud: personal use of company resources
 Unfair termination

Major Sources of Ethical Issues in International Business

Although the ethical issues identified in international affairs are extremely numerous and different,
but there are five fundamental sources of ethical dilemmas.

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 i) Corruption,

Thus, one of the most important ethical dilemmas that international managers must face is that of
corruption, respectively the opportunity of paying a governmental clerk, providing this action leads
to making some business, employing local labor force and, implicitly, increasing the organizational
efficiency and the living standard in the respective community.

In most developed or underdeveloped countries, the bribe is a daily aspect, which led to the
opinion that in such countries, the governmental payments are an indivisible side of a successful
business. Many of the multinational companies that have applied such practices motivate that they
are determined by their competitors who put them into practice and they do not want to stay
behind.

The managers of the transnational corporations that face with such financial demands from some
governmental officials on the foreign markets where they act may solve these demands in an
ethical manner, without having the risk to break the relations with the host state if they respect the
following three general principles:

 Respecting the basic human rights;

 Respecting local traditions;
 Making the difference between good and bad by examining the context.

More precisely, the managers of the transnational corporations may respond to such demands in
an ethical manner if they apply one of the following methods:

 donations in money in order to create or develop various public services (such as building
hospitals or roads) for the host state, correspondingly promoted and managed, may
increase the public appreciation to the organization and prevents the money
disappearance in private pockets;
 donations in goods or services may be medical equipments for hospitals, computers for
schools or aids for underprivileged persons and, if promoted correspondingly, may
facilitate the future development of the business and they are absolutely ethical;
 donations in jobs refer to employing some persons in the host country in some projects
meant to sustain the organizational activity, but also to increase their trust in it.

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 ii) Industrial espionage

Industrial espionage is another unorthodox and absolutely illegal method which transnational
corporations use in order to go ahead of their competitors.

iii) Relation with the environment

Another source of ethical issues that multinational companies have to face is their relation with the
environment.

Presently, the international organizations must respect not only the national legislation regarding
environment protection, but also the one of the host countries and the international regulations that
get tougher and tougher sanctions in case of disrespecting them.

In spite of all this, there is a big temptation to break these rules, as the costs required to obey them
often significantly diminish the companies’ profits and competitive capacity. Many times, famous
names in the economic international business were involved in pollution scandals, with lasting
effects in the reputation and the image perceived by the consumers.

iv) Relation with the Employees

The relation with the employees is another important aspect upon which the managers of the
multinational corporations must make ethical decisions, without compromises.

The managers have the heavy task to create a climate of respect and mutual confidence, by
respecting the rights of the executive personnel that are subordinated to them.

The employees will really get involved into their tasks, for the success of the organization, only if
they have a certain status at their workplace, liberty, intimacy, and a fair salary.

The organizations must not only respect the law but also respect the traditions of employment and
personnel remuneration.

v) Relation with the Consumers

The relation with the consumers is almost a permanent source of ethical dilemmas for
contemporary managers. Thus, starting with practicing some exaggerated prices up to spending

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huge amounts to promote their products, starting with practicing excessive value added taxes,
using cheating practices of packaging, promoting and selling, starting with bringing into the market
some products that do not correspond from the point of view of quality and security up to the
planned moral usage, the cases of unethical behaviors of the organizations in their relation with the
consumers face an impressing diversity.

The worst situations are the ones in which the organizations violate not only the ethical business
principles, but also the consumers’ fundamental rights, which takes them in front of the law, in case
of such practices.

Also, the organizations promote, numberless of times, a customer manipulation, if not illegal, at
least unethical.

The issue of the clients’ unethical manipulation is based on the fact that a large part of the persons
in the organization find what happens and think that they, their families and friends could be the
clients unfairly treated by these companies

Consequences of Unethical Behavior in International

i) Continuous Source of Expenses

 Any unethical behavior of the organization will represent a continuous source of expenses,
in order to hide it from the partners interested in its activity. At the same time, any “secret”
represents a weak pint of the organization, which turns it vulnerable in front of the
competitors.
 Obviously, the more unethical are the manifestations of the organization, the more
vulnerable it gets to the competitors’ attacks.
 Many times, regardless of the size of the efforts made for the organization to hide its
unethical attitudes, they are revealed and divulged to the large public (most often, by mass
media or its competitors).

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 ii) Negative Effect Upon The Reputation
 Divulging these unethical behaviors will have a negative effect upon the reputation of the
international organization, especially on the developed markets, where the legislation
stipulates pretty tough sanctions.
 Also, losing the fame of the organization or the rumors regarding its dishonesty may
determine the decrease of sales and the clients may choose different providers.
 Another important aspect refers to the fact that a big part of the ethical dilemmas and issues
may be known before the organizational plans be implemented and the anticipatory solution
of all the ethical issues saves to time, money, effort and resources and, mostly, increases
the organization’s reputation.
 Besides, the organic integration for some ethical responsibilities in the organizational culture
and, implicitly, in the employees’ mentality, will create a positive image in the perception of
the large public, that will regard it with confidence and will be tempted to support its actions.
Recent evidence also suggests that high ethics and social responsibility are related to good
financial performance

iii) Abandonment by Clients and Business Partners

An organization that is unethical in its business practices is likely to be abandoned by a series of

clients and business partners.

iv) Lack of Focus

An organization, which tries to get rid of the accusations regarding the suspicious transactions,
cannot concentrated anymore upon the objectives and the purposes on a long term, does not even
pay the required attention to the competitors that go over it.

v) Wastage of Resources

Such an organization wastes its resources trying to decipher the situation in which it is and the
reasons for which it got there, and this look to the past is the consequence of neglecting the ethics

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On a long term, the organization will face a lack of confidence both inside and outside, the negative
image that it formed being able to generate important financial losses or even to disappear from the
market.

vi) Increased inefficiency

Unfortunately, an ethical behavior does not necessarily provide a greater efficiency in the individual
or organizational activity.

Thus, an organizational policy refusing to make various payments to the governmental officials in the
countries where this practice is self-understood may generate costly delays and even losing some
businesses of the company in the respective countries.

vii) Weak Protection against employees and competitors’ unethical behavior

From an antagonistic perspective, respecting the business ethical principles may generate a series
of important advantages for the contemporary organizations. Thus, first of all, promoting an ethical
behavior provides the company protection both against the competitors’ unethical behavior and the
possible abuses from its own employees.

More precisely, the employees’ ethical behavior in the relations with the economic and social
environment where the company develops its activity protects the organization from any possible
disloyal practices.

viii) Results in Poor Profits

A recent perspective on the relationship between profits and social responsibility is that it works two
ways. More profitable firms can better afford to invest in ethics and social responsibility initiatives,
and these initiatives in turn lead to more profits.

Summary

 Ethics and international business

 Standards of conduct for international business
 Special Ethical challenges of international business

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Teaching Methodology:

Lessons notes, quick quizzes, Self-study questions, Self-directed projects/exercises

Course Evaluation

CATS: 30%

Final Exam: 70%

Total: 100 %

Learning Activities
.
Assignments
1. Briefly describe the ethical practices of global organizations
2. Explain the ethical challenges faced by organizations in international business

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