Aristotle said the most hated form of wealth-getting was usury, which makes a gain out of money itself. The Koran decrees, "…let there be amongst you traffic and trade by mutual good will.…" These philosophical and religious principles have long been a basis for commercial activities the world over. In the last ten years, however, business has seemed to reach beyond ancient wisdom, using these principles as a base for ethical standards that have subsequently been codified, handbooked, adopted, and enshrined by corporations all over the industrialized world.
Because of the rise of laws and watchdog bodies, the ethics business in the United States, including private and nonprofit consultants who conduct what are known as ethical audits of corporations, has become an industry that estimates its own worth at over $1 billion a year. As regulatory measures appear in other countries, companies with a global presence now distribute their ethical manifestos by parcel and by e-mail, although many are finding that what works fine in Indianapolis may have to be altered in Indonesia.
What is happening in the corporate world represents an evolution in public perception of who the guardians of ethical behavior are, a job that through most of history was entrusted to philosophers, clergy, and government officials. It seems that business leaders have come a long way from the Confucian doctrine that held the merchant at the bottom rung of society and from Dickens's depictions of cruel workhouse masters.
Take the case of General Electric. Following a series of pricing scandals that rocked the defense industry in the 1980s, General Electric became representative of American corporations in need of an image overhaul. In response, the company created a corporate ombudsman's office ten years ago, originally for the purpose of examining its government defense contracts. The company also drew up a summary of in-house rules on ethical concerns, called Integrity: The Spirit & the Letter of Our Commitment, which runs to eighty pages and is available in Arabic, Urdu, and most other languages that are spoken in the General Electric worldwide network. In early 1993 the office started a network of toll-free help lines for each business unit in the United States. Employees can call the hot lines anonymously to ask questions about the guidelines and to report suspected violations. The infrastructure is solid. "GE now has one of the best ethics compliance programs in existence," says Larry Ponemon, national director of Business Ethics Services at KPMG, the accounting and consulting firm.
Other United States companies began to set up ethical programs as well. One motivation was to comply with Chapter Eight of the United States Federal Sentencing Guidelines passed in 1991 in the wake of the defense-industry pricing scandals. Applicable to all United States businesses, the guidelines stipulate that if a company's senior management is aware that a staff member has committed an illegal act, the company can be held liable for fines that, as Ponemon puts it, "can be stiff enough to put them out of business." However, if the company can prove it is making a serious effort to clean up its act, the penalties may be substantially reduced.
Companies often created compliance systems as a public demonstration of an effort to clean up their own ranks before the courts did it for them. Nynex, for instance, set up an ethics office and hot line in 1990, before the federal guidelines were in place, because of a company scandal in the late 1980s. Eight purchasing managers at Materiel Enterprises Company, Nynex's purchasing subsidiary, attended wild parties thrown by vendors. Although the managers did not accept money or gifts, Nynex instituted the code of conduct to protect against future conflict-of-interest situations.
While the long arm of the law is a factor in business decision making, sometimes the arm of ethics is longer still. Margaret Somerville, a McGill University professor of law and medicine who has been a consultant on ethics to executives, politicians, doctors, and scientists for more than twenty years, says, "We moved to asking the question, this is legal, but is it ethical? More recently we have turned around the order of analysis to ask first, what is ethical, then, does this coincide with the law, and if not, what should we do about it?"
Still, the Federal Sentencing Guidelines have been a powerful incentive to American companies to establish comprehensive compliance systems. These come complete with training programs in corporate ethics and hot lines for reporting violations (for the very purpose of avoiding court appearances for transgressions). Codes of conduct, spelling out a corporate ethical credo and explaining exactly what acts will not be tolerated, have also been part of an attempt to show that a company wishes to comply with existing laws and avoid being a lightning rod for a government crackdown.
The Conference Board, a research organization in New York City, estimates that at least 95 percent of the Fortune 500 companies now have codes of conduct, as opposed to approximately 84 percent of 250 major companies surveyed in 1991. In this same survey, published in 1992, about 90 percent of those firms with codes of conduct said they had them for compliance reasons. Among the first companies to establish codes of conduct were General Electric, General Dynamics, Martin Marietta (now Lockheed Martin), and other defense contractors. All had been caught up in procurement scandals (although General Dynamics and Martin Marietta were not charged), but now the defense sector is actively policing itself. In 1986 seventeen contractors signed the Defense Industry Initiative on Business Ethics and Conduct, which declares that each of the companies will review its ethical practices annually. The life insurance sector is currently considering a similar document.
The push for ethical standards has spread worldwide. The World Bank is involved in a certification of ethical standards that will serve as criteria in granting loans. South Africa recently set up the King Commission, which established standards for ethical conduct and issued a report listing companies that live up to the standards. In the United Kingdom, Stanley Kiaer—director of the ten-year-old Institute of Business Ethics, founded by a group of businessmen and supported by corporate and private funds—says 47 percent of the country's 500 largest companies have codes of conduct, up from 18 percent in 1987. Kiaer says that companies are trying to stay ahead of the government in enacting compliance measures. "Massive privatization here has created more media interest in business, and there is a feeling that we should give self-regulation of newly privatized industries a chance," he says.
The Chinese government is also trying to address corruption through various new regulations and disciplinary measures prohibiting a wide range of practices, including giving and accepting gifts, hosting excessive banquets, accepting kickbacks, and charging illicit fees. Clifford Chance, a law firm in Hong Kong, cites the statistic that in the first five months of 1996 alone, 26,667 corruption cases were handled by Chinese prosecutors.
In Hong Kong the twenty-two-year-old Independent Commission Against Corruption (ICAC) has in recent years shifted its emphasis from government malfeasance to corruption in the private sector. As a result, many publicly traded companies have adopted codes of conduct, says Sally Stewart, director of the Center for the Study of Business Values, launched in 1994 at The University of Hong Kong. Stewart, however, does not have a great deal of faith in codes of conduct alone. "Many just post a code on the bulletin board to pay lip service," she says. "Worse still are those that feel pressured by the government and the ICAC to show a gesture of ethical conduct and crack down in the wrong places. We've seen some cases, for instance, of an office abandoning the tradition of giving tips to the cleaning women at Chinese New Year on the grounds that this could be bribery. Companies that are ethical are going to be ethical with or without a formal policy."
Due more to public sentiment than to law, the corporate world has been under increasing pressure to contribute something to society. The buzzwords of the 1970s (corporate social responsibility) and of the 1980s (employee empowerment and total quality management) have given way in the 1990s to the concept of responsibility to a body politic known as stakeholders, who include not only investors and creditors but also employees, suppliers, customers, and the community. How much consideration do these stakeholders merit?
The idea of social accountability has gained the most credence in Europe. According to a recent Conference Board survey of large firms in Canada, Europe, Mexico, and the United States, 55 percent of the European firms said their code of conduct was a social compact, worked out with management and employee representatives. Only 13 percent of United States firms had drafted their code this way.
Robert E. Allinson, a lecturer and author on business ethics, writing in the book Whose Business Values? Some Asian and Cross-Cultural Perspectives, absolves corporations of any sting of original sin: "One might require a definition of business such as the following: the ownership or use of capital investment, labour or land to produce a product, or to provide a service that fills some existent social need, or creates a new need to be filled or some social value in order to generate revenue for the owner.…The point is, one cannot have a business enterprise in the first place unless one takes social needs into account."
For some, that's a selling point. A whole sector of ethical corporations has arisen in recent years, with such well-known companies as The Body Shop, Ben & Jerry's, and Working Assets making social consciousness their raison d'être. Levi Strauss has become almost synonymous with the "good guy" image because of its refusal to use subcontractors that exploit workers in developing countries.
Ethical is a particularly resonant word in the pharmaceutical industry, signifying not only moral choice but also "drugs that are available only by prescription." Astra AB of Sweden is an ethical company in both senses of the word. In fact, Astra's Canadian subsidiary has turned to the clean image to hold its own against competition from the generic drug industry. Under Canada's socialized health care system, the government pays for drugs prescribed to many citizens and tends to favor generic drugs, which may cost 15 to 50 percent less than an original product.
"The government has the key to our market access," says Gerald McDole, president and chief executive officer of the subsidiary, Astra Pharma, Inc., in Mississauga, Ontario. "If the government doesn't approve of a company, its products aren't distributed and customers aren't reimbursed for it."
In 1993, Canadian manufacturers of brand-name pharmaceuticals received a boost from a law that extended the life of a patent from seventeen to twenty years and changed licensing regulations. As a result, generic drugs had less market access. Opponents of the measure said the brand-name sector, in return for the privileges granted, should engage in more research and development in Canada, which has the lowest research and development rate of any industrialized nation.
Although there was no legal requirement to do so, Astra Pharma set up a $225 million research facility in Quebec, employing about fifty researchers. It helps, says McDole, to be known as an ethical company when government panels review pharmaceutical products. "Generic prices are clearly lower than ours, but that doesn't take into account…the fact that we help find cures for diseases," says McDole.
Through its advertising campaigns, Astra Pharma has let the public know of its ethical policies. The company discontinued making chlorofluorocarbon aerosol inhalers about five years ago, even though it wasn't required to by law until 1996. It has not increased its prices since 1990 and compensates its sales staff by salary rather than commission, to eliminate any temptation to sell customers something they don't need.
Amid the debate, corporations that choose to meet any of the definitions of good are finding that at least a degree of so-called empowerment seems to go hand in hand with a comprehensive ethics policy. Employees need to feel that they have the authority to do the right thing and to communicate concerns to the top brass.
Those at the lower rungs of the corporate ladder may be more likely to observe misconduct, or at least to acknowledge it, says a recent survey by the nonprofit Ethics Resource Center in Washington. The survey found that the pressure to engage in misconduct increases as one moves down the organization. Front-line supervisors were significantly more likely to spot ethical violations—and feel pressure to engage in misconduct—than senior managers, who reported observing 20 to 35 percent less misconduct than staff at other levels. And while senior managers were most likely to have confidence in their knowledge of the law, they were no more or less likely than those at other levels to select clearly acceptable responses to hypothetical scenarios.
AES Corporation, an independent power producer based in Arlington, Virginia, has taken the empowerment concept to previously unheard of heights at its seven United States plants. Duties are rotated so that no one feels pigeonholed: Control-room operators arrange multimillion-dollar financial deals, storeroom operators plan budgets, and everyone on staff is held responsible for ethical decisions.
In the last three years, AES has begun an ambitious global expansion and now has twenty-seven plants open or under construction in countries including Argentina, Brazil, Hungary, Kazakhstan, Pakistan, and the United Kingdom. All of the foreign plants operate with a strong degree of autonomy.
"People often make the assumption that the more controls you have at the top, the fewer mistakes will be made," says Dennis Bakke, president and chief executive officer of AES. Before the start-up phase of each new plant, everyone at every level of the organization participates in a three- to four-month training program at which values and culture are important topics of discussion. Bakke says that the company does not like to do a great deal of checking for ethical transgressions before the fact because "that keeps people from taking responsibility."
AES, which reported profits of $100 mil-lion on sales of $533 million in 1995, has been a darling of both Wall Street and the ethics industry for some time, yet the system hasn't been foolproof. In 1992, AES officials publicly disclosed employee fraud at a large plant in Oklahoma. The plant's assistant manager had discovered several employees falsifying federally required reports on the quality of the facility's waste-water discharge.
Bakke doesn't believe that tighter controls would be any guarantee against this kind of incident, especially in plants that are an ocean away from the home office. "We'll assume people will follow the principles, but when they don't, we'll deal with it," he says. So far the biggest scandal the company has uncovered abroad was a dilemma over what to do about fifty workers at the newly acquired Kazakhstan plant who repeatedly came to work drunk. The manager there fired them, choosing not to practice cultural relativism and shrug the problem off as a local custom.
Although some companies are simply posting their codes in every far-flung office, those most likely to succeed at a global ethics program try to find more innovative and visible ways to make their standards as harmonized as possible, says Michael G. Daigneault, president of the Ethics Resource Center. He likes the idea of communicating over the Internet. "A whole code of conduct could be put on-line, for employees all over the world to view and comment on. You could also post questions people ask and solicit answers from all over," says Daigneault. General Electric, Motorola, and Levi Strauss are among the major multinationals that bestow a great deal of responsibility for ethical decisions on managers in each country. Local managers and ethics ombudsmen are trained through rigorous discussion of situations that might present a need for an ethical decision. Hewlett-Packard conducts an annual review of its twenty-page code with its employees around the world.
General Electric took its ethics program global three years ago. Gene Mensching, deputy ombudsman at General Electric corporate headquarters in Fairfield, Connecticut, and his boss, Jay Ireland, vice president of corporate audit staff, spend a great deal of time these days traveling to train ethics ombudsmen in divisions worldwide. They often find that they have to address an ethical dilemma themselves: Should they advocate cultural absolutism—i.e., the letter of the company law must be identical all over—or cultural relativism, allowing local ethics officers to interpret certain practices according to local custom? Where local customs are not in violation of United States law, they try to take the second approach.
The very idea of reporting to an ombudsman is problematic in countries—such as China, Germany, and Russia—that still bear scars of totalitarianism. "We explain this as a resource and assist line, not as a way to turn in a friend," says Mensching.