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Markkula Center for Applied Ethics

Globalization Demands More Effective Programs

Kirk O. Hanson
Kirk Hanson speaks at the annual international business ethics conference

The growing globalization of business and business operations changes the requirements for effective management of corporate behavior in response to public and governmental expectations.  This is true for American and European companies and also for Asian companies becoming more global.   The change may be felt most significantly by Chinese companies, which are "going global" most rapidly.

We are currently in the third phase of the development of global behavior standards for large corporations.  It has become clear that many companies are struggling to get beyond the first two phases.

In phase one, global standards were dominated by Western perceptions of proper business behavior and were presented and enforced using Western methods.  There was a naive sense that if the methods worked in an American or European context that they would work anywhere in the world.  Typically, American companies would simply extend the ethics standards or code of business conduct used in the United States to their own operations in other parts of the world, including China.  And the American companies would expect Chinese companies doing business with the American firms to adopt and comply with the standards as a "cost" of doing business with the American firm.  Many Chinese companies objected to this approach, arguing that the Western codes did not meet the local conditions in China.

In many cases, the Western codes were very poorly implemented in China and other countries, even in a Western company's own operations.  Many neglected to even translate their codes into the Chinese language.

In the second phase, there has been an attempt to write "global codes" of behavior which claim to respond to "global" conditions and realities.  Many of these codes are industry specific, covering the behavior of textile, mining, petroleum, or pharmaceutical firms.   Others have addressed some aspect of business such as environmental impacts or human rights implications.

Some Chinese companies have been engaged in the development and promotion of global codes, and many more have become "signatories" of the global code organizations.  One code, the United Nations Global Compact, has attracted a growing number of Chinese signatories.

Two primary problems have come up in phase two of the development of global standards of corporate behavior.  The first is that many of the codes require little actual change to remain a member in good standing.  In some cases, simply announcing one's intent to follow the code is sufficient to remain in good standing.  As a result, some codes result in little change and can be regarded with skepticism by outside observers.

The second problem is that when global codes try to solve the problem of poor commitment, they often rely on a strict regime of auditing and evaluation, which leads to a "compliance mentality."   When a company has adopted a compliance mentality, it is concerned more with meeting the minimum standards and exact wording of the code rather than the true meaning and purpose of the code.  Some of the auditing standards adopted to enforce global codes focus on the adoption of management systems and ways of doing things, but NOT the actual behavior in the operations of the company.  Thus the codes can at times result in formal "compliance" but not real change in decisions that the company makes.

Global companies today are attempting to move beyond these first two phases to create their own approaches to meeting public expectations.  They have typically adopted one of two general strategies - compliance or management by values.

A compliance approach, by which a company pledges and works diligently to meet the standards of local law in each nation and region in which it works, and to meet the specific requirements of global standards it has "signed," has encountered many significant difficulties.

The second approach, a "management of values" approach, can lead to a more successful corporate program of meeting public expectations.  But this approach is harder to implement and requires the development of 12 key management processes to be successful.

Among the many significant difficulties encountered by the compliance approach are the following:
1.  In many countries, the law is poorly developed and many areas of corporate behavior of concern to the public, are not addressed.  With no law in place, it is difficult to construct a compliance program.
2.  In many countries, the "rule of law" is not well developed.  Though laws may exist, they may be poorly enforced or their enforcement may be influenced by power or political relationships.  This can make compliance difficult as it is unclear what standards a company will actually be held to.
3.  As noted earlier, a compliance approach in implementing global standards can result in achieving compliance formally without actually changing corporate behavior.

In addition, a compliance approach can be easily misunderstood by the managers and employees of a global corporation.  If the "message" to the organization is to comply, then it will often be understood as "do the least possible" or even "don't get caught not complying."  Either message can undermine the effort to meet public expectations.

The "management of values" approach requires more effort and the development of ten key management systems for effective implementation.  When done well, it can result in much more effective management of corporate behavior and much greater sensitivity to public expectations.

The systems that must be developed for the "management of values" approach include:

1.  The development of a statement of values for the global company.  To manage by values, there must be a set of values to live and manage by.  This statement of values will usually indicate how the company wants to treat key stakeholders of the enterprise: shareholders, employees, customers, suppliers, business partners, the environment, countries in which the company operates.  This statement will commit the company to aspirations regarding its behavior.

2.  The hiring and selection of managers committed to the company's values.  Only a cadre of managers firmly committed to the values of the company can implement them.  Only managers who model the desired behavior in all their decisions can motivate behavior at other levels in the company consistent with the values.  If managers who have violated the values are left in place, the company will not be successful in managing by values.

3.  The interpretation of the values for each unit of the company.  A large global company has many different operations in different industries and different national settings.  The application of the company's value statement to the realities on the ground in each unit must be accomplished by the individual manager.  The manager must help employees understand what specific types of behavior toward customers, the environment, or human rights are appropriate in this unit and this business.  When this is done well, the manager should be promoted; when this is done poorly, the manager should be removed.

4.  The development of a compliance code of behavior.  Even in a company that "manages by values" there is the need for a set of standards that are enforced consistently and diligently.  These standards, often based on the law, must be embodied in a compliance code.

5.  Employee education in the values and codes of the company.  Ongoing employee ethics and values training is essential to an effective system to meet public expectations.  This training may be accomplished by annual briefings or online education, but it must always be reinforced by the normal chain of management command.  One's own boss must tell every employee that these standards and values are important.

6.  Creation of systems that embody the values.  Employees are primarily guided by the systems of the company - what is measured, what is rewarded, what is discussed, behaviors which lead to promotions.  These must support the values of the company rather than hinder them.

7.  Ethics risk assessment.  In every company, there are areas of risk where it is more likely that the values of the company will be violated.  It may be that sales people will be severely tempted to make payments to secure contracts.  It may be that operating executives will be tempted to overlook environmental impacts in order to cut costs or increase returns.  These areas must be identified systematically and be addressed by more oversight and watchfulness.  Penalties for violators in these areas must be more severe.

8.  Mechanism for deciding difficult cases.  Because a values system is not only a compliance system, there will be many management decisions that are "close calls" or which involve significant cost to the company.  In these cases, the individual manager or employee must have a way of raising these decisions with higher management and getting guidance or assistance to make the right decision.

9.  Opportunities for lower level employees to raise questions regarding adherence to value standards.  While Western notions of "hotlines" and "whistle blowing" systems may not fit every cultural setting, there must be some way in which lower level employees can point out for more senior management areas in which values performance can be improved.

10.  Periodic renewal of the company's commitment to the values.  Global companies with the strongest value systems renew or reintroduce their values on a periodic basis, perhaps once every three years.  It is important that the values be mentioned daily, but it is also important that periodically the values are reintroduced and the top management communicates how important they are to the success of the company.  This also gives top management the opportunity to emphasize certain aspects of the values that need emphasis, or to alter the formulation of the values to communicate more effectively the behavior desired.

As noted in this paper, the trend toward "compliance" as the primary way companies meet public expectations is not adequate to a complex and changing world.  The clear statement of the values the company seeks to follow, and the implementation of those values in the many industries and settings in which a truly global company operates, can effectively meet public expectations in the years ahead.

Kirk O. Hanson is the executive director of the Markkula Center for Applied Ethics at Santa Clara University. He delivered this talk at the "Rule of Law and International Business Ethics" in Beijing, Oct. 22, 2011. The conference was sponsored by the Center for International Business Ethics where Hanson serves as honorary chair.

*Picture courtesy of Kirk O. Hanson, available under a Creative Commons Attribution-Noncommercial license

Oct 22, 2011