A far cry from the humorous foibles Mark Twain recounted about American tourists, the ethical conflicts U.S. companies face when conducting business overseas are not funny. Businesses are becoming dead serious about protecting their reputations.

It’s hard to be good, and it’s even harder when you’re away from home. Moral boundaries blur, laws and values change, and accepted business practices vary with the scenery. Guidelines and codes of conduct developed in one country seem out of place in another. The pressure to close a deal or edge out a competitor dulls an otherwise sharp sense of business ethics. According to a number of international organizations that monitor corruption, illegal and unethical business practices are pervasive. As U.S. companies expand abroad, executives and managers increasingly face the temptation to play dirty in a dirty world.

PSEG Global Inc., an energy company based in Parsippany, N.J., with power generation and distribution facilities on five continents, does business in countries that score high on the corruption scale and in an industry where the potential for corruption is great. According to PSEG Global’s senior vice president and general counsel, Andrea Bonime-Blanc, the company "encounters ethical issues on a regular basis." Like employees at other U.S.-based global companies, PSEG Global’s employees confront relatively black-and-white ethical issues that entail potential violations of law, as well as the far more difficult issues that arise in the gray areas of situational ethics and cultural variations of accepted business practices.

Dealing With the Gray Areas

How do executives and managers doing business abroad know if a specific situation is a potentially hazardous ethical problem or a harmless variation in culturally determined business practices? The following test, which contains advice offered by half a dozen ethics experts, should help executives and managers determine if a situation carries the potential for harm.

  1. Does it violate core human values or basic human rights? If so, it belongs on the agenda for policy discussions among top management.
  2. Is it illegal? If it is, don’t do it.
  3. Does it violate the basic values of corporate policy? If it does, back off and consult with your ethics department or corporate executives.
  4. Will it damage your reputation or the company’s if reported in the media? If so, stop and seek advice.
  5. What would a respected adviser say? Your own judgment may be clouded by the pressure to make the deal. Reassess the situation from a more neutral perspective.

PSEG Global has kept its own hands clean through scrupulous attention to a code of ethics that the company applies and enforces on a cross-border basis. Not all companies, however, exercise such caution in dealing with business ethics abroad. "U.S. companies pay more attention to their domestic ethics programs and put off internationalizing those programs," says Winn Swenson, managing director of KPMG’s Integrity Management Services in Washington, D.C. Ethics experts agree that unethical and illegal business practices are rampant in certain regions of the world, but they also uniformly believe that companies can protect themselves with the right approach to ethics management — a combination of universal guidelines applied with some sensitivity to cultural differences, plus a deeper underlying corporate commitment to ethical values.

Common Close Encounters

Bonime-Blanc says the ethical issues PSEG Global employees encounter usually fall into one of the following categories:

  • Issues arising under the U.S. Foreign Corrupt Practices Act (FCPA) and the Organization for Economic Cooperation and Development (OECD) Anti-Bribery and Corruption Treaty, which prohibit companies from bribing or otherwise providing items of value to officials in exchange for favorable business treatment. "Issues in this category can range very broadly and need to be carefully analyzed," says Bonime-Blanc.
  • Internal control issues at any one of the global, regional, operational or joint venture levels of the company involving employees or others suspected of defrauding the organization.
  • Procurement irregularities that might involve giving or receiving kickbacks, or steering contracts to friends or relatives.
  • Other ethical or legal issues, such as appearances of impropriety, confidentiality violations and HR situations.

How does PSEG Global deal with such a wide range of potentially disastrous situations? "We address these situations by first determining whether an ethical or legal violation may have occurred," says Bonime-Blanc. "If the answer is positive, we launch an internal investigation to ascertain all the facts as best possible. A team consisting of the general counsel, internal auditors and other relevant individuals conducts the investigation and provides a report to the general counsel. We will also engage outside U.S. counsel as well as local counsel for the purposes of creating attorney-client privilege and obtaining and applying the relevant legal knowledge and guidance."

Once the investigation has been completed, the team issues a report with a set of recommendations, the general counsel issues a letter to the relevant business manager with a recommended action list, and a follow-up inquiry takes place within a set period of time. "During this entire process," says Bonime-Blanc, "we keep the general counsel of our parent company, as well as the chief internal auditor of the parent company, informed and engaged."

Troublesome Relationships

Ethics issues and the investigations they prompt become even more complicated when a partner or third party is involved. "One fairly common problem that finance executives encounter concerns whom to do business with," says Thomas Donaldson, professor of legal studies in the Wharton School at the University of Pennsylvania, Philadelphia, and director of the Wharton Ethics Program. "Actually, the issue is whom not to do business with. In Japan, for example, executives of large American banks have agonized over the issue of the possible Yakuza [Japanese organized crime] connections of some of their clients. If it turns out that a large client has Yakuza connections, should a bank executive or CFO say no to doing any business at all? And if they should say no, then how much detective work should they undertake to uncover facts about their clients? The same issue arises in Russia and elsewhere," he says.

Another side of the global ethics issue involves suppliers or partners in foreign countries that a company suspects may be paying bribes to third parties. "Just how far should a company go to ensure that its hands, or more accurately, its partners’ hands, are clean?" Donaldson asks. "The answer to this question is difficult, but clearly finance executives must look it straight in the eye. Too often, problems are neglected, only to cause embarrassment and financial losses later."

Policing Partners

Donaldson believes that the first step in the successful resolution of problems with vendors and suppliers is to elevate the issues to the level of dialogue among key executives. The aim of the dialogue should be to arrive at a basic approach or policy. Some companies establish formal rules for client relationships. "For example," Donaldson notes, "the company might stipulate that it will not do business with any company that it has reason to believe has Yakuza connections. It may ask suppliers annually to sign a statement that they refrain from paying bribes. More CFOs should reach out in host countries to network with their peers. This can be an effective way to share information and tips about successful approaches."

PSEG Global requires all business developers and asset managers to proactively discuss its ethical standards with prospective partners and vendors to determine if they hold similar standards. "We conduct background checks and thorough due diligence prior to entering into any major transactions as part of our business strategy," says Bonime-Blanc. "We make it clear that PSEG Global has high standards for our employees and partners, and our guidelines must take precedence over any local customs or business practices that would differ."

If the company becomes aware of unethical activities by a partner, it first tries to influence and change the practice. "In the past," notes Bonime-Blanc, "this has been enough in some cases and not in others. When it’s not enough, we exercise management rights to try to change the process. We commonly include audit, visitation and other rights in our joint venture agreements to help in this process. If the practice continues, we will walk away from a deal. We have ended negotiations with potential partners who were hesitant to embrace our standards of conduct, and we have dissolved partnerships when it became clear our ways of doing business were incompatible. With respect to our employees, a pattern of violating the company’s guidelines or a serious isolated violation can lead to a reprimand or termination of employment."

Going Global

KPMG’s Swenson believes that a formal, written ethics policy is absolutely necessary. "As a company becomes international," he notes, "it must determine whether its standards of conduct will be universal. The prudent course for a large company is to set standards that are universal, but be ready to accommodate cultural differences that don’t offend the basic values of the company."

Donaldson agrees that a formal global policy is essential. To ensure that the policy is effective and works well in different cultural settings, he advises companies to create internal mechanisms that allow information about sensitive issues to reach people at the top of the organization. He also advises companies to empower employees operating abroad — often citizens of the host country — to actively participate in ethics education and problem solving. "Too often," he notes, "ethics and values appear as foreign imports. Integrating a company’s ethics with the host country culture is crucial for long-term success."

Two-Way Communication

Swenson underscores the importance of two-way communication in creating an effective ethics policy. "It’s easy for a company to roll out a paper program. It’s tougher to understand the issues airing in a local workplace and to create a program that will be effective there. Intelligence for making these decisions can come from sitting down with the employees in the host country for clarification of what a particular rule may mean in that culture. Objections to the rule may be raised and overcome, or the policy may be modified," he says.

Swenson believes that the right ethics message will trickle down the chain of command. "But to get the right communications back from the field," he says, "the company must give people a way to step out of the chain of command and report questionable behaviors. Expatriates may be willing to use a U.S.-based hotline, but employees in the host country may need local ethics officers who are visible, well-known and available." Swenson advises companies to construct and evaluate their communication methods on a culture-by-culture basis. "One common mistake occurs when a U.S.-based company takes its U.S. communications, translates them and expects that to resolve the problem. The translation must be cultural, not just literal," he says. The company must also clearly communicate the message that it values people who raise concerns and will protect them against retaliation.

Training and Work Environments

Many U.S. companies operating on a global basis must deal with situations or behaviors that are acceptable business practices in the foreign country but questionable or unethical in the United States. PSEG Global uses a broad set of global business ethics and shared values guidelines to train employees to deal with the gray areas. "We issue a global business ethics (GBE) handbook to all new employees, and all employees must attend GBE seminars on an annual basis, including FCPA training," says Bonime-Blanc. The training consists of hypothetical scenarios that employees must work through and discuss with their peers. Other companies recognized for their solid ethical standards also use scenario training and small-group discussions.

Swenson notes that some companies may avoid overt corruption, but inadvertently create environments that encourage unethical behavior. Although relatively few cases of unethical behavior reach the proportions of a full-blown bribery investigation, there are countless occasions when executives and lower-level managers confront potentially troublesome ethical decisions when working abroad. "With bribery," he says, "it’s likely that someone higher up the corporate ladder will be aware of it. But there are lots of lower-level ethical breaches that can occur lower down in the company." For example, a sales force may be engaged in fraudulent agreements that violate U.S. antitrust laws. "The company has to look at the goals it sets for its salespeople, the objectives they are expected to attain and how the salespeople are evaluated," Swenson warns. "If the goals are unrealistic — if the salespeople have to stretch too far to make their sales — the company may encourage unethical behavior."

Donaldson agrees that companies must guard against what he calls "risk-tolerant environments," where employees are consumed by business goals, and corporate leadership fails to communicate that unethical acts are not an acceptable part of achieving those goals. Companies with successful ethics programs, he notes, combine formal rules and guidelines with deeper corporate values, strong leadership and work environments that discourage "goal mesmerization." According to Donaldson, too many companies believe that they can solve ethics problems by simply getting rid of the employees who breach company policy. This approach, he says, is rarely sufficient because the work environment remains unchanged, and the people who created the problem are often just "ordinary people."

Changing Norms

Companies may find it easier to maintain their ethical practices abroad as the OECD’s new Anti-Bribery Convention, the first major intergovernmental effort to reduce corruption, takes hold. Bonime-Blanc believes that "the OECD efforts É will help level the playing field and promote competition based on who offers the best deal for a company or government — not who is unrestricted in giving bribes. While multilateral worldwide enforcement of these newly enacted laws in the OECD and other countries will take a while, and most certainly be imperfect, the global mood on corruption is changing. Transparent competition will become a more accepted and common practice."

Swenson agrees that the OECD’s efforts are important, but also sees "some movement toward the idea that laws and governments may not have all the answers. Companies need to manage their behavior from within. There is a business benefit to doing this. More companies are finding that how they address the issues that are important to their stockholders makes a difference in their long-term strategic success."

Short-Term vs. Long-Term Perspective

Bonime-Blanc advises finance executives who are faced with ethical issues "not to sacrifice business principles and reputation for quick dollars. The small advantage a company might gain in the short term will be far outweighed by the damage to reputation, the loss of good partnership and alliance opportunities, and the call for additional unethical acts. The fact that a company pays bribes gets around, and soon everyone expects one. Being ethical may cost a deal here or there, but makes good business sense in the long run. Being unethical could cost you and your company a lot more — in reputation, self-esteem, dollars and, potentially, a criminal record."

Ultimately, Bonime-Blanc says that "the single most important key to ensuring that [ethical] guidelines are upheld around the world boils down to one simple principle: Hire the most ethical, principled, responsible individuals you possibly can in every location you do business in." Donaldson adds that it’s equally important to provide strong leadership and ongoing efforts to avoid risk-tolerant work environments.

Motorola’s Code of Business Conduct

Motorola Inc., the $33 billion communications and electronics giant based in Schaumburg, Ill., first drafted its code of conduct in the 1970s and updated it as part of its ethics renewal process in 1996. Motorola’s code, posted on its Web site, requires all Motorola employees and agents to abide by the code, and instructs them to call the "EthicsLine" with any questions concerning the company’s policy. Here’s the section of Motorola’s code that discusses the particularly difficult issue of gifts, which is complicated by cultural differences:

  • Gifts are not always physical objects — they might also be services, favors or other items.
  • Motorolans don’t accept kickbacks, lavish gifts or gratuities. We can accept items of nominal value, such as small promotional items bearing another company’s name. We will not accept anything that might make it appear that our judgment for Motorola would be compromised.
  • In some rare situations, it would be impractical or harmful to refuse or return a gift. When this happens, discuss the situation with local management.
  • Some business situations call for giving gifts. Motorola’s gifts must be legal, reasonable and approved by local management. Motorolans never pay bribes.
  • We understand that gift-giving practices vary among cultures. Our local gift policies and guidelines address this.
  • We will not provide any gift if it is prohibited by law or the policy of the recipient’s organization. For example, the employees of many government entities around the world are prohibited from accepting gifts. If in doubt, check first.