part two National Differences Ethics, Corporate Social Responsibility, and Sustainability 5 LEARNING OBJECTIVES After reading this chapter, you will be able to: LO 5-1 Understand the ethical, corporate social responsibility, and sustainability issues faced by international businesses. LO 5-2 Recognize an ethical, corporate social responsibility, and/or sustainability dilemma. LO 5-3 Identify the causes of unethical behavior by managers as they relate to business, corporate social responsibility, or sustainability. LO 5-4 Describe the different philosophical approaches to business ethics that apply globally.
LO 5-5 Explain how global managers can incorporate ethical considerations into their decision making in general, as well as corporate social responsibility and sustainability initiatives. Budrul Chukrut/SOPA Images/Shutterstock Gucci’s Code of Ethics OPENING CASE ensure any non-conformance has been rectified. The com- pany also uses Environmental Profit and Loss accounting The Italian fashion house Gucci is one of the most famous to measure the monetary impact of its activities on the and venerable luxury brands in the world. Best known for its environment.
This information is published by the com- handbags, clothes, shoes, accessories, makeup, and pany and used as a tool to identify areas for environmental fragrances, the Florence-based company designs its prod- improvement, which are aimed at reducing the impact of ucts and sells them through a global network of 487 com- externalities such as CO2 emissions and the use of pany-owned stores. As is normal in the fashion industry, plastics. manufacturing is contracted out to third-party suppliers. All of this sounds well and good, and indeed in many Unlike many other fashion houses, however, the majority of ways Gucci has become a model of ethical business prac- those suppliers—some 95 percent—are based in Italy rather tices.
However, in a sign of just how difficult it can be to than Southeast Asia. In 2019, the company generated ensure compliance, in 2011 five former employees of a €9.63 billion in sales and had 17,157 employees. Since flagship Gucci store in Shenzhen, China, lodged com- 1999, Gucci has been owned by Kering, a French-based plaints against “inhumane” working conditions in the store. multinational enterprise that specializes in luxury goods.
In an open letter, the five revealed that the store imposed Over the last two decades, Gucci and its corporate par- about 100 rules that regulated employee behavior, many ent have worked hard to establish a reputation for ethics, of which seemed harsh and in violation on Gucci’s own diversity, and environmental sustainability. The company code of conduct. The complaints included being pres- has had a code of ethics in place since 2005. The code sured to work extra hours without payment (the employ- prohibits the company or its employees from engaging in ees complained that they were required to work 12 hour any kind of corruption, including influence peddling and days and then take inventory afterward), having to ask per- facilitation payments (often called “speedmoney”) aimed at mission before drinking water or using the toilet, and not “facilitating, guaranteeing or speeding up the execution of being allowed to spend more than 5 minutes in the rest- administrative payments.” Suppliers are also required to room.
A former manager at Gucci’s Beijing office told a abide by a strict code of conduct that, among other things, reporter that mistreatment of employees was widespread prohibits (1) work by children under 15 years of age; (2) at all levels in Gucci’s Chinese stores and that the prob- human trafficking, debt bondage, and the use of forced or lems were not caused by the brand, but by “mismanage- compulsory labor; (3) discrimination on the basis of race, ment of Gucci’s China branch.” ethnicity, or gender; and (4) all forms of psychological A detailed analysis of this case came to the conclusion harassment, including notably sexual harassment. that the problem was caused by the “labor dispatch” sys- With regard to environmental sustainability, the com- tem widely used in China in which a company (such as pany has a goal of reducing CO2 emissions by 50 percent Gucci China) leases workers from an employee leasing by 2025, not just in its company-owned operations, but company, which then dispatches them to the leasing entity. throughout its supply chain. Gucci is also committed to Under this system, the workers’ labor contract was with the sourcing all cellulosic fibers from sustainably managed for- leasing company, not Gucci, and it was the leasing com- ests.
In 2018, the company went “fur free,” no longer using pany that was setting terms of employment. For its part, animal fur in its products. The company is also committed Gucci reacted quickly, stating that “Gucci does not and will to the precautionary principle, putting protective measures not endorse or tolerate the alleged malpractices.” Gucci in place if, in the current state of scientific knowledge, also stated that the company had conducted thorough potential damage from its activities could affect the envi- investigations and had implemented a series of measures, ronment in a serious and irreversible way. including the replacement of the store manager and assis- To give these principles teeth and ensure compliance, tant store manager.
Gucci has a formal monitoring system in place. For exam- ple, suppliers are trained in Gucci’s principles and are sub- Sources: L. Snell, “A Case Study of Ethical Issue at Gucci ject to regular audits from a special group at Kering and in Shenzhen, China,” Asian Journal of Business Ethics, 2013, pp. Shanshan, “Gucci Accused of Staff Abuse,” Global from independent third parties.
If any breaches of compli- Times, October 9, 2011; Kering, Code of Ethics, 2020. Also see ance are identified, corrective action plans are put together https://equilibrium.com/environmental-profit-and-loss- following audits. Follow-up audits are then conducted to accounting. 131 132 Part 2 National Differences Introduction The Opening Case to this chapter describes how Gucci, the Italian-based producer of high- end fashion products has developed and implemented a code of ethics, part of which is aimed at ensuring that Gucci’s employees and its suppliers are held to high ethical stan- dards.
Despite its good intentions, as the case notes, Gucci still had to deal with abuses of the code within its own operations in China, which showed that even a well-intentioned company can be blindsided by the ethical consequences of established business practices in another nation. In this chapter, we will cover concepts and frameworks that will help you to think though ethical issues and help you to anticipate ethical problems and chart out the correct course of action. As you will see, ethical issues arise frequently in international business, often because economic development, business practices, regulations, and traditions differ from nation to nation. These differences can create ethical dilemmas for businesses.
Understanding the nature of an ethical dilemma, and deciding what course of action to pursue when confronted with one, is an important skill for a manager in an international business. ONLINE COURSE MODULES globalEDGE™ has a series of interactive “online course modules”—free educational learning opportunities for business people, policy officials, and students. These modules focus on issues important to international business. Each module includes a wealth of content, a case study or anecdotes, a glossary of terms, questions to consider, and a list of references.
See more at globaledge.edu/reference-desk/online-course-modules. The combination of the textbook and the globalEDGE™ online course modules serves as an excellent resource that you can use to prepare for NASBITE’s Certified Global Business Professional Credential. Achieving the industry-leading CGBP credential ensures that employees are able to practice global business at the professional level—including ethics, corporate social responsibility, and sustainability—required in today’s competitive global environment. View the questions in the modules as a test of your readiness to achieve the CGBP credential.
We open this chapter by discussing ethics. The term ethics refers to accepted principles of right or wrong that govern the conduct of a person, the members of a profession, or the actions of an organization. Business ethics are the accepted principles of right or wrong governing the conduct of business people, and an ethical strategy is a strategy, or course of action, that does not violate these accepted principles. This chapter looks at how ethical issues should be incorporated into decision making in an international business.
The chap- ter also reviews the reasons for poor ethical decision making, discusses different philo- sophical approaches to business ethics, and extends the discussion of ethics to incorporate corporate social responsibility and sustainability. The chapter closes by reviewing different processes managers can adopt to make sure that ethical considerations are incorporated into decision making in an international business and that the actions of a company are ethical, socially responsible, and sustainable. LO5-1 Understand the ethical, Ethics and International Business corporate social responsibility, and Many ethical issues in international business are rooted in the fact that political systems, the sustainability issues faced law, economic development, and culture vary significantly from nation to nation. What is by international businesses.
considered normal practice in one nation may be considered unethical in another. Because Ethics, Corporate Social Responsibility, and Sustainability Chapter 5 133 they work for an institution that transcends national borders and cultures, managers in a multinational firm need to be particularly sensitive to these differences. In the international business setting, the most common ethical issues involve employment practices, human rights, environmental regulations, and the moral obligation of multinational corporations. EMPLOYMENT PRACTICES When work conditions in another country (host nation) are inferior to those in a multina- tional corporation’s home nation, which standards should be applied? Those of the home nation, those of the host nation, or something in between? While few would suggest that pay and work conditions should be the same across nations, how different can they be before we find it to be unacceptable? For example, while 12-hour workdays, extremely low pay, and a failure to protect workers against toxic chemicals may be common in some less- developed and so-called emerging nations, does this mean it is okay for a multinational company to tolerate such working conditions in its subsidiaries or to condone it by using local subcontractors in those countries? Without taking into account the potential finan- cial implications, it would be easy to simply say that every company should be as ethical, socially responsible, and sustainable as its home-country environment dictates.
But it’s not really that simple. Some time ago, Nike found itself in the center of a storm of protests when news reports revealed that working conditions at many of its subcontractors were poor. A 48 Hours report on CBS painted a picture of young women who worked with toxic materials six days a week in poor conditions for only 20 cents an hour at a Vietnamese subcontractor. The report also stated that a living wage in Vietnam was at least $3 a day, an income that could not be achieved at the subcontractor without working substantial overtime.
Nike and its subcontractors were not breaking any laws, but questions were raised about the ethics of using “sweatshop labor” to make what were essentially fashion accessories. It may have been legal, but was it ethical to use subcontractors who, by developed-nation standards, clearly exploited their workforce? Nike’s critics thought not, and the company found itself the focus of a wave of demonstrations and consumer boycotts. These exposés surrounding Nike’s use of subcontractors forced the company to reexamine its policies. Realizing that even though it was breaking no law, its subcontracting policies were perceived as unethical, Nike’s management established a code of conduct for its subcontractors and instituted annual monitoring by independent auditors of all subcontractors.1 As the Nike case demonstrates, a strong argument can be made that it is not appropri- ate for a multinational firm to tolerate poor working conditions in its foreign operations or those of subcontractors.
However, this still leaves unanswered the question of which stan- dards should be applied. We shall return to and consider this issue in more detail later in the chapter.