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Journal of International Trade Law and Policy

International business ethics


Ben Tran
Article information:
To cite this document:
Ben Tran, (2010),"International business ethics", Journal of International Trade Law and Policy, Vol. 9 Iss 3
pp. 236 - 255
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http://dx.doi.org/10.1108/14770021011075491
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JITLP
9,3 International business ethics
Ben Tran
Marshall Goldsmith School of Management,
Alliant International University, San Francisco, California, USA
236
Abstract
Purpose While international corporate unethical behaviors seem to permeate uncontrollably, it is
nevertheless, not an incurable dilemma. The paper aims to address the key steps in achieving such
governance: chief ethics officer, tone-at-the-top, and whistle-blower hotlines. With that said, this paper
will also address the value of unethical behavior, both from a macro and a micro perspective.
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Design/methodology/approach The paper uses an archival literature review to date on


international corporate governance, and its challenges to achieve international corporate ethics
compliance governance are analysed.
Findings One of the greatest challenges for international corporations is establishing a setup that
involves more than the board of directors and senior management, but every employee within the
corporation. A key compliance challenge is creating an international corporate culture that tolerates
and encourages employees to come forward and report improper conduct.
Originality/value International corporate unethical behaviors are not myths, should not remain
taboo, and should be addressed immediately, for it is not an incurable dilemma. Those who do not
learn from ones corporate unethical behaviors are deemed to repeat it. Those who do not learn from
others corporate unethical behaviors are deemed to commit it. Reputation takes time to establish but
takes less time to ruin.
Keywords International business, Business ethics, Corporate governance
Paper type Literature review

Introduction
Crime, fraud, and corruption, according to Tran (2008), are all nouns that pertain to the
act of deception that depicts an intention to increase an opportunity in ones favor in an
unlawful manner that pertains to an organizations interest and goals. These crimes
(offenses or corruptions to be exact) are nothing new to the corporation. Such crimes are
numerous and quite costly and are now commonplace in corporations (Adler and
Lord, 1991; Baker and Faulkner, 1993; Bacus and Near, 1991; Calavita and Pontell, 1991,
1994; Clinard and Yeager, 1980; Clinard et al., 1979; Jamieson, 1994; Mokhiber, 1988;
Preze, 1978; Pontell and Calavita, 1993; Reichman, 1993; Ross, 1992; Simpson, 1986, 1987;
Staw and Szwajkowski, 1975; Yeager, 1987, 1993). Gottfredson and Hirschi (1990)
definition of crime, according to Reed and Yeager (1996), is the use of force or fraud in the
perpetrators self-interest.
According to Shover and Hochstetler (2002), on the other hand, crime is behavior that
violates criminal statutes, regardless of whether or not it becomes known or responded to
by criminal, civil, or administrative state agencies. Crime is behavior that is potentially
sanctionable by agencies of criminal justice. Historically, investigations of crime focused
Journal of International Trade Law predominantly on individuals and their misdeeds, and investigators by contrast were
and Policy slow to recognize and to take seriously the fact that a great deal of crime is organizational
Vol. 9 No. 3, 2010
pp. 236-255 in nature. Organizational crime is crime committed by officers, managers, or employees
q Emerald Group Publishing Limited
1477-0024
of legitimate formal organizations in furtherance of their conception, however farfetched
DOI 10.1108/14770021011075491 or erroneous, of organizational interest and goals (Shover and Hochstetler, 2002).
Sutherland (1945, p. 9) defined [corporate] crime as [. . .] committed by a person of International
responsibility and high social status in the course of his occupation. Among the various business ethics
definitions of the term, the practicality of it remains as archival antique information,
rhetorically appealing but insignificant to even be an elective course in business
programs. Nevertheless, practitioners must overlook its taboo reputation and embrace
the probability of its destructions if they choose to glance at it. Denial is no longer an
effective strategy. The existences of crime and its destructions are not a myth and are not 237
a theory, for its presentences (existences and its destructions) are made known both
domestically and internationally. For example, Enron Corporation in Houston, Texas,
USA, was convicted in 2001, and Seecon in Concord, California, USA in 2010, where
boxes of documents were confiscated in suspicion of white-collar crime.
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International business ethics


While international corporate unethical behaviors seem to permeate uncontrollable, it is
nevertheless, not an incurable dilemma. One of the greatest challenges for international
corporations is establishing a set of tone that involves more than the board of directors
and senior management, but every stakeholder and employee within the corporation.
Along with these challenges, a key compliance challenge is creating an international
corporate culture that tolerates and encourages employees to come forward and report
improper conduct. Thus, the purpose of this paper is to explore corporate ethics,
domestic and international, for achieving responsible business practices. In so doing,
this paper will address the key steps in achieving such governance: chief ethics officer
(CEO), tone-at-the-top, and whistle-blower hotlines. This article will also address the
value of unethical behavior, both from a macro and a micro perspective.

Domestic corporate (un-) ethics


Sutherland (1945, p. 9) reported that his sample of 70 major American corporations had
an average of 14 legal decisions against them for illegal acts, roughly one for every three
years of their average corporate lifetime. The offenses ranged from restraint of trade and
false advertising to patent and trademark infringement and unfair labor practices.
He also found significant levels of recidivism. The 41 companies that had been
criminally convicted of offenses averaged four convictions each. Sutherlands definition
of corporate crime prompted a debate and an investigation on the meaning of
(white-collar) crime (Wozniak, 2001).
Following Sutherlands (1945) study, according to Reed and Yeager (1996), more
recently, Clinard and Yeager (1980) also found high rate of lawbreaking (white-collar) by
large US corporations. Their study of the largest industrial firms focused upon only a
two-year period (1975-1976), but they found that 46 percent (222 companies) of the
sample had been charged with non-minor violations of federal laws. While arguably not
all of such cases involved force or fraud, the study found numerous offenses that did,
such as antitrust conspiracies, unsafe workplaces, unfair labor practices, and
commercial bribery. Similarly, in his case of more than 1,000 of the nations largest
firms during the period 1970-1980, Ross (1992, pp. 9-10) found that 11 percent (117 firms)
either had been criminally convicted or signed consent decrees involving five types
of offenses: criminal antitrust violations, bribery, illegal political contributions, fraud,
and/or tax evasion. Ross (1992) also described the numerous cases of procurement fraud,
JITLP many committed by the nations largest defense contradictions in the 1980s, as
9,3 constituting a corporate way of life in the defense industry.
Ironically, views from and of the inside of corporations consistently suggest that the
routine nature of such offenses in organizations is not new. Indeed, surveys of corporate
officials indicate that unethical and illegal practices are common. For example, studies
find that substantial majorities of executives agree that criminal antitrust violations and
238 other unethical acts are rather common in business (Baumhart, 1961; Nader and Green,
1972; Silk and Vogel, 1976). This body of research also finds that managers see superiors
as pressuring them toward unethical and illegal behavior.
For example, in a Harvard Business Review survey on corporate ethics, half of
the sampled managers thought that their superiors frequently did not wish to know how
results were obtained so long as the desired outcomes were achieved. Moreover,
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respondents frequently complained of superiors pressure to support incorrect


viewpoints, sign false documents, overlook superiors wrongdoing, and do business
with superiors friends (Brenner and Molander, 1977, p. 60). Relatedly, Clinard (1983)
interviewees, retired middle managers, reported that unethical and illegal acts were
connected to the culture established by top management. Intriguingly, these managers
further suggested that the nature of the ethical climate depended in part on the professional
backgrounds of corporate leaders and their mode of recruitment. Respondents saw leaders
with engineering backgrounds, and those recruited from among long-standing employees,
as being more likely to establish positive ethical climates than financial specialists and
recruits from outside the firm, who focused more on bottom-line results (Clinard, 1983,
pp. 136-7).
Recent data confirmed that corporate fraud is anything but a myth or a theory, for
according to American Lawyer Magazine (ALM) (2008), while collecting such data is a
difficult undertaking, data do exist. While reviewing its record of fraud prosecution, the
US Department of Justice, after repeated inquires, finally explained that it collects its
statistics from individual US attorneys offices and does not maintain a centralized
record of the corporate fraud cases that produced the 1,236 convictions cited by then
attorney general Alberto Gonzales at the task forces anniversary celebration. In all, the
ALM analyzed 124 corporate fraud investigations, which resulted in 440 indicted
defendants. This database contains information about when and where these 440 cases
were brought, the lawyers on both sides, and how the cases turned out. In all, the ALM
believed that the database provides a historic portrait of corporate fraud prosecution in
the post-Enron (American Lawyer Magazine, 2008) (the seventh largest corporation in
the USA), WorldCom (the second largest long-distance phone company in the USA), and
YBM Yagnex (Gowling Lafleur Henderson, LLP, 2005) age.

International corporate (un-) ethics


International corporate corruption has escalated to the extent that a glossary that examines
the key standards for criminalization of corruption is deemed necessary and was
established by the three major international conventions: the Organization for Economic
Co-operation and Development (OECD)[1]. Convention on Combating Bribery of Foreign
Public Officials in International Business Transactions, the Council of Europe Criminal
Law Convention on Corruption, and the United Nations Convention Against Corruption.
The original member countries of the OECD are Austria, Belgium, Canada, Denmark,
France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, The Netherlands, Norway,
Portugal, Spain, Sweden, Switzerland, Turkey, the UK, and the USA. The following International
countries became Members subsequently through accession at the dates indicated business ethics
hereafter: Japan (April 28, 1964), Finland (January 28, 1969), Australia (June 7, 1971),
New Zealand (May 29, 1973), Mexico (May 18, 1994), the Czech Republic (December 21,
1995), Hungary (May 7, 1996), Poland (November 22, 1996), Korea (December 12, 1996), and
Slovak Republic (December 14, 2000). The Commission of the European Communities takes
part in the work of the OECD (Article 13 of the OECD Convention) (Organization for 239
Economic Co-operation and Development, 2007). The glossary explains these standards,
including elements of the bribery offences, sanctions, defenses and immunity, statute of
limitation, responsibility of legal persons, special investigative techniques, extradition,
mutual legal assistance, and asset recovery, and clarifies which level of implementation
would be sufficient to be compliant with these international conventions.
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Conventional wisdom points to low corruption within OECD countries. According to


Kaufmann (2003), on average, OECD countries ranked at about the 90th percentile.
However, these are averages, within a relative ranking, and the measures included in
these indices relate to the standard definition of corruption, namely, the abuse of public
office for private gain. Hence, the focus is on the illegal nature of acts such as bribery,
in order to illicitly derive private gain.
According to Kaufmann (2004), the long-standing OECD members from Southern
Europe exhibit higher levels of bribery prevalence than the tigers of East Asia, or of
some emerging countries in other regions, such as Chile, or Slovenia, other new EU
members from Eastern Europe, and, in some dimensions, Botswana in Africa. The high
variation within the OECD is illustrated by the fact that the gap in the prevalence of
bribery between the exemplary Nordic countries, on the one hand, and Southern Europe,
on the other, is larger than the gap between Southern Europe and the average for all
emerging economies. With that said, according to Lee and Ng (2004), Denmark,
New Zealand, and Finland received the best corruption rankings while Pakistan,
Indonesia, and Venezuela received the worse. Most of the countries were ranked for four
years. Only five countries were ranked for two years or fewer. The average number of
firms per year ranged from one (Venezuela) to 1,690 (USA). The number of surveys used
to compile a countrys composite CPI score ranged from 3 to 12. The standard deviation
of the scores from these surveys ranges from 0.4 (Malaysia) to 1.7 (Greece). These
standard deviation statistics provide some indication of the degree of agreement among
surveys as to a countrys relative ranking.
According to the annual survey by the Berlin-based organization (Transparency
International (TI), 2008), on the other hand, Finland, Iceland, and New Zealand are
perceived to be the worlds least corrupt countries, and Haiti is perceived to be the most
corrupt. TIs perception index is a composite index, drawing on 12 polls and surveys
from nine independent institutions. TI is a civil society organization. Through more
than 90 chapters worldwide and an international secretariat in Berlin, Germany,
TI participates to the raise of awareness of the damaging effects of corruption.
Only 163 of the worlds 193 countries are included in the survey, due to an absence
of reliable data from the remaining countries. The scores range from 10 (relatively
clean) to 0 (highly corrupt). A score of 5.0 is the number TI (www.transparency.org/poli
cy_research/surveys_indices/cpi/2006) considers the borderline figure distinguishing
countries that do and do not have a serious corruption problem (Transparency
International, 2008). With that said, the German federal police service,
JITLP Bundeskriminalamt Germany, registered nearly 90,000 cases of such crimes in 2005,
9,3 a 10 percent increase over the previous year, while a survey by the auditing giant
Klynveld Peat Main Goerdeler concluded that 80 percent of these cases go entirely
unreported (Dougherty, 2007). Kaufmann (2004) delved deeply into the views of the
firm about the main constraints they face, as reported in their answers to a simple and
telling question at the end of the Executive Opinion Survey (EOS) instrument: From
240 the following list (of 15 obstacles), please select the five most problematic factors for
doing business in your country, and rank them from one (most problematic).
When organizing the 15 listed constraints around seven key institutional and policy
clusters, the governance cluster, comprising corruption and bureaucracy, emerges as the
most binding constraint. On average, worldwide, these were named as one of the top
three constraints by firms in 79 out of the 104 EOS sample countries. Although the
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clusters of finance, labor markets/human capital, tax regime, and infrastructure also
pose significant obstacles in many countries, they lag far behind the governance cluster.
On the other extreme end of the spectrum, the macroeconomic policy cluster, represented
by foreign exchange regulations and macroeconomic instability/inflation, no longer
figures as a priority constraint to the enterprise sector[2].
The World Economic Forums Growth Competitiveness Index (GCI), which rates the
relative competitiveness of all EOS countries, has been one of the key contributions of
the Global Corruption Report over the years. There are several ways to analyze the
possible key determinants of country competitiveness, as measured by the GCI, but any
viable analysis would have to account for the pitfalls of confusing simple association
with clear causality, or of equating fundamental determinants of competitiveness with
an observed empirical link between the GCI and current variables, which may simply
reflect a quasi-tautology. The latter is because the GCI is, in itself, a composite of many
current EOS and external variables. Thus, we see that a high correlation between the
GCI and the EOS data on the extent of access to the internet in schools, the likelihood of
recession this coming year, or the frequency of bribes for tax payments would not be
very informative, because those variables are explicit inputs into the calculation of the
GCI subindices in the first place (information and communication technologies,
macroeconomic stability and public institutions, respectively).

Chief ethics officer


While some claimed that having a CEO did not help Hewlett-Packard. The scandal that
ensued led to Dunns indictment and an investigation by the House Energy and
Commerce Committee. Even CEO Mark Hurd, who replaced Dunn as Chair, has been
implicated in the scandal. This all happened under the watch of Kevin Hunsaker, HPs
senior counsel and CEO. He resigned in September (Clark, 2006).
Chief ethics and compliance officers have become trendy in recent years, but some
experts fear they act mainly as window dressing. If one person is in charge of ethics, they
argue, everyone else might think they are off the hook. In a way, its a job creation
program, says Mary Ann Jorgenson, a partner in the law firm Squire, Sanders and
Dempsey. Its not great for every company. Its not necessary for every company.
CEOs started appearing in corporate hallways in 1991, when the Federal Sentencing
Guidelines for corporations went into effect. The guidelines stated that companies with
effective compliance and ethics programs could receive preferential treatment during
prosecutions for white-collar crimes. It is an A for effort philosophy, in which
companies that prioritize ethics can sometimes escape punishment when their ethics International
programs fail. In the last five years, companies have become even more obsessed with business ethics
ethics and compliance. After the corporate scandals of 2001 and 2002, and the
Sarbanes-Oxley Act that followed, companies began tripping over themselves to
identify potential ethics problems. Even minor lapses are no longer tolerated by
hypersensitive boards (witness RadioShack), which fired its CEO for being untruthful on
his resume. 241
The ethical world cannot be discouraged nor overruled by the unethical world. For
example, one cannot say that since people are unlawful, then why have laws? Instead,
this is more reasons why ethics, and ethics offers are paramount. That is one reason
why membership in the Society of Corporate Compliance and Ethics, a trade group for
ethics and compliance officers, has increased more than 70 percent in the last three
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years, according to Roy Snell, the organizations CEO. Ten years ago, it was very, very
rare to hear about a CEO position, says Julie Goldberg, a senior client partner with
executive search firm Korn/Ferry. Today, more and more companies are creating
the role.
It is a requirement for good governance, says Odell Guyton, who has been director of
compliance at Microsoft since 2001. He says the position allows him to ask tough
questions. Just because youve done something that way for 20 years, that doesnt mean
its the way you do it today, he says. While critics say everyone at a firm should be
responsible for ethics, Guyton says a point person is necessary. How are you going to
make sure its being done, when people have other core responsibilities? Guyton says.
That doesnt mean its on the shoulders of the compliance person alone.
With that said, according to Gross (2003), Nancy Higgins became Microwave
Communications, Inc.s (MCI) Executive Vice President of Ethics and Business
Conduct and CEO, reporting to MCI Chairman and CEO Michael Capellas. Capellas
appointed an interim CEO in January after he took over the company in November,
but Higgins is the first permanent CEO at MCI, still officially named WorldCom.
David (Dave) Heller was appointed Chief Ethics and Compliance Officer for Qwest in
December 2002. He is responsible for ethics, corporate and regulatory compliance,
security, disaster preparedness, claims, environmental affairs, safety and industrial
hygiene and risk finance and insurance (Qwest, 2008). In 2003, Harold J. Tinkler
became the first Chief Ethics and Compliance Officer for Deloitte & Touche USA LLP
(Deloitte & Touche, USA) and its US subsidiaries (the Deloitte US Firms) (Deloitte,
LLP, 2008).
According to Gebler (2007), ethics officers need to be more precise in their practice.
Todays ethics officer needs to be very clear in distinguishing their ethics
responsibilities from their compliance responsibilities. The need for compliance is of
course, ongoing. Employees and managers need to be made aware of the standards of
behavior they are expected to follow and organizations must have robust processes to
permit employee concerns to be communicated and investigated. But that is not
ethics. Ethics must be the discipline of helping managers and leaders create the
culture where raising issues is safe, as well as socially acceptable, and where
frustrations stemming from todays business pressures can be safely vented. Helping
organizations first assess cultural vulnerabilities and then coordinate functional leaders
in communication and training to address these issues is the most valuable role an
ethics officer can play.
JITLP The role of business ethics as a distinct discipline is changing rapidly in todays work
9,3 environment. It was only a few years ago that ethics officers were building ethics
departments within their companies to manage integrated investigations,
communications, and training. Today, with the focus on building ethical cultures,
ethics officers are seeing the need to influence key business practices that go far beyond
awareness of code standards and corporate values. There is a challenging paradox in
242 that the successful ethics officer of tomorrow will be the one that has the
smallest organizational footprint. Their success will be in having other functions,
such as organizational development, organizational psychologist, human resources, and
communications, be successful.
According to Gebler (2007), The latest issue of Ethikos, an industry newsletter, looked
back over the last 20 years of business ethics. There certainly have been tremendous
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gains in terms of awareness of ethics issues as well the deployment of key program
elements such as helplines, codes, and training. However, several veteran ethics
professionals expressed concerns that over 20 years, the ethics movement has
not succeeded in actually inculcating responsible behavior in business people.
As Lori Tansey Martens said, we have not really stepped up to the challenge of creating
that still elusive (and not always defined) culture of ethics.

C EO: the bucks stops with the point person


CEO also known as the Director (and Executive Director for non-profits), the Senior
Corporate Executive, and the Chief Ethics Corporate Officer (CECO) (Ethics Resource
Center, 2007), are all corporate leaders who should be the point person who leads and is
responsible for, or accountable for, the accountability of the corporation. CEOs are quite
new to many corporations, domestic and international, for it is quite taboo, and deemed
unnecessary. For other innovative and cutting edge corporations, domestic and
international, various corporate governance guidelines and requirements for CEOs have
been established. To date, however, there is no one standardized required guidelines for
CEOs. The standardized guidelines for CEOs vary based on the needs of the
corporations but commonalities do exist.

Tone-at-the-top: CECO/CEO
An organization sends an important message about the priority of ethics and compliance
to leadership by the way the functions appear on an organizational chart. A CECO as a
formal part of an executive level team gives a strong indication that ethics not only
begins at the top, but also that the ethics and compliance-related interests of the
organization are intentionally represented in high-level business decisions. By contrast,
CEOs may actively talk about the fact that ethical conduct is important, but if the next
highest official working with the ethics and compliance area is found several levels
down on the organizational chart, a less persuasive argument can be made that ethics
and compliance really matter.
While several characteristics of the job description are common among CECOs who are
effective in their organizations, in practice every organization must define the role of the
CECO according to its particular needs and culture. Recognizing the need to strike a
balance, we suggest a set of basic definition about the role of the CECO. The designated
high-level official within a corporation should be expected to assume a broad and
substantial position which is outlined in the Ethics Resource Center (2007, pp. 17-19).
Selection of chief ethics officer International
All Board of Directors of a corporation should have a substantial majority of directors business ethics
who meet the criteria for independence required by the Statement of Policy of Director
Independence Standards adopted by the Board. In determining independence, the Board
will broadly consider all relevant facts and circumstances, including the commercial,
industrial, banking, consulting, legal, accounting, charitable, and familial relationships
that a director has with the corporation. The Nominating and Governance Committee is 243
responsible for reviewing with the Board the requisite skills and characteristics for
Board members, as well as the composition of the Board as a whole. In assessing possible
candidates for nomination to the Board, the Nominating and Governance Committee will
consider the background, experience, skills, character and successfulness of the
individual in chosen field, background in public companies, geographic diversity, and
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independence of candidates. Prospective nominees for director will be identified and


recommended by the Nominating and Governance Committee in accordance with the
policies and criteria established from time to time by the Board.
The business and affairs of the corporation are under the direction of the Board of
Directors. The Board selects a CEO and other officers of the corporation who have those
powers and duties regarding the day-to-day operations of the corporation as are
specified in the corporations Bylaws or as otherwise determined by the Board.
In discharging their obligations, directors will be entitled reasonably to rely on the
corporations employees and its outside advisors and auditors. CEO is expected to attend
meetings of the Board and of Committees on which they serve, and to spend whatever
time is necessary, including time to review materials distributed in advance of board or
committee meetings, properly to discharge ones responsibilities.
CEO has full and free access to officers and employees of the corporation and, as
necessary, outside advisors. In making any contact with an officer, employee or advisor,
the CEO will take into account the potential affect of any such contact and the orderly
conduct of the corporations affairs. The Board welcomes regular attendance at Board
meetings of senior executives of the corporation. Whenever a non-employee director
serves as Chairman of the Board, the CEO shall consult with the Chair with respect to the
attendance of other executives, employees or advisors to the corporation. Conversely,
if the Chairman is an employee director, the Chairman and the Lead Director shall
consult concerning such matters.
The Compensation Committee will review the CEOs compensation policies and
recommend changes, as appropriate, from time to time to the Board. The Compensation
Committee will consider the relationship of the CEO compensation and perquisites to
customary levels for comparable companies. The Compensation Committee will conduct
an annual review of the CEOs performance, and either as a committee or together with
other independent directors, determine and approve the compensation level of the CEO
based on such review. Whenever there is a non-employee Chairman, the Chairman will
communicate with the CEO regarding results of the CEOs annual performance review.
If the Chairman is an employee director, the Lead Director will so communicate with
the CEO.

Knowledge, skills, abilities, and integrity of a CEOs competencies


The CEO is under great pressure to build and maintain strong organizational ethics
programs. The stakes are high for any organization that fails to make ethics a priority
JITLP and then finds itself embroiled in scandal. Public perceptions often driven by the
9,3 media spoil a companys reputation and weaken its brand value. Lowered trust
among investors can devastate a companys ability to attract support for growth.
Regulators and lawmakers may move swiftly to punish and/or further regulate those
who step outside accepted ethical boundaries. Recently, many organizations are
choosing to consolidate the critical responsibility for ethics and compliance programs
244 under a CEO or CECO. But the specific roles and reporting lines for this relative
newcomer among corporate management positions are not always clearly defined.
Many CEOs report feeling set up for failure due to insufficient authority or inadequate
resources (Ethics Resource Center, 2007).
The bottom line: CEOs Add Value. CEOs whose roles are clearly and properly
defined and who are empowered to create and maintain strong ethics programs:
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.
help provide shelter from severe sanctions in the event of legal/regulatory
difficulty;
.
contribute to the establishment of an enduring ethical culture;
.
help other corporate leaders prevent misconduct or effectively address it when it
occurs; and
.
provide a public demonstration of the organizations commitment to integrity.

The cornerstone: a clearly defined role. To truly be a value-added function, the CEO
must have a well-defined role and be endowed with adequate resources. This demands
a balance between tailoring the job to an organizations unique characteristics and
providing the CEO with the basic authority and tools that should be universal for all
who hold such positions. At minimum, a CEO should be:
.
held accountable to the governing authority while carrying out its delegated
fiduciary responsibilities;
.
independent to raise matters of concern without fear of reprisal or a conflict of
interest;
. connected to company operations in order to build and ethical culture that
advances the overall objectives of the business;
.
given the authority to have decisions and recommendations taken seriously at all
levels of the organization; and
.
the CEO also must have the financial and human resources necessary to
comprehensively promote standards, educate the workforce, and respond to
potential violations in a timely manner.

Assuring access and independence: reporting relationships and accountability. A CEOs


line of reporting is perhaps the single biggest influence on his or her credibility and
authority within the organization. Ideally, the CEO will have:
.
employment decided and terminated only at the direction of the board of
directors;
.
a direct reporting relationship to either the board or the CEO;
.
direct, unfiltered access to the board;
. performance goals defined by the board and the CEO; and
.
the CEO position should be augmented by the Boards appointment of one International
independent director or member of the audit committee, knowledgeable about business ethics
business ethics and compliance, with accountability for ethics and compliance.

Responsibilities: being a full member of the executive team. A CEO should be a full
member of executive leadership and expected to:
.
oversee assessment of organizational risk for misconduct and noncompliance; 245
.
establish organizational objectives for ethics and compliance;
.
manage the organizations entire ethics and compliance program;
.
implement initiatives to foster an ethical culture throughout the organization;
.
supervise ethics and compliance staff embedded throughout the organization;
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.
frequently, inform the board of directors and senior management team of risks,
incidents, initiatives driven by the ethics and compliance program, and progress
toward program goals;
.
implement a program of measurement to monitor performance; and
.
oversee periodic measurements of program effectiveness.

Personal qualifications: knowledge, skills, abilities, and integrity. Like any other member
of the senior executive team, a CEO should enter the position with certain knowledge
and skills, including:
.
management experience;
.
ability to work at the executive level;
.
knowledge of business;
.
knowledge of and passion for ethical conduct and compliance; and
.
strong personal character and a commitment to integrity.
The CEOs special role: professional development and responsibility to the field. Beyond
their daily duties, CEOs have a responsibility to themselves and to the broader ethics
and compliance field. As executives, CEOs should consider themselves accountable to
a standard of conduct equal to that imposed upon other executives, the board, the
broader public, and to CEO peers. As a result, CEOs must:
.
demand a high standard of conduct from vendors, non-governmental
organizations, and others providing ethics and compliance-related services;
.
take responsibility for the preparation of rising CEOs and other ethics and
compliance professionals; and
. advance knowledge and shape public dialogue about ethics and compliance.

Conclusion: the CEO role continues to evolve. Infusing and maintaining the highest
ethical standards across the extended enterprise are among the most important job
responsibilities in corporations today. The role of the CECO has emerged in response to the
demand for a more accountable, transparent, and ethical business culture, and the creation
of CEO positions across industries is testimony to corporate leaders recognition of the
importance of ethics and compliance in assuring their companies success and longevity.
Still, many executives and boards have not yet realized the potential of their CEOs,
JITLP in some cases by not providing adequate resources or authority to those holding the
9,3 position. This report further defines the CEO role and demonstrates its critical value to an
organization. Properly constituted, the CEO investment is always worthwhile because,
in the end, ethical conduct is a key ingredient in building and sustaining investor and
stakeholder trust and in protecting society from organizational misconduct.

246 Whistle-blower hotlines


Recently, many organizations have re-examined the adequacy of their policies and
practices for the reporting and investigation of allegations of fraud, misconduct, and
wrongdoing. The impetus for this trend was, for the most part, the enactment of
legislation in various jurisdictions to respond to a number of large, well-publicized
financial scandals. Generally, the legislation requires publicly traded companies to
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establish procedures for the receipt, investigation and reporting of complaints and
allegations of wrongdoing, including anonymous mechanisms for the receipt of
complaints and allegations. Although there is no similar, broad legislation for
non-publicly traded organizations such as privately held companies, municipalities and
not-for-profit organizations, many leading organizations in these sectors are voluntarily
reviewing their practices around complaints and allegations of wrongdoing. In many
cases, organizations have proactively implemented policy enhancements similar to the
legislated provisions as a matter of good governance.
A whistle-blower is generally defined as a person who calls attention to a
questionable or illicit activity in an attempt to have it brought to an end (Canadian
Oxford Dictionary, 2004). A whistle-blower can also be defined as employees who expose
corruption or wrongdoing on the part of an employer. However, there is an overall lack of
consistency in the definition of whistle-blowing and the key elements of a
whistle-blower program. In part, this would appear to result from the fact that much of
the recent activity and importance ascribed to whistle-blowing is legislatively driven.
As such, much of the activity is directed towards compliance with the specific legislation
applicable to the organization. For purposes of this paper, the term whistle-blower
program is used to refer collectively to all policies, procedures, and processes within an
organization that address issues related to questionable activities, fraud, misconduct,
and other wrongdoing.
Since employers engaged in illegal activity are interested in avoiding exposure,
employees who threaten to contact the authorities or who alert upper management are
often subject to harassment, intimidation, or the loss of their job. To help encourage
these whistle-blowers ethicalness, avoid threats, reputable companies need to setup
whistle-blower hotlines. This process is just an important part of the companys
corporate governance process.

The program facilitates reporting of complaints and/or allegations of wrongdoing


According to (McTaggart, 2006), the best way to deal with waste, misconduct,
or wrongdoing is to prevent them from occurring at all. Activities that promote an
organization that is resistant to wrongdoing are:
. corporate culture and values;
.
policies and procedures that address fraud, misconduct, and other wrongdoing
(policies and procedures should include a process for receiving complaints and
allegations);
.
the program ensures all reported items are investigated and appropriately International
resolved; business ethics
.
the program protects individuals making the report from reprisal; and
.
the program includes steps to address underlying causes so as to minimize the
risk of further occurrences and improve the ethical culture of the organization.
247
The value and benefit of corporate corruption
According to Lee and Ng (2004), prior studies on corruption fall into two broad
categories:
(1) those interested in understanding the determinants of corruption; and
(2) those aimed at evaluating its effect. Studies in the first camp show that the level
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of corruption in a country has historical, cultural, economic, and political roots.

For example, Treisman (2000) finds that countries with lower corporate corruption
tend to be largely Protestant, former British colonies, have higher per capita income, a
common law (versus civil law) legal system, a high ratio of imports to gross domestic
product, long exposure to democracy, and a unitary form of government. Other related
studies document similar findings.
Studies aimed at assessing the economic impact of corporate corruption have
documented country level associations between it and a variety of social or economic
ailments. For example, Mauro (1995) shows that corporate corruption lowers
investment, and impedes economic growth while an increase in corporate corruption
lowers the amount of direct foreign investment. Corporate corruption is also associated
with reduced government tax revenue (Ul-Haque and Sahay, 1996; Tanzi and Davoodi,
1997; Johnson et al., 1999), decreased spending on operations and maintenance, such as
medicine and textbooks (Tanzi and Davoodi, 1997), increased military spending
(Gupa et al., 2000), higher child mortality rates and student dropout rates (Gupa et al.,
2001), as well as a larger unofficial economy (Johnson et al., 1998).
Although these studies have helped us to better understand the pervasive nature of
corruption, they provide little evidence on its implications for shareholder value. In two
studies that are closer in spirit, Ciocchini et al. (2003) and Hall and Yago (2000) find that
more corrupt countries have higher relative spread on their sovereign bonds. Their
evidence hints at the possibility that the cost of equity capital could be higher as well in
more corrupt countries.

The value and benefit of corporate corruption: macro perspective


Corporate corruption happens for a reason. From a macro perspective, corporate
corruption refers to how corruption is related to firm value under different assumptions
about global market integration. According to Lee and Ng (2004), the dependent
variables for the empirical analysis are the price-to-book (PB) and price-to-earnings (PE)
ratios of individual firms. The main proposition is that in more corrupt countries,
investors will demand a higher cost of capital (r), leading to lower market multiples.
Furthermore, in highly corrupt countries, agents routinely expend higher costs or
more effort to mitigate counter-party risk before the contract, to monitor compliance, and
to enforce property rights in the event of a contractual breach. Even routine transactions
such as the cashing of personal checks or background checks on new employees
JITLP can be arduous (Lee and Ng, 2004). These higher transaction costs, like the cost of
illiquidity (Amihud and Mendelson, 1986) or elevated information risk (Easley and
9,3 OHara, 2004; Bhattacharya and Daouk, 2002; Bhattacharya et al., 2003), are not easily
diversified away. As a result, investors in more corrupt countries will demand a higher
rate of return from their investment.
For an example, according to Lee and Ng (2004), who came up with an equation based
248 on considering a two-country environment with three different types of investors.
In home country h, there are Nh domestic investors. In the rest of the world there are
Nw investors. A fraction, l, of these Nw investors is able to invest in the home market.
These investors are global investor, whose asset demands are denoted with the
subscript g. The remaining (1 2 l) Nw investors are non-global foreign investors who,
for information or transaction costs reasons, are prevented from investing in the home
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market but can invest in foreign markets. The asset demands of foreign investors are
identified by a subscript f.
Based on Lee and Ngs (2004) equation, in this setting, l proxies for international
integration, where l 0 implies no international investment in the home market, and
l 1 implies perfect integration. The rate of return on home equity Rh has a mean of
(1 mh) and a standard deviation of sh, while the rate of return on the equity on the
world portfolio Rw has a mean of (1 mw) and a standard deviation of sw.
The covariance between the two returns is shw. The portfolio choice problem of the
representative type j investor (where j h, g, and f stand for home investor, global
investor, and foreign non-global investor, respectively) involves maximizing the
following objective function:
b
M X hj aX wj xEW 1j 2 varW 1j 2 cxhj 1
2
where 1 j W is the value of investor js terminal wealth, hj x and wj x are the amounts he
invests in the home and the world market, b is a risk aversion parameter, and c is the cost
associated with higher corruption in the home market. In this model, market clearing
conditions[3] lead to a required return on equity with four terms:
 
s2 xh
mh r c b s2h 2 hw 2
bh mw 2 r 2
sw N h lN w
where bh shw s2w is the home country beta relative to the world market.
The first term in equation (2) is the risk-free rate. The second is the cost of corruption.
The third term captures the effect of integration on the cost of capital. Specifically, it is a
function of the supply of equity funding to domestic companies, hX, and of the
home countrys own variance and covariance with the world stock market:
Xh
0
Nh Nw
The fourth term is the home country beta multiplied by the world market risk premium.
Notice that so long as some foreign investors are able to invest in the home market
(l . 0), as the number of foreign investors increases, the equity risk that each investor
bears becomes smaller. If the number of foreign investors wN becomes arbitrarily large
relative to the funding to domestic companies, then X h =N h N w 0. In other words,
as world markets become fully integrated, the supply of equity becomes perfectly elastic International
and the second term approaches zero, thus lowering the cost of capital. business ethics
However, because the cost of corruption is essentially a transaction cost, it is
unaffected by the degree of diversification with world markets. Even in the case of
complete integration, the cost of corruption, c, still increases the required rate of return.
As corruption cost is lowered, the required rate of return is also reduced. Several other
academic studies lend support to our basic premise that transaction costs can affect 249
expected rates of return. For example, Amihud and Mendelson (1986) find that firms
with higher bid-ask spreads are associated with higher required rates of return in the
USA Easley and OHara (2004) model the effect of information asymmetry risk on asset
prices and show that this risk can remain undiversified in equilibrium. More recently,
two empirical studies using international data also find corroborating evidence.
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Specifically, failure to enforce insider trading laws (Bhattacharya and Daouk, 2002) and
elevated levels of earnings opacity (Bhattacharya et al., 2003) are both found to be
associated with higher costs of equity capital across countries. In all these instances, the
evidence indicates that higher contracting costs are reflected in higher costs of capital.
Also consistent with this basic argument, according to Lee and Ng (2004) and
La Porta et al. (2001) show that firms from countries with better investor protection laws
have higher Tobins q. Their study uses the origin of a countrys laws (Common versus
Civil) and the index of specific legal rules as indicators of shareholder protection.
As mentioned earlier, the origin of a countrys law is correlated with corruption. It is
difficult to distinguish whether corruption per se, or shareholder protection, is the
primary theoretical construct that accounts for the results in La Porta et al. (2001). This
issue is addressed by including the LLSV index of shareholder protection (Antidir), the
efficiency of the judicial system (Judsys), and the level of accounting standards
(Accstand) as control variables. In sum, corruption encompasses a broader set of social
behavior than is captured by shareholder protection. For example, public corruption is
likely to be mirrored by similar behavior in the private sector. To the extent that unethical
behavior in general increases contracting and monitoring costs, the adverse effect of
corruption on corporate values will extend beyond legal protection of shareholders.

The value and benefit of corporate corruption: micro perspective


Unethical actions pertain to the act of deception that depicts an intention to increase an
opportunity in ones favor in an unlawful manner that pertains to organizational interest
and goals. These actions (offenses and corruptions) are nothing new to the corporations.
Such offenses are numerous and quite costly are now a commonplace in criminal actions
of corporations (Adler and Lord, 1991; Baker and Faulkner, 1993; Bacus and Near, 1991;
Calavita and Pontell, 1991; 1994; Clinard and Yeager, 1980; Clinard et al., 1979; Jamieson,
1994; Mokhiber, 1988; Preze, 1978; Pontell and Calavita, 1993; Reichman, 1993; Ross,
1992; Simpson, 1986; 1987; Staw and Szwajkowski, 1975; Yeager, 1987; 1993). Core cases
of corruption involve four key components:
(1) an official (A), who, acting for personnel gain;
(2) violates the norms of public office;
(3) harms the interests of the public (B); and
(4) to benefit a third party (C) who rewards A for access to goods or services which
C would not otherwise obtain (Philp, 2001).
JITLP Values of unethical behaviors
9,3 Unlike Philp (2001) paradigm, the four key components to corruptions, the values of
unethical behaviors do not necessarily consist of the fourth component. The equation
for the value(s) for such (un)ethical behaviors is:

P 1C P 1B
Bu $ P 1 PE ;
250 C
where Bu is the actual benefit of the unethical behavior, the P1 C is the probability of the
consequences, the P1B is the probability of the benefit, and the C is the actual
consequences. The P1(PE) is the probability of a postal employee. Thus, the actual
benefit of the unethical behavior must be greater than or equal to, the sum of the
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probability of the consequences and the probability of the benefit, compared to the
actual consequences. The equation is based on four factors: Bu, P1 C, P1B, C, and
P1(PE), and it has two exceptions.
Actual benefit of the unethical behavior (Bu). The actual benefit of the unethical
behavior (Bu) is very individualized, thus subjective, quite rhetorical, and sometime
defies logic. Nevertheless, it is usually due to financial gain, survival of the fittest, or
discrepancy. While financial gain and discrepancy are self explanatory, survival of the
fittest is a phrase which is a short hand for a concept relating to competition for survival
or predominance. The concept was original applied by Herbert Spencer in his Principle
of Biology in 1864. Spencer drew parallels to his ideas of economics with Charles
Darwins theories of evolution by what Darwin termed natural selection (Wikipedia,
2007).
However, there are two exceptions to the Bu equation, educational skills (ES) and
career ladder (CL). ES refers to the necessary skills and training that are required from
the individual from becoming a perpetrator. For example, a Certified Public
Accountant license for an Accountant, a Marriage Family Therapy license for a
Therapist/Counselor, a State Bar Examination for an attorney, and the Architectural
Registration Examine for an Architect, or related education and skills. Individuals who
lack such ES are more likely to become a perpetrator of unethical behavior since they
are more likely to encounter barriers, be held by, and are disgruntled with their
employer due to a lack of disagreement on the vision of their future career path.
As such, the values of the benefits of the unethical behavior, due to ES, are
ES . Bu $ P 1 C P 1 B=C.
The second exception to the Bu equation is CL. CL refers to the opportunity, or the lack
of opportunity, to excel on the CL. The lack of opportunity to excel on the CL may be due
to age, drive, or passion. Individuals who lack such CL are more likely to become a
perpetrator of unethical behavior since they are more likely to disconnect oneself
from the employer, estrange with the employer, and are disgruntled with the employer
due to a lack of disagreement on the vision of their future career path. As such, the values
of the benefits of the unethical behavior, due to CL, are CL . Bu $ P 1 C P 1 B=C.
Thus, the combination of the two exceptions is the receipt for disaster, an unethical
behavior waiting to take its course. Individuals who lack ES and CL are only out for
themselves without the consideration for others or the employer. ESCL to an employer
is like a kleptomaniac to a retail store. As such, the values of the benefits of the
unethical behavior, due to ESCL, given that ESCL . ES . Bu $ P 1 C P 1 B=C and
ESCL . CL . Bu $ P 1 C P 1 B=C, is ESCL . Bu $ P 1 C P 1 B=C.
Potential consequences (P1C) and potential benefits (P1B). Potential consequences International
(P1C) refers to the existing possibility of the consequences that the individual may business ethics
encounter, be affected by, and/or be penalized by if the unethical actions are to be
carried out and caught. Potential benefit (P1B) refers to the existing possibility of
the benefits that the individual may encounter, be affected by, and/or benefit from if the
unethical actions are to be carried out and not caught. The existing possibility of the
consequences and the existing possibility of benefits are very individualized and 251
cannot be judged nor compared by any other but the perpetrators for it defies logic.
Other variables that can contribute to the P1C includes industry, seniority, and
severalty of the unethical action.
Actual consequences (C). Actual consequences (C) refers to the consequences that the
individual will encounter, experience, and be penalized by if and when the perpetrator
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is caught with enacting the unethical action. The C is very individualized and cannot
be judged nor compared by any other but the perpetrator and the legality of it for it
defies logic. Other variables that can contribute to the C include the industry, seniority,
and severalty of the unethical action. The probability that diminishes the value of the C
is the probability of P1C more than C, and definitely the increased probability of P1B
over both P1C and C combined.
Postal employees [P1(PE)]. P1 refers to the probability of postal employee PE. There
are two different types of PE. The first type of PE is PEESCL, PEESCL are the ones who
have the ES, and are on the CL. Nevertheless, there exist two types of conflict between the
employer and the PE, conflict that estranged the PE. A disgruntle between the employer
and the PE, due to a lack of disagreement on the vision of the PE future career path, or
that fresh talents outshined the PE. The second type of PEESCL are the ones who do not
have the ES, nor on the CL, but wanted to be on the CL. Thus, a disgruntlement between
the employer and the PE arises, due to a lack of disagreement on the vision of the PE
future career path. The P1(PE) is based on the PE due to PEESCL.
When the supervisor believes an employee is a PEESCL and has the P1(PE) of doing
something unethical, the supervisor should take immediate action. First, the supervisor
should be proactive and not reactive, and need to gather and record evidence. Then the
supervisor addresses the employee with the evidence and follows the organizations
disciplinary procedure. After dealing with a specific problem, the supervisor should try
to understand what conditions contributed to the problem and then seek to correct
those conditions.
Values of the unethical behavior (Bu). The actual benefit of the unethical behavior
(Bu) is very individualized, thus subjective, quite rhetorical, and sometime defies logic.
Nevertheless, it is usually due to financial gain, survival of the fittest, or discrepancy.
As such, the projected benefit of the unethical behavior is often due to survival of
the fittest and discrepancy, and such individual is like a chameleon. Like a chameleon,
the individual is among others, functioning alongside the employer, but without the
respect for boundaries and ethics.
The sole purpose of the P1, like a chameleon, is survival of the fittest. The P1 will only
reveal its true color when felt threatened. The threat varies and may not necessarily be
logical. Example of a threat is new and fresh talent who possesses ESCL to. As such, the
P1 cannot be in position of power and authority over new ESCL, nor be in the position of
and related to the Milgram experiment with new ESCL. The P1 will utilize the
opportunity and manifest its P1.
JITLP Conclusion
9,3 While international corporate unethical behaviors seem to permanents uncontrollable,
it is nevertheless, not an incurable dilemma. However, when international corporations
consciously decide not to address the issue and handle it, then these international
corporations have decided not to resolve the dilemma. An issue becomes a dilemma
when an issue is not addressed. A dilemma becomes an incurable dilemma when the
252 dilemma is not resolved. One of the greatest challenges, in resolving this dilemma, for
international corporations, are establishing a set of tone that involves more than the
board of directors and senior management, but every employee within the corporation.
Another greatest challenges, in resolving this dilemma, for international corporations is
that corporations often do not take the importance of CEO as paramount as needed but
only as a fade. Along with these challenges, a key compliance challenge is creating an
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international corporate culture that tolerates and encourages employees to come


forward and report improper conduct. Thus, the purpose of this paper is an archival
literature review to date on international corporate governance, and its challenges to
achieve international corporate ethics compliance governance. In so doing, this paper
addressed the key steps in achieving such governance: CEO, tone-at-the-top, and
whistle-blower hotlines. With that said, the paper also addressed the value of unethical
behavior, both from a macro and a micro perspective.

Notes
1. Lee and Ngs (2004) manuscript have also mentioned this information and the OECD
web site is www.oecd.org/home/0,2987,en_2649_201185_1_1_1_1_1,00.html
2. The fact that firms do not single out as high-priority obstacles related to the foreign exchange
regime or inflation do not necessarily mean an absence of global macroeconomic challenges,
illustrated by the potential global dangers and costs which may be projected into future
years posed by the current twin fiscal and balance-of-payment deficits in the USA.
3. See Appendix A, Details of model derivation on pp. 31-2 of Lee and Ng (2004).

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About the author


Ben Tran received his Doctor of Psychology (PsyD) from the Marshall Goldsmith School of
Management at Alliant International University in San Francisco, California. Ben Tran has
presented and published articles on topics of, but not limited to, corporate and social
responsibility, business and management ethics, expatriate and employee recruitment, selection
training and retention, knowledge management, and green management. Ben Tran can be
contacted at: tranconsulting@gmail.com

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