To build a truly great, global business, business leaders need to adopt a global standard of ethical practices
In business school, we used to debate whether your business ethics should adapt to the local environment or be the same around the world. Many of my classmates argued, "When in Rome, do as the Romans do." In other words, follow local practices. Those were the days when leading ethicists like Joseph Fletcher and James Adams at Harvard were promoting "situation ethics," based on flexible, pragmatic approaches to complex dilemmas.
I listened to their arguments but never could figure out how leaders of business organizations could operate with one set of principles in their homeland and another overseas.
In the 1970s, the Foreign Corrupt Practices Act (FPCA) sent a chill throughout the business community by criminalizing the act of making payments outside the U.S. in pursuit of contracts. Yet the practice persisted. Many U.S. executives lobbied to relax the FPCA's provisions, arguing that they were at a competitive disadvantage in bidding against non-U.S. companies.
Risking the Company's Reputation
These days the business world has gone global, which has intensified the ethics debate. Making payments to obtain business is common practice in many developing markets in Asia, Africa, the Middle East, and Eastern Europe, and some companies feel obliged to play the game to compete. Witness Germany's Siemens (SI), which has admitted to nearly $2 billion in bribes, leading to the resignations of both its board chairman and its CEO in 2007. Then there's Britain's BAE Systems, which has been accused of making a $2 billion payment to a Saudi prince to secure $80 billion in government contracts. (The company denied the allegation, which is being investigated by the U.S. Justice Dept.)
What's significant about these ethical scandals is the damage they do to great institutions. If you were leading such an organization, would you risk permanently damaging your company in order to win a few overseas contracts? Regrettably, for some executives the answer is yes.
Forty years of experience has strengthened my belief that the only way to build a great global company is with a single global standard of business practices, vigorously communicated and rigorously enforced. Applying "situation ethics" in developing countries is the fastest way to destroy a global organization. To sustain their success, companies must follow the same standards of business conduct in Shanghai, Mumbai, Kiev, and Riyadh as in Chicago.
Engage the CEO in the Process
How else will employees in far-flung locations know what to do when pressured by customers or competitors to deviate from company standards? If overseas managers miss their financial targets because they adhere to strict ethical standards, can they be confident management will back them up?
Operating ethically requires much more than a code of conduct. The CEO and top management must engage with employees around the world to insist on transparency and compliance. Otherwise, they will never know what's going on. The company must have a closed-loop system of monitoring and auditing local marketing practices. The "don't look, don't tell" approach is bound to destroy your company's reputation. High standards must be enforced with a zero tolerance policy.
This well-established approach is employed by the companies on whose boards I serve—ExxonMobil (XOM), Goldman Sachs (GS), and Novartis (NOVN). Their employees throughout the world know precisely what is expected of them. Nothing is more important to these companies than their reputations, and they know that nothing destroys reputations faster than ethical violations.
Ethics Create Shareholder Value
General Electric's (GE) former general counsel, Ben Heineman, writes in "Avoiding Integrity Land Mines" in the Harvard Business Review about high performance with high integrity, proposing that performance and ethics go hand in hand. Heineman argues persuasively that CEOs can't just publish their policies and enforce them. Rather, they must get personally involved in ensuring ethical behavior and engaging employees in vigorous discussions of real-world issues. Otherwise, marginal practices like using agents to make payments will abound.
Despite the best efforts, there will be deviations. That's when leaders are watched most closely by their subordinates. Will management make an exception for a top performer?
Early in my time as CEO of Medtronic (MDT) I had to deal with numerous such deviations that led to the termination of such high-performing executives as the president of our European operations and country managers of Japan, Argentina, and Italy. These actions sent a powerful message that we were serious about company standards, and no one was exempt.
The bottom line is that good ethics is good business. There is a direct correlation between behaving ethically and creating long-term shareholder value. Furthermore, high integrity in external business dealings goes hand in hand with creating greater transparency and increased integrity in internal relationships. This necessitates choosing leaders who are not only ethical themselves but also committed to ensuring their organizations operate ethically at all times.
Bill's True North Principle: Great global organizations can be built only from a solid ethical foundation.