Corruption and Ethical Behavior in International Management

Duško Pavlović
Libetas International University, Croatia
dpavlovic@libertas.hr

Damir Mladić
Libetas International University, Croatia
dmladic@libertas.hr

Stipe Buzar
Libetas International University, Croatia
sbuzar@libertas.hr

Abstract. Corruption and other forms of unethical behavior in business are not merely undesirable
from the standpoint of business ethics – they are prohibited by law within various domestic legal
systems throughout the world. Thus, when it comes to ethical and legal standards within one’s own
country, the playing field is relatively clearly set – we know which laws apply and we are able to
ascertain which types of behavior are either ethical or unethical. However, when it comes to
international business, especially in various possible and actual international trade scenarios, it is not
always clear which set of rules apply. Even if we set aside the obvious differences between various
domestic legal systems, there remain the cultural (and hence moral) differences in the way business is
conducted, and corruption is perceived, in various parts of the world. While a particular act may be
considered as bribing in one country, the same may act may be considered as simple tipping in another
country. Thus, one and the same act may be an unacceptable practice in one, but the norm in another
country. In light of this circumstance, how should a manager from one country behave when doing
business in another country with a different set of values? Which moral guidebook should he/she use?
Finally, which is more important for the manager, to conduct a successful trade within the moral
framework that is acceptable in another country, or to risk the trade by clinging to one’s domestic
beliefs and values? The authors address these questions with a two-level analysis, in order to see how
they might be answered from a deontological (rules), consequentialist (consequences) and virtue ethics
point of view?

Keywords: corruption, ethical behavior, management, international trade, relativism, rules,

consequences, virtue

1 Introduction

Corruption and other forms of unethical behavior in business are not merely undesirable from the
standpoint of business ethics – they are prohibited by law within various domestic legal systems
throughout the world. Thus, when it comes to ethical and legal standards within one’s own country,
the playing field is relatively clearly set – we know which laws apply and we are able to ascertain
which types of behavior are either moral or immoral. However, when it comes to international
business, especially in various possible and actual international trade scenarios, it is not always clear
which set of rules apply. Even if we set aside the obvious differences between various domestic legal
systems, there remain the cultural (and hence moral) differences in the way business is conducted, and
corruption is perceived, in various parts of the world. The goal of this paper is, therefore, to examine
the moral status of those acts which would be considered corrupt in developed Western countries, but
may not be considered problematic in another part of the world. We are concerned with questions such
as: How should managers from one country react when asked to engage in bribery in another country?

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Should they abide by the mores of their country of origin, or accept the age old dictum: “When in
Rome…”?

In order to examine these questions, we will first introduce the topic by defining the field of business
ethics, settling on definitions of some of our central concepts such as corruption and bribery, and
examining how the logic of corruption and bribery may function differently in the domestic and
international case. Finally, we will address these questions with a three-level analysis, in order to see
how they might be answered from a deontological (rules), consequentialist (consequences) and virtue
ethics point of view?

2 Ethics and Business Ethics and Corruption

To begin our examination, we must first define the concepts of business ethics and corruption.
However, before we define business ethics, we must first say what we mean by the term ‘ethics’.
„Broadly speaking, ethics is the human search for the difference between good and evil.“ In this
sense, all human beings engage in ethical thinking, because everyone finds that knowledge of the
difference between good and evil is useful when conducting one’s own behavior and when observing
the behavior of others.

However, when we speak of ethics as an academic discipline, we mean something more specific than
the above definition. Namely, ethics has been a part of philosophy for some 2500 years. Historians of
philosophy commonly date the beginning of Western philosophy in the 7th and 6th centuries BC in
Ancient Greece and Asia Minor. However, the early philosophers were not yet ethicists in the strict
sense, but were rather concerned with unravelling the primordial element of all being – what they
called the arche panton. Given the dominance of such intellectual interests, the first phase of Ancient
Greek philosophy was called the cosmological phase. It started because philosophers had found that
commonsense and mythological explanations of the world (classical cosmogony and Theogony) were
no longer self-explanatory, and no longer sufficient. They had made the jump from mythos to logos,
from the mythological form of explanation to the scientific (logical, philosophical) form.

By the 5th century BC, the modes of life and social order in particular Greek city-states had become so
complex and diversified that ancient wisdom about the origin of the social order, the origin of the good
and the age old standards of behavior, could no longer be self-explanatory, and thus the philosopher
became the ethicist. If we wish to define ethics in the strict (stricta dictae) rather than in the broad
sense (late dictae) we can define it as: a philosophical discipline, that began in the 5th century BC, that
examines human behavior inasmuch as that behavior is morally relevant. It is important to stress the
term ‘morally relevant’, simply because there are many human acts and modes of behavior that are not
morally relevant. For instance, if one hits and harms a person on the street without provocation, one is
committing a morally relevant act. However, if one gets on someone’s nerves because one snores
when they sleep, the act of snoring itself is morally irrelevant, because the actor is unaware of it. Thus,
ethicists divide all human action into three categories:
• Moral acts (morally praiseworthy)
• Immoral acts (morally odious)
• Amoral acts (morally neutral)

Moral and immoral acts, that is, morally praiseworthy and morally odious acts, are those types of acts
that we can discuss in the context of philosophical ethics – they are morally relevant. On the other
hand, amoral acts are not morally relevant and thus are not the subject matter of ethical inquiry.

Now that we know what we mean by ‘ethics’, we can try to define business ethics. “Business ethics is
a study of the moral issues that arise when human beings exchange goods and services, where such

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exchanges are fundamental to our daily existence.” We should reflect on the last part of this
definition. Namely, while the rest of the definition seems to be self-explanatory, there is reason to give
further thought to the last part. There is a great need for ethical discussion about business, precisely
because business exchanges are so fundamental to our daily existence. It is also because of this that the
typical stance of authors such as Milton Friedman and Alfred Carr cannot stand. What do we mean?
Namely, their approaches to business ethics can be explained with two simple propositions:
1) the purpose of business practice should disregard communal ends;
2) the rules governing acceptable practice within business are both different and opposed to that
within personal ethics (and social ethics).

Proposition (2) is certainly more basic, so we should see how it is commonly defended. Alfred Carr
claims that this proposition can stand true because people are inclined to allow certain types of
activities to have their own moral standards, different that those of the society at large. To illustrate, he
uses his famous poker analogy, where he says:

[…] the unethical player is one who, while abiding by the letter of the rules, finds ways to put
the other players at an unfair disadvantage. Perhaps he unnerves them with loud talk. Or he
tries to get them drunk. Or he plays in cahoots with someone else at the table. Ethical poker
players frown at such tactics.
Poker’s own brand of ethics is different from the ideals of civilized human
relationships. The game calls for distrust of the other fellow. It ignores the claim of friendship.
Cunning deception and concealment of one’s strength and intentions, not kindness and open-
heartedness, are vital in poker. No one thinks any worse of poker on that account. And no one
should think any worse of the game of business because its standards of right and wrong differ
from the prevailing traditions of morality in our society.

The problem, however, for Carr’s analogy, is that poker players are completely voluntary players
(notwithstanding any gambling addictions), just as they are in any game of chance, any board game,
any sport into which they engage as a free activity. One is free to choose their business as well, but
they are not really free to choose not being in business at all, precisely because business “exchanges
are fundamental to our daily existence.“ To put it simply, if one must work, than why must one also
disregard the better part of their own moral judgement?

That should be enough to settle our attempt to define business ethics, at least for now. However, there
may be one further use in mentioning Carr’s analogy, and that is in creating a segway for a definition
of corruption. Carr insists that the element of bluffing is completely acceptable in the business mores.
However, he also claims that the unethical player (according to the customs of the society at large) is
one who abides by the letter of the rules – indicating that there is a strong difference between bluffing
and cheating, that is, breaking the rules. In fact, Carr states this difference quite picturesquely:

The man who keeps an ace up his sleeve or who marks the cards is more than unethical; he is a
crook, and can be punished as such, kicked out of the game or, in the Old West, shot.

Notwithstanding Carr’s frequently changing meaning of words such as “ethical” and “unethical”, he is
right – bluffing and cheating, though both can be called immoral, are simply not at the same level, nor
are they sanctioned in the same way once knowledge of them is disclosed. In this sense, corruption is
certainly a form of cheating, rather than a form of bluffing, and represents a very serious infringement
of moral rules and regulations. So, what is corruption? It can be defined as “the abuse of entrusted
power for private gain”. Corruption can be classified as grand, petty and political, depending on the
amounts of money lost and the sector where it occurs.” To simplify, we will focus on acts of bribery,

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and look into why it is that in certain international cases, they not only present businessmen with
moral dilemmas, but also present ethicists with ethical dilemma.

3 The ethical problem of corruption in cases of international business and trade

Before we continue, we should quickly revisit our definition of ethics and explain the difference
between ethics on one hand, and morals on the other. A system of morals is a system of beliefs and
customs that exists in any given human society. These systems can be different, and people from
different societies may disagree on the morality of any given point, decision, action, etc. When a
person does not know what to do, what course of action to choose, because of moral reasons, we can
say that they are in a moral dilemma. On the other hand, we defined ethics as a philosophical
discipline about human morality. Within this discipline there are many theories and entire theoretical
traditions in which ethicists have discussed which moral principles are more important, and which
one’s should guide human behavior. When an ethicist cannot choose which principle to apply to a
certain decision making process or action, we may say that they are in an ethical dilemma.
Now, to get back to the problem of bribing, we can say that there are no ethical dilemmas when it
comes to such acts in most of the Western world today. There are moral dilemmas, in which people
find themselves when considering whether or not to take/give a bribe, but there are no ethical
dilemmas. Namely, we know that the action is immoral. More to that, such an action is also illegal,
which often helps us make the moral decision as well. The problem arises, however, when business is
conducted across borders, that is, in international business and trade.

While a particular act may be considered as bribing in one country, the same act may be considered as
simple tipping in another country. Thus, the same act may be an unacceptable practice in one, but the
norm in another country. In light of this circumstance, how should a manager from one country behave
when doing business in another country with a different set of values? Which moral guidebook should
they use? Finally, which is more important for the manager, to conduct a successful trade within the
moral framework that is acceptable in another country, or to risk the trade by clinging to one’s
domestic beliefs and values? It is a difficult situation, but what makes it so intellectually enticing is
that the international manager/businessman/trader who finds themselves caught in it, is not merely a
person with a moral dilemma – they are at that point an ethicist with an ethical dilemma. For the sake
of clarity, we should review the question and options again.

Let’s say that X is the act of giving some money to a customs officer in order to import a product for
which the paperwork is unclear. or in order to import it more speedily.

• In country A the act X is considered a bribe (and is unacceptable).

• In country B the act X is considered a tip.
• In country C the act X is considered a bribe (but the social mores surrounding such an act are
more lax than in country A).

The question is how should a manager from country A act when trading in country B or country C?
Whether or not they should bribe the customs officer is their moral dilemma, but which country’s
moral and cultural norms they should respect in this case is their ethical dilemma.

One notable attempt at giving a permanent legal solution to this ethical dilemma is the US Foreign
Corrupt Practices Act. According to this Act the US federal government makes business actors
accountable for corrupt practices, even if such practices take place on foreign soil. Whether or not
there are legal standards and precedents for this sort of legal act, is beside the point here. Namely,
there are various accounts of legal action against corrupt practices, such as the Siemens bribery
scandal, and others. The question that concerns us is an ethical question. Should a manager from

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country A engage in bribery in country B or in country C (notwithstanding the fact that country C can
be a mere figment of the imagination)? Ethical considerations can go at least three ways – towards a
virtue, deontological, or consequentialist approach.

3.1 Virtue ethics

The oldest tradition in ethics is the tradition of virtue ethics, and it has been passed down to us from
the Ancient Greek philosophers such as Socrates, Plato, and Aristotle. In this tradition the criterion for
the assessment of the moral standing of any particular act, is not in the act itself, nor in the
consequences of the act, but are tied to the person performing the act. To put it bluntly – virtuous
people perform virtuous acts. The main question that a virtue ethicist asks is: „What kind of a person
am I supposed to be?“, rather than „What am I to do?“ The questions that inevitably follow are:
• What is virtue?
• What does it mean to be a virtuous person?
• How do we identify a virtuous person?

However we answer these questions, one thing seems clear – if we do have some definition, or at least
a vague image of what a virtuous person is like, their moral character is decided based on their moral
consistency. Namely, a morally virtuous person does not falter easily, because it is in their habit to act
morally.

Therefore, if an international businessman/trader/manager from country A is a virtuous person, and is

put into a situation where they have to consider bribing someone in country C, we are inclined to
expect that their behavior will be consistent to their behavior in country A – we will expect them not
to commit the act of bribery because they are a virtuous person. If they are a wicked person, we will
expect corrupt practices both in domestic and international cases.

3.2 Deontological ethics

The deontological tradition in ethics sets itself apart inasmuch as all of its theories claim that there is a
kind of universal moral law that serves as the final and most important criterion of how a human being
is supposed to behave in morally relevant situations. A fortiori, acting in accordance to one such
moral law is the duty (Greek deon = duty) of every human being, and our actions are judged based on
their correspondence to such a law.
In this case, we must say that disagreements about which of these universal moral laws are true, and
how they should be categorized, are possible and quite real. However, we can also observe, that
regardless of any disagreements, any deontological approach will claim that a specific set of moral
laws holds universally.

Therefore, if an international businessman/trader/manager from country A holds certain moral laws to

be true, and is put into a situation where they have to consider bribing someone in country C, we are
inclined to expect that their behavior will be consistent to their behavior in country A – we will expect
them not to commit the act of bribery, because of their adherence to a specific moral law. If they do
not adhere to any such moral law, we will expect corrupt practices both in domestic and international
cases.

It is also important to note that any appeal to the specific rules of a company being different from
those of the society at large, or to the differences between moral norms between societies, does not
change our conclusions, because it is in the nature of the deontologist to consider moral laws as
universally binding.

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3.3 Consequentialist ethics

Within the consequentialist tradition the main and only criterion of the morality of action are the
consequences, or perceived or foretold consequences of those actions. The best known of all
consequentialist theories is utilitarianism, with its famous equation where good=utility=happiness. Of
course, consequentialist theories are not as simple as that, but for the sake of argument we shall deal
with them as though they were. Ultimately, figuring out what the best possible consequences would be
is no easy task. However, what makes these theories interesting is that the insistence on consequences
opens us to argument in our particular conundrum in a way that virtue and deontological theories
cannot.

Because we can easily disagree on what are the best possible outcomes in any given situation, we can
also disagree on what a truly moral action is in cases where an international
businessman/trader/manager from country A is put into a situation where they have to consider bribing
someone in country C. They know that bribing is morally unacceptable in their own society, but if
they don't make the bribe, they may not „close the deal“, and if they continue working that way,
ultimately their company may go bankrupt, causing a number of people to lose their jobs, homes, etc.
In that case, is bribing immoral, if the opposite potentially causes even worse consequences, which
may fully be considered as immoral consequences? Whatever any particular answer to this question
may be, the important conclusion should be that consequentialist reasoning is the “true battlefield” for
these arguments, in the sense that it is only within this type of reasoning that the matter can be settled
empirically, and where a businessman/trader/manager can employ their faculties to the best of their
abilities – to calculate the best possible outcome.

3.4 Consequentialist reasoning and the Siemens bribery scandal of 2008

When we speak of the “possible” consequences of corruption we primarily refer to the negative
consequences that corrupt practices can have on a company. In regards to the society at large the
argument against corruption is far easier to make. The consequentialist point against bribery and other
corrupt practices can be made by saying that the possible outcomes of corrupt practices, once they are
disclosed, can be so detrimental to the health and overall balance sheet of a company that they can
cause all the negative business and moral effects stated earlier. Disclosed corruption scandals can also
drive positive change in companies as is shown in the case of the Siemens bribery scandal. In 2008,

US authorities fined the German engineering group Siemens a record $800m (£523m) […] to
settle a long-running bribery and corruption scandal.
Siemens also agreed to pay a fine of €395m (£354m) to settle a case in Munich, its home
town, over the failure of its former board to fulfil its supervisory duties. It was fined €201m
there [in 2007] over bribery by its former telecoms division.

[The 2008] fines, in the biggest corporate scandal in post-war Germany, bring the total cost to
Siemens so far to €2.5bn, including €850m in lawyers' and accountants' fees[…].

Such enormous fees present a relevant loss even to corporate giants such as Siemens, and give us a
fresh outlook on the functioning of the consequentialist argument. Namely, it serves as a clear case
against corrupt practices. However, the leadership at Siemens seems to have learned a valuable lesson,
and since 2008 they claim to have turned their practices towards more morally feasible strategies.
More to that, their annual reports in the years following the scandal and the change of business
practices have shown a growth in both revenue and net income, as shown in Picture 1.

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 Figure 1: Siemens Facts and Financials

Source: Löscher, P. (2012), The CEO of Siemens on Using a Scandal to Drive Change, Harvard
Business Review, November Issue.

4 Conclusion

In conclusion, we can say that the arguments against bribery and corrupted behavior in international
business, even if we take into account cultural, political, and moral differences across the globe,
converge neatly towards the classical conclusion of business ethicists – ethical business practices are
good business practices. As we have seen, out of the three great traditions in normative ethics, the
greatest theoretical struggle seems to be present in the consequentialist tradition. However, numerous
case studies in the past several decades, and we specifically name only one – the Siemens Bribery
Scandal – have shown that there is a strong consequence-based (also meaning profit-based) case to be
made when it comes to advocating corruption-free and bribery-free international business practices.

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