What Do We Mean By Business Ethics?

By Jeffrey M. Kaplan

While this is back-to-school week for some, I’m now back from school, having just finished teaching a business ethics course for executive MBA students.

The first question raised in this class – “What do we mean by business ethics?” - may be of interest not only to students but also to organizations and their advisors seeking to address the recommendations of the OECD anti-bribery working group that companies should “develop and adopt adequate internal controls, ethics and compliance programmes…” (emphasis added).

In the most traditional sense, business ethics is generally based on several schools of philosophy, particularly Aristotle’s virtue ethics, Bentham’s utilitarianism and Kant’s deontology.  But other disciplines are relevant, too – particularly when one views ethics as not only providing a framework for identifying what is right and wrong but also for ensuring that individuals act in desirable ways based upon such knowledge.

One of these disciplines is psychology. In his truly fascinating book Experiments in Ethics (Harvard 2008), Anthony Appiah recounts how much philosophy has become unmoored from a practical understanding of human nature, but how this gap is now being closed by, among other things, behavioral science. Both that book and the equally important Blind Spots by Max Bazerman and Ann Tenbrunsel (Princeton 2011) describe countless behaviorist experiments showing the startlingly small role that pure rational thought often plays in shaping real-life ethical decision making.

There are three dimensions to how this behavioral ethics knowledge is relevant to MBA students - and to others in the business world. First, it can help them be alert to a wide range of possible ethical pitfalls in their individual careers. Second, it can aid managers in ensuring that their organizations act ethically. Third, behavioral ethics learning can make them more effective citizens (a word used broadly here), an increasingly important role given the many ills the world now faces requiring the attention of business people.

The discipline of management itself should also play an important role in business ethics instruction, particularly regarding the second of the above three dimensions (ensuring that one’s organization acts ethically). Although compliance programs arise from legal standards, at bottom their design and operation are based on the application of sound management practices to the particular challenge of promoting lawful and ethical conduct by organizations. Bringing management skills and knowledge to the field of ethics – for instance, as reflected in the recent UN human rights due diligence standards – is something that business students (and business persons) can do well.

Aspects of economics are important to business ethics, too, particularly to understanding how incentives can promote both ethical and unethical behavior. While this has always been true, the unprecedented attention in the past few years to moral-hazard based risks is helping bring economics into the business ethics mainstream. Not surprisingly, given the training that they often have in economics, many MBA students show a keen interest in and facility for this aspect of business ethics. (For more on this see The First Word On Compliance Incentives.)

A central feature of anthropology is, of course, the study of human culture, and cultures can play an immensely important role in shaping ethics-related outcomes. In my class, students are asked to consider the impact of various types of business-related cultures – organizational, industry and geographic – on ethics. The ability to do so outside the class can be essential to safeguarding the interests of individuals and their companies.

Then there is the discipline of law itself. Much in the same way that philosophy and psychology were torn asunder, so many have sought to present law as a force alien to ethics. While this might be a fair criticism of a purely mechanistic approach to law, it fails to account for the extent to which law is intended to embody the ethical judgments of communities. Appreciating this can enrich a businessperson’s understanding of both law and ethics.

Finally, while all of these fields of knowledge are relevant to teaching ethics in business school, they can be equally important to providing ethics training to senior managers and boards. And, such individuals may indeed enjoy going “back to school.”

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Jeffrey M. Kaplan, a partner in the Princeton, New Jersey office of Kaplan & Walker LLP, has practiced in the compliance law field since the early 1990’s. He serves as Adjunct Professor of Business Ethics at NYU’s Stern School of Business. He can be contacted here.

The Case For Optimism

Will ours be the time when international public corruption is finally tossed into the garbage can of history? There are plenty of reasons to think so.

Only five years ago, even thoughtful people believed  overseas bribery was a victimless crime -- a harmless agreement between two consulting adults.

Happily, that idea is largely gone, replaced by an awareness, still growing, that graft's victims can be counted in the billions.

What changed attitudes? Not one thing but many.

Respected NGOs are now speaking for the victims. The stories aren't pleasant (think 'Blood Diamond'), but the links between graft and human rights abuses are now in plain sight. Global Witness' briefing on illegal and exploitive logging, as one example among many, is heartbreaking.

Though the damage from corruption can be seen and felt, it's hard to measure, putting it in the realm of 'soft' science. Still, some brave academics have taken up the cause. One is Elizabeth Spahn at New England Law School ("The impact of a self-reinforcing cycle of bribes, regulations and deteriorating quality control is not limited to consumer purchases however. Even the truly wealthy consume air and water. Systemic bribery has a negative impact on environmental regulation.")

The U.N. and OECD are promoting the links between compliance, ethics, and human rights. It's one of the most important new trends of corporate citizenship.

Ordinary people have more power to fight corruption than at any time in history. There's easy access to online public and private hotlines. Cell phones record 'secret' shakedowns in the tax office, snap photos of cash-grabbing clerks, and capture videos of corrupt cops and judges that might appear on YouTube an hour later.

Through Facebook, victims find each other and lock arms. And with Twitter, a hundred thousand people can be in the streets by noon to march against sleaze.

No wonder anti-corruption enforcement is spreading beyond the United States. The U.K. is now on the front lines, Canada has joined the fight, the G-7 have more attention on enforcement than ever, and the OECD is pushing all of its members to get on board.

Sure, there's lots of work ahead. But these really are hopeful times.

Will Nigeria Take Another Bite?

By Marcus Cohen, David Elesinmogun & Obumneme Egwuatu

The penalty for paying bribes in Nigeria may increase following demands from a Nigerian NGO that the Nigerian government seek its share of the recent anti-graft bounty.  Maybe…

Multi-million dollar FCPA settlements based on bribery of Nigerian government officials have become commonplace in recent years, but only a tiny fraction of those penalty dollars are assessed by the Nigerian government.  In fact, the total amount of fines levied by the Economic and Financial Crimes Commission (EFCC), the body charged with prosecuting corruption cases in Nigeria, equates to less that 4% of the total penalties fines imposed by the United States, Germany, and the United Kingdom. (See the “Corruption Penalty Comparison Chart” below.) 

But should corporations that have already doled out tens of millions to the U.S. Department of Justice for violations of the Foreign Corrupt Practices Act (FCPA) really be concerned that the EFCC is going to take another bite?

The Nigerian people are the most direct victims of corrupt payments by foreign corporations.  In a recent statement, the Socio-Economic Rights and Accountability Project (SERAP), a non-profit Nigerian NGO, noted that bribery by foreign corporations “has caused immense damage and devastation to the economy and to institutions of governance, and directly undermined the full and effective enjoyment of internationally recognized human rights, especially economic, social and cultural rights by the citizens.

To redress this disparity, SERAP petitioned the EFCC on August 2 to ensure that multinational corporations pay commensurate damages to the Nigerian people for the foreign bribery committed in the country.  Specifically, SERAP’s petition demands that the EFCC “urgently take steps to seek adequate damages and compensation against multinational corporations who have been found guilty in the US of committing foreign bribery in Nigeria and to take all necessary steps to effectively bring to justice the Nigerian officials complicit in such cases of bribery.”  However, fears that the EFCC will suddenly seek millions in penalties from corporations that have already settled with the DOJ may be premature.

Apart from the public remonstrations of SERAP, there has been little outcry in Nigeria for bribery penalty parity.  The issue has gained little attention from either Nigerian government officials or in the press; which may be based on shrewd political and economic considerations.  Many Nigerians, both those serving in public office as well as those on the street, may not want to pursue multinational corporations already dinged for FCPA violations.  The underlying concern being that additional penalty demands by the EFCC may scare off foreign companies willing to invest in Nigeria.  Halliburton and Siemens continue to have a significant business presence in Nigeria, notwithstanding imposition of colossal penalties by the U.S, Germany, and Nigeria.  However, other multinational corporations may not stomach additional fines.

SERAP eloquently avers that the penalty disparity violates the fundamental provisions of the United Nations Convention against Corruption, ratified by Nigeria seven years ago.  Article 35 of the Convention provides that persons who have suffered damage as a result of an act of corruption have the right to adequate damages and compensation.  However, simply because the Nigerian government has the right to seek damages does not equate to a political wiliness to do so.  Further penalization of multinational companies may lead to corporate flight – the resulting loss of jobs ultimately, if unintentionally, punishing the Nigerian people.

Corruption Penalty Comparison Chart

Multinational Corp	Non-Nigerian Penalty Amt.	Nigerian Penalty Amt.
Siemens AG	$800M (US) & €796M (DE)	$46M
Halliburton/KBR	$727M (US)	$35M
Snamprogetti/ENI SpA	$365M (US)	$32.5M
JGC Corp	$218.8M (US)	$28.5M
Royal Dutch Shell	$48.2M (US)	$10M
Technip SA	$338M (US)	$0
Panalpina	$82M (US)	$0
Pride International	$56.1M (US)	$0
Willbros International	$41M (US)	$0
Tidewater Inc	$20.6M (US)	$0
Shell Nigerian Exploration	$18M (US)	$0
MW Kellogg (KBR)	£7M (UK)	$0
Noble Corp	$8.1M (US)	$0
Total Penalty Amt:	$3.87B	$152M

Marcus Cohen is of Counsel to Sandler, Travis & Rosenberg in Washington DC, where he advises clients on compliance with U.S. and international anti-corruption measures and export controls and sanctions laws. He can be reached at mcohen@strtrade.com.

David Elesinmogun and Obumneme Egwuatu are founding partners of Elesinmogun & Egwuatu, with offices in Lagos, Nigeria, and Washington DC. Elesinmogun's practice focuses on advising both Nigerian and international corporations in cross-border commercial ventures, banking, criminal law, securities regulation, environmental law and immigration. Egwuatu concentrates his practice on advising multinational corporations on investing in Nigeria and Africa and compliance with both Nigerian and U.S. law. They can be reached, respectively, at de@eandelawyers.com and oe@eandelawyers.com.

Military Equipment Maker Pays $16 Million In Settlement

Armor Holdings Inc., a military and law enforcement equipment company formerly listed on the NYSE and now owned by BAE Systems, will pay $16 million to resolve FCPA violations arising from bribes to secure U.N. contracts and covering the payments up.

Armor will pay the DOJ a criminal penalty of $10.3 million and will disgorge $5.7 million to the SEC.

A former executive at Armor, Jonathan Spiller, was indicted with the 22 shot-show defendants. He pleaded guilty this year to conspiracy to violate the FCPA. He hasn't been sentenced.

[Editor's Note: The SHOT Show is owned by the National Shooting Sports Foundation (NSSF) and is a registered trademark of the NSSF. The SHOT Show has no connection with the arrests made by the FBI in Las Vegas in January 0f 2010. No arrests were made at the SHOT Show and neither the SHOT Show nor the NSSF are in any way involved in the matter.]

An Armor subsidiary, the DOJ said, paid more than $200,000 in commissions to a third-party sales agent, knowing some would be used to bribe a U.N. procurement official. Armor won U.N. contracts for body armor worth $6 million.  

Armor falsely recorded the commission payments on its books and records. And it kept off its books and records $4.4 million in additional payments to agents and other third-party intermediaries.

The offenses occurred from 2001 to 2006.

In 2007, BAE Systems of the U.K. bought Armor, which was formerly based in Jacksonville, Florida.

BAE pleaded guilty last year to conspiring to defraud the United States by impairing and impeding its lawful functions, to make false statements about its Foreign Corrupt Practices Act compliance program, and to violate the Arms Export Control Act and International Traffic in Arms Regulations. It was sentenced to pay a $400 million criminal fine, placing it third on our top ten list.

In today's settlement of the Armor Holdings case, the DOJ credited BAE for its new compliance measures.

"The Justice Department’s agreement recognizes Armor’s complete voluntary disclosure of the conduct," the DOJ said, "its internal investigation and cooperation with the department and the SEC; the fact that the conduct took place prior to the acquisition of Armor by BAE; and Armor’s extensive remedial efforts undertaken before and after its acquisition by BAE."

The DOJ gave Armor a non-prosecution agreement and didn't require it to retain a corporate monitor.

View the DOJ's July 13, 2011 release here.

View the SEC's Litigation Release No. 22037 and Accounting and Auditing Enforcement Release No. 3302 (both dated July 13, 2011) in Securities and Exchange Commission v. Armor Holdings, Inc., Case No. 1:11-cv-01271(D. D.C.)(ESH) (filed July 13, 2011) here.

Download the SEC's civil complaint against Amor Holdings here.

Respecting Human Rights Through Due Diligence

The UN's top expert on business and human rights, Harvard Professor John Ruggie. Photo courtesy of the European ParliamentBy John Ruggie

I’d like to elaborate on Jeff Kaplan’s post on March 31, which discussed the role of Compliance and Ethics Officers in enabling their companies to respect human rights.

As custodians of the values that animate the best and most sustainable business conduct, they may find parallels and support for their work in human rights due diligence, a robust human rights risk management process for business that has been developed under my UN mandate as Special Representative to the Secretary-General for Business and Human Rights. Let me explain.

In March, I released the Guiding Principles for Business and Human Rights. They provide the first authoritative global standard for preventing and addressing the risk of adverse human rights impacts linked to business activity. The UN Human Rights Council will consider formal endorsement in June 2011.

The Guiding Principles are the product of six years of research and extensive consultations involving governments, companies, business associations, civil society, affected individuals and groups, investors and others. They outline how States and businesses should implement the UN “Protect, Respect and Remedy” Framework in order to better manage business and human rights challenges. That Framework, which I proposed in 2008, was unanimously welcomed by the Council at the time, and has since enjoyed extensive global uptake by all stakeholder groups and other international initiatives, including ISO 26000.

The Principles are organized under the UN Framework’s three pillars:

• The State Duty to Protect against human rights abuses by third parties, including business enterprises, through appropriate policies, regulation, and adjudication.

• The Corporate Responsibility to Respect human rights, which means that business enterprises should act with due diligence to avoid infringing on the rights of others and address adverse impacts with which they are involved.

• The need for greater Access to Remedy for victims of business-related abuse, both judicial and non-judicial.

The scope of a company’s responsibility to respect human rights—the Framework’s second pillar --includes avoiding adverse human rights impacts through the company’s direct operations and relationships. The due diligence necessary to meet that responsibility has the hallmarks of other business risk management systems with which the readers of this blog may be familiar; such as safety, environment, and anticorruption.

What is unique about the due diligence needed to respect human rights is its perspective. It is about respecting the dignity and value of all people. It asks companies to focus on adverse impacts not just on the company’s bottom line, but also on individuals and society. This approach resonates with the codes of conduct of the best-run global companies.

Respecting human rights requires engagement and dialogue. Therefore, the third pillar of the Framework—the need for greater access to remedy—includes a call for companies to supplement familiar whistleblower systems with grievance mechanisms that encourage employees, communities, and other affected stakeholders to raise any concerns they have in order to resolve them early and effectively through direct discussion with the company--before they accumulate, concretize, and erupt into litigation and public campaigns.

As companies worldwide begin to manage their human rights risks through due diligence, the expertise and experience of those in companies who already manage systems to prevent and mitigate harmful business impacts will become a very important resource for companies.

John Ruggie, the Berthold Beitz Professor in Human Rights and International Affairs at the Kennedy School of Government at Harvard University and an Affiliated Professor in International Legal Studies at Harvard Law School, is the Special Representative for the UN Secretary General on Business and Human Rights.