14 Nov 2011  Research & Ideas

Creating a Global Business Code

In the wake of corporate scandals, many companies are looking more closely at how to manage business conduct worldwide. Realizing the complexity of this issue, Harvard Business School professors Rohit Deshpandé, Lynn S. Paine, and Joshua D. Margolis decided to evaluate standards of corporate conduct around the world—one of the most daunting research projects the three faculty have undertaken. Key concepts include:

  • The researchers found broad consensus among employees at four multinational corporations regarding the actions that constitute appropriate corporate behavior.
  • However, the researchers discovered a wide divergence in opinions between how employees thought a company should behave and how their company actually behaved.
  • People at the top of the organizational hierarchy generally have a more positive view of a company's ethics than those on the front lines.

 

The turn of the 21st century has been laden with high-profile corporate scandals, prompting widespread concern about the standards of conduct followed by big business. Intrigued by the complexity of managing corporate behavior in a global context, three Harvard Business School professors decided to investigate corporate conduct standards around the world. But what started as a seemingly straightforward search soon grew into a major undertaking that required a dedicated server to process multilingual data from thousands of employees at four large global firms.

The results of their research are both heartening and disturbing.

"We were looking for 'Generally Accepted Conduct Principles.'"
—Rohit Deshpandé

The good news is that the researchers found broad consensus among the employees of the four multinationals who were asked for their opinions about appropriate corporate behavior.

"Along the lines of Generally Accepted Accounting Principles, we were looking for 'Generally Accepted Conduct Principles,' " says Rohit Deshpandé, who conducted the research along with HBS colleagues Lynn S. Paine and Joshua D. Margolis. "And we actually have them. We found them."

The bad news is that the researchers discovered a wide divergence in opinions between how respondents thought a company should behave and how their company actually behaved. Furthermore, the lower a respondent's position in the company, the greater the gap between "should" and "actual." "People at the top of the hierarchy generally have a more positive view of an organization than the people in the middle and on the frontlines," Paine says. "The top of the organization doesn't really know what the frontlines are seeing."

The professors are now working on an article that explores various uses of the corporate assessment tool that they developed for their research.

They recently sat down with HBS Working Knowledge to discuss the origins of the project, and where they plan to take it from here.

Three phases

The effort began in 2004, evolving from the School's required first-year MBA course Leadership and Corporate Accountability, which focuses on the economic, legal, and ethical responsibilities of business leaders. As they studied various business cases, the students were looking for objective criteria for making ethical decisions. "They were asking, 'What standards are we supposed to be adhering to?' " Paine recalls, adding that she heard the same question from executives who, at the time, were facing pressures from many external groups to follow various codes of corporate conduct.

In launching the Global Business Standards project, the professors aimed to provide an ethical reference point for both future and current business leaders. "We wanted a way to help companies answer these questions," Margolis says. "How do we know if we're doing well on ethics? And how do we know how we're doing relative to others?"

Phase 1 of the project looked for key similarities and differences in conduct guidelines and regulatory requirements from around the world: the Caux Round Table Principles, the Global Reporting Initiative, the UN Global Compact, the OECD Guidelines for Multinational Enterprises, the Interfaith Center on Corporate Responsibility principles, the Sarbanes-Oxley Act, various US Securities and Exchange Commission regulations, and several stock exchange listing rules, as well as the company codes of 14 top global firms.

"People at the top of the hierarchy generally have a more positive view of an organization than the people in the middle and on the front lines."
—Lynn Paine

The team noticed key differences according to who authored each code: Those written by business practitioners generally emphasized the company's financial health and employees' responsibilities to the company, while codes written by multi-sector groups (such as the UN Global Compact) emphasized companies' responsibilities to employees and the general public. But the team found eight recurring principles among all the codes, covering specific mandates such as obey the law, protect the environment, avoid cooking the books, keep promises, respect and protect human rights, and refrain from bribery. The research team created a codex of widely endorsed standards based on these similarities.

Phase 2 of the project focused on developing a survey instrument derived from the codex and centered on two crucial issues: one, the extent to which business practitioners agreed with the common precepts of the world's leading conduct codes for business; and two, the extent to which their companies actually followed these precepts—that is, the "shoulds" and the "actuals."

"We started discussing doing something empirical to test this notion of an ethical gap," Deshpandé says.

The team developed 62 questions based on the principles in their newly created codex, and then pilot-tested their survey with volunteers among executives enrolled in the Advanced Management Program at HBS. The team then refined the survey and since 2006 has administered it in 11 cohorts of AMP participants to nearly 900 executives from more than 600 companies. (The results of the AMP surveys have not yet been published since this phase of the project is ongoing.)

Phase 3 of the project aimed to address the same crucial questions as phase 2, but across a stratified sample of employees at several multinational companies. The researchers wanted the impressions of frontline workers as well as corporate executives. The goal was to develop a benchmark of real-world business conduct that practitioners could use to evaluate and track their own company's ethical performance.

And this is when the project got really complicated. For starters, there was the issue of buy-in. The researchers discovered that some companies balked at the idea of employees potentially airing shortcomings in company behavior, even if the information were to remain anonymous. In other cases, top executives agreed to participate initially, but then hesitated when lawyers voiced reservations or HR managers raised concerns about "survey fatigue" among employees. "Some of the others wanted to be able to modify the questions to suit their particular needs, but that didn't meet our research objectives," Deshpandé recalls.

"We just hung on for dear life and moved as quickly as we could."
—Joshua Margolis

Executives who did choose to participate saw the survey as a unique opportunity to gain insight into perceptions of the company's conduct among a large cross section of employees around the world, and to benchmark themselves against other leading companies. When the global financial crisis hit, the project team decided to close the survey and analyze the data gathered up to that point. In the end, phase 3 included only four companies—but all four were major multinationals, headquartered in the United States, Europe, and Japan.

In the course of research, the team inadvertently discovered some cultural truths.

"I experienced firsthand what I've learned in my research on cross-cultural management, which is that in the United States you can get a quick yes in agreeing to participate, but when you get into actual implementation, the yes may turn into a no," Paine says. "In Japan, it's likely that they'll take a long time getting to yes. But after they commit to do it, they are really engaged. It was an interesting cultural difference."

Because all four companies involved in phase 3 were multinationals, the surveys had to be translated from English into nine additional languages. "That was actually quite a task because a lot of these ethical issues are fairly nuanced, and it took a while to make sure that we had not only the correct syntactical interpretation but also the correct idiomatic interpretation," Deshpandé says.

There was also the matter of trying to complete the surveys in a short amount of time, to respect the participants' schedules and to avoid the possibility of more companies pulling out of the project. "We just hung on for dear life and moved as quickly as we could after they said yes," Margolis says.

Collecting and processing data from a 5,000-person cross section of invited respondents in each company in a matter of weeks was a bandwidth-heavy proposition. (In the end, the researchers received 7,600 responses, but they had to be ready to process up to 20,000.) "We realized we did not have the computing wherewithal to handle it because our system would crash if employees all over the world were all responding at once," Deshpandé says, explaining that the School ended up investing in a dedicated server for the project. "We were not aware of anyone else at the School engaged in a project of this magnitude—both in the sheer number of responses and in the cultural complexity."

Future phases

After publishing the final results of the multinational survey, the team plans to explore more focused research on companies headquartered in emerging markets such as Brazil, India, China, and Russia. In the meantime, the Global Business Standards project already has garnered a great deal of interest among multinational firms, including, Margolis observes, those that hesitated to participate in the initial survey.

In focusing on the perceived differences between what a company should do and what it actually does do, this research has yielded a valuable insight: firms should adopt a performance perspective on conduct as opposed to a compliance mentality, Margolis says. "It's not just about thou shalt not, it's about taking a path of continual improvement."

About the author

Carmen Nobel is senior editor of HBS Working Knowledge.

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    • Anonymous

    This sounds incredibly naive. I used to work for a global transportation company in sales. When entertaining, our clients in Asia expected our sales executives to take them to [brothels]. And they did. This was not just our company, it was virtually every large transportation company. It was an industry standard.

    Plus, the corruption is built into the very structure of corporations. They are totalitarian systems and that ruins executives and workers alike. The corruption is institutionalized.

    One thing I witnessed with executives is that they work so hard, such long hours, and are under so much pressure that they feel that they have no other life outside of work, that they are trading their life away.

    This is dangerous. It leads to them feeling entitled to anything - ... kickbacks, lavish expense account dinners, private jets, etc. I think the outrageous pay corrupts them too. The enormous power they have and the lack of a healthy work / life balance explains the dumb behavior, or at least partly.

    And dumb behavior has little to do with the ethics of individuals. The system corrupts them. How else do you explain how widespread unethically behavior is? Are all these people bad? I think not, I think it has something to do with the environment in which they work.

    The answer lays in reforming the corporation, the very structure of it, not some bolt on code. There's a lot to that, but in general what that means to me is that corporations need to become radically more democratic (decision-making, pay, ownership, transparency) and to get off the Wall Street-induced treadmill of meeting quarterly goals.

    So, bottom line, a code of conduct is going to work about as well as GAAP in making sure people do the right thing.

     
     
     
    • John
    • Van Slyke Jr., Morgan Hall Co.

    I think this article is noble in its intent.

    However, after more than 40 years on the track since graduating from HBS in 1970 and experience in more than 30 industries during the business cycles since, I simply do not think this proposal will work.

    We human beings are not all that far from the trees and caves from which we sprang. The programming that enabled the human species to survive those early times and evolve to dominate the earth are still in our brains. That programming contains powerful Darwinian adaptive drivers that cause a person to seek ways to dominate and defeat other humans in the competition for survival.

    We humans have devised systems of formal and informal laws that retrain predatory behavior. These are group norms, standards of practice, black letter laws and what we call ethics. The lattice of these restraints is what distinguishes us from animals who also must conform to Darwinian laws of the survival of the fittest and adaptation. Another term for these restraints is civilization and civilized behavior. We have adapted the ways we live, including forming groups and nations, to accept these restraints; because, they help the species survive and prosper, not because they benefit individuals in certain situations.

    Commerce also cannot take place on a sustained basis without norms and restraints. Commerce also depends on systems that facilitate the common good. Our financial systems and judicial system, which provides for the enforcement of contracts and orderly redress of grievances, are two examples. When these systems work effectively, national and world economies work, and individuals within economies are better off as a group.

    In some groups within national and world economies, ethical and civilized conduct is the norm. The very strict ethics of the world diamond trade comes to mind. In other areas, organized crime for example, norms exist, but they are antisocial or even sociopathic. But they exist to preserve order.

    In the US, and thanks to a long con by the right wing, our system of norms and standards in finance were torn down to benefit a few. The chief constraints were the repeal of Glass-Steagall and the CFMA of 2000. The first removed laws that had been enacted after the 1929 Crash preventing core banking from being corrupted by high risk non-banking activities, including investment banking and trading. The CFMA of 2000 made toxic derivatives, including credit default swaps lawful after they had been made illegal following the Crash of 1929. Then, an utterly fraudulent theories that regulation of financial markets per se (republican party dogma) was bad and that markets would regulate themselves (Greenspan, et. al) further unfettered the system of restraints in the US, including the Securities Acts, that had worked since the 1930s.

    The result was that the doors were flung wide open for Wall Street. Little stood in the way of anyone who could concoct and sell toxic securities from doing so. The opportunity to capture unimaginable profits was historical. It is no wonder that those who were in a position to do so ran, make that sprinted, into the field of opportunity and grabbed the riches. Self serving Darwinian interests of individuals was clearly at the core. But, so do was the obligation of officers, directors and key employees to enrich shareholders.

    Without any impediments world wide, the planets came into perfect alignment.

    Now we come to the central issue. We know that give a choice individuals will grab riches and exploit opportunities. We also know that those who are driven by pure self interest will never consider the common good. And, at the end of the day, the common good is what matters.

    So far as I have read or been able to tell, NO ONE ever asked whether what he or she was doing was in the national interests of the US or the world economy. NO ONE.

    Why do I go through all of this stuff? Because I simply have seen no evidence over my career, or when looking back at history, that absent restraints, individuals will consistently engage in what we think of as ethical behavior. Were it otherwise, we would not need laws. Plain and simple.

    But, there is a more practical consideration. There must be a bite and negative consequences to unethical, antisocial (which is exactly what we have seen on Wall Street), and illegal behavior. In an increasingly complex world, business people move like mercury. Pin them in one place, and they will ooze out somewhere else. Some will band together, pool their resources and work like hell to get rid of restraints and protect positions of privilege. That is what has happened in Wall Street's response to the calamity of 2008.

    So, what's the answer?

    I raised this question in my last class every term. I wrote a case, Skyhook Systems (can't remember the number), which was full of ethical and practical ambiguity. These were such that each of the principals in the case had to make decisions in the gray areas. At the time, there was no such thing as the MBA Code or some kid of World Code of conduct in business. Skyhook and I showed that even if there were, the questions came down to what individuals would do when the chips were down, including when no one was watching.

    So, my ultimate question for the section was, where does the guidance come from and what do you do in the absence of guidance? Predictably, opinions spanned the gamut, including religion, family values, standards of conduct, laws, etc., etc., etc. This is interesting, but certain systems of belief can lead a person to do why another system discourages or forbids.

    Don't believe this? Return to the diamond trade example. A person is instantly banned for life from then trade if that person lies. Very cool. But, ever hear of anyone lying in the pre-owned motor trade, or in regions where haggling is the way business is conducted?

    OK, Johnny, enough. What do you think.

    I think that ethics in business boils down to this, and it is very practical. If you are ethical, do not lie, cheat people, steal, are forthright, trustworthy, etc., there is no one in the world with whom you cannot do business. Including the worst and most criminals. Your world is wide open. But, the minute you begin to cut corners, your world begins to shrink. Keep it up and eventually, the only people who will do business with you are criminals.

    The implication here should be clear. If those on the "buy side" adopt very strict standards of behavior for those whither they do business, then the system becomes self reinforcing. Behave in an unacceptable manner, and you will suffer practical sanctions. Ex the law, we will not do business with you. Your sources of revenue or whatever is important to you are terminated.

    This leaves the issue of antisocial and sociopathic behavior unresolved. Here, I think the standard escalates to a person's social contract in his or her nation.
    The grechenfragge is this: Is what I am about to do in the national interests of my country and its people?

    When, if ever, have you heard that question asked?

    I have to get back to work.

     
     
     
    • JSeydl
    • Analyst, Wells Fargo

    John,

    Your comment is so unbelievably on point. I think it all boils down to the (Ayn Rand) illusion that if each individual were to behave radically in his or her own self-interest, then it would somehow lead to morally acceptable outcomes in the aggregate and benefit the common good. Not going to happen. Never has and never will. And yet, so many people in business and on Wall Street ascribe to objectivism as if it is the only path to prosperity.

    So what's the problem? The lack of accountability. As you noted, after the doors flung open for Wall Street, everyone sprinted toward that pot of gold with the belief that it was the moral thing to do; that it would benefit the common good. But it didn't benefit the common good at all, and it needs to be known that it didn't benefit the common good. It should be repeated over and over in the media and in classrooms that it didn't benefit the common good. And until there is a broad-based awareness that selfish actions generally lead to destructive outcomes, your vision of a world in which ethical, forthright, and trustworthy businessmen excel will never take hold.

    A strict set of standards for behavior would be helpful, but it won't do much until there are explicit and known consequences for individuals who break those standards.

     
     
     
    • BUDS M. FERNANDO
    • Founder-President, INTEGRAL TRANSFORMATION GROUP, INC.

    "A new civilization is emerging in our lives, and blind men everywhere are trying to suppress it. This new civilization brings with it new family styles, changed ways of working, loving, and living, a new economy, new political conflicts, and beyond all this is an altered consciousness as well." (Alvin and Heidi Toffler). I fully agree that these are the main reasons why people now are discontented, even the rich ones. We have overlooked that globally our current situation calls for a new paradigm, a new vision subsuming our old assumptions and values. We have failed to see that part of the need of passing through a watershed of history is the need to find fresh purposes. For the purposes that brought us thus far, by themselves alone, can no longer suffice as guiding theme for our future. This is the raison d'etre of total quality management, of educare.

     
     
     
    • Ben Huynh
    • Real Estate Agent, Champions Real Estate Group

    Great informative.Thank you.

     
     
     
    • Chris Davison
    • University Lecturer, Kingston University London

    As a business school lecturer I include a session on international business ethics for each course. Given the ethnic and nationality mix of the students, I usually explain that it is not my role to teach them what is right and wrong. I am not a priest, nor am I their parent. What I seek to explain are the various issues and ask them to consider the long-term effect on their business if some dubious practice is revealed by a whistle blower or the media. Will unethical behaviour, perhaps in some foreign country, harm or offend a stakeholder group and lead to a loss of business, fall in share price or exodous of key emplyees.

     
     
     
    • Dennis Nelson
    • Quality Lead, SFS

    More than the code (as which or whose "code" is better depending on what circumstances could be debated) is:

    A. the need for widely hailed role models, and B. the need to help individuals of different ages and cultures with two concepts:

    1. What is "in my best self interest (versus selfish interest)?" as in "this place, this moment"; or "any place in my lifetime"; or "in any situation throughout eternity and involving impacts to others" (not to mention: physical, mental, emotional or spiritual interest)?

    2. And, making the consequences and benefits of choices real to individuals who have yet to experience them personally. Having heard of regret, guilt, prison, ostracization and eternal condemnation or blessings is not the same as having experienced any of them, particularly if the benefit or penalty will impact one's own or many peoples' lifetimes, successive family generations or eternal placement.

    Arguably, if we agreed on what is in our "pure best interests for all circumstances (as opposed to momentary selfish interests which may not be in our best interests at all) and realize how to convey the concepts to all cultures and ages; than "do unto others as you would want them to do unto you" might be the only code needed, supplemented by aforementioned role models (Jesus, Ghandi, Mother Theresa, etc.) also on which agreement would be needed.

    Absent all of the above, by what standards would permit a sorting of cultural differences into "best interest" versus "non-best interest" or selfish practices as would be needed to have a worldwide code (standards)?

     
     
     
    • Kapil Kumar Sopory
    • Company Secretary, SMEC(India) Private Limited

    This is a laudable proposition for ethics and morals are basics to a clean conduct of personal and official affairs. Hence, organisations spell out their expectations from all their staff - seniors, juniors,et al - through robustly drafted codes of behavior/conduct which are duly vetted at the highest level ( Board of Directors) and got duly noted by one and all who promise to conform to what is laid down. At many companies, these are prominently displayed in premises at spots where the staff cannot avoid seeing these repeatedly. These are contained in the company websites as well. It is ironical that despite all such efforts some prominent companies behaved totally in reverse way and the actions - mostly of the top management - led to their downfall. That being so, business codes cannot be the solution for halting the corrupt practices being followed for various reasons, greed being on the top. Uniformity of business codes is not visible within any country and this needs first to be aimed at. Time is not yet ripe for uniform Global code. The basic problem in eradicating corruption is that the very many available rules, guidelines,regulations,laws, etc. are not truly enforced. Lately,in India, a well intentioned movement( to devise a Jan Lokpal Bill )by a social worker, Anna Hazare, is meeting criticisms even by the powers that matter. It seems the virus of corruption has sweet- poisoned the general public and they do not find a way out of this, in a sense this is being pleasurably welcomed. So far, improvement is a far cry. Unless exceptional punishments are awarded soon after corruption is detected, people remain confident that they need not bother as they have recourse to means whereby judgements and actions can be got deferred sine die..

     
     
     
    • Peter Carrillo
    • COO and Adjunct at NU, SA-LFTR

    "People at the top of the organizational hierarchy generally have a more positive view of a company's ethics than those on the front lines." This is always the case at the top level, they are the ones that have to deal with locals (government and vendors) to get the TNC into and operating. And how do you thingk that happens? They are certainly not going to be the ones to say their organization's ethics are not above board. I have worked in 27 different countries and my experience says 'beware the blind man who sees all.