Legal & Ethical Issues Underlying in the Operations of MNCs - Research Paper Example

CORPORATE SOCIAL RESPONSIBILITY, LEGAL AND ETHICAL ISSUES AND IMPACT OF MNC’S ON HOST COUNTRIES PART I A: Legal & Ethical issues underlying in the operations of MNC’s The World Business Council for Sustainable Development defines “corporate responsibility as the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce, their families and the local community and society at large. Corporate responsibility is achieved when a business adapts all of its practices to ensure that it operates in ways that meet, or exceeds, the ethical, legal, commercial and public expectations that society has of business.” MNCS are defines as “Enterprise operating in several countries but managed from one (home) country. Generally, any firm or group that derives a quarter of its revenue from operations outside of its home country is considered a MNC.” Multinational companies are located globally and internationally for business interest. These interests are often embedded in cost savings in form of cheaper labour, better infra structure, lesser legal procedures, regulatory framework might not include certain policies of public and consumer interest which are prevailing in other countries but are absent in the host country or even taxation. The host country allows MNC’s access to their own markets for the following reasons that it would increase employment for the locals the MNC’s would bring their technology in their market which would eventually penetrate in the local market and benefit the local manufacturers, or the product that the MNC is providing is currently absent in the local market. Apparently, the host-MNC relationship is a win-win situation. However, this is just the tip of the ice berg. Any case studies of the past have shown that MNC’s in their zest for money making ignore their corporate social responsibility and trespass the fine regulatory lines drawn by the regulations of their parent company. In many cases, it has been seen that the MNC’s milk the host country and flee as soon as the market conditions are not as lucrative as before. Moreover, the benefits to the host country as were perceived can not be seen. B: Importance of Corporate Social responsibility to my Organization Like any organization, my organization also tends to look at foreign markets with keen interest. High competition and high manufacturing costs in USA are enough to drive any profit seeking concern to a third world market like Pakistan. Another factor in favour of his decision is the fact that many of our competitors like Cummins CNG buses, and Foton have shifted their manufacturing to Pakistan. Likewise many of our trade partners from allied industries like CNG/LPG cylinder manufacturers, valve manufacturers and kit manufacturers like Landi Renzo from Italy, BRC from Italy and Endress & Hauser from Switzerland have shifted operations & manufacturing to Pakistan. Considering this, our management has been contemplating the option of shifting manufacturing to Pakistan since the cost savings in terms on cheap labour, cheap utilities and lenient taxation and other investment friendly government policies are very viable for us. However, before making such a move the case study of NIKE keeps coming to my mind. “So Nike success story is not based on good name and advertising alone but also attached to it is the tears of tortured workers and child labor.” ( http://www.american.edu/TED/nike.htm). This and other quotes like these are enough to bring down the image and brand name of any company, subsequently leading to losing out on brand equity. As stated in the same journal, “The basic truth about Nike is that its only real strength is its good name. Nike rules because of all the good things people associate with the company: sharp ads, Michael Jordan, Tiger Woods, little Penny, and Michael Jordan again. If "beaten workers" and "child labor" get added to that list, then Nikes greatest asset will be lost.” Today, Nike may still be a well know sports goods manufacturer but its name is marred by the term “child labour” and the mention of Nike comes side by side with the term “child labour”. The case for child labour is defended by Nike supporters by taking up the stance that Nike helps the children and their families stay above the poverty line and thus benefits the host country. A columnist Stephen Chapman from Libertarian newspaper argues that "But why is it unconscionable for a poor country to allow child labor? Pakistan has a per-capita income of $1,900 per year - meaning that the typical person subsists on barely $5 per day. Is it a a revelation - or a crime - that some parents willingly send their children off to work in a factory to survive? Is it cruel for Nike to give them the chance?" (source: http://www.raincity.com/~williamf/words96.html) C: Importance to Contemporary Society: Child Labor is more of a human rights issue. It is a question mark on the company’s corporate social responsibility and worst is that it is encouraging companies to engage in more and more child labour which eventually leads the parents to increase the birth rate and the problem gets from bad to worst. Also, it can be argued that these third world countries might have a democratic government some day which might stand to question the Americans on their ethics as a nation? Since the human rights violators are US based companies. This might strain the foreign relations of USA and Pakistan. On the Flip side, Nike has been \facing charges from the activists since 1996. As a company, we would definitely want higher margins but definitely not at the stake of our brand name and reputation and definitely nit by having such charges against us. PART II: FACTS A: Organizational Background: Increasingly in the past few years, and in view of the growth we have achieved in the transition business, we are now looking ahead to reaping a higher percentage of margins as well as investing in the assets of the company Moreover, we would like to enter into foreign markets. The reason for this is that due to the fuel price hike world over and the environmental concerns over pollution, people have started shifting to public transportation and prefer traveling via CNG buses. Likewise, following the example of Argentina, Brazil and Pakistan, the governments of many countries are encouraging the use of CNG buses. These countries include India and Bangladesh. Pakistan however, remains our first choice for investing in CNG bus transit business for the reasons that it has government policies that are very investment friendly and infra structure for CNG sector has been fully developed. Moreover gas reserves exist within the country and with chances of IPI gas pipeline deal being sealed; gas can be expected to be plentiful in future. Considering this, the investment climate in this sector in Pakistan is very lucrative. However, being a manufacturing concern, “child labour” or “bonded labour”, would also be one of the problems that we may be facing. The vehicle assembly lines are such that they follow line mechanism and age does not restrict the operations of such these. For e.g. he same work can be performed by a 65 year old as can be by a teenager. The teenager can be paid lesser wages as compared to the adult. On the other hand, “bonded labour” is a term more concerned with the working environment conditions and the nature of work. For this purpose, policies have been laid down to prevent labour exploitation and work force management , but these policies are not such that they can not be trespassed. B: Legal and Ethical Problems arising from this Situation Some of the top most legal & ethical problems our company might be facing are: The greatest issue we might face is that of language problem. Since our own employees are not fluent in the local language i.e. Urdu, we would need to employ locals with the necessary expertise in managerial and supervisory roles. 1. What checks and balances can be set up to ensure that these new employees adhere to the work environment and labour laws of the company? 2. How can it be ensured that workers do not “willingly” work overtime for overtime income? 3. How can work shifts be designed to ensure that access to basic facilities like food and toilets can be maximized? 4. What disciplinarian actions can be taken against workforce that is violating set rules and regulations that are in accordance with the international labour laws? 5. We would need to be aware of the local Industrial relations laws and other laws governing the labour management issues 6. We would need to find out what the legal limit of working hours is in the country. If there is no legal limit, should we expedite the current 200 work hours a year work limit being practiced in USA to Pakistan? 7. Management of sub contractors would be an issue since we need to sub-contract quite a few of our operations. How can it be ensured that our sub contractors would also follow our labour and ethical policies along with our quality policies? 8. And last but not the least; our problem would be to determine wages. What wages should be paid to workforce? Should they be the standard that we pay in our facilities in USA or should they be what is paid in Pakistan which is somewhere around PKR 6000 a month? If, to maximize gains, we decide to pay the amount that is being paid in Pakistan, would we be violating our own policies? And if we decide to go ahead with our pay scheme in USA, then would it be financially viable to shift manufacturing to Pakistan? C:Opportunities: Even though the above mentioned issues need to be addressed, opportunities exist. The greatest opportunity for us would be presence of a port. Pakistan has a central location to all other South Asian countries and due to this transportation of consignments is easy. Freight costs are also significantly reduced. The education levels in urban cities as increased due to which there is a greater availability of highly skilled workforce that can be utilized at pay structures which are below the world average. Even though the labor wages by the local government have been increased to PKR 6000 a month, these still remain low in the region. Considering the above opportunities, it can be said hat Pakistan would remain a good option for us even if we implement all of our labour, quality and work environment policies. PART III: ANALYSIS A. Laws Applying to our Situation: The Employment of Children Act 1991 clearly states that no child below the age of 14 shall be permitted to work or be employed in any establishment in the country. Similarly, articles 11, 35 and 37 of the Pakistani constitution also prohibit child labor. Furthermore the U.S constitution states that child labor is an illegal and inhumane practice and any U.S. company found guilty practicing and encouraging it will be prosecuted. GATT and WTO prohibit member nations, like the United States, from discriminating against the importation of goods made by children. US attorney Natacha Thys, of the International Labor Rights Fund (ILRF), spoke about the cases her organization is involved in that could set a precedent that companies can be held accountable if they engage, even indirectly, in human rights violations. Thys explained the Alien Tort Claims Act (ATCA) is the legislation being used as the basis for some of these legal claims. This law gives US courts jurisdiction to hear cases of human rights abuses and violations of customary international law (prohibitions against torture, slavery) occurring anywhere in the world as long as the US courts have jurisdiction over the company. According to the Pakistani Laws, my company would be subject to complying with the following laws: Article 11 of the Constitution prohibits all forms of slavery, forced labour and child labour; • Article 17 provides for a fundamental right to exercise the freedom of association and the right to form unions; • Article 18 proscribes the right of its citizens to enter upon any lawful profession or occupation and to conduct any lawful trade or business; • Article 25 lays down the right to equality before the law and prohibition of discrimination on the grounds of sex alone; • Article 37(e) makes provision for securing just and humane conditions of work, ensuring that children and women are not employed in vocations unsuited to their age or sex, and for maternity benefits for women in employment. (Source-http://www.labourunity.org/labourlaws.htm) B. Impact of Laws on my Organization As mentioned earlier and as seen in Nikes case, in Pakistan, the human rights laws are in place but importance has not been attached to them. Thus, they exist but without implementation. However, this might change in future. With the judiciary issue being blown out of proportion and eventually leading to the impeachment of General Musharraf, this is bound to change. With a stronger judiciary at work, it can be expected that activists and judiciary in Pakistan may take up human rights violations as a serious issue. So, apparently, things are not as lucrative as before. As mentioned earlier, we would not like to start off with a bad label next to our brand name of “Child Labor’, ‘Bonded Labor” or bad labour practices. For this purpose we will be starting off by paying the median wage rates. By median, we mean that they would be above Pakistan’s industry average, but below the US standards. Also we will ensure to comply with all legal procedures. This will raise our costs and erode our margins, but planning would include this which means we might cut down a little on our advertising budgets to provide higher salaries. Unionism is Pakistan is very strong. This includes labour unions as well as trade unions. According to both US & Pakistani law, unions can not be prevented. Due to this it can be expected that an industrial relations manager would need to be hired to listen to the grievances of the laborers and find solutions. Article 25 of the Pakistani Law, which relates to discrimination, is something which worries us as a company. Knowing the pro-Islamist culture of Pakistan and the additional responsibility that comes with hiring women and shift hours, we would not be keen on employing women in shifts. This would be an issue with us. However, another company manufacturing Masala, is said to have all male workers in their factory, so I suppose this is an issue that can be worked out with the authorities. C: Models of Business Ethics that are Applicable: Business Ethics Problem arises when there is a gap between the actual business ethics of a company and the society’s expectations of business ethics. The various ethical issues may include Employee-employer relations, employer-employee relations, company-customer relations, company –shareholder relations and company-community relations. The three models of ethical management include immoral management, moral management and amoral management. Also, law is the minimum level of ethics. Thus, a company can be performing according to law but may be in ethical in its decisions. As a company we would like to be a moral management company. The morals of the company come from the morals of the “leaders’ within the company. Thus, it is crucial to recruit managers and other people in leadership positions who belong to the same region and are well aware of the norms, religion, culture and the unsaid morals and ethics of this part of the world. Considering this we would follow the old British rule of thumb to recruit local managers who are well aware of the customs of the region. D: Viewpoint of Others on this Subject “Ethics in Practice”, an e journal published by the Hong Kong Ethics Development Centre states in its fifth edition, “I realize that this analysis may seem counter-intuitive. Suppose the home country norms vary widely from host country norms. Wouldnt a MNC be likely to fail if it practiced home country norms that were at wide variance with those in the host country? Quite possibly. Customers may not buy their product” Laczniak and Naor are of the view “The laws of economically developed countries generally define the lowest common denominator of acceptable behavior for operations in those domestic markets. In an underdeveloped country or a developing country, it would be the actual degree of enforcement of the law that would, in practice, determine the lower limits of permissible behavior.” Kristopher Blanchard, North Central University, in his work Managing Interdependence-social Responsibility states raises the question that how is a manager operating abroad to know what is the “right” decision when faced with questionable or unfamiliar circumstances of doing business? Here is a suggested sequence: i. Consult the laws of both the home and the host countries ii. Consult the International Codes of Conduct for MNEs (as shown in text Exhibit 2-2) iii. Consult the company’s code of ethics iv. Consult your superiors v. Use your own moral code of ethics vi. Follow your own conscience PART IV: ACTION A. What is the best legal solution to the organizational issues and why? Issue #1 Dealing with Child Labour: We propose to check the National Identification Cards (NIC) of all children workers to ensure that no one below the 18 year age limit is working in the factories. For this purpose, we will keep contracts which are at least quarterly in tenure rather than the shift system currently operating in Pakistan according to which labourers are hired on daily basis on daily wages. Issue # 2: Dealing with Overtime: Shift after shift operations will be watched closely and workers would be encouraged to take the next shift off by offering lesser wages for those laborers who are continuing their shifts. Issue# 3: Dealing with Bad Labour Practices: Media and other auditing firms would be provided open access to our plants to see and find out any discrepancies in our work environment. Issue # 4: dealing with Sub-contractors: Subcontractors tend to fall into bad labour practices if they are offered less margins. Once they are paid highly and trained in our policies, they will have less incentive to indulge in bad labour practices. Business with any sub contractor indulging in bad labour practices will be terminated. Issue #b5. Dealing with Discrimination: Prior meetings with the local authorities will be conducted to obtain an NOC on basis of work nature to discourage employment of women on plant. Women will be considered for employment in administration, HR and other departments with work nature which is not very grueling. B. The best ethical solution to the organizational issue Considering the fact that child labour feeds many families, if wee need to recruit children below 18, we will ensure that they are provided education at work. For this purpose, we would arrange to have a primary and secondary school on our site. The proposal of this would be discussed with the NGOS and United Nation’s relevant organizations. (UNDP) C. What legal and ethical benefits do we expect? Are there legal and/or ethical pitfalls to be avoided or managed? The greatest benefit to be expected is the value that we will be adding on to our brand name. Consumers today are aware and the media penetration is very high. A company might be performing very well at the Stock exchange but one such scandal like the one experienced by NIKE is enough to tarnish the name. Further campaigns will eventually reduce the business. A good example is the recent boycott of Danish products by some nations which dug a hole in the Danish exports. The greatest benefit derived would be the image of a responsible company working for the welfare of the host country. PART V: PERSONAL REFLECTIONS Foreign markets are the dream of any business. However, in the past two decades quite a few MNC’s have behaved in a ways in which the ethics and the corporate social responsibility of all MNCS are being questioned. These MNC’s include Shell, Mc Donalds, Tesco and Nike. Considering these issues, it will not be surprising if laws are passed in the parliaments of various democracies on corporate social responsibility limiting the role of MNC’s. As a person, I believe that MNC’s should adopt the same code of ethics in the host country as they have in the parent country. Moreover, these codes should be refined to suit the local culture. REFERENCES 1. The Impact of Foreign Investment on Host Countries:A Review of the Empirical Evidence, Magnus Blomström 2. http://www.irinnews.org/report.asp?ReportID=43644&SelectRegion=Central_Asia&SelectCountry=PAKISTAN 3. http://www.krysstal.com/display_acts.php?article=2001_childlabour 4. http://www.american.edu/TED/nike.htm 5. http://www.corporate-responsibility.com.au/default.asp 6. http://www.zianet.com/boje/tamara/issues/volume_1/issue_1_2/2Banfe_Govekar_Miceli_Woods.htm 7. http://www.nber.org/reporter/winter06/blonigen.html 8. http://www.cleanclothes.org/news/newsletter16-09.htm 9. http://www.labourunity.org/labourlaws.htm 10. http://ethisphere.com/wme2008/ 11. http://www.businessdictionary.com/definition/multinational-corporation-MNC.html 12. Business Ethics Fundamentals, MGT 3800,Chapter 6 13. Multinational Corporations and the Ethics of Global Responsibility: Problems and Possibilities,Mahmood Monshipouri, Claude E. Welch, Jr., Evan T. Kennedy,Human Rights Quarterly, 25(4), Nov 2003, pp. 965-989(http://www.iadb.org/Etica/Documentos/abs_mon_multi-i.doc) 14. http://www.icac.org.hk/hkedc/ethics/eip/edc005_e.htm Read More