It seems to me that the first ethical principle of business is to survive, to maximize the long-term value of the firm to its owners. Without survival, the subject of business ethics becomes irrelevant. Long-term survival can only be achieved by focusing on profit (the lifeblood of a business), by being a good corporate citizen, by making choices that benefit customers and other stakeholders, and by practicing ordinary decency and building trust through honesty and fairness. Unfortunately, the public often embraces an anti-business mentality and blindly accepts that any pursuit of profit is evil. In fact, the profit motive is a highly moral imperative for success and economic well-being. Long-term profitability requires honesty and integrity practicing fraud destroys a company's value, as has been amply demonstrated by the recent examples of Enron, WorldCom, Global Crossing, and Arthur Anderson. To succeed, businesses must offer high-quality products, not shoddy goods they must maintain a reputation for fair dealing and maintain accurate accounting statements otherwise, they loose the trust of the bankers, the credit rating agencies, and the investing public. Even suspicions of wrongdoing can destroy a company's stock price and, therefore, its ability to borrow money. Creating wealth requires offering goods and services that satisfy customers' demand for value. The profit motive has given us cheaper, safer, and better products. The vast majority of business leadersâ€”just like their employeesâ€”strive to earn honest profits as they work for their own rational self-interest. They should be rewarded for their success, not condemned. Defend the profit motive and your rights as a businessperson and do not accept unearned guilt.
My ultimate standard of value is my life on Earth lived at a high level of self-actualization (as opposed to basic biological subsistence). Based on that standard, my individual code of conduct provides a good level of comfort without contradictions. However, I accept that my code may not be "right" for you, and quite likely, your code will not be "right" for me. The debates about what should constitute the proper absolute moral code for all human beings will go on indefinitely because we do not all share the same cultural and ethical values, and most people are not yet ready to accept that their own life on Earth should be the ultimate moral standard of value.5
Cultural norms often determine whether a particular behavior is considered bribery and corruption, or simply customary practice in appreciation for customer loyalty and cooperation. I have listened to many self-righteous Western business people condemn behavior that on the surface is essentially the same as North American practices, except the rewards may be in the form of a gift or money rather than entertainment at sporting events. The difference between a gratuity and a bribe is often ambiguous, and one's judgment usually depends on the cultural perspective of the beholder.
5. In fact, many believe death and martyrdom represent a higher level of exaltation than life on Earth. I diagnose that belief to be an illness caused by the epidemic of mysticism throughout the world. Mysticism is the belief in intuitive spiritual revelation, the belief that personal communication or union with some divine entity is achieved through intuition, faith, ecstasy, or sudden insight. All organized religions would fall under that definition, as well as the many forms of superstition, tribalism, and witchcraft still prevalent throughout the world.
Globalization produced some lively debates about corporate ethics. For example, is it sufficient that businesses meet local laws regarding safety and environmental standards if they are lower than are those in more developed countries? The explosion at the Union Carbide plant in Bhopal, India, in 1984, killed about 8,000 people and brought that environmental issue to the attention of the world community. Subsequently, most multinational companies (including Caterpillar Inc.) have established minimum standards for health, safety, and the environment that exceed the local requirements.
Â The reason that a person should exercise integrity is the same reason that he needs to adhere to rational principles in the first place. Irrational action works against his life. Only the consistent loyalty to rational principles that integrity prescribes enables a person to reap the rewards of the other virtues and to achieve objective values. Breaches of integrity defeat a person's purpose of achieving his happiness.1Â Tara Smith
Take China as an example. Caterpillar sold its first product to China in 1975, and shortly thereafter, I roamed the country helping to provide service support to our customers. Local production began in the early 1990s, and subsequently, several joint ventures and wholly owned facilities were established in China, together with a network of independent dealers. During the past few years leading up to 2006, exports to China increased 40 percent and, as a result, some 5,000 new production jobs were created in the United States, making a major contribution to the health and strength of the U.S. economy.3
I believe that each of us should strive to develop our own individual personal code of conduct based on what we identify as our own individual ultimate standard of value. Moreover, our personal code should go well beyond just gratuities, bribes, and corruption. It should include important issues, such as the proper role of business and the proper role of government, as well as corporate and individual social responsibility.
Occasionally, difficulties arose during normal commercial transactions and routine dealings with public officials. For example, our Chinese employees from Hong Kong periodically traveled to Indonesia to work with the local dealer. The longstanding antagonism of the Indonesians toward the Chinese periodically resulted in deliberate harassment of our Hong Kong employees. Occasionally, while passing through immigration at the airport in Jakarta in the 1980s, their passports would mysteriously disappear until a $50 gratuity was paid to expedite them through the immigration approval process. Consequently, I approved expense reports that claimed "Gratuities to Indonesian immigration officialsâ€”$50." Caterpillar's Code of Conduct clearly stated that we were strictly forbidden to pay (that is, bribe) public officials to avoid doing what they were expected to do however, payments of "customary amounts" were allowed to "facilitate correct performance of the officials' duties" when deemed unavoidable. Paying the gratuity to the immigration official was not considered a violation, because the payment was to facilitate the performance of their official duties. However, one could debate the virtue of the immigration official who demanded a gratuity.
Libraries are replete with volumes on the subject of business ethics it is easy to explore the opinions of a wide variety of self-appointed experts. In North America, a significant industry has developed around corporate social responsibilityâ€”consulting firms, conferences, magazines, and scholarly journals. Awards have been offered to companies exhibiting the best "corporate conscience." Many large companies now have Corporate Ethics Officers, and there is an Ethics & Compliance Officer Association (ECOA).2 No doubt, the role that business plays in society has become an ethical issue, and there are frequent debates about what role that should be. Often these debates suggest that the choice is simply one between money and moralityâ€”as if they were mutually exclusive.
Those are the predominant ways in which business fulfills its social responsibility and helps billions of people participate in the global economy and acquire jobs, knowledge, and a better quality of life. Since the beginning of the Industrial Revolution, business has been the primary engine driving the improvement of the human condition.
The third ethical principle of business deals with integrity. In our Western culture, rewards offered after services have been provided are generally considered gratuities they are characterized as appreciation for services already rendered. On the other hand, rewards offered before the services are given are often considered bribes, a form of corruption they are characterized as payments to influence preferential treatment in the future. According to these definitions, the timing of the payment is the main characteristic that distinguishes between what is ethical and unethical. Others believe the form of the payment is the most important distinguishing characteristic, arguing that paying for entertainment is okay, but just handing over money is not. Some believe the amount of the payment is the important distinguishing characteristic. I found all these definitions to be oversimplified and have come to believe that several factors must be considered together, and that the deciding factorsâ€”not always easy to evaluateâ€”are whether the transaction violates the rights of other parties not involved in the transaction, and/or whether anyone has been unfairly disadvantaged.
The first and perhaps the most important contribution is the work the products do. One of the greatest rewards of my life has been playing a small part in projects that contribute to economic development throughout the world. Examples include the construction of roads, airports, railways, canals, dams, reservoirs, levees, sewers, and waterways the development of sites for homes, factories, and stores the clearing, forming, and terracing of land the production and harvesting of crops the excavating of coal and ore the reclaiming of wastelands for useful purposes the exploring for oil and gas the constructing of pipelines the disposal of waste materials and the supplying of power for trucks, boats, industrial equipment, hospitals, and factories. Such work improves living standards and quality of life throughout the world. Developing countries always benefit the most from these projectsâ€”if their leaders care about the welfare of the people.
The third contribution business makes to social responsibility is transferring and sharing technology. Each time a new facility is established somewhere in the world, a certain amount of technology transfer and information sharing takes place. Caterpillar first launched technology transfer agreements with the Chinese in the 1980s, at which time the Chinese began building licensed products. Technology transfers help people help themselves, which they must ultimately do in order to climb up the economic ladder and out of their poverty and attendant illiteracy. For decades, Caterpillar has shared its technology related to management, product design, application, service support, and a variety of other business functions with many countries.
It is quite common in the business world to entertain important customers on all-expense-paid trips to sporting and other events, and I have participated in several. They were generally considered good public relations and rewards for customer loyalty however, they were also invariably expected to influence preferential treatment when future procurement decisions were madeâ€”often called customer retention programs. In these situations, I asked myself, "Were anyone's rights violated, and was anyone unfairly disadvantaged?"
3. James W. Owens, "The Realities and Rewards of Globalismâ€”Caterpillar's View toward China" (Keynote Address at Manufacturing Week, Chicago, March 22, 2006)
Â 1. For an excellent examination of ethics and morality, see Tara Smith, Ayn Rand's Normative Ethics (2006). This book explains the fundamental virtues considered vital for a person to achieve objective well-being: rationality, honesty, independence, justice, integrity, productiveness, and pride. Tara Smith also discusses traits such as kindness, charity, generosity, temperance, courage, forgiveness, and humility. And she writes in a way that makes life's important issues easily understandable.
Shortly after the Caterpillar Code was first published, I was assigned to work for the company in Africa and the Middle East, and later in Southeast Asiaâ€”geographical regions where cultural practices and ethical standards are often significantly different from those in North America. I once joined a group of Saudi Arabian customers on an all-expenses-paid trip to a product demonstration and seminar in Malaga, Spain. Both existing loyal customers and potential new customers were hosted by the local dealer who entertained them all with the finest champagne and Spanish women that money could buy. It was a way to show appreciation for customer loyalty as well as to influence future business decisions.
We will keep our word. We won't promise more than we can reasonably expect to deliver nor will we make commitments we don't intend to keep. We won't seek to influence sales â€¦ by payment of bribes, kickbacks, or other questionable inducements.
The second way in which business contributes to social responsibility is providing employment to people by establishing manufacturing facilities and marketing organizations in the various geographical areas they serve. Caterpillar's products and components are manufactured in 50 facilities in the United States and in over 50 other locations. Caterpillar has had a presence in over 40 countries around the globe. Each of its facilities has generated significant employment opportunities for the local people, so that they could look forward to improving their "poor, nasty, brutish and short" lives. Contrary to media reports, these facilities did not displace manufacturing capacity in the United States quite the oppositeâ€”they strengthened market position and captured new business in new locations that would not have otherwise been available. In addition, in almost every instance, they stimulated exports from the United States.
While working for the dealer organizations, I encountered intermediaries (consultants or brokers) who routinely handled the procurement of goods and services for government entities. If these intermediaries were not on board to facilitate commissions (kickbacks) to the purchaser, their role was otherwise difficult to explain. The intermediaries could usually issue an invoice to show transparency when scrutinized by the auditors. Few experienced people are fooled in such situations if the invoice exceeds what would be considered a reasonable amount for the "services rendered" but then, what consultant is going to accuse another of fraud merely because they charged "too much" for their services? In some situations, the invoices may have been fictitious, in the sense that no legitimate identifiable services were performed. During the years that I was involved in the retail end of international business, there was occasional perceptible evidence of that practice. Caterpillar's Code strictly forbade its employees from participating in such activity, or in such activity engaged in by others. The Code also strongly discouraged its dealers from engaging in such practices.
Caterpillar's Code also discussed the involvement of people in decisions affecting their work aspiring to high standards in human relationships stewardship of the Board protection of the environment relationships with suppliers, dealers, and public officials financial reporting inter-company pricing public responsibility and a variety of other ethical issues. Employees were expected to follow the Code, and each year had to sign a document that reported on their compliance to it. Caterpillar's Code was written to accommodate those differing business practices without compromising its basic principles. The Code recognized that there is not necessarily "one best way," because different cultures hold varying views about practices related to dealing with competition, information disclosure, international mergers, inter-company pricing, safety standards, intellectual property and trademark protection, and so on.
The second ethical principle of business is to balance the pursuit of profit with social responsibility. It is not a matter of focusing on one to the detriment of the otherâ€”the two are not mutually exclusive, although without profitability, it is not possible to practice much social responsibility for very long. My experiences have convinced me that doing productive work that improves the human condition is the best way to practice social responsibility. By that, I mean doing work that, in the end, improves the lives of people who, in the 17th-century words of Thomas Hobbs, can anticipate a life that is "poor, nasty, brutish and short." How does business make a contribution?
Most large companies have attempted to deal with the ambiguity by publishing a code of conduct. Caterpillar was one of the first companies to define a corporate ethics policy in a Code of Conduct4 as early as 1974 and, over the years, has established an enviable reputation for ethical behavior. Rather than merely being a broad philosophical statement of little practical value, the Caterpillar Code acknowledged global reality and addressed ethical issues encountered in day-to-day business activities. It included statements like:
While working and traveling in the international business community, I encountered a wide variety of cultures and beliefs that produced a similarly wide variety of conflicting ethical standards and behaviors. I was determined to understand, to reconcile, and to deal with these diverse standards in a way that would be most beneficial to both the organization and to me. My journey toward that goal continues, but I am comfortable sharing some experiences and observations. My treatment of the subject is certainly not comprehensive, and I do not presume my views will be widely accepted. However, I share them with you, hoping they might provoke thought and help clarify your own views on the subject. Some will say, "Simply follow the Ten Commandments." For me, that guidance was certainly not sufficient for dealing with diverse cultures and systems throughout the world, many of which do not even recognize the Ten Commandments.
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