The Trend of the Business Ethics in USA & Suggestions to Japan

Takaji Hishiyama

1. The Sentencing Guidelines

1-1. The Federal Sentencing Guidelines

In the USA, they have sentencing guidelines that show how to decide sentencing to people working at organizations. The sentencing will be decided by the following equations.

base fine x multiplier = fine range
2003 Sourcebook of Federal Sentencing Statistics. at http://www.ussc.gov/ANNRPT/2003/SBTOC03.htm

The guideline was revised on November 2004. The former guideline was regulations-compliance oriented. The new guideline is ethics-compliance oriented. In this new guideline, sharing values, ethical corporate culture, and responsibility of board members counts(Figure.1), I think there are two kinds of ethics-compliance circles: 1) observe the regulations, or be punished. 2) work freely within the limit of the basic philosophy of the organization. Balancing them is up to the management.

Figure2 is data by Japan Association of Corporate Executives. More than 50% of companies answered they have written management principles and are making an effort to let the principles penetrate the staff. However, only one forth of the total companies answered that the principles actually permeate through the staff. This lack of permeation is one of the causes of scandals and misconducts. I think the USA ethics-compliance oriented approach became mainstream because of a similar situation as found in Japan.

1-2. The Situation of Misconduct in the USA

Figure 3 shows the data from the Wall Street Journal on Mar.24 about Ethics in the Workplace in USA. 36% answer yes to "Calling in sick when they are well", 35% answers yes to "Keeping quiet when they see co-worker misconduct". Figure 4 shows the position that people held who committed misconduct. The number of offenses was largest among employees; however the median loss was biggest in owner or executives. Figure 5 shows the data about the detection methods of occupational frauds. Help lines and hotlines are used most. Some are detected by internal controls and external audits. Internal controls should be recommended more than help lines. Figure 6 shows the percent of tips by source. Many are from employees, and some are from customers or venders. Tips from a third person are important, so it is recommended that help lines be established to receive tips from customers and venders.

It depends on companies how strictly they adhere to guidelines and compliance even in the USA. For example, Citigroup is on parole and prohibited to purchase a company.


2. Corporate Governance

In this February and March, some presidents and CEOs of famous companies were fired(Figure 8)｡Boards tend to fire problematic CEOs in order not to take risk by them and not to get sued.

However boards in Japan have not functioned as well as those in the USA. Japan Association of Corporate Executives has similar idea as boards in the USA, and the association ascribes a system as the main point of corporate governance to evaluate a president's achievement and to fire the president in case that the achievement is not enough, and have surveyed Japanese companies to ascertain if they have such a system. However only 9% of the companies answered positively(Figure 9).

In the USA, judgment of misconduct is strict, and the amount of penalty is large. It is said that defendant B. Evers who was CEO of WorldCom may be convicted for 9 crimes and may receive an 85 year sentence.

In the USA, most board members tend to be outside board members. In case that they have to pay penalty, until now insurance companies have paid it; now in some cases they have to pay a part of the penalty by themselves (ex. Enron Corp case).

It has been criticized that the amount of compensation of CEOs is too large as follows.

  1. high average
    9,840,000USD1 (the average of 170 main companies in USA in 2004)
  2. year on year increase is large
    +12%1 (the average of 170 main companies in USA in 2004)
    (factory workers : +3.6%1)
  3. large gap between CEOs and employees
    301 times of that of employee2 (in 2003)
1.AFL-CIO, 2004 Trends in CEO Pay
2.J. Moriarty, "Does CEOs get paid too much?", 2005, Business Ethics Quarterly, Vol. 15, Issue 2, pp.257-281

There are two opinions for the situation shown above.

[agree to the present situation]

  1. amount of compensation is decided by negotiation between the company board and the CEO
  2. amount of compensation is worth the price of achievement of the CEO
  3. Incentive in order to continue the CEO
[disagree to the present situation]
  1. ego of the board members who want to hire the CEO.
  2. Quality of evaluation is low.
  3. gap is too large to be rationalized.
    (22 times of the average of Japanese CEOs､ 6 times of that of UK)
    (53times of the average of medical doctors, generals and US District Judge)
a J. Moriarty, "Does CEOs get paid too much?", 2005, Business Ethics Quarterly, Vol. 15, Issue 2, pp. 257-281

Figure 17 shows the fact that donation portion of one's income is the largest among the poorest people.

The corporate governance problems tend to be resolved by stockholder proposals in the USA. Especially, funds of SRI and NGOs propose it. Environmental problems (ex. global warming), political donation, fair employment, animal welfare, and so on. The problems of large amounts of compensation of CEO become an issue very often.


3. CSR

3-1. The backgrounds of CSR

The backgrounds of CSR are follows:
  • Growth in the scale of company, globalization, growth of influence of companies
  • Environmental problem, human rights
  • Change of institutional frameworks ex) easing of regulations, external pressure, self-responsibility
  • Scandals, misconduct
  • Elicitation and empowerment of stakeholders' point of view
  • Consumer, investor, NGOs/NPOs, local communities
  • Change of roles of and expectation to companies
    (disclosure, accountability, transparency, dialogue, ethics)
  • Code of conduct, evaluation by society(International organization, SRI)
  • Progress of IT; gathering, transmission, sharing of information; speed and influence

3-2. Triple Bottom Lines & The Pyramid of Corporate Social Responsibility

In Japan, the mainstream of corporate philosophy for the 21st century is "Triple Bottom Lines"(Figure 11). On the other hand, in the USA, the mainstream of corporate philosophy is "The Pyramid of Corporate Social Responsibility" by A. Caroll (Figure 12). Figure 13 shows A. Caroll's newest idea, which appeared in an American magazine about business ethics in Oct.2003. In the article, it is said that compliance, ethics, and economy should all contribute to human society, and that profits should be included in them.

However, the typical model of business ethics is Benjamin Franklin, who was born in a poor family, worked hard, lived a stoic and puritan life styles, and lasting the end all of his family members made the big time.

3-3. Sustainability

Figure 14 shows acceptable environmental limit of the earth. The scale of economic activity of human beings has much exceeded the acceptable environmental limit of the earth. Increase of population especially in developing countries, the problems of poverty and so on. Figure 15 shows The Millennium Development Goal by UN, to which social aware companies such as BP., the Shell group began to cooperate.

3-4. Business in Poor Countries

The market size for the poor who lives by less than $2 per day is estimated at 1,300,000,000USD per year. People living in areas without water supply and sewerage systems may buy a TV, mobile phone, and so on. Some ask what is wrong with selling a TV and mobile phone to them. However, to help the poor and to sell to them are clearly different. It is a problem that businesspersons create demand among the poor and sell things that are not essential for the poor to live. UN recommends that companies contribute to the poor under cooperation with the local government and NGOs.

There exists a problem of a water shortage. Coca-Cola Co. sells Coca-Cola and Fanta using groundwater in developing countries. Nestle Group is selling bottled water using groundwater in Pakistan, where people live by less than 1 USD, and only 20% of people have access to clean water. I do not think that people living by 1 USD per a day can pay 38 cents for a bottle of water. It means that only the upper or middle class people can access water, and people in the lower class cannot.

There exists another problem. Pumping water from the ground makes well water level lower and makes it difficult to pump up water from wells and make the quality of well water worse. Then, it becomes more difficult for the poor to get water for their agriculture. In these countries, they do not have regulations about pumping the water. These companies often have a cozy relationship with the senior levels of the governments. Even if the company has a good corporate philosophy such as a mission to contribute to peoples in the future, they should be criticized unless they contribute to the poor.

The typical problematic situation about business in developing countries is Tobacco business. The companies justify themselves about CSR by informing the risk of tobacco to consumers in the USA, however they sell tobacco in developing countries instead of selling in the USA. They sell tobacco to people who are poor, ill educated, lack of access to adequate sanitation, and lack of knowledge about risk of tobacco. How can they justify themselves as fulfilling CSR?

3-5. 10 Principles of "The Global Compact"

In order to improve this situation, the UN proposed "The Global Compact", which encourages companies to endorse and observe the international regulations about human rights, labor standards, and environmental standards(Figure 16,17). More than 1000 companies all over the world including around 30 Japanese companies are committing to The Global Compact.

For example, NIKE had been suspected of forced labor and child labor in areas where personnel cost is low. NIKE published the CSR report 2004 on 13th April 2005, and publicly disclosed the names and addresses of all NIKE-related factories all over the world. This was highly regarded because NIKE disclosed information considered as a part of company secret. The amount of volatile organic compound also decreased from 340 gram to 16 gram per a shoe.

The global compact also affects Japanese overseas factories. Last year, the factory of Panasonic in the Philippines was audited by Vodafone. In this case, if Vodafone found any problems about labor conditions of Panasonic, Vodafone will break off the bargain with Panasonic.

Corporate corruption problem, the tenth principle of global compact, has been a main topic for these 10 years. Monsanto in Indonesia and Titan in Beninese were punished for bribery in this year. Last month, OECD criticized Japanese for insufficient prevention of bribery to foreign officials.

It is difficult to tell what is right or wrong concerning CSR. For example, Wal-Mart., one of the top companies in the USA, wants to increase the number of Wal-Mart shops from 3700 to 4000, and claims that they are carrying out their social responsibility by hiring people in the middle or lower class to give them a chance to work. The managers of Wal-Mart do not agree that laborers have a labor union because it keeps costs high and it is not efficient. They think that they should offer products to poor people at lower rates rather than keep labor unions. And they claim that they will contribute to the area by attracting Wal-Mart related firms and shops with the new Wal-Mart shop, and will contribute to society by spending 3,500,000,000 yen to nature conservation for these 10 years. However, local supermarkets may have to close their business because of Wal-Mart's new shops. The unemployment rates in the USA will increase because about 80 % of the Wal-Mart products are made in China. Low labor fee will be kept because laborers have no unions.

Lately, obesity is one of the most serious problems in the USA. Medical costs related to illness caused by obesity are very high. In Japan, we may have the same problem. For example, McDonald's is criticized often. McDonald's launched crunchy menus, and they achieved increasing sales. The new menu is with lower cost and higher price than a hamburger.

American Automobile Manufacturers Association (AAMA) filed a complaint against California State that decided to decrease emission gas from cars by 27% until the year 2030. AAMA claimed that the policy of California State is too strict violating the policy of the Federal Government. Japanese environmental NGO protested against AAMA's appeal because it impedes environmental controls. Some Japanese automobile companies such as TOYOTA and HONDA are members of AAMA. In this situation, TOYOTA is in a double bind. In Japan, TOYOTA is one of the leading companies of SRI and Japan Association of Cooperate Executives, the top of which Chairman Okuda of TOYOTA is calling on the USA to rejoin the Kyoto protocol on global warming. However TOYOTA has a friendly relation with GM, a member of AAMA. Environmental NGO including Green Peace Japan claimed the Japanese Companies that were involved in AAMA gave up filing a complaint and sent an open letter to them and asked for an answer.

Another case is that of an overseas subsidiary of a Japanese commercial firm with legal actions in human rights filed by staff of the subsidiary. The Japanese vice president sent an e-mail to a recruitment staff and recommended the subsidiary hire an Asian male at the age of 25-30. The staff claimed that the policy of vice president is discriminatory against non-Asians. In fact, blacks are only 3 of 200 staff, and no African-female manager, only one Hispanic manager, and all meetings were held in the Japanese language, some of the executives used racial epithets.

Another case is a Japanese company that ordered conversion of the work-position of a pregnant worker. Two American workers pointed it out and asked remediation, and then they were ordered to take a vacation. They filed a legal action against the company. In this suit, the amount requested per person was 4,000,000 USD for separation pay, pension, 55,000,000USD for compensation and attorney's fee.


4. Expectations for Japan

Firstly, Japanese companies are expected to address CSR and corporate governance not only in Japan but also in overseas subsidiaries. They are expected to contribute to resolution of global problems including the green house effect.

Secondly, in the symposium last May in which the topic "how companies behave in developing countries" was discussed, the organizer who was a professor of Wharton School asked me why so few people from Japan despite being the second biggest economic power joined the global discussion which people from other Asian countries attended. He asked me if Japanese do not want to take social responsibilities.

Japanese should take another CSR, citizen social responsibilities. Japanese companies and Japanese workers should think what a right action as a citizen is, carry through the ideal principles, and act in order to improve the world. Japanese should establish themselves as individuals.

Thirdly, Japanese people should recognize that today they have to address new types of risks, such as green house effects, nature destruction, population explosion, water recourse depletion, terrorism, weapons of mass destruction, nuclear accidents, new technologies (gene-technologies), new types of illness, and so on. They are beyond the existing risk management systems. People on the earth have to have common recognition about those problems. Companies also should prepare for these new types of risk.

At the last, keeping identity as Japanese is also important. There are cultural differences between Japan and the USA (Figure18). Do we Japanese follow the USA in this globalization? We should discuss what culture we keep? I think the Japanese culture phrases "harmony" and "mottainai" ("what a waste") contribute to solve sustainability problems. These two concepts will create a stir in an age of mass consumption and destruction.




Q&A:

1. Application of The Sentencing Guidelines

Q. In 1991, the sentencing guidelines began to be applied to organizations themselves. The maximal organization in our society is a government. If a government is out of the application scope of the sentencing guidelines, I think the guideline is lame. Were there any developments of the application scope in the revision of the sentencing guidelines?

A. Put simply, any kinds of organized crimes are involved in the application scope of the guideline including environmental crimes and crimes perpetrated by the army. On the other hand, some claim that the sentencing guidelines are not anything more than guidelines, and that sentencing should be in the discretionary power of courts. However, the sentencing guidelines will continue to be used and will be a standard norm.

2. Japanese Companies' Participation in the Global Compact

Q. Today, the number of the organizations that are involved in the global compact is 1782, however the number of Japanese companies involved in it is only 32(April 2005). Larger the company is, more negative attitude it has to the global compact. I think this is a problematic situation. What do you think about the situation?

A. Japanese companies are on the ball. For example, the quality of CSR reports and environmental reports are the best in the world. 20% of companies that make their CSR report accordant with the Global Report Initiatives are Japanese companies. However, the recognition level of Japanese companies to global problems is low. And also, according to the report by the UN, Japan was in the 34th rank about woman's social advancement. Japan is behind the Philippines and Namibia. In the Philippines, the prime minister was a woman. Japanese companies tend to have less conscious to human rights issues which are included in the global compact.

3. Kick out of CEO by Boards

Q. You said that the boards tend to fire problematic CEOs lately. Are there any tendencies that fired CEOs file a suit with the board?

A. Theoretically, they can. However, it is difficult for them to file a suit if the reason of kick out is compelling. And also, it is difficult to file a suit because the board is representative of stock holders. In the USA, usually, the board fires the CEO after making agreement with the CEO for a soft landing of the problems.

Q. The USA is a litigation happy country However, the sentencing guideline is the federal guideline, and also is not included in civil law but in public law. So, the guideline is superior to economic code. It is difficult for CEOs to file a suit if they were against the guidelines.

A. It may be true. And also, CEOs tend to be fired because of their poor business results. For example, Ms. Fories, who was a CEO of HP CO. was criticized that she was too authoritarian to hear of junior staffs' opinions.

4. CSR Model by Carroll

Q. I have a question about the CSR Pyramid Model and A. Carroll's newest model in Figure 23. I don't think that compliance, ethics, and economy in Figure 23 are parallel, but that ethics should be superior to others. As we can see in the accident of JR-Nishinihon, from an economic point of view, we try to improve the efficiency and maximize profit. There are a lot of things that are not obligated by law but should be examined ethically in our business activities. We are pressed for a decision about them day by day. Then ethics would be superior to compliance and economy rather than parallel to them.

A. I think your question is an important one. Carroll said that the companies that are classified into the crossing part of the three circles are the best companies. His idea is that economy, compliance, and economy are parallel, and the crossing part is the best. He classified American companies into each part of the circles. For example, Merck is classified into ethics circle as an ethics first priority company, and Procter & Gamble is classified to the crossing part of the three circles. Each company has a priority setting. I personally agree that ethics is the most important for the companies.

Q. Who should the worker contribute to? For example, civil- service employee should contribute to citizens. However, in companies, company workers should contribute to one's company and earn a profit. In the companies, if employees do not work for the organization but work for himself or herself, it is easily examined ethically.

However, if he or she works for the organization, and the organization commits a crime, it is difficult to examine the organization activity ethically.

5. Improvement of Information Distribution

Q. You mentioned the Five Step Plan as a revolution of City Groups. Here, I would like to know more detail about 2. improvement of information distribution and 3. buildup of HRD. Our company, Hitachi Ltd., we are working on improvement of communication. I would like to get some concrete information on how to communicate.

A. The main point of their improvement was to make bad news or negative information be passed on to higher level. They had a problem that bad news or negative information tended not to be passed on to a higher level even it was passed on to an immediate superior. I hear that they waged a campaign to improve information distribution and communication. You can get a little information on the website of City Group Co. about Five Steps including buildup of HRD.

6. Global Problems and New types of Risk

Q. You said that we have global problems and new types of risk in the present society. Our institute, Central Research Institute of Electric Power Industry, is working on green house problems, however companies take forever to work on such issues. What do you think a possible trigger for companies to work on such cosmopolitan risk is?

A. It is important for a company to think what they can do for social problems in the context of their corporate culture. All companies do not have to act according to a united text book, it is important for them to act according to their business culture. This is an essence of CSR. CSR varies by companies. For example, BP CO. does not cover all issues. Your company, Central Research Institute of Electric Power Industry, is working on solving the greenhouse effect. Some company may try to keep their temperature of the rooms at 28 degrees C. for resolution of green house effect. You can begin with what you can do.

7. ISO's Activity

Q. ISO began to make an international standard of ethics at the end of the last year. I heard the news that Japan Association of Corporate Executives and overseas subordinates will engage with it positively. Do you have some further information about it? Would you please give your opinion for the ISO's activity to make an international standard?

A. I know that they held the first meeting in Brazil this March; many stakeholders participated in it and it was a "kick-off" for further plans. I do not have further information about it. Tokyo Electric Power Company, do you have some information?

A. A member of our company, Tokyo Electric Power Company, participated in the meeting. I did not hear the details about it, however I heard that the main point of the discussion was how to discuss the guideline making. They could reach some conclusions, and arrived at an agreement that they discuss according to those conclusions in the future.

A. I think it takes a lot of time to make a guideline because there are so many stakeholders. My personal opinion is as I spoke in the meeting as a member of Ministry of Economy Trade and Industry. As a business person I disagree with ISO's prescription of CSR. How to take CSR is a matter for a company and should be decided by a head of a company. This idea by a head makes a difference in the operation of a company. ISO should not control CSR in a united form. I think and hope that they will make a guideline with a lot of flexibility.

Q. I heard that they would discuss details concretely in the next 2 years. We should recognize that the feasibility has advanced.

8. Field of CSR-Local Area, Prefecture, International Society ?

Q. How broad should the field of CSR be? We cannot resolve the problem in the present society only by working in our own company. Do we have to take CSR in our prefecture, nation, or the world? The field in which they work will vary according to the size and power of the company. I think companies whose business is global should take a world-wide perspective. I think Japanese companies should take more social responsibility in global level including joining then global compact. What do you think?

A. The size of the company is not matter, it is the scale. All companies should think "what are the problems of our company?"" what are problems at the national level?", "what are the problems at the global level?" and then should do what they can do considering their companies' size.

Q. A lot of committees and meetings are held all over the world concerning global problems including environmental problems. I wonder how often Japanese companies attend them if they were made an offer to attend. I think to attend such meetings and to take an important role will bring merit for Japanese companies in the present society. I would like to know how often Japanese companies attend them in the situation that various committees and meetings are held.

A. Some companies are made an offer, some are not. Each company has limitations including financial condition. Some companies in the USA will defray the cost of my trip when I attend the meeting in the USA next time. In the USA, companies are trying to contribute to the society by gathering opinion leaders from all over the world, hearing their opinions, and make the USA better. Companies can contribute to the society in various ways. They can defray the trip costs and send a person to a meeting even if they do not attend the meeting. What is important is to recognize their CSR.