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How much risk are companies allowed to take?

When multinationals decide to do business in new countries or with new clients, partners or vendors, financial viability is a critical consideration. However, organizations are increasingly being challenged to justify their decisions on ethical grounds as well – and, in some cases, cancel their business plans based on these ethical concerns.

The logic behind this argument makes sense: Businesses wield great influence and so, by refusing to work with people or in places that don't respect certain values, they can bring about change.

But as well-intentioned as that might be, it could be having a less-than-desired effect.


Higher standards than ever before

Fear risk surfing
David Gray | Reuters

In the past, when companies were looking to do business somewhere or with someone new, all most of them had to do was carry out the minimum level of due diligence – a sanctions check and a review of Transparency International's Corruption Perceptions Index, for example.

Today, that is no longer enough. Shareholders also expect companies to consider human rights issues when determining whether they should enter into business in a country or with a particular partner.

The growth of civil society activism is also adding to this pressure. This activism has expanded rapidly since the days of trade union boycotts against South Africa's apartheid regime or against Israel for its actions in Palestine. Today, civil society organizations are demanding that companies cease trading in countries or industries deemed corrupt, whether it is diamond mining in the Central African Republic or teak logging in Sarawak.

In this new environment, new business partners, vendors or third party agents must be vetted to determine their reputation in the local market. Their name may not appear on any sanctions list, and they may not have been implicated in a judicial review, but deeper enquiries as to their reputation may reveal information that sheds doubt on their suitability as a representative of your brand.


When it goes wrong

There is a lot at stake if you get it wrong. As the Wall Street Journal has pointed out, ethical companies are more highly regarded by consumers, and unethical companies are more likely to be punished if they are seen to be exploiting workers or communities.

This argument is backed up by a KRW International study covered in the Harvard Business Review, which showed that companies led by a chief executive who, as rated by their employees, demonstrated high levels of integrity, responsibility, forgiveness and compassion, on average saw a 9.35 percent growth in return on assets over a two-year period. This contrasted with the 1.93 percent growth experienced by companies where the CEOs were rated on the lower end of the integrity scale.

Doing things differently

But should companies be bowing to stakeholder activism and media pressure? If a corporation with high levels of integrity, strong ethical principles and an employee base that "walks the walk" decides not to operate in a particular country or industry, or withdraws due to the bad publicity that might arise from the perceived corruption, what fills the gap?

Are those who demand that a company withdraws in these circumstances actually opening the door to less-scrupulous players and thus pushing the country or industry further down the integrity ladder?

Is it not instead incumbent on the ethical, socially aware company to stay and thus help change attitudes to corruption within the communities where they operate?

As Steven Fox puts it in an article for Forbes: "Once in place, a strong anticorruption culture can set in motion a kind of virtuous cycle: a company that successfully develops a reputation for strictly abstaining from corrupt behavior can discourage counterparties from even attempting to extract bribes, significantly lowering the risk of an incident."


Change in action

The electronics industry is a good example of an industry that suffered from a perception issue related to labour practices.

However, rather than cut controversial partners adrift, a number of players in the industry set up the Electronics Industry Citizens Coalition (EICC) with the specific intention of improving the human rights of people working in manufacturing facilities in China and Taiwan, among other countries.

The EICC and its Code of Conduct has had a profound effect on the way the major corporations such as Intel, IBM and Apple engage with their vendors and the communities in which they operate.


A new way of doing risky business

Unless "good" corporations take action against the bad eggs, no improvements will ever be made. Rather than withdrawing from an environment because the competition is prepared to "pay to play", should they not act to expose the corrupt behaviour? After all, corruption thrives in the dark.

Of course, convincing stakeholders and civil society of the validity of this approach – where companies, instead of avoiding challenging environments, make a conscious effort to invest in them and help bring change from the inside – will not be easy.

But businesses have a duty to take sometimes tough decisions. In this era of keyboard warriors, when anyone and everyone can voice an opinion -- whether it is based on fact or fiction -- it is more important than ever to take positive actions.

The question, then, may not be "should we take this approach?", but "can we afford not to?"

Jane Niven is Global Client Governance Counsel at JLL


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