Management of ethics in foreign contracting

Introduction

When contracting in many overseas positions, project employees must run a gauntlet of ethical issues and legal pitfalls, some of which directly affect project timely completion or budgetary success. These situations, when judged on a Western Standard, have direct unambiguous answers. But when placed in the context of a foreign setting, with different standards and mores, problems and answers become magnified and distorted.

In order to place this statement in realistic terms, let's take for instance, the import of goods into a fictitious country. In terms of demography, this country could fit into any number of third-world emerging economies. The annual income of the local populous is less than $3,000 per year, the average education level 6th grade, the government is democratically elected, except for the reality that it is dominated by a number of wealthy families, most of which have strong connections with the countries military elite. Most government employees earn little above the average national income. The government realizes if they are to grow economically, they will require additional power plants. Your company has been awarded a contract to supply a new Cogeneration Power Plant. All of the equipment must be imported due to the fact that nothing of this nature is manufactured locally. The government has issued your company an Import License. Your first shipment arrived at Customs, in country, but it has not been cleared for two weeks. You had scheduled only one week for port clearance. Out of concern you travel to the customs office with your broker. After discussing the matter with the customs clerk, the broker explains to you that it is necessary to make, what he terms, a facilitating payment, along with the normal customs duty, in order to obtain the materials from customs. You ask what the facilitating payment is for and are told that is the cost of doing business here if you wish priority treatment. You ask, “What priority treatment? I just want my equipment.” Your broker explains that it could take at least another two to three weeks without the payment. That would place your shipment a month behind schedule. What do you do? You don't pay the payment and your materials sit in customs for three more weeks, throwing you off schedule with potential Liquidated Damages. You pay and you have potentially violated a local law, as well as the Foreign Corrupt Practices Act of the U.S. Government. You complain to the local government authorities, who may well be related to the customs official, or who may well be getting part of the facilitating payment. Your broker further explains that if you decide to take it to a higher authority, you may find that the facilitating payment has just gone up because one of the political families will want in on the money.

This type of dilemma is a daily occurrence in foreign contracting and Project Managers are faced with decisions that, otherwise, may never be faced by other professions. Managers may be faced with no-win situations in which they will have to “reconcile the legal requirements of the U.S. workplace with potentially conflicting cultural requirement” (Sears 1998), or for that matter any other country with accepted legal norms. However, in many emerging economies “corruption is widely seen as playing a significant role in international commerce” (Transparency International 2000).

How does a conscientious manager deal with problems of this nature? Honesty is seen as a basic character trait needed to be a superior project manager (Toney 1998). But in the dog-eat-dog world of International Contracting, “projects are often high-risk/high-visibility ventures: when the stakes are high, the pressure to cheat—or at least cut corners—is high, as well” (Baker 1999).

Case Study

This paper deals with the perceptions of Project Practitioners in foreign settings, as to ethical issues and suggestions in dealing with those issues. Due to the sensitivity of such matters, anonymity had to be assured. In order to assure this, a blind survey form was used to solicit responses. The form was structured into two parts, that being close-ended and open-ended opinion questions. The questions attempted to answer:

1. What is the perception of people with whom contractors have to deal with in foreign projects in terms of ethics?

2. Are companies, doing foreign contracting, dealing with ethical issues to support their personnel?

3. If not, what can be done to alleviate this problem?

The questionnaire form was distributed to 87 project-related employees from over 45 different companies. Of this group, only 62 employees returned the form.

The respondents can be divided into three primary groups, that being Managers, Administrators, and Engineers. The Managers group was comprised primarily of Project Managers, Site Managers, and Site Superintendents. The Administrators were made up of Contracts Administrators and Procurement Managers. The Engineers was made up of Project Engineers, Field Engineers and Service Technical Advisors. All of the respondents had foreign field experience. Of the total, 55% had over 20 years of project experience, 27% had 10 to 20 years experience, and 18% had from 5 to 10 years of project experience. There was virtually no continent (except Antarctica) that they had not worked. There were 10 geographic groups: Asia (57%), South America (48%), Pacific Rim (47%), Eastern Europe (45%), North America (45%), Middle East (36%), Indian Subcontinent (27%), Africa (18%), Western Europe (9%), and Australia (6%). All respondents had worked in more than two foreign assignments; in fact, one respondent had worked in 18 different countries. The average was six different countries per respondent.

Table 1

Table 1

Results

The data analysis showed that when asked to rate the integrity of individuals with whom they had dealt on foreign projects, that Project Managers (1.7), Shopkeepers (2.3), Workmen (2.4), and the Local Populous (2.4) were considered as either honest or sort of honest. The next group comprised of Foreign Partners (2.5), Suppliers (2.6), Military (2.7), and the Owner's Representatives (2.9) were perceived as questionable. The third group made up of Inspectors (3.5), Local Subcontractors (3.6), Police (4.1), Politicians (4.2), and Government Officials (4.3) were seen as probable dishonest. At the very bottom of the list was Customs Officials (5.0). They were overwhelmingly seen as being corruptible. Refer to Exhibit 1.

Further, regarding having been approached on certain questionable issue, 33% of the respondents had been asked to contribute to either a political party or a religious organization, and 53% had been ask to give a bribe. Over 55% had been asked to hire a relative of an influential foreigner. Even 32% had been ask to turn their back on a product or an action or inaction on a project. Of the total respondents, only 22% had not been approached regarding one of the items listed above.

Away from the statistical side of the study for a moment, how people reacted to these issues was quite varied. Many did not wish to respond to what action they opted to take and, therefore, did not respond to the question. However, of those that did respond, most said that honesty and doing what they thought was right was the best action to take when solicited by a foreigner. A few said that it was best to act like you didn't understand what they wanted or even just ignore the request. There was a small percent that responded that they paid the bribe or hired the relative. All responded that they did not turn their back on a faulty product or action or the lack of action.

Very few respondents offered anecdotes; however, one said that he had been told the only way that he would have a seat on a departing plane was to place $50 U.S. in an envelope and to turn it over to the ticket attendant as he departed. He further said that sometimes you will do things that otherwise would be totally unacceptable. Another respondent told of a Government Inspector who had conveyed the word that if the contractor wanted the equipment to pass the required inspection it would take $1,000 U.S.. Still another told of having to bridge a stream, rather than pass through a village where the mayor was charging them by the truckload for crossing the city's bridge. The hiring of relatives seems to be a somewhat acceptable practice so long as the relative has the qualifications for the position. There was even one story regarding a government agency having to pay the military of another country in order to assure that materials for an embassy were given safe passage through the country.

Again on the statistics side, 73% of the respondents say that the company they work for is aware of the problems encountered on foreign projects, and that 89% of those companies have ethics policies. When ask about ethics orientation prior to being placed on overseas assignments, 55% responded that they had not received foreign orientation of any kind. Further, of those that had received orientation, 67% felt that the training was inadequate to cope with the situations that they had faced in the foreign setting.

When ask what could be done by companies to better be prepared for foreign projects, the most reoccurring statement was that the companies should conduct better studies on the customs of the host country. They pointed out that all new hires should have extensive improved orientation prior to placement in the field. It was also stated that companies should be very careful when choosing the foreign partner or subcontractors.

There was also a number of different responses when ask what could be done to improve ethics in foreign contracting. Many of the respondents said that nothing could be done. Still others stated that until economic problems improved in the host countries, no amount of good ethics on the part of the contractors would help the situation. Still others pointed out that improved communications between contractors that performed foreign work might help. Yet another respondent said that as long as foreign contractors are willing to do anything to be successful in obtaining and generating profit in these situations, nothing would change. In another instance, it was pointed out that the contractors of the host country accepts bribery and double booking was a common practice of doing business, and unless they are given incentive to change, then change will never happen.

Discussion

It is not the intent of this paper to solve the socioeconomic problems that underline the causes of the ethical issue faced by foreign projects. It is hoped that by examining the perceptions of the practitioners methods for coping with the dilemma of being “between a rock and a hard place” can be dealt. Most companies doing foreign business recognize the existence of a problem. However, if their orientation fails to equip employees with the tools to properly answer ethical issues, then we are taking an ostrich approach to the problem. One statement in particular stands out from all of the participants. When describing his company's attitude toward the ethics issue, he said that they wanted him to “do what you have to do, just don't let us know.” This attitude even transcends to the feelings of the employees in their apathy toward being able to do anything to solve the problem.

Orientation sessions deal with broad generalities that express high ideals and clinical approaches to problems. They fail to give any analysis as to how to deal with the problems. So what is the foreign employee to do? In examining one of the ethical policies of a large foreign contractor, it becomes obvious that the employee is told what he shall not do. But, there is no attempt to tell what shall be done. There is a statement that says, “We expect all employees to use their own common sense and make good faith judgments about such situations.” The policy, however, does go further to support the employee in these decisions by providing a 24 hour, 7 days a week hotline that allows the problems to be posed to someone else. On the one hand it does indicate that the company is aware of problems. On the other it allows them to monitor ethical issues. In contacting the hotline the advise given by those people on the other end, however, reflects only Corporate Policy, not a “how to handle” methodology. Ultimately, the individual must formulate his or her response to the situation. He or she is on the front line of the issue.

So as not to confuse this matter, let's list the general don'ts:

1. Don't do anything that places either you or the company that you work for in violation of either your own country or the host country's laws.

2. Don't do anything that might jeopardize any other individual or other individual's property.

Many companies now let their employees work at home, but it is very unlikely that the company you work for will allow you work from a jail cell and, certainly, not one in a foreign country.

Having said this, let's consider a bribe. A bribe is “money or other valuable consideration, given or promised, with a view to corrupt the behavior of a person” (Webster 1997). Is a bribe a bribe if it is requested by the person whose actions are desired? Or is it extortion? Extortion is “the crime of obtaining money or some other thing of value by the abuse of one's office or authority” (Webster 1997). Let's take this one step further; consider the word “duress.” Again using Webster's, duress is “coercion of a degree sufficient to void any legal agreement entered into or any act performed under its influence.” If a person requesting a bribe approaches you, it may not be a bribe, it is may be extortion. Further, if the damages incurred by not paying the extortion are so great that you are coerced to make the remuneration, then you have performed under duress. I am not suggesting that this reasoning allows you to pay a bribe and then call it extortion. I am also not saying that a foreign government will interpret your actions this way. I am saying that at some point in time and under some amount of pressure, even the most reasonable person may succumb to a “payoff” in a foreign situation.

Exhibit 2

Exhibit 2

Returning to one of the situations given by one of the respondents, you have been ask to give $50 in an envelope and you will have a seat on the plane. If you had just spent the last six months at a remote site and hadn't seen your family in the same amount of time, would you pay a $50 bribe to get a seat, especially, if you knew the next plane did not leave for another week? You better believe it. You would be on that plane.

In looking at the other side of the coin, Transparency International has conducted a survey by which they rank countries with a Bribe Payers Index (BPI). The BPI compares “leading exporting countries in terms of the degree to which their companies are perceived to be paying bribes abroad” (Transparency International 1999).

If the major exporting companies from these countries would refrain from paying bribes or succumbing to extortion, it would go along way to stem the tide of requests. Just the knowledge that the major players in the International Market do not entertain such activities would curtail many requests, but it takes a united effort. In many instances this effort is the law. Some of these laws were ratified in what is called the OECD Convention. Unfortunately, many governments have not ratified the articles of the Convention, while others have not made the articles well know throughout the Industry. For instance Transparency International found that only 6% of those people surveyed in the BPI knew anything about the OECD Convention. From the survey it was also determined that things were getting worse. They cited the following as the main factors for the bribes existing:

1. Low Pay in the Public Sector

2. Public Officials Immune from Prosecution

3. Secrecy in Government

4. Worsening Public Procurement Practices

5. The Privatization Policies

6. Increased Foreign Investment and Trade

7. Restrictions on Local Media

8. It is apparent that if there were not a market, then there wouldn't be individuals that offer their services for bribes.

Let's reverse the situation. Another anecdote of a Project Manager was that he had been approached by an Office Manager from an associated foreign company. The Office Manager said that he had a friend that owned a car rental agency and if any of the project field representatives needed a rental car, could the PM please pass them on to the friend. A simple request, no problem. He, however, adds, “He will give you $100 for every month that one of your representatives uses an automobile.” The PM told him thanks, but no. The Office Manager responds, “If that's not enough, he can make it $200. He'll just add it on to the cost of the car and don't worry. No one will know.” What would you do? You have 12 to 15 representatives on the job site.

The Project Manager politely, said thanks, but no thanks, however, he further added, “Unfortunately, I will know.” It is all a matter of perception. This sent a strong message to the foreign Office Manager.

There is the day-to-day interaction with locals that do not exert a great deal of influence and economic weight on matters that affect the ultimate outcome of your project, i.e., the storekeeper who sells you materials without taxes, the subcontractor who offers kickback for preferential treatment. In this situation, you stand to gain little, but lose a lot. Just as in the larger situations, perception of your willingness to be corrupted will tarnish your effectiveness in the host country. As a foreign manager a “removed air of integrity” must be maintained.

Conclusion

The likelihood of managers being approached during foreign assignments with questionable propositions is almost inevitable. How he or she reacts to these situations cannot be taught in a textbook. The companies for which these managers work generally have some idea what situations will confront their managers, however, orientation and mentoring is in most instances lacking. It is easy to take the moral high ground and present patented answers, but they do not always fit the situation. Certainly, out and out bribery and corruption must be dealt with in a forthright manor. But, the Foreign Contractors need to understand that their front-line managers, especially junior ones, need mentors. These mentors need to be aware of pressures that managers are faced with, such as schedule and budget, as well as those of day-to-day operations. They need to be creative in their responses. Only the outcome needs to be determined. How we get to that correct ethical response is the Management of Ethics in Foreign Contracting.

It is only fitting that I address the situation posed in my lead-in paragraphs; the corrupt Customs Official and the Facilitating Payment.

Step No. 1. Never raise the level of confrontation when dealing with a bribe. Your best chance of a reasonable ethical settlement is at the lower levels. The person presenting the bribe proposal knows if it goes higher, more than likely, they will be dealt out.

Step No. 2. Ask what am I getting for this facilitating payment?

Step No. 3. When you are told that you are getting some kind of preferential treatment or custom service, state that this is the best thing that has happened to you all day, but that in order to take them up on the proposition you must have a receipt. State that your company requires backup showing any disbursement of funds. People receiving bribes never want to provide backup or traceability.

Step No. 4. If he can provide a receipt then it is not a bribe and the services you are paying for are an available service to anyone that can afford it. But if he says that a receipt is not possible, then it is a bribe and we move on to the next step.

Step No. 5. Ask if this activity requires that he work overtime or extra effort on his part, but continue to repeat that you cannot disburse monies without a receipt (remember that this is your first shipment and you will set a precedence for future shipments).

Step No. 6. Explain to him the importance of the shipment to the National Energy Policy. At this point name-dropping is essential. State the name of high officials or plant managers that you are dealing with on the project. You haven't raised the proposition to higher ground, but you have made the official aware that he may be on shaky ground. Nine times out of ten it will end after an hour of “non-monetary influence peddling” or “this is who I know” ear bending.

Step No. 7. If he still insists that he needs the money in order to give you the special treatment. Then say that you have to go, but that this late shipment will have to be reported in the upcoming report to the Plant Manager. Give him your business card and leave. Let him think. Generally speaking, he is now the one that stands to lose and you have given him a mind set for future shipments.

There are no guarantees when dealing with human responses, but having mentored for other foreign project staffs, this has been effective. However, all situations are unique and have to be dealt with in their own special context.

The list of potential Ethical Issues in Foreign Contracting can go on and on. The points to remember are (1) is the action you are about to take legal, (2) if the action is gray, then who can you contact to get a second mature opinion, and (3) can you sleep tonight without worry. Faced with a situation that affects your project's schedule or budget, will you take the high road and the right road? I hope so.

Baker, B. 1999, Dec. Ethics, Leadership, and Your Family Sofa. PM Network.

Sears, D. 1998, Nov. Managing Client and Workforce Culture. PM Network.

Toney, F. 1998, July. The Quest to Find the Superior Project Manager. PM Network.

Transparency International. 2000, Jan. Bribe Payers Survey. www.Transparency.org.

New Webster's Encyclopedic Dictionary of the English Language. 1997. New York: Random House Publishing Inc.

This material has been reproduced with the permission of the copyright owner. Unauthorized reproduction of this material is strictly prohibited. For permission to reproduce this material, please contact PMI or any listed author.

Proceedings of the Project Management Institute Annual Seminars & Symposium
November 1–10, 2001 • Nashville, Tenn., USA

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