Global profits, ethical perils: the old adage, "when in Rome do as the Romans do," made decisions easy. The new one, yet to be written, will make life hard. (Global).

Dennis Bakke CEO of AES Corp., the world's largest independent power producer, based in Arlington, Va., is a self-proclaimed "cultural imperialist." His $9.3 billion corporation, he says, doesn't lower its ethical standards in any of the 31 nations in which it owns or invests in 184 power plants.

That includes countries like corruption-plagued December 2001, AES gained final approval to build a 250-megawatt hydroelectric dam on Uganda's upper Nile River. Bakke says that in a decade of project development so far, he has forbidden the paying of bribes. One of AES's own Ugandan employees landed in jail for stealing from the company. But that's the exception.

Outsiders hearing about the $550 million project say that resisting corruption must have been impossible. But Bakke maintains otherwise. He says he wouldn't even approve of paying Ugandan reporters fees for writing positive stories -- a routine Ugandan practice -- despite withering criticism leveled at AES for destroying the Bujagali rapids, for displacing poor farmers and for backroom political dealing.

Bakke deals regularly with an issue facing all firms that do business globally -- deciding what's ethically acceptable when home and host country practices conflict. But the dilemmas he and other CEOs handle have become much more complex and more quickly attract the media spotlight.

Note the 1990s travails of footwear and apparel manufacturers, from Nike to Levi Strauss. Accusations of sweatshop and child labor tarred their reputations. In view of those experiences, CEOs everywhere have learned that they have to nurture a culture of ethical decision-making. They also have to implement review systems that reward ethical behavior and set a more visible example of good corporate practices.

Government hand-off to corporations

Society's increasing focus on corporate ethics stems from corporations' ongoing displacement of governments as the most powerful agents of social change. From the United Kingdom to Thailand, governments are pulling back. They are handing over control of a range of services -- from water and power to health care, telecommunications and transportation -- to the private sector. The U.K. recently proposed to bid out the operation of the London Underground subway system. Italy proposes contracting out operation of its art museums. The world's citizens, in turn, insist that executives make decisions based on more than maximizing shareholder value.

"If we believe that the nation-state has some moral responsibility," says Rushwood Kidder, president of the Institute for Global Ethics in Camden, Maine, "then we have to extend [the same thinking] to the multinational corporation," the entity that's taking the nation-state's place in more and more parts of society.

John Browne, CEO of BP, feels similarly. "If globalization marks the end of sovereignty for national governments," he said in a speech at Cambridge University last year, "it should equally end any sense of splendid isolation that exists in the corporate world."

The dictum once embraced in some quarters -- "When in Rome, do as the Romans do" -- has become ever more unacceptable. Anti-globalization protesters have taken to the streets to remind CEOs of that, giving many of them a flogging in the court of public opinion.

The new CEO challenge is to act like an ethical leader for society as a whole, to act before crises demand it, to engage outsiders in decision-making and to adhere to standards of behavior that locals embrace. This complex job, demanded by figures with the moral authority of U.N. Secretary-General Kofi Annan, can cause executives a lot of discomfort.

Among the most difficult questions are those arising in emerging markets. Ronald Berenbeim, an ethics expert at The Conference Board in New York, says that the toughest issues come up either in zones of conflict -- Sudan, for example -- or in what he calls "failed states," such as China, Nigeria and Myanmar. By "failed," he means nations without independent judiciaries, with malfunctioning health services, corrupt election processes and so on.

In such spots, CEOs face hard questions: Do you support a repressive country's national interests? Do you counter environmental degradation? Do you take a role in alleviating poverty?

Even if CEOs can easily answer "yes," the question arises, "To what extent?" And, "To what global standard do we defer?"

Often there are no correct answers. The challenge has shifted from choosing between right and wrong to choosing between right and right, says the Institute for Global Ethics' Kidder. Well-meaning, thoughtful people can have different views and both can be correct.

Georges Enderle, business ethics professor at the University of Notre Dame, goes even further. He notes that decisions may offer only several lousy alternatives -- choices between wrong and wrong.

Johnson & Johnson CEO Ralph Larsen recalls his decision in 1998 to close about 50 small plants around the world, each with 50 to 100 employees. The fall of trade barriers made them uncompetitive. Keeping them running with hundreds of employees was wrong because the short-term expense could later trigger big layoffs firm-wide. But laying off local staff seemed wrong, too.

"I had visited all of these plants; I'd shaken hands with many of these people," he says. A layoff violated Johnson & Johnson's commitment to its employees. Still, he says, "It's an action we had to do for the larger good.... It cost me a lot of sleep, because we were impacting the lives of people who gave us their lives."

Larsen couldn't have made the decision without relying on what experts agree is the basis for ethical decision-making: a set of values, put together in advance of crisis. The explicit values narrow the gray area. In this case, Larsen relied on Johnson & Johnson's "credo," a one-page statement of values that highlights the company's responsibility to each of its stakeholders. The credo, which CEO-elect William Weldon will continue to use upon Larsen's scheduled retirement in July 2002, gives executives a basis for working through tough issues.

Corporate values are key and so is analysis, says Michael Hoffman, executive director of Bentley College's Center for Business Ethics in Waltham, Mass. "We only see what we're looking for," he says, adding, "This is all about making people wear ethical glasses."

But even with glasses, global ethics cover uncomfortable ground. A look at four dilemmas illustrates the toughness of analysis, the vagaries of mechanisms to find resolution and some hard-won lessons.

When to lower the ethical bar

Sometimes the right decision appears to be to accept lower ethical standards in an emerging country. James Baker, retired CEO of Arvin Industries, recalls a painful decision during the l980s in Taiwan. To get Arvin auto-part shipments off the dock and shipped to the U.S. and Canada, Taiwanese longshoremen demanded small bribes, roughly $40 each. Baker couldn't stomach the idea, but he couldn't see a way around it, either.

"[The decision] came to me," he says, "because we had a policy against facilitating payments. Period." His solution: Rather than hiding the bribes, he authorized them as long as they were openly accounted for monthly. "We said we'd compromise our principles, but we're going to compromise above the board and not below the board."

Like many CEOs, Baker retained the prerogative to craft solutions himself. "My role was as the chief ethics officer of the corporation," he says. "That's not something I delegated." In this case, Baker lowered the bar. But how should he have analyzed such a case?

Veteran business ethicist Thomas Donaldson, professor at the University of Pennsylvania's Wharton School, advises executives to divide such questions into two piles. In the first are those cases where CEOs might lower their ethical standards because, owing to the host country's lower level of economic development, the reduction is the "caring" thing to do. For instance, the CEO might approve a higher level of air pollution if doing so provides jobs that support starving families.

The second pile consists of those cases where relative economic development fails to justify the decision. In these cases, lowering the standards makes sense, Donaldson says, only if CEOs can find no other way to do business and they don't violate a fundamental human right. By that measure, Baker was in the right. The small bribes probably didn't violate any human right such as liberty, security, non-discrimination, minimal education and political participation.

Of course, some companies believe that lowering the bar is never acceptable. "We said we would not do it," says AES's Bakke of paying bribes for good press in Uganda. And that was despite the company's desperate desire to refute the allegations. "It's not because we re goody two shoes," he says. "We just don't think it's the right way to do business."

To circumvent the culture of corruption, Bakke secured early on a promise from Ugandan President Yoweri Museveni to support AES's just-say-no-to-bribes approach. Museveni sent that message down through the 283-member Ugandan Parliament and to his 30 ministers.

AES Uganda director Christian Wright then met with ministers and parliamentarians. He started every conversation the same way, acknowledging "rumors" of Ugandan corruption, which he called a "cancer" that restrained Uganda's standard of living. He then said some Ugandan leaders "could" put their own interests before the country's, but he was glad he was not talking to one of them.

"That sort of tack saved us a lot of awkward moments," Wright says. And it allowed him to ignore the many times when decision-makers suggested indirectly that they were open to influence through financial favors. It also saved the power project, one of the largest-ever investments in East Africa. "Even if you want to be unethical," he says, "it's untenable" be cause so many people--hundreds of politicians, residents, activists, civil servants--could then have been on the take.

Arvin's Baker has struggled with a second issue: doing business with repressive regimes, which he's done in South Africa. In the face of U.S. State Department economic sanctions and demonstrating students, Baker recalls how he decided to retain two South African auto-part plants, each employing about 500 workers. "It made sense to us that the best way to treat people was not to shut down their jobs," he says.

That view has been hotly debated. The dilemma comes down to this: If you believe a regime is ethically at odds with your values, do you engage in it or do you isolate it? And if you feel responsible for furthering the cause of human rights, which works better in getting the regime to change its ways?

Doing business with repressive regimes

One of the most criticized companies today on this issue is Unocal, the El Segundo, Calif., oil company. The $6.7 billion corporation conducts business in Myanmar, a regime under U.S. economic sanctions. Although Unocal CEO Charles Williamson declined to comment for this article, the company has stated publicly that it believes engagement is the best way to strengthen emerging economies and promote open societies.

Unocal is an investor in a gas pipeline reaching from the Yadana offshore gas field in Myanmar to Thailand. The company points out that the project has brought unprecedented economic, health care and education benefits to the 40,000 people in the area. Independent monitors verify this claim, reporting that the company goes well beyond its legal obligations, including paying above-market wages. Still, Unocal is a partner with a government reviled for human rights abuses.

Unocal is following a principle that the Institute for Global Ethics' Kidder characterizes as follows: "If you want to beat the dents out of a can, it's a lot easier to do it from the inside than the outside."

BP follows the same approach in China. "Our world is very much a pro-engagement one," says David Rice, co-director of BP's government and public affairs policy unit in London. That said, he adds: "We certainly have a responsibility for our own behavior. The first thing is we must make sure we're not complicit in any human rights abuses."

Critics say BP is indirectly complicit. They have attacked the company since March 2001, when it invested $578 million to buy 2 percent of PetrolChina, a subsidiary of China National Petroleum. Critics assail the investment as support for China's destruction of Tibetan culture: PetroChina is building a pipeline across Tibet and transferring ethnic Chinese into the region to do so.

BP rejects the criticism. It bought the PetroChina shares to support its overall relationship with China, which encompasses multiple energy projects. "We choose to work in some areas that are experiencing difficulty and where human rights fall short of western standards," said CEO Browne in his Cambridge speech. "We do so because we believe that by being there we can provide some small reinforcement to progress.

But is engagement the right decision? As guidance, consider the logic of ethicist Donaldson. He notes that most people, by a sort of moral reflex, refuse to do business with entities that go beyond a certain threshold of objectionable behavior--Hitler, the Mafia, drug smugglers. If this is true, a moral principle probably lies behind this reflex.

Donaldson suggests that corporations adopt a principle that simply forbids transactions with parties that go beyond a threshold. But that threshold can be hard to define. He suggests executives invoke a widely accepted measure of human rights. Transactions with violators of that measure -- of the U.N. Declaration of Human Rights, for example--would be impermissible.

By that measure, Unocal's investment would be unethical. Of course, Donaldson notes exceptions. The most critical: If the transactions discourage future violations or if they harm or fail to benefit the violating party. The exceptions often leave CEOs poised on the horns of a dilemma and, in public, bloodied by them.

A CEO's obligation to alleviate poverty

Deciding whether to address poverty is easy for many companies. At AES, "The whole purpose of the company is to serve the world and make a contribution," says Bakke, a devout Christian. "Are we trying to reduce poverty? Absolutely." But the dilemma, comes in deciding how to do so.

Bakke's answer is to invoke the company's stakeholder view. He says all stakeholders--shareholders, employees, customers, local citizens, governments, bankers--deserve a piece of the pie. "All those people have to be treated with equal priority," he says. When they are, Bakke believes AES will demonstrate a corporate model for raising living standards in poor nations.

"It's not charity; it's hard-nosed economics," he says. "The [ethical] argument is about balance. That's the discussion we should be having."

One question of balance is deciding how much AES will charge for electricity. Critics say that 6 cents per kilowatt hour, the current figure, is way too high in a country where many earn less than a dollar a day. But Bakke asks, "How much should they pay?" He answers his own question: The bulk of impoverished Ugandans can't afford to pay anything. But AES can't operate in a sustainable fashion by giving power away.

Bakke agrees to an investment return far short of the 35 percent that would take into account all the company's risks in Uganda. But he makes sure the project earns a good enough return for investors to stick with it--AES's investors are accepting 16 to 20 percent. "We're taking a lower number than you typically would take," he says. "It's not exploitation and not charity either, and it's sustainable."

At Johnson & Johnson, Larsen follows similar logic. Most recently, he guided the company through one of the more difficult decisions facing pharmaceutical companies: How to price drugs internationally.

"It's an ethical dilemma," says Larsen. On the one hand, his company strives to sell its drugs for the same price in every country. On the other, he says, "It makes no sense to be offering a product if no one can afford to buy it.

"Pharmaceutical companies have an obligation to make their drugs available around the world," he adds. That's a position that comes from the company's credo, which says, in part, "We are responsible to the communities in which we live and work and to the world community as well." Larsen's conclusion about how to provide drugs in destitute nations? "The best route is to make them available via royalty-free license" to local entrepreneurs, he says.

Johnson & Johnson hasn't yet struck a royalty-free agreement. It is still formulating policy. But as the company sorts its options, the credo remains the guiding light. Like a mantra, Larsen recites its premise: "If we serve our customers well, treat our employees well, and treat communities well, our shareowners will come out alright." If it doesn't, the world's computer and networking systems are online to broadcast in seconds any lapses in global corporate rectitude. And the world's protesters are on the street corner ready to cry foul.

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RELATED ARTICLE: Corporations Open Doors to Activists

Nongovernmental organizations, or NGOs, can be a pain in the neck, and many CEOs would prefer to shut them out. But increasingly, this is both practically and ethically untenable. The world's citizens view NGOs as proxies for expressing society's legitimate control over corporate power and action, and NGOs can use their own political power and specialized knowledge to push companies around.

"Unless you have a deliberative process that includes voices that are key stakeholders," says business ethicist Thomas Donaldson, a professor at the University of Pennsylvania's Wharton school, "you can't make an ethical decision."

That raises a fourth question: How does a company deal with NGOs? Many are opening their doors. Arlington, Va.-based power giant AES, which has plans to build a hydroelectric dam on Uganda's Nile River, paid to fly its Ugandan opponents to an NGO forum in Washington, to which it also invited International Rivers Network, an archenemy of all dams. BP met with the Free Tibet Campaign, International Campaign for Tibet and Students for Free Tibet. "That's part of the engagement process," says David Rice, co-director of BP's government and public affairs policy unit. "We try to inform them and help them understand what we're doing."

Opening that door is a lesson that Freeport-McMoRan Copper & Gold learned the hard way in Indonesia. For 20 years, Freeport was widely criticized by NGOs for its rough treatment of the environment and local peoples in West Papua, formerly Irian Jaya. David Lowry, Freeport's vice president of social and community affairs and human rights compliance, acknowledges the struggles and says it is looking for new ways to move forward.

"The rightful aspirations and dignity of local people are issues we never had to deal with before," Lowry admits. Fifteen years ago, the company dealt mainly with government officials in Jakarta. But Lowry, who spent Live years in West Papua in the 199 Os at the company's goliath Grasberg Mine, maintains that the most pressing dilemma now is to figure out how, in dealing with indigenous peoples, to "struggle together and not against each other."

Freeport has engaged the local Amungme and Kamoro tribes in a dialogue. It has hired a Ph.D. for cultural relations as well as community liaison officers. It assigned a team for local development and created two multimillion-dollar trusts for local development.

But as the company resolves political and economic issues, the tough cultural and spiritual ones remain. "The issue we're really struggling with is their perception of their relationship with the earth," Lowry says. To locals, the land is the "head of mother, breasts of mother, and the river is mother's milk," he says. "When you disturb the land you are disturbing our mother."

Perhaps most difficult, the company is in the midst of managing decisions over which it no longer has full reign. That puts Freeport in the position of many global companies. Notre Dame business ethics professor Georges Enderle says that CEOs faced with strong NGOs just can't craft solutions on their own. "That is a topic of negotiation," Enderle says. "It's a process."