The Shakedown free essay sample

This case portrays the widely propagated and accepted phenomena of bribes and corruption in developing countries. Specifically how it affects every sector of the Ukrainian society, therefore making it difficult for the American investors to establish companies there and to prosper solely on doing good business. The case describes the types of obstacles and ethical dilemmas being created for the investors as a result of bribery and extortion. Situation In analyzing these issues, we will first present a brief introduction to the situation. Mr. Pavlo Zhuk, a young, but already well established, entrepreneur from California, is faced with a difficult ethical business decision concerning his recently incorporated company in Kiev, Ukraine. His company, Customer Strategy Solutions, is being targeted for money extortion by UTA (Ukraine Tax Authority) officials. The UTA, represented by Laryssa Ossipivna Simonenko, claims that the company owes the government close to $16, 000 in taxes due to unfiled schedules . But this is not an ordinary visit from the UTA to his development center in Kiev. We will write a custom essay sample on The Shakedown or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page Setting up his software development center in Ukraine means more to Zhuk than just business expansion to his company. He wants to make a difference. Zhuk, being himself of Ukrainian descent, sees this as an opportunity for him to invest in this country and therefore help its economy, to contribute to Ukrainian modernization by introducing new technology. He decides to train his employees in array of skills, to raise the standard of their living by providing higher salaries than the other local companies, to enable the people to buy homes, cars and consumer durables. But for Zhuk this is not the first difficulty he encountered since he started his company here. His first problem occurred when he tried to get telephone lines installed in his office. He learned firsthand how business is made in developing country, after his friend and head of the development center in Kiev, Kostya Hnatyuk, took him to Dnipro Telecom, a government-owned telecommunications utility. After meeting with Vasy l Feodorovich Mylofienko, a senior business manager at Dnipro Telecom, they were told that because of the current backlog of orders, it might take up to three years for the lines to be installed. But for a onetime fee of $5,000, they can have the software center up and running next week. 1 It was clear to Zhuk at that moment that they need to bribe Mylofienko. And although such action is in direct contradiction with Zhuk’s moral beliefs, for the sake of his company and the programmers he already hired, he decides to make that call. Zhuk realizes that if he wants to keep his company in Ukraine and to generate profit in the future, he needs to keep compromising his ethical values. He knows that it is a never-ending process, and once he bribes a government official, more will follow. All this consequently leads Zhuk to the crossroads of decision making; should he stay true to his moral beliefs, close his company and return to the United States, or, should he stay in Ukraine, pay off the bureaucrats, and therefore walk over all ethical values he has? II. Analysis In this case the dilemma facing Zhuk is harshly straight forward and evident, but the yarns that weave together to create this mess of a fabric are quite complex. Like most situations where ethics are brought under fire the lines are blurred, and a host of factors can contribute. Ethical Landscape Let’s start by acknowledging the fact that Zhuk, while having Ukrainian blood running through his veins, is inevitably American. He must realize that mere good will is not enough to sustain one’s self let alone an organization when faced with the pressures of maneuvering in an environment he is far removed from and out of touch with. After all, Zhuk is the product of parents who fled the chaos of Ukraine post World War II and embraced, with arms wide open, the culture and values of Mid-western United States. These were people who longed to be free of the ills that lay before their country and strived to expose their children to anything but. Zhuk was born into a comfortable life in California watching parents who eagerly modeled American values, was educated at the best American schools, worked for the best American technology firms, and thus learned and was comfortable with conducting business the American way. Zhuk did a poor job recognizing these differences within himself and the environment in Kiev. In Unit 2 of our management course one of the topics discussed was cultural differences and IQ, Zhuk made the ill-founded assumption that because his lineage traced back to Ukraine, he was connected to and understood the business environment. He couldn’t have been more wrong. It is only reasonable that any investor interested in starting a company in a developing nation to research and investigate the business landscape in such an unfamiliar terrain before opening up operations there. This is beneficial, as it will provide the prospective investor with important information about the business environment and practices. In particular, an investor should analyze the labor market, examine the costs of founding a company and consider the possible business ethics challenges. In our case, Zhuk needed to make certain his business strategy was in tune with the local culture, business practices and laws in Ukraine. Cultural Framework Ukraine is just a different animal, and because of the cultural differences between the two countries it is no wonder why Zhuk feels like a fish out of water (see Exhibit 1). There is a ridiculously high incentive received on who you know, or should I say, who you pay, and the government’s role in this pay for play game makes it that much more taxing- no pun intended. Americans may feel they echo- identically- this same sentiment with our eastern European friends, but be assured the U. S. is to be considered the minor leagues in comparison to these seasoned pro athletes. Ukraine has been in turmoil for some time now, namely since it claimed it’s independence from the Soviet Union in 1991. Ukraine had its share of economic woes prior to this but since then, what was thought to become a land of economic prosperity has since become a melting pot of governmental mismanagement and corruption. This nation is the equivalent of a child growing up parentless, forced to find its own way in a world that is, sadly enough, full of individuals caught up in their own quest to emerge strong and triumphant. â€Å"The only starting point that could be used for reference is the nation’s historical identity, comprised of its language, culture, traditions, and family structure. One minor hindrance is that in today’s global environment of global influences, any nation, especially one who is in a period of economic transition, will have no clear vision when it comes to ethics. Unit 3of MGT 500 discusses some different approaches to arrive at ethical decision making. Of those presented, the Moral -Rights approach describes Zhuk’s behavior best, it states: †¢Moral decisions are those that best maintain the rights of those people affected by them †¢An ethical decision is one that avoids interfering with the fundamental rights of others Dr. Simpson goes on to de fine the Six Moral Rights (see exhibit 2) . The challenge here is deciding when these rules apply. Is it fair for Zhuk to impose his cultural customs and moral standards on to the next party? The answer to such a question is the very thing that makes discussion about morals and ethics the song that doesn’t end. Individual Difference Communication Disconnect It appears that Zhuk should have spent more time establishing the corporate ethical values that his company would live by before entering the marketplace. The individual and ethical differences are made evident by the actions of Zhuk’s business partner Hnatyuk when the pair ran into trouble getting the phone lines established. Hnatyuk didn’t hesitate to give the telecom manager signal that they were willing to pay a bribe; Zhuk, uncomfortably obliged. It is clear that Hnatyuk and Zhuk are on two totally different wavelengths. Hnatyuk has been doing business in the country for six years and has a tandem amount of knowledge about how business is conducted. It seems as if he has embraced the way of paying government workers to more promptly administer permits and paperwork. Zhuk on the other hand, is ignorant of the inter-workings of the business environment. The lack of communication between the two partners further enhanced the complexity of the situation. Zhuk had no idea that a potential bribe was being paid until after he agreed and the money changed hands. Abuse of Power Another defining concept in this case is the use, and abuse of power in Ukraine. From the telecom company to the government tax officials, it is clear that entities use their position for their own personal gain, unfairly charging and taxing foreign investors. The bureaucrats, driven by their own greed, create very unfavorable investing conditions, repelling foreigners who are willing to invest money in Ukraine. The problem with the power structure in this country is that, while it is exerted in a coercive manner, it is not at all formal. see Exhibit 3 )Being a developing country, the policies and rules are very unclear if existent at all; mainly because no one, not even the government abides by them. This makes it hard for international businesses to defend themselves from this type of force, because it is unclear what rights they truly have. It becomes timely and ultimately costly figure out exactly what is lawful and defend one’s self from these activities. T he right to pursue due process should be innate, but, as in most developing countries, the judicial systems are highly politicized and the web of corruption entangles every member of the society. Recommendation Zhuk’s decision to pay a bribe in order to get phone service expedited may seem like a small price to pay but has sent out a major signal to the rest of the business community in Kiev. It is a symbol of his, though reluctant, acknowledgement of the way business is conducted in the country and his willingness to participate. As Djelic, one of the thought leaders who gave commentary on the article said, â€Å"†¦once you join that dance, the music never stops. † He went on to say that if Zhuk decided to pay off the tax officials, he may risk forfeiting business relationships and customers once word gets out. This, unfortunately, is part of the price of doing business in Kiev. At first glance it may appear that Zhuk should pack up his company and leave. After all, if we look at the model for three domains of human actions, the legal standards have the highest amount of explicit control over the process of decision making. (see exhibit 4). The law and the effects of it, will be the determining factors for Zhuk’s actions and starting point in the decision making process. Zhuk should ask himself â€Å"Is it legal? † Customer Strategy Solutions should stay, and continue to build its operations in Kiev. To answer the first question in the Decision Tree for Ethical Decisions (see Exhibit 5), we believe that Zhuk’s action were legal and in compliance with the Ukrainian law and with the U. S. Foreign Corrupt Practices Act (FCPA). The FCPA, endorsed in 1977, prohibits corrupt payments to foreign officials for the purpose of obtaining or keeping business. The Foreign Corrupt Practices Act, while prohibiting bribery, offers protection for the company under its Permissible Payments and Affirmative Defenses Section. The FCPA permits â€Å"payment of small sums to facilitate routine, non-discretionary governmental functions†. This includes things like paying for phone service, issuance of permits and licenses, etc. It goes on to define â€Å"affirmative defenses† as permissible if â€Å"payment was lawful under the written laws of the foreign country or that the money was spent as part of demonstrating a product or performing a contractual obligation†10. In this case, the fee paid for speeding up the process of telephone lines installation and the unpaid taxes, both fall under this provision. Does this decision maximize the shareholder value? We can only speculate about this, since the case doesn’t provide us with information as to if Customer Strategy Solutions has public traded stock. But nevertheless, should we ignore the fact that there is certain future success for the company in Ukraine? According to the Ukrainian Software Developers Association, the Ukraine’s exports of IT-related services will double in the next two years. Customer Strategy Solutions is there at the right time, and should stay. The last and maybe most difficult question to answer on the decision tree is the ethical one. How do we answer the question â€Å"Is it ethical? Considering the complexity of various situations, and what moral values and beliefs are important, there are several different ethical decision models. (see Exhibit 6). The Utilitarian Approach best answers Zhuk’s dilemma: should he pay off the tax officials? While he might be acting against his moral standards, Zhuk will be doing greater good for the greatest number of people. (see Exhibit 7). Operating in Kiev, Customer Strategy Solutions will offer a certain number of jobs for Ukrainian programmers, provide good salaries and benefits for its employees, and improve their financial stability and help the Ukrainian economy. The Shakedown free essay sample This case portrays the widely propagated and accepted phenomena of bribes and corruption in developing countries. Specifically how it affects every sector of the Ukrainian society, therefore making it difficult for the American investors to establish companies there and to prosper solely on doing good business. The case describes the types of obstacles and ethical dilemmas being created for the investors as a result of bribery and extortion. Situation In analyzing these issues, we will first present a brief introduction to the situation. Mr. Pavlo Zhuk, a young, but already well established, entrepreneur from California, is faced with a difficult ethical business decision concerning his recently incorporated company in Kiev, Ukraine. His company, Customer Strategy Solutions, is being targeted for money extortion by UTA (Ukraine Tax Authority) officials. The UTA, represented by Laryssa Ossipivna Simonenko, claims that the company owes the government close to $16, 000 in taxes due to unfiled schedules . But this is not an ordinary visit from the UTA to his development center in Kiev. We will write a custom essay sample on The Shakedown or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page Setting up his software development center in Ukraine means more to Zhuk than just business expansion to his company. He wants to make a difference. Zhuk, being himself of Ukrainian descent, sees this as an opportunity for him to invest in this country and therefore help its economy, to contribute to Ukrainian modernization by introducing new technology. He decides to train his employees in array of skills, to raise the standard of their living by providing higher salaries than the other local companies, to enable the people to buy homes, cars and consumer durables. But for Zhuk this is not the first difficulty he encountered since he started his company here. His first problem occurred when he tried to get telephone lines installed in his office. He learned firsthand how business is made in developing country, after his friend and head of the development center in Kiev, Kostya Hnatyuk, took him to Dnipro Telecom, a government-owned telecommunications utility. After meeting with Vasy l Feodorovich Mylofienko, a senior business manager at Dnipro Telecom, they were told that because of the current backlog of orders, it might take up to three years for the lines to be installed. But for a onetime fee of $5,000, they can have the software center up and running next week. 1 It was clear to Zhuk at that moment that they need to bribe Mylofienko. And although such action is in direct contradiction with Zhuk’s moral beliefs, for the sake of his company and the programmers he already hired, he decides to make that call. Zhuk realizes that if he wants to keep his company in Ukraine and to generate profit in the future, he needs to keep compromising his ethical values. He knows that it is a never-ending process, and once he bribes a government official, more will follow. All this consequently leads Zhuk to the crossroads of decision making; should he stay true to his moral beliefs, close his company and return to the United States, or, should he stay in Ukraine, pay off the bureaucrats, and therefore walk over all ethical values he has? II. Analysis In this case the dilemma facing Zhuk is harshly straight forward and evident, but the yarns that weave together to create this mess of a fabric are quite complex. Like most situations where ethics are brought under fire the lines are blurred, and a host of factors can contribute. Ethical Landscape Let’s start by acknowledging the fact that Zhuk, while having Ukrainian blood running through his veins, is inevitably American. He must realize that mere good will is not enough to sustain one’s self let alone an organization when faced with the pressures of maneuvering in an environment he is far removed from and out of touch with. After all, Zhuk is the product of parents who fled the chaos of Ukraine post World War II and embraced, with arms wide open, the culture and values of Mid-western United States. These were people who longed to be free of the ills that lay before their country and strived to expose their children to anything but. Zhuk was born into a comfortable life in California watching parents who eagerly modeled American values, was educated at the best American schools, worked for the best American technology firms, and thus learned and was comfortable with conducting business the American way. Zhuk did a poor job recognizing these differences within himself and the environment in Kiev. In Unit 2 of our management course one of the topics discussed was cultural differences and IQ, Zhuk made the ill-founded assumption that because his lineage traced back to Ukraine, he was connected to and understood the business environment. He couldn’t have been more wrong. It is only reasonable that any investor interested in starting a company in a developing nation to research and investigate the business landscape in such an unfamiliar terrain before opening up operations there. This is beneficial, as it will provide the prospective investor with important information about the business environment and practices. In particular, an investor should analyze the labor market, examine the costs of founding a company and consider the possible business ethics challenges. In our case, Zhuk needed to make certain his business strategy was in tune with the local culture, business practices and laws in Ukraine. Cultural Framework Ukraine is just a different animal, and because of the cultural differences between the two countries it is no wonder why Zhuk feels like a fish out of water (see Exhibit 1). There is a ridiculously high incentive received on who you know, or should I say, who you pay, and the government’s role in this pay for play game makes it that much more taxing- no pun intended. Americans may feel they echo- identically- this same sentiment with our eastern European friends, but be assured the U. S. is to be considered the minor leagues in comparison to these seasoned pro athletes. Ukraine has been in turmoil for some time now, namely since it claimed it’s independence from the Soviet Union in 1991. Ukraine had its share of economic woes prior to this but since then, what was thought to become a land of economic prosperity has since become a melting pot of governmental mismanagement and corruption. This nation is the equivalent of a child growing up parentless, forced to find its own way in a world that is, sadly enough, full of individuals caught up in their own quest to emerge strong and triumphant. â€Å"The only starting point that could be used for reference is the nation’s historical identity, comprised of its language, culture, traditions, and family structure. One minor hindrance is that in today’s global environment of global influences, any nation, especially one who is in a period of economic transition, will have no clear vision when it comes to ethics. Unit 3of MGT 500 discusses some different approaches to arrive at ethical decision making. Of those presented, the Moral -Rights approach describes Zhuk’s behavior best, it states: †¢Moral decisions are those that best maintain the rights of those people affected by them †¢An ethical decision is one that avoids interfering with the fundamental rights of others Dr. Simpson goes on to de fine the Six Moral Rights (see exhibit 2) . The challenge here is deciding when these rules apply. Is it fair for Zhuk to impose his cultural customs and moral standards on to the next party? The answer to such a question is the very thing that makes discussion about morals and ethics the song that doesn’t end. Individual Difference Communication Disconnect It appears that Zhuk should have spent more time establishing the corporate ethical values that his company would live by before entering the marketplace. The individual and ethical differences are made evident by the actions of Zhuk’s business partner Hnatyuk when the pair ran into trouble getting the phone lines established. Hnatyuk didn’t hesitate to give the telecom manager signal that they were willing to pay a bribe; Zhuk, uncomfortably obliged. It is clear that Hnatyuk and Zhuk are on two totally different wavelengths. Hnatyuk has been doing business in the country for six years and has a tandem amount of knowledge about how business is conducted. It seems as if he has embraced the way of paying government workers to more promptly administer permits and paperwork. Zhuk on the other hand, is ignorant of the inter-workings of the business environment. The lack of communication between the two partners further enhanced the complexity of the situation. Zhuk had no idea that a potential bribe was being paid until after he agreed and the money changed hands. Abuse of Power Another defining concept in this case is the use, and abuse of power in Ukraine. From the telecom company to the government tax officials, it is clear that entities use their position for their own personal gain, unfairly charging and taxing foreign investors. The bureaucrats, driven by their own greed, create very unfavorable investing conditions, repelling foreigners who are willing to invest money in Ukraine. The problem with the power structure in this country is that, while it is exerted in a coercive manner, it is not at all formal. see Exhibit 3 )Being a developing country, the policies and rules are very unclear if existent at all; mainly because no one, not even the government abides by them. This makes it hard for international businesses to defend themselves from this type of force, because it is unclear what rights they truly have. It becomes timely and ultimately costly figure out exactly what is lawful and defend one’s self from these activities. T he right to pursue due process should be innate, but, as in most developing countries, the judicial systems are highly politicized and the web of corruption entangles every member of the society. Recommendation Zhuk’s decision to pay a bribe in order to get phone service expedited may seem like a small price to pay but has sent out a major signal to the rest of the business community in Kiev. It is a symbol of his, though reluctant, acknowledgement of the way business is conducted in the country and his willingness to participate. As Djelic, one of the thought leaders who gave commentary on the article said, â€Å"†¦once you join that dance, the music never stops. † He went on to say that if Zhuk decided to pay off the tax officials, he may risk forfeiting business relationships and customers once word gets out. This, unfortunately, is part of the price of doing business in Kiev. At first glance it may appear that Zhuk should pack up his company and leave. After all, if we look at the model for three domains of human actions, the legal standards have the highest amount of explicit control over the process of decision making. (see exhibit 4). The law and the effects of it, will be the determining factors for Zhuk’s actions and starting point in the decision making process. Zhuk should ask himself â€Å"Is it legal? † Customer Strategy Solutions should stay, and continue to build its operations in Kiev. To answer the first question in the Decision Tree for Ethical Decisions (see Exhibit 5), we believe that Zhuk’s action were legal and in compliance with the Ukrainian law and with the U. S. Foreign Corrupt Practices Act (FCPA). The FCPA, endorsed in 1977, prohibits corrupt payments to foreign officials for the purpose of obtaining or keeping business. The Foreign Corrupt Practices Act, while prohibiting bribery, offers protection for the company under its Permissible Payments and Affirmative Defenses Section. The FCPA permits â€Å"payment of small sums to facilitate routine, non-discretionary governmental functions†. This includes things like paying for phone service, issuance of permits and licenses, etc. It goes on to define â€Å"affirmative defenses† as permissible if â€Å"payment was lawful under the written laws of the foreign country or that the money was spent as part of demonstrating a product or performing a contractual obligation†10. In this case, the fee paid for speeding up the process of telephone lines installation and the unpaid taxes, both fall under this provision. Does this decision maximize the shareholder value? We can only speculate about this, since the case doesn’t provide us with information as to if Customer Strategy Solutions has public traded stock. But nevertheless, should we ignore the fact that there is certain future success for the company in Ukraine? According to the Ukrainian Software Developers Association, the Ukraine’s exports of IT-related services will double in the next two years. Customer Strategy Solutions is there at the right time, and should stay. The last and maybe most difficult question to answer on the decision tree is the ethical one. How do we answer the question â€Å"Is it ethical? Considering the complexity of various situations, and what moral values and beliefs are important, there are several different ethical decision models. (see Exhibit 6). The Utilitarian Approach best answers Zhuk’s dilemma: should he pay off the tax officials? While he might be acting against his moral standards, Zhuk will be doing greater good for the greatest number of people. (see Exhibit 7). Operating in Kiev, Customer Strategy Solutions will offer a certain number of jobs for Ukrainian programmers, provide good salaries and benefits for its employees, and improve their financial stability and help the Ukrainian economy.