CASE STUDY

How Rule- Based and Relationship Based governance system affect ethical behavior! The developed nations of the world operate under governance systems quite different from those used by developing nations. The developed nations and the business firms within them follow well recognized rules in their dealings and financial reporting. To the extent that a countrys rules force business corporations to publicly disclose in-depth information about the company to potential shareholders and others, that countrys financial and legal system is said to be transparent. Transparency is said to simplify transactions and reduce the temptation to behave illegally or unethically. Finland, the United Kingdom, Hong Kong, the United States, and Australia have very transparent business climates. The Kurtzman Group, a consulting firm, developed an opacity index that measures the risks associated with unclear legal systems, regulations, economic policies, corporate governance standards, and corruption in 48 countries. The countries with the most opaque/least transparent ratings are Indonesia, Venezuela, China, Nigeria, India, Egypt, and Russia. Developing nations tend to have relationship-based governance. Transactions are based on personal and implicit agreements, not on formal contracts enforceable by a court. Information about a business is largely local and privatethus cannot be easily verified by a third party. In contrast, rule-based governance relies on publicly verifiable informationthe type of information that is typically not available in a developing country. The rule-based system has an infrastructure, based on accounting, auditing, ratings systems, legal cases, and codes, to provide and monitor this information. If present in a developing nation, the infrastructure is not very sophisticated. This is why investing in a developing country is very risky. The relationship based system in a developing nation is inherently nontransparent due to the local and non-verifiable nature of its information. A business person needs to develop and nurture a wide network of personal relationships. What you know is less important than who you know. The investment in time and money needed to build the necessary relationships to conduct business in a developing nation creates a high entry barrier for any newcomers to an industry. Thus, key industries in developing nations tend to be controlled by a small number of companies, usually privately owned, family-controlled conglomerates. Because public information is unreliable and insufficient for decisions, strategic decisions may depend more on a CEO playing golf with the prime minister than with questionable market share data. In a relationship-based system, the culture of the country (and the founders family) strongly affects corporate culture and business ethics. What is fair depends on whether one is a family member, a close friend, a neighbor, or a stranger. Because behavior tends to be less controlled by laws and agreed-upon standards than by tradition, businesspeople from a rule-based developed nation perceive the relationship-based system in a developing nation to be less ethical and more corrupt. According to Larry Smeltzer, ethics professor at Arizona State University: The lack of openness and predictable business standards drives companies away. Why would you want to do business in, say Libya, where you dont know the rules?

Questions: 1. How relationship based governance system affects ethical behavior of business organizations in developing nations? 2. The investment in time and money needed to build the necessary relationships to conduct business in a developing nation creates a high entry barrier for any newcomers to an industry. Justify this statement in context to the business environment of United Arab Emirates [UAE]