CREDIT: <a href="">Jake Brewer</a> (<a href="">CC</a>).
CREDIT: Jake Brewer (CC).

Policy Innovations Digital Magazine (2006-2016): Innovations: Merck's Dubai Ethics Center

Oct 12, 2007

Resolute ethical business standards can be a distinct bottom-line liability for companies operating in environments where corruption is more the rule than the exception—at least in the short term. This is certainly the case in many Arab countries where bakshish (financial favors to win business contracts) and waasta (pulling strings for personal gain) are culturally hardwired. It's also the reason that Merck, whose ethics code forbids bribes or kickbacks, found it was not gaining much ground in sales to the region's public health ministries, which have long dominated pharmaceutical procurements in paternalistic states.

"If you are a deputy minister you don't it see as a problem to purchase from a dealer that could be your cousin," explained Samir Khalil, a former Merck senior executive in the Middle East. "In their mind it's not clicking that this is a conflict of interest."

To address this obstacle Merck decided to underwrite the creation of an ethics center. Merck committed funding in 1998 (eventually more than $3 million) through its company foundation and with the assistance of the Washington, D.C.-based Ethics Resource Center. The funding was meant to cover the first few years until the center could be supported by local businesses, and it was part of a wider effort to improve the overall business environment.

A case study, conducted at Merck's request in 2002 by the Boston College Center for Corporate Citizenship, characterized the effort as the "one of the most improbable business concepts of the decade." After several permutations, the center is now known as the Dubai Ethics Resource Centre (DERC) and is affiliated, since 2005, with the Dubai Chamber of Commerce.

The study found that within a fairly short time the Centre "had clearly impressed a cross-section of government, military and business thought leaders on the importance of codifying and enforcing 'workplace ethics.'" At the same time, the study noted, although only a handful of companies had made "any attempts at real organizational change, the newly receptive mindset was meaningful in a culture where the concept never before existed."

The United Arab Emirates was assessed as the most promising site in the region for this new agenda to take root. It seemed to dovetail with the UAE's ambitions of becoming a world-class hub for business and finance, tourism, and real estate.

The Centre has forced government and business leaders to take note of global expectations, particularly regarding the corporate social responsibility agenda, of which minimizing corruption is a part. As a whole, the Middle East ranks as one of the most corrupt regions in the world, according to Transparency International, which also found the UAE to be the least corrupt among the lot.

Dubai's confidence in its increasing global integration is reflected in projects such as the multibillion-dollar Health Care City—Dubai's bid to become a regional medical center, undertaken with foreign partners including Harvard Medical School.

"Definitely there is a correlation between corruption and health care delivery," noted Khalil, a native Jordanian. The United Arab Emirates boasts the region's longest life expectancy by birth—75 years.

Merck's original purpose was to create a forum where ethical standards could be discussed. Although it took longer than Merck had expected to find indigenous funding to take over support for the Centre, that threshold has now largely been crossed through its affiliation with the Dubai Chamber of Commerce. DERC's mission is "to raise the level of awareness, and encourage standards of good practice in organizational ethics, corporate responsibility and governance through the provision of research, training, standard certification and advisory work" for Chamber members and other stakeholders.

Many of those most actively inculcating ethics in their business practices are the local subsidiaries of multinational firms. And although the Centre was also intended to be a regional model, it remains unique. Merck has subsequently gone on to establish three other similar organizations, in South Africa (focused on bioethics), Turkey and, Colombia, where the emphasis has been on small- and medium-sized businesses.

How can we gauge the real impact of this effort and the lessons it offers? A recent assessment of the Centre's efforts highlights the glaring gap between the rhetoric of corporate social responsibility and the reality of most business practices.

"Companies are becoming familiar with the term 'corporate responsibility' and they recognize the need to be saying the right things in this rapidly developing, highly competitive international marketplace [and] yet their actions, if not the words, prove that they remain unconvinced or unclear of the business case for corporate responsibility and the benefits successful CR management could bring to them in terms of mitigating risk and identifying opportunities," concluded the DERC-commissioned report.

Despite this gap and problems of measurement, there are bound to be some collateral benefits to discussing ethical standards, just as there is an osmotic influence on local business from the increased presence of foreign companies operating under global expectations. The Centre's early training efforts, now expanded from an original focus on the health care profession, resulted in the adoption of new ethical codes by various organizations, including the country's air force.

The logic and utility of a unified and enforceable code is readily apparent when one considers that the UAE health ministry has 15,000 staff, mostly expatriates from more than 100 different countries. This proved useful leverage when Merck, in the summer of 2001, appealed a UAE health ministry contract for several pirated versions of patented drugs, including Merck's blockbuster Zocor. The appeal cited the ministry's own commitment to raise ethical standards. The undersecretary concurred, canceled the order (for a modest $500,000) and awarded it to Merck, a decision regional general manager Nidal Fakhoury hailed as setting "a strong precedent that such violations will not be tolerated."

The undersecretary was considered a strong supporter of the Centre, though it is not clear whether there was an enduring improvement in the ministry's procurement practices. Anecdotal evidence suggests there was early traction on a range of health-related issues—extortion rates were declining, there was more frequent prosecution of other abuses in the system, and the Centre was credited with helping to introduce draft patent protection legislation.

"It is very difficult assess the [Centre's] impact on a wide scale because there are so many components working at the same time," said Nidal Fakhoury, Merck's regional general Manager based in Dubai. At the same time, he believes that DERC did help bring about "tremendous improvements" in the health care sector in the last few years.

Although there is still no patent protection law, the Ministry of Health has issued a ministerial decree effectively granting rights to patent-holders, short-circuiting a tedious legislative process. The decree, which has been used as the basis for successful challenges to patent violations, has provided a measure of comfort to foreign firms and prompted substantial recent investment in Dubai by research-based firms. This is reflected in the promising launch of Health Care City, which has attracted investors from the region as well as from the United States, Canada, and the UK. Among them are the Mayo Clinic, Harvard Medical School, Johnson & Johnson, and AstraZeneca.

One benefit is that the local population—at least those who can afford it—now has access to the best medicines and medical technologies "almost at the same time as they appear in the North American or Europe," said Fakhoury. Local patients have also benefited from the sector's adoption of a code of conduct which, among other provisions, requires that patients sign consent forms for treatments.

Many local businesses are loath to spend money on ethical staff training, especially those businesses with a large expatriate staff and high turnover. As a consequence, this kind of training is more regularly pursued by the local subsidiaries of multinational firms. Even in more basic matters, such as worker health and safety, DERC interview research has shown there is a "lack of wide understanding" about these issues beyond basic compliance. Workers themselves are inadequately informed about elementary safety issues.

DERC researchers have found that conflicts of interest on corporate boards are the "single biggest governance-related concern." They seem inevitable in small countries with a close-knit business community. The lack of financial transparency and auditing integrity is another pressing issue. "Several interviewees said it was quite easy to 'shop around' for an auditor that would give the company's management the financial audit result they desired, independent of whether or not it reflected the firm's financial reality," a DERC research report revealed. Deceptive advertising was identified as the "biggest ethics-related misconduct," with a majority of interviewees advocating consumer protection laws to assist legitimate businesses.

Real impacts are the most critical metric. By this measure, healthcare in the Middle East remains poor, with life expectancy ranging from 75 years in the UAE to 45 in Somalia and Djibouti. Healthcare expenditures in most Arab countries are typically between 3 to 4.5 percent of GDP, compared to 5.7 percent in middle-income countries. In Egypt, spending on pharmaceuticals is one-fourth to one-third of what the average Turk spends.

Without effective health safety nets, most Arabs self-prescribe medicines and weak regulations mean widespread abuse of pharmaceuticals, explained Kahlil. This impairs the effectiveness of treatments which are further undermined because most people, especially those with chronic conditions, soon have to choose between medications and food.

"Everyone is struggling with healthcare reform, and there are no easy answers, but Arab countries are starting from a very low base," said Khalil.

The region's key health challenge is the shockingly high maternal mortality rates, according to the UNDP's Arab Development Reports. In more than half of the Arab countries, 75 mothers die per 100,000 live births, and in a third of the countries that figure is more than 200. In only two countries (UAE and Kuwait) are the levels considered low by international standards—below five.

The UNDP reports also examine the intractability of corruption in the region, noting that it is an inherent part of many of the region's political systems, especially where "law and customs decree that the land and its resources belong to the ruler." The reports distinguish between "conventional corruption" and what it calls the "structural" variety, where "the personal abuse of public office and misuse of public finances are considered normal according to the prevailing customs, or even necessary for the regime to endure." Structural corruption is "one of the biggest obstacles to reform since it is systematically used to sabotage political and civil activity through its containment of the elites and by creating classes with vested interests in the status quo who are ready to defend it at all costs."

UNDP findings have led to intense debate and even polarization among Arab elites about the "right way to reform"—top-down (from the state) or bottom-up (through civil society)—and which values reform should seek to instill, "traditional values, including religious ones, or modern, democratic and secular values along Western lines."

DERC has had to finesse this dilemma and the Boston College case study notes that the "the Centre was careful not to overtly impose Western standards on its audiences, but rather strove to achieve a delicate duality in messages: 'Find your own values and live by the standards you set. But also be cognizant of what Western partners expect of you.'"

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