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CHAPTER

2 Integrity, Ethics,

and Social Entrepreneurship

LEARNING OBJECTIVES

By studying this chapter, you should be able to… 2-1 Define integrity, and understand its importance to

small businesses. 2-2 Explain how integrity applies to various stakeholder

groups. 2-3 Identify some common challenges and benefits of

maintaining integrity in small businesses. 2-4 Suggest practical approaches for building a

business with integrity. 2-5 Define social entrepreneurship, and describe its

influence on small companies and startup opportunities.

2-1 WHAT IS INTEGRITY?

• Integrity – A general sense of honesty and reliability that is expressed in a strong commitment to doing the right thing, regardless of the circumstances.

• “Doing anything for money” can quickly lead to distortions in business behavior.

• Acting with integrity requires that an individual first consider the welfare of others.

• Many small business owners strive to achieve the highest standards of honesty, fairness, and respect in their business relationships.

2-2 INTEGRITY AND THE INTERESTS OF MAJOR STAKEHOLDERS (slide 1 of 3)

• Closely tied to integrity are ethical issues, which go beyond what is legal or illegal to include more general questions of right and wrong.

• A recent Ethics Resource Center survey indicated that employees witness various forms of misconduct in their workplaces, with the most frequently observed offenses involving abusive behavior and lying to employees.

2.1 Most Frequently Observed Forms of Workplace Misconduct

2-2 INTEGRITY AND THE INTERESTS OF MAJOR STAKEHOLDERS (slide 2 of 3)

• When making decisions, small business owners guided by integrity must consider the interests of several different groups: • Owners. • Customers. • Employees. • The community. • The government.

• Individuals in these groups are sometimes referred to as stakeholders. • Stakeholders – Individuals or groups that either can affect or are

affected by the performance of the company. • Because the interests of various stakeholder groups sometimes

conflict, decisions can be very difficult to make.

2.2 Four Types of Responsibilities for Small Businesses

Type of Responsibility

Societal Expectation

General Focus

Economic Required Be profitable. Legal Required Obey all laws, adhere to all

regulations. Ethical Expected Avoid questionable practices. Discretionary Desired/Expected Be a good corporate citizen, and

give back.

Source: Adapted with permission from Archie B. Carroll and Ann. K. Buchholtz, Business and Society: Ethics, Sustainability, and Stakeholder Management, 9e (Mason, OH: Cengage Learning, 2015), p. 35.

2-2 INTEGRITY AND THE INTERESTS OF MAJOR STAKEHOLDERS (slide 3 of 3)

• The concerns of important stakeholders are fundamental to the management of a business. • If neglected, any one group can use its influence to

negatively affect the performance of the company. • Therefore, stakeholder interests should be carefully

considered and widely balanced.

2-2a The “Big Three” Stakeholders— Owners, Customers, and Employees (slide 1 of 2)

PROMOTING THE OWNERS’ INTERESTS • A company’s owners have a clear and reasonable right to benefit from the

financial performance of the business. • In a business with more than one owner, high standards of integrity require

an honest attempt to promote the interests of all the owners, which include a commitment to financial performance and protection of the firm’s reputation.

CARING ABOUT CUSTOMERS • Those companies that take customers seriously and serve them well are

likely to have more of them. • Companies with integrity recognize the importance of treating their

customers with care. • When a company delivers an excellent product with first-rate service,

customer satisfaction and healthy sales are likely to follow.

2-2a The “Big Three” Stakeholders— Owners, Customers, and Employees (slide 2 of 2)

VALUING EMPLOYEES • Showing proper appreciation for employees as human beings and as

valuable members of the team is an essential ingredient of managerial integrity.

• According to recent research, when employees feel that they are valued and socially connected at work, they tend to be highly engaged and much more productive.

• Small business owners must give much thought to the standards of conduct that guide everyday behavior. • Lapses in integrity are passed down from superiors to subordinates,

replicating like a life-threatening virus that spreads throughout the organization.

2-2b Social Responsibility and Small Business (slide 1 of 2)

• Most people consider an ethical small business to be one that acts as a good citizen in its community.

• Social responsibilities – A company’s ethical obligations to the community.

• Companies have increasingly shown commitment to the communities where they do business. • Their contribution starts with creating jobs and adding to local

tax revenues, but many entrepreneurs feel a duty to give back even more to the community in return for the local support they enjoy—and they usually benefit from increased goodwill as a result.

2-2b Social Responsibility and Small Business (slide 2 of 2)

• Entrepreneurs should think carefully about their community commitments, because building a business on a foundation of “doing good” may add to a small company’s financial burden.

• Research suggests that most small business owners exercise great integrity, but some tend to cut corners when it comes to social responsibilities if profits will be affected.

2-2c Integrity and Governmental Regulations

• Government regulations encompass workplace safety, equal employment opportunities, fair pay, clean air, and safe products, to name a few.

• Entrepreneurs must obey governmental laws and follow applicable regulations if they want to maintain their integrity and avoid jail time.

• One glaring example of unethical behavior by small firm management is fraudulent reporting of income and expenses for income tax purposes. • This conduct includes skimming (that is, concealing some

income), as well as improperly claiming personal expenses to be business-related.

2-3 THE CHALLENGES AND BENEFITS OF ACTING WITH INTEGRITY

• Small firms’ limited resources and desire to succeed make them especially vulnerable to allowing or engaging in unethical practices.

2-3a Small Companies and the Legitimacy Lie (slide 1 of 3)

• Because startups do not have a history and a reputation to lean on when trying to sell customers on their new product or service or to impress other important stakeholders, entrepreneurs often are uniquely tempted to resort to telling what some researchers call legitimacy lies. • That is, they sometimes misrepresent the facts or create false

impressions to mislead others intentionally and earn their confidence.

• Telling legitimacy lies threatens the reputation of the business and the trust that goes along with it. • If (when) the truth is revealed, future sales or support could very

well be compromised.

2-3a Small Companies and the Legitimacy Lie (slide 2 of 3)

• Research has shown that customers are less likely to decide to purchase if they have significant questions about the product or service that the new venture is offering, about those who represent and/or run the business, and about the organization itself. • These features are called PRO factors—Products,

Representatives, and the Organization—to emphasize that they can promote firm performance when customers are satisfied with them.

• Advertising, publicity programs, social media tools, and other promotional strategies are used to address PRO factors.

2-3a Small Companies and the Legitimacy Lie (slide 3 of 3)

• A small firm’s legitimacy is staked on the reputation of its owner, but it is important to highlight and honestly bolster the credibility of anyone who represents the venture. • It is best to make the credentials (educational background, expertise,

industry experience, etc.) of key employees known, as well as to encourage those employees to participate in trade, business, and community organizations where they can build important relationships and associations.

• The business itself can establish legitimacy by: • Setting up a high-quality website. • Insisting on professional behavior from all employees. • Forming strategic alliances with well-respected partner firms.

2-3b Integrity and the Internet (slide 1 of 3)

• An issue of great concern to Internet users is personal privacy. • Businesses and consumers often disagree about how private

the identity of visitors to websites should be. • Example: Businesses use cookies (digital “ID tags”) to collect

data on consumers’ buying habits and create a more personalized shopping experience and offer convenience to the buyer, but they may also sell the cookies to media-buying companies and other interested groups.

• To minimize customer concerns, a company must be honest and transparent with customers about its practices and draft a privacy policy that conforms to the guidelines provided by organizations like the Better Business Bureau or through consultation with an attorney.

2-3b Integrity and the Internet (slide 2 of 3)

• The extent to which an employer may monitor an employee’s Internet activity is also hotly debated. • Many workers believe it is inappropriate for employers to monitor their

e-mail, a practice they consider to be an invasion of privacy. • Many employers, on the other hand, are concerned that employees

may be engaging in “cyberslacking” at the office—that is, wasting company time dealing with personal e-mail, shopping online, and surfing the Internet—and are convinced such activity hinders workplace productivity.

• Companies that choose to monitor workers’ Internet use should be sure to develop a carefully worded and legally sound policy first, and then ensure that all employees are aware of it.

• Those choosing to take an even more cautious approach have employees sign a monitoring consent form when they are first hired.

2-3b Integrity and the Internet (slide 3 of 3)

• Widespread use of the Internet has also focused attention on the issue of protecting intellectual property. • Intellectual property – Original intellectual creations,

including inventions, literary creations, and works of art, that are protected by patents, copyrights, trademarks, design rights, and trade secrets.

• The law allows originators of intellectual property to require compensation for its use. • However, the Internet has made it easy for millions of users to

copy intellectual property free of charge.

2-3c Integrity and Doing Business Abroad

• Cultural differences may complicate ethical decision making for small firms operating abroad.

• Ethical imperialism – The belief that the ethical standards of one’s own country can be applied universally. • The Foreign Corrupt Practices Act makes it illegal for U.S.

businesses to use bribery in their dealings anywhere in the world. • Ethical relativism – The belief that ethical standards are subject

to local interpretation. • This implies that anything goes if the local culture accepts it.

• One-time practices may set a pattern for future behaviors. • Example: Offering a bribe to make a business deal often creates

expectations for more of the same in the future.

2-3d The Integrity Edge (slide 1 of 2)

• Research supports the notion that ethical business practices are good for business. • The advocacy group Business for Social Responsibility

contends that there are numerous long-term benefits of adopting ethical and responsible business practices:

• Improved financial performance. • Enhanced brand image and reputation. • Increased sales and customer loyalty. • Improved productivity and quality. • Better recruitment and reduced employee turnover. • Fewer regulatory inspections and less paperwork. • Improved access to capital.

2-3d The Integrity Edge (slide 2 of 2)

• Perhaps the greatest benefit of integrity in business is the trust it generates. • When customers and employees trust a small

company to act with integrity, their support can help keep the company going.

2-4 BUILDING A BUSINESS WITH INTEGRITY

• The goal of a small business owner with integrity should be to operate honorably in all areas of practice, which sets the entrepreneur on a path toward crafting a worthy legacy.

• Those at the top must provide the leadership, culture, and training that support appropriate ethical perspectives and proper behavior.

2-4a The Foundations of Integrity (slide 1 of 2)

• The business practices that a firm’s leaders and employees view as right or wrong reflect their underlying values. • Underlying values – Beliefs that provide a foundation for

ethical behavior in an individual or a firm. • An individual’s beliefs affect what that person does on

the job and how she or he acts toward customers and others. • Business behavior, then, reflects a person’s commitment to

honesty, respect, truthfulness, and so forth—in other words, to integrity in all of its dimensions.

2-4a The Foundations of Integrity (slide 2 of 2)

• Values that serve as a foundation for integrity in business are based on personal views of the role of humankind in the universe and, naturally, are part of basic philosophical and/or religious convictions. • Since these principles are reflected in the business

practices of firms of all sizes, a leader’s personal commitment to certain basic values is an important determinant of his or her firm’s commitment to business integrity.

2-4b Leading with Integrity

• In a small organization, the influence of a leader is more pronounced than it is in a large corporation where leadership can be diffused.

• In a small company, a leader’s behavior has much greater influence on employees than his or her stated philosophy does. • The leader’s conduct establishes the culture of the

company, underscoring what is allowed or encouraged or what is prohibited.

• Thus, the dominant role of this one person (or the leadership team) shapes the ethical performance of the small company, for good or for ill.

2-4c An Ethical Organizational Culture (slide 1 of 2)

• An organizational culture that supports integrity is key to achieving appropriate behavior among a firm’s employees.

• To define ethical behavior in a company, the owner-manager of a small firm should formulate a code of ethics similar to that of most large corporations. • Code of ethics – Formally established standards of employee

behavior communicated by a business owner. • Authors Kenneth Blanchard and Norman Vincent Peale suggest

that an ethics policy be based on the following five fundamental principles: 1. Purpose. 2. Pride. 3. Patience. 4. Persistence. 5. Perspective.

2-4c An Ethical Organizational Culture (slide 2 of 2)

• Codes of ethics can shape and improve conduct in organizations in a number of ways: • By defining behavioral expectations. • By communicating that those expectations apply to employees at all

levels in the business. • By helping employees convey the company’s standards of conduct to

suppliers and customers. • By serving as a guide for handling peer pressure. • By providing a formal channel for communicating with superiors without

fear of reprisal. • A well-written code expresses the principles to be followed by

employees of the firm and gives examples of these principles in action. • If a code of ethics is to be effective, employees must be aware of its

nature and convinced of its importance, and the entrepreneur’s behavior must be consistent with his or her own stated principles.

2-4d Better Business Bureaus

• Many small companies join Better Business Bureaus (BBBs) to promote ethical conduct throughout the business community. • BBBs encourage ethical practices in the following

ways: • By providing consumers with free information to help them

make informed decisions when dealing with a company. • By creating an incentive for businesses to adhere to proper

business practices and earnestly address customer complaints.

• By resolving questions or disputes concerning purchases through mediation or arbitration.

2-4e The Ethical Decision- Making Process (slide 1 of 3)

STEP 1: DEFINE THE PROBLEM • How you define the problem is important because this will guide

where you look for solutions. • Looking for the root of the problem is the best place to start in

your search for a solution to a challenging ethical problem.

STEP 2: IDENTIFY ALTERNATIVE SOLUTIONS TO THE PROBLEM • It is tempting to go with an “obvious” solution or one that has been

used in the past, but often this is not the best answer—even if it is ethical.

• Be open-minded, and consider creative alternatives. • Seeking advice from trusted friends and advisers who have faced

similar situations can spur your thinking and lead to options that you might otherwise overlook.

2-4e The Ethical Decision- Making Process (slide 2 of 3)

STEP 3: EVALUATE THE IDENTIFIED ALTERNATIVES • Ask yourself the following four questions when you prepare to

make a decision about the things you think, say, or do: 1. Is it the truth? 2. Is it fair to all concerned? 3. Will it build goodwill and better friendships? 4. Will it be beneficial to all concerned?

• Perhaps the most widely recommended principle for ethical behavior is simply to follow the Golden Rule: “Treat others as you would want to be treated.”

• Writing down your thoughts about alternatives, listing the ethical pros and cons of each alternative, or ranking all potential options based on their overall merits and then narrowing the list to the two or three best solutions to consider further will allow you to make a better selection.

2-4e The Ethical Decision- Making Process (slide 3 of 3)

STEP 4: MAKE THE DECISION • Keeping your vision and core values in mind is essential to making

solid decisions that do not compromise your ethical standards.

STEP 5: IMPLEMENT THE DECISION • Avoiding action on the decision may allow a small problem to

grow into a major crisis, and it may cause you to spend more time thinking about the problem when other important matters deserve your attention.

STEP 6: EVALUATE THE DECISION • If the situation has not gotten better, or if new information has come

to light indicating that your decision was not the most ethical course of action, you may need to reopen the matter to make things right.

2-5 SOCIAL ENTREPRENEURSHIP: A CONTINUING TREND

• Social entrepreneurship – Entrepreneurial activity that provides innovative solutions for social issues.

• A social entrepreneur is one who comes up with innovative solutions to society’s most pressing needs, problems, and opportunities and then makes them happen.

2-5a Social Entrepreneurship and the Triple Bottom Line

• Social entrepreneurs focus on an expanded set of priorities—a triple bottom line, which takes into account a venture’s impact on people, profits, and the planet.

2-5b Small Business and the Natural Environment (slide 1 of 3)

• Escalating concern for the environment has spawned a shift toward sustainable small businesses. • Sustainable small businesses – A profitable

company that responds to customers’ needs while showing reasonable concern for the environment.

• This trend recognizes that a company must be profitable to stay in business, but it also promotes the use of eco-friendly practices (careful use of resources, energy conservation, recycling, etc.) through all facets of a company’s operations.

2-5b Small Business and the Natural Environment (slide 2 of 3)

SUSTAINABILITY MATTERS • Environmentalism – The effort to protect and preserve the

environment. • The commitment to the cause of environmentalism makes financial

sense for many businesses. • Example: Though more expensive to construct, LEED-certified buildings

(facilities that have been built to strict standards promoting energy and water conservation, reduced CO2 emissions, and improved indoor air quality) can decrease energy costs from operations by as much as 20 percent, and healthier workplace environments improve employee productivity, reduce illness and absences, improve recruitment, and raise retention—all of which can create a net savings for the company.

• However, some small businesses can be adversely impacted by environmental protection laws. • Examples: Fast lube and oil change centers, medical waste disposal

operations, and self-service car washes.

2-5b Small Business and the Natural Environment (slide 3 of 3)

• Firms whose products leave minimal environmental impact are generally preferred by customers over competitors whose products pollute.

• The Small Business Administration (SBA), the Environmental Protection Agency (EPA), and other public and private resources stand ready to help small businesses comply with environmental regulations.

GREEN OPPORTUNITIES FOR SMALL BUSINESSES • Small companies are sometimes launched precisely to take

advantage of opportunities created by environmental concerns. • Creating environmentally friendly products and services requires

creativity and flexibility, areas in which small businesses tend to excel.

Key Terms code of ethics environmentalism ethical imperialism ethical relativism integrity intellectual property

social entrepreneurship social responsibilities stakeholders sustainable small businesses underlying values

�CHAPTER�2��Integrity, Ethics, �and Social Entrepreneurship
LEARNING OBJECTIVES
2-1 WHAT IS INTEGRITY?
2-2 INTEGRITY AND THE INTERESTS OF MAJOR STAKEHOLDERS (slide 1 of 3)
2.1 Most Frequently Observed Forms of Workplace Misconduct
2-2 INTEGRITY AND THE INTERESTS OF MAJOR STAKEHOLDERS (slide 2 of 3)
2.2 Four Types of Responsibilities for Small Businesses
2-2 INTEGRITY AND THE INTERESTS OF MAJOR STAKEHOLDERS (slide 3 of 3)
2-2a The “Big Three” Stakeholders—�Owners, Customers, and Employees (slide 1 of 2)
2-2a The “Big Three” Stakeholders—�Owners, Customers, and Employees (slide 2 of 2)
2-2b Social Responsibility �and Small Business (slide 1 of 2)
2-2b Social Responsibility �and Small Business (slide 2 of 2)
2-2c Integrity and �Governmental Regulations
2-3 THE CHALLENGES AND BENEFITS OF ACTING WITH INTEGRITY
2-3a Small Companies and �the Legitimacy Lie (slide 1 of 3)
2-3a Small Companies and �the Legitimacy Lie (slide 2 of 3)
2-3a Small Companies and �the Legitimacy Lie (slide 3 of 3)
2-3b Integrity and the Internet �(slide 1 of 3)
2-3b Integrity and the Internet �(slide 2 of 3)
2-3b Integrity and the Internet �(slide 3 of 3)
2-3c Integrity and �Doing Business Abroad
2-3d The Integrity Edge (slide 1 of 2)
2-3d The Integrity Edge (slide 2 of 2)
2-4 BUILDING A BUSINESS �WITH INTEGRITY
2-4a The Foundations of Integrity (slide 1 of 2)
2-4a The Foundations of Integrity (slide 2 of 2)
2-4b Leading with Integrity
2-4c An Ethical �Organizational Culture (slide 1 of 2)
2-4c An Ethical �Organizational Culture (slide 2 of 2)
2-4d Better Business Bureaus
2-4e The Ethical Decision-�Making Process (slide 1 of 3)
2-4e The Ethical Decision-�Making Process (slide 2 of 3)
2-4e The Ethical Decision-�Making Process (slide 3 of 3)
2-5 SOCIAL ENTREPRENEURSHIP: A CONTINUING TREND
2-5a Social Entrepreneurship and the Triple Bottom Line
2-5b Small Business and the Natural Environment (slide 1 of 3)
2-5b Small Business and the Natural Environment (slide 2 of 3)
2-5b Small Business and the Natural Environment (slide 3 of 3)
Key Terms