Phase 2 due in 36 hours

Social Response Strategies

• Reactive
• Defensive
• Accommodative
• Proactive

© 2016 Cengage Learning

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A company using a reactive strategy will do less than society expects. It may deny responsibility for a problem or fight any suggestions that the company should solve a problem. By contrast, a company using a defensive strategy would admit responsibility for a problem but would do the least required to meet societal expectations. A company using an accommodative strategy will accept responsibility for a problem and take a progressive approach by doing all that could be expected to solve the problem. Finally, a company using a proactive strategy will anticipate responsibility for a problem before it occurs, do more than expected to address the problem, and lead the industry in its approach.

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American Express Headquarters, New York, New York

With medical costs rising 10 to 15 percent per year, one of the members of your Board of Directors at American Express mentioned that some companies are now refusing to hire smokers and that the board should discuss this option at the next month’s meeting. Nationwide, about 6,000 companies refuse to hire smokers. Weyco, an employee benefits company in Okemos, Michigan, requires all applicants to take a nicotine test. Weyco’s CFO says, “We’re not saying people can’t smoke. We’re just saying they can’t smoke and work here. As an employee-benefits company, we need to take a leadership role in helping people understand the cost impact of smoking.” The Cleveland Clinic, one of the top hospitals in the United States, doesn’t hire smokers. Paul Terpeluk, the director of corporate and employee health, says that all applicants are tested for nicotine and that 250 people have lost job opportunities because they smoke. The Massachusetts Hospital Association also refuses to hire smokers. The company’s CEO says, “Smoking is a personal choice, and as an employer I have a personal choice within the law about who we hire and who we don’t.”

As indicated by your board member, costs are driving the trend not to hire smokers. According to the U.S. Centers for Disease Control, a smoker costs about $4,000 more a year to employ because of increased health-care costs and lost productivity. Breaking that down, a smoker will have 50 percent higher absenteeism, and, when present, will work 39 fewer minutes per day because of smoke breaks, which leads to 162.5 lost hours of annual productivity. A smoker will have higher accident rates, cause $1,000 a year in property damage (from cigarette burns and smoke damage), and will cost up to $5,000 more a year for annual insurance premiums.

Although few would disagree about the costs, others argue it is wrong not to hire smokers. Jay Whitehead, publisher of a magazine for human resources managers, says, “There is discrimination at many companies—and maybe even most companies—against people who smoke.” Even if applicants aren’t asked whether they smoke, it “doesn’t mean that hiring managers turn off their sense of smell.” Paul Sherer, a smoker who was fired less than a week after taking a new job, says, “Not hiring smokers affects millions of people and puts them in the same category as women able to bear children, that is, people who contribute to higher health-care costs. It’s unfair.” Law professor Don Garner believes that not hiring smokers is “an overreaction on the part of employers whose interest is cutting costs. If someone has the ability to do the job, he should get it. What you do in your home is your own business. . . . Not hiring smokers is ‘respiratory apartheid.’”

Well, with the meeting just a month away, you’ve got to prepare for questions from the Board of Directors. For example, on what basis should the company decide whether to hire smokers? Should the decision be based on what’s in the best interest of the firm, what the law allows, or what affirms and respects individual rights? The Board is interested in making good decisions for the company, but “doing the right thing” is also one of its core values. Is this an issue of ethics or social responsibility? Is refusing to hire smokers is a form of discrimination?

The dilemma facing American Express is an example of the tough decisions involving ethics and social responsibility that managers face. Unfortunately, no matter what you decide to do, someone or some group will be unhappy with the outcome. Managers don’t have the luxury of choosing theoretically optimal, win–win solutions that are obviously desirable to everyone involved. In practice, solutions to ethics and social responsibility problems aren’t optimal. Often, managers must be satisfied with a solution that just makes do or does the least harm. Rights and wrongs are rarely crystal clear to managers charged with doing the right thing. The business world is much messier than that.

If you were in charge at American Express, what would you do?

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Areas of unethical behavior are: authority and power, handling information, influencing the behavior of others, and setting goals.

Unethical management behavior occurs when managers personally violate accepted principles of right and wrong. The authority and power inherent in some management positions can tempt managers to engage in unethical practices. Since managers often control company resources, there is a risk that some managers will cross the line from legitimate use of company resources to personal use of those resources. For example, some managers have used corporate funds to pay for extravagant personal parties, lavish home decorating, jewelry, or expensive pieces of art.

Handling information is another area in which managers must be careful to behave ethically. Information is a key part of management work. Managers collect it, analyze it, act on it, and disseminate it. However, they are also expected to deal in truthful information and, when necessary, to keep confidential information confidential. Leaking company secrets to competitors, "doctoring" the numbers, wrongfully withholding information, or lying are some possible misuses of the information entrusted to managers.

A third area in which managers must be careful to engage in ethical behavior is the way in which they influence the behavior of others, especially those they supervise. Managerial work gives managers significant power to influence others. If managers tell employees to perform unethical acts (or face punishment), such as “faking the numbers” to get results, then they are abusing their managerial power. This is sometimes called the “move it or lose it” syndrome. “Move it or lose it” managers tell employees, “Do it. You’re paid to do it. If you can’t do it, we’ll find somebody who can.”

Setting goals is another way that managers influence the behavior of their employees. If managers set unrealistic goals, the pressure to perform and to achieve these goals can influence employees to engage in unethical business behaviors.

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Historically, if management was unaware of such activities, the company could not be held responsible for an employee’s unethical acts. However, under the 1991 U.S. Sentencing Commission Guidelines, companies can be prosecuted and punished even if management didn’t know about the unethical behavior. Moreover, penalties can be substantial, with maximum fines approaching $300 million dollars!

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Nearly all businesses, nonprofits, partnerships, labor unions, unincorporated organizations and associations, incorporated organizations, and even pension funds, trusts, and joint stock companies are covered by the guidelines. If your organization can be characterized as a business (remember, nonprofits count, too), then it is subject to the guidelines.

The guidelines cover offenses such as invasion of privacy, price fixing, fraud, customs violations, antitrust violations, civil rights violations, theft, money laundering, conflicts of interest, embezzlement, dealing in stolen goods, copyright infringements, extortion, and more. However, it’s not enough to stay “within the law.” The purpose of the guidelines is not just to punish companies after they or their employees break the law. The purpose is to encourage companies to take proactive steps that will discourage or prevent white-collar crime before it happens. The guidelines also give companies an incentive to cooperate with and disclose illegal activities to federal authorities.

The guidelines impose smaller fines on companies that take proactive steps to encourage ethical behavior or voluntarily disclose illegal activities to federal authorities. Essentially, the law uses a “carrot-and-stick” approach. The stick is the threat of heavy fines that can total millions of dollars. The carrot is greatly reduced fines, but only if the company has started an effective compliance program to encourage ethical behavior before the illegal activity occurs.

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The first step is computing the base fine by determining what level of offense has occurred. The level of the offense (i.e., the seriousness of the problem) is figured by examining the kind of crime, the loss incurred by the victims, and how much planning went into the crime.

After assessing a base fine, the judge computes a culpability score, which is a way of assigning blame to the company. Higher culpability scores suggest greater corporate responsibility in conducting, encouraging, or sanctioning illegal or unethical activity. The culpability score is a number ranging from a minimum of 0.05 to a maximum of 4.0.

The culpability score is critical, because the total fine is computed by multiplying the base fine by the culpability score. Going back to our level 24 fraud offense, a company with a compliance program that turns itself in will only be fined $105,000 ($2,100,000 x 0.05). However, a company that secretly plans, approves, and participates in illegal activity will be fined $8.4 million ($2,100,000 x 4.0)!

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The method used to determine a company’s punishment illustrates the importance of establishing a compliance program, as illustrated in Exhibit 3.1.

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Source: D.R. Dalton, M.B. Metzger, & J.W. Hill, “The ‘New’ U.S. Sentencing Commission Guidelines: A Wake-up Call for Corporate America,” Academy of Management Executive 8 (1994): 7-16.

Fortunately, for those who want to avoid paying these stiff fines, the 1991 U.S. Sentencing Guidelines are clear on the seven necessary components of an effective compliance program. These guidelines are listed in Exhibit 3.2.

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While some ethical issues are easily solved, for many there are no clearly right or wrong answers. The ethical answers that managers choose depend on the ethical intensity of the decision and the moral development of the manager.

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Managers don’t treat all ethical decisions the same. The manager who has to decide whether to deny or extend full benefits to Joan Addessi and her family is going to treat that decision much more seriously than the manager who has to deal with an assistant who has been taking paper home for personal use. The difference between these decisions is one of ethical intensity, which is how concerned people are about an ethical issue.

Magnitude of consequences is the total harm or benefit derived from an ethical decision.

Social consensus is agreement on whether behavior is bad or good.

Probability of effect is the chance that something will happen and then result in harm to others.

Temporal immediacy is the time between an act and the consequences the act produces.

Proximity of effect is the social, psychological, cultural, or physical distance of a decision maker to those affected by his or her decisions.

Finally, whereas the magnitude of consequences is the total effect across all people, concentration of effect is how much an act affects the average person.

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In part, according to Lawrence Kohlberg, ethical decisions are based on a person’s level of moral development. Kohlberg identified three phases of moral development, with two stages in each phase.

At the preconventional level of moral development, people decide based on selfish reasons. For example, if you were in Stage 1, the punishment and obedience stage, your primary concern would be not to get in trouble. Yet, in Stage 2, the instrumental exchange stage, you make decisions that advance your wants and needs.

People at the conventional level of moral development make decisions that conform to societal expectations. In Stage 3, the good boy--nice girl stage, you normally do what the other “good boys” and “nice girls” are doing. In the law and order stage, Stage 4, you do whatever the law permits.

People at the postconventional level of moral maturity always use internalized ethical principles to solve ethical dilemmas. In Stage 5, the social contract stage, you would consider the effects of your decision on others. In Stage 6, the universal principle stage, you make ethical decisions based on your principles of right and wrong.

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Managers can encourage more ethical decision making in their organizations by carefully selecting and hiring ethical employees, establishing a specific code of ethics, training employees how to make ethical decisions, and creating an ethical climate.

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Overt integrity tests estimate honesty by directly asking job applicants what they think or feel about theft or about punishment of unethical behaviors. For example, an employer might ask an applicant, “Would you would ever consider buying something from somebody if you knew the person had stolen the item?” or, “Don’t most people steal from their companies?” Surprisingly, because they believe that the world is basically dishonest and that dishonest behavior is normal, unethical people will usually answer yes to such questions.

Personality-based integrity tests indirectly estimate employee honesty by measuring psychological traits such as dependability and conscientiousness. For example, prison inmates serving time for white-collar crimes (counterfeiting, embezzlement, and fraud) scored much lower than a comparison group of middle-level managers on scales measuring reliability, dependability, honesty, and being conscientious and rule-abiding. These results show that companies can selectively hire and promote people who will be more ethical.

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Today, almost all large corporations have an ethics code in place. However, two things must happen if those codes are to encourage ethical decision making and behavior. First, companies must communicate the codes to others both within and outside the company.

An excellent example of a well-communicated code of ethics can be found at Nortel Networks Internet site, at http://www.nortel-us.com. With the click of a computer mouse, anyone inside or outside the company can obtain detailed information about the company’s core values, specific ethical business practices, and much more.

Second, in addition to general guidelines and ethics codes like “do unto others as you would have others do unto you,” management must also develop practical ethical standards and procedures specific to the company’s line of business. Visitors to Nortel’s Internet site can instantly access references to specific ethics codes, ranging from bribes and kickbacks to expense vouchers and illegal copying of software.

Specific codes of ethics such as these make it much easier for employees to decide what they should do when they want to do the “right thing.”

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The first objective of ethics training is to develop employee awareness about ethics. This means helping employees recognize what issues are ethical issues, and then avoid the rationalization of unethical behavior: “This isn’t really illegal or immoral.” “No one will ever find out.”

The second objective for ethics training programs is to achieve credibility with employees. Not surprisingly, employees can be highly suspicious of management’s reasons for offering ethics training.

The third objective of ethics training is to teach employees a practical model of ethical decision making. A basic model should help them think about the consequences their choices will have on others and consider how they will choose between different solutions. This model is shown on the next slide.

Exhibit 3.4 presents a basic model of ethical decision making.

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The first step in establishing an ethical climate is for managers—especially top managers—to act ethically themselves. Managers who decline to accept lavish gifts from company suppliers; who only use the company phone, fax, and copier for business and not personal use; or who keep their promises to employees, suppliers, and customers encourage others to believe that ethical behavior is normal and acceptable.

A second step in establishing an ethical climate is for top management to be active in the company ethics program.

A third step is to put in place a reporting system that encourages managers and employees to report potential ethics violations. Whistleblowing, which is reporting others’ ethics violations, is a difficult step for most people to take. Potential whistleblowers often fear that they will be punished rather than the ethics violators.

The final step in developing an ethical climate is for management to fairly and consistently punish those who violate the company’s code of ethics.

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Compared with job applicants who score low, there is an 82 percent chance that job applicants who score high on overt integrity tests will participate in

less illegal activity, unethical behavior, drug abuse, or workplace violence. Personality-based integrity tests also do a good job of predicting who will engage in workplace deviance. Compared with job applicants who score low, there is a 68 percent chance that job applicants who score high on personality-based integrity tests will participate in less illegal activity, unethical behavior, excessive absences, drug abuse, or workplace violence.

In addition to reducing unethical behavior and workplace deviance, integrity tests can help companies hire better performers. Compared with employees who score low, there is a 69 percent chance that employees who score high on overt integrity tests will be better performers.

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There are two perspectives regarding to whom organizations are socially responsible: the shareholder model and the stakeholder model. According to Nobel prize-winning economist Milton Friedman, the only social responsibility that organizations have is to satisfy their owners, that is, company shareholders. This view--called the shareholder model--holds that the only social responsibility that businesses have is to maximize profits. By maximizing profit, the firm maximizes shareholder wealth and satisfaction. More specifically, as profits rise, the company stock owned by company shareholders generally increases in value.

By contrast, under the stakeholder model, management’s most important responsibility is long-term survival (not just maximizing profits), which is achieved by satisfying the interests of multiple corporate stakeholders (not just shareholders). Stakeholders are people or groups with a legitimate interest in a company. Since stakeholders are interested in and affected by the organization's actions, they have a "stake" in what those actions are. Consequently, stakeholder groups may try to influence the firm to act in their own interests.

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The shareholder model holds that the only social responsibility that businesses have is to maximize profits. By maximizing profit, the firm maximizes shareholder wealth and satisfaction. More specifically, as profits rise, the company stock owned by shareholders generally increases in value. By contrast, under the stakeholder model, management’s most important responsibility is the firm’s long-term survival (not just maximizing profits), which is achieved by satisfying the interests of multiple corporate stakeholders (not just shareholders).

Some stakeholders are more important to the firm’s survival than others.

Primary stakeholders are groups, such as shareholders, employees, customers, suppliers, governments, and local communities, on which the organization depends for long-term survival. So when managers are struggling to balance the needs of different stakeholders, the stakeholder model suggests that the needs of primary stakeholders take precedence over the needs of secondary stakeholders. According to the life-cycle theory of organizations, some primary stakeholders are more important than others. In practice, though, CEOs typically give somewhat higher priority to shareholders, employees, and customers than to suppliers, governments, and local communities, no matter what stage of the life cycle a company is in.

Secondary stakeholders, such as the media and special interest groups, can influence or be influenced by the company. Yet in contrast to primary stakeholders, they do not engage in regular transactions with the company and are not critical to its long-term survival. Consequently, meeting the needs of primary stakeholders is usually more important than meeting the needs of secondary stakeholders. While not critical to long-term survival, secondary stakeholders are still important, because they can affect public perceptions and opinions about socially responsible behavior.

Exhibit 3.5 shows the various stakeholder groups that the organization must satisfy to assure its long-term survival.

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A century ago, society expected businesses to meet their economic and legal responsibilities and little else. Today, however, when society judges whether businesses are socially responsible, ethical and discretionary responsibilities are considerably more important than they used to be.

Historically, economic responsibility, or making a profit by producing a product or service valued by society, has been a business’s most basic social responsibility. Organizations that don’t meet their financial and economic expectations come under tremendous pressure.

Legal responsibility is the expectation that companies will obey a society’s laws and regulations as they try to meet their economic responsibilities.

Ethical responsibility is society’s expectation that organizations will not violate accepted principles of right and wrong when conducting their business. Because different stakeholders may disagree about what is or is not ethical, meeting ethical responsibilities is more difficult than meeting economic or legal responsibilities.

Discretionary responsibilities pertain to the social roles that businesses play in society beyond their economic, legal, and ethical responsibilities.

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Historically, economic responsibility, or making a profit by producing a product or service valued by society, has been a business’s most basic social responsibility. Legal responsibility is a company’s social responsibility to obey society’s laws and regulations as it tries to meet its economic responsibilities. Ethical responsibility is a company’s social responsibility not to violate accepted principles of right and wrong when conducting its business. Discretionary responsibilities pertain to the social roles that businesses play in society beyond their economic, legal, and ethical responsibilities.

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The model of social responsiveness, shown in Exhibit 3.7, identifies four strategies for responding to social responsibility problems: reactive, defensive, accommodative, and proactive. These strategies differ in the extent to which the company is wiling to act to meet or exceed society’s expectations.

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A company using a reactive strategy will do less than society expects. It may deny responsibility for a problem or fight any suggestions that the company should solve a problem. By contrast, a company using a defensive strategy would admit responsibility for a problem but would do the least required to meet societal expectations. A company using an accommodative strategy will accept responsibility for a problem and take a progressive approach by doing all that could be expected to solve the problem. Finally, a company using a proactive strategy will anticipate responsibility for a problem before it occurs, do more than expected to address the problem, and lead the industry in its approach.

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One question that managers often ask is, “Does it pay to be socially responsible?” While this is an understandable question, asking whether social responsibility pays is a bit like asking if giving to your favorite charity will help you get a better-paying job. The obvious answer is no. There is not an inherent relationship between social responsibility and economic performance. However, this doesn’t stop supporters of corporate social responsibility from claiming a positive relationship.

In the end, if company management chooses a proactive or accommodative strategy toward social responsibility (rather than a defensive or reactive strategy), it should do so because it wants to benefit society and its corporate stakeholders, not because it expects a better financial return.

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Theo Chocolate: Managing Ethics and Social Responsibility

Joe Whinney exudes a sense of mission in everything he does. After a trip to cacao farms in Central America, Whinney decided to build the first organic fair trade chocoloate factory in the U.S. By building the first sustainable chocolate maker in the nation, Whinney hoped to help solve social and environmental issues by operating a profitable and ethical business. While Theo Chocolate is finding good success in the organic foods industry, perhaps the most exciting thing for “Theonistas” is that the company is being hailed as a voice for change. Employees say they have gained a loyal following for their efforts in the developing world, and business success has opened up new opportunities for sharing their vision of a better world.