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CHAPTER 4

Ethics and Social Responsibility

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Learning Objectives (1 of 2)

Explain the relationship between ethics and the law.

Differentiate between the claims of the different stakeholder groups affected by managers and their companies’ actions.

Describe four rules that can help companies and their managers act in ethical ways

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Learning Objectives (2 of 2)

Discuss why it is important for managers to behave ethically.

Identify the four main sources of managerial ethics.

Distinguish among the four main approaches toward social responsibility that a company can take.

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The Nature of Ethics (1 of 2)

Ethical dilemma

The quandary people find themselves in when they have to decide if they should act in a way that might help another person or group even though doing so might go against their own self-interest

Sharon is offered a high-paying sales position with a pharmaceutical company; however, she disagrees with the money these companies spend in lobbying and elections.

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Ethical dilemma is the quandary people find themselves in when they have to decide if they should act in a way that might help another person or group and is the right thing to do, even though doing so might go against their own self-interest.

A dilemma may also arise when a person has to choose between 2 different courses of action, knowing that whichever course he selects will harm one person or group even while it may benefit another.

The ethical dilemma here is to decide which course of action is the lesser of 2 evils.

People often know they are confronting an ethical dilemma when their moral scruples (compass) comes into play and cause them to hesitate, debate, and reflect upon the rightness or goodness of a course of action. Moral scruples are thoughts and feelings that tell a person what is right or wrong; they are a part of a person’s ethics.

The Nature of Ethics (2 of 2)

Ethics

The inner guiding moral principles, values, and beliefs that people use to analyze or interpret a situation and then decide what is the right or appropriate way to behave

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Ethics are the inner guiding moral principles, values, and beliefs that people use to analyze or interpret a situation and then decide what is the right or appropriate way to behave.

Ethics also indicate what is inappropriate behavior and how a person should behave to avoid doing harm to another person.

Dealing with Ethical Issues

There are no absolute or indisputable rules or principles that can be developed to decide if an action is ethical or unethical.

Neither laws nor ethics are fixed principles.

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Managers must confront the need to decide what is appropriate and inappropriate as they use a company’s resources to produce goods and services.

Not being illegal does not make behavior ethical.

Ethical beliefs lead to the development of laws and regulations to prevent certain

behaviors or encourage others.

Stakeholders and Ethics

Stakeholders

The people and groups that supply a company with its productive resources and so have a claim on and stake in the company

#marchforourlives protestors can be considered the community stakeholders of the gun industry

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When the law does not specify how companies should behave, managers must decide what is the right or ethical way to behave toward the people and groups affected by their actions.

The people and groups that supply a company with its productive resources and so have a claim on and a stake in the company are called stakeholders.

Types of Company Stakeholders

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Types of Company Stakeholders: stockholders; managers; employees; suppliers and distributors; customers; and community, society, and nation-state.

Stockholders

Want to ensure that managers are behaving ethically and not risking investors’ capital by engaging in actions that could hurt the company’s reputation

Want to maximize their return on investment

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Stockholders have a claim on a company because when they buy its stock, they become its owners.

Stockholders are interested in how a company operates because they want to maximize the return on their investment.

Stockholders also want to ensure that managers are behaving ethically and not risking investors’ capital by engaging in actions that could hurt the company’s reputation.

Managers (1 of 2)

Responsible for using a company’s financial capital and human resources to increase its performance

Have the right to expect a good return or reward by investing their human capital to improve a company’s performance

Frequently juggle multiple interests

Layoffs of employees to reduce costs and benefit stockholders

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One problem has been that in many companies, corrupt managers focus not on building the company’s capital and stockholder’s wealth but on maximizing their own personal capital and wealth.

Managers are a vital stakeholder group because they are responsible for using a company’s financial, capital, and human resources to increase its performance, and thus its stock price.

In making such decisions, managers are frequently in the position of having to juggle the interests of different stakeholders, including themselves.

These sometimes difficult decisions challenge managers to uphold ethical values because some decisions that benefit certain stakeholder groups harm other groups.

Managers (2 of 2)

One problem has been that in many companies, corrupt managers focus not on building the company’s capital and stockholder’s wealth but on maximizing their own personal capital and wealth.

SEC now requires companies to reveal to stockholders the value of the stock options they give their top executives and directors.

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In 2010, many company’s corrupt managers focused not on building the company’s capital and stockholders’ wealth but on maximizing their own personal capital and wealth.

In an effort to prevent future scandals, the Securities and Exchange Commission (SEC), the government’s top business watchdog, has begun to rework the rules governing a company’s relationship with its auditor, as well as regulations concerning stock options, and to increase the power of outside directors to scrutinize a CEO.

Ethics and Nonprofit Organizations

More than 2,700 executives of nonprofit organizations earn more than $1 million a year in salary, bonus, and other benefits.

21% excise tax on nonprofit employers with salaries over $1 million (2017)

Laws governing disclosure are far weaker for non-profits.

New laws would subject nonprofits to strict Sarbanes-Oxley-type regulations that force the disclosure of issues related to managerial compensation and financial integrity.

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The issue of what is fair executive compensation is not limited to for-profit companies; it is one of the many issues facing nonprofits.

Unlike for-profit companies, which are required by law to provide detailed reports of their operations to their shareholders, nonprofits do not have shareholders, so the laws governing disclosure are far weaker.

As a result, the board and its top managers have considerable latitude to decide how they will spend a nonprofit’s resources, and little oversight exists.

To remedy this situation, many states and the federal government are considering new laws that would subject nonprofits to strict Sarbanes-Oxley-type regulations that force the disclosure of issues related to managerial compensation and financial integrity.

There are also efforts in progress to strengthen the legal power of the IRS to oversee nonprofits’ expenditures so that it has more scope to examine how these organizations spend their resources on managerial and director compensation and perks.

Experts hope that the introduction of new rules and regulations to monitor and oversee how nonprofits spend their funds will result in much more value being created from the funds given by donors.

Employees

Employees expect to receive rewards consistent with their performance.

Companies can act ethically toward employees by creating an occupational structure that fairly and equitably rewards employees for their contributions.

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A company’s employees are the hundreds of thousands of people who work in its various departments and functions.

One principal way that a company can act ethically toward employees and meet their expectations is by creating an occupational structure that fairly and equitably rewards employees for their contributions.

Suppliers and Distributors

Suppliers expect to be paid fairly and promptly for their inputs.

Raw materials, component parts

Distributors expect to receive quality products at agreed-upon prices.

Wholesalers and retailers

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Every company is in a network of relationships with other companies that supply it with the inputs that it needs to operate.

It also depends on intermediaries such as wholesalers and retailers to distribute its products to the final customers.

Suppliers expect to be paid fairly and promptly for their inputs; distributors expect to receive quality products at agreed-upon prices.

Many ethical issues arise in how companies contract and interact with their suppliers and distributors.

Important issues concerning product quality and safety specifications are governed by the contracts a company signs with its suppliers and distributors.

However, many problems can arise.

Table 4.1 Some Principles from the Gap’s Code of Vendor Conduct

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Have students talk about the points that show this company’s commitment to social responsibility.

Customers

Most critical stakeholder

Company must work to increase efficiency and effectiveness in order to create loyal customers and attract new ones.

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Customers are often regarded as the most critical stakeholder group, because if a company cannot attract them to buy its products, it cannot stay in business.

Managers and employees must work to increase efficiency and effectiveness in order to create loyal customers and attract new ones.

They do so by selling customers quality products at a fair price and provide them good after-sales service.

Many laws protect customers from companies that attempt to provide dangerous or shoddy products.

Laws allow customers to sue a company whose product causes them injury or harm.

Community, Society, and Nation

Community

Physical locations like towns or cities in which companies are located

Provides a company with the physical and social infrastructure that allows it to operate

A company contributes to the economy of the town or region through salaries, wages, and taxes.

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The effects of the decisions made by companies and their managers permeate all aspects of the communities, societies, and nations in which they operate.

Community refers to physical locations like towns or cities or to social milieus like ethnic neighborhoods in which companies are located.

A community provides a company with the physical and social infrastructure that allows it to operate.

Through the salaries, wages, and taxes it pays, a company contributes to the economy of its town or region and often determines whether it prospers or declines.

A company affects the prosperity of a society and a nation and, to the degree that a company is involved in global trade, all the countries it operates in and thus the prosperity of the global economy.

Business ethics are important because the failure of a company can have catastrophic effects on a community; a general decline in business activity affects a whole nation.

Figure 4.2 Four Ethical Rules

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Four Ethical Rules

Utilitarian Rule

Decision that produces the greatest good for the greatest number

How do you measure the benefits and harms that will be done to each stakeholder group?

How do you evaluate the rights and importance of each group?

Moral Rights rule

Decision that best maintains and protects the fundamental or inalienable rights and privileges of the people affected by it

Justice rule

Decision that distributes benefits and harms among people and groups in a fair, equitable, or impartial way

Practical rule

Decision that a manager has no hesitation about communicating to people outside the company because the typical person would think it is acceptable

Practical Decision Model

Does my decision fall within the acceptable standards that apply in business today?

Am I willing to see the decision communicated to all people and groups affected by it?

Would the people with whom I have a significant personal relationship approve of the decision?

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A business decision is probably acceptable on ethical grounds if a manager can answer yes to each of these questions:

Does my decision fall within the accepted values or standards that typically apply in business activity today?

Am I willing to see the decision communicated to all people and groups affect by it—for example, by having it reported in newspapers or on television?

Would the people with whom I have a significant personal relationship, such as family members, friends, or even managers in other organizations, approve of the decision?

Applying the practical rule to analyze a business decision ensures that managers are taking into account the interests of all stakeholders.

Four Ethical Rules

Utilitarian Rule: Decision that produces the greatest good for the greatest number

How do you measure the benefits and harms that will be done to each stakeholder group? How do you evaluate the rights and importance of each group?

Moral Rights Rule: Decision that best maintains and protects the fundamental or inalienable rights and privileges of the people affected by it

Justice rule: Decision that distributes benefits and harms among people and groups in a fair, equitable, or impartial way

Practical rule: Decision that a manager has no hesitation about communicating to people outside the company because the typical person would think it is acceptable

Why Should Managers Behave Ethically?

The relentless pursuit of self-interest can lead to a collective disaster when one or more people start to profit from being unethical, because this encourages other people to act in the same way.

Unethical behavior destroys the trust between a company and its customers, suppliers and distributors.

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The relentless pursuit of self-interest can lead to a collective disaster when one or more people start to profit from being unethical, because this encourages other people to act in the same way.

More and more people jump on the bandwagon, and soon everybody is trying to manipulate the situation to serve their personal ends with no regard for the effects of their actions on others. This situation is known as the “tragedy of the commons.”

Figure 4.3 Some Effects of Ethical and Unethical Behavior

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Figure 4.3 Some Effects of Ethical and Unethical Behavior

Unethical behavior ruins business and commerce, and society has a lower standard of living because fewer goods and services are produced.

Trust and Reputation (1 of 2)

Trust

The willingness of one person or group to have faith or confidence in the goodwill of another person, even though this puts them at risk

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Trust is the willingness of one person or group to have faith or confidence in the goodwill of another person, even though this puts them at risk.

When one person acts in a trustworthy way, this encourages others to act in the same way.

Over time, as greater trust between stakeholders develops, they can work together more efficiently and effectively, which raises company performance (Figure 4.4).

An important safeguard against unethical behavior is the potential for loss of reputation.

Trust and Reputation (2 of 2)

Reputation

Esteem or high repute that individuals or organizations gain when they behave ethically

Arthur Anderson’s shredding of files greatly damaged their reputation.

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Reputation, the esteem or high repute that people or organizations gain when they behave ethically, is an important asset.

Stakeholders have valuable reputations that they must protect, because their ability to earn a living and obtain resources in the long run depends on how they behave.

If a manager misuses resources and other parties regard that behavior as being at odds with acceptable standards, the manager’s reputation will suffer.

Behaving unethically in the short run can have serious long-term consequences.

All stakeholders have reputations to lose.

Suppliers who provide shoddy inputs find that organizations learn over time not to deal with them, and eventually they go out of business.

Powerful customers who demand ridiculously low prices find that their suppliers become less willing to deal with them, and resources ultimately become harder for them to obtain.

Workers who shirk responsibilities on the job find it hard to get new jobs when they are fired.

Figure 4.4 Sources of Ethics

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Figure 4.4 Sources of Ethics

There are four main determinants of differences in ethics between people, employees, companies, and countries, especially the ethics of a company’s top managers:

Societal ethics

Occupational ethics

Individual ethics

Organizational ethics

Societal Ethics

Societal ethics are standards that govern how members of a society should deal with one another in matters involving issues such as fairness, justice, poverty, and the rights of the individual

People behave ethically because they have internalized certain values, beliefs, and norms.

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Societal ethics are standards that govern how members of a society should deal with one another in matters involving issues such as fairness, justice, poverty, and the rights of the individual.

Societal ethics emanate from a society’s laws, customs, and practices and from the unwritten values and norms that influence how people interact with each other.

Societal ethics vary among societies.

Occupational Ethics

Standards that govern how members of a profession, trade, or craft should conduct themselves when performing work-related activities

Medical and legal ethics

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Occupational ethics are standards that govern how members of a profession, trade, or craft should conduct themselves when performing work-related activities.

Within an organization, occupational rules and norms often govern how employees should make decisions to further stakeholder interests.

Employees internalize the rules and norms of their occupational group and often follow them automatically when deciding how to behave.

Table 4.2 lists some failures or lapses in professional ethics according to type of functional manager.

Table 4.2 Some Failures in Professional Ethics

For manufacturing and materials management managers:

Releasing products that are not of a consistent quality because of defective inputs

Producing product batches that may be dangerous or defective and harm customers

Compromising workplace health and safety to reduce costs (for example, to maximize output, employees are not given adequate training to maintain and service machinery and equipment)

For sales and marketing managers:

Knowingly making unsubstantiated product claims

Engaging in sales campaigns that use covert persuasive or subliminal advertising to create customer need for the product

Marketing to target groups such as the elderly, minorities, or children to build demand for a product

Sponsoring ongoing campaigns of unsolicited junk mail, spam, door-to-door, or telephone selling

For accounting and finance managers:

Engaging in misleading financial analysis involving creative accounting or “cooking the books” to hide salient facts

Authorizing excessive expenses and perks to managers, customers, and suppliers

Hiding the level and amount of top management and director compensation

For human resource managers:

Failing to act fairly, objectively, and in a consistent manner toward different employees or kinds of employees because of personal factors such as personality and beliefs

Excessively encroaching on employee privacy through non-job-related surveillance or personality, ability, and drug testing

Failing to respond to employee observations and concerns surrounding health and safety violations, hostile workplace issues, or inappropriate or even illegal behavior by managers or employees

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Some Failures in Professional Ethics

For manufacturing and materials management managers:

• Releasing products that are not of a consistent quality because of defective inputs

• Producing product batches that may be dangerous or defective and harm customers

• Compromising workplace health and safety to reduce costs (for example, to maximize output, employees are not given adequate training to maintain and service machinery and equipment)

For sales and marketing managers:

• Knowingly making unsubstantiated product claims

• Engaging in sales campaigns that use covert persuasive or subliminal advertising to create customer need for the product

• Marketing to target groups such as the elderly, minorities, or children to build demand for a product

• Having ongoing campaigns of unsolicited junk mail, spam, door-to-door, or telephone selling

For accounting and finance managers:

• Engaging in misleading financial analysis involving creative accounting or “cooking the books” to hide salient facts

• Authorizing excessive expenses and perks to managers, customers, and suppliers

• Hiding the level and amount of top management and director compensation

For human resource managers:

• Failing to act fairly, objectively, and in a uniform way toward different employees or kinds of employees because of personal factors such as personality and beliefs

• Excessively encroaching on employee privacy through non-job-related surveillance or through personality, ability, and drug testing

• Failing to respond to employee observations and concerns surrounding health and safety violations, hostile workplace issues, or inappropriate or even illegal behavior by managers or employees

Individual Ethics

Personal standards and values that determine how people view their responsibilities to other people and groups

How they should act in situations when their own self-interests are at stake

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Individual ethics are personal standards and values that determine how people view their responsibilities to other people and groups, and, thus, how they should act in situations when their own self-interests are at stake.

Sources of individual ethics include the influence of one’s family, peers, and general upbringing.

Organizational Ethics

Guiding practices and beliefs through which a particular company and its managers view their responsibility toward their stakeholders

Top managers are especially important in shaping the organization’s code of ethics.

Organizational ethics are the guiding practices and beliefs through which a particular company and its managers view their responsibility toward their stakeholders.

The individual ethics of a company’s founders and top managers are especially important in shaping the organization’s code of ethics.

Managers or workers may behave unethically if they feel pressured to do so by the situation they are in and by unethical top managers.

People typically confront ethical issues when weighing their personal interests against the effects of their actions on others.

If a company’s top managers consistently endorse ethical principles in its corporate credo, they can prevent employees from going astray.

Employees are much more likely to act unethically when a credo does not exist or is disregarded.

Top managers play a crucial role in determining a company’s ethics.

It is clearly important, then, that when making appointment decisions, the board of directors should scrutinize the reputations and ethical records of top managers.

Johnson & Johnson Credo

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Figure 4.5 Johnson & Johnson Credo

Johnson & Johnson’s code of ethics—its credo—reflects a well-developed concern for its stakeholders.

Social Responsibility

The way a company’s managers and employees view their duty or obligation to make decisions that protect, enhance, and promote the welfare and well-being of stakeholders and society as a whole

Fitbit’s recall of the Fitbit Force

A company’s stance on social responsibility is the way its managers and employees view their duty or obligation to make decisions that protect, enhance, and promote the welfare and well-being of stakeholders and society as a whole.

Many kinds of decisions signal a company’s beliefs about its obligations to make socially responsible business decisions (Table 4.3).

Elon Musk and Tesla

Identify a need and then a product.

Musk launched electric cars to offer a cleaner-fuel than fossil fuels.

Tesla’s microgrid saves solar energy while the sun isn’t shining; this helped Puerto Rico after Hurricane Maria.

Musk sees “no scalability limit” on the uses of microgrids.

TOMS One for One: Identify a Need and then a Product

TOMS operates by identifying a global need and creating a product to help address it. TOMS recently launched TOMS Roasting Co to compliment the shoe and eyewear business models. The trademark business model at TOMS is One for One: for every product sold, a similar product is donated to a person in need. TOMS has applied this model to shoes and eyeglasses, and has recently been donating a week of water for every bag of coffee purchased, In using the One for One model, the company has seen a positive impact on communities around the world, giving eyeglasses or surgery to more than 150,000 people and more than 10 million pairs of shoes to those in need around the globe

Table 4.3 Forms of Socially Responsible Behavior

Managers are being socially responsible and showing their support for their stakeholders when they:

Provide severance payments to help laid-off workers make ends meet until they can find another job.

Give workers opportunities to enhance their skills and acquire additional education so they can remain productive and do not become obsolete because of changes in technology.

Allow employees to take time off when they need to and provide health care and pension benefits for employees.

Contribute to charities or support various civic-minded activities in the cities or towns in which they are located (Target and Levi Strauss both contribute 5 percent of their profits to support schools, charities, the arts, and other good works).

Decide to keep open a factory whose closure would devastate the local community.

Decide to keep a company’s operations in the United States to protect the jobs of American workers rather than move abroad.

Decide to spend money to improve a new factory so it will not pollute the environment.

Decline to invest in countries that have poor human rights records.

Choose to help poor countries develop an economic base to improve living standards.

The type of decision that a company makes, will show what its beliefs are about its obligations to society.

The cases of GM and Ford as compared to Fitbit

Figure 4.6 Approaches to Social Responsibility

Approaches to Social Responsibility

Obstructionist approach

Defensive approach

Accommodative approach

Proactive approach

Four Different Approaches (1 of 4)

Obstructionist approach

Companies and their managers choose not to behave in a socially responsible way and instead, behave unethically and illegally.

Manville Corporation hid evidence that asbestos causes lung damage.

At the low end of the range is an obstructionist approach, in which companies and their managers choose not to behave in a socially responsible way.

Instead, they behave unethically and often illegally and do all they can to prevent knowledge of their behavior from reaching other organizational stakeholders and society at large.

Four Different Approaches (2 of 4)

Defensive approach

Companies and their managers behave ethically to the degree that they stay within the law and strictly abide by legal requirements.

Dot.com company executives selling billions of dollars of their stocks before stock prices collapsed

A defensive approach indicates at least some commitment to ethical behavior.

Defensive companies and managers stay within the law and abide strictly by legal requirements, but they make no attempt to exercise social responsibility beyond what the law dictates; thus they can and often do act unethically.

Four Different Approaches (3 of 4)

Accommodative approach

Companies and their managers behave legally and ethically and try to balance the interests of different stakeholders as the need arises.

Managers make choices that are reasonable in the eyes of society and want to do the right thing.

An accommodative approach acknowledges the need to support social responsibility.

Accommodative companies and managers agree that organizational members ought to behave legally and ethically, and they try to balance the interests of different stakeholders so the claims of stockholders are seen in relation to the claims of other stakeholders.

Four Different Approaches (4 of 4)

Proactive approach

Companies and their managers actively embrace socially responsible behavior, going out of their way to learn about the needs of different stakeholder groups and using organizational resources to promote the interests of all stakeholders.

Nucor refuses to lay off employees.

Companies and managers taking a proactive approach actively embrace the need to behave in socially responsible ways.

They go out of their way to learn about the needs of different stakeholders and are willing to use organizational resources to promote the interests of all stakeholders.

Proactive companies are often at the forefront of campaigns for causes such as a pollution-free environment; recycling and conservation of resources; the minimization or elimination of the use of animals in drug and cosmetics testing; and the reduction of crime, illiteracy, and poverty.

Why Be Socially Responsible?

Demonstrating its social responsibility helps a company build a good reputation.

If all companies in a society act socially, the quality of life as a whole increases.

Demonstrating its social responsibility helps a company build a good reputation.

The rewards for a good company reputation are increased business and improved ability to obtain resources from stakeholders.

In a capitalist system, companies, as well as the government, have to bear the costs of protecting their stakeholders, providing health care and income, paying taxes, and so on.

So if all companies in a society act responsibly, the quality of life as a whole increases.

How companies behave toward their employees determines many of a society’s values and norms and the ethics of its citizens.

It has been suggested that if all organizations adopted a caring approach and agreed that their responsibility is to promote the interests of their employees, a climate of caring would pervade the wider society.

Role of Organizational Culture

Ethical values and norms help organizational members:

Resist self-interested action.

Realize they are part of something bigger than themselves.

C. The Role of Organizational Culture

Although an organization’s code of ethics guides decision making when ethical questions arise, managers can go one step further by ensuring that important ethical values and norms are key features of an organization’s culture.

Employees naturally look to those in authority to provide leadership, just as a country’s citizens look to its political leaders, and managers become ethical role models whose behavior is scrutinized by subordinates.

Managers can also provide a visible means of support to develop an ethical culture.

Ethics Ombudsman

Responsible for communicating ethical standards to all employees

Designing systems to monitor employees conformity to those standards

Teaching managers and employees at all levels of the organization how to appropriately respond to ethical dilemmas

Increasingly, organizations are creating the role of ethics officer, or ethics ombudsperson, to monitor their ethical practices and procedures.

The ethics ombudsperson is responsible for communicating ethical standards to all employees, designing systems to monitor employees’ conformity to those standards, and for teaching managers and employees at all levels of the organization how to respond to ethical dilemmas appropriately.

Video: Cellphones for Soldiers

What opportunities for "making a difference" in the world have you noticed? What could you do to address this issue or need?

Identify and briefly explain the three questions to be answered when determining whether or not an action is "ethical.”

Why is it important for all employees to act ethically and responsibly in an organization?

Brittany and Robbie, 12- and 13-year old siblings, noticed that U.S. troops stationed abroad had difficulty communicating with their loved ones and asked, "What can we do to help?" They decided to form a nonprofit organization and raise funds to send free cell phones to the military. Their efforts demonstrate that acting ethically begins with the individual. They established the basis for socially responsible behavior through their nonprofit organization, and their ethical standards shaped the company. Neither Brittany nor Robbie accepted any compensation and derived satisfaction from knowing that they helped soldiers keep in touch with their families back home. They believe that acting ethically and responsibly provides a far greater payoff than any financial achievement ever could.