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Section 1: The Challenge of Entrepreneurship

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Essentials of Entrepreneurship and Small Business Management

Ninth Edition

Chapter 2

Ethics and Social Responsibility: Doing the Right Thing

Learning Objectives (1 of 2)

Define business ethics and describe the three levels of ethical standards.

Determine who is responsible for ethical behavior and why ethical lapses occur.

Explain how to establish and maintain high ethical standards.

In this chapter, you will:

1. Define business ethics and describe the three levels of ethical standards.

2. Determine who is responsible for ethical behavior and why ethical lapses occur.

3. Explain how to establish and maintain high ethical standards.

Learning Objectives (2 of 2)

Explain the difference between social entrepreneurs and traditional entrepreneurs.

Define social responsibility.

Understand the nature of business’s responsibility to the environment.

Describe business’s responsibility to employees.

Discuss business’s responsibility to customers.

Describe business’s responsibility to investors.

Describe business’s responsibility to the community.

In addition, you will:

4. Explain the difference between social entrepreneurs and traditional entrepreneurs.

5. Define social responsibility.

6. Understand the nature of business’s responsibility to the environment.

7. Describe business’s responsibility to employees.

8. Discuss business’s responsibility to customers.

9. Describe business’s responsibility to investors.

10. Describe business’s responsibility to the community.

Ethical Behavior

Ethical behavior: doing what is “right” as opposed to what is “wrong.”

Reflects entrepreneur’s personal values and beliefs

It is important to consider the perspectives of different stakeholders: the various groups and individuals who affect and are affected by a business.

Ethical behavior involves doing what is “right” as opposed to what is “wrong.” When thinking about ethical behavior, it’s important to consider the perspectives of different stakeholders.

Figure 2.1 Key Stakeholders

This figure shows different stakeholders in an organization.

Ethics and Social Responsibility

Ethics: a branch of philosophy that studies and creates theories about the basic nature of right and wrong, duty, obligation, and virtue.

Social responsibility: how an organization responds to the needs of the many elements in society.

Ethics and social responsibility set behavioral boundaries for business owners.

Business Ethics

Business ethics: the fundamental moral values and behavioral standards that form the foundation for the people of an organization as they make decisions and interact with stakeholders.

While maintaining an ethical perspective is essential to creating and protecting a company’s reputation, it’s not easy! Ethical dilemmas lurk in the decisions that entrepreneurs make every day.

Figure 2.2 Three Levels of Ethical Standards

This figure shows the three levels of ethical standards: the law; organizational policies and procedures; and morality.

Moral Management (1 of 2)

Table 2.1 Approaches to Business Ethics

Organizational Characteristics	Immoral Management	Amoral Management	Moral Management
Ethical norms	Management decisions, actions, and behavior imply a positive and active opposition to what is moral (ethical). Decisions are discordant with accepted ethical principles. An active negation of what is moral is implicit.	Management is neither moral nor immoral; decisions are not based on moral judgments. Management activity is not related to any moral code. A lack of ethical perception and moral awareness may be implicit.	Management activity conforms to a standard of ethical, or right, behavior. Management activity conforms to accepted professional standards of conduct. Ethical leadership is commonplace.
Motives	Selfish. Management cares only about its or its company’s gains.	Well-intentioned but selfish in the sense that impact on others is not considered.	Good. Management wants to succeed but only within the confines of sound ethical precepts such as fairness, justice, and due process.

This table shows the three ethical styles of management: immoral, amoral, and moral management.

Moral Management (2 of 2)

[Table 2.1 Continued]

Organizational Characteristics	Immoral Management	Amoral Management	Moral Management
Goals	Profitability and organizational success at any price.	Profitability. Other goals are not considered.	Profitability within the confines of legal obedience and ethical standards.
Orientation toward law	Legal standards are barriers that management must overcome to accomplish what it wants.	Law is the ethical guide, preferably the letter of the law. The central question is “What we can do legally?”	Obedience toward the letter and spirit of the law. Law is a minimal ethical behavior. Prefer to operate well above what law mandates.
Strategy	Exploit opportunities for corporate gain. Cut corners when it appears useful.	Give managers free rein. Personal ethics may apply but only if managers choose. Respond to legal mandates if caught and required to do so.	Live by sound ethical standards. Assume leadership position when ethical dilemmas arise. Enlightened self-interest.

Source: Archie B. Carroll, “In Search of the Moral Manager,” reprinted from Business Horizons, March/April, Copyright 1987 by the Foundation for the School of Business at Indiana University. Used with permission.

Keep in mind that an entrepreneur who practices ethical behavior establishes the moral tone for the entire organization.

Benefits of Moral Management

Companies avoid the damaging fallout from unethical behavior on their reputation.

Dealing with stakeholders is much easier if a company has a solid ethical foundation on which to build.

It is easier to attract and retain quality workers.

It has a positive impact on a company’s bottom line.

It has an impact on a company’s ability to provide value for its customers.

Entrepreneurs must recognize that ethical behavior is an investment in the company’s future rather than merely a cost of doing business.

Why be Ethical? (1 of 2)

Top Five Reasons to Run a Business Ethically:

Protect brand and company reputation

It is the right thing to do

Maintain customers’ trust and loyalty

Maintain investors’ confidence

Earn public acceptance and recognition

The top five reasons to be ethical are:

To protect the brand and company’s reputation;

Because it’s the right thing to do;

To maintain customer loyalty and trust;

To maintain the confidence of investors;

To earn public acceptance and recognition.

Why be Ethical? (2 of 2)

Top Five Factors That Drive Business Ethics:

Corporate scandals

Marketplace competition

Demands by investors

Pressure from customers

Globalization

What drives business ethics?

Corporate scandals

Competition

Investor demands

Customer pressure

Globalization

Establishing an Ethical Framework (1 of 2)

Step 1: Identify the personal moral and ethical principles that shape all business decisions.

Step 2: Recognize the ethical dimensions involved in the dilemma or decision.

Step 3: Identify the key stakeholders involved and determine how the decision will affect them.

Triple bottom line (3BL): measuring business performance using profitability, commitment to ethics and social responsibility, and its impact on the environment (“profit, people, and planet”).

To cope successfully with the many ethical decisions they face, entrepreneurs must develop a workable ethical framework to guide themselves and the organization.

Establishing an Ethical Framework (2 of 2)

Step 4: Generate alternative choices and distinguish between ethical and unethical responses.

Step 5: Choose the “best” ethical response and implement it.

The final choice must be consistent with the company’s goals, culture, and value system as well as those of the individual decision makers.

Why Ethical Lapses Occur

Figure 2.3 Causes of Ethical Lapses

Source: Based on KPMG Integrity Survey 2013, p. 12.

This figure highlights the primary causes of misconduct in business.

Causes of Ethical Lapses

An unethical employee

An unethical organizational culture

Moral blindness

Competitive pressures

Opportunity pressures

Globalization of business

We can explore the primary causes of ethical lapses in more detail.

Features of Ethical Cultures (1 of 2)

Leaders support and model ethical behavior.

Consistent communications come from all company leaders.

Ethics is integrated into the organization’s goals, business processes, and strategies.

Ethics is part of the performance management system.

Ethics is part of the company’s selection criteria and selection process.

Research shows that in organizations with ethical cultures:

Leaders support and model ethical behavior.

There are consistent communications come from all company leaders.

Ethics is integrated into the organization’s goals, business processes, and strategies.

Ethics is part of the performance management system.

Ethics is part of the company’s selection criteria and selection process.

Features of Ethical Cultures (2 of 2)

The needs of the various stakeholder are balanced when making decisions.

A strong set of core values supports the vision and mission of the company.

The company maintains a long-term perspective on all decisions.

In addition:

The needs of the various stakeholder are balanced when making decisions.

A strong set of core values supports the vision and mission of the company.

The company maintains a long-term perspective on all decisions.

Establishing and Maintaining Ethical Standards

Ethical tests for judging behavior:

The utilitarian principle

Kant’s categorical imperative

The professional ethic

The Golden Rule

The television test

The family test

These tests can help employees identify the moral implications of the decisions they face.

Principles to Guide Ethical Behavior

Honesty

Integrity

Promise-keeping

Fidelity

Fairness

Caring for others

Respect for others

Responsible citizenship

Pursuit of excellence

Accountability

The study of history, philosophy, and religion reveals a strong consensus about certain universal and timeless values that are central to leading an ethical life.

Maintaining Ethical Standards (1 of 3)

Set the tone.

Create a company credo:

A statement that defines the values underlying the entire company and its ethical responsibilities to its stakeholders.

Establish high standards of behavior.

Involve employees in establishing ethical standards.

Create a culture that emphasizes two-way communication.

To create an environment that encourages ethical behavior, entrepreneurs must make building an intentional culture that is based on a strong ethical foundation a core responsibility as leaders of their businesses.

To maintain ethical standards, entrepreneurs should:

Set the tone

Create a company credo

Establish high standards of behavior

Involve employees in establishing ethical standards

Create a culture that emphasizes two-way communication

Maintaining Ethical Standards (2 of 3)

Eliminate “undiscussables.”

Develop a code of ethics:

A written statement of the standards of behavior and ethical principles a company expects from its employees.

Enforce the code of ethics through policies.

Recruit and promote ethical employees.

Ethical commitment.

Ethical consciousness.

Ethical competency.

In addition, firms should:

Eliminate “undiscussables”

Develop a code of ethics

Enforce the code of ethics through policies

Recruit and promote ethical employees

Maintaining Ethical Standards (3 of 3)

Conduct ethics training.

Reward ethical conduct.

Separate related job duties.

Perform periodic ethical audits.

Finally, entrepreneurs should:

Conduct ethics training

Reward ethical conduct

Separate related job duties

Perform periodic ethical audits

Social Entrepreneurship

Social entrepreneurs:

Seek solutions for social problems that are met by neither the market nor the government.

Focus on creating social benefit rather than commercial success.

Tackle social problems by taking full advantage of natural market forces.

Whereas traditional entrepreneurs seek opportunities to create market value, there is a growing trend to use entrepreneurship to pursue opportunities to create social value.

Social Responsibility

Companies must go beyond “doing well” – simply earning a profit – to “doing good” – living up to their social responsibility.

Surveys show:

55% of small businesses’ mission statements include references to achieving social goals.

52% of small business owners give to charity.

Society is constantly redefining its expectations of business and now holds companies of all sizes to high standards of ethics and social responsibility.

Why be Socially Responsible?

Research shows:

75% of consumers say social responsibility is important in their purchasing decisions.

There is a positive correlation between ethical, socially responsible behavior and profitability.

But it can be difficult to define just what socially responsible behavior is!

When customers shop for “value,” they no longer consider only the price–performance relationship of the product or service; they also consider the company’s stance on social responsibility.

Being Socially Responsible

Encourage recycling.

Support local fundraisers.

Join in community service.

Reduce energy usage.

Create a grant program.

Support local causes.

Partner with local school.

These are some simple ways small businesses can be socially responsible.

Business’s Responsibility to the Environment

Socially responsible business owners focus on the three Rs:

Reduce the amount of energy and materials used in your company.

Reuse whatever you can.

Recycle the materials you must dispose of.

Due to a strong personal belief in environmental protection, many entrepreneurs seek to start ventures that have a positive impact on the environment or take steps to operate their businesses in ways that help protect the environment. Focusing on the three Rs is one way to accomplish this.

Business’s Responsibility to Employees

Recognize the value of employees:

Listen to them and respect their opinions.

Ask for their input and involve them in the decision-making process.

Provide regular feedback – positive and negative.

Tell them the truth – always.

Let them know exactly what’s expected of them.

Reward them for performing their jobs well.

Trust them – create an environment of respect and teamwork.

Remember that employees produce the winning competitive edge for entrepreneurs so it’s important to treat them well.

Cultural Diversity in the Workplace

Figure 2.4 Diversity Index by County

Source: Kyle Reese-Cassal, “2015/2020 Esri Diversity Index,” Esri, March 2015, p. 4.

The Diversity Index measures the probability that two people chosen at random from the same area belong to different race or ethnic groups.

Composition of the U.S. Workforce in 2020

Figure 2.5 Projected Composition of the U.S. Workforce in 2020

Source: Based on Mitra Toossi, “Labor Force Projections to 2024: A More Slowly Growing Workforce,” Monthly Labor Review, January 2015, www.bls.gov/opub/mlr/2015/article/labor-force-projectionsto-2024.htm.

This figure shows the projected composition of the U.S. workforce for 2020.

Managing Diversity

Use a “SPLENDID” approach:

Study

Plan

Lead

Encourage

Notice

Discussion

Inclusion

Dedication

How can entrepreneurs achieve unity through diversity? The only way is by managing diversity in the workforce. Try using a SPLENDID approach.

Managing a Culturally Diverse Workforce

Business owners need to:

Assess diversity needs.

Learn to recognize and correct their own biases and stereotypes.

Avoid making invalid assumptions.

Push for diversity in their management teams.

Concentrate on communication.

Make diversity a core value in the organization.

Continue to adjust the company to their workers.

Managing a culturally diverse workforce successfully requires a business owner to do the following:

Assess diversity needs

Learn to recognize and correct their own biases and stereotypes

Avoid making invalid assumptions

Push for diversity in their management teams

Concentrate on communication

Make diversity a core value in the organization

Continue to adjust the company to their workers

Drug Testing

An effective, proactive drug program should include:

A written substance abuse policy.

Training for supervisors to detect substance-abusing workers.

An employee education program.

A drug-testing program, when necessary.

An employee assistance program (E A P):

A company-provided benefit designed to help reduce workplace problems such as alcoholism, drug addiction, a gambling habit, and other conflicts and to deal with them when they arise.

Substance abuse has infiltrated the workplace making it important even for entrepreneurs to have an effective, proactive drug program.

Sexual Harassment

Sexual harassment: any unwelcome sexual advance, request for sexual favors, and other verbal or physical sexual conduct made explicitly or implicitly as a condition of employment.

Small businesses are especially vulnerable because they lack the policies, procedures, and training to prevent it.

Sexual harassment is a violation of Title VII of the Civil Rights Act of 1964 and is considered to be a form of sex discrimination. Studies show that sexual harassment occurs in businesses of all sizes, but small businesses are especially vulnerable because they typically lack the policies, procedures, and training to prevent it.

What is Sexual Harassment?

Behaviors that can result in sexual harassment charges:

Quid pro quo harassment

Hostile environment

Harassment by nonemployees

Most sexual harassment charges arise from claims of a hostile environment.

Preventing Sexual Harassment

Education:

Training programs can raise awareness of what constitutes harassment.

Policy:

Implement a meaningful and enforceable policy against harassment.

Procedure:

Provide a channel for employees to express their complaints.

A company’s best weapons against sexual harassment are education, policy, and procedures.

Privacy

Business owners should:

Establish a clear policy for monitoring employees’ communications.

Create guidelines for the proper use of the company’s communication technology and communicate them to everyone.

Monitor in moderation.

To avoid ethical and legal problems, business owners should follow these guidelines:

Establish a clear policy for monitoring employees’ communications

Create guidelines for the proper use of the company’s communication technology and communicate them to everyone

Monitor in moderation

Business’s Responsibility to Customers

Businesses should build long-term relationships with their customers.

Abide by the Consumer Bill of Rights.

Right to safety.

Right to know.

Right to be heard.

Right to education.

Right to choice.

Companies have the responsibility to provide their customers with safe, quality products and services.

Business’s Responsibility to Investors

Businesses have a responsibility to:

Provide investors with an attractive return on their investment.

Meet ethical and social goals.

Report their financial performance in an accurate and timely fashion to their investors.

Although earning a profit may be a company’s first responsibility, it is not its only responsibility; meeting its ethical and social responsibility goals is also a key to success. Investors today want to know that entrepreneurs are making ethical decisions and acting in a socially responsible manner.

Business’s Responsibility to the Community

Businesses have a responsibility to:

Provide jobs and create wealth.

Contribute to the community in other ways.

Act as volunteers for community groups.

Participate in projects to help the elderly or poor.

Adopt a highway to promote a clean community.

Volunteer in school programs.

As corporate citizens, businesses have a responsibility to the communities in which they operate. Indeed, consumers expect companies to be socially responsible and to be good corporate citizens.

Conclusion

Businesses must do more than earn profit; they must act ethically and in a socially responsible way.

But, there is no universal definition of ethical behavior.

Business owners need to commit to following the highest ethical standards if they expect their employees to do so.

Businesses must do more than merely earn profits; they must act ethically and in a socially responsible manner. Establishing and maintaining high ethical and socially responsible standards must be a top concern of every business owner. Finally, business owners and managers must recognize the key role they play in influencing their employees’ ethical and socially responsible behavior.