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CHAPTER 15 Incorporating Ethics and Social Responsibility into the Business

CHAPTER OBJECTIVES

Explain the role of ethics in entrepreneurship.

List the types of ethical situations entrepreneurs may face.

Discuss how entrepreneurs can demonstrate social responsibility.

Describe how an entrepreneur’s vision and values contribute to the culture of the new venture.

Discuss the relationship of core values to success.

UNETHICAL BEHAVIOR

Most entrepreneurs, executives, and employees are not unethical by nature; however, they are often placed in situations that ignore or even reward unethical behavior.

Here are some of things we regularly do in business that actually encourage unethical behavior:

We set goals and incentivize employees based on those goals, but this often encourages bad behavior.

We don’t see unethical behavior if it comes on gradually.

We pretend there is no unethical behavior if it serves our interests (the ends justify the means).

We tend to ignore unethical behavior when the outcome is positive.

Entrepreneurs who understand their value systems and create a code of ethics for their businesses can successfully maneuver through these challenges without forsaking their principles.

15.1 ETHICS (slide 1 of 8)

Ethics is the moral code by which we live and conduct business—essentially the concept of right and wrong.

It derives, principally, from the cultural, social, political, and ethnical norms with which we were raised as children.

Therefore, everyone has a moral code by which they instinctively act.

It’s only when we are faced with a dilemma that raises obvious moral or ethical issues that we may consciously ask ourselves what is the correct thing to do.

15.1 ETHICS (slide 2 of 8)

Most ethical issues are not criminal acts but rather small dilemmas that present themselves with great regularity every day.

In business, merely avoiding criminal acts does not equate to being ethical.

Being ethical is about doing the right thing all the time—even when no one is looking—and being proud of acting honorably.

Unfortunately, most ethical dilemmas in the business environment are subject to “gray areas” that are troubling when one attempts to apply an ethical principle.

15.1 ETHICS (slide 3 of 8)

Recent research has identified four categories of ethical decision making that entrepreneurs face on a daily basis:

Individual values, such as integrity and honesty.

Organizational values concerning employee well-being.

Customer satisfaction, as reflected in the value provided to the customer.

External accountability, or how the company relates to the community and the environment.

15.1 ETHICS (slide 4 of 8)

Awareness is a critical first step in identifying and assessing an ethical dilemma.

Here are three steps you need to take, along with questions you should ask yourself at each step:

Identify the issues.

Is your conscience bothered by the activity?

Does it violate any known laws or regulations?

Would it be okay if the activity were published on the front page of the newspaper?

Does the activity harm anyone in some way?

15.1 ETHICS (slide 5 of 8)

Identify the stakeholders affected by what you are proposing to do.

Who exactly is affected by your action or inaction?

How will the stakeholders perceive the action or inaction?

Do these parties have any rights or legitimate concerns?

Finally, what options are available to you?

Is there anyone from whom you can seek advice?

15.1 ETHICS (slide 6 of 8)

Once the analysis of an ethical issue is complete, you have to make a decision and that decision is affected by your perspective.

Most ethical dilemmas require balancing among three perspectives:

Ideals (what ought to be true).

Obligations or duty.

Utility or cost/benefit.

This is no easy task; therefore, many people resort to avoiding ethical issues through one of four approaches:

Dogmatic approach: “I simply will never lie or cheat or steal.”

Egoistic approach: “Everyone needs to look out for him- or herself.”

Situational approach: “When in Rome, do as the Romans.”

Subjectivist approach: “Ethics is simply a point of view.”

FIGURE 15.1 The Elements of Ethical Action

15.1 ETHICS (slide 7 of 8)

When faced with an ethical dilemma, it’s important to understand what’s at stake.

What are the issues that will need to be resolved?

Who will be affected by the decisions you make and what will the impact be?

What options do you have to resolve this dilemma?

In answering these questions, you will need to figure out:

If there is an ideal action that is possible.

Whether this situation involves an obligation.

Whether a cost-benefit analysis is warranted.

All of these considerations will be viewed through the lens of your view of ethics—typically, one of the four perspectives noted previously.

15.1 ETHICS (slide 8 of 8)

The five most common types of ethical dilemmas in business are:

Conflicts of interest.

Survival tactics.

Responding to incentives.

Stakeholder pressure.

Pushing the legal limit.

15.1a Conflicts of Interest

A conflict of interest occurs when a person’s private or personal interests clash with his or her professional obligations such that an independent observer might reasonably question whether the individual’s professional actions or decisions are influenced by personal gain, financial or otherwise.

Entrepreneurs have vested interests in many areas of their lives: careers, business, family, community, and their financial investments, to name just a few.

It is rare for all these interests to be in complete harmony with one another at any point in time.

15.1b Survival Tactics

Many are the stories of entrepreneurs who did whatever it took to survive, even violating their own standards to do so.

Survival is an area where most people’s ethics really face a test.

The importance of sticking to an ethical code is critical, because what you do today out of desperation will follow you for the rest of your business career.

15.1c Responding to Incentives

Sometimes entrepreneurs inadvertently make it easy for their employees to participate in unethical behavior as the unintended consequence of badly designed incentives.

It is important to have high ethical standards in business, but it is also important to put procedures in place that make it difficult for employees to act in an unethical manner.

What is considered ethical versus unethical behavior is perceived differently by Western and Eastern cultures.

In the West, we tend to describe ethical behavior in terms of appropriate behavior, moral standards, and compliance; it is more transactional in nature.

In Eastern culture, ethical leaders are viewed as being modest and open to others’ ideas; they are humble and seek to follow their inner calling or purpose rather than material wealth.

However, at their foundations, both cultures share basic moral values of honesty and integrity.

15.1d Stakeholder Pressure

Stakeholders include any person or organization that has an interest in seeing the company succeed—investors, shareholders, suppliers, customers, and employees, to name a few.

There are many stakeholders in a business, and they all want what is owed them when it’s owed them.

They may pressure you to make a decision that may not be the best thing for the company.

Research has revealed that the most healthy outcome is realized when you hold to your code of ethics and base decisions on it, not on the personal agendas of stakeholders who may not have the best interests of your company at heart.

15.1e Pushing the Legal Limit

Some entrepreneurs look for ways to bend the law as much as possible without actually breaking it.

Entrepreneurs who regularly play too close to the edge of legality eventually get caught, and the price is high—often their businesses and their reputations.

Ethical entrepreneurs don’t play those games, but they’re always on the alert for companies that might use quasi-legal practices against them to gain an edge in the market.

15.1f Learning from Real-Life Dilemmas

There is no better way to understand the role of ethics in any business than to encounter real-world dilemmas and to think about how you might deal with them.

15.1g The Importance of Developing a Code of Ethics (slide 1 of 3)

The ethical behavior of employees is very much influenced by the code of ethics of the company.

When a code of ethics is spelled out and written down, people in the organization take it more seriously.

The best way to handle ethical dilemmas is to have in place a mechanism for avoiding them in the first place.

The Process of Developing a Code of Ethics

The process of developing a code of ethics begins with a company’s self-examination to identify values held by individuals and alert everyone to inconsistencies in how people deal with particular issues.

For a new company, this means getting the founding team together to discuss how certain issues should be dealt with.

15.1g The Importance of Developing a Code of Ethics (slide 2 of 3)

The Process of Developing a Code of Ethics (continued)

The Joseph son Institute of Ethics has developed a list of ethical values that should be considered in any code of ethics.

Characteristics of an Effective Code

The most effective code of ethics will have the following characteristics:

The code and its associated policies will be clear and easy to understand.

Details about special situations that need further explanation will be included.

In cases where employee judgment may be required, descriptions and examples will make it easier for the employee to make the decision.

TABLE 15.1 Character Counts Inventory

15.1g The Importance of Developing a Code of Ethics (slide 3 of 3)

Characteristics of an Effective Code (continued)

The following are some guidelines for ensuring that the code of ethics is implemented and maintained over time.

As the leader, you should model the behavior expected of others in your company.

Employees should be educated about ethics through workshops that put employees in hypothetical situations.

Demonstrate commitment to the ethics program by mentioning it on a regular basis and providing examples of appropriate behavior that employees display during the course of their work.

The code should be shared with customers so that they understand the company’s commitment and are assured of its integrity.

A clear channel for reporting and dealing with unethical behavior must exist, and there should be a means for rewarding ethical behavior through recognition, bonuses, raises, and so forth.

15.2 SOCIAL RESPONSIBILITY (slide 1 of 3)

Where business ethics is the foundation for good corporate governance, social responsibility is really the link between a company as an ethical entity and a socially responsible citizen.

Today, it’s not enough to have a successful business and make a profit.

Many would argue that the business must hold itself to a higher standard of social responsibility by giving something back to the community or communities in which it does business and, through them, to society as a whole.

15.2 SOCIAL RESPONSIBILITY (slide 2 of 3)

Social responsibility is operating a business in a way that exceeds the ethical, legal, commercial, and public expectations that society has of the business.

This means obeying the law, respecting the environment, and being mindful of the impact the business has on its stakeholders, the industry, and the community in general.

The benefits to businesses that seek to become socially responsible are many, including:

Improved financial performance.

Reduced operating costs by cutting waste and inefficiencies.

Enhanced brand image and reputation.

Increased sales and customer loyalty.

Increased productivity and quality.

Increased ability to attract and retain employees.

Reduced regulatory oversight.

15.2 SOCIAL RESPONSIBILITY (slide 3 of 3)

All entrepreneurs should practice social responsibility when it comes to running their businesses; however, some entrepreneurs have chosen to make social responsibility the reason for their business’s existence.

Socially responsible entrepreneurs generally start their businesses with a social mission, and they are faced with different challenges as they seek the resources to fund and sustain their businesses.

Their rewards derive not only from profits but also from the social value they create by being change agents for the betterment of society.

This has been called a triple bottom line strategy: people, planet, profit.

15.2a Effective Ways to Become Socially Responsible

You can create a successful social venture in a number of important ways:

Pick a single cause to focus on, rather than trying to support many different causes.

Consider partnering with a nonprofit organization to make a greater impact.

Incentivize everyone in the company to get involved.

Target disadvantaged markets.

Employ disadvantaged individuals.

Procure products and supplies.

Create products or services that have social value.

Donate products, services, or revenues.

Donate expertise.

Produce for social good.

15.3 VISION AND VALUES

Every great company begins with the entrepreneur’s vision of what that company will become.

Although it is possible for a company to be successful without a vision, it is difficult, if not impossible, to become a great company without a vision.

FIGURE 15.2 The Components of Company Vision

15.3a Core Values

Core values are the fundamental beliefs that a company holds about what is important in business and in life in general.

They are based on the personal values and beliefs of the founder or the founding team; therefore, they are not something that can be created or invented for the company out of thin air.

A company’s core values tell the world who it is and what it stands for.

Because they are so fundamental to the existence of a company, core values rarely change over time, and they endure beyond the tenure of the founder.

15.3b Purpose

Purpose is your company’s fundamental reason to be in business.

It is the answer to the question “Why does the business exist?”

It is not necessarily a unique characteristic of the business.

What is crucial is that the purpose be authentic; that is, the company must mean what it says.

A properly conceived purpose will be broad, enduring, and inspiring, and it will allow the company to grow and diversify.

15.3c Mission

A company’s mission is what brings everyone together to achieve a common objective and is closely related to the company’s purpose.

A company’s mission is communicated through a mission statement.

A mission statement precisely identifies the environment in which the company operates and communicates the company’s fundamental philosophy.

The best mission statements are simple, precise, and clearly worded.

15.3d Strategies and Tactics

Once goals have been set, strategies should be developed.

Strategies are the plans for achieving those goals and, ultimately, accomplishing the mission.

Tactics, which are the means to execute the strategies, should also be put in place.

15.4 CORE VALUES AND SUCCESS

Your personal definition of success—what it means to be successful—is really a function of the core values and vision that you have for your life.

Research has shown that the personal rewards that motivate entrepreneurs to start businesses are independence and freedom.

Entrepreneurs tend to be goal-oriented, so being one’s own boss, being in control of one’s destiny, and having ultimate control of the success of the venture are reasons for going into business.

They measure their personal success by their achievement of these goals.

15.4a Constants of Success (slide 1 of 2)

No matter how success is defined, there are four constants that seem to permeate everyone’s definition.

Purpose.

To feel successful, you need to know that what you are doing is taking you in the direction of a meaningful goal you want to achieve.

Beliefs about failure.

Although most entrepreneurs have experienced several failures of one sort or another along the way, they typically do not fear failure, because they know intuitively that those who obsessively avoid failure are doomed to mediocrity.

Most entrepreneurs are calculated risk-takers; they use the experience as a learning opportunity.

Entrepreneurs are generally optimists who believe that failure is a normal part of the entrepreneurial process.

15.4a Constants of Success (slide 2 of 2)

A sense of satisfaction with what was accomplished.

The most successful entrepreneurs are doing what they love, so their satisfaction level is usually very high.

Having to pay for, or earn, success.

Success rarely comes without work.

Entrepreneurs do not have the luxury of a 9-to-5 workday; they are usually married to their businesses 24 hours a day, at least in the beginning.