Principles of Management live inclass EXAM

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Chapter 4 Ethics and Social Responsibility

Ethics – the set of moral principles or values that defines right and wrong for a person or group.

Ethical behavior – a behavior that conforms to a society’s accepted principles of right and wrong.

Hello Class,

Chapter 4 Ethics and Social Responsibility will cover two main topics: business ethics and corporate social responsibility. For the first topic on business ethics, we will discuss a number of sub-topics – ethics and ethical dilemmas, three domains of human action, workplace deviance, the U.S. Sentencing Commission Guidelines for Organizations, principles of ethical decision making, and practical steps to ethical decision making.

According to the Ethics Recourse Center’s National Business Ethics Survey, 41% of employees observed unethical behavior at work. 24% of unethical behavior was committed by senior managers, and 60% by managers of all kinds. In addition, 9% of employees report being pressured to compromise ethical standards at work. Business ethics are an important issue in the workplace. For responsible decision making in a business environment, a good set of ethics is key.

Ethics is the set of moral principles or values that defines right and wrong for a person or group.

E.g. Susan often schedules personal appointments and run personal errands during work hours. Her co-worker complained to the HR manager about Susan’s absenteeism. The HR manager said that it was not a problem because it didn’t affect her overall performance. Both Susan’s and the HR manager’s behavior are not morally right, which raises an ethical issue.

Ethics are not only a guide to making decisions, but also the criteria the public judge you on. How people see you and your company is the basis of building trust. If you’re taking unethical actions, you lose credibility, and your business will suffer. These values form the basis of business ethics, such as honesty, integrity, keeping your promises, loyalty, fair, caring, respect, obeying the law, and accountable, etc. They what you need to hold yourself accountable to:

Ethical behavior is a behavior that conforms to a society’s accepted principles of right and wrong.

E.g. Martin is Laura’s boss and they are also friends. Martin is going to report a project progress at a corporate meeting. Laura asks Martin to report her part of the project as finished even though she still has a few days left to go. If Martin reports Laura’s performance accurately, this would exemplify an ethical behavior. If Martin decided to report falsely, this would be an unethical behavior.

Three Domains of Human Action

Codified law – values and standards that are written into the legal system.
Free choice – behavior about which law has no say and for which an individual or organization enjoys complete freedom.

Amount of Explicit Control

High Medium Low

Domain of

Ethics

(Social Standard)

Domain of

Codified Law

(Legal Standard)

Domain of

Free Choice

(Personal Standard)

Three domains of human action

Ethics can be better understood when compared with behaviors governed by laws and by free choice.

According to Prof. Richard Daft, human behavior falls into three domains. The first domain is codified law, or simply domain of law. In codified law, values and standards are written into the legal system and enforceable in the courts.

Lawmakers set rules and companies and people must follow in a certain way.

E.g. Agreements among competitors can raise antitrust suspicious. Fixing prices, restricting output, and dividing sales markets among competitors are illegal. These issues are in the domain of law. So antitrust authorities must investigate the effect and purpose of such an agreement to determine its legality.

The domain of free choice is at the opposite end of the scale and pertains to behavior about which the law has no say and for which an individual or organization enjoys complete freedom. People may step over the line if they are not clear about in what areas you have free choice and what areas are governed by law.

E.g. Whether you want to complete your higher education or not, it is your free choice.

However, it is mandatory for children to go to primary and secondary schools, which is not your free choice.

E.g. You want to drive a car or not, this is your free choice. However, you must have a drive license in order to drive, or it is illegal; and this is in the domain of law.

E.g. For a firm, it is the firm’s free choice to decide how many products it wants to produce.

However, a firm must produce products that meet legal requirements such as safety standards.

Between the legal domain and the free choice domain lies the domain of ethics.

The domain of ethics has no specific laws, yet it does have standards of conduct based on shared principles and values about what is right and wrong and those standards guide an individual, a company, or a group.

E.g. A manager took credit for a product design for himself while this design was a result of the entire group work.

This behavior falls into the domain of ethics.

These domains indicate different amount of explicit control. In the domain of codified law, obedience is to laws prescribed by the legal system. You must act in certain ways as required by laws. So this domain shows the high amount of explicit control. In the domain of ethical behavior, obedience is to unenforceable norms and standards, and this domain has the medium amount of explicit control. In the domain of free choice, obedience is strictly to oneself, so it has the low amount of explicit control.

An ethically acceptable decision is both legally and morally acceptable to the larger community.

E.g. Certain accounting practices are unethical such as unjustifiably shifting expenses to inappropriate periods to influence current financial results. These behaviors are in the domain of ethics.

Some other accounting practices are unethical as well as illegal, such as flat-out misrepresenting income or expense figures on financial statements. These behaviors are in the domain of law.

All these practices are not legally and/or morally acceptable to the society.

Case: Freedom of Speech

Freedom of speech – one of the essential personal freedoms based on the First Amendment to the US Constitution.
No arm of the government, federal or state, can abridge free speech right.

Exceptions to free speech
Time, place, manner (TPM) restrictions.
Threats of violence
Fighting words
Defamation
Obscenity
False statements of fact
False advertising
Terrorist threats

Case on freedom of speech

The First Amendment to the United States Constitution is part of the Bill of Rights. It ensures against governmental intrusions on the essential personal freedoms like free expression.

Free expression means that Congress shall make no law abridging the freedom of speech.

The Courts have interpreted the language to mean that no arm of the government, federal or state, can abridge the free speech right.

Free speech is an individual’s right and freedom in the domain of free choice.

However, the Free Speech Clause of the First Amendment is not absolute. It has never been interpreted to guarantee all forms of speech without any restraint whatsoever.

There are exceptions to free speech and most exceptions relate to health and safety concerns.

Let’s go over some exceptions to free speech.

Time, place, and manner (TPM) restrictions place reasonable restrictions on the time, place, and manner of individual expression. The restrictions are content-neutral, which is not to restrict the content of a speech.

E.g. No one is allowed to hold a street meeting in the middle of Time Square at the rush hour.

Other examples of exceptions to free speech in the US include threats of violence, fighting words, defamation, obscenity, false statements of fact, false advertising, and terrorist threats.

Those exceptions are unprotected by laws and they are not in the domain of your free choice.

Speech can be suppressed by governments if the speech shows clear and present danger of imminent harm to the public welfare. E.g. Speech that promotes an unlawful end, such as a speech urging people to riot, is not protected.

Case on telephone conversations

Two girls talked over the phone. The first girl instructed another girl where to put explosives in a building in order to achieve a maximum effect. As soon as they hung up the phone, police showed up at the door and wanted to arrest the first girl for a terrorist attempt. The first girl said it was a computer game. Police did not believe it. So the girl had to bring the police to another girl’s home to show the computer game and proved her innocence.

You should realize that your telephones may be bugged for potential terrorist acts and threats. The violence-related words and attempts will be tracked down to the source.

Case on national flag

Flag desecration refers to a various set of acts that intentionally destroy, damage, or burn a flag in public.

Burning national flag in public is often intended to make a political point against government’s policies.

The US Supreme Court in the Texas v. Johnson case (1989) ruled that due to the First Amendment to the US Constitution, it is unconstitutional for a government (whether federal, state, or municipality) to prohibit the desecration of a flag, due to its status as “symbolic speech.” Therefore laws banning the desecration of flag is not enforceable.

However, many people believe that the desecration of national flag is not right and this act often falls into the domain of ethics. An incident at UC-Irvine and people’s responses to that incident showed people’s feeling and attitudes toward national flag.

The student legislative council of Associated Students at UCI approved a resolution that would removed all flags including the U.S. flag from the common lobby area of the student government offices on March 5, 2015.

The executive council of the student government at UCI vetoed the ban on the display of flags on March 7.

Outraged by such an attempt, Republican state legislative leaders proposed a constitutional amendment that would protect Old Glory from being banished from state-funded colleges and universities.

Flag ban at UCI stirs emotions. Criticism was also voiced by citizens and veterans. Carol Schlaepfer, a 76-year-old lady, wearing Chino Valley Tea Party T-shirt, joined the protest on the campus and held a banner saying “Our flag is the reason for your freedom!” When a student said, “It’s just a flag.” A 93-year-old man said, “What’s the matter with you, it represents this wonderful country”！

As you can see, there is strong opposition from the general public against the disrespect actions toward national flag. So such an action is in the domain of ethics.

Ethical Dilemma

Ethical Dilemma
A situation when all alternative choices are undesirable because of potentially negative consequences.
A quandary people are in when deciding which way they should act.

Ethical dilemma

Because ethical standards are not codified, disagreement and dilemmas about proper decision or behavior often occur. A ethical dilemma arises when all alternative choices are undesirable because of potentially negative consequences. It is a quandary people are in when they decide which way they should act in the case that right and wrong cannot be clearly identified.

Consider the following two cases about ethical dilemmas.

Case 1 about Foreign Payment

A high-level government official in a foreign nation asks you to pay a $200,000 consulting fee. In return, the official promises special assistance in obtaining a $100-million contract that would produce at least a $5-million profit for your company. The contract will probably go to a foreign competitor if not won by you.

Your choices are:

I won’t pay.
I’ll pay even though I think it’s unethical.
I’ll pay and think it’s ethical in a foreign country.

Among the three alternatives above, some managers choose to refuse to pay. According to the Foreign Corruptive Practice Act (FCPA) in the US, if the IRS considers this practice as a questionable payment or a disguised bribe, it is illegal as well as unethical.

Some managers choose to pay even though they think this is unethical. Getting the contract and making profits is their top priority, so they are willing to do something unethical in order to obtain business.

Yet some other managers choose to pay because they think this is ethical in a foreign country and this is a normal way of doing business there. Besides, it is called consulting fee, not bribe.

There have been many multinational corporations that were involved in the bribery scandals in China and other countries. This is a serious issue managers have to face and make decisions.

Case 2 about Competitor’s Employee

You learn that a competitor has made an important scientific discovery. It will substantially reduce, but not eliminate, your profit for about a year. There is a possibility of hiring one of the competitor’s employees who knows the details of the discovery. You have two alternative choices:

I will hire the person.
I won’t hire the person.

A business journal survey shows that 50% of the journal subscribers said that they probably hire the person while another 50% would not hire the person. The survey results show a tie in managers’ decisions and indicates an ethical dilemma managers often encounter.

Workplace Deviance

Workplace deviance – unethical behavior that violates organizational norms about right and wrong.

Production deviance – unethical behavior that hurts the quality and quantity of work produced.

Property deviance – unethical behavior that aimed at the organization’s property or products.

Political deviance – using one’s influence to harm others in the company.

Personal aggression – hostile or aggressive behavior toward others.

Workplace deviance is unethical behavior that violates organizational norms about right and wrong.

Studies show that one-third to three-quarters of all employees admit that they have some form of workplace deviance. Experts estimate that these unethical behaviors may cost companies as much as $3.5 trillion a year, or roughly 5% of their revenues.

There are four types of workplace deviance: production deviance, property deviance, political deviance, and personal aggression.

Production deviance is unethical behavior that hurts the quality and quantity of work produced.

E.g. During the NCAA (National Collegiate Athletic Association) basketball tournament season in every spring, employees fill out their tournament brackets for March Madness in hopes of winning office betting pools. It is estimated that 50 million American office workers participate in March Madness office pools, which are technically illegal. About 56% of those 50 million workers spend at least one hour filling out their tournament selections, the cost of that lost hour nationwide to employers is $1.9 billion. These are unproductive behaviors.

Property deviance is unethical behavior that aimed at the organization’s property or products.

Employees who abuse company property are committing deviant acts.

E.g. When employees steal company merchandise, this is called employee shrinkage, which costs US retailers $15.2 billion a year.

E.g. “Sweethearting” is another example of property deviance, in which employees discount or don’t ring up merchandise their family or friends bring to the cash register. Sweethearting is responsible for 35% of losses in supermarkets.

E.g. Still another example of property deviance is “dumpster diving,” in which employees unload trucks, stash merchandise in a dumpster, and then retrieve it after work.

Political deviance is using one’s influence to harm others in the company.

E.g. The game of "company politics" can be considered a form of workplace deviance. An employee may spread false rumors or gossip about another in an effort to gain a promotion or more favorable work assignment.

Personal aggression is hostile or aggressive behavior toward others.

E.g. Workplace violence is one kind of personal aggression. Fortunately, workplace violence has dropped significantly from 16 of every 1,000 employees who experienced nonfatal workplace violence in 1993 to 4 of every 1,000 employees today.

Types of Workplace Deviance

Source: “A Typology of Deviant Workplace Behaviors,” (Figure), S. L. Robinson & R. J. Bennett. Academy of

Management Journal, 1995, Vol. 38.

This exhibit shows four types of workplace deviance.

Robinson and Bennett developed a typology of deviant workplace behaviors, which was published in Academy of Management Journal in 1995.

They put workplace deviance in four categories by two dimensions:

How deviant the behavior is, from minor to serious.
The target of the deviant behavior, either organizational or interpersonal.

The exhibit indicates that production deviance and political deviance are minor deviance while property deviance and personal aggression are serious deviance.

Production deviance and property deviance target at the organizations while political deviance and personal aggression target at particular people in the workplace.

We have discussed the four categories in the previous slide. This exhibit provides more examples in each of the four types of company-related deviance.

Production deviance includes such examples as leaving work early, taking excessive breaks, intentionally working slowly, and wasting resources.

Property deviance includes examples like sabotaging company equipment, accepting kickbacks, lying about hours worked, and stealing from company. Note that lying about hours worked is property deviance instead of production deviance. For example, you are assigned to work at the client’s site and you claimed 8 working hours instead of actual 5 hours. You pocketed money for the false 3 hours and you “pad” your time sheet and your company’s asset. So it is property deviance.

Political deviance includes such examples as showing favoritism, gossiping about coworkers, blaming coworkers, and competing non-beneficially.

Personal aggression include examples like sexual harassment, verbal abuse, stealing from coworkers, and endangering coworkers.

The US Sentencing Commission Guidelines

The guidelines were established in 1991.

The guidelines were amended in 2004 and resulted in stricter ethics training requirements.

Companies can be prosecuted and punished even if management didn’t know about the unethical behavior.

Who: Nearly all businesses are covered.
What: Punishes a number of offenses.
Why: Encourages businesses to be proactive
How: Heavy fines verses incentives.

The US Sentencing Commission Guidelines for Organizations were established in 1991 and since then companies can be prosecuted and punished even if management did not know about the unethical behavior.

Later changes to the Guidelines in 2004 resulted in much stricter ethics training requirements and emphasized the importance of creating a legal and ethical company culture.

Now let’s look at the guidelines in more depth.

Who? Nearly all businesses are covered by the US Sentencing Commission’s guidelines.

This includes nonprofits, partnerships, labor unions, unincorporated organizations and associations, incorporated organizations, and even pension funds, trusts, and joint stock companies.

What? The guidelines cover offenses defined by federal laws 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.

Why? The purpose of the guidelines is not just to punish companies after they or their employees break the law but also to encourage companies to take proactive steps that will discourage or prevent white-collar crime before it happens.

How? The guidelines not only impose fines for corporate offenses, but also give companies incentives to cooperate with and 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 a greatly reduced fine for companies that have started an effective compliance program to encourage ethical behavior before the illegal activity occurs.

The US Sentencing Guidelines clearly spell out the necessary components of an effective compliance program.

Case

Caremark International, a managed-care service provider in Delaware, pleaded guilty to criminal charges related to its physician contracts and improper patient referrals. When shareholders sued the company for negligence and poor management, the Delaware court dismissed the case, ruling that the company’s ethics compliance program based on the US Sentencing Guidelines, was a good-faith attempt to monitor employees and that the company did not knowingly allow illegal and unethical behavior to occur. Therefore, such a compliance program was enough to shield the company from liability. This case indicates the importance of a company’s compliance program based on the guidelines.

Principles of Ethical Decision Making

Principle of long-term self-interest
An ethical principle that holds that you should never take any action that is not in your or your organization’s long-term self-interest.

Principle of personal virtue
An ethical principle that holds that you should never to anything that is not honest, open, and truthful and that you would not be glad to see reported in the newspapers or on TV.

Principles of Ethical Decision Making

Many ethical dilemmas involve a conflict between the needs of the part and the whole, such as the individual versus the organization as a whole, or the organization versus society as a whole.

E.g. If a company decides to implement mandatory alcohol and drug testing for employees, it might benefit the organization as a whole but reduce the individual freedom of employees. Should the firm do it?

E.g. If a company is the leading employer in a town and creates many jobs but its waste effluents may potentially cause local health problems in the community. Which issue is more important?

Managers face many tough ethical choices. Ethical principles can be used to guide ethical decision making.

We now introduce 7 principles of ethical decision making.

Principle of long-term self-interest is an ethical principle that holds that you should never take any action that is not in your or your organization’s long-term self-interest. This is also known as individualism approach.

This principle does not mean to promote selfishness. What we do to maximize our long-term interests (save more, spend less, exercise every day, watch what we eat) is often very different from what we do to maximize short-term interests (max out our credit cards, be couch potatoes, eat whatever we want).

Individualism is believed to lead to honesty and integrity because that works best in the long run.

Lying and cheating for immediate self-interest just causes business associates to lie and cheat in return.

Principle of personal virtue is an ethical principle that holds that you should never do anything that is not honest, open, and truthful and that you would not be glad to see reported in the newspapers or on TV.

E.g. A former CEO of Radio Shack lied about his education. He said he received two bachelor degrees but he did not.

Soon after he became CEO, the truth was discovered and the CEO then had to resign.

The CEO violates the principle of personal virtue and eventually lost his CEO job.

Principles of Ethical Decision Making
(continue)

Principle of religious injunctions
An ethical principle that holds that you should never take any action that is not kind and that does not build a sense of community.

Principle of government requirements
An ethical principle that holds that you should never take any action that violates the law, for the law represents the minimal moral standard.

We continue to introduce more principles of ethical decision making.

Principle of religious injunctions is an ethical principle that holds that you should never take any action that is not kind and that does not build a sense of community.

E.g. If a firm suddenly announces that it would severely cut health care benefits for employees due to high costs, the proposed change in health care benefits could become very contentious. This may result in low employee morale and more employees leaving the company. According to the principle of religious injunctions, the firm may be better off if it just absorbs the increase in costs and maintain current levels of health benefits.

Principle of government requirements is an ethical principle that holds that you should never take any action that violates the law, for the law represents the minimal moral standard.

E.g. According to the Affordable Care Act, healthcare coverage is mandatory for companies with more than 50 employees. Companies that do not do so would be considered unethical.

Principles of Ethical Decision Making
(continue)

Principles of utilitarian benefits – An ethical principle that holds that you should never take any action that does not result in greater good for society.

Principle of individual rights – An ethical principle that holds that you should never take any action that infringes on others’ agreed-upon rights.

Principle of distributive justice – An ethical principle that holds that you should never take any action that harms the least fortunate among us: the poor, the uneducated, the unemployed.

Now we still continue to introduce more principles of ethical decision making.

Principles of utilitarian benefits is an ethical principle that holds that you should never take any action that does not result in greater good for society. Under this approach, managers should consider how different possible alternatives would benefit or ham all parties involved. Then they should choose the alternative that benefits the greatest number of people, or conversely, does the least harm to people.

E.g. A company decides to lay off 15% of its workforce in order to be able to remain competitive and return to profitability. Then 85% of its employees would stay at the job. The company may use the utilitarian principles to justify its layoff decision as being an ethical choice.

E.g. A pharmaceutical company released a drug that has been governmentally approved with known side effects. The drug is able to help more people than are bothered by the minor side effects. The release is regarded as an ethical choice since it does more benefits than harms. The utilitarian approach often shows “the end justifies the means” mentality.

Principle of individual rights is an ethical principle that holds that you should never take any action that infringes on others’ agreed-upon rights. Under the moral-rights approach, ethical decisions would protect people’s rights to freedom, life and safety, property, privacy, free speech, and freedom of conscience. The ethical dilemma is that decisions that will protect the rights of some groups often will hurt the rights of other groups.

E.g. You know a product of your company has flaws that might harm the safety or health of customers. As a manager, your decision to release this product without revealing the true information would clearly be unethical.

Principle of distributive justice is an ethical principle that holds that you should never take any action that harms the least fortunate among us: the poor, the uneducated, the unemployed. Under the justice approach, an ethical decision should distribute benefits and harms among people and groups in a fair, equitable, or impartial way.

E.g. Managers give their favorite employees big raises and give other employees smaller raises because managers do not like them. This decision violates the principle of distributive justice and is regarded as an unethical choice.

Practical Steps to Ethical Decision Making

I. Select and hire ethical employees

Overt Integrity Tests – a written test that estimates job applicants’ honesty by directly asking them what they think or feel about unethical behaviors.

Personality-Based Integrity Tests – a written test that indirectly estimates job applicants’ honesty by measuring psychological traits.

Practical Steps to Ethical Decision Making

As statistics shows, 81% of companies provide ethics training, 67% include ethical conduct as a standard part of performance evaluation, and 74% communicate internally about disciplinary actions that are taken when unethical behavior occurs.

Let’s review four practical steps to ethical decision making in organizations.

The first step is to select and hire ethical employees. Organizations may use the overt integrity tests and personality-based integrity tests when screening and selecting employees.

Overt integrity tests are a written test that estimates job applicants’ honesty by directly asking them what they think or feel about unethical behaviors.

E.g. An employer might ask an applicant, “Do you think 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, unethical people will usually answer yes to such questions because they believe that the world is basically dishonest and that dishonest behavior is normal.

E.g. This is a story about overt integrity tests. A company’s CEO is going to retire and will select a new CEO from internal candidates. He gave all candidates seeds to grow plants. He told candidates that a CEO will be selected one year later based on the plants they grew from the seeds. After one year, the candidates brought their beautiful plants to the company but one candidate who nothing grown in his pot. Other candidates laughed at him. Then the CEO announced that this candidate who had nothing in his pot was selected as new CEO.

Why? Because the seeds were dead and cannot grow into any plants. He is the only person who is honest and so he is selected.

Personality-based integrity tests are a written test that indirectly estimates job applicants’ honesty by measuring psychological traits, such as dependability and conscientiousness.

E.g. 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.

Practical Steps – II. Code of Ethics

Codes of ethics – formal standards and rules developed and adopted by an organization to help its members conduct their actions accordingly.

Sources of an Organization’s Code of Ethics
Societal ethics – the moral principles that govern what is considered appropriate behavior and what is not acceptable for people as a whole in a society.

Professional ethics – the standards that govern how members of a profession, trade, or craft should conduct themselves when performing work-related activities.
Individual ethics – personal values and attitudes that govern how individuals interact with others.

The second practical step for ethical decision making is developing codes of ethics.

Codes of ethics are the formal standards and rules developed and adopted by an organization to help its members conduct their actions accordingly.

Organizations often use code of ethics to establish principles for acceptable ethical behavior. Almost all large corporations have an ethics code in place. To make codes of ethics work, a firm must first communicate its codes to others both inside and outside the company. Also, management must develop practical ethical standards and procedures specific to the firm’s line of business.

E.g. Hershey’s, the leading producer of chocolate and confectionary goods in North America, has its Code of Ethical Business Conduct in 8 languages and the code sets specific ethical standards on topics ranging from treatment of coworkers to protecting the environment to maintenance of financial records.

For example, the code states, “If management, our auditors or government investigators request information or documentation from us, we must cooperate. This means we may not conceal, alter or destroy such information”.

The code at Hershey’s company clearly indicates what employees should do under these situations.

An organization’s code of ethics derives from three principal sources: societal ethics, professional ethics, and the individual ethics of the organization’s managers and employees.

Societal ethics are the moral principles that govern what is considered appropriate behavior and what is not acceptable for people as a whole in a society.

E.g. Using animals to test cosmetics products is losing support from more and more of the general public.

The Humane Society of the United States and Humane Society International are committed to ending animal testing forever. Beautyfille.com lists over 100 beauty brands that do not test on animals such as The Body Shop, Victoria’s Secret, and LA Girls.

The Vegetarian Site.com exposes the names of manufactures of personal care and household items that still test their products on animals, such as Revlon, Clinique, Estee Lauder, Ralph Lauren Fragrances, and Neutrogena.

Societal ethics vary from country to country and may change over time.

E.g. Using child labor was ethical in some developing countries but unethical in other countries.

E.g. Sweatshops were ethical in some countries in the past, and now becomes unethical.

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

E.g. Medical ethics govern the way doctors and nurses should treat their patients. Doctors are expected to perform only necessary medical procedures and to act in the patient's interest and not in their own self-interest.

E.g. Occupational Therapy Code of Ethics and Ethical Standards are developed by American Occupational Therapy Association and applied to its members in this profession.

Professional ethics vary from group to group.

E.g. When I submitted papers to management journals and legal journals respectively, I follow different professional ethics in each field. For management journals, I am allowed to submit a paper to one journal only at a time. If the paper is rejected for publication, I can try another journal. However, legal profession has different rules. I am allowed to submit the same paper to as many journals as you wish at the same time. If the article is accepted by more than one journal, I can choose the best journal to publish. I was able to choose to publish my papers in Yale Journal of International Law and Pennsylvania Journal of International Economic Law.

The third source of code of ethics is individual ethics.

Individual ethics are personal values and attitudes that govern how individuals interact with other people.

They are personal ethics that a person identifies with in respect to people and situations that they deal with in everyday life. Individual ethics are influenced by one’s family, peers, and upbringing in general, and an individual’s personality and experience. Many decisions or behaviors that one person finds unethical may be acceptable to another person because of differences in their values, personalities, and attitudes.

E.g. Some pet owners have plastic surgery for their dog or cat for cosmetic purpose only, such as getting their dogs’ ears pierced or tattooed. Many vets won’t perform cosmetic procedures. The American Veterinary Medical Association and the Humane Society of the United State is also against surgery purely for cosmetic reasons.

An individual’s moral standards may affect his or her decision toward such procedures for pets.

In some cases, personal and professional ethics may clash and cause a moral conflict. For example:

Sometimes, there may be inconsistence between individual ethics and occupational ethics.

E.g. A doctor may not personally believe that the course of medical treatment (such as abortion) chosen by a patient is the right choice. However, under the Code of Ethics for the Medical Association, the doctor must respect the rights, autonomy and freedom of choice of the patient.

When there are enough people who endorse a norm, it may become a formal rule. If there are sufficient individuals who support an ethical standard, it may be codified into a law.

E.g. On Nov. 17, 2009, Los Angeles City Council approved a city ordinance and put a ban on declawing for cats.

In this case, declawing for cats was an ethical issue and now is a legal issue in Los Angeles.

Practical Step – III. Ethics Training

Ethics training objectives
Increase employees’ awareness of ethics
Teach them how to make ethical decisions.

Avoid the rationalizations for unethical behavior:
“This is not really illegal.”
“This is really in everyone’s best interests.”
“No one will ever know about it.”
“I’m doing it for my firm and my firm will stand behind me.”

Effective training programs
Make training content relevant to jobs
Use various delivery methods

Ethics training is the third practical step for ethical decision making.

Organizations need to provide ethics and compliance training in order to create an ethical company culture.

The ethics training aims to increase employees’ awareness of ethics and teach them how to make ethical decisions.

The training would make employees realize that the following rationalizations for unethical behavior should be avoided, such as:

“This is not really illegal, so it is OK to do it,”

“This is really in everyone’s best interests,”

“No one will ever find out”, or

“I am doing this for my company, so my company will stand behind me.”

These rationalizations are just excuses for unethical behavior and should not be used to justify unethical behavior.

To make ethics training more effective, companies need to make their training practical and relevant to their jobs and may use various delivery methods to keep employees interested such as videos, contests, and internal social media.

E.g. CA Technologies company created a series of comical training videos with a fictional manager, Griffin Peabody, who faces a series of ethics issues, such as conflicts of interest, competitive intelligence, and workplace harassment.

These issues are real for their employees and the video series teach compliance lessons in a funny way. It works well. (You can find these videos at YouTube.com)

Practical Step – IV. Ethical Climate

Organizational culture is the key for establishing ethical climate:

Managers, especially top managers, should act ethically.

Managers are committed to the ethics program.

A reporting system is in place.
Whistleblowing – reporting others’ ethics violations to management or legal authorities.

Management fairly and consistently punish ethical violators.

Establishing an ethical climate in an organization is the fourth, and last practical step for ethical decision making.

Organizational culture is key to fostering ethical decision making. The 2013 National Business Ethics Survey reported that companies with strong ethical culture are less likely to experience ongoing misconduct – 10% in strong ethical culture versus 35% in weak ethical culture.

To establish an ethical climate, managers, especially top managers, should act ethically themselves and are committed to the company ethics program. Companies also need to have a reporting system in place to encourage managers and employees to report potential ethics violations

Whistleblowing is reporting others’ ethics violations to management or legal authorities.

41% of workers have observed unethical behavior, 63% of those have reported the misconduct, and 21% of those who reported the unethical behavior experienced some kind of retaliation.

To encourage employees to act as whistleblowers, many firms have installed confidential ethics hotlines.

E.g. At Paychex company, a multibillion dollar payroll services firm in Rochester, New York, the information obtained from the hotline is reported directly to the company’s board of directors and audit committee, which can then trigger an investigation independent of company management.

Case about whistleblower protection

A pilot at AirTran Airways was removed from “flight status,” meaning that he was ineligible to fly, after he field 10 safety reports in 2 days, all concerning an unbalanced tire on one of AirTran’s passenger jets. Three weeks later, following a 17-minute hearing he was fired for allegedly not satisfactorily answering questions at the hearing.

However, the Occupational Safety and Health Administration (OSHA) ruled that the firing was retaliatory, that AirTran violated whistleblower protection laws, and that AirTran should reinstate the pilot and pay him more than $1 million in back pay and compensatory damages.

OSHA Assistant Secretary of Labor Dr. David Michaels said, “Airline workers must be free to raise safety and security concerns, and companies that diminish those rights through intimidation or retaliation must be held accountable.”

Finally, management should fairly and consistently punish ethical violators.

E.g. Paychex’s CEO Martin Mucci says, the key is to deal with it quickly, severely, and publicize it. Our employees know that if they are caught cheating in any way, even if only to make a few dollars, they will most likely be terminated. Then we review that with the entire management team. The company does not treat anyone differently even top salespersons or managers of locations can be fired if they violate the company’s code of ethics.

To whom are organizations socially responsible?

Social responsibility – a business’s obligation to pursue policies, make decisions, and take actions that benefit society.
Shareholder model – a view of social responsibility that holds that a firm’s overriding goal should be profit maximization for the benefit of shareholders.

Stakeholder model – a theory of corporate responsibility that holds that management’s most important responsibility is the firm’s long-term survival, which is achieved by satisfying the interests of multiple corporate stakeholders.

The second main topic in this chapter is about corporate social responsibility. We’ll discuss to whom are organizations socially responsible, for what are organizations socially responsible, corporate responses to demands for social responsibility, and the relationship between social responsibility and economic performance.

Social responsibility is a business’s obligation to pursue policies, make decisions, and take actions that benefit society. There are disagreements over to whom and for what in society organizations are responsible, and so it can be difficult for managers to know what is or will be perceived as socially responsible corporate behavior.

There are two perspectives regarding to whom organizations are socially responsible: the shareholder model and the stakeholder model.

Shareholder model is a view of social responsibility that holds that a firm’s overriding goal should be profit maximization for the benefit of shareholders. As the late Nobel Prize-winning economist Milton Friedman wrote, There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits and satisfy their owners (shareholders) so long as it engages in open and free competition, without deception or fraud.

E.g. When Jack Welch run GE, he was regarded as the incarnation of the idea that a firm's sole aim should be maximizing returns to its shareholders. This idea has dominated American business for the past 25 years until the financial crisis hit. Even Mr. Welch has expressed doubts: “On the face of it, shareholder value is the dumbest idea in the world,” he said in 2009 (The Economist, A New Idolatry, 4/22/2010).

Stakeholder model is a theory of corporate responsibility that holds that management’s most important responsibility is the firm’s long-term survival, which is achieved by satisfying the interests of multiple corporate stakeholders.

In his article “Employees First, Customers Second” in Harvard Business Review in 2010, Prof. Roger Martin argues that shareholder value should give way to “customer-driven capitalism” in which firms “should instead aim to maximize customer satisfaction.”

E.g. Unilever’s CEO Paul Polman said to the Financial Times, “I do not work for the shareholder, to be honest; I work for the consumer, the customer…I'm not driven and I don't drive this business model by driving shareholder value.”

Many concede that both models are usually not mutually exclusive, and often mutually reinforcing.

Under the shareholder model, the problem is not the emphasis on shareholder value, but the use of short-term increases in a firm's share price as a proxy for it. With the stakeholder model, shareholders are one of the key stakeholder groups but not the only one. A firm’s long term survival depends on satisfying the interests of multiple corporate stakeholders, such as employees, customers, suppliers, and the local community.

Prof. Jeff Smith in his article “The Shareholders vs. Stakeholders Debate” in MIT Sloan Magazine explains the fundamental distinction between the two models. Under the shareholder model, non-shareholders can be viewed as “means” to the “ends” of profitability. To satisfy customers, firms need to satisfy employees. Happy

employees help increase revenue and profits, which may be the best way to maximize long-term shareholder value.

Under the stakeholder model, the interests of many non-shareholders are also viewed as “ends.” The objective is to balance profit maximization with the long-term ability of the corporation for survival.

Understanding Your Stakeholders

Stakeholders – persons or groups with a stake or legitimate interest in a firm’s actions, and can affect or being affected by a firm’s actions.
Primary stakeholder – any group on which an organization relies for its long-term survival.
E.g. Shareholders, employees, customers, suppliers, creditors, governments, local communities.

Secondary stakeholder – any group that can influence or be influenced by a company and can affect public perceptions about its socially responsible behavior.
E.g. Media, special interest groups, trade associations.

Understanding your stakeholders

Stakeholders are persons or groups with a stake or legitimate interest in a company’s action. They can affect and be affected by the organization’s actions, decisions, objectives, and policies. There are many stakeholder groups. How can a firm identify its stakeholders and balance the different needs of different stakeholders?

Distinguishing between primary and secondary stakeholders can help answer these questions.

Primary stakeholders are any groups on which an organization relies for its long-term survival.

Examples of primary stakeholders include shareholders, employees, customers, suppliers, creditors, governments, local communities. Primary stakeholders have a direct interest in a company. For instance, the employees and investors depend on a company’s financial well-being for their own well-being.

Among primary stakeholders, managers typically give higher priority to key stakeholders such as shareholders, employees, and customers than to other stakeholders such as suppliers, governments, and local communities.

Secondary stakeholders are any groups that can influence or be influenced by a company and can affect public perceptions about its socially responsible behavior.

Examples of secondary stakeholders include media, special interest groups, and trade associations.

Secondary stakeholders have an indirect interest in a company but can influence a firm’s business.

E.g. An environmental group, As You Sow, along with company shareholders, asked Exxon Mobile to provide detailed information about the impact of fracking, a technique that uses water to extract oil and natural gas from oil shale. Exxon declined the request in the first place. But one year later, in the face of increased concerns about fracking, Exxon provided a report on fracking’s impact on air quality, water, and chemical usage at Exxon sites.

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.

For what are organizations socially responsible?

Economic responsibility – a company’s social responsibility to make a profit by producing a valued product or service.

Legal responsibility – a company’s social responsibility to obey society’s laws and regulations.

Ethical responsibility – a company’s social responsibility not to violate accepted principles of right and wrong when conducting its business.

Discretionary responsibilities – the social roles that a company fulfills beyond its economic, legal, and ethical responsibilities.

For what are organizations socially responsible?

If organizations are to be socially responsible to stakeholders, what are they to be socially responsible for?

In other words, what is total corporate social responsibility?

Total corporate social responsibility can be divided into 4 primary criteria: economic, legal, ethical, and discretionary responsibilities.

Economic responsibility is a company’s social responsibility to make a profit by producing a valued product or service. Historically, this has been a most basic social responsibility for businesses. If companies do not meet their financial and economic expectations, their CEOs would be under tremendous pressure. According to the Conference Board, approximately 25% of CEOs of large companies are fired each year.

E.g. Symmantec, the software virus company, fired its second CEO in less than two years because “We weren’t making enough progress in product innovation. We were not seeing revenue growth.”

Legal responsibility is a company’s social responsibility to obey society’s laws and regulations as it tries to meet its economic responsibilities. All businesses are expected to fulfill their economic goals within the legal framework.

E.g. Tie-in sale is the sale of one product (the tying product) to a customer on the condition that a second product must be purchased. The customer may not want the second product, or may be able to purchase it elsewhere at a lower price. Tie-in sale or tying is often illegal if they restrict competition.

Ethical responsibility is a company’s social responsibility not to violate accepted principles of right and wrong when conducting its business. We have discussed 7 principles of ethical decision making and organization decision makers are expected to act accordingly.

E.g. Hong Kong is a business hub in Asia but also one of the most polluted cities in the world. To help Hong Kong become greener, Maersk Line, the world’s largest container-shipping company, has used a special type of fuel on its ships to Hong Kong. This fuel has just 0.5% sulphur, a level one-seventh lower than what the Hong Kong government requires. The low-sulphur fuel costs the company an extra $2 million per year.

In this case, Maersk Line goes beyond what law requires and contributes to what society urges for a greener environment. Thus, the company fulfills its ethical responsibility.

Discretionary responsibilities pertain the social roles that a company fulfills beyond its economic, legal, and ethical responsibilities. Carrying out those responsibilities such as charity donations and philanthropic actions is voluntary. Firms are not considered unethical if they do not perform them. However, corporate stakeholders expect firms to do much more than in the past to meet their discretionary responsibilities.

E.g. Hurricane Sandy, the largest Atlantic hurricane ever recorded, caused approximately $75 billion in damage in New York and New Jerseys states. J.P. Morgan pledged $2 million to the Red Cross, $1 million to local agencies, and $5 billion in special loans to small and mid-sized businesses. The bank also allowed storm-affected customers to skip mortgage payments for 90 days and suspended all of its foreclosure activity in storm-damaged areas.

An Organization’s Social Responsibilities

Ethical

Legal

Economic

Discretionary

Abide by principles
of right and wrong

Obey laws and
regulations

Be profitable

Serve a social role

This exhibit shows the pyramid of corporate social responsibility that portrays 4 components of corporate social responsibility we just discussed in the previous slide.

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.

The economic responsibility is the fundamental responsibility for any business. Businesses are expected to make money so that their investors can receive a strong return on their investments and companies can continue to provide products, services, and jobs to society.

Organizations are also expected to obey the laws and regulations. Legal requirements are imposed by the local city councils, state legislators, or federal regulatory agencies.

Examples of illegal acts include corporate fraud, white-collar crimes, performing unnecessary repairs or procedures, and billing clients for work not done.

According to a study by the Association of Certified Fraud Examiners (ACFE), 5% of all revenues are lost annually as a result of fraud.

Ignoring legal responsibilities could lead to serious consequences for managers and companies.

E.g. The former chief information officer of Foundry Networks, a California-based technology company, was sentenced to 6½ years in prison for an insider trading scheme that produced $27 million in illegal profits. The former CIO supplied sales information about his employer to a San Francisco-based hedge fund analyst who spread the information to others.

The ethical responsibility is for companies and managers to abide by principles of right and wrong.

Because different stakeholders may disagree about what is right or wrong, meeting ethical responsibilities is more difficult than meeting economic or legal responsibilities.

E.g. A doctor accepted significant annual payments from a medical device company and heavily promoted its products to his patients. This is considered an unethical behavior.

The discretionary responsibility often refers to philanthropic actions to promote human welfare or goodwill.

The distinguishing feature between discretionary and ethical responsibilities is that the discretionary responsibilities are not expected in an ethical or moral sense. Communities desire firms to contribute their money, facilities, and employee time to humanitarian programs or purposes, but they do not regard the firms as unethical if they do not do so. Therefore, philanthropy is more discretionary or voluntary on the part of businesses even though there is always the societal expectation that businesses provide it.

E.g. At Campbell Soup Company, employees are given time in the workday to help schools design more nutritious menus and to expand the availability of fresh produce in local grocery stores. The company also allows a food bank to take from its assembly lines product that would otherwise be discarded and use it to feed the needy.

References: Archie Carroll, The Pyramid of Corporate Social Responsibility: Toward the Moral Management of Organizational Stakeholders, Business Horizons, July-August 1991, and The Four Faces of Corporate Citizenship, Business and Society Review, 1998.

Responses to Demands for Social Responsibility

Social responsiveness – a company’s strategy
to respond to stakeholders’ economic, legal, ethical, or discretionary expectations concerning social responsibility.

Reactive strategy – a social responsiveness strategy in which a firm does less than society expects.

Defensive strategy – a social responsiveness strategy in which a firm admits responsibility for a problem but does the least required to meet societal expectations.

Responses to Demands for Social Responsibility

Social responsiveness is a company’s strategy to respond to stakeholders’ economic, legal, ethical, or

discretionary expectations concerning social responsibility.

A social responsibility problem exists whenever company actions do not meet stakeholder expectations.

Four strategies may be used for firms to respond to social responsibility problems: reactive, defensive, accommodative, and proactive.

Reactive strategy is a social responsiveness strategy in which a firm does less than society expects.

E.g. In Spring 2014, General Motors (GM) publicly acknowledged that since 2001 it had knowingly produced 1.6 million GM cars with faulty ignition switchers, which is linked to 12 auto-related deaths. The problem was first documented at GM in 2001 but the defective switches were not redesigned until 2007 and the first vehicle recall was not issued until 2013. Ironically, the problem is easily fixed with a $5 replacement part that takes minutes to install.

Defensive strategy is a social responsiveness strategy in which a firm admits responsibility for a problem but does the least required to meet societal expectations.

E.g. Foxconn from Taiwan has factories in China that make iPhones and iPads. 18 employees attempted suicide over four years. An extensive New York Times investigation found that employees often worked 7 days a week, were exposed to dangerous chemicals, and lived in crowded dorm rooms.

Apple had been conducting audits of its suppliers’ manufacturing facilities for many years but was slow to respond.

After the New York Times story, Apple began working with the Fair Labor Association, a nonprofit organization that promotes and monitors safe working conditions.

Four years after the problems began, Apple and Foxconn agreed to increase pay, limit workers to a maximum of 49 hours a week, build more dorms, and hire thousands of additional workers.

Responses to Demands for Social Responsibility (continue)

Accommodation strategy – a social responsiveness strategy in which a firm accepts responsibility for a problem and does all that society expects to solve that problem.

Proactive strategy – a social responsiveness strategy in which a firm anticipates a problem before it occurs and does more than society expects to take responsibility for and address the problem.

This slides continues on the responses to demands for social responsibility.

Accommodation strategy is a social responsiveness strategy in which a firm accepts responsibility for a problem and does all that society expects to solve that problem.

E.g. Novartis, a Swiss drug maker, discovered some misconducts in its Japanese clinical research trials. There were “ethically inappropriate” links between sales and research because sales staff had made attempts to influence research results. The company announced the immediate resignation of top 3 executives at the Japanese division and began training programs to make clear what was and was not acceptable in the context of sales and clinical research.

Proactive strategy is a social responsiveness strategy in which a firm anticipates a problem before it occurs and does more than society expects to take responsibility for and address the problem.

E.g. Unilever announced that it would no longer use micro-plastic beads in its soap products from 2015.

No conclusive evidence indicates that micro-beads are harmful, but there is potential to be harmful because micro-beads absorb chemicals. Unilever decided to completely eliminate micro-beads from its products.

Social Responsibility and Economic Performance

Social responsibility

Economic performance

There is no trade-off

between these two.

Usually it does pay to be

socially responsible.

It does not guarantee
profitability.

Social Responsibility and Economic Performance

One question that managers often ask is, “Does it pay to be socially responsible?”

Let’s examine some of the recent research results.

First, there is no trade-off between being socially responsible and economic performance. Being socially responsible won’t make a business less profitable. Customers may be willing to pay more for products and services that are socially responsible.

E.g. Patagonia sells expensive outdoor gear and clothing to customers who are willing to pay a higher price because of the company’s environmental focus. The company switched to organic cotton two decades ago, which costs 3 times as much as traditional cotton because it is grown without chemicals and irrigation.

Patagonia created the Common Threads Partnership, in which it pledges “to build useful things that last, to repair what breaks and recycle what comes to the end of its useful life. It run an ad proclaiming, “Don’t Buy This Jacket.” The sales jumped after this ad.

Second, it usually does pay to be socially responsible and that relationship becomes stronger when a firm or its products have a strong reputation for social responsibility.

Finally, there is no guarantee that socially responsible companies will be profitable.

E.g. GM’s Chevy Volt features a plug-in hybrid engine, producing outstanding fuel efficiency of 60 miles per gallon and the ability to drive 800 miles between fill-ups. This is a highly environmentally friendly car but it has been a disaster for GM financial performance. The Volt is difficult and expensive to assemble, so much so that Reuters estimates that GM loses $50,000 per Volt!

In the end, if firms choose 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.