Identify some key takeaways from the reading
Complex_
CH6.pdf
6 Corporate Social Responsibility: Doing Well and Doing Good
A good company delivers excellent products and services, and a great
company does all that and strives to make the world a better place.
(Bill Ford—grandson of Henry Ford)
Case Scenario: Zoey’s dilemma at Happy Paws 175
Introduction 176
Social Expectations 177
What Is Business Ethics at the Individual Level? 178
Business Ethics at the Organizational Level: Corporate Social Responsibility 180
Arguments for Building an Ethical Corporate Culture 182
Arguments for Social Responsibility 185
Striking the Right Balance of Responsibilities 187
Encouraging Ethical Behavior 188
Analytical Case: The ethics involved in the modern retail store 191
Practical Skill: Ethical reasoning 193
Summary and Conclusion 193
CHAPTER CONTENTS
CASE 6 SCENARIO
Zoey’s dilemma at Happy Paws
When Zoey had initially planned her pet store, it was going to sell pet products, but not include live pets. However, Zoey soon realized she would be hard pressed to compete with the major pet store chains if she did not have some live animals for variety and interest. Live animals tend to draw people into pet stores if they are cute or unusual and Zoey had those large picture windows in the front of her grandmother’s old house that were perfect for showing off little puppies or turtles to passersby.
But Zoey couldn’t afford a complex array of animals, and the pets must be alone in the store overnight. Even though she’d be right upstairs, she was still concerned over a large live inventory. She decided on just a handful of puppies at a time, a couple kittens, some tiny turtles, goldfish and one other simple variety of fish, and gerbils. The animals increase traffic and sales but they are a challenge. What do you do when the puppies are split up and one must stay alone in the store overnight? What if a puppy doesn’t sell? The tiny turtles are big sellers but Zoey has learned the Food and Drug Administration (FDA) has banned them because they tend to spread salmonella, a special genus that causes human infection; ironically, the FDA is generally ignored by pet stores on this regulation. Should she be concerned? The turtles in her shop window practically drag people in. The gerbils are cute, but the children that they are given to lose many of them within a day or two and sometimes within the first hour, with parents often coming back for another to calm an upset child. Should she be happy for the extra income or should she be concerned about this?
Introduction
After the environmental scandals of the 1980s and 1990s (e.g., the Bophal accident and the Exxon Valdez oil spill), a barrage of accounting scandals from 2000–2002 (e.g., Enron), the mortgage and insurance scandals associated with the economic downturn of 2008 (e.g., widespread deceptive mortgage lending and the highly risky securitized insurance schemes of companies like AIG), and the out-and-out scams of financial moguls such as Bernie Madoff and Allen Stanford (2009), there have been a number of consequences. First, the morality of business has been questioned by the public and business itself (Kurlantzick 2003; Pearce and Doh 2005). This has led to new regulation (in some cases simply re-regulation) of industries that were not capable of policing themselves and where both the public and investors were held liable for the financial misdeeds of individuals or companies. Second, there has been a tremendous interest in fostering individual morality across sectors, tightening legal accountability, and promoting corporate social responsibility. Businesses across the spectrum have found that it is not only the right thing to do, but the wise thing to do as well (e.g., Shinn 2009, reporting on KPMG); business schools have followed business’s lead as well as their urgings for a more robust ethics curriculum (Bisoux 2008; Heijltjes 2007; Samuelson 2009).
Ethics is a system of beliefs about how to behave. When one complies with society’s system of beliefs, one is moral; when one does not, one is either amoral at best (acting in a fashion that is neither good nor bad), or immoral (in contravention of proper behavior) at worst. Societies dictate general systems of ethics through their culture, and their stated convictions about bad, good, and exceptionally good action. Behavioral minimums are expressed as laws and “hard” rules (where some sort of sanctions may be levied), which may be broad and sweeping, or detailed and narrow. Broad behavioral expectations that exceed bare minimums and are strongly encouraged are expressed as professional and organizational norms, which may have sanctions if flagrantly violated. The highest ethical behavior is considered
176 Business–Government Relations in the Sociopolitical Arena
Corporate Social Responsibility 177
exemplary. The ethics of societies is quite stable, but does evolve over time as the contingencies and the long-term needs and preferences of society change (Rokeach 1973; Van Wart and Denhardt 2001).
Social Expectations
General Social Expectations
Because systems of ethics are never exact, individuals can have a substantial range of acceptable beliefs and actions within societies. Nonetheless, certain strong beliefs will permeate all of society (Van Wart 1998). In the case of American society, some of the most fundamental values are honesty, fairness, and legality. Honesty is prized as a means to build trust and long-term relationships. It means no lying, no shading the truth, and no hiding information from those with a right to know. Fairness is valued in a democratic society built on equality of opportunity and mutual respect over birth or station in life. It means no cheating or self-dealing, and following organizational and professional rules. Legality, or being law abiding, is critical in a nation built on the rule of law and founded on a constitutional compact. Although these are always at the top of American values lists, there are many others as well, such as consistency (a reasoned attempt to act from principle rather than from whim), coherence (a reasoned attempt to connect principles and to make them as harmonious as possible) and reciprocity (a reasoned attempt to act toward others as you would have them act toward you). While honesty, fairness, and legality generally constitute the basics of ethical behavior, high ethical standards require people to act out their principles with consistency and coherence, and to express compassionate reciprocity in their daily actions. Ethical exemplars in society are those who are willing to put others before themselves in order that substantial good will thereby be achieved, or those who show courage in the face of adversity or personal loss in doing what is moral for the sake of principles or compassion (Rugeley and Van Wart 2006).
Specific Social Expectations
Groups and individuals in society often have specific ethical expectations within the general context that will emphasize certain values more than others. Particularly important for our discussion are the ethical expectations of different professional groups. Consider judges, spies, nurses, and soldiers. Do they all have the same specific ethical expectations? We expect judges to be very high in honesty, fairness, legality, consistency, and coherence. Judges must be truth-tellers, scrupulously even handed, masters of the law, and great followers of precedent and the philosophy of law. Yet we do not expect judges to be judged, or to be exceptional in selflessness or courage. On the other extreme, CIA spies are expected to put aside their honesty, fairness, and legality in their formal roles when they may be required to assume alien identities that are maintained by lies, deceit, or even breaking foreign laws. However, CIA spies are expected, as a matter of course, to be selfless in risking their freedom and courageous in risking their lives. Another simple comparison is
between soldiers and the nurses who serve with them. While soldiers have the responsibility to harm enemy combatants in the fray of war, nurses have an opposite responsibility to help all combatants equally as they are called upon to treat them. This is not to say that values are entirely relativistic or that anything goes, but rather to say that values are contextual and that one’s occupational function features strongly in this specification of values.
What Is Business Ethics at the Individual Level?
In seeking a definition of ethics for a particular profession, then, we realize that it is a combination of both the general requirements of society (laws) and expectations (norms), that were discussed above, but also the specific values emphasized by a sector or industry, in this case business. What are the specific values of American business (de George 1999)? American business is founded on capitalistic beliefs, which are in turn founded on competition and the promotion of personal gain (and company profits). When exercised fairly, competition provides merit because those who work hard and have talent are rewarded. It also encourages personal respon - sibility and enhances the general good by vetting the best ideas, goods, and services in an ongoing dynamic selection process. Personal gain provides the incentive for people to do their best and work their hardest within a personally chosen context in which other important values in life, such as family, religion, and relaxation, are balanced.
It should be noted that public-sector organizations are not exempt from market- like concerns, indirectly expressed through the allocation of scarce resources and market pressures to both increase and manage costs. Thus, a prime organizational value of public-sector agencies is efficiency, but unlike the private sector, much higher standards of transparency, participation, appeal, and review are required, which both diminish efficiency and increase costs. Efficiency concerns surfaced as a primary factor in the 1990s through increased performance measurement, oversight, and outright competition (Berman and Van Wart 1999) and continue to be a part of the public debate.
Because individuals do not give up their general role in society, business people cannot abnegate (disregard) their other basic responsibilities. Honesty, fairness, and legality are still full expectations as they would be from teachers, mayors, non-profit managers, or assembly-line workers. Exemplary behavior is when those in business do the right thing while not required to do so, even though it will be a short-term expense (e.g., voluntarily recalling a hazardous product or installing higher safety standards), or giving back to the community from which they got their success and wealth.
Exhibit 6.1 examines the levels of business morality from a progressive perspec - tive, from immoral behavior to amoral to (basic) morality to exemplary behavior. It uses the two major values discussed here: competition and personal gain.
Because ethical behavior is often more complex than commonly supposed, it is useful to think of it as a four-part process (Brown and Trevino 2006)—awareness, judgment, motivation/intention, and behavior. One needs to be aware of who is involved in decisions and what the issues are. For example, if one is unaware of
178 Business–Government Relations in the Sociopolitical Arena
E X
H IB
IT 6
.1
B u
s in
e s s -s
p e
c ifi
c i
n d
iv id
u a
l e
th ic
s :
A p
ro g
re s s iv
e m
o ra
l p
e rs
p e
c ti
ve
Im m
o ra
l A
m o
ra l
M o
ra l
H ig
h ly
M o
ra l (e
xe m
p la
ry )
C o
m p
e ti
ti o
n •
W in
n in
g i s
a ll
th a t
m a tt
e rs
• L yi
n g
, c h e a ti n g
, a n d
e ve
n l a w
-b re
a ki
n g
i s
O K
if u n d
e te
c te
d
• W
in n in
g i s
b y
fa r
th e
m o
st i m
p o
rt a n t
va lu
e ,
b u t
d a n g
e r
o f
b e in
g d
e te
c te
d i s
n o
t w
o rt
h t
h e
ri sk
• S
h a d
in g
t ru
th a
n d
h id
in g
in fo
rm a ti o
n i s
O K
; a lw
a ys
g o
t o
t h e e
d g
e o
f th
e r
u le
s (d
o g
-e a t-
d o
g );
m in
im u m
l e g
a lit
y is
a c c e p
ta b
le (
lo o
p h o
le s
sh o
u ld
b e u
ti liz
e d
; le
t th
e b
u ye
r b
e w
a re
; m
a n ip
u la
ti o
n o
f th
e sy
st e m
i s
O K
i f
le g
a l)
• W
in n in
g i s
im p
o rt
a n t
b u t
th e re
a re
o th
e r
im p
o rt
a n t
va lu
e s
• H
o n e st
y, f
a ir n e ss
, a n d
le g
a lit
y a re
s u b
st a n ti ve
; fo
r e xa
m p
le ,
h o
n e st
y m
e a n s
sh a ri n g
u n p
le a sa
n t
in fo
rm a ti o
n ,
fa ir n e ss
m e a n s
n o
t m
a n ip
u la
ti n g
t h e r
u le
s, a n d
l e g
a lit
y m
e a n s
fo llo
w in
g t
h e s
p ir it o
f th
e la
w
• W
in n in
g i s
a b
yp ro
d u c t
o f
c o
m p
e te
n c e ,
e xc
e lle
n c e ,
d ili
g e n c e ,
a n d
p o
si ti ve
p sy
c h o
lo g
ic a l tr
a it s
(o p
ti m
is m
, c o
m p
a ss
io n ,
re si
lie n c e ,
e tc
.) •
B e in
g a
g o
o d
t e a m
p la
ye r
is a
s im
p o
rt a n t
a s
b e in
g a
g o
o d
c o
m p
e ti to
r •
S p
o rt
sm a n sh
ip i s
m o
re im
p o
rt a n t
th a n w
in n in
g •
W h ile
w in
n in
g p
ro vi
d e s
b e n e fit
s, l o
si n g
a ls
o p
ro vi
d e s
le ss
o n s
fr o
m w
h ic
h t
o l e a rn
P e
rs o
n a
l G
a in
• P
e rs
o n a l g
a in
a b
o ve
a ll
• L yi
n g
, c h e a ti n g
, a n d
e ve
n l a w
-b re
a ki
n g
i s
O K
if u n d
e te
c te
d
• P
e rs
o n a l g
a in
i s
o n ly
im p
o rt
a n t
va lu
e ;
o th
e r
th a n v
a lu
e o
f a vo
id in
g p
u n is
h m
e n t
• L e g
a l m
a n d
a te
s m
u st
b e
c o
m p
lie d
w it h (
b u t)
; c o
n c e a lin
g t
ru th
i s
g e n e ra
lly O
K ;
le g
a l
p ro
fit e e ri n g
(m a n ip
u la
ti o
n o
f ru
le s)
i s
O K
; m
in o
r in
fr a c ti o
n s
a re
O K
i f
o n e i s
w ill
in g
t o
p a y
th e p
ri c e (
fin e )
• P
e rs
o n a l g
a in
m o
ti va
ti o
n is
i m
p o
rt a n t
b u t
g re
e d
(e xc
e ss
iv e s
e lf-
in te
re st
) is
a v
ic e
• H
o n e st
y, f
a ir n e ss
, a n d
le g
a lit
y a re
s u b
st a n ti ve
; fo
r e xa
m p
le ,
h o
n e st
y m
e a n s
sh a ri n g
u n p
le a sa
n t
in fo
rm a ti o
n ,
fa ir n e ss
m e a n s
n o
t m
a n ip
u la
ti n g
t h e r
u le
s, a n d
l e g
a lit
y m
e a n s
fo llo
w in
g t
h e s
p ir it o
f th
e la
w
• P
e rs
o n a l g
a in
s th
a t
a re
su st
a in
e d
( e ve
n i f
m o
d e st
) o
r la
rg e m
o ra
lly re
q u ir e a
c o
n tr
ib u ti o
n b
a c k
to t
h e c
o m
m u n it y
th a t
su p
p o
rt e d
t h e
w e a lt h g
e n e ra
ti o
n •
C o
n tr
ib u ti o
n o
f ti m
e t
o th
e c
o m
m u n it y
• C
o n tr
ib u ti o
n o
f m
o n e y
fo r
c o
m m
u n it y
o r
to c h a ri ti e s
ethics, accounting, or environmental laws, one is likely to violate them. One has to have the analytic ability to see the connections and ramifications of different types of decisions. For example, if one is not well versed in good management practices, one may ascribe an ethical breach to the poor virtue of an individual employee when in fact it may be a systemic training and culture issue. One has to have the motivation to act on one’s (hopefully good) judgment. For example, one may perceive one’s own “small” moral lapse but ignore it because “everyone does it” or “you are really owed more than you get anyway.” And one has to know how to act and successfully implement judgments. Just because you know wrong-doing has occurred and want to take action, it does not mean that you will have the understanding of corrective processes or the courage to do the appropriate thing.
With this background, we can proceed to a definition of business ethics from an individual’s perspective: One is ethical in business to the degree that one complies with the laws of the land and obeys appropriate organizational rules, seeks to meet professional norms such as providing quality goods and services, as well as social norms such as exercising honesty and fairness, and strives to achieve the highest standards of morality such as prevention of harm and donating back to society part of the proceeds of one’s success.
Business Ethics at the Organizational Level: Corporate Social Responsibility
The same logic of ethics applies to private companies and publicly held corporations as it does to individuals. Although there are many models of corporate social responsibility that are relatively complementary (Redman 2005), the one by A. B. Carroll (1979) will be used here. He suggested a progressive model, with levels of responsibility. At the base or economic level, the business must provide quality goods and services that are valued by consumers. These goods and/or services in turn provide jobs to employees, a source of revenue for suppliers, profits to shareholders, and wealth to owners and senior managers. The other fundamental base value is abiding by its legal responsibilities, because if a company is not law abiding, it risks social opprobrium (harsh criticism) at a minimum, and scandal that can bring down a company at its worst. After these absolute foundational respon - sibilities come ethical responsibilities, which are those that may not be required by law, but are socially accepted norms of honesty, decency, and fair play. Companies may not be required to give ample notice when a layoff is to occur but to the degree they can forewarn employees, they are more ethical and trustworthy. Finally, there are discretionary responsibilities, which are those that include voluntary efforts to be environmentally friendly, enhance human rights, be an employer of choice, provide philanthropy, and so on.
In sum, Corporate Social Responsibility is meeting basic economic needs through diligence and innovation, exceeding legal requirement by fulfilling the spirit of the law, while simultaneously finding ways to enhance the community and planet with mutually beneficial actions, and when possible, provide outright acts of charity.
180 Business–Government Relations in the Sociopolitical Arena
E X
H IB
IT 6
.2
C o
rp o
ra te
S o
c ia
l R
e s p
o n
s ib
ili ty
( C
S R
): A
s u
c c
e s s iv
e l
e ve
l a
p p
ro a
c h
E c o
n o
m ic
R e sp
o n si
b ili
ty L e g
al R
e sp
o n si
b ili
ty P
ro fe
ss io
n al
R e sp
o n si
b ili
ty C
iv ic
R e sp
o n si
b ili
ty
C o
rp o
ra te
R e sp
o n si
b ili
ti e s
S o
c ia
l R
e sp
o n si
b ili
ti e s
• R
e sp
o n si
b ili
ty t
o p
ro vi
d e
g o
o d
s a n d
s e rv
ic e s
th a t
a re
d e si
re d
• R
e sp
o n si
b ili
ty t
o p
ro vi
d e
w a g
e s,
p a y
b ill
s, a
n d
p ro
vi d
e w
e a lt h (
e .g
., d
iv id
e n d
s)
• T
h o
se s
tu c k
a t
th is
l e ve
l th
in k:
I f
w in
n in
g c o
m p
e ti ti ve
b a tt
le s
a n d
p ro
fit -m
a ki
n g
a re
t h e o
n ly
va lu
e s,
t h e n e
va d
in g
t h e
la w
i s
g o
o d
, th
e a p
p e a ra
n c e o
f h o
n e st
y is
m o
re i m
p o
rt a n t
th a n t
h e
re a lit
y, a
n d
a ss
is ta
n c e t
o th
e c
o m
m u n it y
is a
d is
tr a c ti o
n t
o b
u si
n e ss
• R
e sp
o n si
b ili
ty t
o c
o m
p ly
w it h t
h e l a w
s o
f th
e l a n d
re g
a rd
in g
e m
p lo
ym e n t
p ra
c ti c e s
(e .g
., d
is c ri m
in a ti o
n ), w
o rk
p ra
c ti c e s
(e .g
., l a b
o r
la w
s) ,
a n d
e n vi
ro n m
e n t
(e .g
., p
o llu
ti o
n )
• T
h o
se s
tu c k
a t
th is
l e ve
l th
in k:
I f
su c c e ss
e s
a t
c o
m p
e ti ti o
n ,
p ro
fit s,
a n d
st ri c t
le g
a lit
y a re
a ll
th a t
m a tt
e rs
, th
e n p
ro fe
ss io
n a l
n o
rm s
a re
a l u xu
ry t
h a t
sh o
u ld
o n ly
b e u
se d
w h e n
a d
va n ta
g e o
u s
a n d
g iv
in g
b a c k
to t
h e c
o m
m u n it y
is n o
t a b
u si
n e ss
f u n c ti o
n
• R
e sp
o n si
b ili
ty t
o s
tr iv
e f
o r
so c ia
l a n d
p ro
fe ss
io n a l
n o
rm s
re g
a rd
in g
e m
p lo
ym e n t
p ra
c ti c e s
(d iv
e rs
it y)
, lo
n g
-t e rm
e m
p lo
ye e n
e e d
s (h
e a lt h
c a re
, re
ti re
m e n t,
d e ve
lo p
m e n t)
, a n d
e n vi
ro n m
e n t
(e .g
., re
c yc
lin g
)
• T
h o
se s
tu c k
a t
th is
l e ve
l th
in k:
I f
e th
ic a l
o rg
a n iz
a ti o
n s
d o
t h e ir f
a ir
sh a re
i n t
e rm
s o
f tr
e a ti n g
e m
p lo
ye e s
w e ll,
c u st
o m
e rs
fa ir ly
, a n d
r e sp
e c ti n g
t h e
c o
m m
u n it y,
w h y
sh o
u ld
th e y
d o
m o
re ?
• R
e sp
o n si
b ili
ty t
o s
tr iv
e f
o r
th e h
ig h e st
s o
c ia
l a n d
p ro
fe ss
io n a l st
a n d
a rd
s, sh
a re
w e a lt h m
o re
e q
u it a b
ly w
it h t
h o
se re
sp o
n si
b le
f o
r it s
g e n e ra
ti o
n ,
g iv
e b
a c k
to th
e c
o m
m u n it y
(e .g
., c h a ri ty
, c o
m m
u n it y
p ro
g ra
m s)
, a n d
a c ti ve
ly p
re ve
n t
h a rm
( e .g
., vo
lu n ta
ri ly
c o
m p
ly in
g w
it h
in te
rn a ti o
n a l b
a n s)
• O
ft e n t
h e se
o rg
a n iz
a ti o
n s
a re
k n o
w n a
s in
d u st
ry le
a d
e rs
, o
ri g
in a to
rs o
f b
e st
p ra
c ti c e s,
e m
p lo
ye rs
o f
c h o
ic e ,
a n d
s o
c ia
l e xe
m p
la rs
( e .g
., “
g re
e n ”
o r
so c ia
lly c
o n sc
io u s
o rg
a n iz
a ti o
n s)
S o
u rc
e :
A d
a p
te d
f ro
m C
a rr
o ll
(1 9 7 9 ).
Exhibit 6.2 provides a graphic presentation of the levels of responsibility in Carroll’s perspective on corporate social responsibility. The last bullet in each cat egory identifies the problems with limiting corporate social responsibility too narrowly. For example, the company that pursues only profits is likely to see laws as obstacles to be circumvented when possible, or ignored if detection can be escaped.
Arguments for Building an Ethical Corporate Culture
No one argues against corporate responsibility (i.e., economic and legal aspects). However, some people do argue against corporate social responsibility. Milton Friedman (1970) is famously known for his argument that corporations should focus on profit-making in a fair legal context (i.e., legal framework providing as “perfect” an economic market as possible). However, in general, the public and most corporations do not contest the importance of including social responsibility, but rather how much social responsibility and under what conditions.
Starting with the absolute base of business ethics, corporate responsibility is providing profits and conforming to legal mandates. The importance of profit- making is incontestable in a capitalist system. Generally speaking, profits—even high ones—are not contested as long as they are the result of innovation, quality products and services, and value added to customers and society, but not the result of fraud or market manipulation. Even using Friedman’s very narrow definition, market manipulation is a distortion of competition and the principles of capitalism and calls for government regulation to correct the “playing field.”
A breach of practical responsibility is the case of excessive pay to employees. In one variation, older companies might have provided wages and benefits to line workers that were out of line with global competition (aka the company having excessive “legacy” costs). Such “legacy” costs can push a company into bankruptcy. Of course in the long-term, capitalist theory does not assert that bankruptcy is wrong, in the sense that different industries move around the globe according to wage structures. Another variation is that of executive pay that is either disproportionate or not linked to long-term performance. It is a company responsibility to ensure that executive pay is fair and not set by executives themselves. For example, in 1993, Disney CEO Michael Eisner earned $203 million (primarily exercising stock options), 68 percent of the profit that year for Disney, which experienced a major downturn in revenue as his salary escalated (New York Times 1994). Further, it is a responsibility to ensure that boards of directors earn their salaries and exercise their oversight. In general, the wise management of a company is a part of its bedrock responsibility.
Law-abiding behavior is also a foundational responsibility. Violations of the law bring ruin to individuals, bankruptcy to companies, and increased regulation to industries, including governments themselves. Even when companies are not ruined by legal breaches, empirical evidence suggests that they are damaged (Baucus and Baucus 1997). Not just individual cases, but whole classes of cases, are not hard to find, given the enormous increase in exposure of wrong-doing since 2000. The exposure of wrong-doing is increased when markets burst, such as the dot.com bust in the early 2000s, and when the entire market collapses, as it did in 2008 with the
182 Business–Government Relations in the Sociopolitical Arena
Corporate Social Responsibility 183
Recent corporate accounting scandals with US companies
Company Year Issue or Accountant Culprit
Microstrategy 2000 Michael Saylor
Unify Corporation 2000
Computer Associates 2000 Sanjay Kumar
Xerox 2000** Falsifying financial results
Enron 2001 Jeffrey Skilling, Kenneth Lay, Andrew Fastow
Adelphia 2002 John Rigas
AOL 2002 Inflated sales
Bristol-Myers Squibb 2002 Inflated revenues
CMS Energy 2002 Round trip trades (this is a market-manipulation practice used to misrepresent the number of transactions occurring on any given day)
Duke Energy 2002 Round trip trades
Dynegy 2002 Round trip trades
El Paso Corporation 2002 Round trip trades
Freddie Mac 2002 Understated earnings
Global Crossing 2002 Network capacity swaps to inflate revenues
Halliburton 2002 Improper booking of cost overruns
Homestore.com 2002 Improper booking of sales
ImClone Systems 2002 Samuel D. Waksal
Kmart 2002 Misleading accounting practices
Merck & Co. 2002 Recorded co-payments that were not collected
Merrill Lynch 2002 Conflict of interest
Mirant 2002 Overstated assets and liabilities
Nicor 2002 Overstated assets, understated liabilities
Peregrine Systems 2002 Overstated sales
Qwest Communications 2002 Inflated revenues
Reliant Energy 2002 Round trip trades
Sunbeam 2002
Tyco International 2002 Improper accounting, Dennis Kozlowski
WorldCom 2002 Overstated cash flows, Bernard Ebbers
HealthSouth 2003 Richard M. Scrushy Corporation
Chiquita Brands Int. 2004 Illegal payments
AIG 2004 Accounting of structured financial deals
Bernard L. Madoff Invest- 2008 David G. Friehling†
ment Securities LLC
Source: Wikipedia, Accounting Scandals. Note that there are many other types of scandals other than accounting scandals, involving corporate lying/cover-up, product liability, corporate disasters (such as the Exxon Valdez spill or the Union Carbide Bophal explosion), spying, etc. 1 http://en.wikipedia.org/wiki/Accounting_scandals. 2 David G. Friehling was charged with securities fraud, aiding and abetting investment adviser fraud, and four counts of filing false audit reports with the Securities and Exchange Commission. He faces up to 105 years in prison on all of the charges.
EXHIBIT 6.3
184 Business–Government Relations in the Sociopolitical Arena
excessive market leverage (and profit taking) in the mortgage, stock market, commodity, and insurance industries.
Although there are many types of legal breaches, the example we will use here is accounting fraud. Large numbers of companies “cooked” the books to increase profits realized for the short-term, inflate market activity, and keep losses off the books, etc. In the worst cases, companies and individuals perpetrated fraud to steal billions of dollars from investors, employees, and taxpayers in brazen, illegal schemes. Additionally, external auditors either did not catch or note these financial breaches, or in some egregious cases, actually aided companies in nefarious activity. Further adding to this problem, the bond-rating agencies were lax in their oversight, giving high ratings to agencies that were in reality on the verge of bankruptcy (Lowenstein 2008). The worst string of accounting scandals occurred from 2000– 2002, and culminated in the far-reaching Sarbanes–Oxley Act of 2002, which only had three opposing votes in all of Congress. Without trust in the market, investors abandon it as they have done in many markets around the world when governments either fail to provide the conditions of a fair market, or intervene in the market in order to reduce competition for the benefit of elite interests (e.g., Blush 2008). See Exhibit 6.3 for a list of the most prominent scandals and Exhibit 6.4 for a listing of the most prominent securities laws, including Sarbanes–Oxley.
The laws that govern the securities industry
There are many laws that cover corporate responsibilities. The major ones covering securities are listed below. The latest, Sarbanes–Oxley, was far reaching after the enormous number of scandals occurring in 2002.
Securities Act of 1933 Securities Exchange Act of 1934 Trust Indenture Act of 1939 Investment Company Act of 1940 Investment Advisers Act of 1940 Sarbanes–Oxley Act of 2002
Sarbanes–Oxley Act of 2002
On July 30, 2002, President Bush signed into law the Sarbanes–Oxley Act of 2002, which he characterized as “the most far-reaching reforms of American business practices since the time of Franklin Delano Roosevelt.” The Act mandated a number of reforms to enhance corporate responsibility, enhance financial disclosures and combat corporate and accounting fraud, and created the “Public Company Accounting Oversight Board,” also known as the PCAOB, to oversee the activities of the auditing profession. The full text of the Act is available at: http://uscode.house.gov/download/pls/15C98.txt.
Source: SEC website (www.sec.gov/about/whatwedo.shtml).
EXHIBIT 6.4
Arguments for Social Responsibility
Self-interest is a powerful incentive, and proponents of social responsibility and most in the corporate community themselves suggest a bottom line value in exceed - ing simple legal requirements to investors, employees, the environment, and consumers. Although empirical evidence was initially weak (Aupperle, Carroll, and Hatfield 1985; Rechner and Roth 1990), more recent research has consistently found a modest to strong relationship (Arthur 2003; Meyer 2000; Russo and Fouts 1997; Waddock and Graves 1997). First, investors, consumers, and employees are far more aware of corporate social responsibility records (Margolis and Walsh 2003). As Exhibit 6.5 indicates, all major corporations are annually rated on their corporate citizenship. Perhaps the most well-known ranking, started by Business Ethics and now conducted by CRO, rates companies on environment, climate change, human rights, philanthropy, employee relations, financial, and governance. The top 100 companies get wide coverage and bragging rights, as do those who are at the top in specific categories. Nearly all corporations report on their corporate social responsibility in their annual reports, and external validation is now the expectation of those claiming to be robust in this category.
Corporate Social Responsibility 185
Bristol-Myers Squibb: Overarching policies
EXHIBIT 6.5
Economic Progress
Shareholder value Profitable growth
Environmental Protection
Clean and healthy environment
Social Responsibility
Conscientious citizenship
Safe workplace
Eco-efficient operations
Safe and effective products Our
Mission and
Commitment
Source: www.bms.com.
186 Business–Government Relations in the Sociopolitical Arena
While investors and employees may not make strength in corporate social responsibility the priority factor in decision-making, it frequently is a determining factor once economic factors are accounted for, and it is an all-things-being-equal calculus (Barney and Hansen 1994; Orlitzky, Schmidt, and Rynes 2003; Turner and Greening 1997). Since numerous “cause” organizations work hard to target com - panies they consider offenders of various social responsibilities, bad publicity is a very powerful disincentive. Further, social responsibility in general, but especially social initiatives such as adopting a problematic community or policy issue, can lead to enormous good (if “soft”) publicity (Adler and Kwon 2002; Porter and Kramer 2002).
Finally, there is the moral argument, which is quite popular in the general public, but which is far from universally accepted by all business theorists or business people. The range of opinion is neatly captured by two of the examples already cited. Milton Friedman (1970) said that there “is one and only one social
The top 20 companies in corporate social responsibility by overall ranking1
1 Bristol Myers-Squibb, Pharmaceuticals
2 General Mills, Inc., Retail—Food
3 IBM Corp., Computer Hardware
4 Merck & Co., Pharmaceuticals
5 HP Co., L.P., Computer Hardware
6 Cisco Systems, Computer Hardware
7 Mattel, Inc., Leisure Products
8 Abbott Laboratories, Pharmaceutical Manufacture and Sale
9 Kimberly-Clark Corp., Personal Care Products Manufacturing
10 Entergy Corp., Utilities—Electric
11 Exxon Mobil Corp, Oil and Gas—Integrated
12 Wisconsin Energy Corp., Utilities—Electric
13 Intel Corp., Electrical Components and Equipments
14 Procter & Gamble Co., Personal Care Products Manufacturing
15 Hess Corp., Oil and Gas—Integrated
16 Xerox Corp., Computer Manufacture
17 3M Co., Industrials—Diversified
18 Avon Products, Inc., Hygiene and Beauty Care Products
19 Baxter International Inc., Healthcare—Supplies
20 Monsanto Co., Chemicals
1 By Corporate Responsibility Officer magazine, CRO’s 100 best, Corporate Citizens 2009 (formerly compiled by Business Ethics). Based on seven weighted categories: environment, climate change, human rights, philanthropy, employee relations, financial, and governance.
EXHIBIT 6.6
responsibility of business—to use its resources and engage its activities designated to increase profits so long as it stays within the rules of the game, which is to say engages in free and fair competition, without deception or fraud.” On the other hand, Bill Ford said: “A good company delivers excellent products and services, and a great company does all that and strives to make the world a better place.” The moral argument is that companies are not just legal entities, but are legal “persons,” and as such, they share the same responsibilities to society that individuals do.
Harking back to the founding of the country, when capitalist economic principles were laid down as one pillar of society, the idea was that capitalism’s emphasis on the market as a means to harness the best of competition, merit, innovation, and efficiency would lead to the ultimate betterment of all. However, capitalism was not the only pillar of society. The democratic pillar asserted equality under the law and promised that the affluent would not be able to excessively dominate the public agenda. The third pillar was a religious or moral one, in which citizens would contribute to the “common weal” by serving in the military and on juries, paying taxes, voting, and contributing to social projects and charity as their means allowed.
Striking the Right Balance of Responsibilities
While few would take as narrow a stand as Friedman on corporate social responsi - bility today, if only because the market itself now exposes and punishes those who are especially recalcitrant in the long-term so much more effectively, the issue of the proper balance of responsibilities is very much with us. Some common, but not universally, held beliefs about corporate social responsibility are:
• The dual responsibilities of economic viability and legal compliance are essential. Only non-profits and government organizations do not have a responsibility to produce profits.
• All companies and corporations have a responsibility to act ethically as well— to exceed legal minimums by actively seeking to mitigate environmental impact, to treat employees well, to contribute to the community as resources will allow, etc. Indeed, it is pragmatic to act ethically if medium- and long-term corporate interests are being protected even in such areas as environmental impact (Thomas 2001).
• It makes economic and moral sense for successful companies, which have profited from a stable and healthy society, to adopt discretionary responsibilities such as corporate social initiatives. The wealth of major corporations can be used to do good, provide a business perspective on social problems, and provide another example of leadership.
An underlying theme is that of balance. A financially strapped company may need to focus nearly exclusively on economic survival, but cannot focus on economic profits by violating the law. Better to go out of business with integrity than to violate its compact with society. A productive company should expand its responsibilities, but do so in a pragmatic way that will not overwhelm its financial standing. Successful companies can afford to divert substantial resources without distracting from the financial leadership that they have attained.
Corporate Social Responsibility 187
Encouraging Ethical Behavior
Organizational Level
What can organizations do to encourage ethical behavior at both the company and
individual levels? A variety of methods are suggested.
1. Once it is acknowledged that profits and strict legality are not the only values
to be pursued, a broader analysis of the various stakeholders of a company is
required. Just as stakeholder analysis is one of the most fundamental tools of strategic planning, performance measurement, and public relations, so too
is it the foundation of making ethical decisions (Freeman and Gilbert 1988).
Stake holders can largely be divided into those inside the company and those
outside.
Inside stakeholders (potentially) include private owners, stockholders,
executive officers, boards of directors, and employees. Inside stakeholders are
concerned about the short-term profit-making, long-term viability of the
company, and its reputation to varying degrees. It is an ethical truism that a
dominant focus on the short-term perspective will ultimately give way not only
to ethical breaches, but ultimately to pragmatic problems as well, as companies
squander their financial edge for profit-taking. The longer the time frame, the
more the stakeholder analysis will be diversified.
There are many potential external stakeholders—creditors, suppliers, customers, governments, local communities, the general public, unions, and
competitors. Creditors want to know that the company’s debts will be paid just as suppliers want to know that their goods and services will be ordered and paid for in a timely and reasonable fashion. Customers want a fair mix of value and quality. Governments at various levels are concerned with regu- lating the legal aspects of companies—such as environmental protection
standards and product safety, to providing a supportive base for operations
in terms of infrastructure, workforce education, etc. Governments also have
to manage the negative externalities of companies such as employee layoffs
and closed facilities. Local communities (similar but not identical to gov - ernments) want companies to be good corporate citizens in terms of paying
employees well, and providing local charity. Variously, the general public can be thought of as having a primary concern for the larger social issues
such as environmental protection, international ramifications of good work
and trade practices, and the systemic issues of good corporate governance.
Unions are concerned with employee rights, pay, and working conditions. Even competitors are a part of a good stakeholder analysis because they are key to setting industry standards and occasionally function as corporate
partners.
In some instances the number of significant stakeholders is quite large and
in other cases it is quite small, depending on the scope of the issue or issues
involved.
188 Business–Government Relations in the Sociopolitical Arena
2. A thorough stakeholder analysis and a corporate commitment to balancing social responsibilities with economic and legal ones should be reflected in mission and values statements.
3. Guidelines and codes of conduct can provide concrete language about minimalist expectations as a bulwark against wrong-doing. They can be of great assistance in delineating what is inappropriate as well as specific steps to take in case of ethical breaches. Codes of ethics can provide tangible language about what individuals and groups should strive for and identify exemplary behavior (Van Wart 1996, 2003).
4. Ethics training ensures knowledge of rules and encourages inspirational convictions toward being a moral exemplar.
5. Many larger companies have an ethics officer and or an ethics hotline. 6. An emphasis can be placed on executives and managers being role models of
fairness, commitment, and charity. 7. An ethics award can be added to a company’s recognition program. 8. A social responsibility audit can be conducted to see if the balance of social
responsibilities is appropriate for the company in its current status, as well as to ensure that the company is meeting its stated convictions and goals. Can social responsibilities be added that both save the environment and save costs, provide employee enrichment and increase efficiency, provide increased transparency while enhancing public image, etc.?
9. More successful corporations can consider adopting a social initiative. Social initiatives can be modest, such as an ongoing program to keep a highway clean, to contribute food and manpower to a local non-profit like Second Harvest, or to encourage a big brother/sister program. Larger social initiatives by wealthy companies can include the adoption of a community or by taking a stand on a national social problem such as worldwide water conservation.
10. Successful companies can strive for ethics awards, either at the national level (such as becoming a top 100 corporate citizen), or locally.
Individual Level Ethical Analysis
What basic skills do you need to conduct an ethical analysis? First, one has to be sensitive to the fact that significant decisions have consequences beyond the individual and usually beyond the company. Several pragmatic questions will generally identify whether more ethical analysis is necessary.
First, am I OK with this decision being publicized and will it stand up to public scrutiny?
Second, what if everyone did what I am doing? Would the community or society be better or worse off? In this context, a company that is facing bankruptcy may be more ethically justified in cutting pay temporarily, than a company making record profits would be in freezing pay in a period of high unemployment.
Third, who are the stakeholders involved? If you do not know who will be affected by decisions, you cannot consider their interests.
Fourth, what are the concrete ethical issues involved? Do they involve economic, legal, and/or social responsibilities?
Corporate Social Responsibility 189
190 Business–Government Relations in the Sociopolitical Arena
EXHIBIT 6.7
Beyond The Green Corporation: Imagine a world in which eco-friendly and socially responsible practices actually help a company’s bottom line. It’s closer than you think.
Under conventional notions of how to run a conglomerate like Unilever, CEO Patrick Cescau should wake up each morning with a laserlike focus: how to sell more soap and shampoo than Procter & Gamble Co. (PG ). But ask Cescau about the $52 billion Dutch–British giant’s biggest strategic challenges for the twenty-first century, and the conversation roams from water-deprived villages in Africa to the planet’s warming climate.
The world is Unilever’s laboratory. In Brazil, the company operates a free community laundry in a São Paolo slum, provides financing to help tomato growers convert to eco-friendly “drip” irrigation, and recycles 17 tons of waste annually at a toothpaste factory. Unilever funds a floating hospital that offers free medical care in Bangladesh, a nation with just 20 doctors for every 10,000 people. In Ghana, it teaches palm oil producers to reuse plant waste while providing potable water to deprived communities. In India, Unilever staff helps thousands of women in remote villages start micro-enterprises. And responding to green activists, the company discloses how much carbon dioxide and hazardous waste its factories spew out around the world.
As Cescau sees it, helping such nations wrestle with poverty, water scarcity, and the effects of climate change is vital to staying competitive in coming decades. Some 40 percent of the company’s sales and most of its growth now take place in developing nations. Unilever food products account for roughly 10 percent of the world’s crops of tea and 30 percent of all spinach. It is also one of the world’s biggest buyers of fish. As environmental regulations grow tighter around the world, Unilever must invest in green technologies or its leadership in packaged foods, soaps, and other goods could be imperiled. “You can’t ignore the impact your company has on the community and environment,” Cescau says. CEOs used to frame thoughts like these in the context of moral responsibility, he adds. But now, “it’s also about growth and innovation. In the future, it will be the only way to do business.”
A remarkable number of CEOs have begun to commit themselves to the same kind of sustainability goals Cescau has pinpointed, even in profit-obsessed America. For years, the term “sustainability” has carried a lot of baggage. Put simply, it’s about meeting humanity’s needs without harming future generations. It was a favorite cause among economic development experts, human rights activists, and conservationists. But to many US business leaders, sustain- ability just meant higher costs and smacked of earnest UN corporate responsi - bility conferences and the utopian idealism of Western Europe. Now, sustainability is “right at the top of the agendas” of more US CEOs, especially young ones, says McKinsey Global Institute Chairman Lenny Mendonca.
Source: Pete Engardino with Kerry Capell, John Carey, and Kenji Hall, Business Week, January 29, 2007.
Finally, what alternatives exist that maximize as many of these competing values as possible? This means that the importance of various values must be weighed, because they will not necessarily be equal. Considering all values—and the weights of those values—when considering alternatives means that relatively optimal solutions will be selected. In fact, often with good ethical reasoning the final outcome can become a win-win solution, and sometimes problems can be married together to create new opportunities! Even when ethical dilemmas simply mean making tough choices, however, the decisions will be better and easier to justify. Below is a case regarding the ethics involved in modernday retail.
ANALYTICAL CASE: THE ETHICS INVOLVED IN THE MODERN RETAIL STORE
Big Box Corporation is a modern low-cost department store. To keep its costs down, it has a number of standard practices that ensure profitability.
First, it aggressively keeps costs low and does not rely extensively on sales to build long-term rather than temporary customer loyalty. Therefore it is a global buyer with no “buy-American” policy. In fact, while it does ensure that its products are legally made, it does not concern itself with non-governmental protocols on recommendations about working conditions or child labor.
Second, it keeps its market prices extremely low by ensuring that the jobs of line workers are as simple and repetitive as possible, so that workers can easily be trained and replaced. Big Box Corporation has been largely successful at keeping unions out of its stores in all but a few instances. This means that many of the workers are the second or third wage earners in homes and that many of its employees are part- time retired workers or young workers seeking their first jobs. As importantly, these wage earners, who are just above minimum wage, do not normally have significant benefits such as health care and retirement. Many of the workers do not need them because they are covered by a first wage earner or do not care about them because retirement has occurred or is a distant concern. A small, but not tiny, percentage of the line workers qualify for government benefits such as child health care. Middle managers are recruited from “the floor” and get improved wages and modest benefits, but are still paid very modestly by management standards. Store managers are generally professionally trained and analysis driven to examine profitability trends, cost–benefit ratios, contingency analysis, etc., and thus rarely come from the floor. They are largely recruited from corporate manager-training programs populated by college business majors and MBA graduates. After serving as an assistant store manager with modest pay (each store has three to five assistant store managers) for a period of three to seven years, opportunities to become a store manager often open up. Store managers are well paid for retail.
Third, Big Box Corporation prefers to locate its stores just outside of cities, when they are not land-locked by other cities, in order to avoid city taxes. This has the side advantage of cheaper land for large parking areas. Alternatively, when locating in an urbanized area with adjacent cities, as is common today, Big Box always considers two or three options in adjacent jurisdictions that will be desirous of having
Corporate Social Responsibility 191
the store. By doing so, the store can make the jurisdictions compete aggressively, and can get excellent multi-year tax concessions (sometimes up to a decade) as well as infrastructure improvements such as road widening on the arterial to the store, traffic lights, and sewer and utility extensions.
Fourth, Big Box Corporation is large enough that it can force suppliers to maintain ownership of products until point of customer sale. In other words, unlike smaller retailers that must buy goods to stock shelves and then discount unsold goods, thereby competing with their own goods not on sale, Big Box does not pay suppliers until goods are registered as sold. In experimenting with new products, it risks the loss of shelf space but has no inventory cost liability. Unsold goods are simply returned, although the supplier must pick them up or abandon them.
Fifth, because of its size, Big Box is able to stay abreast of current trends and appeal to all but the smallest niche markets. This means that it is able to push old-fashioned stores with less efficient practices out of business, absorb their market share, and maintain a lock on the market environment for the cost- conscious buyer who is impervious to all stores except other corporations with a similar style, or stores that carry only discontinued products that they have purchased for pennies on the dollar but whose product lines vary enormously month by month.
Sixth, while not immune to “green” initiatives, Big Box knows that most of its customers place a much larger premium on value than on environmental concerns and thus it caters to that preference. When enough customers are perceived to be interested and the cost differential is modest, Big Box occasionally offers a product that can be marketed as “environmentally friendly.”
Seventh, Big Box is careful not to dilute its efficiency and profits thrust with local charity issues. Charity is done, but almost exclusively at the corporate level, so that it can easily be “counted” for accounting purposes, and easily be identified for corporate public relations.
Questions for Discussion and Analysis
1. What are the possible ethical questions that are involved? (At least seven are implicitly identified in the case.) This question is often asked at the same time as the following question.
2. Who are the stakeholders who are/will be affected in this scenario and what are their interests? (This is covered in previous chapter.)
3. What are the concrete ethical issues that you feel need to be considered? (This requires narrowing down the list of possible ethical issues, which should be done after identifying stakeholders and their interests.) What alternatives exist? How do these alternatives maximize various values, given the weight of those values?
4. What recommendations do you have in how the situations you chose to address could be/should have been resolved or improved? Or, state if no changes are necessary, and the reasons why the status quo is acceptable.
192 Business–Government Relations in the Sociopolitical Arena
Corporate Social Responsibility 193
PRACTICAL SKILL
Ethical reasoning
Ethical reasoning is the logic about right and wrong personal and business conduct. It requires a person to understand their professional ethical roles, recognize ethical issues in a business scenario, assess their own ethical values and the social context of problems, think about how differ - ent ethical perspectives might be applied to the ethical dilemmas, and consider the ramifications of alternative actions.
If you find yourself in situations where your ethics are challenged, what should you do? Try this simple ethical reasoning framework:
• Get a clear understanding of the situation, differentiating facts from your assumption.
• Conduct a stakeholder analysis, determining who’s really involved and the degree to which their interest is affected. (You have learned this in Chapter 2.)
• Define the conflicting interests and values and identify the higher-order values involved. Ethical conflict or dilemma always involves conflict of interests and values. Sometimes it is not to make right or wrong decision, it is to make right versus right decision based on your personal and professional judgment.
• Identify the options that you can reasonably take. You need to know that although none of the options satisfies all the interests involved, some options do a better job.
• Identify the potential consequences of your options. Some options may be correct but disastrous; other options may work at one time but not others; still other options may reap gains in the short run but losses in the long run.
Skill Exercise: Stakeholder analysis of ABC’s relocation
Read the opening case scenario: Zoey’s dilemma at Happy Paws. Apply the above framework to analyze the issues that Zoey is facing. Discuss how the analysis may inform you and how you would resolve the issue, if you were Zoey.
SUMMARY AND CONCLUSION
1. When corporations and the private sector engage in corruption and excessively self-serving behavior, the legal system is frequently changed to regulate areas of societal concern more tightly.
2. Ethics is a system of beliefs about how to behave, and morals reflects one’s actual behaviors.
194 Business–Government Relations in the Sociopolitical Arena
3. General social expectations permeate all of society and include such values as honesty, fairness, and legality. There are also specific social expectations, so that we have different standards for judges, business people, soldiers, and spies. Even so, it is not difficult to discern the difference among business people who are immoral, amoral, moral, and exemplary.
4. Corporate social responsibility is meeting basic economic needs through diligence and innovation, exceeding legal requirements by fulfilling the spirit of the law, while simultaneously finding ways to enhance the community and planet with mutually beneficial actions, and when possible, provide outright acts of charity. This can be thought of as the basic corporate responsibilities of economic success and legality and the social responsibilities of professionalism and civic responsibility.
5. Today, the stakes for being known as a good and honorable organization are being made more critical by “cause” organizations that attack corporations they perceive as lacking basic corporate social responsibility.
6. The basis of ethical analysis is sensitivity to ethical issues, stakeholder analysis, thinking long and hard about the tough ethical issues, and making sure that alternatives are examined and the values underlying those decisions are well understood.
Amoral “Cause” organizations Corporate responsibility Corporate social
responsibility
Ethical exemplars Ethics Moral Professional norms Social norms
Social responsibility audit
Stakeholder analysis
KEY TERMS
STUDY QUESTIONS
1. To what degree do you think your system of ethics comes from your religion, your parents, your peers, and your education? Place an approximate percent on each and provide an example.
2. What drives people and companies to be of low morality, even while they are asserting ethical principles? Provide some examples of both ideal and wicked business leaders.
3. To what degree do you think it is the government’s responsibility to ensure a relatively fair playing field? Give an example of when the government has done a good job in ensuring a fair playing field, done too little, or done too much.
4. Do you think that American business ethics are improving, deteriorating, or staying about the same over the last 50 years?
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