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CHAPTER 9

Ethics, Corporate Social Responsibility, Environmental Sustainability, and Strategy

Learning Objectives

THIS CHAPTER WILL HELP YOU UNDERSTAND:

LO 1 How the standards of ethical behavior in business are no different from the ethical standards and norms of the larger society and culture in which a company operates.

LO 2 What drives unethical business strategies and behavior.

LO 3 The costs of business ethics failures.

LO 4 The concepts of corporate social responsibility and environmental sustainability and how companies balance these duties with economic responsibilities to shareholders.

© Boris Lyubner/age fotostock

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We don’t think of ourselves as do-gooders or altruists. It’s just that somehow we’re trying our best to be run with some sense of moral compass even in a business environment that is growing.

Craig Newmark—Founder of Craigslist

The time is always right to do what is right.

Martin Luther King, Jr.—Civil rights activist and

humanitarian

Sustainability, ensuring the future of life on Earth, is an infinite game, the endless expression of generosity on behalf of all.

Paul Hawken—Founder of Erewhon Trading Co.;

cofounder of Smith & Hawken

CORE CONCEPT

Business ethics deals with the application of general ethical principles to the actions and decisions of businesses and the conduct of their personnel.

Clearly, in capitalistic or market economies, a company has a responsibility to make a profit and grow the business. Managers of public companies have a fiduciary duty to operate the enterprise in a manner that creates value for the company’s shareholders. Just as clearly, a company and its personnel are duty-bound to obey the law and comply with governmental regulations. But does a company also have a duty to go beyond legal requirements and hold all company personnel responsible for conforming to high ethical stan- dards? Does it have an obligation to contribute to the betterment of society, independent of the needs and preferences of the customers it serves? Should a company display a social conscience

by devoting a portion of its resources to better- ing society? Should its strategic initiatives be screened for possible negative effects on future generations of the world’s population?

This chapter focuses on whether a company, in the course of trying to craft and execute a strat- egy that delivers value to both customers and shareholders, also has a duty to (1) act in an ethi- cal manner; (2) be a committed corporate citizen and allocate some of its resources to improving the well-being of employees, the communities in which it operates, and society as a whole; and (3) adopt business practices that conserve natural resources, protect the interests of future generations, and pre- serve the well-being of the planet.

WHAT DO WE MEAN BY BUSINESS ETHICS? Ethics concerns principles of right or wrong conduct. Business ethics is the appli- cation of ethical principles and standards to the actions and decisions of business organizations and the conduct of their personnel.1 Ethical principles in business are not materially different from ethical principles in general. Why? Because business actions have to be judged in the context of society’s standards of right and wrong, not with respect to a special set of ethical standards applicable only to business situ- ations. If dishonesty is considered unethical and immoral, then dishonest behavior in business—whether it relates to customers, suppliers, employees, shareholders,

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competitors, or government—qualifies as equally unethical and immoral. If being ethical entails not deliberately harming others, then businesses are ethically obliged to recall a defective or unsafe product swiftly, regardless of the cost. If society deems bribery unethical, then it is unethical for company personnel to make payoffs to gov- ernment officials to win government contracts or bestow favors to customers to win or retain their business. In short, ethical behavior in business situations requires adhering to generally accepted norms about right or wrong conduct. As a consequence, com- pany managers have an obligation—indeed, a duty—to observe ethical norms when crafting and executing strategy.

LO 1

How the standards of ethical behavior in business are no different from the ethical standards and norms of the larger society and culture in which a company operates.

CORE CONCEPT

The school of ethical universalism holds that the most fundamental conceptions of right and wrong are universal and apply to members of all societies, all companies, and all businesspeople.

WHERE DO ETHICAL STANDARDS COME FROM—ARE THEY UNIVERSAL OR DEPENDENT ON LOCAL NORMS?

Notions of right and wrong, fair and unfair, moral and immoral are present in all societies and cultures. But there are three distinct schools of thought about the extent to which ethical standards travel across cultures and whether multinational companies can apply the same set of ethical standards in any and all locations where they operate.

The School of Ethical Universalism According to the school of ethical universalism, the most fundamental concep- tions of right and wrong are universal and transcend culture, society, and religion.2 For instance, being truthful (not lying and not being deliberately deceitful) strikes a chord of what’s right in the peoples of all nations. Likewise, demonstrating integrity of character, not cheating or harming people, and treating others with decency are concepts that resonate with people of virtually all cultures and religions.

Common moral agreement about right and wrong actions and behaviors across multiple cultures and countries gives rise to universal ethical standards that apply to members of all societies, all companies, and all businesspeople. These univer- sal ethical principles set forth the traits and behaviors that are considered virtuous and that a good person is supposed to believe in and to display. Thus, adherents of the school of ethical universalism maintain that it is entirely appropriate to

expect all members of society (including all personnel of all companies worldwide) to conform to these universal ethical standards.3 For example, people in most societ- ies would concur that it is unethical for companies to knowingly expose workers to toxic chemicals and hazardous materials or to sell products known to be unsafe or harmful to the users.

The strength of ethical universalism is that it draws on the collective views of mul- tiple societies and cultures to put some clear boundaries on what constitutes ethical and unethical business behavior, regardless of the country or culture in which a com- pany’s personnel are conducting activities. This means that with respect to basic moral standards that do not vary significantly according to local cultural beliefs, traditions, or religious convictions, a multinational company can develop a code of ethics that it applies more or less evenly across its worldwide operations. It can avoid the slippery slope that comes from having different ethical standards for different company per- sonnel depending on where in the world they are working.

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The School of Ethical Relativism While undoubtedly there are some universal moral prescriptions (like being truthful and trustworthy), there are also observable variations from one society to another as to what constitutes ethical or unethical behavior. Indeed, differing religious beliefs, social customs, traditions, core values, and behavioral norms frequently give rise to different standards about what is fair or unfair, moral or immoral, and ethically right or wrong. For instance, European and American managers often establish standards of business conduct that protect human rights such as freedom of movement and resi- dence, freedom of speech and political opinion, and the right to privacy. In China, where societal commitment to basic human rights is weak, human rights consider- ations play a small role in determining what is ethically right or wrong in conducting business activities. In Japan, managers believe that showing respect for the collec- tive good of society is a more important ethical consideration. In Muslim coun- tries, managers typically apply ethical standards compatible with the teachings of Muhammad. Consequently, the school of ethical relativism holds that a “one-size- fits-all” template for judging the ethical appropriateness of business actions and the behaviors of company personnel is totally inappropriate. Rather, the underlying thesis of ethical relativism is that whether certain actions or behaviors are ethically right or wrong depends on the ethical norms of the country or culture in which they take place. For businesses, this implies that when there are cross-country or cross- cultural differences in ethical standards, it is appropriate for local ethical standards to take precedence over what the ethical standards may be in a company’s home market.4 In a world of ethical relativism, there are few absolutes when it comes to business ethics, and thus few ethical absolutes for consistently judging the ethical correctness of a company’s conduct in various countries and markets.

This need to contour local ethical standards to fit local customs, local notions of fair and proper individual treatment, and local business practices gives rise to multiple sets of ethical standards. It also poses some challenging ethical dilemmas. Consider the following two examples.

The Use of Underage Labor In industrialized nations, the use of underage workers is considered taboo. Social activists are adamant that child labor is unethical and that companies should nei- ther employ children under the age of 18 as full-time employees nor source any products from foreign suppliers that employ underage workers. Many countries have passed legislation forbidding the use of underage labor or, at a minimum, regulating the employment of people under the age of 18. However, in Eretria, Uzbekistan, Myanmar, Somalia, Zimbabwe, Afghanistan, Sudan, North Korea, Yemen, and more than 50 other countries, it is customary to view children as potential, even necessary, workers. In other countries, like China, India, Russia, and Brazil, child labor laws are often poorly enforced.5 As of 2013, the International Labor Organization estimated that there were about 168 million child laborers age 5 to 17 and that some 85 million of them were engaged in hazardous work.6

While exposing children to hazardous work and long work hours is unquestionably deplorable, the fact remains that poverty-stricken families in many poor countries can- not subsist without the work efforts of young family members; sending their children to school instead of having them work is not a realistic option. If such children are not permitted to work (especially those in the 12-to-17 age group)—due to pressures imposed by activist groups in industrialized nations—they may be forced to go out on

CORE CONCEPT

The school of ethical relativism holds that differing religious beliefs, customs, and behavioral norms across countries and cultures give rise to multiple sets of standards concerning what is ethically right or wrong. These differing standards mean that whether business- related actions are right or wrong depends on the prevailing local ethical standards.

Under ethical relativism, there can be no one-size- fits-all set of authentic ethical norms against which to gauge the conduct of company personnel.

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the streets begging or to seek work in parts of the “underground” economy such as drug trafficking and prostitution.7 So, if all businesses in countries where employing underage workers is common succumb to the pressures to stop employing underage labor, then have they served the best interests of the underage workers, their families, and society in general? Illustration Capsule 9.1 describes IKEA’s approach to dealing with this issue regarding its global supplier network.

The Payment of Bribes and Kickbacks A particularly thorny area facing multinational companies is the degree of cross- country variability in paying bribes.8 In many countries in eastern Europe, Africa, Latin America, and Asia, it is customary to pay bribes to government officials in order to win a government contract, obtain a license or permit, or facilitate an adminis- trative ruling.9 In some developing nations, it is difficult for any company, foreign or domestic, to move goods through customs without paying off low-level officials. Senior managers in China and Russia often use their power to obtain kickbacks when they purchase materials or other products for their companies.10 Likewise, in many countries it is normal to make payments to prospective customers in order to win or retain their business. Some people stretch to justify the payment of bribes and kick- backs on grounds that bribing government officials to get goods through customs or giving kickbacks to customers to retain their business or win new orders is simply a payment for services rendered, in the same way that people tip for service at restau- rants.11 But while this is a clever rationalization, it rests on moral quicksand.

Companies that forbid the payment of bribes and kickbacks in their codes of ethical conduct and that are serious about enforcing this prohibition face a particularly vexing problem in countries where bribery and kickback payments are an entrenched local custom. Complying with the company’s code of ethical conduct in these countries is very often tantamount to losing business to competitors that have no such scruples—an outcome that penalizes ethical companies and ethical company personnel (who may suffer lost sales commissions or bonuses). On the other hand, the payment of bribes or kickbacks not only undercuts the company’s code of ethics but also risks breaking the law. The Foreign Corrupt Practices Act (FCPA) prohibits U.S. companies from paying bribes to government officials, political parties, political candidates, or others in all countries where they do business. The Organization for Economic Cooperation and Development (OECD) has antibribery standards that criminalize the bribery of foreign public officials in international business transactions—all 35 OECD member countries and 7 nonmember countries have adopted these standards.

Despite laws forbidding bribery to secure sales and contracts, the practice persists. As of June 2014, 263 individuals and 164 entities were sanctioned under criminal pro- ceedings for foreign bribery by the OECD. At least 80 of the sanctioned individuals were sentenced to prison. In 2014, Alcoa agreed to pay $384 million to settle charges brought by the Justice Department and the Securities and Exchange Commission (SEC) that it used bribes to lock in lucrative contracts in Bahrain. French oil giant Total settled criminal charges for $398 million the prior year for similar behavior in Iran. Other well- known companies caught up in recent or ongoing bribery cases include Archer Daniels Midland, the global agribusiness trader; Swiss oil-field services firm Weatherford; Avon; and Walmart. In 2013, the Ralph Lauren Corporation struck a non-prosecution agreement with the SEC to forfeit illicit profits made due to bribes paid by a subsidiary in Argentina. When the parent company found the problem, it immediately reported it to the SEC and provided substantial assistance with the investigation. The company paid only $882,000 in penalties (above the forfeited profits) as a result.

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Using the Principle of Ethical Relativism to Create Ethical Standards Is Problematic for Multinational Companies Relying on the principle of ethical relativism to determine what is right or wrong poses major problems for multinational companies trying to decide which ethical stan- dards to enforce companywide. It is a slippery slope indeed to resolve conflicting ethical standards for operating in different countries without any kind of higher- order moral compass. Consider, for example, the ethical inconsistency of a multi- national company that, in the name of ethical relativism, declares it impermissible

ILLUSTRATION CAPSULE 9.1

Known for its stylish ready-to-assemble home furnish- ings, IKEA has long relied on an extensive supplier net- work to manufacture its products and support its rapid global expansion. It has worked hard to develop a suc- cessful approach to encourage high ethical standards among its suppliers, including standards concerning the notoriously difficult issue of child labor.

IKEA’s initial plan to combat the use of child labor by its suppliers involved (1) contracts that threatened immediate cancellation and (2) random audits by a third- party partner. Despite these safeguards, the company discovered that some of its Indian suppliers were still employing children. IKEA realized that this issue would crop up again and again if it continued to use low-cost

suppliers in developing countries—a critical element in its cost-containment strategy.

To address this problem, IKEA developed and intro- duced its new code for suppliers, IWAY, which addresses social, safety, and environmental issues across its pur- chasing model. When faced with a supplier slip-up, IKEA works with the company to figure out and tackle the root cause of violations. Using child labor, for example, can signal bigger problems: production inefficiencies that require the lowest-cost labor, lack of alternative options for children like school or supervised commu- nity centers, family health or income challenges that mean children need to become breadwinners, and so on. IKEA takes action to provide technical expertise to improve working conditions and processes, offer financ- ing help at reasonable rates, run training programs onsite, and help develop resources and infrastructure in areas where its suppliers are based. The IKEA founda- tion also began focusing on these issues through part- nerships with UNICEF and Save the Children aimed at funding long-term community programs that support access to education, health care, and sustainable fam- ily incomes. As of 2016, their efforts have improved the education opportunities of more than 12 million children in 46 different countries.

IKEA’s proactive approach has reduced some of the risks involved in relying on suppliers in developing coun- tries. Through its approach, IKEA has been able to main- tain its core strategic principles even when they seem to be at odds: low costs, great design, adherence to its ethical principles, and a commitment to a better world.

IKEA’s Global Supplier Standards: Maintaining Low Costs While Fighting the Root Causes of Child Labor

© Holly Hildreth/Moment/Getty Images

Note: Developed with Kiera O’Brien.

Sources: IKEA, “About the Company: This Is IKEA,” www.ikea.com/ms/en_US/this-is-ikea/people-and-planet/people-and-communities/; Elain Cohen, “Banning Child Labor: The Symptom or the Cause?” CSR Newswire, www.csrwire.com/blog/posts/547-banning-child-labor-the- symptom-or-the-cause; UNICEF Press Center, Joint Press Release, www.unicef.org/media/media_89819.html (accessed February 2, 2016).

Codes of conduct based on ethical relativism can be ethically problematic for multinational companies by creating a maze of conflicting ethical standards.

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to engage in kickbacks unless such payments are customary and generally overlooked by legal authorities. It is likewise problematic for a multinational company to declare it ethically acceptable to use underage labor at its plants in those countries where child labor is allowed but ethically inappropriate to employ underage labor at its plants else- where. If a country’s culture is accepting of environmental degradation or practices that expose workers to dangerous conditions (toxic chemicals or bodily harm), should a multinational company lower its ethical bar in that country but rule the very same actions to be ethically wrong in other countries?

Business leaders who rely on the principle of ethical relativism to justify con- flicting ethical standards for operating in different countries have little moral basis for establishing or enforcing ethical standards companywide. Rather, when a com- pany’s ethical standards vary from country to country, the clear message being sent to employees is that the company has no ethical standards or convictions of its own and prefers to let its standards of ethical right and wrong be governed by the customs and practices of the countries in which it operates. Applying multiple sets of ethical stan- dards without some kind of higher-order moral compass is scarcely a basis for holding company personnel to high standards of ethical behavior. And it can lead to prosecu- tions of both companies and individuals alike when there are conflicting sets of laws.

Ethics and Integrative Social Contracts Theory Integrative social contracts theory provides a middle position between the oppos- ing views of ethical universalism and ethical relativism.12 According to this theory, the ethical standards a company should try to uphold are governed by both (1) a limited number of universal ethical principles that are widely recognized as put- ting legitimate ethical boundaries on behaviors in all situations and (2) the cir- cumstances of local cultures, traditions, and values that further prescribe what constitutes ethically permissible behavior. The universal ethical principles are based on the collective views of multiple cultures and societies and combine to form a “social contract” that all individuals, groups, organizations, and businesses in all situations have a duty to observe. Within the boundaries of this social con- tract, local cultures or groups can specify what other actions may or may not be ethically permissible. While this system leaves some “moral free space” for the people in a particular country (or local culture, or profession, or even a company) to make specific interpretations of what other actions may or may not be permissible, universal ethical norms always take precedence. Thus, local ethical standards can be more stringent than the universal ethical standards but never less so. For exam- ple, both the legal and medical professions have standards regarding what kinds of advertising are ethically permissible that extend beyond the universal norm that advertising not be false or misleading. The strength of integrated social contracts theory is that it accommodates the best parts of ethical universalism and ethical relativism. Moreover, integrative social contracts theory offers managers in multinational companies clear guidance in resolving cross-country ethical differences: Those parts of the company’s code of ethics that involve universal ethical norms must be enforced worldwide, but within these boundaries there is room for ethical diversity and the opportunity for host- country cultures to exert some influence over the moral and ethical standards of business units operating in that country.

A good example of the application of integrative social contracts theory to busi- ness involves the payment of bribes and kickbacks. Yes, bribes and kickbacks are

CORE CONCEPT

According to integrated social contracts theory, universal ethical principles based on the collective views of multiple societies form a “social contract” that all individuals and organizations have a duty to observe in all situations. Within the boundaries of this social contract, local cultures or groups can specify what additional actions may or may not be ethically permissible.

According to integrated social contracts theory, adherence to universal or “first-order” ethical norms should always take precedence over local or “second-order” norms.

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common in some countries. But the fact that bribery flourishes in a country does not mean it is an authentic or legitimate ethical norm. Virtually all of the world’s major religions (e.g., Buddhism, Christianity, Confucianism, Hinduism, Islam, Judaism, Sikhism, and Taoism) and all moral schools of thought condemn brib- ery and corruption. Therefore, a multinational company might reasonably conclude that there is a universal ethical principle to be observed here—one of refusing to condone bribery and kickbacks on the part of company personnel no matter what the local custom is and no matter what the sales consequences are.

In instances involving universally applicable ethical norms (like paying bribes), there can be no compromise on what is ethically permissible and what is not.

HOW AND WHY ETHICAL STANDARDS IMPACT THE TASKS OF CRAFTING AND EXECUTING STRATEGY Many companies have acknowledged their ethical obligations in official codes of ethi- cal conduct. In the United States, for example, the Sarbanes–Oxley Act, passed in 2002, requires that companies whose stock is publicly traded have a code of ethics or else explain in writing to the SEC why they do not. But the senior executives of ethi- cally principled companies understand that there’s a big difference between having a code of ethics because it is mandated and having ethical standards that truly provide guidance for a company’s strategy and business conduct.13 They know that the litmus test of whether a company’s code of ethics is cosmetic is the extent to which it is embraced in crafting strategy and in operating the business day to day. Executives committed to high standards make a point of considering three sets of questions when- ever a new strategic initiative or policy or operating practice is under review:

∙ Is what we are proposing to do fully compliant with our code of ethical conduct? Are there any areas of ambiguity that may be of concern?

∙ Is there any aspect of the strategy (or policy or operating practice) that gives the appearance of being ethically questionable?

∙ Is there anything in the proposed action that customers, employees, suppliers, stockholders, competitors, community activists, regulators, or the media might consider ethically objectionable?

Unless questions of this nature are posed—either in open discussion or by force of habit in the minds of company managers—there’s a risk that strategic initiatives and/ or the way daily operations are conducted will become disconnected from the com- pany’s code of ethics. If a company’s executives believe strongly in living up to the company’s ethical standards, they will unhesitatingly reject strategic initiatives and operating approaches that don’t measure up. However, in companies with a cosmetic approach to ethics, any linkage of the professed standards to its strategy and oper- ating practices stems mainly from a desire to avoid the risk of embarrassment and possible disciplinary action for approving actions that are later deemed unethical and perhaps illegal.

While most company managers are careful to ensure that a company’s strategy is within the bounds of what is legal, evidence indicates they are not always so careful to ensure that all elements of their strategies and operating activities are within the bounds of what is considered ethical. In recent years, there have been revelations of ethical misconduct on the part of managers at such companies as Koch Industries, Las Vegas Sands, BP, Halliburton, Hewlett-Packard, GlaxoSmithKline, Marathon Oil

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Corporation, Kraft Foods Inc., Motorola Solutions, Pfizer, several leading investment banking firms, and a host of mortgage lenders. The consequences of crafting strate- gies that cannot pass the test of moral scrutiny are manifested in sizable fines, devas- tating public relations hits, sharp drops in stock prices that cost shareholders billions of dollars, criminal indictments, and convictions of company executives. The fallout from all these scandals has resulted in heightened management attention to legal and ethical considerations in crafting strategy.

LO 2

What drives unethical business strategies and behavior.

CORE CONCEPT

Self-dealing occurs when managers take advantage of their position to further their own private interests rather than those of the firm.

DRIVERS OF UNETHICAL BUSINESS STRATEGIES AND BEHAVIOR

Apart from the “business of business is business, not ethics” kind of thinking apparent in recent high-profile business scandals, three other main drivers of unethical business behavior also stand out:14

∙ Faulty oversight, enabling the unscrupulous pursuit of personal gain and self-interest.

∙ Heavy pressures on company managers to meet or beat short-term performance targets.

∙ A company culture that puts profitability and business performance ahead of ethical behavior.

Faulty Oversight, Enabling the Unscrupulous Pursuit of Personal Gain and Self-Interest People who are obsessed with wealth accumulation, power, status, and their own self-interest often push aside ethical principles in their quest for personal gain. Driven by greed and ambition, they exhibit few qualms in skirting the rules or doing whatever is necessary to achieve their goals. A general dis- regard for business ethics can prompt all kinds of unethical strategic maneuvers and behaviors at companies.

The U.S. government has been conducting a multiyear investigation of insider trad- ing, the illegal practice of exchanging confidential information to gain an advantage in the stock market. Focusing on the hedge fund industry and nicknamed “Operation Perfect Hedge,” the investigation has brought to light scores of violations. The six- year crackdown on insider trading yielded 87 convictions, although 14 were dismissed by prosecutors or lost on appeal by 2015. Among the most prominent of those con- victed was Raj Rajaratnam, the former head of Galleon Group, who was sentenced to 11 years in prison and fined $10 million. At SAC Capital, a $14 billion hedge fund, eight hedge fund managers were convicted of insider trading, in what has been called

the most lucrative insider trading scheme in U.S. history. The company agreed to pay $1.8 billion in penalties and has been forced to stop managing money for out- side investors.15 Since Operation Perfect Hedge began, abnormal jumps in the stock price of target firms (a sign of insider trading) have fallen 45 percent.

Responsible corporate governance and oversight by the company’s corporate board is necessary to guard against self-dealing and the manipulation of informa- tion to disguise such actions by a company’s managers. Self-dealing occurs when managers take advantage of their position to further their own private interests rather than those of the firm. As discussed in Chapter 2, the duty of the corporate board (and its compensation and audit committees in particular) is to guard against

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such actions. A strong, independent board is necessary to have proper oversight of the company’s financial practices and to hold top managers accountable for their actions.

A particularly egregious example of the lack of proper oversight is the scandal over mortgage lending and banking practices that resulted in a crisis for the U.S. residential real estate market and heartrending consequences for many home buyers. This scandal stemmed from consciously unethical strategies at many banks and mortgage compa- nies to boost the fees they earned on home mortgages by deliberately lowering lending standards to approve so-called subprime loans for home buyers whose incomes were insufficient to make their monthly mortgage payments. Once these lenders earned their fees on these loans, they repackaged the loans to hide their true nature and auc- tioned them off to unsuspecting investors, who later suffered huge losses when the high-risk borrowers began to default on their loan payments. (Government authorities later forced some of the firms that auctioned off these packaged loans to repurchase them at the auction price and bear the losses themselves.) A lawsuit by the attorneys general of 49 states charging widespread and systematic fraud ultimately resulted in a $26 billion settlement by the five largest U.S. banks (Bank of America, Citigroup, JPMorgan Chase, Wells Fargo, and Ally Financial). Included in the settlement were new rules designed to increase oversight and reform policies and practices among the mortgage companies. The settlement includes what are believed to be a set of robust monitoring and enforcement mechanisms that should help prevent such abuses in the future.16

Heavy Pressures on Company Managers to Meet Short-Term Performance Targets When key personnel find themselves scrambling to meet the quarterly and annual sales and profit expectations of investors and financial analysts, they often feel enormous pressure to do whatever it takes to protect their reputation for delivering good results. Executives at high-performing companies know that investors will see the slightest sign of a slowdown in earnings growth as a red flag and drive down the company’s stock price. In addition, slowing growth or declining profits could lead to a downgrade of the company’s credit rating if it has used lots of debt to finance its growth. The pressure to “never miss a quarter”—to not upset the expectations of analysts, investors, and creditors—prompts nearsighted managers to engage in short-term maneuvers to make the numbers, regardless of whether these moves are really in the best long-term interests of the company. Sometimes the pres- sure induces company personnel to continue to stretch the rules until the limits of ethi- cal conduct are overlooked.17 Once ethical boundaries are crossed in efforts to “meet or beat their numbers,” the threshold for making more extreme ethical compromises becomes lower.

In 2014, the SEC charged Diamond Foods (maker of Pop Secret and Emerald Nuts) with accounting fraud, alleging that the company falsified costs in order to boost earn- ings and stock prices. The company paid $5 million to the SEC to settle fraud charges, while its (now ousted) CEO paid $125,000 to settle a separate charge of negligence and returned $4 million in bonuses to the company. The company’s now-former CFO initially fought the charges, but eventually settled by paying a $125,000 fine. The real blow for the company was that its pending acquisition of potato chip giant Pringles fell apart as a result of the scandal, thwarting the company’s dreams of becoming the second-largest snack company in the world.18

Company executives often feel pressured to hit financial performance targets because their compensation depends heavily on the company’s performance. Over the last two decades, it has become fashionable for boards of directors to grant lavish

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bonuses, stock option awards, and other compensation benefits to executives for meeting specified performance targets. So outlandishly large were these rewards that executives had strong personal incentives to bend the rules and engage in behaviors that allowed the targets to be met. Much of the accounting manipula- tion at the root of recent corporate scandals has entailed situations in which execu- tives benefited enormously from misleading accounting or other shady activities that allowed them to hit the numbers and receive incentive awards ranging from $10 million to more than $1 billion for hedge fund managers.

The fundamental problem with short-termism—the tendency for managers to focus excessive attention on short-term performance objectives—is that it doesn’t create value for customers or improve the firm’s competitiveness in the market- place; that is, it sacrifices the activities that are the most reliable drivers of higher profits and added shareholder value in the long run. Cutting ethical corners in the name of profits carries exceptionally high risk for shareholders—the steep stock price decline and tarnished brand image that accompany the discovery of scur- rilous behavior leave shareholders with a company worth much less than before—

and the rebuilding task can be arduous, taking both considerable time and resources.

A Company Culture That Puts Profitability and Business Performance Ahead of Ethical Behavior When a company’s culture spawns an ethically corrupt or amoral work climate, people have a company-approved license to ignore “what’s right” and engage in any behavior or strategy they think they can get away with. Such cultural norms as “Everyone else does it” and “It is okay to bend the rules to get the job done” permeate the work environment. At such compa- nies, ethically immoral people are certain to play down observance of ethical stra- tegic actions and business conduct. Moreover, cultural pressures to utilize unethical means if circumstances become challenging can prompt otherwise honorable people to behave unethically. A perfect example of a company culture gone awry on ethics is Enron, a now-defunct but infamous company found guilty of one of the most sprawl- ing business frauds in U.S. history.19

Enron’s leaders pressured company personnel to be innovative and aggressive in figuring out how to grow current earnings—regardless of the methods. Enron’s annual “rank and yank” performance evaluation process, in which the lowest-ranking 15 to 20 percent of employees were let go, made it abundantly clear that bottom-line results were what mattered most. The name of the game at Enron became devising clever ways to boost revenues and earnings, even if this sometimes meant operating outside established policies (and legal limits). In fact, outside-the-lines behavior was celebrated if it generated profitable new business.

A high-performance–high-rewards climate came to pervade the Enron culture, as the best workers (determined by who produced the best bottom-line results) received impressively large incentives and bonuses. On Car Day at Enron, an array of luxury sports cars arrived for presentation to the most successful employees. Understand- ably, employees wanted to be seen as part of Enron’s star team and partake in the benefits granted to Enron’s best and brightest employees. The high monetary rewards, the ambitious and hard-driving people whom the company hired and promoted, and the competitive, results-oriented culture combined to give Enron a reputation not only for trampling competitors but also for internal ruthlessness. The company’s win-at- all-costs mindset nurtured a culture that gradually and then more rapidly fostered the erosion of ethical standards, eventually making a mockery of the company’s stated values of integrity and respect. When it became evident in fall 2001 that Enron was a

CORE CONCEPT

Short-termism is the tendency for managers to focus excessively on short-term performance objectives at the expense of longer-term strategic objectives. It has negative implications for the likelihood of ethical lapses as well as company performance in the longer run.

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house of cards propped up by deceitful accounting and myriad unsavory practices, the company imploded in a matter of weeks—one of the biggest bankruptcies of all time, costing investors $64 billion in losses.

In contrast, when high ethical principles are deeply ingrained in the corporate cul- ture of a company, culture can function as a powerful mechanism for communicating ethical behavioral norms and gaining employee buy-in to the company’s moral stan- dards, business principles, and corporate values. In such cases, the ethical principles embraced in the company’s code of ethics and/or in its statement of corporate values are seen as integral to the company’s identity, self-image, and ways of operating. The message that ethics matters—and matters a lot—resounds loudly and clearly through- out the organization and in its strategy and decisions. Illustration Capsule 9.2 dis- cusses Novo Nordisk’s approach to building an ethical culture and putting its ethical principles into practice.

WHY SHOULD COMPANY STRATEGIES BE ETHICAL? There are two reasons why a company’s strategy should be ethical: (1) because a strat- egy that is unethical is morally wrong and reflects badly on the character of the com- pany and its personnel, and (2) because an ethical strategy can be good business and serve the self-interest of shareholders.

The Moral Case for an Ethical Strategy Managers do not dispassionately assess what strategic course to steer—how strongly committed they are to observing ethical principles and standards definitely comes into play in making strategic choices. Ethical strategy making is generally the product of managers who are of strong moral character (i.e., who are trustworthy, have integrity, and truly care about conducting the company’s business honorably). Managers with high ethical principles are usually advocates of a corporate code of ethics and strong ethics compliance, and they are genuinely committed to upholding corporate values and ethical business principles. They demonstrate their commitment by displaying the company’s stated values and living up to its business principles and ethical standards. They understand the difference between merely adopting value statements and codes of ethics and ensuring that they are followed strictly in a company’s actual strategy and business conduct. As a consequence, ethically strong managers consciously opt for strategic actions that can pass the strictest moral scrutiny—they display no toler- ance for strategies with ethically controversial components.

The Business Case for Ethical Strategies In addition to the moral reasons for adopting ethical strategies, there may be solid business reasons. Pursuing unethical strategies and tolerating unethical conduct not only damages a company’s reputation but also may result in a wide-ranging set of other costly consequences. Figure 9.1 shows the kinds of costs a company can incur when unethical behavior on its part is discovered, the wrongdoings of company per- sonnel are headlined in the media, and it is forced to make amends for its behavior. The more egregious are a company’s ethical violations, the higher the costs and the bigger the damage to its reputation (and to the reputations of the company personnel

LO 3

The costs of business ethics failures.

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Conducting business in an ethical fashion is not only morally right—it is in a company’s enlightened self-interest.

ILLUSTRATION CAPSULE 9.2

Novo Nordisk is a $15.2 billion global pharmaceuti- cal company, known for its innovation and leadership in diabetes treatments. It is also known for its dedica- tion to ethical business practices. In 2012, the com- pany was listed as the global leader in business ethics by Corporate Knights, a corporate social responsibility advisory firm.

Novo Nordisk’s company policies are explicit in their attention to both bioethics and business ethics. In the realm of bioethics, the company is committed to con- ducting its research involving people, animals, and gene technology in accordance with the highest global ethi- cal standards. Moreover, the company requires that all of its suppliers and other external partners also adhere to Novo Nordisk’s bioethical standards. In the realm of business ethics, the policies dictate (1) that high ethical standards be applied consistently across the company’s

value chain, (2) that all ethical dilemmas encountered be addressed transparently, and (3) that company officers and employees be held accountable for complying with all laws, regulations, and company rules.

Novo Nordisk’s strong culture of responsibility helps translate the company’s policies into practice. At Novo Nordisk, every employee pledges to conduct himself or herself according to the Novo Nordisk Way, a set of behavioral norms that has come to define the company’s culture. It’s a culture that promotes teamwork, coopera- tion, respect for others, and fairness. The commitment to business ethics grew out of those values, which are promoted throughout the company by hiring practices, management leadership, and employee mobility to fos- ter a global one-company culture.

As part of this process, Novo Nordisk has set up a business ethics board, composed of senior manage- ment. The board identifies key ethical challenges for the company, drafting guidelines and developing training programs. The training programs are rigorous: All Novo Nordisk employees are trained annually in business eth- ics. The board is also responsible for ensuring compli- ance. It has set up an anonymous hotline and conducts an average of 40 to 50 audits each year. The goal of the audits is to maintain a culture that promotes the prin- ciples of the Novo Nordisk Way.

Implementing a code of ethics across an organiza- tion of 26,000 employees is very difficult and lapses do occur. But such incidents are exceptional and are swiftly addressed by the company. For example, when insider trading allegations came to light against a corporate executive, the company immediately suspended and subsequently fired the employee.

How Novo Nordisk Puts Its Ethical Principles into Practice

© Revelli-Beaumont/SIPA/Newscom

Note: Developed with Dennis L. Huggins.

Sources: J. Edwards, “Novo Nordisk Exec Charged with Insider Trading; Cash Stashed in Caribbean,” CBS News, September 2008, www.cbsnews.com (accessed February 19, 2012); company filings and website (accessed April 1, 2014); Corporate Knights, “The 8th Annual Global 100,” global100.org/ (accessed February 20, 2012).

involved). In high-profile instances, the costs of ethical misconduct can easily run into the hundreds of millions and even billions of dollars, especially if they pro- voke widespread public outrage and many people were harmed. The penalties lev- ied on executives caught in wrongdoing can skyrocket as well, as the 150-year prison term sentence of infamous financier and Ponzi scheme perpetrator Bernie Madoff illustrates.

The fallout of a company’s ethical misconduct goes well beyond the costs of making amends for the misdeeds. Customers shun companies caught up in highly

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publicized ethical scandals. Rehabilitating a company’s shattered reputation is time-consuming and costly. Companies with tarnished reputations have difficulty in recruiting and retaining talented employees. Most ethically upstanding people are repulsed by a work environment where unethical behavior is condoned; they don’t want to get entrapped in a compromising situation, nor do they want their personal reputations tarnished by the actions of an unsavory employer. Creditors are unnerved by the unethical actions of a borrower because of the potential busi- ness fallout and subsequent higher risk of default on loans.

All told, a company’s unethical behavior can do considerable damage to share- holders in the form of lost revenues, higher costs, lower profits, lower stock prices, and a diminished business reputation. To a significant degree, therefore, ethical strategies and ethical conduct are good business. Most companies understand the value of operating in a manner that wins the approval of suppliers, employees, inves- tors, and society at large. Most businesspeople recognize the risks and adverse fallout attached to the discovery of unethical behavior. Hence, companies have an incentive to employ strategies that can pass the test of being ethical. Even if a company’s manag- ers are not personally committed to high ethical standards, they have good reason to operate within ethical bounds, if only to (1) avoid the risk of embarrassment, scandal, disciplinary action, fines, and possible jail time for unethical conduct on their part; and (2) escape being held accountable for lax enforcement of ethical standards and unethical behavior by personnel under their supervision.

Shareholders suffer major damage when a company’s unethical behavior is discovered. Making amends for unethical business conduct is costly, and it takes years to rehabilitate a tarnished company reputation.

FIGURE 9.1 The Costs Companies Incur When Ethical Wrongdoing Is Discovered

Internal Administrative Costs

Visible Costs Intangible or Less Visible

Costs

Government fines and penalties

Civil penalties arising from class-action lawsuits and other litigation aimed at punishing the company for its o�ense and the harm done to others

The costs to shareholders in the form of a lower stock price (and possibly lower dividends)

Legal and investigative costs incurred by the company

The costs of providing remedial education and ethics training to company personnel

The costs of taking corrective actions

Administrative costs associated with ensuring future compliance

Customer defections

Loss of reputation

Lost employee morale and higher degrees of employee cynicism

Higher employee turnover

Higher recruiting costs and di�culty in attracting talented employees

Adverse e�ects on employee productivity

The costs of complying with often harsher government regulations

Source: Adapted from Terry Thomas, John R. Schermerhorn, and John W. Dienhart, “Strategic Leadership of Ethical Behavior,” Academy of Management Executive 18, no. 2 (May 2004), p. 58.

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The idea that businesses have an obligation to foster social betterment, a much-debated topic over the past 50 years, took root in the 19th century when progressive companies in the aftermath of the industrial revolution began to provide workers with housing and other amenities. The notion that corporate executives should balance the interests of all stakeholders—shareholders, employees, customers, suppliers, the communities in which they operate, and society at large—began to blossom in the 1960s. Some years later, a group of chief executives of America’s 200 largest corporations, calling themselves the Business Roundtable, came out in strong support of the concept of corporate social responsibility (CSR):

Balancing the shareholder’s expectations of maximum return against other priorities is one of the fundamental problems confronting corporate management. The shareholder must receive a good return but the legitimate concerns of other constituencies (custom- ers, employees, communities, suppliers and society at large) also must have the appropriate attention. . . . [Leading managers] believe that by giving enlightened consideration to bal- ancing the legitimate claims of all its constituents, a corporation will best serve the interest of its shareholders.

Today, corporate social responsibility is a concept that resonates in western Europe, the United States, Canada, and such developing nations as Brazil and India.

The Concepts of Corporate Social Responsibility and Good Corporate Citizenship The essence of socially responsible business behavior is that a company should balance strategic actions to benefit shareholders against the duty to be a good cor- porate citizen. The underlying thesis is that company managers should display a social conscience in operating the business and specifically take into account how management decisions and company actions affect the well-being of employees, local communities, the environment, and society at large.20 Acting in a socially

responsible manner thus encompasses more than just participating in community ser- vice projects and donating money to charities and other worthy causes. Demonstrating social responsibility also entails undertaking actions that earn trust and respect from all stakeholders— operating in an honorable and ethical manner, striving to make the company a great place to work, demonstrating genuine respect for the environment, and trying to make a difference in bettering society. As depicted in Figure 9.2, corpo- rate responsibility programs commonly include the following elements:

∙ Striving to employ an ethical strategy and observe ethical principles in operating the business. A sincere commitment to observing ethical principles is a necessary component of a CSR strategy simply because unethical conduct is incompatible with the concept of good corporate citizenship and socially responsible business behavior.

∙ Making charitable contributions, supporting community service endeavors, engaging in broader philanthropic initiatives, and reaching out to make a dif- ference in the lives of the disadvantaged. Some companies fulfill their philan- thropic obligations by spreading their efforts over a multitude of charitable and

LO 4

The concepts of corporate social responsibility and environmental sustainability and how companies balance these duties with economic responsibilities to shareholders.

CORE CONCEPT

Corporate social responsibility (CSR) refers to a company’s duty to operate in an honorable manner, provide good working conditions for employees, encourage workforce diversity, be a good steward of the environment, and actively work to better the quality of life in the local communities where it operates and in society at large.

STRATEGY, CORPORATE SOCIAL RESPONSIBILITY, AND ENVIRONMENTAL SUSTAINABILITY

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community activities—for instance, Wells Fargo and Google support a broad variety of community, art, and social welfare programs. Others prefer to focus their energies more narrowly. McDonald’s concentrates on sponsoring the Ronald McDonald House program (which provides a home away from home for the fami- lies of seriously ill children receiving treatment at nearby hospitals). Leading prescription drug maker GlaxoSmithKline and other pharmaceutical companies either donate or heavily discount medicines for distribution in the least developed nations. Companies frequently reinforce their philanthropic efforts by encourag- ing employees to support charitable causes and participate in community affairs, often through programs that match employee contributions.

∙ Taking actions to protect the environment and, in particular, to minimize or elimi- nate any adverse impact on the environment stemming from the company’s own business activities. Corporate social responsibility as it applies to environmental protection entails actively striving to be a good steward of the environment. This means using the best available science and technology to reduce environmen- tally harmful aspects of the company’s operations below the levels required by prevailing environmental regulations. It also means putting time and money into improving the environment in ways that extend beyond a company’s own industry

FIGURE 9.2 The Five Components of a Corporate Social Responsibility Strategy

Actions to promote workforce diversity

Actions to ensure the company operates

honorably and ethically

Actions to support philanthropy,

participate in community service, and better

the quality of life worldwide

Actions to enhance employee well-being

and make the company a great place to work

Actions to protect and sustain the

environment

A Company’s Corporate Social

Responsibility Strategy

Source: Adapted from material in Ronald Paul Hill, Debra Stephens, and Iain Smith, “Corporate Social Responsibility: An Examination of Indi- vidual Firm Behavior,” Business and Society Review 108, no. 3 (September 2003), p. 348.

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boundaries—such as participating in recycling projects, adopting energy conser- vation practices, and supporting efforts to clean up local water supplies. Häagen- Dazs, a maker of all-natural ice creams, started a social media campaign to raise awareness about the dangers associated with the decreasing honeybee popula- tion; it donates a portion of its profits to research on this issue. The Walt Disney Company has created strict environmental targets for themselves and created the “Green Standard” to inspire employees to reduce their environmental impact.

∙ Creating a work environment that enhances the quality of life for employees. Numerous companies exert extra effort to enhance the quality of life for their employees at work and at home. This can include onsite day care, flexible work schedules, workplace exercise facilities, special leaves for employees to care for sick family members, work-at-home opportunities, career development programs and education opportunities, showcase plants and offices, special safety programs, and the like.

∙ Building a diverse workforce with respect to gender, race, national origin, and other aspects that different people bring to the workplace. Most large compa- nies in the United States have established workforce diversity programs, and some go the extra mile to ensure that their workplaces are attractive to ethnic minorities and inclusive of all groups and perspectives. At some companies, the diversity initiative extends to suppliers—sourcing items from small busi- nesses owned by women or members of ethnic minorities, for example. The pursuit of workforce diversity can also be good business. At Coca-Cola, where strategic success depends on getting people all over the world to become loyal consumers of the company’s beverages, efforts to build a public persona of inclusiveness for people of all races, religions, nationalities, interests, and tal- ents have considerable strategic value.

The particular combination of socially responsible endeavors a company elects to pursue defines its corporate social responsibility strategy. The specific compo- nents emphasized in a CSR strategy vary from company to company and are typi- cally linked to a company’s core values. Few companies have managed to integrate CSR as fully and seamlessly throughout their organization as Burt’s Bees; there a special committee is dedicated to leading the organization to attain its CRS goals with respect to three primary areas: natural well-being, humanitarian responsibil- ity, and environmental sustainability. General Mills also centers its CSR strategy around three themes: nourishing lives (via healthier and easier-to-prepare foods), nourishing communities (via charitable donations to community causes and vol- unteerism for community service projects), and nourishing the environment (via efforts to conserve natural resources, reduce energy and water usage, promote recy-

cling, and otherwise support environmental sustainability).21 Starbucks’s CSR strat- egy includes four main elements (ethical sourcing, community service, environmental stewardship, and farmer support), all of which have touch points with the way that the company procures its coffee—a key aspect of its product differentiation strategy. Some companies use other terms, such as corporate citizenship, corporate respon- sibility, or sustainable responsible business (SRB) to characterize their CSR initia- tives. Illustration Capsule 9.3 describes Warby Parker’s approach to corporate social responsibility—an approach that ensures that social responsibility is reflected in all of the company’s actions and endeavors.

Although there is wide variation in how companies devise and implement a CSR strategy, communities of companies concerned with corporate social responsibility

CORE CONCEPT

A company’s CSR strategy is defined by the specific combination of socially beneficial activities the company opts to support with its contributions of time, money, and other resources.

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ILLUSTRATION CAPSULE 9.3

Since its founding in 2010, Warby Parker has succeeded in selling over one million pairs of high-fashion glasses at a discounted price of $95—roughly 80 percent below the average $500 price tag on a comparable pair of eyeglasses from another producer. With more than 25 stores in the United States, the company has built a brand recognized universally as one of the strongest in the world; it consistently posts a net promoter score (a measure of how likely someone would be to recommend the product) of close to 90—higher than companies like Zappos and Apple.

Corporate responsibility is at Warby Parker’s core. For each pair of glasses sold, the company provides international nonprofit partners like VisionSpring with a monthly donation of glasses; with Warby Parker’s support, these partners provide basic eye exams and teach community members how to manufacture and sell glasses at very low prices to amplify beneficial effects in their communities. To date, VisionSpring alone has trained nearly 20,000 people across 35 countries with average impacts of 20 percent increase in income and 35 percent increase in productivity.

Efforts to be a responsible company expand beyond Warby Parker’s international partnerships. The com- pany voluntarily evaluates itself against benchmarks in the fields of “environment,” “workers,” “customers,” “community,” and “governance,” demonstrating a nearly unparalleled dedication to outcomes outside of profit. The company is widely seen as an employer of choice and regularly attracts top talent for all roles across the organization. It holds to an extremely high environ- mental standard, running an entirely carbon neutral operation.

While socially impactful actions matter at Warby Parker, the company is mindful of the critical role of its customers as well. Both founders spent countless hours coordinating partnerships with dedicated suppliers to ensure quality, invested deeply in building a lean man- ufacturing operation to minimize cost, and sought to build an organization that would keep buyers happy. The net effect is a very economically healthy company—they post around $3,000 in sales per square foot, in line with Tiffany & Co.—with financial stability to pursue responsi- bilities outside of customer satisfaction.

The strong fundamentals put in place by the firm’s founders blend responsibility into its DNA and attach each piece of commercial success to positive outcomes in the world. The company was recently recognized as number one on Fast Company’s “Most Innovative Com- panies” list and continues to build loyal followers—both of its products and its CSR efforts—as it expands.

Warby Parker: Combining Corporate Social Responsibility with Affordable Fashion

© Carolyn Cole/Los Angeles Times via Getty Images

Note: Developed with Jeremy P. Reich.

Sources: Warby Parker and “B Corp” websites; Max Chafkin, “Warby Parker Sees the Future of Retail,” Fast Company, February 17, 2015 (accessed February 22, 2016); Jenni Avins, “Warby Parker Proves Customers Don’t Have to Care about Your Social Mission,” Quartz, December 29, 2014 (accessed February 14, 2016).

(such as CSR Europe) have emerged to help companies share best CSR practices. Moreover, a number of reporting standards have been developed, including ISO 26000—a new internationally recognized standard for social responsibility set by the International Standards Organization (ISO).22 Companies that exhibit a strong com- mitment to corporate social responsibility are often recognized by being included on lists such as Corporate Responsibility magazine’s “100 Best Corporate Citizens” or Corporate Knights magazine’s “Global 100 Most Sustainable Corporations.”

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Corporate Social Responsibility and the Triple Bottom Line CSR initiatives undertaken by companies are frequently directed at improving the com- pany’s triple bottom line (TBL)—a reference to three types of performance metrics: economic, social, and environmental. The goal is for a company to succeed simulta- neously in all three dimensions, as illustrated in Figure 9.3.23 The three dimensions of performance are often referred to in terms of the “three pillars” of “people, planet, and profit.” The term people refers to the various social initiatives that make up CSR strategies, such as corporate giving, community involvement, and company efforts to improve the lives of its internal and external stakeholders. Planet refers to a firm’s ecological impact and environmental practices. The term profit has a broader mean- ing with respect to the triple bottom line than it does otherwise. It encompasses not only the profit a firm earns for its shareholders but also the economic impact that the company has on society more generally, in terms of the overall value that it creates and the overall costs that it imposes on society. For example, Procter & Gamble’s Swiffer cleaning system, one of the company’s best-selling products, not only offers an earth- friendly design but also outperforms less ecologically friendly alternatives in terms of its broader economic impact: It reduces demands on municipal water sources, saves electricity that would be needed to heat mop water, and doesn’t add to the amount of detergent making its way into waterways and waste treatment facilities. Nike sees itself as bringing people, planet, and profits into balance by producing innovative new products in a more sustainable way, recognizing that sustainability is key to its future profitability. TOMS shoes, which donates a pair of shoes to a child in need in over 50 different countries for every pair purchased, has also built its strategy around main- taining a well-balanced triple bottom line.

Many companies now make a point of citing the beneficial outcomes of their CSR strategies in press releases and issue special reports for consumers and inves- tors to review. Staples, the world’s largest office products company, makes reporting

FIGURE 9. 3 The Triple Bottom Line: Excelling on Three Measures of Company Performance

Economic

Environmental

Social

Goal = Excellence in All Three Performance Dimensions

Source: Developed with help from Amy E. Florentino.

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an important part of its commitment to corporate responsibility; the company posts a “Staples Soul Report” on its website that describes its initiatives and accomplish- ments in the areas of diversity, environment, community, and ethics. Triple-bottom- line reporting is emerging as an increasingly important way for companies to make the results of their CSR strategies apparent to stakeholders and for stakeholders to hold companies accountable for their impact on society. The use of standard reporting frameworks and metrics, such as those developed by the Global Reporting Initiative, promotes greater transparency and facilitates benchmarking CSR efforts across firms and industries.

Investment firms have created mutual funds consisting of companies that are excelling on the basis of the triple bottom line in order to attract funds from environ- mentally and socially aware investors. The Dow Jones Sustainability World Index is made up of the top 10 percent of the 2,500 companies listed in the Dow Jones World Index in terms of economic performance, environmental performance, and social performance. Companies are evaluated in these three performance areas, using indi- cators such as corporate governance, climate change mitigation, and labor practices. Table 9.1 shows a sampling of the companies selected for the Dow Jones Sustainability World Index in 2013.

Name Market Sector Country

Volkswagen AG Automobiles & Components Germany

Australia & New Zealand Banking Group Ltd. Banks Australia

Siemens AG Capital Goods Germany

Adecco SA Commercial & Professional Services Switzerland

Panasonic Corp. Consumer Durables & Apparel Japan

Tabcorp Holdings Ltd. Consumer Services Australia

Citigroup Inc. Diversified Financials United States

BG Group PLC Energy United Kingdom

Woolworths Ltd. Food & Staples Retailing Australia

Nestlé SA Food, Beverage, & Tobacco Switzerland

Abbott Laboratories Health Care Equipment & Services United States

Henkel AG & Co. KGaA Household & Personal Products Germany

Allianz SE Insurance Germany

Akzo Nobel NV Materials Netherlands

Telenet Group Holding NV Media Belgium

Roche Holding AG Pharmaceuticals, Biotechnology, & Life Sciences

Switzerland

Stockland Real Estate Australia

TABLE 9.1 A Selection of Companies Recognized for Their Triple-Bottom-Line Performance in 2013

(continued)

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What Do We Mean by Sustainability and Sustainable Business Practices? The term sustainability is used in a variety of ways. In many firms, it is synony- mous with corporate social responsibility; it is seen by some as a term that is gradu- ally replacing CSR in the business lexicon. Indeed, sustainability reporting and TBL

reporting are often one and the same, as illustrated by the Dow Jones Sustainability World Index, which tracks the same three types of performance measures that con- stitute the triple bottom line.

More often, however, the term takes on a more focused meaning, concerned with the relationship of a company to its environment and its use of natural resources, including land, water, air, plants, animals, minerals, fossil fuels, and biodiversity. It is widely recognized that the world’s natural resources are finite and are being con- sumed and degraded at rates that threaten their capacity for renewal. Since corpora- tions are the biggest users of natural resources, managing and maintaining these resources is critical for the long-term economic interests of corporations.

For some companies, this issue has direct and obvious implications for the con- tinued viability of their business model and strategy. Pacific Gas and Electric has begun measuring the full carbon footprint of its supply chain to become not only a “greener” company but a more efficient energy producer.24 Beverage companies such as Coca-Cola and PepsiCo are having to rethink their business models because of the prospect of future worldwide water shortages. For other companies, the con- nection is less direct, but all companies are part of a business ecosystem whose economic health depends on the availability of natural resources. In response, most major companies have begun to change how they do business, emphasizing the use of sustainable business practices, defined as those capable of meeting the needs of the present without compromising the ability to meet the needs of the future. Many have also begun to incorporate a consideration of environmental sustainabil- ity into their strategy-making activities.

Environmental sustainability strategies entail deliberate and concerted actions to operate businesses in a manner that protects natural resources and eco- logical support systems, guards against outcomes that will ultimately endanger the planet, and is therefore sustainable for centuries.25 One aspect of environmental

CORE CONCEPT

Sustainable business practices are those that meet the needs of the present without compromising the ability to meet the needs of the future.

CORE CONCEPT

A company’s environmental sustainability strategy consists of its deliberate actions to protect the environment, provide for the longevity of natural resources, maintain ecological support systems for future generations, and guard against ultimate endangerment of the planet.

Name Market Sector Country

Lotte Shopping Co. Ltd. Retailing Republic of Korea

Taiwan Semiconductor Manufacturing Co. Ltd. Semiconductors & Semiconductor Equipment Taiwan

SAP AG Software & Services Germany

Alcatel-Lucent Technology Hardware & Equipment France

KT Corp. Telecommunication Services Republic of Korea

Air France-KLM Transportation France

EDP–Energias de Portugal SA Utilities Portugal

Source: Adapted from RobecoSAM AG, www.sustainability-indices.com/review/industry-group-leaders-2013.jsp (accessed February 7, 2014).

TABLE 9.1 (continued)

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sustainability is keeping use of the Earth’s natural resources within levels that can be replenished via the use of sustainable business practices. In the case of some resources (like crude oil, freshwater, and edible fish from the oceans), scientists say that use levels either are already unsustainable or will be soon, given the world’s grow- ing population and propensity to consume additional resources as incomes and liv- ing standards rise. Another aspect of sustainability concerns containing the adverse effects of greenhouse gases and other forms of air pollution to reduce their impact on undesirable climate and atmospheric changes. Other aspects of sustainability include greater reliance on sustainable energy sources; greater use of recyclable materials; the use of sustainable methods of growing foods (to reduce topsoil depletion and the use of pesticides, herbicides, fertilizers, and other chemicals that may be harmful to human health or ecological systems); habitat protection; environmentally sound waste management practices; and increased attempts to decouple environmental degradation and economic growth (according to scientists, economic growth has historically been accompanied by declines in the well-being of the environment).

Unilever, a diversified producer of processed foods, personal care, and home cleaning products, is among the many committed corporations pursuing sustainable business practices. The company tracks 11 sustainable agricultural indicators in its processed-foods business and has launched a variety of programs to improve the envi- ronmental performance of its suppliers. Examples of such programs include special low-rate financing for tomato suppliers choosing to switch to water-conserving irri- gation systems and training programs in India that have allowed contract cucumber growers to reduce pesticide use by 90 percent while improving yields by 78 percent. Unilever has also reengineered many internal processes to improve the company’s overall performance on sustainability measures. For example, the company’s facto- ries have reduced water usage by 63 percent and total waste by 67 percent since 1995 through the implementation of sustainability initiatives. Unilever has also redesigned packaging for many of its products to conserve natural resources and reduce the vol- ume of consumer waste. The company’s Suave shampoo bottles were reshaped to save almost 150 tons of plastic resin per year, which is the equivalent of 15 million fewer empty bottles making it to landfills annually. As the producer of Lipton Tea, Unilever is the world’s largest purchaser of tea leaves; the company committed to sourcing all of its tea from Rainforest Alliance Certified farms, due to its comprehensive triple- bottom-line approach toward sustainable farm management. Illustration Capsule 9.4 sheds more light on Unilever’s focus on sustainability.

Crafting Corporate Social Responsibility and Sustainability Strategies While CSR and environmental sustainability strategies take many forms, those that both provide valuable social benefits and fulfill customer needs in a superior fashion may also contribute to a company’s competitive advantage.26 For example, while car- bon emissions may be a generic social concern for financial institutions such as Wells Fargo, Ford’s sustainability strategy for reducing carbon emissions has produced both competitive advantage and environmental benefits. Its Ford Fusion hybrid automobile not only is among the least polluting automobiles but also now ranks 1 out of 22 in hybrid cars, with exceptional fuel economy, a quiet powertrain, and a spacious cabin. It has gained the attention and loyalty of fuel-conscious buyers and given Ford a new green image. Green Mountain Coffee Roasters’s commitment to protect the welfare of coffee growers and their families (in particular, making sure they receive a fair

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ILLUSTRATION CAPSULE 9.4

With over 53.3 billion euros in revenue in 2015, Unilever is one of the world’s largest companies. The global con- sumer goods giant has products that are used by over 2 billion people on any given day. It manufactures iconic global brands like Dove, Axe, Hellman’s, Heartbrand, and many others. What it is also known for, however, is its commitment to sustainability, leading GlobeScan’s Global Sustainability Survey for sustainable companies with a score 2.5 times higher than its closest competitor.

Unilever implemented its sustainability plan in as transparent and explicit way as possible, evidenced by the Unilever Sustainable Living Plan (USLP). The USLP was released in 2010 by CEO Paul Polman, stating that the company’s goal was to double the size of the busi- ness while halving its environmental footprint by 2020. Importantly, the USLP has remained a guiding force for the company, which dedicates significant resources and time to pursuing its sustainability goals. The plan is updated each year with targets and goals, as well as an annual progress report.

According to Polman, Unilever’s focus on sustain- ability isn’t just charity, but is really an act of self- interest. The company’s most recent annual report states “growth and sustainability are not in conflict. In fact, in our expe- rience, sustainability drives growth.” Polman insists that this is the modern-day way to maximize profits, and that doing so is simply rational business thinking.

To help implement this plan, Unilever has instituted a corporate accountability plan. Each year, Unilever benchmarks its progress against three leading indices: the UN Global Compact, the Global Reporting Initia- tive’s Index, and the UN Millennium Development Goals.

In its annual sustainability report, the company details its progress toward its many sustainability goals. Exam- ples from 2014 include the 397 million people Unilever helped to improve their health and hygiene habits by 2014 as part of the company’s goal of helping 1 billion people do so by 2020.

Unilever has also created new business practices to reach its ambitious targets. Unilever set up a central corporate team dedicated to spreading best sustain- ability practices from one factory or business unit to the rest of the company, a major change from how the siloed manner in which the company previously oper- ated. Moreover, the company set up a “small actions, big differences” fund to invest in innovative ideas that help the company achieve its sustainability goal. To reduce emissions from the overall footprint of its products and extend its sustainability efforts to its entire supply chain, it has worked with its suppliers to source sustainable agricultural products, improving from 14 percent sus- tainable in 2010 to 48 percent in 2014.

Unilever’s Focus on Sustainability

© McGraw-Hill Education/David A. Tietz, photographer

Note: Developed with Byron G. Peyster. 

Sources: www.globescan.com/component/edocman/?view=document&id=179&Itemid=591; www.fastcocreate.com/3051498/behind-the- brand/why-unilever-is-betting-big-on-sustainability; www.economist.com/news/business/21611103-second-time-its-120-year-history- unilever-trying-redefine-what-it-means-be; company website (accessed March 13, 2016).

price) also meets its customers’ wants and needs. In its dealings with suppliers at small farmer cooperatives in Peru, Mexico, and Sumatra, Green Mountain pays fair trade prices for coffee beans. Green Mountain also purchases about 29 percent of its coffee directly from farmers to cut out intermediaries and see that farmers realize a higher price for their efforts—coffee is the world’s second most heavily traded commodity after oil, requiring the labor of some 20 million people, most of whom live at the pov- erty level.27 Its consumers are aware of these efforts and purchase Green Mountain coffee, in part, to encourage such practices.

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CSR strategies and environmental sustainability strategies are more likely to contribute to a company’s competitive advantage if they are linked to a company’s competitively important resources and capabilities or value chain activities. Thus, it is common for companies engaged in natural resource extraction, electric power production, forestry and paper products manufacture, motor vehicles production, and chemical production to place more emphasis on addressing environmental con- cerns than, say, software and electronics firms or apparel manufacturers. Companies whose business success is heavily dependent on maintaining high employee morale or attracting and retaining the best and brightest employees are somewhat more prone to stress the well-being of their employees and foster a positive, high-energy workplace environment that elicits the dedication and enthusiastic commitment of employees, thus putting real meaning behind the claim “Our people are our greatest asset.” Ernst & Young, one of the four largest global accounting firms, stresses its “People First” workforce diversity strategy that is all about respecting differences, fostering individuality, and promoting inclusiveness so that its more than 175,000 employees in over 150 countries can feel valued, engaged, and empowered in devel- oping creative ways to serve the firm’s clients. Costco Wholesale, the warehouse club, credits its success to its treatment of its employees, who are paid an average of $20.89 an hour, not including overtime—far above the industry average. Eighty-eight percent of Costco’s employees have company-sponsored insurance; CEO Craig Jelinek is committed to ensuring that his people make a living wage and receive health ben- efits, an approach that he says “also puts more money back into the economy. It’s really that simple.” Between 2009 and 2014, Costco sales grew 39 percent and stock prices doubled—an anomaly in an industry plagued by turmoil and downsizing.

At Whole Foods Market, a $14.2 billion supermarket chain specializing in organic and natural foods, its environmental sustainability strategy is evident in almost every segment of its company value chain and is a big part of its differentiation strategy. The company’s procurement policies encourage stores to purchase fresh fruits and veg- etables from local farmers and screen processed-food items for more than 400 com- mon ingredients that the company considers unhealthy or environmentally unsound. Spoiled food items are sent to regional composting centers rather than landfills, and all cleaning products used in its stores are biodegradable. The company also has cre- ated the Animal Compassion Foundation to develop natural and humane ways of rais- ing farm animals and has converted all of its vehicles to run on biofuels.

Not all companies choose to link their corporate environmental or social agendas to their value chain, their business model, or their industry. For example, the Clorox Company Foundation supports programs that serve youth, focusing its giving on non- profit civic organizations, schools, and colleges. However, unless a company’s social responsibility initiatives become part of the way it operates its business every day, the initiatives are unlikely to catch fire and be fully effective. As an executive at Royal Dutch/Shell put it, corporate social responsibility “is not a cosmetic; it must be rooted in our values. It must make a difference to the way we do business.”28 The same is true for environmental sustainability initiatives.

The Moral Case for Corporate Social Responsibility and Environmentally Sustainable Business Practices The moral case for why businesses should act in a manner that benefits all of the company’s stakeholders—not just shareholders—boils down to “It’s the right thing to do.” Ordinary decency, civic-mindedness, and contributions to society’s

CSR strategies and environmental sustainability strategies that both provide valuable social benefits and fulfill customer needs in a superior fashion can lead to competitive advantage. Corporate social agendas that address only social issues may help boost a company’s reputation for corporate citizenship but are unlikely to improve its competitive strength in the marketplace.

Every action a company takes can be interpreted as a statement of what it stands for.

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well-being should be expected of any business.29 In today’s social and political cli- mate, most business leaders can be expected to acknowledge that socially responsible actions are important and that businesses have a duty to be good corporate citizens. But there is a complementary school of thought that business operates on the basis of an implied social contract with the members of society. According to this contract, society grants a business the right to conduct its business affairs and agrees not to unreasonably restrain its pursuit of a fair profit for the goods or services it sells. In return for this “license to operate,” a business is obligated to act as a responsible citi- zen, do its fair share to promote the general welfare, and avoid doing any harm. Such a view clearly puts a moral burden on a company to operate honorably, provide good working conditions to employees, be a good environmental steward, and display good corporate citizenship.

The Business Case for Corporate Social Responsibility and Environmentally Sustainable Business Practices Whatever the moral arguments for socially responsible business behavior and envi- ronmentally sustainable business practices, there are definitely good business reasons why companies should be public-spirited and devote time and resources to social responsibility initiatives, environmental sustainability, and good corporate citizenship:

∙ Such actions can lead to increased buyer patronage. A strong visible social responsibility or environmental sustainability strategy gives a company an edge in appealing to consumers who prefer to do business with companies that are good corporate citizens. Ben & Jerry’s, Whole Foods Market, Stonyfield Farm, TOMS, Green Mountain Coffee Roasters, and Patagonia have definitely expanded their customer bases because of their visible and well-publicized activities as socially conscious companies. More and more companies are also recognizing the cash register payoff of social responsibility strategies that reach out to people of all cultures and demographics (women, retirees, and ethnic groups).

∙ A strong commitment to socially responsible behavior reduces the risk of reputation-damaging incidents. Companies that place little importance on oper- ating in a socially responsible manner are more prone to scandal and embar- rassment. Consumer, environmental, and human rights activist groups are quick to criticize businesses whose behavior they consider to be out of line, and they are adept at getting their message into the media and onto the Internet. Pressure groups can generate widespread adverse publicity, promote boycotts, and influ- ence like-minded or sympathetic buyers to avoid an offender’s products.

Research has shown that product boycott announcements are associated with a decline in a company’s stock price.30 When a major oil company suffered damage to its reputation on environmental and social grounds, the CEO repeatedly said that the most negative impact the company suffered—and the one that made him fear for the future of the company—was that bright young graduates were no lon- ger attracted to working for the company. For many years, Nike received stinging criticism for not policing sweatshop conditions in the Asian factories that pro- duced Nike footwear, a situation that caused Nike cofounder and chair Phil Knight to observe that “Nike has become synonymous with slave wages, forced overtime, and arbitrary abuse.”31 In response, Nike began an extensive effort to monitor

The higher the public profile of a company or its brand, the greater the scrutiny of its activities and the higher the potential for it to become a target for pressure group action.

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conditions in the 800 factories of the contract manufacturers that produced Nike shoes. As Knight said, “Good shoes come from good factories and good factories have good labor relations.” Nonetheless, Nike has continually been plagued by complaints from human rights activists that its monitoring procedures are flawed and that it is not doing enough to correct the plight of factory workers. As this suggests, a damaged reputation is not easily repaired.

∙ Socially responsible actions and sustainable business practices can lower costs and enhance employee recruiting and workforce retention. Companies with deservedly good reputations for social responsibility and sustainable business practices are better able to attract and retain employees, compared to companies with tarnished reputations. Some employees just feel better about working for a company committed to improving society. This can contribute to lower turn- over and better worker productivity. Other direct and indirect economic benefits include lower costs for staff recruitment and training. For example, Starbucks is said to enjoy much lower rates of employee turnover because of its full-benefits package for both full-time and part-time employees, management efforts to make Starbucks a great place to work, and the company’s socially responsible prac- tices. Sustainable business practices are often concomitant with greater opera- tional efficiencies. For example, when a U.S. manufacturer of recycled paper, taking eco-efficiency to heart, discovered how to increase its fiber recovery rate, it saved the equivalent of 20,000 tons of waste paper—a factor that helped the company become the industry’s lowest-cost producer. By helping two-thirds of its employees to stop smoking and by investing in a number of wellness programs for employees, Johnson & Johnson saved $250 million on its health care costs over a 10-year period.32

∙ Opportunities for revenue enhancement may also come from CSR and environmen- tal sustainability strategies. The drive for sustainability and social responsibility can spur innovative efforts that in turn lead to new products and opportunities for revenue enhancement. Electric cars such as the Chevy Volt and the Nissan Leaf are one example. In many cases, the revenue opportunities are tied to a company’s core products. PepsiCo and Coca-Cola, for example, have expanded into the juice business to offer a healthier alternative to their carbonated beverages. General Electric has created a profitable new business in wind turbines. In other cases, revenue enhancement opportunities come from innovative ways to reduce waste and use the by-products of a company’s production. Tyson Foods now produces jet fuel for B-52 bombers from the vast amount of animal waste resulting from its meat product business. Staples has become one of the largest nonutility corporate producers of renewable energy in the United States due to its installation of solar power panels in all of its outlets (and the sale of what it does not consume in renewable energy credit markets).

∙ Well-conceived CSR strategies and sustainable business practices are in the best long-term interest of shareholders. When CSR and sustainability strategies increase buyer patronage, offer revenue-enhancing opportunities, lower costs, increase productivity, and reduce the risk of reputation-damaging incidents, they contribute to the economic value created by a company and improve its profitabil- ity. A two-year study of leading companies found that improving environmental compliance and developing environmentally friendly products can enhance earn- ings per share, profitability, and the likelihood of winning contracts. The stock prices of companies that rate high on social and environmental performance

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criteria have been found to perform 35 to 45 percent better than the average of the 2,500 companies that constitute the Dow Jones Global Index.33 A review of 135 studies indicated there is a positive, but small, correlation between good cor- porate behavior and good financial performance; only 2 percent of the studies showed that dedicating corporate resources to social responsibility harmed the interests of shareholders.34 Furthermore, socially responsible business behav- ior helps avoid or preempt legal and regulatory actions that could prove costly and otherwise burdensome. In some cases, it is possible to craft corporate social responsibility strategies that contribute to competitive advantage and, at the same time, deliver greater value to society. For instance, Walmart, by working with its suppliers to reduce the use of packaging materials and revamping the routes of its delivery trucks to cut out 100 million miles of travel, saved $200 million in costs (which enhanced its cost-competitiveness vis-à-vis rivals) and lowered car- bon emissions.35 Thus, a social responsibility strategy that packs some punch and is more than rhetorical flourish can produce outcomes that are in the best interest of shareholders.

In sum, companies that take social responsibility and environmental sustain- ability seriously can improve their business reputations and operational efficiency while also reducing their risk exposure and encouraging loyalty and innovation. Overall, companies that take special pains to protect the environment (beyond what is required by law), are active in community affairs, and are generous sup- porters of charitable causes and projects that benefit society are more likely to be seen as good investments and as good companies to work for or do business with. Shareholders are likely to view the business case for social responsibility as a strong one, particularly when it results in the creation of more customer value, greater productivity, lower operating costs, and lower business risk—all of which should increase firm profitability and enhance shareholder value even as the com- pany’s actions address broader stakeholder interests.

Companies are, of course, sometimes rewarded for bad behavior—a company that is able to shift environmental and other social costs associated with its activi- ties onto society as a whole can reap large short-term profits. The major cigarette producers for many years were able to earn greatly inflated profits by shifting the health-related costs of smoking onto others and escaping any responsibility for the harm their products caused to consumers and the general public. Only recently

have they been facing the prospect of having to pay high punitive damages for their actions. Unfortunately, the cigarette makers are not alone in trying to evade paying for the social harms of their operations for as long as they can. Calling a halt to such actions usually hinges on (1) the effectiveness of activist social groups in publicizing the adverse consequences of a company’s social irresponsibility and marshaling public opinion for something to be done, (2) the enactment of legislation or regulations to correct the inequity, and (3) decisions on the part of socially conscious buyers to take their business elsewhere.

Socially responsible strategies that create value for customers and lower costs can improve company profits and shareholder value at the same time that they address other stakeholder interests.

There’s little hard evidence indicating shareholders are disadvantaged in any meaningful way by a company’s actions to be socially responsible.

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KEY POINTS

1. Ethics concerns standards of right and wrong. Business ethics concerns the appli- cation of ethical principles to the actions and decisions of business organizations and the conduct of their personnel. Ethical principles in business are not materi- ally different from ethical principles in general.

2. There are three schools of thought about ethical standards for companies with international operations:

∙ According to the school of ethical universalism, common understandings across multiple cultures and countries about what constitutes right and wrong behaviors give rise to universal ethical standards that apply to members of all societies, all companies, and all businesspeople.

∙ According to the school of ethical relativism, different societal cultures and customs have divergent values and standards of right and wrong. Thus, what is ethical or unethical must be judged in the light of local customs and social mores and can vary from one culture or nation to another.

∙ According to the integrated social contracts theory, universal ethical princi- ples based on the collective views of multiple cultures and societies combine to form a “social contract” that all individuals in all situations have a duty to observe. Within the boundaries of this social contract, local cultures or groups can specify what additional actions are not ethically permissible. However, universal norms always take precedence over local ethical norms.

3. Apart from the “business of business is business, not ethics” kind of thinking, three other factors contribute to unethical business behavior: (1) faulty oversight that enables the unscrupulous pursuit of personal gain, (2) heavy pressures on company managers to meet or beat short-term earnings targets, and (3) a company culture that puts profitability and good business performance ahead of ethical behavior. In contrast, culture can function as a powerful mechanism for promoting ethical business conduct when high ethical principles are deeply ingrained in the corporate culture of a company.

4. Business ethics failures can result in three types of costs: (1) visible costs, such as fines, penalties, and lower stock prices; (2) internal administrative costs, such as legal costs and costs of taking corrective action; and (3) intangible costs or less vis- ible costs, such as customer defections and damage to the company’s reputation.

5. The term corporate social responsibility concerns a company’s duty to operate in an honorable manner, provide good working conditions for employees, encourage workforce diversity, be a good steward of the environment, and support philan- thropic endeavors in local communities where it operates and in society at large. The particular combination of socially responsible endeavors a company elects to pursue defines its corporate social responsibility (CSR) strategy.

6. The triple bottom line refers to company performance in three realms: economic, social, and environmental. Increasingly, companies are reporting their perfor- mance with respect to all three performance dimensions.

7. Sustainability is a term that is used in various ways, but most often it concerns a firm’s relationship to the environment and its use of natural resources. Sustainable business practices are those capable of meeting the needs of the present without

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compromising the world’s ability to meet future needs. A company’s environmen- tal sustainability strategy consists of its deliberate actions to protect the environ- ment, provide for the longevity of natural resources, maintain ecological support systems for future generations, and guard against ultimate endangerment of the planet.

8. CSR strategies and environmental sustainability strategies that both provide valu- able social benefits and fulfill customer needs in a superior fashion can lead to competitive advantage.

9. The moral case for corporate social responsibility and environmental sustain- ability boils down to a simple concept: It’s the right thing to do. There are also solid reasons why CSR and environmental sustainability strategies may be good business—they can be conducive to greater buyer patronage, reduce the risk of reputation-damaging incidents, provide opportunities for revenue enhancement, and lower costs. Well-crafted CSR and environmental sustainability strategies are in the best long-term interest of shareholders, for the reasons just mentioned and because they can avoid or preempt costly legal or regulatory actions.

ASSURANCE OF LEARNING EXERCISES

1. Widely known as an ethical company, Dell recently committed itself to becoming a more environmentally sustainable business. After reviewing the About Dell sec- tion of its website (www.dell.com/learn/us/en/uscorp1/about-dell), prepare a list of 10 specific policies and programs that help the company achieve its vision of driving social and environmental change while still remaining innovative and profitable.

2. Prepare a one- to two-page analysis of a recent ethics scandal using your univer- sity library’s access to LexisNexis or other Internet resources. Your report should (1) discuss the conditions that gave rise to unethical business strategies and behav- ior and (2) provide an overview of the costs resulting from the company’s business ethics failure.

3. Based on information provided in Illustration Capsule 9.3, explain how Warby Parker’s CSR strategy has contributed to its success in the marketplace. How are the company’s various stakeholder groups affected by its commitment to social responsibility? How would you evaluate its triple-bottom-line performance?

4. Go to www.google.com/green/ and read about the company’s latest initiatives surrounding sustainability. What are Google’s key policies and actions that help it reduce its environmental footprint? How does the company integrate the idea of creating a “better web that’s better for the environment” with its strategies for cre- ating profit and value. How do these initiatives help build competitive advantage for Google?

LO 1, LO 4

LO 2, LO 3

LO 4

LO 4

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EXERCISE FOR SIMULATION PARTICIPANTS

1. Is your company’s strategy ethical? Why or why not? Is there anything that your company has done or is now doing that could legitimately be considered “shady” by your competitors?

2. In what ways, if any, is your company exercising corporate social responsibility? What are the elements of your company’s CSR strategy? Are there any changes to this strategy that you would suggest?

3. If some shareholders complained that you and your co-managers have been spend- ing too little or too much on corporate social responsibility, what would you tell them?

4. Is your company striving to conduct its business in an environmentally sustainable manner? What specific additional actions could your company take that would make an even greater contribution to environmental sustainability?

5. In what ways is your company’s environmental sustainability strategy in the best long-term interest of shareholders? Does it contribute to your company’s competi- tive advantage or profitability?

LO 1

LO 4

LO 3, LO 4

LO 4

LO 4

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