short assignment

[ Chapter Objectives To define the concept of social responsibility

To trace the development of social responsibility

To examine the global nature of social responsibility

To discuss the benefits of social responsibility

To introduce the framework for understanding social responsibility

Chapter Outline

Social Responsibility Defined

Development of Social Responsibility

Global Nature of Social Responsibility

Benefits of Social Responsibility

Framework for Studying Social Responsibility

Opening Vignette

Consumers may be surprised to realize that one com

pany controls much of the industry for eyewear,

including manufacturing, distribution. Critics claim

this has resulted in excessive prices for quality eye

wear. Among these critics was Neil Blumenthal. In

2008 Neil Blumenthal partnered with David Gilboa,

and three classmates to develop a plan for a business

to compete against the industry giant and eyewear

affordable for the masses. The idea was developed for

Wharton Business School’s business plan competition.

Unfortunately, the school did not see their idea as a

promising endeavor. The business plan did not even

reach the final round. Nearly a decade later, this business plan has devel

oped into a successful firm that has now sold more than

1 million pairs of glasses. The founders founded their

firm—Warby Parker—on the premise that designing

and manufacturing glasses in-house and selling them

on the Internet would significantly reduce costs. These costs could then be passed onto the consumer so they would be able to afford designer glasses at a fraction of their competitor’s costs. Because of its ability to save on costs, consumers can purchase eyeglasses for as little as $95 each from Warby Parker. Today this $1.2 billion company has expanded beyond selling solely online and has been able to open up 27 retail locations.

Warby Parker is known for more than just making eyeglasses affordable for the masses. The foundation

of the business was also built on making eyewear available for people in developing countries who could not normally afford glasses. Enter Visionspring, a nonprofit charity that provides glasses to individuals in developing countries. Warby Parker partnered with Visionspring to donate one pair of eyeglasses to an individual in a developing country for every pair of eye glasses it sells. Each month Warby Parker determines how many glasses it sold and then makes a donation

to Visionspring that handles the costs of sourcing the eyeglasses. The reason why Warby Parker does not simply donate the glasses is because Visionspring trains consumers in the country—particularly women—to be entrepreneurs and sell the glasses to tradespeople for approximately $4 each. This is much more affordable for tradespeople while also providing more economic opportunities for women to own their own small busi nesses and generate income. Glasses have been found

to make a world of difference for people who require eye care in developing countries. It is estimated that these tradespeople see their earning power rise by 20 percent after they have purchased glasses. Warby Parker demonstrates how a company can effect positive change in this world while simultaneously earning a profit. Its strategic social responsibility results in high- quality products at lower prices as well as the ability for those in developing countries to obtain the eyewear they need.

CHAPTER ONE

Social Responsibility Framework

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Warby Parker: Socially Responsible Vision

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4 Business and Society Chapter 1 Social Responsibility Framework 5

Businesses today must cope with challenging decisions related to theirinterface with society. Consumers, as well as others, are increasmgtyemphasizing the importance of companies’ reputations, which are often based on ethics and social responsibility. The meaning of the term “social responsibility” goes beyond being philanthropic or environmen tally sustainable. Seventy-six percent of Americans think the meaning now extends to how employees are treated and the values a company holds.2 In an era of intense global competition and increasing media scrutiny, con sumer activism, and government regulation, all types of organizations need to become adept at fulfilling these expectations. Like Warby Parker, many companies are trying, with varying results, to meet the many economic, legal, ethical, and philanthropic responsibilities they now face. Satisfying the expectations of social responsibility is a never-ending process of contin uous improvement that requires leadership from top management, buy-in from employees, and good relationships across the community, industry, market, and government. Companies must properly plan, allocate, and use resources to satisfy the demands placed on them by investors, employees, customers, business partners, the government, the community, and others. Those who have an interest or stake in the company are referred to as stakeholders.

In this chapter, we examine the concept of social responsibility and how it relates to today’s complex business environment. First, we define social responsibility. Next, we consider the development of social responsi bility, its benefits to organizations, and the changing nature of expectations in our increasingly global economy. Finally, we introduce the framework for studying social responsibility used by this text, which includes such elements as strategic management for stakeholder relations; legal, regula tory, and political issues; business ethics; corporate governance; consumer relations; employee relations; philanthropy and community relations; tech nology issues; sustainability issues; and global relations.

SOCIAL RESPONSIBILITY DEFINED

___

Business ethics, corporate volunteerism, philanthropic activities, going green, sustainability, corporate governance, reputation management— these are terms you may have heard used, or even used yourself, to describe the various rights and responsibilities of business organizations. You may have thought about what these terms actually mean for business practice. You may also have wondered how businesses engage in these behaviors or contribute to these outcomes. In this chapter, we clarify some of the confusion that exists in the terminology that people use when they talk about expectations for business. To this end, we begin by defining social responsibility.

In most societies, businesses are granted a license to operate and the right to exist through a combination of social and legal institutions. Businesses are expected to provide quality goods and services, abide by

laws and regulations, treat employees fairly, follow through on contracts, protect the natural environment, meet warranty obligations, and adhere to many other standards of good business conduct. Companies that con tinuously meet and exceed these standards are rewarded with customer satisfaction, employee dedication, investor loyalty, strong relationships in the community, and the time and energy to continue focusing on business- related concerns. Firms that fail to meet these responsibilities can face penalties, both formal and informal, and may have their attention diverted away from core business practice. for example, Volkswagen received a number of penalties and criticisms for installing “defeat devices” into its diesel vehicles. These defeat devices were intended to fool regulators. While the cars were undergoing emissions testing, the cars ran below per formance to meet requirements. However, when on the road they emitted 40 times the allowable limit of emissions in the United States. Perhaps most damaging to the firm is that this scandal was a deliberate attempt to bypass environmental rules. German prosecutors launched an investiga tion to determine whether top executives also mislead investors by failing to inform them about complaints filed against the company in a timely manner.3 The goal is to prevent these negative outcomes in the future.

In contrast, a large multinational corporation may be faced with pro testors who use illicit means to destroy or deface property. More firms are seeing their websites hacked and/or sabotaged by those who are protest ing specific issues, for instance, the Japan External Trade Organization’s website crashed after hackers attacked the site to protest against Japan’s stance toward whale hunting.4 Whether the attacks are physical or virtual, they can cost companies significant resources in having to rebuild.

Finally, a company engaged in alleged deceptive practices may face for mal investigation by a government agency. For instance, a group of promi nent authors and booksellers are demanding that the Justice Department investigate Amazon for engaging in anticompetitive practices. According to the group, Amazon, which holds 40 percent of the market for new books, has used below-cost pricing to put competitors out of business and blocked the sale of books to force publishers for more favorable deals.5 Investigations such as this could lead to legal charges and penalties, perhaps severe enough to significantly alter the company’s products and practices or close the business. For example, The Scooter Store, a company that sold motorized wheelchairs all over the United States, filed for Chapter 11 bank ruptcy after a federal investigation determined the company had deceptively overcharged Medicare and Medicaid between $47 million and $88 million over the course of two years. The company was found to have engaged in deceptive tactics, such as continually contacting doctors to prescribe the motorized wheelchairs whether or not a patient was in need of one; claim ing the wheelchairs were free in advertisements when taxpayers were paying for them; and contributing to political campaigns to avoid any changes to Medicare and Medicaid. In addition, the city of New Braunfels, Texas, the home of the company’s headquarters, sued the company for the more than $2 million that was given to them from an economic development fund to

I

6 Business and Society Chapter 1 Social Responsibility framework 7

build their headquarters. To make matters worse, consumers remarked they made purchases from the company because they claimed their goat was to “Always Do the Right Thing.”6

Businesses today are expected to look beyond self-interest and recog nize that they belong to a larger group, or society, that expects responsible participation. Therefore, if any group, society, or institution is to function, there must be a delicate interplay between rights (i.e., what people expect to get) and responsibilities (i.e., what people are expected to contribute) for the common good. Research indicates that the most ethical and socially responsible companies are the most profitable.7 Therefore, responsible conduct and policies yield significant benefits to society as well as share holders. While the media provides much coverage of misconduct and illegal activities in business, most businesses try to act in an ethical and socially responsible manner.

The term social responsibility came into widespread use in the business world during the 1970s. It has evolved into an emphasis on the following areas: social issues, consumer protection, sustainability, and corporate governance. Social issues are linked with the idea of the “common good.” The common good is associated with the development of social conditions that allow for societal welfare and fulfillment to be achieved. In other words, social issues involve the ethical responsibilities a firm owes to soci ety. Equal rights, gender roles, marketing to vulnerable populations, data protection, and internet tracking are examples of social issues common in business. Social issues can become so significant that they warrant legisla tion to protect consumers. For the Federal Trade Commission’s Bureau of Consumer Protection, leading consumer protection issues include mislead ing advertising, product safety, and advertising to children.

Sustainability has also become a growing area of concern in society. In the United States, sustainability is used to refer more to the environ mental impact on stakeholders. Green marketing practices, consumption of resources, and greenhouse gas emissions are important sustainability considerations that socially responsible businesses will have to address. Corporate governance will be described in more detail in Chapter 3. It refers to formal systems of accountability, oversight, and control. Corporate governance is becoming an increasingly important topic in light of business scandals over the last 10—15 years. Issues in corporate governance include concerns over executive compensation, internal con trol mechanisms, and risk management.8 Figure 1.1 discusses the social responsibility issues that we will be covering in this text.

These four areas of social responsibility tend to conflict with the tra ditional or neoclassical view of a business’s responsibility to society. The traditional view of social responsibility, articulated in the famous econo mist Milton Friedman’s 1962 Capitalism and Freedom, asserts that busi ness has one purpose, satisfying its investors or shareholders, and that any other considerations are outside its scope.9 Although this view still exists today, it has lost credibility as more and more companies have assumed a social responsibility orientation.10 Companies see social responsibility

Social issues

J Consumer protectionSustainabilityCorporate governance Philanthropy

Legal responsibilities Employee well-being

as a part of their overall corporate strategy and a benefit that directly increases the bottom line. We define social responsibility as the adoption by a business of a strategic focus for fulfilling the economic, legal, ethical, and philanthropic responsibilities expected of it by its stakeholders. This definition encompasses a wide range of objectives and activities, including both historical views of business and perceptions that have emerged in the last decade. Let’s take a closer look at the parts of this definition.

Social Responsibility Applies to All Types of Businesses It is important to recognize that all types of businesses—small and large, sole proprietorships and partnerships, as well as large corporations— implement social responsibility initiatives to further their relationships with their customers, their employees, and their community at large. For example, Altered Seasons, a candle retailer in Buffalo, New York, operates on a one-for-one model, where the company gives a meal to the hungry for every candle that it sells. The company’s candles are made from environ mentally friendly materials and are manufactured in the United States.11 Thus, the ideas advanced in this book are equally relevant and applicable across a wide variety of businesses and nonprofits.

Nonprofit organizations are expected to be socially responsible. Relationships with stakeholders—including employees, those that are served, and the community—affect their reputation. For example, the Southern California chapter of the Better Business Bureau was expelled from the organization after evidence emerged in 2010 that it had been operating a pay-for-play scheme. The Better Business Bureau is a non profit self-regulatory organization that objectively rates businesses on how they treat consumers and handle consumer complaints. Investigations revealed that employees at the Southern California bureau were awarding

FIGURE 7.7 Major Emphases of Social Responsibility

Recognition

Issue Awareness

Issues

Outcomes

Decisions

Source: © O.C. Ferrell, 2016.

Stakeholder Evaluations

social responsibility The adoption by a business of a strategic focus for ful filling the economic, legal, ethical, and philanthropic responsibilities expected of it by its stakeholders.

8 Business and Society Chapter 1 Social Responsibility Framework 9

• Curiosity and Exploration • Performance • Engagement • Design • Relationships • Inclusiveness • A Better World • Transparency • Foundations

businesses high rankings only if they paid to become members. The bureau is the largest ever expelled for misconduct.12 This example demonstrates that nonprofit organizations must also develop strategic plans for social responsibility. In addition, government agencies are expected to uphold the common good and act in an ethical and responsible manner.

Although the social responsibility efforts of large corporations usually receive the most attention, the activities of small businesses may have a greater impact on local communities.13 Owners of small businesses often serve as community leaders, provide goods and services for customers in smaller markets that larger corporations are not interested in serving, cre ate jobs, and donate resources to local community causes. Medium-sized businesses and their employees have similar roles and functions on both a local and a regional level. Although larger firms produce a substantial portion of the gross national output of the United States, small businesses employ about half of the private sector workforce and produce roughly half of the private sector output. In addition to these economic outcomes, small business presents an entrepreneurial opportunity to many people, some of whom have been shut out of the traditional labor force. Women, minorities, and veterans are increasingly interested in self-employment and other forms of small business activity.14 It is vital that all businesses consider the relationships and expectations that our definition of social responsibility suggests.

Social Responsibility Needs a Strategic Focus Social responsibility is an important business concept and involves signifi cant planning and implementation. Our definition of social responsibility requires a formal commitment, or a way of communicating the company’s social responsibility philosophy. For example, Herman Miller, a multina tional provider of office, residential, and healthcare furniture and services, established a set of values that create a culture of community both within

and outside of the company (shown in Table 1.1). This statement declares Herman Miller’s philosophy and the way it will fulfill its responsibilities to its customers, its shareholders, its employees, the community, and the natu ral environment. Because this statement takes into account all of Herman Miller’s constituents and applies directly to all of the company’s operations, products, markets, and business relationships, it demonstrates the company’s strategic focus on social responsibility. Other companies that embrace social responsibility have incorporated simi lar elements into their strategic communications, includ ing mission and vision statements, annual reports, and websites. For example, Hershey Entertainment & Resorts focuses upon four pillars of CSR: (1) the environment and the goal to reduce the ecological footprint; (2) the com munity and being a positive, productive, and informed

partner; (3) the workplace, in fostering one that is safe, inclusive, desirable, and respectful; and (4) a marketplace and guest focus that considers the ethical treatment of all stakeholders.15

In addition to a company’s verbal and written commitment to social responsibility, our definition requires action and results. To imple ment its social responsibility philosophy, Herman Miller has developed and implemented several corporate-wide strategic initiatives, including research on improving work furniture and environments, innovation in the area of ergonomically correct products, progressive employee devel opment opportunities, volunteerism, and an environmental stewardship program.16 These efforts have earned the company many accolades, such as being named the “Most Admired” furniture manufacturer in America by fortune magazine, and a place on many prestigious lists, including Fortune magazine’s “100 Best Companies to Work for in America,” Forbes magazine’s “Platinum List” of America’s 400 best-managed large companies, Business Ethics magazine’s “100 Best Corporate Citizens,” Diversity Inc. magazine’s “Top 10 Corporations for Supplier Diversity,” and The Progressive Investor’s “Sustainable Business Top 20.17 As this example demonstrates, effective social responsibility requires both words and action.

If any such initiative is to have strategic importance, it must be fully valued and championed by top management. Leaders must believe in and support the integration of stakeholder interests and economic, legal, ethi cal, and philanthropic responsibilities into every corporate decision. For example, company objectives for brand awareness and loyalty can be developed and measured from both a marketing and a social responsibility standpoint because researchers have documented a relationship between consumers’ perceptions of a firm’s social responsibility and their intentions to purchase that company’s brands.18 Likewise, engineers can integrate consumers’ desires for reduced negative environmental impact in product designs, and marketers can ensure that a brand’s advertising campaign incorporates this product benefit. Finally, consumers’ desires for an envi ronmentally sustainable product may stimulate a stronger company inter est in assuming environmental leadership in all aspects of its operations. Home Depot, for example, responded to demands by consumers and envi ronmentalists for environmentally friendly wood products by launching a new initiative that gives preference to wood products certified as having been harvested responsibly over those taken from endangered forests.19 With this action, the company—which has long touted its environmental principles—has chosen to take a leadership role in the campaign for envi ronmental responsibility in the home improvement industry. Although social responsibility depends on collaboration and coordination across many parts of the business and among its constituencies, it also produces effects throughout these same groups. We discuss some of these benefits in a later section of this chapter.

Because of the need for coordination, a large company that is commit ted to social responsibility often creates specific positions or departments to

TABLE 7.1 Herman Miller, Inc.’s, Corporate Culture Values of Community

Source: “Things That Matter to Us,” Herman Millet, Inc., http://www.hermanmiller.com/aboutus/ things-that-maffer-to-us.html (accessed June 17, 2016). Courtesy of Herman Miller, Inc.

70 Business and Society Chapter 1 Social Responsibility Framework

spearhead the various components of its program. For example, Starbucks has a Global Responsibility Department that focuses on responsible and ethical behaviors regarding the environment, employee relations, customer interactions, suppliers, and communities. The company’s Environmental Starbucks Coffee Company Affairs team works to develop environmen tally responsible policies and minimize the company’s “footprint.” CEO Howard Schultz considers the creation of a good work environment a top priority. Some of the results of this philosophy include offering one of the best healthcare programs in the coffee shop industry and the institu tion of wellness programs. Starbucks also practices conservation with its Starbucks Coffee and Farmer Equity Praètices (CAFE), which is a set of socially responsible coffee-buying guidelines. Finally, the company is phil anthropic and engages the community on how well the company is doing from their perspective. In the table of contents page of the company’s annual report, CSR (corporate social responsibility) is listed as a key fea ture.20 A smaller firm may give an executive, perhaps in human resources or the business owner, the ability to make decisions regarding community involvement, ethical standards, philanthropy, and other areas. Regardless of the formal or informal nature of the structure, this department or execu tive should ensure that social responsibility initiatives are aligned with the company’s corporate culture, integrated with companywide goals and plans, fully communicated within and outside the company, and measured to determine their effectiveness and strategic impact. In sum, social respon sibility must be given the same planning time, priority, and management attention that is given to any other company initiative, such as continuous improvement, cost management, investor relations, research and develop ment, human resources, or marketing research.

Social Responsibility Fulfills Society’s Expectations Another element of our definition of social responsibility involves society’s expectations of business conduct. Many people believe that businesses should accept and abide by four types of responsibility: financial, legal, ethical, and philanthropic (see Table 1.2). To varying degrees, the four types are required, expected, and/or desired by society.21

At Stage 1, businesses have a responsibility to be financially viable so that they can provide a return on investment for their owners, cre ate jobs for the community, and contribute goods and services to the economy. The economy is influenced by the ways organizations relate to their shareholders, their customers, their employees, their suppliers, their competitors, their community, and even the natural environment. For example, in nations with corrupt businesses and industries, the nega tive effects often pervade the entire society. Transparency International, a German organization dedicated to curbing national and international corruption, conducts an annual survey on the effects of business and government corruption on a country’s economic growth and prospects.

TABLE 7.2 Social Responsibility Requirements

Stages Examples Starbucks offers investors a healthy return on investment, including paying dividends. Starbucks specifies in its code of conduct that payments made to foreign government officials must be lawful accord ing to the laws of the United States and the foreign country.

Stage 3: Ethics, Principles, and Starbucks offers healthcare benefits to part-time employees and supports coffee growers so they get a fair price.

Stage 4: Philanthropic Activities Starbucks created the Starbucks Foundation to award grants to eligible nonprofits and to give back to their communities.

The organization reports that corruption reduces economic growth, inhibits foreign investment, and often channels investment and funds into “pet projects” that may create little benefit other than high returns to the corrupt decision makers. Many of the countries with the high est levels of perceived corruption also report the highest levels of pov erty in the world. These countries include Somalia, Chad, Iraq, Haiti, Afghanistan, and Myanmar. Transparency International also notes that some relatively poor countries, including Bulgaria, Colombia, and Estonia, have made positive strides in curbing corruption. However, Canada and Iceland have started to experience higher levels of perceived corruption, yet maintain relatively strong economies. The organization encourages governments, consumers, and nonprofit groups to take action in the fight against corruption.22 Although business and society may be theoretically distinct, there are a host of practical implications for the four levels of social responsibility, business, and its effects on society.

At Stage 2, companies are required to maintain compliance with legal and regulatory requirements specifying the nature of responsibLe business conduct. Society enforces its expectations regarding the behavior of busi nesses through the legal system. If a business chooses to behave in a way that customers, special-interest groups, or other businesses perceive as irre sponsible, these groups may ask their elected representatives to draft legis lation to regulate the firm’s behavior, or they may sue the firm in a court of law in an effort to force it to “play by the rules.” For example, the New York attorney general’s office is questioning the legality of making new hires sign noncompete agreements. A noncompete agreement stipulates that the employee cannot work for a competitor for a certain amount of time after leaving the organization. New York authorities believes this placed undue hardships on employees. Jimmy John’s settled with the attorney general’s office by agreeing to no longer make employees sign these agree ments. It is estimated that 15 percent of workers without college degrees are subject to these noncompete agreements. Criticisms have emerged from other states as well.23

Stage 1: Financial Viability

Stage 2: Compliance with Legal and Regulatory Requirements

17

Values

12 Business and Society Chapter 1 Social Responsibility Framework 13

Beyond financial viability and legal compliance, companies must decide what they consider to be just, fair, and right—the realm of ethics, principles, and values. Business ethics refers to the principles and standards that guide behavior in the world of business. Principles are specific and universal boundaries for behavior that should never be violated. Principles such as fairness and honesty are determined and expected by the public, government regulators, special-interest groups, consumers, industry, and individual organizations. The most basic of these principles have been cod ified into laws and regulations to require that companies conduct them selves in ways that conform to society’s expectations. Ethical issues exist in most managerial decisions. A firm needs to create an ethical culture with values and norms that meet the expectations of stakeholders. Values are enduring beliefs and ideals that are socially enforced. Freedom of speech, for example, is a strong value in the Western world. At the Marriott, val ues include putting people first, pursuing excellence, embracing change, acting with integrity, and serving our world.24

Many firms and industries have chosen to go beyond these basic laws in an effort to act responsibly. The Direct Selling Association (DSA), for example, has established a code of ethics that applies to all individual and company members of the association. Because direct selling involves personal contact with consumers, there are many ethical issues that can arise. For this reason, the DSA code directs the association’s members to go beyond legal standards of conduct in areas such as product represen tation, appropriate ways of contacting consumers, and warranties and guarantees. In addition, the DSA actively works with government agencies and consumer groups to ensure that ethical standards are pervasive in the direct selling industry. The World Federation of Direct Selling Associations (WFDSA) also maintains two codes of conduct, one for dealing with con sumers and the other for interactions within the industry, that provide guidance for direct sellers around the world in countries as diverse as Argentina, Canada, Finland, Taiwan, and Poland.2

At Stage 4 are philanthropic activities, which promote human wel fare and goodwill. By making philanthropic donations of money, time, and other resources, companies can contribute to their communities and society and improve the quality of life. For example, the UPS Foundation has been active in the global community since 1951. The foundation offers programs in philanthropy and humanitarian relief. Donations total approximately $100 million worldwide. In addition to the monetary con tributions, 1.9 million annual volunteer hours have also been given. The foundation focuses its efforts on education, disaster preparedness and resiliency, urgent response to unexpected disasters, post-disaster recov ery, in-kind disaster relief, skill-based volunteering, partnerships with humanitarian organizations, and thought leadership.26

When these dimensions of social responsibility were first introduced, many people assumed that there was a natural progression from financial viability to philanthropic activities, meaning that a firm had to be financially

viable before it could properly consider the other three elements. Today, social responsibility is viewed in a more holistic fashion, with all four dimen siOnS seen as related and integrated, and this is the view we will use in this book.27 In fact, companies demonstrate varying degrees of social responsi bility at different points in time. Figure 1.2 depicts the social responsibility continuum. Companies’ fulfillment of their responsibilities can range from a minimal to a strategic focus that results in a stakeholder orientation. Firms that focus only on shareholders and the bottom line operate from a legal or compliance perspective. Firms that take minimal responsibility view such activities as a “cost of doing business.” Some critics believe that phar maceutical manufacturers take the minimal approach with respect to the advertising and sale of certain drugs. A court case involving pharmaceutical company GlaxoSmithKline revealed a string of pharmaceutical companies engaging in aggressive and deceptive marketing to encourage doctors to prescribe psychotropic drugs to children. It was found that over the course of 20 years, many companies—including Pfizer, Johnson & Johnson, and Eli Lilly—targeted academic leaders, wrote articles, suppressed data, and seduced doctors with gifts to sell these drugs for pediatric use. Further, the children who were prescribed these drugs were mainly foster children from low-income backgrounds.28

Strategic responsibility is realized when a company has integrated a range of expectations, desires, and constituencies into its strategic direc tion and planning processes. In this case, an organization considers social responsibility an essential component of its vision, mission, values, and practices. BT, formerly known as British Telecom, is communicating its commitment to strategic responsibility with the theme of “Responsible Business,” where BT is focused on tackling climate change, helping create a more inclusive society, and enabling sustainable economic growth. BT has been reporting on its social responsibility activities for nearly 20 years, which makes the company a leader in accountability disclosure. Finally, firms may be forced to be more socially responsible by government, non governmental organizations, consumer groups, and other stakeholders. In this case, any expenditures are considered a “tax” that occurs outside the firm’s strategic direction and resource allocation process.29 Executives with this philosophy often maintain that customers will be lost, employees

FIGURE 1.2 Social Responsibility Continuum

Minimal

Considerations that focus solely on shareholders

Strategic

Financial, legal, ethical, and philanthropic considerations

targeted at selected stakeholders

14 Business and Society

will become dissatisfied, and other detrimental effects will occur because of forced social responsibility.30

In this book, we will give many examples of firms that are at different places along this continuum to show how the pursuit of social responsibil ity is never ending. for example, ConocoPhillips was nominated to the 100 Best Corporate Citizens list in 2015. It was also named to the Dow Jones Sustainability North America Index for a number of years. ConocoPhillips even has a sustainable development group that considers the company’s impact on environmental issues such as climate change and biodiversity. However, in 2016 it was dropped from the 100 Best Corporate Citizens list. In 2015 it settled a lawsuit in California accusing the firm of violating the state’s anti-pollution laws since 2006. It also spent money to resolve spill-related claims in China.3’

Social Responsibility Requires a Stakeholder Orientation The final element of our definition involves those to whom an orga nization is responsible, including customers, employees, investors and shareholders, suppliers, governments, communities, and many others. These constituents have a stake in, or claim on, some aspect of a com pany’s products, industry, markets, and outcomes and are thus known as stakeholders. We explore the roles and expectations of stakeholders in Chapter 2. Companies that consider the diverse perspectives of these constituents in their daily operations and strategic planning are said to have a stakeholder orientation, meaning that they are focused on stakeholders’ concerns. Adopting this orientation is part of the social responsibility philosophy, which implies that business is fundamentally connected to other parts of society and must take responsibility for its effects in those areas.

R. E. Freeman, a developer of stakeholder theory, maintains that business and society are “interpenetrating systems,” in that each affects and is affected by the other.32 For the common good to be achieved, cross-institutional and -organizational interactions must move society toward shared partnerships. For example, Kingfisher, the operator of more than 1,150 home improvement retail stores in nine coun tries, embarked on a new corporate responsibility initiative called “Kingfisher Net Positive.” The four components to this plan included timber, energy, innovation, and communities. The company has nearly reached its goal of sourcing 100 percent of timber from responsible sources, with 96 percent responsibly sourced. Kingfisher has expanded energy-efficient product lines in its stores to help customers reduce energy consumption. In terms of innovation, the company is focusing on designing products with closed loop systems and determining ways of producing materials from in-store recycling. Finally, the company impacts its communities through education, volunteering, and partner ing with other organizations.33

DEVELOPMENT OF SOCIAL RESPONSIBILITY in 1959, Harvard economist Edward Mason asserted that business cor porations are “the most important economic institutions.”34 His declara tion implied that companies probably affect the community and society as much, or perhaps more, in social terms as in monetary, or financial, terms. Employment and the benefits associated with a living wage are nec essary to develop a sustainable economy. The opportunity for individuals and businesses to attain economic success is necessary to create a society that can address social issues. Today some question our economic system, but without economic resources little progress can be made in developing society.

Although some firms have more of a social impact than others, com panies do influence many aspects of our lives, from the workplace to the natural environment. This influence has led many people to conclude that companies’ actions should be designed to benefit employees, customers, business partners, and the community as well as shareholders. Social responsibility has become a benchmark for companies today.35 However, these expectations have changed over time. For example, the first corpora tions in the United States were granted charters by various state govern ments because they were needed to serve an important function in society, such as transportation, insurance, water, or banking services. In addition to serving as a “license to operate,” these charters specified the internal structure of these firms, allowing their actions to be more closely moni tored.36 During this period, corporate charters were often granted for a limited period of time because many people, including legislators, feared the power that corporations could potentially wield. It was not until the mid 1$OOs and early 1900s that profit and responsibility to stockholders became major corporate goals.37

After World War II, as many large U.S. firms came to dominate the global economy, their actions inspired imitation in other nations. The definitive external characteristic of these firms was their economic domi nance. Internally, they were marked by the virtually unlimited autonomy afforded to their top managers. This total discretion meant that these firms’ top managers had the luxury of not having to answer for some of their actions.38 In the current business mindset, such total autonomy would be viewed as a hindrance to social responsibility because there is no effective system of checks and balances. In Chapter 3, we elaborate on corporate governance, the process of control and accountability in organi zations that is necessary for social responsibility.

In the 1950s, the 130 or so largest companies in the United States provided more than half of the country’s manufacturing output. The top 500 firms accounted for almost two-thirds of the country’s nonagricultural economic activity.39 U.S. productivity and technological advancements dramatically outpaced those of global competitors, such as Japan and Western Europe. For example, the level of production in the United States was twice as high as that in Europe and quadruple that in Japan. The level

Chapter 1 Social Responsibility Framework 15

stakeholders Constituents who have an interest or stake in a com pany’s products, industry, markets, and outcomes.

16 Business and Society Chapter 1 Social ResPons1bI1 framework

of research and development carried out by U.S. corporations was also well ahead of overseas firms. For these reasons, the United States was per ceived as setting a global standard for other nations to emulate.

During the l950s and l960s, these companies provided benefits that are often overlooked. Their contributions to charities, the arts, culture, and other community activities were beneficial to the industry or to soci ety rather than simply to the companies’ own profitability. For example, the lack of competition meant that companies had the profits to invest in higher quality products for consumer and industrial use. Although the government passed laws that required companies to take actions to protect the natural environment, make products safer, and promote equity and diversity in the workplace, many companies voluntarily adopted responsible practices rather than constantly fighting government regulations and taxes. These corporations once provided many of the services that are now provided by the government in the United States. For example, during this period, the U.S. government spent less than the government of any other industrialized nation on such things as pensions and health benefits, as these were provided by companies rather than by the government.40 In the 1960s and l970s, however, the business land scape changed.

Economic turmoil during the l970s and l980s changed the role ofcor porations. Venerable firms that had dominated the economy in the l950s and l960s became less important as a result of bankruptcies, takeovers, mergers, or other threats, including high energy prices and an influx of for eign competitors. The stability experienced by the U.S. firms of midcentury dissolved. During the l960s and 1970s, the Fortune 500 had a relatively low turnover of about 4 percent. By 1990, however, one-third of the com panies in the Fortune 500 of 1980 had disappeared, primarily as a result of takeovers and bankruptcies. The threats and instability led companies to protect themselves from business cycles by becoming more focused on their core competencies and reducing their product diversity. To combat takeovers, many companies adopted flatter organizational hierarchies. Flatter organizations meant workforce reduction but also entailed increas ing empowerment of lower-level employees.

Thus, the l980s and 1990s brought a new focus on profitability and economies of scale. Efficiency and productivity became the primary objectives of business. This fostered a wave of downsizing and restruc turing that left some people and communities without financial secu rity. Before 1970, large corporations employed about one of every five Americans, but by the l990s, they employed only one in ten. The familial relationship between employee and employer disappeared, and along with it went employee loyalty and company promises of lifetime employment. Companies slashed their payrolls to reduce costs, and employees changed jobs more often. Workforce reductions and “job hopping” were almost unheard of in the 1960s but had become commonplace two decades later. These trends made temporary employment and contract work the fastest growing forms of employment throughout the 1990s.4’

Along with these changes, top managers were largely stripped of their former freedom. Competition heated up, and both consumers and stockholders grew more demanding. The increased competition led busi ness managers to worry more and more about the bottom line and about protecting the company. Escalating use of the internet provided unprec edented access to information about corporate decisions and conduct, and fostered communication among once unconnected groups, furthering con sumer awareness and shareholder activism. Consumer demands put more pressure on companies and their employees. The education and activism of stockholders had top management fearing for their jobs. Throughout the last two decades of the twentieth century, legislators and regulators initiated more and more regulatory requirements every year. These factors resulted in difficult trade-offs for management.

Corporate responsibilities were renewed in the 1990s. Partly as a result of business scandals and Wall Street excesses in the 1980s, many industries and companies decided to pursue and expect more responsible and respect able business practices. Many of these practices focused on creating value for stakeholders through more effective processes and decreased the nar row and sole emphasis on corporate profitability. At the same time, con sumers and employees became less interested in making money for its own sake and turned toward intrinsic rewards and a more holistic approach to life and work.42 This resulted in increased interest in the development of human and intellectual capital; the installation of corporate ethics pro grams; the development of programs to promote employee volunteerism in the community; strategic philanthropy efforts and trust in the workplace; and the initiation of a more open dialog between companies and their stakeholders.

Despite major advances in the 1990s, the sheer number of corporate scandals at the beginning of the twenty-first century prompted a new era of social responsibility. The downfall of Enron, WorldCom, and other corporate stalwarts caused regulators, former employees, investors, non governmental organizations, and ordinary citizens to question the role and integrity of big business and the underlying economic system. Federal legis lators passed the Sarbanes—Oxley Act to overhaul securities laws and gov ernance structures. The new Public Company Accounting Oversight Board was implemented to regulate the accounting and auditing profession after Enron and WorldCom failed due to accounting scandals. Newspapers, business magazines, and news websites devoted entire sections—often labeled Corporate Scandal, Year of the Apology, or Year of the Scandal— to the trials and tribulations of executives, their companies and auditors, and stock analysts.

In 2007 and 2008, a housing boom in the United States collapsed, setting off a financial crisis. Homeowners could not afford to pay their mortgages. Because of the housing boom, in many cases the mortgages were higher than the houses were worth. People all across the United States began to walk away from their mortgages, leaving banks and other lenders with hundreds of thousands of houses that had decreased in value.

77

18 Business and Society Chapter 1 Social Responsibility framework 19

Meanwhile, companies such as AIG were using complex financial instru ments known as derivatives to transfer the risks of securities such as mort gages, almost as a type of insurance policy. The housing collapse created a number of demands on financial firms who had sold these derivatives to pay their insurance contracts on the defaulted debt securities, but financial firms did not have enough of a safety net to cover so many defaults. The housing collapse created a chain reaction that led to the worst recession since the Great Depression. The government was forced to step in to bail out financial firms in order to keep the economy going and prevent the economy from collapsing further. Many established organizations such as Bear Stearns, Lehman Brothers, and Countrywide went bankrupt or were acquired by other firms at a fraction of what they were originally worth. Table 1.3 describes some of the corporations and banks that collapsed in the financial crisis.

In 2010, Congress passed the Dodd—Frank Wall Street Reform and Consumer Protection Act, the most sweeping legislation since Sarbanes— Oxley. Dodd—Frank is intended to protect the economy from similar financial crises in the future by creating more transparency in the financial industry. This complex law required legislators to develop hundreds of laws to increase transparency and create financial stability. The Dodd— Frank Act will be discussed in more detail in Chapter 4. The financial crisis and the collapse of many well-known institutions has led to a renewed interest in business ethics and social responsibility.

In the last five years, the economy has stabilized and the stock market has recovered. Even though many banks failed during the financial crisis,

TABLE 1.3 Corporations and Banks Involved in the Financial Crisis Organization Outcome

today banks and the other financial institutions are much larger. The larg est five banks are twice as large as they were a decade ago.43 Rather than getting rid of too-big-to-fail financial institutions, they seem to be growing much larger despite recent legislation.

GLOBAL_NATURE OF SOCIAL RESPONSIBILITY Although many forces have shaped the debate on social responsibility, the increasing globalization of business has made it an international concern. A common theme is criticism of the increasing power and scope of busi ness and income differences among executives and employees. Questions of corruption, environmental protection, fair wages, safe working conditions, and the income gap between rich and poor were posed. Many critics and protesters believe that global business involves exploitation of the working poor, destruction of the planet, and a rise in inequality.44 After the finan cial crisis, global trust in business dropped significantly. More recent polls indicate that trust is rebounding in certain countries, but companies are still vulnerable to the ramifications of distrust. Approximately 50 percent of the general public among global consumers indicate they trust business. This is even lower in the United States, where only 49 percent trust business overall.45 In an environment where consumers distrust business, greater regulation and lower brand loyalty are the likely results. We discuss more of the relationship between social responsibility and business outcomes later in this chapter.

The globalization of business has critics who believe the movement is detrimental because it destroys the unique cultural elements of indi vidual countries, concentrates power within developed nations and their corporations, abuses natural resources, and takes advantage of people in developing countries. Multinational corporations are perhaps most subject to criticism because of their size and scope. Table 1.4 shows 25 multi national companies that are more powerful than many of the countries in which they do business. For instance, Apple’s cash exceeds the gross domestic product of two-thirds of the world’s countries. Because of the economic and political power they potentially wield, the actions of large, multinational companies are under scrutiny by many stakeholders. Most allegations by antiglobalization protestors are not extreme, but the issues are still of consequence. For example, the pharmaceutical industry has long been criticized for excessively high pricing, interference with clinical evaluations, some disregard for developing nations, and aggressive pro motional practices. Critics have called on governments, as well as public health organizations, to influence the industry in changing some of its practices.46

Advocates of the global economy counter these allegations by pointing to increases in overall economic growth, new jobs, new and more effective products, and other positive effects of global business. Although these differences of opinion provide fuel for debate and

General Motors

AIG

Bank of America

Washington Mutual

C hrysler

Declared bankruptcy and required a government bailout of $49.5 billion to reorganize. The government sold their last shares in GM in 2013 and is estimated to have lost more than $10 billion on its investment. Received a government bailout of $182 million and was criticized for using bailout money to pay executives large bonuses. AIG repaid the last of its loans in 2013. Received $42 billion in bailout money as part of the Troubled Asset Relief Program. It paid back its loans in 2009. Its banking subsidiaries were sold by the Federal Deposit Insurance Corporation toi.R Morgan for $1.9 billion. Declared bankruptcy and required a government bailout of $12.5 billion. By 2011 Chrysler had repaid most of the debt, and Fiat agreed to purchase the rest of the U.S. Treasury’s shares in Chrysler for $500 million. Acquired by Bank of America for $4.1 billion. Bank of America inherited many of the lawsuits against Countrywide claiming it had engaged in fraudulent and discriminatory lending practices.

Countrywide Financial

20 Business and Society Chapter 1 Social Responsibility framework 21

Commodity Trading and Mining Company

E-Commerce Company

Tech Company Food and Beverage Producer

Tech Conglomerate

Ride-Hailing Service

Telecommunications Company

Multinational Conglomerate

Consulting Firm

Social Media Company

E-Commerce Company Investment Manager

Social Media Company

Sources: David Francis, ‘The Top 2S Corporate Nations,” Foreign Policy, March 15, 2016, http:// foreignpolicy.com/201 6/03/1 5/these-25-companies-are-more-powerful-than-many-countries- multinational-corporate-wealth-power/ (accessed June 17, 2016).

discussion, the global economy probably “holds much greater poten tial than its critics think, and much more disruption than its advocates admit. By definition, a global economy is as big as it can get. This means that the scale of both the opportunity and the consequences are at an apex.”47 In responding to this powerful situation, companies around the world are increasingly implementing programs and practices that strive to achieve a balance between economic responsibilities and other social responsibilities. The Nestlé Company, a globaL foods manufacturer and

marketer, published the Nestlé Corporate Business Principles in 199$ and has continually revised them (2002, 2004, and 2010). These prin ciples serve as a management tool for decision making at Nestlé and have been translated into over 50 languages. The updated principles are consistent with the United Nations’ Global Compact, an accord that covers environmental standards, human rights, and labor conditions.48 We explore the global context of social responsibility more fully in Chapter 12.

In most developed countries, social responsibility involves stake- holder accountability and the financial, legal, ethical, and philanthropic dimensions discussed earlier in the chapter. However, a key question for Implementing social responsibility on a global scale is: “Who decides on these responsibilities?” Many executives and managers face the challenge of doing business in diverse countries while attempting to maintain their employers’ corporate culture and satisfy their expectations. Some com panies have adopted an approach in which broad corporate standards can be adapted at a local level. For example, a corporate goal of demon strating environmental leadership could be met in a number of different ways depending on local conditions and needs. The Coca-Cola Company releases sustainability and social responsibility reports for each region in which it conducts business. In Eurasia and Africa, the company highlights initiatives and progress achieved regarding women’s empowerment, water conservation, and improvement of communities. In Greece, the company contributed toward reforestation and to active lifestyles for youth in the Netherlands. While some of the sustainability and social responsibility initiatives are similar among countries, Coca-Cola’s focus on each indi vidual region allows them to make the most relevant contributions to their stakeholders.

Global social responsibility also involves the confluence of govern ment, business, trade associations, and other groups. For example, coun tries that belong to the Asia-Pacific Economic Cooperation (APEC) are responsible for half the world’s annual production and trade volume. As APEC works to reduce trade barriers and tariffs, it has also developed meaningful projects in the areas of sustainable development, clean technol ogies, workplace safety, management of human resources, and the health of the marine environment. This powerful trade group has demonstrated that financial, social, and ethical concerns can be tackled simultaneously.5° Like APEC, other trade groups are also exploring ways to enhance eco nomic productivity within the context of legal, ethical, and philanthropic responsibilities.

Another trend involves business leaders becoming “cosmopolitan citizens” by simultaneously harnessing their leadership skills, worldwide business connections, access to funds, and beliefs about human and social rights. Bill Gates, the founder of Microsoft, is no longer active day-to-day in the company, as he and his wife spearhead the Bill and Melinda Gates Foundation to tackle AIDS, poverty, malaria, and the need for educational resources. Golfer Jack Nicklaus and his business partner Jack Milstein

TABLE 1.4 Top 25 Corporate Nations Company Type of Company Annual Revenue

(in billions) Walmart

ExxonMobil

Royal Dutch Shell

Apple

Retailer

Oil and Gas Oil and Gas

Tech Company Glencore

Tech Company

221

Samsung

Amazon

Microsoft

Nestle

Alphabet

Uber

Huawei Technologies

Vodafone

Anheuser-Busch lnBev

Maersk

Goldman Sachs

Halliburton

Accenture

McDonald’s

Emirates

Facebook

Alibaba

BlackRock

McKinsey & Company

Twitter

Telecommunications Provider

Beverage Company

Shipping Company Investment Banking Firm

163

107

62.54 ) Fast-Food Restaurant

Airline

Consulting Firm

designed a line of golf balls whose proceeds are designated to chil dren’s heatth care.51 SurveyMonky has a platform called SurveyMonkey Contribute that allows survey takers to earn rewards for taking surveys. Every week for each survey completed, SurveyMonkey will donate to a participating charity of the survey taker’s choice.52 Patagonia donates 1 percent of its profits to environmental organizations. These business lead ers are acting as agents to ensure the economic promises of globalization are met with true concern for social and environmental considerations. In many cases, such efforts supplant those historically associated with gov ernment responsibility and programs.53

In sum, progressive global businesses and executives recognize the “shared bottom line” that results from the partnership among busi ness, communities, government, customers, and the natural environ ment. In a Nielsen survey of more than 28,000 citizens in 56 countries, 76 percent of the respondents indicated that they consult others online regarding the social responsibility of companies before they make a purchase. The top three issues that are most important to consumers include environmental sustainability, advancements in STEM (science, technoLogy, engineering, mathematics) education, and relieving hunger and poverty.54 Thus, our concept of social responsibility is applicable to businesses around the world, although adaptations of implementation and other details on the local level are definitely required. In companies around the world, there is also the recognition of a relationship between strategic social responsibility and benefits to society and organizational performance.

BENEFITS OF SOCIAL RESPONSIBILITY The importance of social responsibility initiatives in enhancing stake- holder relationships, improving performance, and creating other benefits has been debated from many different perspectives.55 Many business managers view such programs as costly activities that provide rewards only to society at the expense of the bottom line. Another view holds that some costs of social responsibility can be recovered through improved performance. If social responsibility is strategic and aligned with a firm’s mission and values, then improved performance can be achieved. It is hard to measure the reputation of a firm, but it is important to build trust and achieve success. Moreover, ample research evidence demonstrates that companies that implement strategic social responsibility programs are more profitable.

Some of the specific benefits include increased efficiency in daily operations, greater employee commitment, higher product quality, improved decision making, increased customer loyalty, as well as improved financial performance. In short, companies that establish a rep utation for trust, fairness, and integrity develop a valuable resource that fosters success, which then translates to greater financial performance

(see Figure 1.3). This section provides evidence that resources invested in social responsibility programs reap positive outcomes for both organiza tions and their stakeholders.

Trust Trust is the glue that holds organizations together and allows them to focus on efficiency, productivity, and profits. According to Stephen R. Covey, author of The 7 Habits of Highly Effective People, “Trust lies at the very core of effective human interactions. Compelling trust is the high est form of human motivation. It brings out the very best in people, but it takes time and patience, and it doesn’t preclude the necessity to train and develop people so their competency can rise to that level of trust.” When trust is low, organizations decay and relationships deteriorate, resulting in infighting, playing poLitics within the organization, and general inef ficiency. Employee commitment to the organization declines, product quality suffers, employee turnover skyrockets, and customers turn to more trustworthy competitors.56 Any stakeholder that loses trust can create a missing link necessary for success.

In a trusting work environment, however, employees can reason ably expect to be treated with respect and consideration by both their peers and their superiors. They are also more willing to rely and act on the decisions and actions of their coworkers. Thus, trusting relationships between managers and their subordinates and between peers contribute to greater decision-making efficiencies. Research by the Ethics Resource Center indicates that this trust is pivotal for supporting an ethical climate. Employees of an organization with a strong ethical culture are much more likely to report misconduct but are much less likely to observe misconduct

22 Business and Society

I FIGURE 1.3 The Role of Social Responsibility in Performance Chapter 1 Social Responsibility framework 23

Social ResponsibilitY

.Ioy Cornmitment-:

Organizational Performance

SharehoderSl -

Support

24 Business and Society Chapter 1 Social ResponsibilitY Framework 25

TABLE 7.5 Indicators of Support, Trust, and Transparency Supervisor gives positive feedback for ethical behavior Satisfied with information from senior leadership about what is going on in company

Supervisor supports following company’s ethics standards Believe that senior leadership is transparent about critical issues that impact our company

Trust coworkers will keep their promises and commitments

Source: Ethics Resource Center, National Business Ethics Survey of the U.S. Workforce fArlington, Virginia: Ethics Resource Center, 2014), p. 33.

than employees in firms with a weak ethical culture.57 Table 1.5 shows five indicators of trust, support, and transparency that have a strong impact on whether employees will report ethical issues. As the table demonstrates, a key factor that inspires trust and transparency in organizations involves support from senior leadership.

Trust is also essential for a company to maintain positive long-term rela tionships with customers. A study by Cone Communications reported that 42 percent of consumers have boycotted or refused to purchase from compa nies that have demonstrated irresponsible behavior in the last 12 months.58 For example, after the Deepwater Horizon oil spill in 2010, certain groups and individual citizens aggressively boycotted BP due to the vast environ mental damage in the Gulf of Mexico. Communities and regulators that lose trust in a company can damage the firm’s reputation and relationships with other stakeholders.

Customer Loyalty The prevailing business philosophy about customer relationships is that a company should strive to market products that satisfy customers’ needs through a coordinated effort that also allows the company to achieve its own objectives. It is well accepted that customer satisfac tion is one of the most important factors for business success. Although companies must continue to develop and adapt products to keep pace with consumers’ changing desires, it is also crucial to develop long-term relationships with customers. Relationships built on mutual respect and cooperation facilitate the repeat purchases that are essential for suc cess. By focusing on customer satisfaction, a business can continually strengthen its customers’ trust in the company, and as their confidence grows, this in turn increases the firm’s understanding of their require ments.

In a Cone survey of consumer attitudes, 89 percent of consumers indicated they would be likely to switch to brands associated with a good cause if price and quality were equal. These results show that consumers take for granted that they can buy high-quality products at low prices; therefore, companies need to stand out as doing something—something that demonstrates their commitment to society.59 A study by Harris

Interactive Inc. and the Reputation Institute reported that one-quarter of the respondents had boycotted a firm’s products or lobbied others

to do so when they did not agree with the firm’s policies or activities.60

Another way of looking at these results is that irresponsible behavior could trigger disloyalty and refusals to buy, whereas good social responsibility initia tives couLd draw customers to a company’s products. For example, many firms use cause-related marketing programs to donate part of a product’s sales revenue to a charity that is meaningful to the product’s target mar ket. Among the best known cause-related marketing programs is Avon’s “pink ribbon.”

Employee Commitment Employee commitment stems from employees who are empowered with training and autonomy. Sir Richard Branson, founder of the Virgin Group, has one of the most committed groups of employees in busi ness for these reasons, as well as many others. He has created a culture wherein he personally asks employees for their input, writes their ideas down, and incorporates them when relevant. He is a very visible and approachable authority and inspires a “passion of commitment” for customer service. Virgin Airlines is ranked as the highest in quality for domestic airlines. In the end, empowered employees keep custom ers happy and coming back for more.61 For instance, service quality is positively related to employee loyalty. This, in turn, leads to higher cus tomer satisfaction and customer loyalty.62 Evidence also suggests that corporate social responsibility initiatives are a good way to retain and attract employees.63

When companies fail to provide value for their employees, loyalty and commitment suffer. A survey by Gallup found low levels of employee loyalty and commitment worldwide. The study, which surveyed thousands of employees in 142 countries, found that only 13 percent of workers indicated feeling engaged in their jobs.64 Employees spend many of their waking hours at work; thus, an organization’s commitment to goodwill and respect of its employees usually results in increased employee loyalty and support of the company’s objectives.

Shareholder Support Investors look at a corporation’s bottom line for profits or the poten tial for increased stock prices. To be successful, relationships with stockholders and other investors must rest on dependability, trust, and commitment. But investors also look for potential cracks or flaws in a company’s performance. Companies perceived by their employees as having a high degree of honesty and integrity had an average three-year total return to shareholders of 101 percent, whereas companies perceived as having a low degree of honesty and integrity had a three-year total

26 Business and Society Chapter 1 Social Responsibility Framew01 21

return to shareholders of just 69 percent.65 After hackers broke into Target’s databases and stole customers’ credit card numbers and other information, stock fell 46 percent.66 Target has been criticized for its lack of sufficient internal controls.

Many shareholders are also concerned about the reputation of companies in which they invest. Investors have even been known to avoid buying the stock of firms they view as irresponsible. For example, Warren Buffet sold 25 percent of his holdings in General Motors after a series of recalls was initiated following a federal investigation. The investigation concluded that the company was at fault in several inju ries and deaths resulting from negligence of a faulty ignition switch.67 Many socially responsible mutual funds and asset management firms are available to help concerned investors purchase stock in responsible companies. These investors recognize that corporate responsibility is the foundation for efficiency, productivity, and profits. In contrast, investors know that fines or negative publicity can decrease a company’s stock price, customer loyalty, and long-term viability. Consequently, many chief executives spend a great deal of time communicating with investors about their firms’ reputations and financial performance and trying to attract them to their stock.

The issue of drawing and retaining investors is a critical one for CEOs, as roughly 50 percent of investors sell their stock in companies within one year, and the average household replaces 80 percent of its common stock portfolio each year.68 This focus on short-term gains subjects corporate managers to tremendous pressure to boost short-term earnings, often at the expense of long-term strategic plans. The resulting pressure for short- term gains deprives corporations of stable capital and forces decision mak ers into a “quarterly” mentality.

Conversely, those shareholders willing to hold onto their invest ments are more willing to sacrifice short-term gains for long-term income. Attracting these long-term investors shields companies from the vagaries of the stock market and gives them flexibility and stability in long-term strategic planning. In the aftermath of the Enron scandal, however, trust and confidence in financial audits and published financial statements were severely shaken. Membership in grassroots investment clubs declined, retail stock investments declined, and investors called for increased transparency in company operations and reports.69 Gaining investors’ trust and confidence is vital for sustaining a firm’s financial stability.

The Bottom Line: Profits Social responsibility is positively associated with return on investment, return on assets, and sales growth.7° A company cannot continuously be socially responsible and nurture and develop an ethical organizational culture unless it has achieved financial performance in terms of profits.

Businesses with greater resources—regardless of their staff size—have the ability to promote their social responsibility along with serving their customels, vaLuing their employees, and establishing trust with the pub lic. As mentioned before, the stock returns of the world’s most ethical companies are often higher than that of companies listed on the S&P 500.

Many studies have identified a positive relationship between social responsilMl1tY and financial performance.7’ For example, a survey of the 500 largest public corporations in the United States found that those that commit to responsible behavior and emphasize compliance with codes of conduct show better financial performance.72 A managerial focus on stakeholder interests can affect financial performance, although the relationships between stakeholders and financial performance vary and are very complex.73 A meta analysis of 25 years of research identified 33 studies (63 percent) demonstrating a positive relationship between corporate social performance and corporate financial performance, 5 studies (about 10 percent) indicating a negative relationship, and 14 studies (27 percent) yielding an inconclusive result or no relationship.74 Research on the effects of legal infractions suggests that the negative effect of misconduct does not appear until the third year following a conviction, with multiple convictions being more harmful than a single one.75

In summary, a company with strong efforts and results in social responsibility is generally not penalized by market forces, including the intention of consumers to purchase the firm’s products. Social responsi bility efforts and performance serve as a reputational lever that managers may use to influence stakeholders. A high-performing company may also receive endorsements from governmental officials or other influential groups, and these are more believable than company messages. A com pany with a strong social responsibility orientation often becomes quite proactive in managing and changing conditions that yield economic benefits, including avoiding litigation and increased reguLation. finally, corporate social performance and corporate financial performance are positively correlated. These findings subjugate the belief that social responsibility is just a “cost factor” for business and has no real benefits to the firm.76

National Economy An often asked question is whether business conduct has any bearing on a nation’s overall economic performance. Many economists have wondered why some market-based economies are productive and provide a high standard of living for their citizens, whereas other market-based economies lack the kinds of social institutions that foster productivity and economic growth. Perhaps a society’s economic problems can be explained by a lack of social responsibility. Trust stems from principles of morality and serves as an important “lubricant of the social system.”77 Many descriptions of

28 Business and Society Chapter 1 Social Responsibility Framework 29

market economies fail to take into account the role of such institutions as family, education, and social systems in explaining standards of living and economic success. Perhaps some countries do a better job of developing economically and socially because of the social structure of their economic relationships.

Social institutions, particularly those that promote trust, are impor tant for the economic wellbeing of a society.78 Society has become eco nomically successful over time “because of the underlying institutional framework persistently reinforcing incentives for organizations to engage in productive activity.”79 In some developing countries, opportunities for political and economic development have been stifled by activities that promote monopolies, graft, and corruption and by restrictions on opportunities to advance individual, as well as collective, wellbeing. L. E. Harrison offers four fundamental factors that promote economic wellbeing: “( 1) The degree of identification with others in a society— the radius of trust, or the sense of community; (2) the rigor of the ethical system; (3) the way authority is exercised within the society; and (4) attitudes about work, innovation, saving, and profit.”8°

Countries with institutions based on strong trust foster a productivity- enhancing environment because they have ethical systems in place that reduce transaction costs and make competitive processes more efficient and effective. In market-based systems with a great degree of trust, such as Germany, Sweden, Switzerland, Canada, and the United Kingdom, highly successful enterprises can develop through a spirit of cooperation and the ease in conducting business.81

Superior financial performance at the firm level within a society is measured as profits, earnings per share, return on investment, and capital appreciation. Businesses must achieve a certain level of financial perfor mance to survive and reinvest in the various institutions in society that provide support. But, at the institutional or societal level, a key factor distinguishing societies with high standards of living from those with lower standards of living is whether the institutions within the society are generally trustworthy. The challenge is to articulate the process by which institutions that support social responsibility can contribute to firm-level superior financial performance.82

A comparison of countries that have high levels of corruption and underdeveloped social institutions with countries that have low levels of corruption reveals differences in the economic wellbeing of the country’s citizens. Transparency International, an organization discussed earlier, publishes an annual report on global corruption that emphasizes the effects of corruption on the business and social sectors. Table 1.6 lists the countries with the most and least corrupt public sectors, as perceived by Transparency International. Eighteen countries are perceived to be more ethical than the United States.83 As stated several times in this chapter, conducting business in an ethical and responsible manner generates trust and leads to relationships that promote higher productivity and a positive cycle of effects.84

TABLE 7.6 Perceptions of Countries as Least/Most Corrupt

Country CPI Least Country CPI Most Corrupt

Rank Score* Corrupt Rank Score*

8 Somalia

18 Turkmenistan

18 Syria

18 Eritrea

* cpi score relates to perceptions of the degree of public sector corruption as seen by businesspeople and country analysts and ranges between 10 (highly clear) and 0 (highly corrupt). The United States is perceived as the 16th least-corrupt nation.

Source: © Transparency International, Corruption Perceptions Index 2015 (Berlin, Germany, 2016). All rights reserved.

FRAr1EwoRK FOR STUDYING SOCIAL

The framework we have developed for this text is designed to help you understand how businesses fulfill social expectations. It begins with the social responsibility philosophy, includes the four levels of social responsibilities, involves many types of stakeholders, and ultimately results in both short and long-term performance benefits. As we discussed earlier, social responsibility must have the support of top management—both in words and in deeds— before it can become an organizational reality. Like many organizations, Cummins Engine Company has faced a number of challenges over the past several decades. Cummins is currently the world leader in the design and manufacture of diesel engines and was the largest employer in Columbus, Indiana, for many years. Cummins’s drive to build positive relationships with employees, customers, and community led Business Ethics to rank tile firm on the magazine’s fist of the “100 Best Corporate Citizens.” The company received the highest possible rating for its corporate governance

2

3

4

S

5

7

8

9

10

10

10

I’.

91 Denmark

90 Finland

89 Sweden

88 New Zealand

87 Netherlands

87 Norway

86 Switzerland

85 Singapore

83 Canada

81 Germany

81 Luxembourg

81 United Kingdom

79 Australia

79 Iceland

77 Belgium

167

167

166

165

163

163

161

161

158

158

158

154

154

154

154

8 North Korea

11 Afghanistan

12 Sudan

15 South Sudan

15 Angola

16 Libya

16 Iraq

17 Venezuela

17 Guinea-BissaU

17 Haiti

18 Yemen

13

13

15

30 Business and Society Chapter 1 Social Responsibility framework 37

practices from Governance Metrics International fGMI), even during the global recession of 2009. In addition, Ethisphere named the company as one of the “World’s Most Ethical Companies” for seven years in a row.85

Once the social responsibility philosophy is accepted, the four aspects of corporate social responsibility are defined and implemented through pro grams that incorporate stakeholder input and feedback. Cummins, like other companies, is aware of the potential costs associated with addressing social responsibility issues and stakeholder requirements. When social responsibil ity programs are put into action, they have both immediate and delayed outcomes.

Figure 1.4 depicts how the chapters of this book fit into our framework. This framework begins with a look at the importance of working with stakeholders to achieve social responsibility objectives. The framework also includes an examination of the influence on business decisions and actions of the legal, regulatory, and political environment; business ethics; and cor porate governance. The remaining chapters of the book explore the respon sibilities associated with specific stakeholders and issues that confront

FIGURE 7.4 An Overview of This Book

business decision makers today, including the process of implementing a social responsibility audit.

strategic Management of Stakeholder Relationships Social responsibility is grounded in effective and mutually beneficial rela tionships with customers, employees, investors, competitors, government, the community, and others who have a stake in the company. Increasingly, companies are recognizing that these constituents both affect and are affected by their actions. For this reason, many companies attempt to address the con cerns of stakeholder groups, recognizing that failure to do so can have seri ous long-term consequences. For exampLe, the Better Business Bureau of the Alaska, Oregon, and Western Washington region revoked the membership of 12 businesses in a period of three months for not meeting the organization’s standards.86 Chapter 2 examines the types of stakeholders and their attri butes, how stakeholders become influential, and the processes for integrating and managing stakeholders’ influence on a firm. It also examines the impact of corporate reputation and crisis situations on stakeholder relationships.

Corporate Governance Because both daily and strategic decisions affect a variety of stakeholders, companies must maintain a governance structure to ensure proper control of their actions and assign responsibility for those actions. In Chapter 3, we define corporate governance and discuss its role in achieving strategic social responsibility. Key governance issues addressed include the rights of shareholders, the accountability of top management for corporate actions, executive compensation, and strategic-level processes for ensuring that financial, legal, ethical, and philanthropic responsibilities are satisfied.

Legal, Regulatory, and Political Issues In Chapter 4, we explore the complex relationship between business and government. Every business must be aware of and abide by the laws and reg ulations that dictate acceptable business conduct. This chapter also exam ines how business can influence government by participating in the public policy process. A strategic approach for legal compliance is also provided.

Business Ethics and Strategic Approaches to Improving Ethical Behavior Because individual values are a component of organizational conduct, these findings raise concerns about the ethics of future business leaders. Chapters 5 and 6 are devoted to exploring the role of ethics in business decision making. These chapters explore business responsibilities that go beyond the conduct that is legally prescribed. We examine the factors that

Corporate Governance (Chapter 3)

Global Social Responsibility (Chapter 72)

Legal, Regulatory, and Political Issues (Chapter 4)

Sustainability Issues

(Chapter 11)

Business Ethics and Ethical

Decision Making (Chapter 5)

Technology Issues

(Chapter 10)

Strategic Approaches to Improving Ethical Behavior (Chapter 6)

Community Relations and Strategic Philanthropy

pter 9)

Employee Relations (Chapter 7)

Consumer Relations (Chapter 8)

32 Business and Society Chapter 1 Social Responsibility framework 33

influence ethical decision making and consider how companies can apply this understanding to increase their ethical conduct. We also examine ethi cal leadership and how it contributes to an ethical corporate culture.

Employee Relations In today’s business environment, most organizations want to build long- term relationships with a variety of stakeholders, but particularly with employees—the focus of Chapter 7. Employees today want fair treatment, excellent compensation and benefits, and assistance in balancing work and family obligations. This is increasingly important as employee privacy issues have become a major concern in recent years. Raytheon developed a com puter program called SilentRunner that can detect patterns of data activity that may reflect employee fraud, insider trading, espionage, or other unau thorized activity.87 Critics, however, question whether the use of such soft ware contributes to an environment of trust and commitment. Research has shown that committed and satisfied employees are more productive, serve customers better, and are less likely to leave their employers. These benefits are important to successful business performance, but organizations must be proactive in their human resources programs if they are to receive them.

Consumer Relations Chapter 8 explores companies’ relationships with consumers. This con stituency is part of a firm’s primary stakeholder group, and there are a number of financial, legal, ethical, and philanthropic responsibilities that companies must address. Chapter 8 therefore considers the obligations that companies have toward their customers, including health and safety issues, honesty in marketing, consumer rights, and related responsibilities.

Community and Philanthropy Chapter 9 examines community relations and strategic philanthropy, the synergistic use of organizational core competencies and resources to address key stakeholders’ interests and to achieve both organizational and social benefits. Whereas traditional benevolent philanthropy involves donating a percentage of sales to social causes, a strategic approach aligns employees and organizational resources and expertise with the needs and concerns of stakeholders, especially the community. Strategic philan thropy involves both financial and nonfinancial contributions (employee time, goods and services, technology and equipment, and facilities) to stakeholders and reaps benefits for the community and company.

Technology Issues In Chapter 10, we examine the issues that arise as a result of enhanced technology in the business environment, including the effects of new

chnbl0gy on privacy, intellectual property, and health. The strategic direction for technology depends on government as well as on business’s 0bility to plan the implementation of new technology and to assess the influence of that technology on society.

Thanks tO the internet and other technological advances, we can communicate faster than ever before, find information about just about anything, and live longer, healthier lives. However, not all of the changes that occur as a result of new technologies are positive. For example, because shopping via the internet does not require a signature to verify transactions, online credit card fraud is significantly greater than fraud through mail- order catalogs and traditional storefront retailers. A major identity theft ring in New York affected thousands of people. Members of the theft ring illegally obtained the credit records of consumers and then sold them to criminals for about $60 per record. The criminals used the credit records to obtain loans, drain bank accounts, and perform other fraudulent activities.88

Sustainability Issues In Chapter 11, we dedicate an entire chapter to issues of sustainability, including the interdependent nature of economic development, social development, and environmental impact. Sustainability has become a watchword in business and community circles, and this chapter explores the ways in which companies define and develop goals, imple ment programs, and contribute to sustainability concerns. The Dow Jones Sustainability Index (DJSI) makes an annual assessment of com panies’ economic, environmental, and social performance, based on more than 50 general and industry specific criteria. The DJSI includes 2,500 companies from 20 countries and is used by investors who prefer to make financial investments in companies engaged in socially respon sible and sustainable practices.89

Global Social Responsibility Finally, in order for many businesses to remain competitive, they must continually evolve to reach global markets and anticipate emerging world trends. Chapter 12 delves into the complex and intriguing nature of social responsibility in a global economy. Building on key concepts discussed throughout the book, we examine the forces that make overseas business plans and activities of paramount concern to host countries, local and national governments, nongovernmental organizations, and other mem bers of society. The chapter covers a wide range of challenges and oppor tunities, such as outsourcing, environmental protection, living wages, labor standards, and trade restrictions.

We hope this framework provides you with a way of understanding the range of concepts, ideas, and practices that are involved in an effec tive social responsibility initiative. So that you can learn more about the

Chapter 1 Social Responsibility Framework 35 34 Business and Society

racti5 of specific companies, a number of cases are provided at the nd of the book. In addition, every chapter includes an opening vignette and other examples that shed more light on how social responsibility works in today’s businesses. Every chapter also includes a real-life sce nario entitled “What Would You Do?,” a contemporary debate issue, and another exercise to help you apply concepts and examine your own cISiomang process. As you will soon see, the concept of social sponsibility is both exciting and controversial; it is in a constant state of develoPment_jt15t like all important business concepts and practices.

A recent survey of thought leaders in the area of social responsibility found that a majority believes social responsibility has made steady progress into conventional business thinking. Much like the social responsibility con tinuum introduced in this chapter, the thought leaders described several stages of commitment to corporate social responsibility. These stages range from light, where companies are concerned about responding to complaints, to deep, where companies are founded on a business model of improving social or environmental circumstances. Many companies fall somewhere in between, with a focus on complying with new standards and surviving in a climate of increasing social responsibility expectations.9° We encourage you to draw on current news events and your own experiences to understand social responsi bility and the challenges and opportunities it poses for your career, profession, role as a consumer, leadership approach, and the business world.

I SUMtARY The term social responsibility came into widespread use during the last several decades, hut there remains some confusion over the term’s exact meaning. This text defines social responsibility as the adoption by a husi ness of a strategic focus for fulfilling the economic, legal, ethical, and phil anthropic responsibilities expected of it by its stakeholders.

All types of businesses can implement social responsibility initiatives to further their relationships with their customers, their employees, and the community at large. Although the efforts of large corporations usu ally receive the most attention, the actions of small businesses may have a greater impact on local communities.

The definition of social responsibility involves the extent to which a firm embraces the social responsibility philosophy and follows through with the implementation of initiatives. Social responsibility must be fully valued and championed by top managers and given the same planning time, priority, and management attention as is given to any other company initiative.

Many people believe that businesses should accept and abide by four types of responsibilities: financial, legal, ethical, and philanthropic. Companies have a responsibility to be financially or economically viable so that they can provide a return on investment for their owners, create

Earth in the Balance: BUSINESS SUSTAINABILITY

Automakers Develop Lighter Cars to Meet Fuel-Efficient Standards

-

Today, many consumers are using sustainability criteria in their purchase decisions. This has had a major impact on the automotive industry. Automobile makers such as Ford are investigating new ways to increase the sustainability of their vehicles. Vehicles have started evolving into lighter versions of themselves as lighter materials increase fuel efficiency. Although automobile makers have a market incen

tive to increase the fuel-efficiency of vehicles, they also have a legal incentive. In the United States it has been mandated that vehicles must reach 35.5 miles per gallon (mpg) by 2016. The government plans to extend this to 54.5 mpg by 2025. In Europe, cars must reduce emissions 40 percent 2007 levels by 2021. This is requiring automakers to be innovative in investigating ways to make their vehicles lighter. Materials for these lighter cars include aluminum, carbon fiber, and high- strength steel, which can decrease a vehicle’s weight by 200 pounds. Automakers are optimistic that develop ing these lighter vehicles will cut fuel emissions in half. Unfortunately, these criteria create a challenge for

carmakers developing electric vehicles (EVs). Although EV5 reduce greenhouse gas emissions, the batteries needed for the EV are often expensive and heavy. EV maker Tesla Motor is dealing with these issues by using less costly, lighter batteries. Its Giga Factory is esti mated to produce 30 gigawatt hours worth of batteries each year—what is needed to power approximately

400,000 vehicles. BMW is spending nearly $3 billion to completely reinvent the car. It is producing a new brand of light hybrid luxury vehicle with a carbon- neutral supply chain. Its i3 EV utilizes light carbon-fiber thread and aluminum to make it incredibly lightweight for a car, at 2,680 pounds. This enables it to get 81 mpg. Automakers are also increasing their use of sus

tainable materials in their vehicles’ interiors. The i3, for instance, has an interior made from eucalyptus. Another EV firm called Fisker is using reclaimed wood for the interior of its sedans. These often lighter mate rials contribute to a more fuel-efficient vehicle. The Ford Fusion’s use of kenaf leaves instead of oil-based resins in its doors reduces door bolsters by 25 percent.

All of these changes will entail challenges, not only for automakers but also for consumers. While consumers might desire more socially responsible and sustainable products, many do not like to sacrifice convenience or cost. It is estimated that repair costs for vehicles made of aluminum will increase due to the lightness of the materials. In countries such as Germany, consumers enjoy driving quickly on the roads, requiring vehicles that use a lot of gas. More fuel-efficient vehi cles may be more limited in speed. Both businesses and consumers will have to make trade-offs in the quest for a more sustainable industry. However, these trade-offs have the potential to significantly reduce the negative impact of vehicle emissions on the environment.

Sources: Gary Witzenburg, “Future Fuel Economy Mandates, Part I: 54.5 mpg Is Going to Be Hard to Reach,” Green Auto Bloy,January 26, 2012, http://green.autoblog.com/201 2/01/26/future-fuel-economy-mandates-part-i-54-5-mpg-is-going-to-be-ha/ (accessedJune 5, 2014); Chris Woodyard, “If a Tree Falls in the Forest, Does It End Up in a Car?” USA Today, June 28, 2013, 3B; Bill Esler, “RealWood Preferred in Eco Car Interiors,” Wood Working Network, July 8, 2013, http://www.woodworkingnetwork.com/wood/componentsourcing/Reclaimed-Wood-Dresses-Car-Interiors-214604411 .html#sthash.cuoBlOEi.dpbs (accessed July 26, 2013); Ford, “Ford Uses KenafPlant Inside Doors in the All-New Escape, Saving Weight and Energy,” http://media.ford.com/article_display.cfm?article_id=35895(accessed July 26, 2013); Chris Woodyard, “Lighter Cars Add Weight to Repair,” U5A Today, September 16, 2013, 18; Brad Plumer,“Why Cars Will Keep Getting Lighter,” Washington Post, January 12, 2012, http:llwww.washingtonpost.com/blogs/wonkblog/postiwhy-cars-will-keep-getting-Iighter/2012/01/1 2/glQARefVtP_blog.html (accessed October 15, 2013); Mark Rogowsky, “Musk: ‘We HopeThe Big Car Companies Do Copy Tesla,” Forbes, February 5, 2014, http://www.forbes.com/sites/markrogowsky/2014/02/05/musk-we-hope-the-big-car-companies-do-copy-tesla/ (accessed June 5, 2014); Jennifer Collins, “For Germans, Need for Speed Clashes withEco-Friendly Ideals,” USA Today, May 26, 2014, http://www.usatoday.com/story/news/world/2014/05124/german-autobahn-speed-limits-emissions/9387539/ (accessed June 5, 2014); Dan Neil, “BMW Plots Sustainable Supercar with the i8 Project,” The Wall Street Journal,May 2, 2014, http://online.wsj.com/newsIartides/SB1000J42405270230467790457953561 2915387656 (accessed June 5, 2014).

jobs for the community, and contribute goods and services to the economy. They are also expected to obey laws and regulations that specify what is responsible business conduct. Business ethics refers to the principles and standards that guide behavior in the world of business. Philanthropic activities promote human welfare or goodwill. These responsibilities can be viewed holistically, with all four related and integrated into a comprehen sive approach. Social responsibility can also be expressed as a continuum.

Because customers, employees, investors and shareholders, suppliers, governments, communities, and others have a stake in or claim on some aspect of a company’s products, operations, markets, industry, and out comes, they are known as stakeholders. Adopting a stakeholder orienta tion is part of the social responsibility philosophy.

The influence of business has led many people to conclude that cor porations should benefit their employees, their customers, their business partners, and their community as well as their shareholders. However, these responsibilities and expectations have changed over time. After World War II, many large U.S. firms dominated the global economy. Their power was largely mirrored by the autonomy of their top manag ers. Because of the relative lack of global competition and stockholder input dtiring the 1950s and 1960s, there were few formal governance procedures to restrain management’s actions. The stability experienced by midcentury firms dissolved in the economic turmoil of the 1970s and 1 980s, leading companies to focus more on their core competencies and reduce their product diversity. The 1980s and 1990s brought a new focus on efficiency and productivity, which fostered a wave of downsizing and restructuring. Concern for corporate responsibilities was renewed in the 1990s. In the 1990s and beyond, the balance between the global market economy and an interest in social justice and cohesion best characterizes the intent and need for social responsibility. Despite major advances in the 1990s, the sheer number of corporate scandals at the beginning of the twenty-first century prompted a new era of social responsibility.

The increasing globalization of business has made social responsibility an international concern. In most developed countries, social responsibil ity involves economic, legal, ethical, and philanthropic responsibilities to a variety of stakeholders. Global social responsibility also involves responsi bilities to a confluence of governments, businesses, trade associations, and other groups. Progressive global businesses recognize the “shared bottom line” that results from the partnership among businesses, communities, governments, and other stakeholders.

The importance of social responsibility initiatives in enhancing stakeholder relationships, improving performance, and creating other benefits has been debated from many different perspectives. Many business managers view such programs as costly activities that pro vide rewards only to society at the expense of the bottom line. Others hold that some costs of social responsibility can he recovered through improved performance. Although it is true that some aspects of social responsibility may not accrue directly to the bottom line, we believe that

organizations benefit indirectly over the long run from these activities. Moreover, ample research and anecdotal evidence demonstrate that there are many rewards for companies that implement such programs.

The process of social responsibility begins with the social responsibil itV philosoPhY includes the four responsibilities, involves many types of stakehoklels, and ultimately results in both short and long-term perfor mance benefits. Once the social responsibility philosophy is accepted, the four types of responsibility are defined and implemented through pro grams that incorporate stakeholder input and feedback.

p.esponsible_Business Debate

How to Regulate Global Business Issue: Are less formal systems and agreements likely to be more sUCCes5fUl than a formal legal and regulatory system?

A key lesson learned from recent business scandals is that responsible, transparent, and ethical leadership is needed in order for companies to develop and maintain a long- term commitment to social responsibility for the benefit of multiple stakeholders. This is especially true of multi national corporations (MNC5) because of the power and influence these businesses and their executives represent. MNCs operate in multiple environments and contexts where laws, rules, expectations, and mores are divergent. In addition, the enforcement and monitoring mecha nisms to oversee these expectations range from the barely existent to well-resourced government agencies. The failure to have a global legal and regulatory

scheme has resulted in environmental disasters, child labor, financial fraud, antitrust violations, tainted food products, and other problems. For example, in 2008 Mattel paid a $12 million settlement to 39 U.S. states for shipping Chinese-made toys containing unsafe amounts of lead. The country’s largest toy maker also agreed to new standards for lead content in its toys. Apple Inc. was later criticized for workplace disasters and worker suicides at one of its Chinese suppliers, Foxconn. To save on manufac turing costs, many U.S. companies make products where wages are lower and regulatory standards often differ.

36 Business and Society Chapter 1 Social Responsibility Framework 37

A

Despite the new coverage of corporate wrongdo ing and questionable decision-making, there are many firms making the commitment to social responsibility through self-regulation. Over 12,000 participants in 145 countries are signatories to the United Nation’s (UN) Global Compact, signaling their agreement to 10 prin ciples on human rights, anticorruption, environment, and labor. The Global Reporting Initiative (GRI) provides a framework for companies developing social responsi bility reports that discuss key standards, are comparable to peers, and capture performance over time. The new 150 26000 standards assist in voluntary organizational self-analysis, media review, investor due diligence, and other reviews of social responsibility efforts.

There Are Two Sides to Every Issue 1. Defend the need for a legal and regulatory system that would oversee international and multina tion business operations. How would the system be developed? How would the system enact its responsibility for enforcing legal and regulatory standards?

2. Defend the efficacy of assurance systems and agree ments, such as the UN Global Compact and ISO 26000 standards. Why are these less formal systems and agreements likely to be more successful than a formal legal and regulatory system?

_________

38 Business and Society Chapter 1 Social Responsibility Framework 39

Jamie wondered what this day would bring. As the nager of conmt1mtY relations, her job was to repre sent Unified in the community, manage the employee volunteer prOgtafl1, create a quarterly newsletter, serve as a liaison tO the Company’s philanthropic founda tiOfl, develop solid relationships, and serve on various hoards related to social welfare and community needs. The company s foundation donated nearly $1.5 million a year to charities and causes. Over one-quarter of its empl0Ye volunteered ten hours a month in their c01fl moflities.

jarnie reported to a vice-president and was pleased with the career progress she had made since graduat ing from college eight years earlier. Although some of her friends wondered out loud how she could work for a tobacco) company, Jamie was steadfast in her belief that even a tobacco firm could contribute something

meaningful to society. She had the chance to affect some of those contributions in her community relations role.

Jamie’s phone rang and she took a call from her vice-president. The VP indicated that, although the protestors seemed relatively calm this time, he was not comfortable with their presence. Several employees had taped signs in office windows telling the protestors to “Go away.” Other VPs had dropped by his office to discuss the protest and thought that the responsibility for handling these issues fell to his group. He went on to) say that he needed Jamie’s help, and the assistance of a few others, in formulating a plan to (1) deal with the protest today and (2) strengthen the strategy for com municating the company’s message and goodwill in the future. Their meeting would begin in one hour, so Jamie had some time to sketch out her recommendations on both issues. What would you do?

Evaluate Fortune magazine’s annual list of the most admired companies found on the magazine’s website (www.fortune.com). These companies as a group have superior financial performance compared to other firms. Go to each company’s website and try to assess its management commitment to the welfare of

Jamie Ramos looked out her window at the early morn ing sky and gazed at the small crowd below. The words and pictures on their posters were pretty tame this time, she thought. The last protest group used pictures of tarred lungs, corpses, and other graphic photos to show the effects of smoking on a person’s internal organs. Their words were also hateful, so much so that employ ees at the Unified Tobacco headquarters were afraid to walk in and out of the main building. Those who nor mally took smoking breaks on the back patio decided to skip the break and eat something instead at the company-subsidized cafeteria. By midday, Unified hired extra security to escort employees in and out of the building and to ensure that protestors followed the state

guideline of staying at least 15 feet from the company’s entrance. The media picked up on the story—and the photos—and it caused quite a stir in the national press.

At least this protest group seemed fairly reason able. Late yesterday, a state court provided a reduced judgment to the family of a lifelong smoker, now deceased. This meant that Unified was going to owe millions less than originally expected. The length and stress of the lawsuit had taken its toll, especially on top management, although all employees were certainly affected. After two years of being battered in the media, learning of a huge settlement, and then continuing on with the appeals process, emotions were wearing thin with the contintied criticism.

KEY TERMS social responsibility (p. 7) stakeholders (p. 14)

1.

DISCUSSION QUESTIONS

S.

3.

l)efine social responsibility. How does this view of the role of business differ from your previous perceptions? How is it consistent with your atti tudes and beliefs about business?

2. If a company is named to one of the “best in social responsibility” lists, what positive effects can it potentially reap? What are the possible costs or negative outcomes that may be associated with being named to one of these lists? What historical trends have affected the social responsibilities of business? How have recent scandals affected the business climate, including any changes in responsibilities and expectations? How would you respond to the statement that this chapter presents only the positive side of

4.

6.

the argument that social responsibility results in improved organizational performance? On the basis of the social responsibility model presented in this chapter, describe the philosophy, responsibilities, and stakeholders that make up a company’s approach to social respc)nsihihty. What are the short and long-term outcomes of this effort? Consider the role that various business disci plines, including marketing, finance, accounting, and human resources, have in social responsibil ity. What specific views and philosophies do these different disciplines bring to the implementation of social responsibility?

EXPERIENTIAL EXERCISE

WHAT WOULD YOU DO?

stakeholders. If any of the companies have experienced legal or ethical misconduct, explain how this may affect specific stakeholders. Rank the companies on the basis of the information available and your opinion on their fulfillment of social respc)nsibihty