Business Ethics And Sustainability

Visit http://www.westpac.com.au/about-westpac/sustainability-and-community/

And examine the engagement strategy used by Westpac

The first point to consider is whether Westpac engage in Sustainability or CSR?

Compare these activities to Prakash Sethi and Carroll’s models

Consider that Westpac in 2012/3 generate the biggest single profit in Australian Banking History yet also retrenched over 1000 workers. Is this CSR or profit maximization?

http://www.probonoaustralia.com.au/news/2013/04/aussie-banking-giants-‘most-ethical’

CSR from Different Ethical Perspectives

It is also possible to describe Carroll’s (1991) four types using the different ethical theories canvassed in our previous unit.

Consequentialism:

The commitment to economic performance, which is consistent with Prakash Sethi’s (1975) corporate behaviour as social obligation, focuses on rational goal attainment, typically sales or profits, which can be seen as a form of utilitarianism having a concern with measuring ends or benefits rather than the how these are achieved.

Deontology

The second and thirds levels of Carroll’s approach are concerned with achieving organisational goals consistent with the prevailing laws, rights, duties, rules and obligations of a society. This aligns with Prakash Sethi’s (1975) corporate behaviour as social obligation of fulfilling economic duties within a society’s legal framework. This is clearly consistent with deontology and similar ethical concepts of justice, fairness and rights. Clearly this is a strong link to law, which was explored earlier in the course.

Virtue Ethics

The final level of Carroll’s typology is described as a discretionary level that includes philanthropic and voluntary activity such as acts of charity, volunteerism of doing good without consideration of impact on reputation or profits. This could be seen as consistent with both Prakash Sethi’s (1975) social responsiveness and responsibility categories and arguably virtue ethics that emphasises the concept of developing virtues such as integrity and generosity that can be seen as a requirements for good citizenship those that lead to eudemonia (Solomon 1984).

Lozano (2008) opines that Carroll's approach to CSR provides a holistic approach to CSR by relating it to society and the broader global context and, it assumes that an organisation’s economic and legal responsibilities are part of its social responsibilities thus avoiding the position of CSR as an extra or external responsibility to normal business practice. Wartick and Cochran (1985) argue that the purpose of social responsiveness is to move organisations away from a singular focus on economic objectives, or its social obligations, towards a greater focus on social response processes. Wartick and Cochran (1985) also suggest that this can be linked to moral agency and to social contract theory.

The CSR Debate

Perhaps the most significant article written in the popular press that effected economic and business perspectives was “The Social Responsibility of Business is to Increase its Profits” by American Economist Milton Freidman. Published in 1970 in the Ne Yorker Magazine, it presented a view that has essentially become known as laissez faire capitalism, monetarism or rational economics which promoted the free market as the basis for economic decision making, “within the rules of the game.” This later point is often not profiled as much when people critique Freidman’s views- suggesting that he advocated total free market domination- which is clearly not the case. Freidman recognized the importance of a minimum moral standard and the need for a legal system to enforce the rules of the market such as contracts, so that it could operate in a predictable way.

Essentially this is within the Libertarian sphere of economic justice that we canvassed in Unit 5. Freidman’s work at the Chicago business School and his many essays and economic perspectives became extremely influential with many Governments, including Australia, New Zealand and Great Britain, adopting his major themes of deregulation of the economy, floating of exchange rates, privatization of State owned enterprises, etc. Freidman’s economic position was in stark contrast to the Keynesian School of Economics that advocated government intervention in economies through expenditure to boost consumption and direct involvement with the provision of goods and services in sectors that the private sectors were unable to be profitable which is essentially the egalitarian concept of economic justice also canvassed in Unit 5.

Interestingly the financial crisis of 2007-2010 saw many Governments return to some Keynesian principles stimulating economies through increased expenditure and major infrastructure projects. The Australian Rudd/Gillard Government of 2007-2013 did just that increasing expenditure on infrastructure projects and on-off payments to households to boost consumer spending. Interesting Australia was on of e the few OECD countries to not be as adversely affected by the GFC, in part due to its tighter market controls on the financial sector.

Arguments against CSR

Whilst Freidman’s views are not new his discussion of limiting Corporate Social Responsibility to purely economic factors is an important perspective that has direct relationship to the concept of the moral corporation and its role in society.

Briefly he argued that organisations are limited entities and therefore should not be expected to act as a moral person. Moreover, he put forward that the agents of the organisation, specifically managers who held the responsibility for decision-making within the organisation, were bound to make decisions only with respect to the objectives of the firm. Their only duty as business leaders is to maximise returns to the shareholders and not to impose their ethical values on the company at its commercial expense (Minkes, Small and Chatterjee 1999, p. 327).

There are several of Freidman’s perspectives that, on the surface, have a degree of relevance to the moral corporation discussion.

The first relates to shareholders as owners of the organisation. The assumption is that shareholders invest their monies expecting a return through dividends and increased share price. Freidman argues that any activities such as philanthropic activity, sponsorship, keeping people employed, charitable donations etc., are not related to the core business of the organisation and increases costs, decreasing profits and returns to shareholders. He argues this is a violation of the concept of agency. An extension of this perspective is that managers have no right to make decisions about how to use shareholder wealth for anything other than the purpose of the business. He also legitimately argues that most managers are not skilled at making such public policy decisions with concepts of philanthropy, ethics and CSR not part of management education. Research undertaken by Segon and Booth (2014) about the extent of business ethics and CSR courses in Australian MBA programs, demonstrated a lack of these type of core courses which indirectly supports Freidman’s view. The other significant position is that monetarism is predicated on the concept of the free and deregulated market mechanism with minimal government intervention. Clearly CSR type activities are not cost neutral and need to be funded either by increasing prices of goods and services or using profits which Freidman again points to as a violation of agency. He also suggests that such expenditure this undermines the market mechanism by adversely affecting the “equilibrium price” normally determined by the interaction of demand and supply. By increasing costs to cover CSR, the equilibrium price will be higher than the true market process, which will adversely affect consumer’s disposable income. The use of profits as the basis for funding CSR will reduce returns to a shareholder, which in turn reduces savings and thus lowers overall investment. leading to market inefficiencies

Arguments for CSR

As we outlined in Unit 4, the arguments for a corporation being held morally responsible for their actions seems to suggest that as a legal person, and satisfying the condition of personhood, albeit conditionally, the corporation is capable of actions that go beyond the minimum economic responsibility as suggested by Prakash Sethi and Carroll.

Freidman’s view of the organisation as having only one key constituent- the “stockholder or shareholder” has been challenged by what has become known as the “stakeholder” perspective. Goodpaster (1991) has identified stakeholder theory as one method by which an organisation can manage its economic mission whilst at the same time addressing critical concerns of business ethics. He gives examples of stakeholders such as employees, suppliers, customers, creditors, suppliers, governments, and communities. Freeman (1984) defines a stakeholder as “any group or individual who can affect or is affected by the achievement of organisational objectives. Goodpaster (1991) argues that ethical or socially responsible management includes careful attention not only to shareholders or stockholders but also to stakeholders as part of the decision-making process; however, he also recognises that the relationship between managers and these groups can be problematic.

According to McDonald (2015) Stakeholder theory emphasises that a company is part of the social system, in which it recognises a variety of internal and external groups of importance to the company, not just its shareholders. Stakeholder theory, therefore, involves maximising returns not only for shareholders (principals) but also for a wider constituency of interested parties of which the business needs to be cognisant.

Stakeholders can be: employees, customers, suppliers, investors, owners, banks, which could be seen as primary stakeholders as they directly interact or affect an organisations performance. Whilst secondary stakeholders would include interest groups such as: the community, media, government, society or even competitors.

Perhaps the most significant importance of stakeholder theory is that it highlights a major problem with rational or classical views of the firm- the emphasis on shareholders. It focuses business attention solely on one constituent group-, which is a form of egoism. The problem is that an organisation’s’ success does not depend on shareholders per se- it depends on customer buying products and using services that are provided by employees. This would tend to suggest that as stakeholders these two groups are most important for a sustainable organisation.

Freidman’s arguments that CSR activities disadvantage organsiatios can also be challenges. Thorne McAllister, Ferrell and Ferrell (2007) identify four advantages to CSR that leads to increased organisational performance: increased customer and employee loyalty, increased customer satisfaction, employee commitment and investor loyalty citing several studies that support their contention. They also highlight that social responsibility is positively associated with return on investment, return on assets and sales growth. American Professor of Accounting at DePaul University in Chicago has identified that organisations with a focus on ethical and responsible practice demonstrate a 2 to 3 times higher market added value reinforcing the benefits of a holistic approach to business activity.

The free market concept can also be challenged. Any first year economics course demonstrates that in order to make the market mechanism “work” assumptions must be made regarding perfect competition, perfect knowledge, many buyers, many sellers etc., that simply does not reflect reality. The arguments against CSR leading to market inefficiencies cannot really be proven, in fact as Verschoor and others identify, CSR leads to more profitable outcomes with more stable share market performance.

The focus on profit maximisation has also resulted in organisations being measured from a short-term rather than a long-term perspective. Many of the advantages of CSR stem from a longer term perspective.

Measuring CSR.

A more recent development in the CSR debate is how to measure “responsible” performance in addition to the more convention financial measures. Often referred to as “Social Accounting” or “Corporate Social Reporting” it is the process of communicating the social and environmental effects of an organisation’s economic actions to particular interest groups within society and to society at large (Dellaportas et al. 2005). Although they may use different jargons and forms of reporting, the general trend seems to be clear: non-financial reporting is likely to become a standard business practice in the not too distant future.

Three significant systems include:

1. The Global Reporting Initiative,

2. AccountAbility’s AA 1000 and;

3. The Triple Bottom Line.

However there is still no universally agreed form of reporting for non-financial performance.

Some companies publish Triple Bottom-Line reports (on financial, social and environmental performance) while others prefer to include a sustainability section in their annual reports.

The Global Reporting Initiative (GRI), originally developed in late 1990s and now in its third iteration, known as G3, was developed as part of a multi-stakeholder process involving business, non-government organisations, trade unions and others, combined with extensive rounds of public consultation. It established a series of indicators across a range of sustainability performance areas, from environment to economic to product responsibility and human rights.

The UK based AccountAbility launched a reporting standard in 1999 which has further been developed and now consists of three specific standards of:

1. AA1000 AccountAbility Principles Standard (2008);

2. AA1000 Assurance Standard (2008); and

3. AA1000 Stakeholder Engagement Standard (2005)

The KPMG International Survey of Corporate Responsibility Reporting issues in 2008 identified that almost 80% of the largest 250 companies worldwide have issued CSR reports. They are most prominent in the UK and Japan but are on the increase word wide. The GRI is the most common method with approximately 75% of companies utilizing this approach.

Within the Australian context, Werkner (2007) stated that only 25% of companies produced a corporate responsibility document, although this is likely to increase. She notes that Westpac tops the CRI in Australia, with Toyota Australia, ANZ and BHP Billiton adopting more detailed reporting systems. She also identifies the increasing use of online interactive communication methods by companies such as NAB and Woodside. In 2003 the Corporate Responsibility Index was launched in Australia with the St James Ethics Centre being the exclusive licensee up until 2010. The CRI uses a questionnaire to measure responsible business practice in four main areas of strategy and strategy implementation, management practice in terms of community activities, environment and workplace issues, and performance in a range of social and environmental areas.

Lastly triple bottom line reporting system was advocated by Elkington (1998) whereby companies report to their stakeholders not only their financial results but also their environmental and social impacts. Similar to the other reporting initiatives, TBL involves traditional financial data combined with descriptions of the organisations activities in managing their environmental impact and social initiatives.

Can CSR be Unethical?

Some debate is emerging within business ethics regarding the intent of companies when engaging in CSR activities.

Some argue that irrespective of the company’s intent the very fact that they are providing a positive social benefit through either philanthropic or economic activities should be welcomed. Others are more skeptical and argue that company’s intent must be a moral one and not motivated by economic benefits.

Some approach the concept of CSR and philanthropy as a business strategy arguing it should be used to enhance overall corporate performance and as a competitive resource (Polanski and Speed 2001). However they note that from an altruistic perspective, as the intent is not one of gaining a benefit for the organisation such decision-making would not be linked to the organisation’s strategy. They do propose that strategic “giving” involves organisations using the business-recipient association as a means to achieve promotional ends. Organisations would therefore choose specific CSR activities with a view to maximising exposure or goodwill as a means of maximizing profits or achieving organisational goals. It is possible that this approach would be viewed as consistent with Freidman’s view that the sole responsibility of organisations is maximization of profit for shareholders. These CSR activities would actually be cause related marketing tools and most likely be part of the marketing or public relations strategy. Is there a problem with this?

In Unit 3 we discussed the concept of ethics and morality and the importance of intent. We noted that organisations can be held morally responsible for their actions because they satisfy the conditions of personhood and lastly in Unit 6 we examined ethical theories and noted that actions and decisions need to be reviewed through and ethics filters of consequentialism, deontology or process and virtue ethics.

It is possible to argue that purely from a consequentialist or utilitarian perspective, that companies, who engage in caused-related CSR, are producing a benefit not only for their shareholders, but also stakeholders and other parties in society. By achieving increased levels of goodwill through these actions, organisational growth may increase, more people could be employed thus increasing disposable income etc., in addition to the CSR activities, thus the benefits outweigh the costs- so it could be considered ethical.

From a deontological or process point of view, providing companies do not break any laws with such activities, and follow a clear and consistent process in the allocation of philanthropic or CSR activities, and no one’s rights are infringed, it would be possible to argue the action as ethical, or at the very least not unethical.

However, as we saw in Unit 6, the inclusion of virtue ethics can provide significant insights into the intent of decision-making that reflects on the character of not only a person, but also an organisation. We would need to ask whether the organisation's intent by engaging in cause-related CSR was a genuine attempt to contribute to “flourishing” or “eudemonia” as identified by Aristotle.

As suggested by Ladd (1993) if organisations undertake such activities purely to meet organisational objectives, then these are nothing more than empirical data used in decision-making. According to this proposition if CSR activities were found to not advantage the organisation then they would be dispensed with. This may suggest that the intent of engaging in CSR activities by some organisations is not a moral one but rather based on deception, i.e. to convince others that they are socially responsible purely to advance the firm’s position. These characteristics are more consistent with vices of lying, deception, cheating etc. rather than the virtues of honesty and integrity.

As noted in Unit 6 on decision-making, if an action cannot pass all three “ethical filters” is most likely high in ethical risk and should be avoided. As Kant noted doing a good thing for the wrong reason does not make it right. Or do we accept its better to accept the positive outcomes, if not quite undertaken for the “right” reasons?

Required Reading

Reading 1

Ferrell,O.C., Fraedrich J. and Ferrell, L. 2015, Business Ethics Ethical Decision making and Cases, South Western, Ch 1 & 2

A quick review of Chapter 1 is in order as it introduces the concept of CSR as discussed in this Unit. Chapter 2 is a more in depth discussion of CSR including the important links to stakeholder analysis. It also discusses the concept of Corporate Governance from a holistic perspective. (You should note that in the Australian context the term corporate governance tends to be associated with financial governance rather than ethics and CSR)

Additional Reading

Reading 2

McDonald, G (2015) Business ethics: a contemporary approach, Cambridge University Press, Port Melbourne. Ch 2

This chapter in McDonald’s text provides an overview of key ethical terms and concepts and a brief discussion beginning with stakeholder management, then CSR, identifying CSR Standards and dimensions before moving on to issues related to environmentalism, which serves as a good lead in to our next Unit on Sustainability. She provides different model of organisational ethics

Reading 3

Thorne McAlister, D, Ferrell, O, Ferrell, L ( 2007) Business and Society A strategic Approach to Social Responsibility, Houghton Mifflin, Boston. Chapter 1 & 2.

This text is co-authored by O.C Ferrell and Linda Ferrell who are also authors of the principle text used in this course, as such there will be some similarities in the discussion. These two chapters provide a thorough discussion of CSR and its strategic role in business. It also includes a section on strategic philanthropy that was noted in the Unit. Chapter two provides key information in stakeholder analysis and canvasses some of the legal dimension of CSR

Journal Readings

Journal Reading 1

Matten, D., and Moon, J. (2008) “ Implicit and Explicit CSR: A conceptual framework for a comparative understanding of Corporate Social Responsibility” Academy of Management Review, Vol. 33, No. 2, pp 404-424

As the article’s title suggests, the focus of this discussion is scoping CSR, its definitions and its theoretical underpinnings. They also explore the differences in CSR between the US and European experiences which is most interesting given the US’s libertarian free market position versus Europe’s egalitarian social contract position.

Journal Reading 2

Lozano, J. (2008) “CSR or RSC? (Beyond the Humpty Dumpty syndrome)” Society and Business Review, Vol. 3, No. 3, pp 191-206

In this interesting article, the author canvasses fundamental CSR concepts as with the other articles, however using “Humpty Dumpty”, as a metaphor. The author proposes that the terms CSR is value laden and its impact changes according to the power of the person who uses it. He proposes that the discussion needs to shift away from t he debate of what CSR actually means to the concept the responsible and sustainable corporation (RSC).

Philanthropic – obligation to improve people's quality of life and community through resource contributions

Ethical – obligation to be fair, just and avoid harm

Legal – obeying society's codified rules

Economic – profitability; the foundational responsibility

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MGMT20134 | Unit 9 | Page 14

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