BUSINESS ETHICS CORPORATE SOCIAL RESPONSIBILITY FUND
ARIZONA STATE UNIVERSITY
OMT 440 - INTERNATIONAL BUSINESS
WEEK 8
15.1. Introduction:
In exploring and understanding the relationship between ethics and business, it is
inevitable that we describe a great policy that has been made by a real company. In this case
let us take the example of Merck and Company dealing with the "River Blindness" case.
In the case of River Blindness, which is a disease outbreak that occurs in the riverbank
areas of Africa and Latin America, many residents in the surrounding areas have been
blinded. Various countermeasures have been taken but with no results. The disease continued
to kill millions of people living in the area until 1979 when it was discovered that one of the
products produced by Merck and Company-Ivermectin-for animal specifications was able to
kill the parasites that caused the River Blindness outbreak (Velasquez, 2006).
Various considerations were made to conduct research into the development of the drug
so that it could be consumed by humans so that it could treat cases of River Blindness
because it was actually only formulated for animals. But a wave of polemics began to arise,
various internal and external problems and contradictions about the development of the drug
began to appear. The enormous cost of the The development of the drug would hit the
consumption capacity of the public, which would have a significant impact on the sales rate.
In short, it can be said that the company's profitability was minimized, but what Vgelos-CEO
of Merck and Company-thought was that the potential human benefits of the drug were too
significant to ignore. Eventually, the decision was made to do the research and development
and the drug was finally available to the public and was able to solve the problem of River
Blindness (Velasquez, 2006).
From the brief discourse above can we reflect on the relationship between ethics in
business? Business experts often say that business ethics is a contradiction in terms because
there is an inherent conflict between ethics and the orientation of self-interest in business in
the form of profit.
Managers in every company are obliged to invest investors' funds appropriately and
produce significant profit optimization. But not all profit orientation can be fully justified
because in life, social interests also play a very important role and it is inseparable from all
that that with this ethical attitude will provide a stimulus to society and is the most powerful
weapon in reaping long-term profits even though the company consciously allows its
potential profits to be enjoyed by others.
Given the importance of ethical behavior in business life, it is important to know how
companies deal with crucial issues in practicing business ethics.
15.2. The Nature of Business Ethics
Before exploring business ethics, we should know the meaning of the words ethical and
ethics in order to help correlate the relationship between ethics and business. The word
ethical - in the author's understanding referring to the book's understanding - means
something that is thought, felt, and believed to be right and in accordance with religious
understanding in providing dominance rules in personal and social life. Meanwhile, ethics
according to the grammatical dictionary is the principle of behavior that governs individuals
or groups in the form of "morality studies". In short, we can clarify that ethics is the study of
the subject of morality (Velasquez, 2006).
What is morality? A brief definition can explain that morality is a guideline that
regulates what is right and what is wrong, what is good and what is bad. Of course, to
universalize a guideline in providing the correct value of morality, certain standards must be
determined in its development. We can call these standards "Moral Standards". Moral
standards have their own essential value in carrying out their function as guidelines for
morality, namely in the form of a moral standard relating to matters that have serious
consequences, transcend personal interests, are based on good reasoning rather than
authority, are based on impartial considerations and their violation is associated with
feelings of guilt, shame or with certain moral vocabulary (Velasquez, 2006).With the
existence of these moral standards we can determine whether an action is moral or not, so
that within a certain range we can study ethical studies in certain fields, such as in the field of
business which is studied through the genre of Business Ethics Studies.
15.3. Definition of Business Ethics
Business ethics is a study that concentrates on moral values and the application of
moral standards in institutional policies and business behavior. Of course, the application of
moral values and moral standards will regulate how a company behaves in running its
business (Velasquez, 2006).
According to Velasquez (2006), the problems faced in the application of business ethics
are divided into three parts, including:
1. Systemic Problems
Systemic issues are problems faced by companies that arise from ethical questions
about the economic, political, legal and other social systems in which the business
operates.
2. Internal Corporate Problems
Corporate issues are business ethics issues that arise from questions from within the
firm. These issues include the morality of the activities, policies, practices and
organizational structures of individual firms as a whole.
3. Individual Problems
These individualized issues in business ethics include ethical questions that arise
around specific individuals within the company.
These problems often cause dilemmas for CEOs or line managers in national or
multinational companies in taking ethical actions to apply ethical attitudes in their business.
In various conditions and roles, these companies will always be challenged by local
regulations, and in the end, decisions will be made that may be unethical for some parties and
ethical decisions for others.
It is inseparable from aspects of existing developments, such as technological
developments. Technological developments also affect moral values which ultimately lead to
ethics in doing business. As we know that rapid development occurs at the current level of
technology, which causes the life cycle of a business to become shorter and not based on
existing morals. Let us take an example of the development in the field of information
technology that has grown so significantly in recent decades. At present, information systems
can be said to be experiencing a golden age where people no longer need a long time to
access and share information to anyone and anywhere. The freedom of sharing has led to a
tendency to manipulate something unethical into something ethical, even though the values in
it do not change the main basis. Let's take the case of the Napster Revolution that happened in
1999, where people could access MP3 songs freely and for free so that it significantly -
notably - reduced the sales of original cassettes in the music industry market, although it did
not rule out the possibility of this actually being a promotional event that was able to boost
purchase intentions consumers. Another example that can be observed is about the freedom
of access to one's privacy that may be needed to do something urgent by certain parties. But
in this case, fraud also often occurs by parties who take advantage of this freedom and
convenience for interests that are not ethically justified.
According to Velasquez (2006), there are four moral standards that can be a reference
that the company's actions can be said to be ethical or unethical, namely:
a. Utilitarianism:
Utilitarianism is any view that states that actions and policies should be evaluated based
on the benefits and costs they impose on society. Many analysts believe that the best way to
evaluate the feasibility of a business decision is to rely on utilitarian cost-benefit analysis.
Socially responsible business actions are those that provide the greatest benefit or lowest cost
to society. Take the case of the Ford automobile company, for example.
At a time when the car's sales position was declining compared to other competitors,
Ford managers immediately implemented a quick strategy by focusing on design,
manufacturing, and fast sales. This was done to regain market share. As a result of this rushed
project, technical design was not considered, such as in the event of a collision, the safety of
passengers was very vulnerable. The manager's reasons for continuing to produce the car
included that the design met all legal standards and government regulations, the manager
thought that the car had a level of safety comparable to cars from other companies, and
because the cost benefit study (modification costs) could not be covered by the profits earned.
So utilitarianism is used for all theories that support the selection of actions that maximize
profits.
b. Concept of Rights:
A right is a claim or ownership of something. A person is said to have a right if he or
she has a claim to perform an action in a particular event. Rights come from a system of laws
that allow a person to act in a certain way. Rights can also come from a system of moral
standards that is independent of any particular legal system. Rights are an important and
purposeful means of enabling individuals to freely choose whatever interests and protect their
choices.
Moral rights have 3 important characteristics that provide enabling and protective
functions, among others:
1. Moral rights are closely related to obligations.
Having a moral right means that others have certain obligations towards the owner of that
right. For example, the moral right to worship according to my beliefs can be defined in
relation to the moral obligation of others not to interfere with my worship.
2. Moral rights provide autonomy and equality for individuals in pursuing their interests.
Rights indicate activities that they are free to seek. For example, when they want to
worship according to their beliefs, they do not need the permission of others when doing
so.
3. Moral rights provide a basis to justify one's actions and to protect others.
If you have the moral right to do something then you will automatically have the moral
justification for doing it. For example, when we justify the actions of a strong person who
is helping a weak person.
c. Justice and Equality:
Norms of justice generally do not reject the moral rights of individuals. Part of the
reason is that to a certain extent, justice is based on the moral rights of individuals. The moral
right to be treated as an equal and free individual for example is part of what lies behind the
idea that benefits and burdens should be distributed equally.
Issues relating to justice and fairness can usually be divided into three categories.
Distributive justice, which is the first and most basic category, deals with the fair distribution
of benefits and burdens in society. Retributive justice, the second category refers to the
imposition of just punishment on wrongdoers. A just punishment is one that the wrongdoer in
some sense deserves. Compensatory justice, the third category relates to the fair way in which
a person is compensated for the harm they have suffered as a result of someone else's actions.
Fair compensation is compensation that is in some sense proportional to the value of the loss
suffered.
d. The Ethics of Paying Attention:
In this case, the ethic of mindfulness emphasizes two moral requirements,
That is:
a. We live in a series of relationships and are obligated to maintain and equalize concrete
and valuable relationships with others.
b. We pay special attention to the people with whom we have good relationships by paying
attention to their needs, values, desires, and existence from their own personal
perspective, and by responding positively to the needs, values, desires, and existence of
those who need and depend on our attention.
But it is also important not to limit this notion of concrete relationships to those
between two individuals or between a person and a particular group of individuals. There are
two important things to know. First, not all relationships have value, and not all of them
create an obligation to pay attention. Second, it is important to recognize that paying attention
is sometimes in conflict. In this case it is important to note that there is no fixed rule that can
resolve all conflicts.
Barriers to Attention Ethics:
The attention ethics approach has been criticized on several grounds. First, it is argued
that attention ethics can turn into unfair favoritism or partiality. The second criticism claims
that the requirements of an attention ethic can lead to boredom. In requiring people to pay
attention to their parents' children, siblings, spouses, lovers, friends and other community
members. The ethic of care appears to require everyone to sacrifice their needs and desires
for the well-being of others.
The advantage of the ethic of mindfulness is that it encourages us to focus on the moral
value of partial attitudes towards close people and the moral significance of giving them
particular responses that we do not give to others.
15.4. Blending Utility, Rights, Justice, and Care:
Utilitarian standards must be used when we do not have the resources to fulfill
everyone's goals or needs, so we consider the social benefits and costs of an action in
achieving a particular goal. Moral judgment is also partly based on standards that indicate
how individuals should be treated or rewarded. It is also based on standards of fairness that
indicate how benefits and burdens are distributed among members of a community group.
Furthermore, moral judgment is also based on standards of care that refer to the kind of
attention we need to give to people with whom we have a special relationship. Standards of
care play an important role when moral issues arise that involve individuals in a network of
relationships, especially individuals who have close relationships (Velasquez, 2006).
15.5. Morality in an International Context
Different countries have different rules, customs and habits, even if they are not
completely different. Moreover, the difference will be felt between countries developed and
developing countries. It has been argued that, when operating in less developed countries,
multinational corporations from developed countries are obliged to follow the rules of more
developed countries, which in this case automatically apply higher and stricter standards.
However, this claim ignores the fact that applying practices implemented in developed
countries to less developed countries is likely to do more harm than good in violation of
utilitarian ethical standards. Thus, it is clear that local conditions, particularly developmental
conditions, at least need to be considered when deciding whether a company should apply
standards from a more developed country to a less developed country, and that it is wrong to
accept the claim that we should apply "higher" standards from developed countries
everywhere. It is further argued that multi-national companies should follow local practices,
whatever they may be, or that they should follow the rules of local governments, as these
governments are representative of their citizens. However, this is also not entirely true, so
further considerations must be made in its application (Velasquez, 2006).
15.6. Factors for Achieving Ethical Standards
Ethical behavior and actions are the product of a complex combination of influences.
At the center of the model in Figure 15.1 is the individual decision maker. Individuals have a
unique combination of personality characteristics, values, and moral principles, which inform
both ethical and unethical behavior. Next, Figure 15.1 illustrates the three main sources of
influence on the roles expected of an individual. People play many roles in life including
employee or manager. One's expectations of how those roles should be played are shaped by
cultural, organizational, and general environmental factors. There are also disruptive
influences on the organization. Many studies have found a tendency in middle and lower
level managers to act unethically in the face of pressure.
The indicators of Organizational Culture according to Wirawan (2007: 129) suggest
indicators of organizational culture as follows:
a. Norm implementation
Norms are rules of behavior that determine the response of employees or employees
regarding what is considered appropriate and inappropriate in certain situations.
Organizational norms are developed over a long period of time by the founders and
members of the organization. Organizational norms are very important because they
regulate the behavior of organizational members, so that the behavior of organizational
members can be predicted and controlled.
b. Implementation of values
Values are guidelines or beliefs used by people or organizations to behave when faced
with situations that must make choices values are closely related to morals and codes of
ethics that determine what should be done. Individuals and organizations must have
values of honesty, integrity and openness.
c. Beliefs and philosophy
Organizational beliefs relate to what the organization thinks is right and not right. Trust
describes moral characteristics of the organization or the organization's code of ethics,
for example, providing a minimum wage in accordance with decent needs will increase
the motivation of employees or employees. Philosophy is the organization's opinion
about the nature or essence of something, for example, companies have different
opinions about the essence of human resources, some companies consider human
resources to be part of the reproduction tool, therefore they require a high-quality
workforce and do not conduct training to improve their competence.
d. Implementation of the Code of Ethics
A code of conduct is a collection of good habits of a society that is passed down from
one generation to another. The function of a code of conduct is to guide the behavior of
members of an organization.
e. Ceremony implementation
Ceremonies are the role of organizational culture or collective acts of cultural worship
that are carried out from generation to generation to remind and reinforce cultural values.
f. History of the organization
Organizational culture is developed over a long period of time throughout the history of
the organization and is a product of the organization's history.
15.7. Developing a Business Ethics Climate in Organizations:
Organizations seek to encourage ethical behavior and discourage unethical behavior in
a variety of ways, such as establishing rules of the road and developing clear ethical positions
on how the company and its employees conduct business (Griffin & Ebert, 2010). Generally,
the single most effective step a company can take is to demonstrate top management support
for ethical conduct. The two most common approaches to shaping top management's
commitment to ethical business practices are establishing written rules or so-called codes of
conduct and enacting ethics programs. (Griffin & Ebert, 2010).
A code of ethics is a written document of philosophical principles and articulates the
values embraced by the organization (Stevens, 1996). The code articulates the organization's
ethical parameters of what is acceptable and what is not (Stevens, 2008). Figure 15.2
illustrates the important role ethics and values should play in corporate policy. Essentially,
the figure suggests that while business strategies and practices may change frequently, and
even business objectives may change at times, the core principles and values of the
organization should remain intact as enshrined in the company's code of ethics (Griffin &
Ebert, 2010). Business culture is a complex element that reflects the culture of the
organization and its components such as ethical approaches in business, the application of
social responsibility, and maintaining etiquette in every business behavior (Militaru & Zanfir,
2012).
Figure 15.2 Core principles and values of the organization According to Kreitner and
Kinicki (2000), efforts that can be done
to develop workplace ethics include:
1. Behave ethically. Managers are clear role models, behaviors, and habits show clear signs
of the importance of ethical command. Ethical behavior is a proposition.
2. Screening of potential employees. More thorough screening during employee
recruitment, such as checking references, certificates, transcripts, and other information
on the applicant list.
3. Develop a meaningful code of ethics. Codes of conduct can have a positive impact if
they meet four criteria, including a) they are distributed to every employee, b) they are
supported by upper management, c) they refer to specific practices and ethical dilemmas
likely to be faced by targeted employees, such as salespeople giving feedback,
purchasing agents giving gifts, laboratory experts controlling data or accountants
manipulating the books, and d) they are backed up with rewards for achievement and
severe penalties for violating them.
4. Provide ethics training. Employees can be trained to identify and deal with ethical issues
during orientation and through seminars and video training sessions.
5. Improving ethical behavior.
6. Establish positions, units and other structural mechanisms that use ethics.
15.8. The concept of Corporate Social Responsibility (CSR)
There are four concepts of CSR, namely CSR as social obligation, CSR as stakeholder
obligation, CSR as ethics driven, CSR as managerial process (Maignan & Ferrell, 2004).
According to Bowen in 1953, CSR as social obligation is defined as a company's
responsibility to follow regulations/policies, to make decisions, or to follow a desired line of
action in terms of societal goals and values. As emphasized by Carroll in 1979, different
types of social obligations can be distinguished: (a) economic obligations (being productive
and economical), (b) legal and ethical obligations (following the law and recognizing values
and norms), and (c) humanitarian obligations (proactively giving back to society).
According to Wood and Jones in 1995, CSR as stakeholder obligation, i.e. businesses
are not responsible to society as a whole but only to those who directly or indirectly affect or
are affected by the company's activities. Based on Henriques and Sadorsky, the categories of
stakeholders include: (a) organizations (e.g., employees, customers, shareholders, suppliers),
(b) communities (e.g., local residents, special interest groups), (c) regulations (e.g.,
municipalities, regulatory systems), and (d) media stakeholders.
CSR as ethics driven is a view that arises due to the criticism of the previous two
concepts of CSR, namely as social obligation or stakeholder obligation which implies that
CSR practices are motivated by self-interest. CSR as ethics driven can be defined as
following ethics-based justice, companies can try to systematically support decisions and
procedures that stimulate equality, freedom, and fairness of opportunity for various partners
and associates. The point is to pay attention to aspects of ethics, human rights and equality
(Maignan & Ferrell, 2004).
CSR as managerial process in Ackerman's opinion in 1975 outlined three main
representatives of socially responsive corporate activities: (a) monitoring and assessing
environmental conditions, (b) paying attention to stakeholder needs, and (c) designing plans
and policies aimed at increasing the company's positive impact. Similarly, Wartick and
Cochran in 1985, along with Wood in 1991 share the same opinion, suggesting that issue
management and environmental assessment are two sets of managerial processes useful for
achieving a proactive stance of social responsibility.
CASE STUDY MATERIALS
GAP'S LABOR PROBLEMS:
Gap Inc. is a chain of retail stores including Gap, Banana Republic, Old Navy, Gap
International, GapKids, and BabyGap, selling casual clothing and shoes, headquartered in
San Francisco. Most of Gap's suppliers are located in 50 countries with a total of 3000
factories. In March 2004, Paul Pressler, CEO of Gap Inc. looked at CSR (Corporate Social
Responsibility) reports that showed problems with workers' rights in factories that supply
Gap's clothing.
The biggest issue that Gap faced in its CSR report was a lawsuit in September 2002. A
lawsuit had been filed on behalf of workers in January 1999 when Gap Inc. and 25 other
retailers were accused of working with a supplier called Sweatshops on the Southeast Asian
island of Saipan. Several ethical issues were at issue for Gap. According to the lawsuit, the
factory on Saipan violated the human rights of its workers. Furthermore, Gap, Inc. and other
retailers deceived American consumers by stating on the labels of clothes made in Saipan that
they were "Made in the USA, slyly implying the clothes were made according to American
labor standards. Pressler took offense to the lawsuit. He knows that Gap Inc. regularly
monitors its factories and he believes that conditions at the Saipan factory are not as bad as
the lawsuit claims. In addition to the Saipan factory, similar worker rights violations have
occurred at factories making clothes for Gap in the Central American region, Lesotho,
Thailand, Cambodia, Bangladesh, Indonesia, and Mexico.
In fact, Gap is one of the first companies to have implemented a code of conduct for its
factories. Gap's code of conduct states that Gap's suppliers must avoid discrimination, not use
workers who have been imprisoned, not employ children under 14 years old, provide a safe
working environment for workers, provide local standard wages (even better), meet all
applicable local environmental regulations and comply with Gap's environmental standards,
not threaten or threaten workers penalize employees for their attempts to organize or bid
collectively, and enforce all local customary laws. Before signing a contract with a new
factory supplier, Gap sends one of its workers to inspect the factory and make sure the
factory owner signs its code of conduct.
Gap's labor problems began in 1995 when a story ran in the New York Times about
Gap's supplier factory in El Savador. The factory in El Savador that made Gap clothing, run
by Mandarin International (a Taiwanese-owned company), paid its employees, mostly young
women, 12 cents for every garment made for Gap that sold for $20 in America. While the
average wage paid is 56 cents per hour - which in this case is estimated to provide only 18%
of the amount needed to support a family of four, it is in line with industry standards in the
region. In addition, the factory also employed a 15-year-old full-time without paying
overtime wages. In fact, El Savador law states that it is prohibited to fire or harass workers
who will form a union, it is prohibited to employ 14 to 18 year olds for more than 6 hours,
and the normal working hours for adults is 44 hours unless overtime pay is added. However,
these laws are not always enforced.
The National Labor Committee (NLC), a coalition of American unions headed by labor
activist Charles Kernaghan visited the factory in El Savador and reported for the newspaper
that when workers attempted to form a union they were subjected to terrible treatment.
Activists began claiming that some Gap factories were using underage workers to make Gap
clothing and that these conditions were indicative of the poor state of Gap factories. Activists
saw that Gap's suppliers were not implementing Gap's code of conduct. In any case, the NLC
claims, workers in Gap's clothing factories are unpaid and non-unionized.
In 2001, Gap finally added a guideline to its code of conduct regarding foreign contract
workers. All existing claims were rectified through the new guidelines. Gap even contributed
$20 million toward workers' compensation and hired a third party, Veritas of Amherst,
Massachusetts, to continuously monitor the Saipan plant. However, in 2002 a similar incident
was still found in Leshoto, Africa. As well as factories in Indonesia, Thailand, and in 2003 a
factory in Cambodia, unions protested for better wages and violent working conditions.
In late 2003, Gap's CEO Paul Pressler, decided that the company needed to do
something to stop the bad publicity about Gap that was hurting the company's reputation and
image. The company finally produced a full and detailed public report on the problems facing
the company and its workers in all regions of the world. The report was published in 2004 on
Gap's corporate website so that the public could know everything about Gap's product
creation including the conditions of the 3,000 factories that did not comply with regulations
in their respective regions. Some labor groups appreciated the report despite statements that it
was difficult to solve the problem and could not simply solve the problem. Charles
Kernaghan of the NLC also appreciated the report and stated that this is a major issue for
contracting companies (outsouching) in various countries regarding labor unions.
Case Question:
1. Is a company like Gap morally responsible for the way in which its suppliers treat their
workers? Explain your answer.
2. From the lengthy description of Gap's history of labor problems, what recommendations
would you propose to bring to Paul Pressler's attention, what should the company do now
to address current and future problems? Explain how your recommendations will be
effective in solving Gap's problems.
CASE STUDY MATERIALS:
GLOBAL ETHICS:
US companies generally have codes of conduct that provide guidelines for their
employees. But these guidelines can be restrictive compared to those commonly used in other
countries. Consider a U.S. company that sells supplies to a foreign manufacturer. Both the
company's code of conduct and the U.S. Foreign Corrupt Practices Act prohibit the company
from offering commissions (monetary rewards) to employees of manufacturers that order its
products. In some countries, this kind of behavior is acceptable. Thus, U.S. suppliers are at a
disadvantage because their employees are required to adhere to a stricter code of conduct.
This is a common ethical dilemma faced by US companies in a globalized environment.
Employees of US companies have to choose between ignoring their ethical guidelines or
bidding for a weaker position in certain foreign countries.
Another ethical dilemma faced by US companies involves the company's relationship
with the governments of certain foreign countries. Companies doing business in foreign
countries must comply with a variety of regulations imposed by local governments. Officials
of certain foreign governments. Companies doing business in foreign countries must comply
with a variety of regulations imposed by local governments. Officials of some foreign
governments commonly accept bribes from companies that need approval for various
business activities. For example, a company needs its products approved for safety reasons,
or its local manufacturing plant needs approval for environmental purposes. The approval
process for even small activities can take months and prevent companies from doing
business. Companies that pay off government officials may receive immediate attention from
local authorities. Lockhead Martin employee charged bribed the Egyptian government to win
an airplane construction contract. Executives from IBM's Argentine subsidiary were charged
with bribing Argentine government officials to obtain business from the government.
Recent assessments of foreign countries by the US Department of Commerce and
intelligence agencies detected numerous deals in which foreign companies used bribes for the
US. Many of these foreign companies are located in France, Germany and Japan, as well as
several other developing countries.
Many US companies try to adhere to a world-level code of conduct that is consistent
across countries. This type of policy reduces the confusion that can result from using
different ethical standards in different countries. While a worldwide code of conduct can be
detrimental to US companies in some countries, it can also increase the credibility of the
company.
Critical Thinking Ability Test Questions
Discuss the answers to the questions below and answer briefly!
1. Explain the definition of business ethics?
2. How to deal with cross-border ethical issues?
3. How to develop an ethical climate in the organization?
