CHAPTER 9 ETHICS, CORPORATE SOCIAL RESPONSIBILITY, ENVIRONMENTAL SUSTAINABILITY, AND STRATEGY McGraw-Hill/Irwin Copyright ®2012 The McGraw-Hill Companies, Inc.

Understand how the standards of ethical behavior in business relate to the ethical standards and norms of the larger society and culture in which a firm operates. Recognize conditions that can give rise to unethical business strategies and behavior. Gain an understanding of the costs of business ethics failures. Gain an understanding of the concepts of corporate social responsibility and environmental sustainability and of how firms balance these duties with economic responsibilities to shareholders.

WHAT DO WE MEAN BY BUSINESS ETHICS? Is the application of general ethical principles to the actions and decisions of businesses and the conduct of their personnel. Are not materially different from ethical principles in general because business actions have to be judged in the context of society’s standards of right and wrong.

WHERE DO ETHICAL STANDARDS COME FROM—ARE THEY UNIVERSAL OR DEPENDENT ON LOCAL NORMS? Sources for Ethical Standards The School of Ethical Universalism The School of Ethical Relativism Integrated Social Contracts Theory

The School of Ethical Universalism Holds that common understandings across multiple cultures and countries about what constitutes right and wrong give rise to universal ethical standards that apply to all societies, all firms, and all businesspeople. Effect on Business Ethics Whether a business-related action is right or wrong is judged by universal standards.

The School of Ethical Relativism Holds that differing beliefs, customs, and behavioral norms across countries and cultures give rise to multiple sets of standards of what is ethically right or wrong. Effect on Business Ethics Whether business-related actions are right or wrong depends on local ethical standards.

Examples of Ethical Relativism Issues The Use of Underage Labor The Payment of Bribes and Kickbacks Relativism Equates to Multiple Sets of Standards The Use of Local Morality to Guide Ethical Behavior Variations in Ethical Standards

How effective has Apple’s Supplier Code of Conduct been is reducing abuses of workers at its supplier facilities? Is it fair for Apple to prescribe that its suppliers comply with universal standards that are at wide variance relative to local market labor practices and conditions?

Integrated Social Contracts Theory Provides a middle-ground balance between universalism and relativism. Posits that the collective views of multiple societies form universal (first order) ethical principles that all persons have a contractual duty to observe in all situations. Within the contract, cultures or groups can specify locally ethical (second-order) actions.

Effects on Ethical Standards: Application of Integrated Social Contracts Theory to Multinational Business Effects on Ethical Standards: Adherence to universal ethical norms takes precedence over local norms. A local custom is not ethical if it violates universal ethical norms. Application of codes of ethics should first follow universal standards with allowance for local ethical diversity and influence.

HOW AND WHY ETHICAL STANDARDS IMPACT THE TASKS OF CRAFTING AND EXECUTING STRATEGY The Ethics Code Litmus Test: Is what we are proposing to do fully compliant with our code of ethics? Are there areas of ambiguity? Is this action in harmony with our core values? Are any conflicts or potential problems evident? Is there anything in the action that is ethically objectionable? Would our stakeholders, our competitors, the SEC, or the media view this action as ethically objectionable?

Consequences of Ethically Questionable Strategies Sizable civil fines and stockholder lawsuits Devastating image and public relations hits Sharp stock price drops as investors lose confidence Criminal indictments and convictions When Strategies Fail the Ethical Litmus Test

WHAT ARE THE DRIVERS OF UNETHICAL STRATEGIES AND BUSINESS BEHAVIOR? Faulty Oversight and Self Dealing Unethical Strategies and Business Behaviors Pressure for Short-term Performance A Weak or Corrupt Ethical Environment

WHAT ARE THE DRIVERS OF UNETHICAL STRATEGIES AND BUSINESS BEHAVIOR? Drivers of Unethical Business Behavior: Faulty internal oversight allows self-dealing in the pursuit of personal gain, wealth, and self-interest. Short-termism pressure to meet or beat short-term performance targets. A culture that puts profitability and business performance ahead of ethical behavior.

Which drivers of unethical behavior were active in the Madoff investment fraud scheme? How did the cultures of the Madoff and Stanford investment firms assist in perpetuating the frauds? What ethical responsibilities were lacking in the fraud’s investors that would have helped prevent the frauds?

How could the ethical culture at General Electric be adversely influenced by the firm’s heavy reliance on financial performance? Is GE’s “one strike and you’re out” ethical standard too harsh? Will GE’s adoption of global ethical standards and adherence to those standards be practical over the long term?

WHY SHOULD A FIRM’S STRATEGIES BE ETHICAL? Moral Case: Because a strategy that is unethical is morally wrong and reflects badly on the character of the firm’s personnel. Business Case: Because an ethical strategy can be both good business and serve the self-interest of shareholders.

9.1 The Costs A Company Incurs When Ethical Wrongdoing Is Found Out

Corporate Social Responsibility (CSR) CORPORATE SOCIAL RESPONSIBILITY, EVIRONMENTAL SUSTAINABILITY, AND STRATEGY Corporate Social Responsibility (CSR) Is a firm’s duty to operate in an honorable manner, provide good working conditions for employees, encourage workforce diversity, be a good steward of the environment, and actively work to better the quality of life in the local communities where it operates and in society at large.

9.2 The Five Components of a Corporate Social Responsibility Strategy

How could components of John Deere’s overall corporate social responsibility strategy conflict with those of its separate business units? Which components of John Deere’s corporate social responsibility strategy correspond to the separate dimensions of the triple bottom line concept?

9.3 The Triple Bottom Line (TBL): Excelling on Three Measures of Company Performance Profit People Planet

9.1 A Selection of Companies Recognized for Their Triple Bottom Line Performance in 2009 and 2010

Sustainability and Sustainable Business Practices Is the relationship of a firm to its environment and its use of natural resources. Sustainable Business Practices Are those practices of a firm that meet the needs of the present without compromising the ability to meet the needs of the future.

Sustainability and Sustainable Business Practices Environmental Sustainability Strategy Consists of the firm’s deliberate actions to: Protect the environment. Provide for the longevity of natural resources. Maintain ecological support systems for future generations. Guard against ultimate endangerment of the planet.

Crafting Corporate Social Responsibility and Sustainability Strategies Pursuing a Sustainable CSR Strategy in the Firm’s Value Chain Activities Moral Case: Stakeholder Benefits Business Case: Competitive Advantage

The Moral Case for CSR and Environmentally Sustainable Business Practices Operate ethically and legally Provide good work conditions for employees Be a good environmental steward Display good corporate citizenship The Implied Social Contract: “To Do the Right Thing”

The Business Case for CSR and Environmentally Sustainable Business Practices Increased reputation and buyer patronage Reduced risk of reputation-damaging incidents Lower turnover costs and enhanced employee recruiting and workforce retention Increased opportunities for revenue enhancement due innovation in support of sustainability and CSR Support for the long-term interests of shareholders

Combating the Evasion of CSR and Socially Harmful Business Practices Increased public awareness of misdeeds of bad behavior by firms Harmful and Unethical Business Actions and Behaviors Increased legislation and regulation correct and punish firms Refusal to do business with irresponsible firms