Chapter 5 Managing Ethics and Social Responsibility

Managerial Ethics Ethics - code of moral principles and values that govern the behaviors of right or wrong Standards about good/bad Ethical issues can be complex People in organizations have divergent views about right/wrong Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved. 2

5.1 Three Domains of Human Action Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved. 3

Ethical scandals during the last decade have been pervasive Corporations and people have become associated with greed, deceit, irresponsibility, and lack of moral conscience Managers carry a big responsibility for setting an ethical climate Ethical crises have brought ethical management to the forefront Ethical Management Today Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved. 4

5.2 Examples of Unethical and Illegal Organizational Behavior Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved. 5

Ethical Dilemmas You are the moral agent, what would you do? Your company requires a terrorist watch list that screens all new customers and takes approximately 24 hours from the time an order is placed. You can close a lucrative deal with a potential long-term customer overnight, even though that means the required watch-list screening will have to be done after the fact. Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved. 6

Criteria for Ethical Decision Making Utilitarian Approach – moral behavior produces the greatest good for the greatest number Individualism Approach – acts are moral if they promote the individu al’s long-term interest Moral-Rights Approach – humans have fundamental rights and liberties that cannot be taken away by an individual's decision Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved. 7

Justice Approach – moral decisions must be based on standards of equity, fairness, and impartiality Virtue Ethics Approach– moral behavior stems from personal virtues Practical Approach– bases decisions on prevailing standards, society, and all stakeholders Criteria for Ethical Decision Making Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved. 8

A Manager’s Ethical Choices Individuals bring their own personality and traits to organizations Personal needs, family influence, and religious background shape individuals Personality characteristics like ego, confidence, and independence Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved. 9

5.3 Three Levels of Personal Moral Development Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved. 10

What is Corporate Social Responsibility (CSR)? Distinguishing right from wrong; doing right Good corporate citizenship Make choices that contribute to society and stakeholders Stakeholders – any group within or outside Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved. 11

5.4 Major Stakeholders Relevant to Monsanto Company Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved. 12

Going GREEN is a new business imperative – Change in social attitudes – New governmental policies – Climate change Information technology immediately spreads the negative decisions of corporations More organizations are embracing sustainability The Green Movement Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved. 13

The Ethic of Sustainability Sustainability – economic development that generates wealth and meets the needs of current population while preserving the environment for the needs of future generations Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved. 14

5.5 Criteria of Corporate Social Performance Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved. 15

Managing Company Ethics and Social Responsibility Code of Ethics – a formal statement of the company’s values regarding ethics and social issues Ethical Structures – systems, positions, and programs like ethics training Whistle-blowing – employee disclosure of illegal, immoral, or illegitimate practices Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved. 16

5.6 Building an Ethical Organization Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved. 17

The Business Case for Ethics and Social Responsibility Ethics and social responsibility are important business issues Stakeholders are pushing more initiatives and issues The connection between ethics and financial performance has been widely debated What do you THINK? Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved. 18

Enron – an energy brokerage house that was top ten in Fortune 500 list as of Arthur Anderson – the most prestigious accounting firm at the time; Enron was its client Illegal collusion between Enron & Arthur Anderson System Failure: Arthur Anderson provided consulting services that helped Enron cook the financials, which was supposed to be audited by Arthur Anderson. Investors lost confidence on financial information, and fled the stock. Enron Scandal - Arthur Anderson Scandal (2001) Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved. 19

3 Major Impacts by SOX [Lee, 2012]: 1.Internal Control System 2.No longer consulting services 3.Accountability SOX helped restore investors’ confidence in the stock market. Sarbanes-Oxley Act (SOX, 2001) Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved. 20

Background – Civil War; President Lincoln drafted this law to punish war profiteers who ripped off the U.S. federal government. When you discover your firm’s wrongdoings such as tax evasion, you hire a Lincoln law specialist lawyer, and file a lawsuit against your firm; the judge will rule in favor of you, and grant big reward to you. Big reward = about half of the money that the federal government would recover from your firm. Lincoln Law - Whistle Blow Act Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved. 21

“Tax loopholes – Big corporations’ business at offshore” [WSJ article, ]Tax loopholes – Big corporations’ business at offshore Who gets most benefit from the government? => Big corporations Big corporations argue less tax & smaller government, but who protects their wealth (police)? Who trains their workforce (public education: K-12 & state universities)? Who provide infrastructures (road, utility, Internet fiber optics cables, etc.)? Using such tax loopholes will make them hard to gain respect & support from customers & American people, which leads to the serious risk to their economic sustainability. 2 minute speech on Fair Taxation by Professor Elizabeth Warren of Harvard Law School: Tax, Corporate Responsibility, & Economic Sustainability Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved. 22

Marginal Tax - 40% with deductions: – Suppose you made $1,000,000. – With help of creative accounting, you made deductions of $900,000 – Taxable income is only $100,000. – You pay about 30% tax, $30,000. In short, your effective tax rate is only 3%; that is, $30,000 tax on $1,000,000 income. – This is how billionaires pay less than 5% with help by creative accountants & tax lawyers, while most pay above 15% effective tax rates. – Is this really a progressive system? – Note: Ordinary middle class citizens do not afford to hire such expensive accountants & tax lawyers, ending up only standard deductions. Flat Tax – say, 10% on revenue or income; no deduction; – Big corporations, billionaires all pay 10% on their income, no matter what. No deductions what so ever! – In the above case, you will pay $100,000 tax. Fair Taxation: Marginal Tax vs. Flat Tax Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved. 23

Suppose you are an owner/president of a private firm; You made $1,000,000 in net profit, which is taxable at 40%. $400,000 is expected to pay the tax. Now, you want to reduce the tax amount. It is human nature to be greedy. You coerce the staff (in-house accountants) to cook the numbers by manipulating & increasing the deductions, e.g. creating fake expense accounts, etc. Once you steal the firm’s money, your staff will start to steal the money. Soon, everyone will steal the company money & resources. Even when you discover the steals, you cannot charge them to the police because you initiated this illegal activity yourself, & the staff threats that they will report your wrongdoings to the police. Economic Sustainability: The company cannot sustain with such wrongdoings when everyone steals from it. Conclusion: If you want to leave the firm to your son & to grandson, (1) set the high ethical standards, and show you actually are serious about the ethics. (2) Build an internal control system to make everyone keep honest. Do not make employees tempted to embezzle the company money. Don’t evade the tax! Tax Evasion & Economic Sustainability [Lee, 2012] Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved. 24

The U.S. may not look perfect, but still the U.S. stock markets and corporate culture are most admired by the world because they are more transparent, more system- controlled, and less corrupt than any other countries. The U.S. economic sustainability entirely depends on maintaining such high ethical standards in government and industry. Do not forget a lesson from the fall of the Roman Empire: Corruptions, greed & unethical behavior by the ruling class ruined the Roman Empire. Ethics & The U.S. Economic Sustainability [Lee, 2012] Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved. 25