Dr Denise Dollimore University of Hertfordshire, UK Metropolia Business School International Project Week (IPW) 2013

Dr Denise Dollimore Senior lecturer in Strategic Management University of Hertfordshire Business School, UK Researcher in Group for Research in Organizational Evolution (GROE) And you? your degree programme… your interest in business ethics…

Theories, perspectives and debates The case study method and ethical issues Monday Business ethics in the age of customer capitalism Tuesday Business ethics, corporate governance and corporate social responsibility Wednesday Doing well by doing good: Stakeholder theory Thursday The business case for CSR and sustainability: are virtuous firms built to last?

 Evaluate ethical issues from a range of strategic management perspectives  Apply ethical and organizational values to situations and choices  Apply theory to devise and justify decision strategies for dealing with ethical dilemmas

What is Business Ethics? What does it mean to you?

 An ‘oxymoron’! – bringing together of two contradictory concepts (Collins 1994)  ‘Principles of conduct within organizations that guide decision making and behavior’ (David 2008) Good business ethics is a prerequisite for good strategic management  ‘The application of ethical principles to organizations to either understand, judge, or direct individual and organizational ethical decision making ’ (King & Lawley 2013) Definitions of Business Ethics

Companies experience “social blowback” when stakeholders perceive that they have breached their deal with society Thomas Donaldson (2007) Meanwhile… The ‘social contract’ of business in society is continually evolving Sandra Waddock (2010)

 Nike 1996: use of child labour  2010 Financial crisis: accounting Bros ‘cosmetic accounting’; over-leveraged / inadequate liquidity/financial losses  BP 2010: oil spill Gulf of Mexico (environmental damage)  Primark : Indian sweatshops/building collapse  McDonalds 2009: Obesity and unhealthy eating  Barclays : Libor scandal (rate fixing)  Tesco 2013: Horsemeat scandal (food contamination) Finnish examples?

Crane, Matten and Spence (2008)  Companies have responded to increasing expectations by advocating what is now a common term in business: Corporate Social Responsibility (CSR).  Most large companies now feature CSR reports, managers, departments, and the subject is increasingly promoted as a core area of management next to marketing & accounting  The business case for CSR continues to be hotly debated While others take more nuanced view…

Roger Martin (2010) Harvard Business Review “For three decades, executives have made maximizing shareholder value their top priority. But evidence suggests that shareholders actually do better when firms put the customer first” “It’s time to discard the popular belief that corporations must focus first and foremost on maximizing value for shareholders. The idea is inherently, and tragically, flawed”

Following the era of CEO owners (Rockefellers/Carnegies) Two major eras of Modern capitalism: Managerial Capitalism (from1930s)  Berle & Means (1936) The Modern Corporation & Private Property  Firms need to have professional management Shareholder value Capitalism (from1970s)  Jensen & Meckling (1976) Theory of the Firm: Managerial Behaviour, Agency Costs and Ownership Structure  Purpose of every corporation should be to maximize shareholder wealth.

Roger Martin’s critique  Data shows that focus on shareholder value has actually earned lower returns since corporations adopted it as their guiding principles.  The harder a CEO is pushed to increase shareholder value, the more the CEO will be tempted to make moves that actually hurt the shareholders.  The better approach is to make customer value the top priority, as Johnson & Johnson and Procter & Gamble have done. These two companies have generated shareholder returns that are at least as high as, if not higher than, those of leading shareholder-focused companies What do you think…?

Johnson and Johnson’s credo (since 1943) “We believe our first responsibility is to the doctors, nurses and patients, to mothers and fathers and all others who use our products and services…We are responsible to our employees, the men and women who work with us throughout the world…We are responsible to the communities in which we live and work and to the world community as well…Our final responsibility is to our stockholders…When we operate according to these principles, the stockholders should realize a fair return.” What Martin calls ‘customer capitalism’

The Principles at work: Procter and Gamble  CEO not focused on shareholder value and fixated on share price is freed up to concentrate on building up the business  Procter and Gamble: 90% of compensation of CEO, Lafley, was in stock options, the vested period (period before owned unconditionally) of which will begin a year after his retirement and last 10 years.  If more companies made customers the top priority, the quality of corporate decision making would improve because thinking about the customer forces you focus on improving your operations and the products and services you provide, rather than on spinning lines to shareholders.  ethical values, issues and choices…

Ethical values: shared beliefs about right and wrong, good and bad  Govern the behaviour of a person or a group Ethical issues: problems or dilemmas which present a conflict of values  Pay a ‘living wage’ or personal financial gain Ethical choices: decisions about which option to take in response to a dilemma  Difficult decisions, because each option has its own drawbacks Ethical dilemmas…

 Crane and Matten [2004] 2010, Business Ethics, Oxford University Press  Collins, J. W. 1994, Is Business Ethics an Oxymoron? Business Horizons, Sept-Oct: 1-8  David, F Strategic Management: Concepts and Cases  Donaldson, T. 2007, ‘“Ethical blowback”: the missing piece in the corporate governance puzzle – the risks to a company which fails to understand and respect its social contract’ Corporate Governance Vol 7. Issue 4  Jensen and Meckling, 1976, Theory of the Firm: Managerial Behaviour, Agency Costs and Ownership Structure. Journal of Financial Economics.3:  Waddock, S. (2010) ‘The Social Contract of Business in Society’ in Aras and Crowther eds. A Handbook of Corporate Governance and Social Responsibility 2010 pp

‘The Social Contract between business and society is constantly evolving...More recently forces of globalization have placed multinational corporations in the position of being the most powerful institutions on the planet, and simultaneously companies have faced criticism about their roles and impacts.’ (Waddock 2010) Companies have evolved their corporate responsibility stances, from a reactive CSR stance (reacting to external crises & offering charitable contributions), to a more responsive stance involving voluntary systems of responsibility assurance (codes of ethics, industry standards, etc).

 CSR manages the paradox of profitability and responsibility  The early message ‘doing well by doing good’ (Freeman, 1984)  CSR imposes political functions of govt on corporate executives  CSR has failed to create the good society – expecting too much from business  Close adherence to CSR agenda leads to falling profits over time  Difficulty in allocating rights responsibilities and enforcing them – who decides?  Stakeholder Theory the way forward – CA through building superior relationships. Notable that some scholars dropping the use of the term ‘CSR’ but retaining that of ‘ethics’ (while others use these terms interchangeably!) Jury is still out – you decide!