Ethics and Social Responsibility Chapter 5 Ethics and Social Responsibility

Learning Objectives After studying this chapter, you should be able to: Describe why an understanding of basic approaches to ethical decision making and corporate social responsibility is important. Explain the basic approaches to ethical decision making. Identify the different implications of each approach in real-life situations. These learning objectives are expressed in the chapter and you may prefer to move directly to slide 4, if you are comfortable that students agree with the objectives. It should be noted at this point, that all slides that have been prepared for this and the other chapters, have been animated to assist in the presentation. The most important animations are not the bulleted text items (which are animated) but rather the animation of models and exhibits. Models and exhibits contain “sequenced” animations and attempt to portray in visual terms, what the text attempts to portray in words. Many of the models contained in the textbook are taken out of their “static” context and shown here as the “dynamic” constructs they are. A dynamic construct is one that shows how one variable or event is affected by another, and this implies change. Such concepts should be presented dynamically, which means the animation should reflect the change implied by the construct or model. It is a good idea to “play” through the slides before presenting the materials to be sure you understand how they work. Although these slides can be printed and displayed as “transparencies”, the dynamic nature of the concepts will be less obvious. The slides are best shown in the classroom with your computer connected to the overhead projector. To view the animated presentation, select “View Show” from the Slide Show pull-down menu, or press the F5 key at the top of the keyboard, or select “Slide Show” from the View pull-down menu. . The slides were prepared using Office 2000 to facilitate the likely lowest common denominator for software. However, they will also play under Office XP and newer software. ©2005 Prentice Hall

Learning Objectives After studying this chapter, you should be able to: Explain the basic approaches to corporate social responsibility. Develop different implications for each approach to corporate social responsibility ©2005 Prentice Hall

Some Observations Managers in large companies usually act as agents of the owners Implied obligation to act in best interest of the owners or shareholders Actions that benefit only themselves are likely to be unethical Ethics and strategy begin at the top of the organization For some students, this may be their first introduction to the notion of “agency” as a concept of management. The obligation of managers to act in the interests of their owners is fundamental to the notion of business. When managers ignore this obligation it can lead to severe consequences for all parties involved in a transaction. Examples, both good and bad can easily be found in current business publications and the local newspaper. ©2005 Prentice Hall

Ethics in Business Award Winners The Bureau of National Affairs, Inc. For over a half-century of dedication to employee ownership, despite pressures to sell the company. Iceland, Inc. For a precedent-setting move in the U.K. toward the sale of all-organic store-brand food at not-organic prices. Whole Foods Market For a broad-based commitment to customer, stockholder, employee, community, and environmental service. This is the first of three slides citing winners of the “Excellence in Business Ethics” award. The list covers the years 2000, 1999 and 1998. If presented in the “View Show” mode, it will appear as one slide. You may discuss each winner if you wish, but the primary reason for the construction of Exhibit 5.1 (page 152) in this manner is to enable the font size to be large enough for viewing in a classroom setting. It is probably more useful to discuss the “reasons why firms are recognized for their ethical actions, and why society encourages ethical actions such as exhibited by these award winners. ©2005 Prentice Hall Adapted from Exhibit 5.1: Excellence in Business Ethics Award Winners

Ethics in Business Award Winners St. Lukes For creating a visionary model of employee ownership, out of the crisis of an unwanted merger. Equal Exchange For its path-breaking approach to fair trade, defining supplier welfare as part of business success. Fetzer Vineyards For a broad-based approach to environmental sustainability, combined with financial excellence. ©2005 Prentice Hall Adapted from Exhibit 5.1: Excellence in Business Ethics Award Winners

Ethics in Business Award Winners SmithKline Beecham For its $1 billion commitment to disease eradication. Wainwright Bank For dedication to social justice, internally and externally. S.C. Johnson For its focus on sustainable community development. ©2005 Prentice Hall Adapted from Exhibit 5.1: Excellence in Business Ethics Award Winners

The Development of Individual Ethics Family Friends Peers Teachers Religion Job experiences Life experiences A good class discussion can be generated here as to why individuals display such a wide range of ethical perspectives. What is the most important influence on students’ ethics? Are peers more influential on the development of individual ethics than are parents? Questions such as these can facilitate the discussion. ©2005 Prentice Hall

Basic Approaches to Ethics Ethical dilemmas The choice between two competing but arguably valid options Frameworks for ethical decision making Utilitarian approach Moral rights approach Universalism approach Justice approach The four frameworks are examined in greater detail in the following five slides. A good question to ask students at this point might be, “Is it possible to have different, but equally valid points of view regarding ethics?” ©2005 Prentice Hall

Basic Approaches to Ethics Utilitarian Approach Focused on the consequences of an action What is the “greatest good?” Different people may see the outcome differently in terms of good or bad ©2005 Prentice Hall

Basic Approaches to Ethics Moral Rights Approach Focused on an examination of the moral standing of actions, independent of their consequences Some actions are simply “right” or they are “wrong” When two actions both have moral standing, then the positive or negative consequences of each will determine which is the more ethical decision or action ©2005 Prentice Hall

Basic Approaches to Ethics Universal Approach “Do unto others as you would have them do unto everyone, including yourself.” Choose a course of action you believe can apply to all people under all situations The issue of rights Rights stem from freedom and autonomy Actions that limit freedom and autonomy generally lack moral justification ©2005 Prentice Hall

Basic Approaches to Ethics Justice Approach How equitably are the costs and benefits of actions distributed? Costs and benefits should be equitably distributed Rules should be impartially applied Those damaged because of inequity or discrimination should be compensated Distributive justice Equitable distribution is based on performance ©2005 Prentice Hall

Basic Approaches to Ethics Justice Approach Procedural justice Ensure that people affected by managerial decisions consent to the decision-making process Ensure that the process is administered impartially Compensatory justice If distributive and procedural justice fail, those hurt by inequitable distribution of rewards are compensated Students generally have well developed senses of justice. Often their senses of justice involve the issue of “fairness.” How do these three views fit their sense of justice? ©2005 Prentice Hall

Moral Intensity in Ethical Decision Making The degree to which people see an issue as an ethical one Six components Magnitude of the consequences Social consensus Probability of effect Temporal immediacy Proximity Concentration of effect The six components of moral intensity are explored in greater detail in the following six slides. An example here of some action that raises an ethical issue would be good for class discussion, focusing on the issue of “To what degree is this unethical?” Is it only a little bit unethical, or highly unethical, or somewhere in-between? Why? ©2005 Prentice Hall

Moral Intensity in Ethical Decision Making Magnitude of the consequences Level of impact anticipated Impact is independent of whether consequences are positive or negative Magnitude of the Consequences Moral Intensity This and the next five slides will appear as one (seamless) if presented in the “View Show” mode. The presentation relies on Exhibit 5.2 from page 160 of the text, and presents factors considered in each of the six components of moral intensity. It is a good idea to play through the presentation before going to the classroom to ensure you understand where mouse clicks are necessary to advance the presentation. It will allow a point-by-point discussion of each factor. ©2005 Prentice Hall Adapted from Exhibit 5.2: Factors of Moral Intensity

Moral Intensity in Ethical Decision Making Consequences Social Social consensus The extent to which members of a society agree that an act is either good or bad Population diversity weakens social consensus Magnitude of the Consequences Moral Intensity ©2005 Prentice Hall Adapted from Exhibit 5.2: Factors of Moral Intensity

Moral Intensity in Ethical Decision Making Consequences Social Probability of effect How likely people think the consequences are The higher the probability of the consequence, the more intense the sense of ethical obligation Magnitude of the Consequences Probability of Effect Moral Intensity ©2005 Prentice Hall Adapted from Exhibit 5.2: Factors of Moral Intensity

Moral Intensity in Ethical Decision Making Consequences Social Temporal immediacy Interval between the time the action occurs and the onset of its consequences The greater the time interval, the less intensity people typically feel toward the issue Magnitude of the Consequences Probability of Effect Moral Intensity Temporal Immediacy ©2005 Prentice Hall Adapted from Exhibit 5.2: Factors of Moral Intensity

Moral Intensity in Ethical Decision Making Consequences Social Proximity The closeness the decision maker feels to those affected Closeness leads to more consideration of the consequences Closeness increases feeling that decision has ethical implications Magnitude of the Consequences Probability of Effect Moral Intensity Temporal Immediacy Proximity ©2005 Prentice Hall Adapted from Exhibit 5.2: Factors of Moral Intensity

Moral Intensity in Ethical Decision Making Consequences Social Concentration of effect Focus of effect on only a few or disbursed across many individuals Higher concentration leads to feelings of greater ethical responsibility Magnitude of the Consequences Probability of Effect Moral Intensity Concentration of Effect Temporal Immediacy Proximity ©2005 Prentice Hall Adapted from Exhibit 5.2: Factors of Moral Intensity

Making Ethical Decisions The manager The organization Code of ethical conduct Formal statement outlining types of inappropriate behavior addressing three issues Being a good “organization citizen” Guiding employee behavior away from unlawful or improper acts that could harm the organization Addressing directives to be good to customers Johnson & Johnson’s credo (code of ethical conduct) is seen in Exhibit 5.3 in the textbook on page 165. It is not presented here because it is difficult to create it such that it can be read in the classroom. However, you can integrate various points from the code into your discussion of how ethical decision making is encouraged by codes of conduct. ©2005 Prentice Hall

Categories Found in Corporate Codes of Ethics Comply fully with antitrust laws and trade regulations. Comply fully with accepted accounting rules and controls. Do not provide false or misleading information to the corporation, its auditors, or a government agency. Do not use company property or resources for personal benefit or any other improper purpose. Each employee is personally accountable for company funds over which he or she has control. Staff members should not have any interest in any competitor or supplier of the company unless such interest has been fully disclosed to the company. Demonstrate courtesy, respect, honesty, and fairness in relationships with customers, suppliers, competitors, and other employees. Comply with safety, health, and security regulations. Do not use abusive language or actions. Dress in businesslike attire. Possession of firearms on company premises is prohibited. Follow directives from supervisors. Be reliable in attendance and punctuality. Manage personal finances in a manner consistent with employment by a fiduciary institution. Maintain confidentiality of customer, employee, and corporate records and information. Avoid outside activities that conflict with or impair the performance of duties. Make decisions objectively without regard to friendship or personal gain. The acceptance of any form of bribe is prohibited. Payment to any person, business, political organization, or public official for unlawful or unauthorized purposes is prohibited. Conduct personal and business dealings in compliance with all relevant laws, regulations, and policies. Exhibit standards of personal integrity and professional conduct. Racial, ethnic, religious, or sexual harassment is prohibited. Report questionable, unethical, or illegal activities to your manager. Seek opportunities to participate in community services and political activities. Conserve resources and protect the quality of the environment in areas where the company operates. Members of the corporation are not to recommend attorneys, accountants, insurance agents, stockbrokers, real estate agents, or similar individuals to customers. Cluster 1 “Be a dependable organizational citizen.” Cluster 2 “Don’t do anything unlawful or improper that will harm the organization.” Strive to provide products and services of the highest quality. Perform assigned duties to the best of your ability and in the best interest of the corporation, its shareholders, and its customers. Convey true claims for products. Unclustered Items Cluster 3 “Be good to our customers.” This slide incorporates “scrolling text” because of the vast volume of information (text) contained in Exhibit 5.4 found on page 166 in the text. Text in the cluster box will appear, following a mouse click, and the points contained in that box (see the Exhibit in the textbook) will automatically (without a mouse click) scroll up in the blank area at the bottom of the slide. The points will scroll too quickly for good reading, but will enable you to “recall” one or two items for additional discussion of that cluster, before proceeding to the next cluster. Proceeding to the next cluster is activated by a mouse click. It is important to review this slide in the “View Show” mode before class so that you gain a complete understanding of where mouse clicks are necessary and where they are not, or else you may inadvertently advance the slide past a discussion point upon which you wished to elaborate. ©2005 Prentice Hall Adapted from Exhibit 5.4: Categories Found in Corporate Codes of Ethics

Adoption of Codes of Ethics United Kingdom France Germany 31% 69% 18% 82% 47% 53% Exhibit 5.5, found on page 167, is animated, permitting some point-by-point discussion of firms with codes and those without codes, and why those percentages differ between countries. Review the slide in the “View Show” mode before presenting in class. 10 20 30 40 50 With Codes Number of Firms Without Codes ©2005 Prentice Hall Adapted from Exhibit 5.5: Adoption of Codes of Ethics

Subjects Addressed in Corporate Codes of Ethics Employee conduct Community and environment Customers Shareholders Suppliers and contractors Political interests Innovation and technology Most often for European firms Most often for United States firms Least often for European Countries Exhibit 5.7 is too large for reasonable viewing in a classroom slide. It has been condensed greatly here to permit discussion of the seven subjects and some obvious differences between how European and U.S. firms address them in their codes of ethics. The exhibit is found on page 167, and you should review it to see if you wish to cover additional points. Least often for United States firms ©2005 Prentice Hall Adapted from Exhibit 5.6: Subjects Addressed in Corporate Codes of Ethics

Successfully Implementing Codes of Ethics Communication Training Implementing Code of Ethics The text describes four factors that are important in implementing codes of ethics. This animated graphic will help you focus on each factor, point-by-point. Whistle-blowing Reward and Recognition ©2005 Prentice Hall

The Government Foreign corrupt practices act Illegal to corrupt actions of foreign officials, politicians, or candidates for office Outlaws making payments to any person when they have "reason to know" that the payments might be used to corrupt the behavior of officials Requires that firms take steps to provide "reasonable assurance" that transactions are in compliance with the law and to keep detailed records of them There is a good discussion of the Foreign Corrupt Practices Act in the textbook. You should supplement this slide with examples of corrupt practices or elicit those from students. Rely on current cases to enhance the discussion. ©2005 Prentice Hall

Social Responsibility Efficiency perspective (maximize profits for the owners of the business) Managers as owners Self-interests of the manager-owner are best achieved by serving the needs of society Managers as agents Managers have no obligation to act on behalf of society if it does not maximize value for the shareholders Concerns with the efficiency perspective Corrective action to corporate harm often occurs after people are injured Externalities This is the first of three slides discussing social responsibility. This slide present the efficiency perspective, which many consider to be the “classical” view of corporate obligations to society. At this point you can recall the earlier discussion of “agency” relationships between owners and managers, and how this supports the efficiency perspective. Class discussion is easy to generate here as students will have differing views. You may decide to delay such debate until the second perspective, next slide, is presented. ©2005 Prentice Hall

Social Responsibility Social responsibility perspective (firms have responsibilities and obligations to society as a whole, not just shareholders ) Stakeholders Employees, financiers, suppliers, communities, society at large, and shareholders To maximize the return to shareholders would take away returns owed to the other stakeholders Concerns with social responsibility perspective Defining exactly what is reasonable or legitimate returns Shareholders have conflicting and competing concerns This slide presents the social responsibility view. Few would argue that firms have at least some obligations beyond profits, but just how much obligation is very debatable. Bring in some examples of corporate actions that have varying degrees of “obligations” to see how students feel about them, as a contrast to the efficiency perspective. ©2005 Prentice Hall

Social Responsibility Comparing Efficiency and Social Responsibility Perspectives Efficiency Perspective Managerially Irresponsible Social Responsibility Perspective Managerially Responsible Efficiency Perspective Managerially Irresponsible Social Responsibility Perspective NO YES Action Harms Shareholders Efficiency Perspective Managerially Responsible Social Responsibility Perspective Efficiency Perspective Managerially Responsible Social Responsibility Perspective Managerially Irresponsible Exhibit 5.7 (page 175) is presented here with animation to allow point-by-point discussion of the four quadrants. You may wish to change the order of the discussion by going to the “Slide Show” pull-down menu and selecting custom animation. The order presented here is upper left, lower right, upper right, and lower left. I like to end on the lower left, where corporate actions harm neither shareholders, nor other stakeholders. Some will argue that this is an idealistic view, not truly attainable because any action that benefits other stakeholders is sure to harm shareholders. Again, good discussion can be generated in class as students offer their views on the social responsibility of business enterprises. NO YES Action Harms Other Stakeholders ©2005 Prentice Hall Adapted from Exhibit 5.7: Subjects Addressed in Corporate Codes of Ethics

Corporate Responses Defenders Accommodators Belief: Focus: We must fight against efforts to restrict or regulate our activities and profit-making potential. We will change when legally compelled to do so. This is the first of two slides regarding Exhibit 5.8 (page 177). This exhibit is animated to permit point-by-point discussion of the four corporate responses. Please review the presentation in the “View Show” format before class to ensure you understand the operation of mouse clicks. The slides will appear seamless. It is a good place to wrap up the discussion, as it can be seen that there are a great many points of view between the two perspectives of corporate social responsibility, and that most firms will adopt some variation of the efficiency perspective that fulfills at least some obligations to all stakeholders. Maximize profits. Find legal loopholes. Fight new restrictions and regulations. Maximize profits. Abide by the letter of the law. Change when legally compelled to do so. ©2005 Prentice Hall Adapted from Exhibit 5.8: Corporate Responses

Corporate Responses Reactors Anticipators Belief: We should respond to significant pressure even if we are not legally required to. We owe it to society to anticipate and avoid actions with potentially harmful consequences, even if we are not pressured or legally required to do so. Focus: Protect profits. Abide by the law. React to pressure that could affect business results. Obtain profits, Abide by the law. Anticipate harmful consequences independent of pressures and laws. ©2005 Prentice Hall Adapted from Exhibit 5.8: Corporate Responses