Ethics and Social Responsibility chapter four McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives Explain the relationship between ethics and the law Differentiate between the claims of the different stakeholder groups that are affected by managers and their companies actions Describe four rules that can be used to help companies and their managers act in ethical ways

Learning Objectives Discuss why it is important for managers to behave ethically Identify the four main sources of managerial ethics Distinguish between the four main approaches toward social responsibility that a company can take

The Nature of Ethics Ethical Dilemma quandary people find themselves in when they have to decide if they should act in a way that might help another person even though doing so might go against their own self-interest

The Nature of Ethics Ethics The inner-guiding moral principles, values, and beliefs that people use to analyze or interpret a situation and then decide what is the right or appropriate way to behave

Dealing with Ethical Issues There are no absolute or indisputable rules or principles that can be developed to decide if an action is ethical or unethical Neither laws nor ethics are fixed principles 6

Stakeholders and Ethics The people and groups that supply a company with its productive resources and so have a claim on and stake in the company. 7

Types of Company Stakeholders Figure 4.1 Page 131

Stockholders Want to ensure that managers are behaving ethically and not risking investors’ capital by engaging in actions that could hurt the company’s reputation Want to maximize their return on investment

Managers Responsible for using a company’s financial capital and human resources to increase its performance Have the right to expect a good return or reward by investing their human capital to improve a company’s performance Frequently juggle multiple interests 10

Managers Problem has been that in many companies corrupt managers focus not on building the company’s capital and stockholder’s wealth but on maximizing their own personal capital and wealth

Employees Expect to receive rewards consistent with their performance Companies can act ethically toward employees by creating an occupational structure that fairly and equitably rewards employees for their contributions

Suppliers and Distributors Suppliers expect to be paid fairly and promptly for their inputs Distributors expect to receive quality products at agreed-upon prices

Some Principles from the Gap’s Code of Vendor Conduct Table 4.1

Customers Most critical stakeholder Company must work to increase efficiency and effectiveness in order to create loyal customers and attract new ones

Whole Food’s Stakeholder Approach to Ethical Business Figure 4.2 Page 137

Community, Society, and Nation Physical locations like towns or cities in which companies are located A community provides a company with the physical and social infrastructure that allows it to operate A company contributes to the economy of the town or region through salaries, wages, and taxes

Example – Houston Non-Profits Many Houston area non-profits were adversely affected by the demise of Enron Many were dependent on donations from Enron The arts community was especially hit hard http://www.nptimes.com/Apr06/news-040106_1.html 18

Ethical Decision Making Utilitarian Rule - Decision that produces the greatest good for the greatest number Therefore, managers should compare and contrast alternative courses of action based on the benefits and costs of those alternatives for different stakeholder groups. How do you measure the benefits and harms that will be done to each stakeholder group? How do you evaluate the rights and importance of each group? Moral Rights rule - Decision that best maintains and protects the fundamental or inalienable rights and privileges of the people affected by it Therefore, managers should compare and contrast alternative courses of action based on the effect of those alternative on stakeholders’ rights. Justice rule - Decision that distributes benefits and harms among people and groups in a fair, equitable, or impartial way Therefore, managers should compare and contrast alternative courses of action based on the degree to which the action will promote a fair distribution of outcomes. This model forces managers to create and utilize fair procedures that inflicts equal amount of benefit, discomfort or harm upon all stakeholders, regardless of differences in race, gender, position, authority, power, etc Practical rule - Decision that a manager has no hesitation about communicating to people outside the company because the typical person would think it is acceptable Figure 4.3 Page 139 19

Practical Decision Model Does my decision fall within the acceptable standards that apply in business today? Am I willing to see the decision communicated to all people and groups affected by it? Would the people with whom I have a significant personal relationship approve of the decision? A manager can assume a decision is ethical if he or she can answer ‘yes’ to the following three questions:

Why should managers behave ethically? The relentless pursuit of self-interest can lead to a collective disaster when one or more people start to profit from being unethical because this encourages other people to act in the same way Tragedy of the Commons – the social harms created when everyone acts to maximize their own self-interests without regard for the consequences when everyone follows suit. For example, if everyone steals music because they can, then musicians could not afford to create music (they’d need to find a way to support themselves) and so music would disappear, harming both musicians and all of us.

Some Effects of Ethical/Unethical Behavior Figure 4.4 Page 144

Trust and Reputation Trust willingness of one person or group to have faith or confidence in the goodwill of another person When stakeholders believe that they are dealing with others who are basically moral and honest, trust exists. Over time, trust between stakeholders allows them to work together more efficiently and effectively, thus raising company performance.

Trust and Reputation Reputation esteem or high repute that individuals or organizations gain when they behave ethically If a manager misuses resources and if other parties regard that behavior as being at odds with acceptable standards, the manager’s reputation will suffer. All stakeholders have reputations to lose.

Sources of Ethics Figure 4.5 Page 146

Societal Ethics Societal Ethics Standards that govern how members of a society should deal with one another in matters involving issues such as fairness, justice, poverty, and the rights of the individual People behave ethically because they have internalized certain values, beliefs, and norms

Occupational Ethics Occupational Ethics Standards that govern how members of a profession, trade, or craft should conduct themselves when performing work-related activities Medical & legal ethics Table 4.2 page 149 See Table 4.2 for some failures in professional ethics.

Individual Ethics Individual Ethics Personal standards and values that determine how people view their responsibilities to other people and groups How they should act in situations when their own self-interests are at stake

Organizational Ethics Guiding practices and beliefs through which a particular company and its managers view their responsibility toward their stakeholders Top managers play a crucial role in determining a company’s ethics Top managers should consistently endorse the ethical principles in its corporate credo.

Social Responsibility The way a company’s managers and employees view their duty or obligation to make decisions that protect, enhance, and promote the welfare and well-being of stakeholders and society as a whole Table 4.3 page 154 See Table 4.3 for forms of socially responsible behavior.

Approaches to Social Responsibility Figure 4.6 Page 155

Approaches to Social Responsibility Obstructionist approach Companies choose not to behave in a social responsible way and behave unethically and illegality An obstructionist approach is at the low end of the commitment scale in which companies and their managers choose to behave unethically and illegally. They then do all they can to prevent knowledge of their behavior from reaching other stakeholders and society at large.

Approaches to Social Responsibility Defensive approach companies and managers stay within the law and abide strictly with legal requirements but make no attempt to exercise social responsibility A defensive approach indicates at least a commitment to ethical behavior.

Approaches to Social Responsibility Accommodative approach Companies behave legally and ethically and try to balance the interests of different stakeholders against one another so that the claims of stockholders are seen in relation to the claims of other stakeholders An accommodative approach is an acknowledgment of the need to support social responsibility. Managers adopting this approach want to make choices that are reasonable in the eyes of society and want to do the right thing when called on to do so.

Approaches to Social Responsibility Proactive approach Companies actively embrace socially responsible behavior, going out of their way to learn about the needs of different stakeholder groups and utilizing organizational resources to promote the interests of all stakeholders Such companies are at the forefront of campaigns for a variety of social causes.

Why Be Socially Responsible? Demonstrating its social responsibility helps a company build a good reputation If all companies in a society act socially, the quality of life as a whole increases The reward for a good reputation is increased trade and improved ability to obtain resources from stakeholders. In a capitalist system companies, along with the government, have to bear the costs of protecting their stakeholders by providing health care, income, paying taxes, etc. So if all companies in a society act socially responsibly, the quality of life as a whole increases.  The way companies behave toward their employees determines many of a society’s values and norms and the ethics of its citizens. Countries where organizations are highly socially responsible and as a result crime, poverty, and unemployment rates are relatively low, the literacy rate is relatively high, and socio-cultural values promote harmony between different groups of people.

Role of Organizational Culture Ethical values and norms help organizational members: Resist self-interested action Realize they are part of something bigger than themselves Managers can emphasize the importance of social responsibility by ensuring that ethical norms and values are a central component of the organization’s culture.  Employees expect those in authority to provide leadership. Therefore, managers should behave as role models of ethical conduct, knowing that subordinates scrutinize their behavior.

Johnson & Johnson Credo Johnson & Johnson is well known for its ethical culture. It has been judged to have the best corporate reputation for two years in a row, based on a survey of over 26,000 consumers. The company’s founder emphasized the importance of ethics and responsibility to stakeholders in 1943 when he wrote the company’s credo. This credo outlines the company’s commitments to its different stakeholder groups and continues to guide employees at Johnson & Johnson today. The company demonstrated its ethicality 20 years ago when it decided to stop marketing its baby oil as a tanning aid because of early evidence suggesting that health problems might result from too much exposure to the sun. That decision cost the company $5 million in lost sales. The company’s vice-president for recruiting finds that the company’s reputation helps them recruit and attract a diverse workforce. (Box in text on p. 136). Figure 4.7 Page 158

Ethics Ombudsman Responsible for communicating ethical standards to all employees Designing systems to monitor employees conformity to those standards Teaching managers and employees at all levels of the organization how to appropriately respond to ethical dilemmas Organizations can encourage an ethical culture by creating the role of ethics officer, or ethics ombudsman. The ethics ombudsman has organization wide authority.