Demanding Ethical and Socially Responsible Behavior CHAPTER 4 Demanding Ethical and Socially Responsible Behavior McGraw-Hill/Irwin Copyright © 2015 by the McGraw-Hill Companies, Inc. All rights reserved.

Ethics and Social Responsibility: A Close Relationship Beliefs about right and wrong SOCIAL RESPONSIBILITY The obligation of a business to contribute to society (businesses concern for welfare of society) 4-2

WHAT are ETHICS? LO 4-1 Ethics The study of right and wrong and of the morality of the choices individuals make An ethical decision is one that is “right” according to some standard of behavior What’s Ethical? Different standards for different people, cultures, countries, etc. Gray areas? More than just following the law Fundamental standards (respect for life, honesty, integrity, etc.) Business ethics The application of moral standards to business situations Good ethics is good business! See Learning Objective 1: Explain why obeying the law is only the first step in behaving ethically. The reputations of American businesses have been under assault due to numerous scandals over the past twenty years. Following the law is only the first step in being ethical. Ethics are standards of moral behavior and are accepted by society as right versus wrong. 4-3

BASIC MORAL VALUES Right: Wrong: Integrity Cheating Cowardice LO 4-1 Right: Integrity Respect for human life Self-control Honesty Courage Self-sacrifice Wrong: Cheating Cowardice Cruelty See Learning Objective 1: Explain why obeying the law is only the first step in behaving ethically. 4-4

UNIVERSAL ETHICAL STANDARDS Fairness and honesty Businesspeople are expected to refrain from knowingly deceiving, misrepresenting, or intimidating others. Follow the “Golden Rule” (treat other people like you want to be treated) Organizational relationships A businessperson should put the welfare of others and that of the organization above his or her own personal welfare. Conflict of interest Issues arise when a businessperson takes advantage of a situation for personal gain rather than for the employer’s interest. Communications Business communications that are false, misleading, and deceptive are both illegal and unethical.

FACTORS THAT INFLUENE ETHICAL BEHAVIOR Three general sets of factors appear to influence the standards of behavior in an organization. Individual factors Individual knowledge of an issue Personal values and beliefs Personal goals Social factors Business Climate (managers, co-workers) Cultural norms, attitudes and beliefs Religion Significant others Co. Enforcement Code of Ethics Co. Policies (ex. Use of the Internet) Opportunity Presence of opportunity 1) Ethics are society’s accepted standards of behavior, in other words behaviors accepted by society as right rather than wrong. 2) Ethics reflect people’s proper relationships with one another. Legality is narrower in that it refers to laws we have written to protect ourselves from fraud, theft, and violence. 3) It helps to ask the following questions when faced with an ethical dilemma: Is the proposed action legal? Is it balanced? Would I want to be treated this way? How will it make me feel about myself? 4-6

ETHICS and YOU LO 4-2 Plagiarizing from online materials is the most common form of cheating in schools today. Studies found a strong relationship between academic dishonesty and dishonesty at work. See Learning Objective 1: Explain why obeying the law is only the first step in behaving ethically. 4-7

FACING ETHICAL DILEMMAS LO 4-2 Ask yourself these questions: Is it legal? Is it balanced? How will it make me feel about myself? See Learning Objective 2: Ask the three questions to answer when faced with a potentially unethical action. When facing an ethical dilemma it is important that you ask these three basic questions: Is it legal? Is it balanced? How will it make me feel about myself? Asking and answering these three questions will prevent many people from making unethical decisions. 4-8

BRIBERY BAD BOYS Five FCPA Investigations LO 4-2 Company Case Smith and Wesson Improper payments to foreign officials. Stryker Corporation Bribing doctors and government officials in five countries. Hewlett-Packard Improper payments for contracts. Bio-Rad Laboratories Subsidiaries made improper payments to officials in Russia, Vietnam, and Thailand. Diebold Bribed officials at government-owned banks. See Learning Objective 2: Ask the three questions to answer when faced with a potentially unethical action. The Justice Department has over 104 open Foreign Corrupt Practices Act (FCPA) cases. This slide highlights five of the cases. To promote discussion, you can discuss how these companies are first extorted by the officials in foreign nations and then punished for their actions back at home. It is illegal for U.S. companies to participate in bribery, yet it is common practice in some countries. How are Americans supposed to deal with these issues? What is the ethical dilemma here? Source: SEC, www.sec.gov, accessed November 2014. 4-9

ETHICS START at the TOP Individuals must make their own LO 4-3 Organizational ethics begin at the top. Managers can help instill corporate values in employees. Trust between workers and managers must be based on fairness, honesty, openness and moral integrity. Individuals must make their own ethical choices BUT The organization can have a significant influence on decisions See Learning Objective 3: Describe management’s role in setting ethical standards. Leadership helps to instill corporate values in employees. So, like many aspects of business, ethical behavior practiced and modeled by managers and executives will often trickle down to the employees at large. 4-10

FACTORS INFLUENCING MANAGERIAL ETHICS LO 4-3 Individual Organizational Environmental Values Work Background Family Status Personality Top Level Management Philosophy Firm’s Reward System Job Dimensions Competition Economic Conditions Social/Cultural Institutions See Learning Objective 3: Describe management’s role in setting ethical standards. Factors Influencing Managerial Ethics Before you put this slide up, you may want to ask the students: What factors influence managerial ethics? Ethics begins with the individual, but are influenced by the organization and the environment in which the business operates. To bring the discussion to the present, you may ask: How can the firm’s reward system impact ethical behavior? How did these reward systems at large banks and other financial institutions exacerbate the financial crisis in this country? (Students should be able to discuss this point. Excessive risk taking imperiled all of the stakeholders of various financial institutions as well as the world economy.) 4-11

ETHICS CODES External to a specific organization LO 4-4 External to a specific organization Governmental legislation and regulations Sarbanes-Oxley Act of 2002 Trade association guidelines IFA (International Factoring Assoc.), TIA (Trans. Intermediaries Assoc) Within an organization Developing a Code of ethics A written guide to acceptable and ethical behavior as defined by an organization; it outlines policies, standards, and punishments for violations Organizational environment Reward ethical behavior  Discipline unethical behavior Reduce opportunity  Provide a forum for reporting Ethics officer  Employee training Leadership & Communication  Ethics Officer Whistle-blowing Informing the press or government officials about unethical practices within one’s organization See Learning Objective 4: Distinguish between compliance-based and integrity-based ethics codes, and list the six steps in setting up a corporate ethics code. 4-12

CORPORATE SOCIAL RESPONSIBILITY LO 4-5 Social Responsibility is the obligation of a business to contribute to society. Core stakeholder groups include employees, customers, investors, and community. See Learning Objective 5: Define corporate social responsibility and compare corporations’ responsibilities to various stakeholders. CSR is based on a commitment to such basic principles as integrity, fairness and respect. Many for-profit companies have philanthropic endeavors as a part of their mission. Communities often depend on companies to help with social programs that make the lives of people in the community better. It stands to reason that businesses that strengthen their communities, as proponents of CSR argue, will grow stronger as their communities improve. Social Responsibility costs money but is also good business. How socially responsible a firm acts may affect the decisions of customers to do or continue to do business with the firm. 4-13

CAN A COMPANY BE REALLY SOCIALLY RESPONSIBLE? LO 4-5 Economist Milton Friedman said, “Asking a corporation to be socially responsible makes no more sense than asking a building to be.” Conflicts of CSR: Difficult to measure how CSR interacts with a long-term responsibility to the community or planet Difficult to balance profits for shareholders and quality for consumers Milton Friedman and others have argued that there is no place for social responsibility as a business function. The business’ sole responsibility is to make a profit and by doing so, the company will be providing products, jobs, and strong stockholder value, and therefore will be socially responsible to these groups of consumers, employees, and stockholders. The role of a company is to maximize profits to stockholders. However, it can be difficult to balance this with the company’s obligation to the community and planet. Additionally, companies must weigh larger profits for shareholders against potential decreases in quality for consumers. 4-14

TWO VIEWS OF SOCIAL RESPONSIBILITY Socioeconomic model (Actively Contribute) Business should emphasize not only profits but also the impact of its decisions on society. The corporation is a creation of society and it must act as any responsible citizen would. Firms take pride in their social responsibility obligations. It is in the best interest of firms to take the initiative in social responsibility matters. Economic model (Passive Contribution) Society will benefit most when business is left alone to produce and market profitable products that society needs. Managerial attitude: social responsibility is someone else’s job; the firm’s primary responsibility is to make a profit for its shareholders. Firms are assumed to fulfill their social responsibility indirectly by paying the taxes that are used to meet the needs of society. Social responsibility is the problem of government, environmental groups, and charitable foundations. 4-15

THE PROS AND CONS OF SOCIAL RESPONSIBILITY Arguments for Passive Contribution of social responsibility (i.e. believers of Economic Model approach to Social Responsibility): Business managers are primarily responsible to stockholders, so management must be concerned with providing a return on owners’ investments. Corporate time, money, and talent should be used to maximize profits, not to solve society’s problems. Social problems affect society in general, so individual businesses should not be expected to solve these problems. Social issues are the responsibility of government officials who are elected for that purpose and who are accountable to the voters for their decisions. See Learning Objective 5: Define corporate social responsibility and compare corporations’ responsibilities to various stakeholders. 4-16

THE PROS AND CONS OF SOCIAL RESPONSIBILITY Arguments for PROACTIVE social responsibility (i.e. Believers of Socioeconomic Approach to Social Responsibility): Because business is part of our society, it cannot ignore social issues. Business has the technical, financial, and managerial resources needed to tackle today’s complex social issues. By helping resolve social issues, business can create a more stable environment for long-term profitability. Socially responsible decision-making by firms can prevent increased government intervention, which would force businesses to do what they fail to do voluntarily. See Learning Objective 5: Define corporate social responsibility and compare corporations’ responsibilities to various stakeholders. 4-17

BENEFITS OF CSR A positive reputation in the marketplace LO 4-5 A positive reputation in the marketplace Strong recruitment and talent retention Efficiency increases when companies use materials efficiency and minimize waste Increased sales via product innovations and environmentally and ethically conscious labeling 4-18

CORPORATE PHILANTHROPY and SOCIAL INITIATIVES LO 4-5 Corporate Philanthropy -- Includes charitable donations. Corporate Social Initiatives -- Include enhanced forms of corporate philanthropy. See Learning Objective 5: Define corporate social responsibility and compare corporations’ responsibilities to various stakeholders. 4-19

CORPORATE RESPONSIBILITY and POLICY LO 4-5 Corporate Responsibility -- Includes everything from hiring minority workers to making safe products, minimizing pollution, using energy wisely, and providing a safe work environment. Corporate Policy -- The position a firm takes on social and political issues. See Learning Objective 5: Define corporate social responsibility and compare corporations’ responsibilities to various stakeholders. 4-20

POSTIVE IMPACTS of COMPANIES LO 4-5 Xerox offers a Social Service Leave program. More and more companies are encouraging employees to volunteer while on company time. The majority of MBA students surveyed reported they would take a lower salary to work for a socially responsible company. See Learning Objective 5: Define corporate social responsibility and compare corporations’ responsibilities to various stakeholders. An ultimate example of a company helping the community is Xerox’s program, Social Service Leave, which allows employees to leave for up to a year and work for a nonprofit while still earning full salary, including benefits and job security. 4-21

PRESIDENT KENNEDY’S BASIC RIGHTS of CONSUMERS LO 4-5 The Right to Safety The Right to be Informed The Right to Choose The Right to be Heard See Learning Objective 5: Define corporate social responsibility and compare corporations’ responsibilities to various stakeholders. 4-22

HOW DO CUSTOMERS KNOW? LO 4-5 The primary use of social media is to communicate CSR efforts. Social media allows companies to reach a broad, diverse group and connect directly to them. Now more than ever, it’s important for companies to live up to their expectations. See Learning Objective 5: Define corporate social responsibility and compare corporations’ responsibilities to various stakeholders. 4-23

SOCIAL CUSTOMER CONTACT Do’s and Don’ts of Using Twitter for Business LO 4-5 Do Don’t Engage followers in discussion relevant to your industry. Start political rants. Think about your message before tweeting. Deleted tweets can still be found! Tweet impulsively. Frequently offer new content. Let your account lie dormant. Create separate accounts for business and personal use. Make personal announcements via your company’s Twitter account. See Learning Objective 5: Define corporate social responsibility and compare corporations’ responsibilities to various stakeholders. Source: Entrepreneur, www.entrepreneur.com, accessed September 2014. 4-24

INSIDER TRADING LO 4-5 Insider Trading -- Insiders using private company information to further their own fortunes or those of their family and friends. Unethical behavior does financial damage to a company and investors are cheated. See Learning Objective 5: Define corporate social responsibility and compare corporations’ responsibilities to various stakeholders. 4-25

RESPONSIBILITY to EMPLOYEES Create jobs and provide a chance for upward mobility. Treat employees with respect. Offer salaries and benefits that help employees reach their personal goals. See Learning Objective 5: Define corporate social responsibility and compare corporations’ responsibilities to various stakeholders. 4-26

AMERICA’S MOST ADMIRED COMPANIES of 2014 LO 4-5 Apple Amazon Google Berkshire Hathaway Starbucks Coca-Cola Disney FedEx Southwest Airlines General Electric See Learning Objective 5: Define corporate social responsibility and compare corporations’ responsibilities to various stakeholders. 1. Before you put this slide up, you may want to ask the students: Are the ideals of maximization of profit and social responsibility in conflict? Corporate social responsibility is the concern businesses have for the welfare of society, not just for their owners. 3. The vast majority of the companies listed in this slide are not only admired, but also financially successful. Source: Fortune, www.fortune.com, accessed November 2014. 4-27

WHEN EMPLOYEES are UPSET… Employee fraud costs U.S. businesses about 5% of annual revenue and causes 30% of all business failures. Disgruntled workers relieve frustration by: Blaming mistakes on others. Manipulating budgets and expenses. Making commitments they intend to ignore. Hoarding resources. Doing the minimum. See Learning Objective 5: Define corporate social responsibility and compare corporations’ responsibilities to various stakeholders. 4-28

SOCIETY and the ENVIRONMENT LO 4-5 Over one-third of working Americans receive their salaries from nonprofits – who are dependent on funding from others. The green movement emerged as concern about global warming increased. Many companies are trying to minimize their carbon footprints – the amount of carbon released during an item’s production, distribution, consumption and disposal. See Learning Objective 5: Define corporate social responsibility and compare corporations’ responsibilities to various stakeholders. 4-29

RESPONSIBILITY to the ENVIRONMENT LO 4-5 Environmental efforts may increase costs, but can offer good opportunities. The emerging renewable-energy and energy- efficiency industries account for 9 million U.S. jobs. See Learning Objective 5: Define corporate social responsibility and compare corporations’ responsibilities to various stakeholders. By 2030, as many as 40 million “Green” jobs will be created. 4-30

SOCIAL AUDITING LO 4-5 Social Audit -- A systematic evaluation of an organization’s progress toward implementing socially responsible and responsive programs. Five Types of Watchdogs Socially conscious investors Socially conscious research organizations Environmentalists Union officials Customers See Learning Objective 5: Define corporate social responsibility and compare corporations’ responsibilities to various stakeholders. 4-31