McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 7-1

Strategy, Ethics, and Social Responsibility Chapter 7 Screen graphics created by: Jana F. Kuzmicki, PhD Troy University - Florida and Western Region

“Leaders must be more than individuals of high character. They must ‘lead’ others to behave ethically.” Quote... Linda K. Trevino and Michael E. Brown

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 7-4 Chapter Outline What Do We Mean by Business Ethics? Ethical Standards—Universal or Dependent on Local Norms and Circumstances? The Three Categories of Management Morality Do Company Strategies Need to Be Ethical? Strategy and Social Responsibility

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 7-5 Should there be a link between a company’s efforts to craft and execute a winning strategy and its duties to  Conduct activities in an ethical manner?  Demonstrate socially responsible behavior by  Being a committed corporate citizen and  Attending to needs of non-owner stakeholders? Key Issues Linkage of Strategy to Ethics and Social Responsibility

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 7-6 What Is Business Ethics? Business ethics involves applying general ethical principles and standards to business behavior Ethical principles in business are not different from ethical principles in general Business actions are judged  By general ethical standards of society  Not by more permissive standards

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 7-7 Are Ethical Standards Universal or Dependent on Local Norms? Three schools of thought regarding extent to which ethical standards can be applied... Ethical Universalism Ethical Relativism Integrative Social Contracts Theory

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 7-8 Concept of Ethical Universalism According to the school of ethical universalism...  Same standards of what is ethical and what is unethical resonate with peoples of most societies regardless of  Local traditions and  Cultural norms  Thus, common ethical standards can be used to judge conduct of personnel at companies operating in a variety of  Country markets and  Cultural circumstances

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 7-9 Examples of Universal Ethical Principles or Norms Honesty Trustworthiness Integrity of character Not cheating Treating people with dignity and respect Respecting rights of others Practicing the Golden Rule Avoiding unnecessary harm to  Workers  Users of a company’s product or service Respecting the environment

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Concept of Ethical Relativism According to the school of ethical relativism...  Different societal cultures and customs have  Divergent values and  Standards of right and wrong  What is ethical or unethical  Must be judged in light of local customs and social mores and  Can vary from one country to another

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved A thorny ethical problems is faced by multinational companies  Degree of cross-country variability in paying bribes as part of business transactions Companies forbidding payment of bribes in their codes of ethics face a formidable challenge in countries where payments are entrenched as a local custom Foreign Corrupt Practices Act prohibits U.S. companies from paying bribes in all countries where they do business Payment of Bribes and Kickbacks

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Ethical Relativism = Multiple Sets of Ethical Standards Proponents of the ethical relativism school maintain there are  Few ethical absolutes to judge a company’s conduct in various countries  Plenty of situations where ethical norms are contoured to fit  Local customs and traditions  Local beliefs about what is fair  Local standards of “right” and “wrong” Ethical problems in business cannot be fully resolved without appealing to the shared convictions of the parties in question

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Drawbacks of Ethical Relativism The ethical relativism rule of “when in Rome, do as the Romans do” presents problems  When the envelope is pushed, it is tantamount to rudderless ethical standards  It is ethically dangerous for company personnel to assume that local ethical standards are an adequate guide to ethical behavior  What if local standards condone kickbacks and bribery?  What if local standards blink at environmental degradation?  From a global markets perspective, ethical relativism results in a maze of conflicting ethical standards for multinational companies wanting to address the issue of what ethical standards to enforce companywide

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Concept of Integrative Social Contracts Theory According to the integrative social contracts theory, the ethical standards a company should try to uphold are governed by both  A limited number of universal ethical principles that are widely recognized as putting legitimate ethical boundaries on actions and behavior in all situations and  The circumstances of local cultures, traditions, and shared values that further prescribe what constitutes  Ethically permissible behavior and  What does not

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Appeal of Integrative Social Contracts Theory Universal ethical principles establish “moral free space” based on the collective view of multiple societies and cultures Commonly held views about morality and ethical principles combine to form a “social contract” with society It is appropriate for societies or companies to go beyond universal ethical principles and specify local or “second- order” ethical norms  Where firms have developed ethical codes, the standards they call for provide appropriate ethical guidance Social contracts theory maintains adherence to universal or first-order ethical norms should always take precedence over local or second-order norms!

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Moral manager Amoral manager Immoral manager Three Categories of Management Morality Managerial ethical and moral principles

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Dedicated to high standards of ethical behavior in  Own actions  How a company’s business is to be conducted Considers it important to  Be a steward of ethical behavior  Demonstrate ethical leadership Pursues business success  Within confines of both letter and spirit of laws  With a habit of operating well above what laws require Characteristics of a Moral Manager

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Characteristics of an Immoral Manager Actively opposes the application of ethical standards to business situations Disregards ethical principles in making decisions Views legal standards as barriers to overcome Avidly practices capitalistic greed Does whatever is in own best interest Considers interests of others as irrelevant Focuses only on bottom line – making one’s numbers Will trample on others to avoid being trampled upon

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Believes business and ethics should not be mixed since different rules apply to  Business activities  Other realms of life Does not factor ethical considerations into own actions since business activity lies outside sphere of moral judgment Views ethics as inappropriate for tough, competitive business world Concept of right and wrong is lawyer-driven (what can we get by with without running afoul of the law) Characteristics of an Intentionally Amoral Manager

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Is blind to or casual about ethics of decision-making and business actions Displays lack of concern regarding whether ethics applies to company actions Sees self as well-intentioned or personally ethical Typical beliefs  Do what is necessary to comply with laws and regulations  Government provides legal framework stating what society will put up with—if it is not illegal, it is allowed Characteristics of an Unintentionally Amoral Manager

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Do Company Strategies Need to Be Ethical? Approaches of most company managers  Ensure a company’s strategy is legal  May or may not ensure all elements of strategies are ethical Approach of senior executives with strong ethical convictions  Insist all aspects of strategy fall within ethical boundaries Approach of immoral or amoral senior executives  Use shady strategies if they think they can get by with it  Use unethical or borderline business practices  Hide ethically questionable actions

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved The large numbers of immoral and amoral business people Overzealous pursuit of personal gain, wealth, and other selfish interests Heavy pressures on company managers to meet or beat earnings targets A company culture that places profits and good performance ahead of ethical behavior What Are the Drivers of Unethical Strategies and Business Behavior?

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved People obsessed with wealth accumulation, greed, power, and status often  Push ethical principles aside in their quest for self gain  Exhibit few qualms in doing whatever is necessary to achieve their goals  Look out for their own best interests  Have few scruples and ignore welfare of others  Will resort to unethical strategies and behaviors to achieve their goals Overzealous Pursuit of Personal Gain, Wealth, and Selfish Interests

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Managers often feel enormous pressure to do whatever it takes to deliver good financial performance  Typically a big % of their compensation (and sometimes their job security) is tied to hitting earnings targets Such pressures often cause managers to  Cut costs wherever savings show up immediately  Squeeze extra sales via “channel-stuffing” (i.e., pressuring customers to accept early deliveries and carry unneeded inventories)  Engage in “smoke and mirrors” accounting and any other measures they can think up to make the numbers  Stretch rules further and further, until limits of ethical conduct are overlooked Fundamental problem with heavy pressure to “make the numbers” is that top executives are driven (perhaps as last resort desperation) to cut ethical corners  Such behavior seldom serves customers or shareholders Heavy Pressures on Company Managers to Meet or Beat Earnings Targets

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved In an ethically corrupt or amoral work climate, people have a company-approved license to  Ignore “what’s right” and stretch the rules  Engage in most any behavior or employ most any strategy they think they can get away with  Play down relevance of ethical strategic actions and business conduct Pressures to conform to cultural norms can prompt otherwise honorable people to  Make ethical mistakes  Succumb to the many opportunities to engage in unethical practices and shady behavior Company Culture Places Profits and Good Performance Ahead of Ethical Behavior

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Approaches to Managing a Company’s Ethical Conduct Unconcerned or non-issue approach Damage control approach Compliance approach Ethical culture approach

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 7-27

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Characteristics of Unconcerned Approach Prevalent at companies whose executives are immoral and unintentionally amoral Notions of right and wrong in business matters are defined by government via prevailing laws and regulations—after that, anything goes If the law permits “unethical behavior,” why stand on ethical principles Companies are usually out to make greatest possible profit at most any cost Strategies used, while legal, may embrace elements that are ethically shady

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Characteristics of Damage Control Approach Favored at companies whose managers are intentionally amoral but who fear scandal May adopt a code of ethics as window-dressing Adept at using “spin” to “explain away” the use of unethical strategy elements or discount the impact of shady actions Executives look the other way when shady behavior occurs Executives may condone questionable actions that help a company reach earnings targets or bolster its market standing

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Characteristics of Compliance Approach From light to forceful compliance is favored at companies whose managers  Lean toward being somewhat amoral but are highly concerned about having ethically upstanding reputations or  Are moral and see strong compliance methods as best way to impose and enforce high ethical standards Emphasis is on securing broad compliance and measuring degree to which ethical standards are upheld Commitment to eradicate unethical behavior stems from a desire to  Avoid cost and damage associated with unethical conduct or  Gain favor from stakeholders for having a highly regarded reputation for ethical behavior

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Pursuing a Compliance Approach: Typical Actions Make code of ethics a visible and regular part of communications with employees Implement ethics training programs Appoint a chief ethics officer Have ethics committees give guidance on ethics matters Institute formal procedures for investigating alleged ethics violations Conduct ethics audits to measure and document compliance Give ethics awards to employees for outstanding efforts to create an ethical climate Install ethics hotlines to help detect and deter violations

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Characteristics of Ethical Culture Approach Top executives believe high ethical principles must  Be deeply ingrained in the corporate culture  Function as guides for “how we do things around here” Company seeks to gain employee buy-in to  Company’s ethical standards  Business principles  Corporate values Ethical principles in company’s code of ethics are  Integral to day-to-day operations  Promoted as “business as usual” Strategy must be ethical  Employees must display ethical behaviors in executing the strategy

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Why Should Company Strategies Be Ethical? An unethical strategy  Is morally wrong  Reflects badly on the character of company personnel An ethical strategy is  Good business  In the self-interest of shareholders

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Characteristics of Managers Committed to Ethical Approaches to Strategy-Making Possess strong moral and ethical characteristics Strongly advocate a corporate code of ethics and strict ethics compliance Display genuine commitment to certain corporate values and business practices Walk the talk in  Displaying a company’s stated values  Living up to ethical business principles and standards Adopt values statements/ethics codes that truly paint the white lines for a company’s business practices Consciously opt for strategic actions passing moral scrutiny

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Fig. 7.1: The Business Costs of Ethical Failures

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Linking Strategy to Ethics and Values If ethical standards are to have more than a cosmetic role, boards of directors and top executives must work diligently to see they are scrupulously observed in  Crafting a company’s strategy and  Conducting every facet of a company’s business Two sets of questions must be considered by senior executives when reviewing a new strategic initiative  Is what we are proposing to do fully compliant with our code of ethical conduct? Is there anything here that could be considered ethically objectionable?  Is it apparent this proposed action is in harmony with our core values? Are any conflicts or concerns evident?

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved What Is Meant By Corporate Social Responsibility? The notion that businesses should balance interests of all stakeholders began to blossom in 1960s Social responsibility as it applies to businesses concerns a company’s duty to  Operate in an honorable manner  Provide good working conditions for employees  Be a good steward of the environment  Actively work to better quality of life in  Local communities where it operates and  Society at large

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved What Is Meant By “Socially Responsible” Business Behavior? Socially responsible behavior is manifested by deliberate actions on the part of a company and its top executives to  Pursue the best interests of shareholders in a manner that does not adversely impact other stakeholders  Improve the general well-being of  Employees (via making the company a great place to work and promoting work force diversity)  Local communities (via support of and participation in community service activities)  Society (via contributions to worthy causes)  Customers and suppliers  Proactively mitigate any harmful effects on the environment that its business operations may have  Means going above and beyond what is required by laws and regulations

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Fig. 7.2: The Five Components of Socially Responsible Business Behavior

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Linking Strategy and Social Responsibility Management should match a company’s social responsibility strategy to its  Core values  Business mission/strategic vision  Overall strategy The combination of socially responsible endeavors a company elects to pursue defines its social responsibility strategy Some companies are integrating social responsibility objectives into their  Missions/strategic visions  Performance targets  Strategies

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Businesses should promote the betterment of society, acting in ways to benefit all their stakeholders because  It’s the right thing to do! There’s an implied social contract whereby society  Grants a business the right to conduct its business affairs  Agrees not to unreasonably restrain a business’s pursuit of a fair profit In return for society granting it a “license to operate,” a business should  Act as a responsible citizen  Do its fair share to promote the general welfare The Moral Case for Corporate Social Responsibility

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Reasons to Behave in a Socially Responsible Manner Generates internal benefits  Enhances recruitment of quality employees  Increases retention of employees  Improves employee productivity  Lowers costs of recruitment and training Reduces risk of reputation-damaging incidents, leading to increased buyer patronage Works in best interest of shareholders  Minimizes costly legal and regulatory actions  Provides for increased investments by socially conscious mutual funds and pension benefit managers  Focusing on environment issues may enhance earnings

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Four different views exist regarding use of company resources by “do-good” executives in pursuit of a better world 1.Any money authorized for social responsibility initiatives is theft from a company’s shareholders 2.Caution should be exercised in pursuing various societal obligations since this  Diverts valuable resources  Weakens a company’s competitiveness 3.Social responsibilities are best satisfied through conventional business activities (doing what businesses are supposed to do, which does not include social engineering) 4.Spending money for social causes  Muddies decision making by diluting focus on a firm’s business mission  Thrusts executives into role of social engineers But Do We Really Want “Do-Good” Executives—Is There a Downside?

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved How Much Attention to Social Responsibility Is Enough? What is the appropriate balance between  Creating value for shareholders?  Obligation to contribute to the larger social good? What fraction of a firm’s resources ought to be aimed at  Addressing social concerns?  Bettering the well-being of society and the environment? Approaches to fund a social responsibility strategy can  Allocate a specified percentage of profits  Avoid committing a specified percentage of profits No widely accepted standard for judging if a company has fulfilled its citizenship responsibilities exists!