1. m a n a g e m e n t 2e H i t t / B l a c k / P o r t e r
Chapter 2:
Ethics and Social Responsibility
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2. 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
Compare and contrast the efficiency and social responsibility perspectives
Explain the strategic corporate social responsibility approach
Explain the basic approaches to ethical decision making

3. Learning Objectives Explain the aspects of moral intensity
Describe the actions that can foster a high degree of ethical behavior in an organization

4. Corporate Social Responsibility
Obligation corporations have to constituencies and the nature and extent of those obligations
Constituencies include shareholders, customers, employees, specific communities, society at large, governments
Issue: constituencies may not share same expectations
Corporate social responsibility is concerned with the obligation that corporations have to constituencies. These constituencies may include shareholders, customers, employees, the communities in which the firm operates, society, and different levels of government.
However, these constituencies may have different values and expectations that cause conflicts which the firms must resolve.
There are different perspectives of social responsibilities: the efficiency perspective, the social responsibility perspective, and strategic social responsibility perspective. The next few slides will focus on each view.

5. There are different perspectives of social responsibilities: the efficiency perspective, the social responsibility perspective, and strategic social responsibility perspective. The next few slides will focus on each view.
Economist Milton Friedman believed that the “business of business is business.” This “efficiency” perspective proposes that the only obligation of a firm is to maximize profits for shareholders and/or owners.

6. 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
Economist Milton Friedman believed that the “business of business is business.” This “efficiency” perspective proposes that the only obligation of a firm is to maximize profits for shareholders and/or owners.
This perspective has two premises:
Managers as owners: when the managers of a business are also its owners, the self-interests of the manager are best achieved by serving the needs of society. In other words, by giving society and customers what they want, the firm will maximize profits.
Managers as agents: when the managers are NOT the owners, they are agents of the company. In this role, managers should have no obligation to act on behalf of society if it does not maximize profits for the shareholders.
The efficiency perspective maintains the assumption that competition will force a firm to do the right thing, not necessarily because it wants to but because it has to in order to stay competitive. However, there are some flaws in this assumption:
Sometimes something bad happens before changes are made. For instance, if a fast-food restaurant is responsible for massive food poisoning, it might not do anything until hundreds of people become very ill. Only then is corrective action taken.
Unintended consequences called “externalities” can occur that were not planned or anticipated by the firm.

7. The efficiency perspective maintains the assumption that competition will force a firm to do the right thing, not necessarily because it wants to but because it has to in order to stay competitive. However, there are some flaws in this assumption:
Sometimes something bad happens before changes are made. For instance, if a fast-food restaurant is responsible for massive food poisoning, it might not do anything until hundreds of people become very ill. Only then is corrective action taken.
Unintended consequences called “externalities” can occur that were not planned or anticipated by the firm.

8. Social Responsibility Perspective
firms have responsibilities and obligations to society as a whole, not just shareholders
Key Stakeholders
The social responsibility perspective argues that society grants existence to firms. Shareholders simply supply risk capital. Therefore, firms have responsibilities and obligations to society as a whole, not just to shareholders.
This perspective provides that the firm is responsible for certain stakeholders.
Stakeholders are individuals or groups that have an interest in and are affected by the actions of an organization. They include customers, employees, financiers, suppliers, communities, and society at large as well as shareholders.
The major problem with this perspective is that stakeholders are bound to have conflicting interests, and the firm may have difficulties making decisions to please everyone.

9. Stakeholders are individuals or groups that have an interest in and are affected by the actions of an organization. They include customers, employees, financiers, suppliers, communities, and society at large as well as shareholders.
The major problem with this perspective is that stakeholders are bound to have conflicting interests, and the firm may have difficulties making decisions to please everyone.

10. Efficiency Versus Social Responsibility Perspective
Action harms other share-holders
Efficiency Perspective
Managerially Irresponsible
Social Responsibility
Perspective
Managerially Responsible
Efficiency Perspective
Managerially Irresponsible
Social Responsibility
Perspective
Yes
Efficiency Perspective
Managerially Responsible
Social Responsibility
Perspective
Efficiency Perspective
Managerially Responsible
Social Responsibility
Perspective
Managerially Irresponsible
The key difference between the efficiency and social responsibility perspectives is the stakeholders to which the firms has an obligation. The efficiency perspective focuses solely on shareholders or managers, while the social responsibility focuses on various stakeholders.
However, the two perspectives differ very little in terms of how to evaluate actions that benefit shareholders and/or society.
Actions that benefit shareholders but harm the other stakeholders would be viewed as managerially responsible from the efficiency perspective, but socially irresponsible from the social responsibility perspective.
Actions that harm shareholders but benefit the other legitimate stakeholders would be viewed as managerially irresponsible from the efficiency perspective, but socially responsible from the social responsibility perspective. No No
Yes
Action harms other stakeholders
Adapted from Exhibit 2.1

11. Actions that benefit shareholders but harm the other stakeholders would be viewed as managerially responsible from the efficiency perspective, but socially irresponsible from the social responsibility perspective.
Actions that harm shareholders but benefit the other legitimate stakeholders would be viewed as managerially irresponsible from the efficiency perspective, but socially responsible from the social responsibility perspective.

12. 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.
(less agresive in fighting
Restrictions & regulation
Focus
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.
How corporations react to the various pressures and constituencies connected to the topic of social responsibility varies widely. [These corporate responses are illustrated on this slide and the next.]
Defenders tend to fight efforts that they see as resulting in greater restriction and regulation of their ability to maximize profits. These firms often operate at the edge of the law and actively seek legal loopholes in conducting their business. Typically they change only when legally compelled to do so.
Accommodators are less aggressive in fighting restrictions and regulations, but they change only when legally compelled to do so. This type of firm tends to obey the letter of the law but does not make changes that might restrict profits if they are not required to.
Adapted from Exhibit 2.2

13. Corporate Responses (cont.)
Reactors
Anticipators
Belief
We should respond to
significant pressure even
if we are not legally
required to.
(make changes on pressure
From stakeholders)
We owe it to society to
anticipate and avoid
actions with 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.
Reactors make changes when they feel that pressure from constituencies is sufficient such that nonresponsiveness could have a negative economic impact on the firm.
Anticipators believe that they are obligated to a variety of stakeholders‑customers, employees, shareholders, general citizens, and so on‑--not to harm them independent of laws or pressures that restrict or regulate their actions. Firms in this category not only abide by the law, but they might take action to avoid harming constituencies, even when the constituencies might not be aware of the potential danger.
Adapted from Exhibit 2.2

14. Strategic Corporate Social Responsibility Perspective
Three fundamental criteria guide managers:
Inside-Out
Approach
Outside-In
Approach
Outside-Out
Approach
Look inside
company at
issues
that are
important
to the
company
Look outside
company at
issues
that
company has
an impact
upon
Look at social
issues in
general in
terms of the
extent to
which they
are
problematic
The strategic corporate social responsibility perspective is a more modern one that combines the best of the efficiency and social responsibility perspectives.
This perspective argues that three criteria can guide manager actions:
Inside-out approach: managers can look inside the company at issues that are more rather than less important as a function of the company’s strategy and business activities. Example: Wal-Mart’s labor-intensive nature places a heavy emphasis on workers.
Outside-in approach: managers can look outside the company at issues that the company has an impact upon. Example: a firm whose manufacturing plant could harm the environment would look at specific issues regarding the environment.
Outside-out approach: look at social issues in general in terms of the extent to which they are problematic. This approach does not consider any kind of direct impact on the corporation.

15. Strategic Corporate Social Responsibility
Problem
in Society
Low
High
Prime
Focus
High
Affected
by the
Company
Worthy
Cause
(for someone
else)
Exhibit 2.3 summarizes a three-criteria approach to help guide manager in making ethical decisions.
The first criteria (“Critical to the Company”) takes an “inside out” approach. In other words, managers can look inside the company at issues that are more rather than less important as a function of the company’s strategy and business activities.
The second criterion (“Affected by the Company”) takes an “outside in” approach. In other words, managers can look outside the company at issues that the company has an impact on
The third criterion (“Problem in Society”) takes an “outside out” approach. In other words, managers should look at social issues in general in terms of the extent to which they are problematic.
Low
Low
High
Critical to the Company (inside-out)
Adapted from Exhibit 2.3

16. The Development of Individual Ethics
Social responsibility naturally leads to a discussion of individual and corporate ethics.
How managers behave ethically might be influenced by what happens at the top of the corporation, but the managers’ individual ethics play a more important role.
Individual ethics are developed throughout a lifetime by many different factors, listed in the slide.

17. 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
All managers face ethical dilemmas, and they may use any number of approaches to make decisions. The four basic approaches are listed in the slide.

18. 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
The utilitarian approach, focuses on consequences of an action. A manager using this approach would make a decision that results in the greatest good for the greatest number of people.
Example: If your firm were shipping grain to a country with mass starvation, and you find that you must “bribe” the customs agent to allow the grain to enter the country, you might pay the bribe in order to get the grain to starving people. Though paying bribes is generally considered unethical by U.S. standards, your decision to pay it results in the greatest good for the greatest number of people.
However, different people may see the outcome differently. For instance, relief organizations might think that your bribe has just reinforced unethical behavior on the part of the customs agent such that it becomes even more difficult for other firms to ship grain without having to pay a bribe.

19. Basic Approaches to Ethics: Moral Rights Approach
Focused on moral standing of actions, independent of their consequences
Some things are simply “right” or “wrong”
When two actions have moral standing, then the positive or negative consequences of each will determine the more ethical
The moral rights approach focuses on an examination of the moral standing of actions independent of their consequences.
In this approach, some things are just “right” or “wrong,” independent of consequences.
When two courses of action both have moral standing, then the positive and negative consequences of each should determine which course is more ethical.
Using this approach, you should choose the action that is in conformance with moral principles and provides positive consequences.
Example: You have an ongoing relationship with a individual consultant but no written contract stating the terms or duration of the relationship. You are the consultant’s major client, and your firm represents 75% of his business. Because of cost issues, your boss insists that you use another consultant who has a good reputation and who is considerably less expensive. Would you cut off the original relationship? In the moral rights approach, you would not, as it is not the “right thing to do,” regardless of the fact that you are not legally obligated to honor the relationship.
The major issue with this approach is that people will certainly disagree about what is “right.”

20. 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
The universal approach is best described by the saying, “do unto others as you would have them do unto everyone, including yourself.”
Under this approach, you would choose an action that would apply to all people under all situations. This approach considers the importance of individual rights, which stem from individual freedom and autonomy. Any actions that limit that freedom or autonomy are simply wrong.
Example: A history professor does not like it when students are late for class. However, one student indicates that he has only five minutes from get from one side of the campus to another, and the English professor in the previous class won’t let him out early. So, the history professor allows that student, and any other student in a similar situation, to be a little late.

21. Basic Approaches to Ethics: Justice Approach
Costs and benefits of actions:
Costs and benefits should be equitably distributed
Rules should be impartially applied
Those damaged should be compensated
Distributive justice
Equitable distribution is based on performance
The justice approach focuses on how equitably the costs and benefits of actions are distributed as the principal means of judging ethical behavior. Costs and benefits should be equitably distributed, rules should be impartially applied, and those damaged because of inequity or discrimination should be compensated.
There are three types of justice approaches that may be used (described in this slide and the next one):
Distributive justice: Managers distribute rewards and punishments equitably based on performance. Thus, managers would not discriminate among employees based on any other criteria, such as race, gender, etc.

22. Basic Approaches to Ethics: Justice Approach
Procedural justice
Ensure that people 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
Procedural justice: Managers make sure that people affected by managerial decisions consent to the decision‑making process and that the process is administered impartially. This type of approach is often used with performance reviews, whereby the employee knows what is expected and consents to the criteria used to judge performance.
Compensatory justice: If distributive justice and procedural justice fail or are not followed as they should be, then those hurt by the inequitable distribution of rewards should be compensated.

23. Moral Intensity in Ethical Decision Making
Consequences
Social
Moral intensity
The degree to which people see an issue as an ethical one
Magnitude of the
Consequences
Probability
of Effect
Moral
Intensity
Concentration
of Effect
Temporal
Immediacy
Another issue regarding ethics is the degree to which people see an issue as an ethical one. This is called moral intensity.
There are six components of moral intensity, and these are explored in greater detail in the following slides.
Proximity

24. 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
The magnitude of the consequences associated with the outcome of a given action is the level of impact anticipated.
Adapted from Exhibit 2.4
Adapted from Exhibit 5.2: Factors of Moral Intensity

25. Moral Intensity in Ethical Decision Making
Consequences
Social
Social consequences
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
Social consensus involves the extent to which members of a society agree that an act is either good or bad.
Example: in the United States, there is greater social consensus concerning the wrongness of driving drunk than speeding on the highway.
Adapted from Exhibit 2.4
Adapted from Exhibit 5.2: Factors of Moral Intensity

26. 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
Probability of effect concerns the likelihood that a given consequence will in fact happen. The higher the probability of the consequence, the higher the moral intensity.
Adapted from Exhibit 2.4
Adapted from Exhibit 5.2: Factors of Moral Intensity

27. 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
Temporal immediacy is a function of the interval between the time an action occurs and the onset of its consequences. The greater the time interval between the action and its consequences, the less intensity people typically feel toward the issue.
Adapted from Exhibit 2.4
Adapted from Exhibit 5.2: Factors of Moral Intensity

28. 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 it has ethical implications
Magnitude of the
Consequences
Probability
of Effect
Moral
Intensity
Temporal
Immediacy
Proximity is concerned with the individual’s physical and psychological closeness to the outcome. The closer the decision maker is or feels to those affected by the decision, the more the decision maker will consider the consequences of the action and feel it has ethical implications.
Proximity
Adapted from Exhibit 2.4
Adapted from Exhibit 5.2: Factors of Moral Intensity

29. 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
The concentration of effect is the extent to which consequences are focused on a few individuals or dispersed across many. The higher the concentration of effect, the high the moral intensity.
Proximity
Adapted from Exhibit 2.4
Adapted from Exhibit 5.2: Factors of Moral Intensity

30. How Firms Make Better Ethical Decisions
Code of ethics: a formal one-to-three page statement outlining the types of behavior that are and are not acceptable
Codes generally stress:
Being a good “organization citizen”
Guiding employee behavior away from unlawful or improper acts that could harm the organization
One way in which firms can help employees make better decisions is to adopt a code of ethics. These codes are generally formal, 1-3 page statements that outline types of behavior that are and are not acceptable. The following four slides give an example of a famous code of ethics that belongs to health care giant, Johnson & Johnson.

31. Johnson & Johnson Credo
Our Credo
• 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. • In meeting their needs everything we do must be of high quality. • We must constantly strive to reduce our costs in order to maintain reasonable prices. • Customers' orders must be serviced promptly and accurately. • Our suppliers and distributors must have an opportunity to make a fair profit.
Johnson & Johnson first adopted its “credo” in 1947, and it’s been revised four times to this current version. The credo (which appears on this slide as well as the next three) is organized around the company’s most important constituents:
Its customers (doctors, nurses, patients, parents, etc.), or the end users of its products;
Its employees
Its communities
And its shareholders/owners
Point out that the constituents are presented in the order of importance to the company, with customers being the most important.
Adapted from Exhibit 2.5

32. Johnson & Johnson Credo (cont.)
• We are responsible to our employees, the men and women who work with us throughout the world. • Everyone must be considered as an individual. • We must respect their dignity and recognize their merit. • They must have a sense of security in their jobs. • Compensation must be fair and adequate, and working conditions clean, orderly and safe. • We must be mindful of ways to help our employees fulfill their family responsibilities. • Employees must feel free to make suggestions and complaints. • There must be equal opportunity for employment, development and advancement for those qualified. • We must provide competent management, and their actions must be just and ethical.
Adapted from Exhibit 2.5

33. Johnson & Johnson Credo (cont.)
• We are responsible to the communities in which we live and work and to the world community as well. • We must be good citizens – support good works and charities and bear our fair share of taxes. • We must encourage civic improvements and better health and education. • We must maintain in good order the property we are privileged to use, protecting the environment and natural resources.
Adapted from Exhibit 2.5

34. Johnson & Johnson Credo (cont.)
• Our final responsibility is to our stockholders. • Business must make a sound profit. • We must experiment with new ideas. • Research must be carried on, innovative programs developed and mistakes paid for. • New equipment must be purchased, new facilities provided and new products launched. • Reserves must be created to provide for adverse times. • When we operate according to these principles, the stockholders should realize a fair return.
Adapted from Exhibit 2.5

35. Categories Found in Corporate Codes of Ethics
Cluster 1
“Be a dependable
organizational citizen”
Cluster 2
“Don’t do anything
unlawful or improper
that will harm
the organization.”
Unclustered Items
Cluster 3
“Be good to our
customers.”
Studies have found three distinct categories, or clusters, of topics in corporate codes of ethics.
The first main cluster included items that focused on being a good "organizational citizen.”
The second cluster included items that guided employees to restrain from unlawful or improper acts that would harm the organization.
The third cluster included items that addressed directives to be good to customers.
Some codes of ethics contained other information not categorized into clusters.
Adapted from Exhibit 2.6

36. Adoption of Codes of Ethics
There are also cultural and national differences regarding codes of ethics.
In a study of codes of ethics for firms in the United Kingdom, France, and Germany, it was found that a higher percentage of German firms had codes of ethics than British or French firms. In addition, only about one‑third of the European firms in this study had codes of ethics, whereas approximately 85 percent of U.S. firms have formal codes.
Percentage of Firms
Adapted from Exhibit 2.7

37. Subjects Addressed in Corporate Codes of Ethics
Employee conduct
Most often used for
European firms
Community and environment
Most often used for
United States firms
Customers
Shareholders
Least often used for
European firms
Suppliers and contractors
This slides shows differences in what U.S. and European firms include in their codes of ethics.
Some interesting differences are:
100 percent of the European firms covered issues of acceptable and unacceptable employee behavior in their codes, while only 55 percent of U.S. firms covered these issues
Only 15 percent of the European firms covered issues of political interests (i.e., business/government relations), while 96 percent of U.S. firms covered these issues in their codes.
Political interests
Least often used for
United States firms
Innovation and technology
Adapted from Exhibit 2.8

38. Successfully Implementing Codes of Ethics
In addition to having a code of ethics, firms need to be able to implement their codes. Following are ideas that will help firms successfully implement their codes:
Communication of a company’s ethical standards needs to take a variety of forms and be repeated.
Training of employees in the ethical code is important so that they understand how to use the code.
Rewards and recognition should be given to employees who follow the code.
Whistle-blowing should be encouraged, though most firms don’t really have a formal program to implement it.

39. The Government: Foreign Corrupt Practices Act
Cannot corrupt actions of foreign officials, politicians, or candidates
Cannot make payments to any person when they have "reason to know" that the payments might be used to corrupt the behavior of officials
Must take steps to provide "reasonable assurance" that transactions are in compliance with the law and to keep detailed records of them
The most important legislation regarding ethical conduct in global business is the Foreign Corrupt Practices Act. The act was passed in 1977 primarily because U.S. firms were making payments to foreign government officials to win government contracts and receive preferential treatment.