1. Ethics and Social Responsibility
The chapter also provides an overview of the efforts being made to ensure that businesses treat society, the natural environment, their customers, their investors, their employees—and each other—fairly. Unfortunately, the actions of a small number of companies around the world have tainted the entire business profession in the eyes of some observers in recent years. According to a recent BusinessWeek/Harris poll, some 79 percent of Americans believe corporate executives put their own personal interests ahead of workers’ and shareholders’. However, as a future business leader yourself, you can be a catalyst for positive change.
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2. Ethics in the Workplace
Contemporary Business
Social Responsibility
Ethical Behavior
This chapter explains what it means to conduct business in an ethically and socially responsible manner and discusses the importance of doing so. Many people use the terms social responsibility and ethics interchangeable, but the two are not the same. Corporate social responsibility is the idea that business has certain obligations to society beyond the pursuit of profits. Ethics, by contrast, is defined as the principles and standards of moral behavior that are accepted by society as right versus wrong. To make the “right choice” individuals must think through the consequences of their actions. Business ethics is the application of moral standards to business situations.
Profits
Society
Principles
Standards
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3. Corporate Fraud Enron Arthur Andersen Marsh & McLennan WorldCom
Ford & Firestone
The new millennium has ushered in a wave of fraud, investment scams, and ethical lapses unprecedented in scope. Worse yet, such corruption has cost thousands of employees their jobs, clipped investor stock portfolios by billions, and destroyed the faith of many in Corporate America and its underlying securities markets.
Enron. The most highly publicized corporate financial scandal of the new millennium involved energy-trading giant Enron and its auditors, Arthur Andersen. Company executives have been charged with grossly inflating company profits by hiding debt and engaging in numerous accounting shenanigans.
Arthur Andersen. Once one of the world’s oldest and most distinguished public accounting firms, Arthur Andersen served as both Enron’s independent financial auditor and management advisor.
Marsh & McLennan. Shock waves rolled through the insurance business when Marsh & McLennan’s insurance brokerage unit was accused of cheating customers by making favorable deals for itself at their expense.
WorldCom. This long-distance telecom giant shocked investors when it revealed in 2002 that it had engaged in one of the biggest frauds in corporate history. The company admitted to overstating cash flow by $3.9 billion by reporting ordinary expenses as capital expenditures. The accounting fraud allowed WorldCom to post a 2001 profit of $1.4 billion instead of reporting a loss for that year.
Ford & Firestone. Faulty Firestone tires on Ford Explorers are blamed for 271 deaths and more than 800 injuries worldwide – numbers that investigators said could have been much lower if both companies had reacted sooner to evidence of product failure.
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4. What is Ethical Behavior?
Competing Fairly
and Honestly
Communicating
Truthfully
In business, besides obeying all laws and regulations, practicing good ethics means competing fairly and honestly, communicating truthfully, and not causing harm to others.
Businesses are expected to compete fairly and honestly and not knowingly deceive, intimidate, or misrepresent customers, competitors, clients, or employees. While most companies compete within the boundaries of the law, some do knowingly break laws or take questionable steps in their zeal to maximize profits and gain a competitive advantage.
Today’s companies communicate with a wide variety of audiences. Communicating truthfully is a simple concept: tell the truth, the whole truth, and nothing but the truth. However, sometimes matters are not so clear. The timing and content of business messages are important.
Placing one’s personal welfare above the welfare of the organization can cause harm to others. For instance, every year tens of thousands of people are the victims of investment scams. Insider trading is illegal and is closely checked by the Securities and Exchange Commission (SEC). Another way that businesspeople can harm others is by getting involved in a conflict of interest situation. A conflict of interest exists when choosing a course of action will benefit one person’s interests at the expense of another or when an individual chooses a course of action that advances his or her personal interests over those of his or her employer.
Not Harming Others
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5. Factors Influencing Ethical Behavior
Cultural Differences
Knowledge
Corporate Behavior
Reporting Systems
Although a number of factors influence the ethical behavior of businesspeople, four in particular appear to have the most impact: cultural differences, knowledge, organizational behavior, and legislation.
Globalization exposes businesspeople to a variety of different cultures and business practices. What does it mean for a business to do the right thing in Thailand? In Africa? In Norway? What may be considered unethical in the United States may be an accepted practice in another culture.
In most cases, a well-informed person is in a position to make better decisions and avoid ethical problems. Making decisions without all the facts or a clear understanding of the consequences could harm employees, customers, the company, and other stakeholders.
The foundation of an ethical business climate is ethical awareness. Organizations that strongly enforce company codes of conduct and provide ethics training help employees recognize and reason through ethical problems. Similarly, companies with strong ethical practices set a good example for employees to follow. On the other hand, companies that commit unethical acts in the course of doing business open the door for employees to follow suit.
Another way companies support ethical behavior is by establishing a system for reporting unethical or illegal actions at work, such as an ethics hotline. Companies that value ethics will try to correct reported problems. If a serious problem exists, or in cases where management may be involved in the act, an employee may choose to blow the whistle. Whistle-blowing is an employee’s disclosure to the media or government authorities of illegal, unethical, or harmful practices by the company.
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6. Making Ethical Decisions
Is It Ethical?
Stakeholder
Issues
Philosophical
Approaches
Utilitarianism
Individual, Legal
and Human Rights
Principles
of Justice
Legality
and Balance
Acceptability
Feasibility
Outsiders
Supervisors
Employees
Even though legal considerations will resolve some ethical questions, you'll often have to rely on your own judgment and principles. You might consider asking yourself a series of questions:
1. Is the decision legal? (Does it break any laws?)
2. Is it balanced? (Is it fair to all concerned?)
3. Can you live with it? (Does it make you feel good about yourself?)
4. Is it feasible? (Will it actually work in the real world?)
When you need to determine the ethics of any situation, these questions will get you started. Some decision-making tools can also help.
One of the most practical and widely accepted methods is utilitarianism, an approach that seeks the greatest good for the greatest number of people involved.
Another approach considers individual legal and human rights: Does it protect people’s own interests? Does it respect the privacy of others and their rights to express their opinions? Does it allow people to act in a way that conforms to their religious or moral beliefs?
Another approach considers upholding the principles of justice: Does it treat people fairly and impartially? Does it apply rules consistently? Does it ensure that people who harm others are help accountable?
These approaches are not mutually exclusive. Most businesspeople combine them to reach decisions that will satisfy as many stakeholders as possible without violating anyone’s rights or treating anyone unjustly.
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7. Ethical Situations Ethical Dilemma Lapse
When making ethical decisions, keep in mind that most ethical situations can be classified into two general types: ethical dilemmas and ethical lapses. An ethical dilemma is a situation in which one must choose between two conflicting but arguably valid sides. All ethical dilemmas have a common theme: the conflict between the rights of two or more important groups of people. The second type of situation is an ethical lapse, in which an individual makes a decision that is clearly wrong, such as divulging trade secrets to a competitor. Be careful not to confuse ethical dilemmas with ethical lapses. A company faces an ethical dilemma when it must decide whether to continue operating a production facility that is suspected, but not proven, to be unsafe. A company makes an ethical lapse when it continues to operate the facility even after the site has been proven unsafe.
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8. Social Responsibility
in Business
Early
20th Century
Middle
20th Century
Early
21st Century
People with equally good intentions can arrive at different conclusions based on different assumptions about the role of business in society. These perspectives can be grouped into three general categories: (1) the only responsibility of business is to make money, (2) business has a larger responsibility to society (and ethical behavior leads to financial success) and (3) businesses must balance social responsibility and financial objectives.
In the nineteenth and early twentieth centuries, the prevailing view among U.S. industrialists was that business had only one responsibility: to make a profit. Caveat emptor was the rule of the day—"Let the buyer beware." If you bought a product, you paid the price and took the consequences. No consumer groups or government agencies would help you if the product was defective or caused harm.
In the mid-twentieth century, Milton Friedman’s view of a company’s responsibility toward society was representative and remained influential for many years: “There is only one social responsibility of business,” said Friedman. “To use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” As he saw it, the only social responsibility of business was to provide jobs and pay taxes.
Most people in the USA now reject the notion that a corporation’s only role is to make money. Therefore, investors and managers support a broader view of social responsibility. They argue that a company has an obligation to society beyond the pursuit of profits and that becoming more socially responsible can actually improve a company’s profits. An emerging perspective is called dynamically balancing ethics and profits. This “third view” asserts that ethics needs to be one of the cornerstones of business but that in the real world, profits and ethics are often at odds. Therefore, managers need to evaluate every situation with the context of the organization’s “moral personality.”
Maximize
Profits
Provide Jobs
and Pay Taxes
Balance Ethics
and Profits
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9. Percentage of Executives Who “Strongly Agree”
or “Agree” That Companies Should:
Percentage
Be environmentally responsible
Be ethical in operations
Earn profits
Employ local residents
Pay taxes
Encourage and support employee volunteering
Contribute money and leadership to charities
Be involved in economic development
Be involved in public education
Involve community representatives in business decisions
Target a portion of purchasing toward local vendors
Help improve quality of life for low-income populations
100 96 94 89 85 75 73 62 61 54
Companies must be profitable businesses to advance their social mission, and their socially responsible activities should enhance the business. Companies that support this line of thinking link the pursuit of socially responsible goals with their overall strategic planning. Such socially responsible companies are just as dedicated to building a viable, profitable business as they are to hewing to a mission—and they think strategically to make both happen. Increasingly, companies and employees are caring about their communities and want to be a part of the greater cause.
The table above shows that executives generally support the notion that companies should serve their communities and be socially responsible citizens in a number of ways. They want to be good corporate citizens and satisfy shareholders’ needs for a return on their investment. Still, finding the right balance can be challenging.
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10. Balancing Business and Stakeholders’ Rights
Investors
Consumers
Employees
Society
Profits
Fair Disclosure
Informed
Purchase
Equity
Health & Safety
Clean
Environment
Exactly how much can businesses contribute to social concerns? This is a difficult decision for most companies because they have limited resources. They must allocate their resources to a number of goals, such as upgrading facilities and equipment, developing new products, marketing existing products, and rewarding employee efforts, in addition to contributing to social causes. This juggling act is a challenge that every business faces.
For example, if a company consistently ignores its stakeholders, its business will suffer and eventually fold. If the company disregards society's needs (such as environmental concerns), voters will clamor for laws to limit the offensive business activities, consumers who feel their needs and values are being ignored will spend their money on a competitor's products, investors who are unhappy with the company's performance will invest elsewhere, and employees whose needs are not met will become unproductive or will quit and find other jobs.
As this slide shows, stakeholders' needs sometimes conflict. In such cases, which stakeholders should be served first—society, consumers, investors, or employees?
Safe
Products
Product
Choice
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11. Social Responsibility
Corporate
Social Responsibility
Social Audits
Cause-Related
Marketing
Philanthropy
Recycling
Programs
Charities
Humanitarian
Aid
Businesses that give back to society are finding that their efforts can lead to a more favorable public image and stronger employee morale. Thus, more and more organizations are attempting to be socially responsible citizens by conducting a social audit, by engaging in cause-related marketing, or by being philanthropic.
A social audit is a systematic evaluation and reporting of the company's social performance. The report typically includes objective information about how the company's activities affect its various stakeholders.
Companies can also engage in cause-related marketing, in which a portion of product sales help support worthy causes.
Some companies choose to be socially responsible corporate citizens by being philanthropic; that is, they donate money, time, goods, or services to charitable, humanitarian, or educational institutions.
Education
Medical
Research
Worthy Causes
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12. Responsibility to Society and the Environment
Natural Resources
and Pollution
Environmental
Activism
Business
Environment
Consumers
The three-way relationship among business, the natural environment, and humans (consumers) who rely on the environment is a great example of the complex ethical decisions that managers often face. People want products to make their lives safer, simpler, and more enjoyable. However, the creation, delivery, and use of those products always generates pollution – which can make people’s lives less safe, more complicated, and less enjoyable. Moreover, the process of business consumes natural resources, either directly or indirectly.
Environmentalists sometimes portray business leaders as heartless profiteers who would strip the Earth bare for the sake of profit. Corporate leaders often cast environmentalists as tree-hugging, fringe lunatics.
Try to keep two important points in mind. First, we all consume natural resources and generate pollution to some degree, so we are all part of the problem; and US consumers have not shown much willingness to make sacrifices in the interest of the environment. Second, environmentalists take on causes that are often as much about human health and safety as they are about forests, rivers, and wildlife.
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13. Pervasiveness of Pollution
Industrial Discharges
Vehicle Emissions
Chemical Spills
Environmental issues exemplify the difficulty that businesses encounter when they try to reconcile conflicting interests: Society needs as little pollution as possible from businesses. But producing quality products to satisfy customers’ needs can cause pollution to some degree.
For decades, environmentalists have warned businesses and the general public about the dangers of pollution (the contamination of the natural environment by the discharge of harmful substances). Our air, water, and land can easily be tainted by industrial discharges, aircraft and motor vehicle emissions, and a number of chemicals that spill out into the environment as industrial waste products. Moreover, the pollution in any one element can easily taint the others. For instance, when emissions from coal-burning factories and electric utility plants react with air, they can cause acid rain, which damages lakes and forests.
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14. Government Efforts to Reduce Pollution
Global Warming
Clean Water Act
EPA Superfund
Clean Air Act
Widespread concern for the environment has been growing since the 1960s with the popularization of ecology, or the study of the balance of nature. In 1970 the federal government established the Environmental Protection Agency (EPA) to regulate air and water pollution. The Clean Air Act was also enacted that year. Unfortunately, the clean-air effort has been bogged down in lawsuits and political wrangling for years. In addition, America’s love affair with the automobile has slowed progress.
Regardless of its source, air pollution is now a global problem, as evidenced by the threat of global warming, a gradual rise in average temperatures around the planet caused by increases in carbon dioxide. In response to such concerns, 124 countries (excluding the USA) have sighed the Kyoto Protocol, which mandates reductions in carbon dioxide emissions.
A good deal of progress has been made in reducing water pollution, thanks in part to the Clean Water Act of However, the conflict between environmental and commercial forces continues unabated over such issues as mining wastes in rivers and streams and mercury pollution in rivers and lakes.
The complex war on toxic waste has seen some successes, but overall results are mixed. The EPA’s Superfund program, designed to clean up the worst toxic waste dumps in the country, is now cleaning up only 40 or 50 sites a year, with more than a thousand left to go.
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15. Business Efforts to Reduce Pollution
Environmental Issues
Environmental Staff
Performance Expectations
Performance Rewards
Long-Term Cost
Product Development
Supplier Expectations
Training and Awareness
While some companies must be pressured by the federal government or private citizens to stop polluting the environment, others do a good job regulating themselves. Many companies are addressing environmental concerns by taking the following actions:
Considering environmental issues a part of everyday business and operating decisions.
Accepting environmental staff members as full-fledged partners in improving the company's competitiveness.
Measuring environmental performance.
Tying compensation to environmental performance.
Determining the long-term environmental costs before such costs occur.
Considering environmental impact in the product-development process.
Challenging suppliers to improve environmental performance.
Conducting environmental training and awareness programs.
In addition to these actions, companies are reducing the amount of solid waste they send to landfills by implementing company-wide recycling programs. Hundreds of thousands of tons of waste have also been eliminated through conservation and more efficient production.
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16. Responsibility Toward Consumers
Freedom of Choice
Right to Be Heard
Accurate Information
Product Safety
The 1960s activism that awakened business to its environmental responsibilities also gave rise to consumerism, a movement that put pressure on businesses to consider consumer needs and interests. At the federal level, President John F. Kennedy announced a "bill of rights" for consumers, laying the foundation for a wave of consumer-oriented legislation. These rights include the right to safe products, the right to be informed, the right to choose, and the right to be heard.
The Consumer Product Safety Commission imposes many safety standards. However, unsafe goods and services are a major concern. While unsafe toys and automobiles grab a lot of the headlines, the range of product safety issues is quite broad, and it is evolving as technology advances and society changes.
Consumers have a right to know what they are buying, how to use it, and whether it presents any risks to them. They also have a right to know the sales price of goods or services and the details of any purchase contracts.
In the USA, the number of products available to consumers is amazing. But how far should the right to choose extend? Are we entitled to choose products that are potentially harmful, such as liquor, tobacco, and guns. Consumer groups, businesses, and the government are all concerned about such questions, but no clear answers have emerged.
Many companies have established toll-free numbers for consumer information and feedback. More companies are establishing websites to provide product information and a vehicle for consumer feedback.
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17. Responsibility Toward Investors
Fair Profit
Distribution
Social
Responsibility
Ethical
Behavior
Clearly, a business can fail its investors by depriving them of their fair share of the profits. Today a growing number of investors are concerned about the business ethics and social responsibility of the companies in which they invest. Aggrieved investors are filing lawsuits against the management of companies that admit to “accounting irregularities,” their boards of directors, and their audit committees.
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18. Responsibility Toward Employees
Equal Employment
Opportunity
Affirmative
Action
Americans with
Disabilities Act
Occupational
Health and Safety
For some companies, the past 30 years have brought dramatic changes in the attitudes and composition of the workforce. These changes have forced businesses to modify their recruiting, training, and promotion practices, as well as their overall corporate values and behaviors.
The Civil Rights Act of 1964 established the Equal Employment Opportunity Commission (EEOC)—the regulatory agency that battles job discrimination. The Civil Rights Act of 1991 extended the original act by allowing workers to sue companies for discrimination and by granting women powerful legal tools against job bias.
In the 1960s, affirmative action programs were developed to encourage organizations to recruit and promote members of minority groups. In addition to affirmative action programs, about 75 percent of U.S. companies have established diversity initiatives.
In 1990 people with a wide range of physical and mental difficulties got a boost from the passage of the federal Americans with Disabilities Act (ADA), which guarantees equal opportunities for an estimated 50 million to 75 million people who have or have had a condition that might handicap them.
During the activist 1960s, mounting concern about workplace hazards resulted in passage of the Occupational Safety and Health Act of 1970, which set mandatory standards for safety and health and which established the Occupational Safety and Health Administration (OSHA) to enforce them.
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19. Global Ethics and Social Responsibility
Bribery
Environmental
Abuse
Unscrupulous
Business Practices
As complicated as ethics and social responsibility can be for U.S. businesses, these issues grow even more complex when cultural influences are applied in the global business environment. Corporate executives may face simple questions regarding the appropriate amount of money to spend on a business gift or the legitimacy of payment to “expedite” business. Or they may encounter out-and-out bribery, environmental abuse, and unscrupulous business practices. In Chapter 3 we discuss global business and highlight how a country’s ethical codes of conduct, laws, and cultural differences are indeed put to test as more and more companies transact business around the globe.
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