Ethics and Social Responsibility in Business

1. m a n a g e m e n t 2eH i t t / B l a c k / P o r t e r Chapter 2: Ethics and Social Responsibility

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

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 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

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 Social Responsibility Perspective Key Stakeholders

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 Managerially Irresponsible Yes Efficiency Perspective Managerially Responsible Social Responsibility Perspective Managerially Responsible Efficiency Perspective Managerially Responsible Social Responsibility Perspective Managerially Irresponsible 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 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. 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. 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

15. Strategic Corporate Social Responsibility Problem in Society Low High Prime Focus High Affected by the Company Worthy Cause (for someone else) Low Low High Critical to the Company (inside-out) Adapted from Exhibit 2.3

16. The Development of Individual Ethics

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

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

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

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

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

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

23. Probability of Effect Temporal Immediacy Social Consequences Magnitude of the Consequences Concentration of Effect Proximity Moral Intensity Moral Intensity in Ethical Decision Making Moral intensity • The degree to which people see an issue as an ethical one

24. Magnitude of the Consequences Moral Intensity Moral Intensity in Ethical Decision Making Magnitude of the consequences • Level of impact anticipated • Impact is independent of whether consequences are positive or negative Adapted from Exhibit 2.4 Adapted from Exhibit 5.2: Factors of Moral Intensity

25. Social Consequences Magnitude of the Consequences Moral Intensity Moral Intensity in Ethical Decision Making Social consequences • The extent to which members of a society agree that an act is either good or bad • Population diversity weakens social consensus Adapted from Exhibit 2.4 Adapted from Exhibit 5.2: Factors of Moral Intensity

26. Probability of Effect Social Consequences Magnitude of the Consequences Moral Intensity Moral Intensity in Ethical Decision Making 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 Adapted from Exhibit 2.4 Adapted from Exhibit 5.2: Factors of Moral Intensity

27. Probability of Effect Temporal Immediacy Social Consequences Magnitude of the Consequences Moral Intensity Moral Intensity in Ethical Decision Making 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 Adapted from Exhibit 2.4 Adapted from Exhibit 5.2: Factors of Moral Intensity

28. Probability of Effect Temporal Immediacy Social Consequences Magnitude of the Consequences Proximity Moral Intensity Moral Intensity in Ethical Decision Making 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 Adapted from Exhibit 2.4 Adapted from Exhibit 5.2: Factors of Moral Intensity

29. Probability of Effect Temporal Immediacy Social Consequences Magnitude of the Consequences Concentration of Effect Proximity Moral Intensity Moral Intensity in Ethical Decision Making Concentration of effect • Focus of effect on only a few or disbursed across many individuals • Higher concentration leads to feelings of greater ethical responsibility 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

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 opportunityto make a fair profit. 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 fulfilltheir 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 charitiesand 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 developedand mistakes paid for.• New equipment must be purchased, new facilities providedand 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.” Adapted from Exhibit 2.6

36. Adoption of Codes of Ethics 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 Political interests Least often used for United States firms Innovation and technology Adapted from Exhibit 2.8

38. Successfully Implementing Codes of Ethics

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