Chapter 9: Ethical Business Strategies, Social Responsibility, and Environmental Sustainability

4. Chapter Learning Objectives Understand why business conduct is judged according to the ethical standards of society at large rather than a special set of ethical standards for businesses only. Understand the principal drivers of unethical strategies and business behavior. Learn why unethical business conduct can be very costly for a company�s shareholders. Become familiar with the various approaches to managing a company�s ethical conduct. Gain an understanding of the concepts of corporate social responsibility, corporate citizenship, and environmental sustainability. Become familiar with both the moral case and the business case for ethical business conduct and socially responsible business behavior.

5. Chapter Roadmap What Do We Mean by Business Ethics? Where Do Ethical Standards Come From � Are They Universal or Dependent on Local Norms and Situational Circumstances? The Three Categories of Management Morality Drivers of Unethical Strategies and Business Behavior Why Ethical Strategies Matter Approaches to Managing a Company�s Ethical Conduct Social Responsibility and Corporate Citizenship Strategies

6. Linking Strategy to Ethicsand Social Responsibility 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? Attending to needs ofnon-owner stakeholders? Limit its strategic initiatives to those meeting needs of consumers without depleting resources needed by future generations

7. 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 a set of rules businesspeopleapply to their own conduct

8. How Do Ethical Standards Impact the Tasks of Crafting and Executing Strategy? 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 that this proposed action is in harmony with our core values? Are any conflicts or concerns evident?

9. Are Ethical Standards Universal or Dependent on Local Norms? Three schools of thought regarding extentto which ethical standards can be applied . . .

10. Concept of Ethical Universalism According to the school of ethical universalism . . . Same standards of what is ethical andwhat is unethical resonate with peoplesof 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

11. Examples of UniversalEthical Principles or Norms Honesty Trustworthiness Respecting rights of others Practicing the Golden Rule Treating people with dignity and respect Exercising due diligence in product safety Acting in a manner that does not Harm others or Pillages the environment

12. What Is the Appealof Ethical Universalism? Draws on collective views of multiple societies and cultures to place clear boundaries on what constitutes Ethical business behavior and Unethical business behavior Regardless of what country acompany is operating in Where basic moral standards do not vary significantly according to local cultural beliefs, traditions, or religious convictions, a multinational company can Apply a code of ethics more or less evenly across its worldwide operations

13. Concept of Ethical Relativism According to the school of ethical relativism . . . Different societies/cultures/countries Put more/less emphasis on some values than others Have different standards of right and wrong Have different social moresand behavioral norms What is ethical or unethical Must be judged in light of localcustoms and social mores and Can vary from one country to another

14. A thorny ethical problem is facedby multinational companies Degree of cross-country variability in payingbribes 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

15. Test Your Knowledge Paying bribes and kickbacks to grease business transactions A. violates ethical principles of right and wrong in all countries. B. is ethically acceptable according to the principle of ethical universalism. C. is acceptable to immoral managers but not to amoral managers. D. should be considered ethically appropriate by a company so long as such payments are normal and customary in the countries where such payments are made. E. may be ethically acceptable according to the principle of ethical relativism if paying bribes and kickbacks is normal and customary practice in a country. Answer: EAnswer: E

16. Ethical Relativism =Multiple Sets of Ethical Standards Proponents of the ethical relativism school maintain there are Few ethical absolutes to judge a company�sconduct in various countries Plenty of situations where ethicalnorms 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

17. 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 istantamount 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 condonekickbacks and bribery? What if local standards blinkat 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

18. Concept of IntegrativeSocial 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

19. Appeal of IntegrativeSocial 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

21. Dedicated to high standards of ethical behavior in Own actions How the 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

22. Characteristics of an Immoral Manager Actively opposes ethical behavior in business Willfully ignores ethical principles in making decisions Views legal standards as barriers to overcome Pursues own self-interests Is an example of self-serving greed Ignores interests of others Focuses only on bottom line �making one�s numbers Will trample on others to avoid being trampled upon

23. Believes business and ethics should notbe mixed since different rules apply to Business activities Other realms of life Does not factor ethical considerations intoown actions since business activity liesoutside sphere of moral judgment Views ethics as inappropriate fortough, competitive business world Concept of right and wrong islawyer-driven (what can we get bywith without running afoul of the law) Characteristics of anIntentionally Amoral Manager

24. Is blind to or casual about ethics ofdecision-making and business actions Displays lack of concern regardingwhether ethics applies to company actions Sees self as well-intentionedor 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

25. Evidence of Managerial Immoralityin the Global Business Community Evidence exists a sizable majority of managers are either Amoral or Immoral Results of recent issues of the Global Corruption Report indicate corruption is widespread across the world Corruption extends beyond bribes and kickbacks

26. Table 9.1: Corruption Perceptions Index (CPI), Selected Countries, 2007

27. What Are the Drivers of Unethical Strategies and Business Behavior?

28. People obsessed with wealth accumulation, greed, power, status, and other self-interests often Push ethical principles aside in theirquest for self gain Exhibit few qualms in Skirting the rules or Doing whatever is necessaryto achieve their goals Engage in all kinds of unethicalstrategic maneuvers and behaviors Overzealous Pursuit of Personal Gain, Wealth, and Selfish Interests

29. Managers often feel enormous pressure to do whatever it takes to deliver good financial performance Actions often taken by managers Cut costs wherever savings show up immediately Squeeze extra sales out of early deliveries Engage in short-term maneuvers to make the numbers Stretch rules to extreme, until limits of ethical conduct are overlooked Executives feel pressure to hit performance targets since their compensation depends heavily on company performance Fundamental problem with a �make the numbers� syndrome Company does not create additional value for customers or improve its competitiveness Heavy Pressures on Company Managersto Meet or Beat Earnings Targets

30. Company Cultures that Put BottomLine Ahead of Ethical Behavior In an ethically corrupt or amoral work climate, people have a company-approved license to Ignore �what�s right� Engage in most any behavior or employ mostany strategy they think they can get away with Pressures to conform to cultural norms can prompt otherwise honorable people to Make ethical mistakes Succumb to the many opportunitiesto engage in unethical practices

31. Why Ethical Strategies Matter An unethical strategy Is morally wrong Reflects badly on the character of company personnel An ethical strategy is Good business In the best interest of shareholders

32. Characteristics of Managers Committedto Ethical Approaches to Strategy-Making Possess strong moral and ethical characteristics Strongly advocate a corporate codeof 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

33. Figure 9.1: The Business Costs of Ethical Failures

34. Test Your Knowledge Which one of the following is false when it comes to making a case for why a company�s strategy should be ethical? A. An unethical strategy can put a company�s reputation at risk and do lasting damage, especially when the misdeeds get into the public spotlight and make media headlines. B. An ethical strategy is in the best interest of shareholders. C. An unethical strategy reflects badly on the character of the company personnel involved. D. Shareholders profits are not greatly reduced by using ethical strategies. E. A strategy that is unethical in whole or in part is morally wrong. Answer: DAnswer: D

36. Table 9.2: Four Approaches to Managing Business Ethics

37. 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 makegreatest possible profit at most any cost Strategies used, while legal, may embraceelements that are ethically shady

38. Characteristics ofDamage 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 waywhen shady behavior occurs Executives may condone questionable actions that help a company reach earnings targets or bolster its market standing

39. Characteristics ofCompliance Approach From light to forceful compliance is favoredat companies whose managers Lean toward being somewhat amoral but are highlyconcerned about having ethically upstanding reputations or Are moral and see strong compliance methods as best way to impose and enforce high ethical standards Ethics code violators are disciplined, sending a clear signal that complying with ethical standards must be taken seriously Commitment to eradicate unethicalbehavior stems from a desire to Avoid cost and damage associatedwith unethical conduct or Gain favor from stakeholders from having ahighly regarded reputation for ethical behavior

40. 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 togive guidance on ethics matters Institute formal procedures forinvestigating alleged ethics violations Conduct ethics audits to measure and document compliance Install ethics hotlines to help detect and deter violations

41. Potential Weaknessof Compliance Approach Moral control resides in a company�scode of ethics and in the ethicscompliance system rather than in Strong peer pressures for ethicalbehavior that come from ingraininga highly ethical corporate culture and An individual�s own moralresponsibility for ethical behavior

42. Characteristics ofEthical 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 codeof ethics are integral to company�s Identity and self-image Day-to-day operations Strategy must be ethical Employees must display ethical behaviors in executing the strategy

43. For Discussion: Your Opinion Is it unethical for a high school or college coach to accept a �talent fee� or similar type of payment from a maker of sports apparel or sports equipment when the coach has authority to determine which brand of apparel or equipment to use for his/her team and subsequently chooses the brand of the company making the payment? Is it unethical for the maker of the sports apparel or equipment to make such payments in expectation that the coach will reciprocate by selecting the company�s brand? (Would you answer be different if �everybody� is doing it?) Student responses will vary. You should press students to justify their answers and the explain the �moral ground� on which their answer rests.Student responses will vary. You should press students to justify their answers and the explain the �moral ground� on which their answer rests.

44. For Discussion: Your Opinion Is it unethical for a credit card company to aggressively try to sign up new accounts when, after an introductory period of interest-free or low-interest charges on unpaid monthly balances, the interest rate on unpaid balances jumps to 1.5 percent or more monthly (even though such high rates of 18 percent or more annually are disclosed in fine print)? Student responses will vary, which gives you an opportunity to explore the different core values and the �moral underpinning� upon which the varying answers are basedStudent responses will vary, which gives you an opportunity to explore the different core values and the �moral underpinning� upon which the varying answers are based

45. What Is Corporate Social Responsibility? The notion that corporate executives should balance interests of all stakeholders began to blossom in the 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

46. Concepts of Social Responsibilityand Corporate Citizenship A company should strive to balance strategic actions to benefit shareholders against the duty to be a good corporate citizen Socially responsible behaviors go beyond Complying with legal requirements and Corporate philanthropy activities Socially responsible behaviors also entail actions to earn trust and respect of stakeholders for efforts to improve the well-being of Employees Local communities Environment Customers Society

47. Figure 9.2: Demonstrating a Social Conscience: The FiveComponents of Socially Responsible Business Behavior

48. What Is a Social Responsibility Strategy?

49. What Is an Environmental Sustainability Strategy?

50. Characteristics of Environmental Sustainability Initiatives Frequently focus on improving a company�s �Triple-P� performance People Planet Profit Convey beneficial outcomes via Press releases Special sustainability reports for stakeholders

51. Example: Unilever�s Environmental Sustainability Strategy

52. Table 9.3: Companies With Exceptional Commitments to Sustainability

53. Crafting Social Responsibility and Sustainability Strategies The socially responsible/sustainability strategies a company pursues impacts its ability to achieve a competitive advantage Management should match a company�ssocial responsibility/sustainabilty strategy to its Core values Business mission Overall strategy Some companies are integrating social responsibility and/or environmentally sustainability objectives into their Missions Performance targets Strategies

54. Businesses should promote the betterment of society, acting in ways to benefit all their stakeholders because �It�s the right thing to do!� Based on an implied social contract, society Grants a business the right toconduct its business affairs Agrees not to unreasonably restraina firm�s pursuit of a fair profit In return for a �license to operate,�a business should Act as a responsible citizen Do its fair share to promote the general welfare Moral Case: Corporate Social Responsibility and Environmentally Sustainable Business Practices

55. Business Case: Socially Responsible Behavior and Environmentally Sustainable Business Practices 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-damagingincidents, leading to increased buyer patronage Works in best interest of shareholders Minimizes costly legal and regulatory actions Provides for increased investmentsby socially conscious mutual fundsand pension benefit managers Focusing on environment issuesmay enhance earnings

56. Test Your Knowledge Which one of the following is false as concerns the merits of why acting in a socially responsible manner is �good business�? A. To the extent that a company�s socially responsible behavior wins applause from consumers and fortifies its reputation, a company may win additional patronage. B. Acting in a socially responsible manner reduces the risk of reputation-damaging incidents. C. Acting in a socially responsible manner is in the overall best interest of shareholders. D. Acting in a socially responsible manner is unlikely to have any effect (positive or negative) on a company�s profitability. E. Acting in a socially responsible manner can generate internal benefits (as concerns employee recruiting, workforce retention, training, and improved worker productivity). Answer: DAnswer: D