2009 south-western, a part of cengage learning. all rights reserved. introduction to...

© 2009 South-Western, a part of Cengage Learning. All rights reserved.

Introduction to Entrepreneurship, 8eDonald F. Kuratko

Chapter 4The Social and Ethical

Perspectives of Entrepreneurship

© 2009 South-Western, a part of Cengage Learning. All rights reserved. 4–2

Chapter ObjectivesChapter Objectives1.1. To examine the concept of “social entrepreneurship”To examine the concept of “social entrepreneurship”2.2. To introduce the challenges of social enterpriseTo introduce the challenges of social enterprise3.3. To discuss the importance of ethics for To discuss the importance of ethics for

entrepreneurs entrepreneurs 4.4. To define the term “ethics”To define the term “ethics”5.5. To study ethics in a conceptual framework for a To study ethics in a conceptual framework for a

dynamic environmentdynamic environment6.6. To review the constant dilemma of law versus ethicsTo review the constant dilemma of law versus ethics7.7. To present strategies for establishing ethical To present strategies for establishing ethical

responsibilityresponsibility8.8. To emphasize the importance of entrepreneurial To emphasize the importance of entrepreneurial

ethical leadershipethical leadership


The Social Entrepreneurship MovementThe Social Entrepreneurship Movement• Social EntrepreneurshipSocial Entrepreneurship

A new form of entrepreneurship applys to social A new form of entrepreneurship applys to social problem solving traditional, private-sector problem solving traditional, private-sector entrepreneurship’s focus on innovation, risk-taking, entrepreneurship’s focus on innovation, risk-taking, and large scale transformation.and large scale transformation.

• Social Entrepreneurship ProcessSocial Entrepreneurship Process Recognition of a perceived social opportunityRecognition of a perceived social opportunity Translation of the social opportunity into an enterprise Translation of the social opportunity into an enterprise

conceptconcept Identification and acquisition of resources required to Identification and acquisition of resources required to

execute the enterprise’s goals.execute the enterprise’s goals.


Social EntrepreneursSocial Entrepreneurs• Social EntrepreneurSocial Entrepreneur

A person or small group of individuals who founds A person or small group of individuals who founds and/or leads an organization or initiative engaged in and/or leads an organization or initiative engaged in social entrepreneurship.social entrepreneurship.

Also referred to as “public entrepreneurs,” “civic Also referred to as “public entrepreneurs,” “civic entrepreneurs,” or “social innovators.entrepreneurs,” or “social innovators.


Social Entrepreneurs (cont’d)Social Entrepreneurs (cont’d)• Characteristics of Social Entrepreneurs Characteristics of Social Entrepreneurs

as Change Agentsas Change Agents Adoption of a mission to create and sustain social Adoption of a mission to create and sustain social

value (beyond personal value)value (beyond personal value) Recognition and relentless pursuit of opportunities for Recognition and relentless pursuit of opportunities for

social valuesocial value Engagement in continuous innovation and learningEngagement in continuous innovation and learning Action beyond the limited resources at handAction beyond the limited resources at hand Heightened sense of accountabilityHeightened sense of accountability


The Social Enterprise ChallengeThe Social Enterprise Challenge• Social ObligationSocial Obligation

Firms that simply react to social issues through Firms that simply react to social issues through obedience to the laws.obedience to the laws.

• Social ResponsibilitySocial Responsibility Firm that respond more actively to social issues; Firm that respond more actively to social issues;

accepting responsibility for various programs.accepting responsibility for various programs.

• Social ResponsivenessSocial Responsiveness Firms that are highly proactive and are even willing to Firms that are highly proactive and are even willing to

be evaluated by the public for various activities.be evaluated by the public for various activities.


Table 4.1What Is the Nature of Social Enterprise?

Environment Pollution controlRestoration or protection of environmentConservation of natural resourcesRecycling efforts

Energy Conservation of energy in production and marketing operations Efforts to increase the energy efficiency of products Other energy-saving programs (for example, company-sponsored car pools)

Fair Business Practices Employment and advancement of women and minoritiesEmployment and advancement of disadvantaged individuals (disabled, Vietnam veterans, ex-offenders, former drug addicts, mentally retarded, and hardcore unemployed)Support for minority-owned businesses

Human Resources Promotion of employee health and safetyEmployee training and developmentRemedial education programs for disadvantaged employees Alcohol and drug counseling programsCareer counselingChild day-care facilities for working parentsEmployee physical fitness and stress management programs

Community Involvement Donations of cash, products, services, or employee timeSponsorship of public health projectsSupport of education and the artsSupport of community recreation programsCooperation in community projects (recycling centers, disaster assistance, and urban renewal)

Products Enhancement of product safetySponsorship of product safety education programsReduction of polluting potential of productsImprovement in nutritional value of productsImprovement in packaging and labeling

Source: Richard M. Hodgetts and Donald F. Kuratko, Management, 3rd ed. (San Diego, CA: Harcourt Brace Jovanovich, 1991), 670


Table 4.2Classifying Social Enterprise Behavior

DIMENSION OF BEHAVIOR

STAGE ONE: SOCIAL OBLIGATION

STAGE TWO: SOCIAL RESPONSIBILITY

STAGE THREE: SOCIAL RESPONSIVENESS

Response to social pressures

Maintains low public profile, but if attacked, uses PR methods to upgrade its public image; denies any deficiencies; blames public dissatisfaction on ignorance or failure to understand corporate functions; discloses information only where legally required

Accepts responsibility for solving current problems; will admit deficiencies in former practices and attempt to persuade public that its current practices meet social norms; attitude toward critics conciliatory; freer information disclosures than stage one

Willingly discusses activities with outside groups; makes information freely available to the public; accepts formal and informal inputs from outside groups in decision making; is willing to be publicly evaluated for its various activities

Philanthropy Contributes only when direct benefit to it clearly shown; otherwise, views contributions as responsibility of individual employees

Contributes to noncontroversial and established causes; matches employee contributions

Activities of stage two, plus support and contributions to new, controversial groups whose needs it sees as unfulfilled and increasingly important

Source: Excerpted from S. Prakash Sethi, “A Conceptual Framework for Environmental Analysis of Social Issues and Evaluation of Business Patterns,” Academy of Management Journal (January 1979): 68. Copyright 1979 by the Academy of Management. Reproduced with permission of the Academy of Management


Environmental AwarenessEnvironmental Awareness• EcovisionEcovision

A leadership style that encourages open and flexible A leadership style that encourages open and flexible structures that encompass the employees, the structures that encompass the employees, the organization, and the environment, with attention to organization, and the environment, with attention to evolving social demands.evolving social demands.


Environmental AwarenessEnvironmental Awareness• Key Steps in an Environmental StrategyKey Steps in an Environmental Strategy

1.1. Eliminate the concept of waste. Eliminate the concept of waste.

2.2. Restore accountability. Restore accountability.

3.3. Make prices reflect costs. Make prices reflect costs.

4.4. Promote diversity. Promote diversity.

5.5. Make conservation profitable.Make conservation profitable.

6.6. Insist on accountability of nations. Insist on accountability of nations.


The Ethical Side of EntrepreneurshipThe Ethical Side of Entrepreneurship• Why are ethics important?Why are ethics important?• What exactly represents right or wrong What exactly represents right or wrong

conduct?conduct?• How do we develop our own codes of How do we develop our own codes of

conduct?conduct?• What impact does integrity and ethical What impact does integrity and ethical

conduct have on creating a successful conduct have on creating a successful venture?venture?


Defining EthicsDefining Ethics• EthicsEthics

A set of principles prescribing a behavioral code that A set of principles prescribing a behavioral code that explains what is good and right or bad and wrong; explains what is good and right or bad and wrong; ethics may outline moral duty and obligations.ethics may outline moral duty and obligations.

Provide the basic rules or parameters for conducting Provide the basic rules or parameters for conducting any activity in an “acceptable” manner.any activity in an “acceptable” manner.

• Reasons for Ethical ConflictsReasons for Ethical Conflicts The many interests that confront business enterprises The many interests that confront business enterprises

both inside and outside the organizationboth inside and outside the organization Changes in values, mores, and societal normsChanges in values, mores, and societal norms Reliance on fixed ethical principles rather than an Reliance on fixed ethical principles rather than an

ethical processethical process


Figure 4.1Classifying Decisions Using a Conceptual Framework

Source: Verne E. Henderson, “The Ethical Side of Enterprise,” Sloan Management Review (spring 1982): 42.


Ethics and LawsEthics and Laws• Managerial RationalizationsManagerial Rationalizations

Justifications in defense of unethical acts are Justifications in defense of unethical acts are believing that an activity:believing that an activity:

1.1. Is not “really” illegal or immoral.Is not “really” illegal or immoral.

2.2. Is in the individual’s or the corporation’s best Is in the individual’s or the corporation’s best interest.interest.

3.3. Will never be found out.Will never be found out.

4.4. That helps the company will be condoned by the That helps the company will be condoned by the company.company.


Table 4.3Types of Morally Questionable Acts

Type Direct Effect Examples

Nonrole Against the firm Expense account cheatingEmbezzlementStealing supplies

Role failure Against the firm Superficial performance appraisalNot confronting expense account cheatingPalming off a poor performer with inflated praise

Role distortion For the firm BriberyPrice fixingManipulating suppliers

Role assertion For the firm Investing in South AfricaUsing nuclear technology for energy generationNot withdrawing product line in face of initial allegations of inadequate safety

Source: James A. Waters and Frederick Bird, “Attending to Ethics in Management,” Journal of Business Ethics 5 (1989): 494.


The Matter of MoralityThe Matter of Morality• Ethical conduct may reach beyond the Ethical conduct may reach beyond the

limits of the law.limits of the law. The requirements of law may overlap at times but do The requirements of law may overlap at times but do

not duplicate the moral standards of society.not duplicate the moral standards of society. Legal requirements tend to be negative (forbidding Legal requirements tend to be negative (forbidding

acts), whereas morality tends to be positive acts), whereas morality tends to be positive (encouraging acts).(encouraging acts).

Legal requirements usually lag behind the acceptable Legal requirements usually lag behind the acceptable moral standards of society.moral standards of society.

Inherent problems arise when people believe laws Inherent problems arise when people believe laws represent morality.represent morality.


Figure 4.2Overlap between Moral Standards and Legal Requirements


Economic Trade-OffsEconomic Trade-Offs• Innovation, risk taking, and venture Innovation, risk taking, and venture

creation are the backbone of the free creation are the backbone of the free enterprise system which fosters enterprise system which fosters individualism and competition.individualism and competition. We cannot blame single individuals for the ethical We cannot blame single individuals for the ethical

problems of free enterprise.problems of free enterprise.

Rather, we must understand the total, systematic Rather, we must understand the total, systematic impact that free enterprise has on the common good.impact that free enterprise has on the common good.


Reasons for Unethical BehaviorReasons for Unethical Behavior• GreedGreed• Distinctions between activities at work and Distinctions between activities at work and

activities at homeactivities at home• A lack of a foundation in ethicsA lack of a foundation in ethics• Survival (bottom-line thinking)Survival (bottom-line thinking)• Reliance on other social institutions to Reliance on other social institutions to

convey and reinforce ethics. convey and reinforce ethics.


Avoiding Another Enron DisasterAvoiding Another Enron Disaster1.1. Bring hidden liabilities back onto the Bring hidden liabilities back onto the

balance sheet.balance sheet.2.2. Highlight the things that matter.Highlight the things that matter.3.3. List the risks and assumptions built into List the risks and assumptions built into

the numbers.the numbers.4.4. Standardize operating incomeStandardize operating income5.5. Provide aid in figuring free-cash flowProvide aid in figuring free-cash flow


Establishing a Strategy for Establishing a Strategy for Ethical EnterpriseEthical Enterprise• Ethical Practices and Codes of ConductEthical Practices and Codes of Conduct

A code of conduct is a statement of ethical practices A code of conduct is a statement of ethical practices or guidelines to which an enterprise adheres.or guidelines to which an enterprise adheres.

Codes of conduct are becoming more prevalent in Codes of conduct are becoming more prevalent in industry.industry.

Recent codes are proving to be:Recent codes are proving to be:• More meaningful in terms of external legal and social More meaningful in terms of external legal and social

developmentdevelopment• More comprehensive in terms of their coverage, and easier to More comprehensive in terms of their coverage, and easier to

implement in terms of the administrative procedures used to implement in terms of the administrative procedures used to enforce them. enforce them.


Table 4.4Approaches to Managerial Ethics OrganizationalCharacteristics

ImmoralManagement

AmoralManagement

MoralManagement

Ethical norms Managerial decisions, actions, and behavior imply a positive and active opposition to what is moral (ethical). Decisions are discordant with accepted ethical principles. An active negation of what is moral is implied.

Management is neither moral nor immoral, but decisions lie outside the sphere to which moral judgments apply. Managerial activity is outside or beyond the moral order of a particular code. A lack of ethical perception and moral awareness may be implied.

Managerial activity conforms to a standard of ethical, or right, behavior. Managers conform to accepted professional standards of conduct. Ethical leadership is commonplace on the part of management.

Motives Selfish: Management cares only about its or the company’s gains.

Well-intentioned but selfish: The impact on others is not considered.

Good: Management wants to succeed but only within the confines of sound ethical precepts (fairness, justice, due process).

Goals Profitability and organizational success at any price.

Profitability; other goals not considered.

Profitability within the confines of legal obedience and ethical standards.

Orientation toward law

Legal standards are barriers management must overcome to accomplish what it wants.

Law is the ethical guide, preferably the letter of the law.The central question is what managers can do legally.

Obedience is toward the letter and spirit of the law. Law is a minimal ethical behavior. Managers prefer to operate well above what the law mandates.

Strategy Exploit opportunities for corporate gain. Cut corners when it appears useful.

Give managers free rein. Personal ethics may apply but only if managers choose. Respond to legal mandates if caught and required to do so.

Live by sound ethical standards. Assume leadership position when ethical dilemmas arise. Enlightened self-interest prevails.

Source: Archie B. Carroll, “In Search of the Moral Manager,” Business Horizons (March/April 1987): 12. Copyright © 1987 by the Foundation for the School of Business at Indiana University. Reprinted by permission.


A Holistic ApproachA Holistic Approach• Principle 1:Principle 1: Hire the right peopleHire the right people• Principle 2:Principle 2: Set standards more than rulesSet standards more than rules• Principle 3:Principle 3: Don’t let yourself get isolatedDon’t let yourself get isolated• Principle 4:Principle 4: The most important principle isThe most important principle is

to let your ethical example at to let your ethical example at all all times be absolutely times be absolutely impeccableimpeccable


Shaping an Ethical StrategyShaping an Ethical Strategy• The entrepreneur’s guiding values and commitments The entrepreneur’s guiding values and commitments

must make sense and be clearly communicated.must make sense and be clearly communicated.

• Entrepreneurs must be personally committed, credible, Entrepreneurs must be personally committed, credible, and willing to take action on the values they espouse.and willing to take action on the values they espouse.

• The espoused values must be integrated into the normal The espoused values must be integrated into the normal channels of the organization’s critical activities.channels of the organization’s critical activities.

• The venture’s systems and structures must support and The venture’s systems and structures must support and reinforce its values.reinforce its values.

• Employees throughout the company must have the Employees throughout the company must have the decision-making skills, knowledge, and competencies decision-making skills, knowledge, and competencies needed to make ethically sound decisions every day.needed to make ethically sound decisions every day.

Source: Adapted from Lynn Sharp Paine, “Managing for Organizational Integrity,” Harvard Business Review (March/April 1994): 106–117.


Ethical ResponsibilityEthical Responsibility

Institutionalization

Ethical Consciousness

Ethical Process and Structure

Ethical Responsibility


Ethics and Business DecisionsEthics and Business Decisions• Complexity of Ethical Decisions:Complexity of Ethical Decisions:

1.1. Ethical decisions have extended consequencesEthical decisions have extended consequences

2.2. Business decisions involving ethical questions have Business decisions involving ethical questions have multiple alternatives.multiple alternatives.

3.3. Ethical business often have mixed outcomes.Ethical business often have mixed outcomes.

4.4. Most business decisions have uncertain ethical Most business decisions have uncertain ethical consequences.consequences.

5.5. Most ethical business decisions have personal Most ethical business decisions have personal implications.implications.


Figure 4.3Four Main Themes of Ethical Dilemmas for Entrepreneurs

Source: Shailendra Vyakarnam, Andy Bailey, Andrew Myers, and Donna Burnett, “Towards an Understanding of Ethical Behavior in Small Firms,” Journal of Business Ethics 16(15) (1997): 1625-1636.


Questioning the Ethics of Business Questioning the Ethics of Business DecisionsDecisions

1.1. Have you defined the problem accurately?Have you defined the problem accurately?

2.2. How would you define the problem if you stood on the other side of the fence?How would you define the problem if you stood on the other side of the fence?

3.3. How did this situation occur in the first place?How did this situation occur in the first place?

4.4. To whom and to what is your loyalty as a person and as a corporation member?To whom and to what is your loyalty as a person and as a corporation member?

5.5. What is your intention in making this decision?What is your intention in making this decision?

6.6. How does this intention compare with the probable results?How does this intention compare with the probable results?

7.7. Whom could your decision or action injure?Whom could your decision or action injure?

8.8. Can you discuss the problem with the affected parties before making your decision?Can you discuss the problem with the affected parties before making your decision?

9.9. Are you confident your position will be as valid over the long-term as it seems now?Are you confident your position will be as valid over the long-term as it seems now?

10.10. Could you disclose without qualms your decision or action to your boss, your CEO, Could you disclose without qualms your decision or action to your boss, your CEO, the board of directors, your family, and society as a whole?the board of directors, your family, and society as a whole?

11.11. What is the symbolic potential of your action if understood? If misunderstood?What is the symbolic potential of your action if understood? If misunderstood?

12.12. Under what conditions would you allow exceptions to your stand?Under what conditions would you allow exceptions to your stand?


Ethical Considerations in Corporate Ethical Considerations in Corporate EntrepreneurshipEntrepreneurship• Corporate EntrepreneursCorporate Entrepreneurs

Are managers or employees who do not follow the Are managers or employees who do not follow the status quo of their co-workers.status quo of their co-workers.

Are depicted as visionaries who dream of taking the Are depicted as visionaries who dream of taking the company in new directions.company in new directions.

Often walk a fine line between clever resourcefulness Often walk a fine line between clever resourcefulness and outright rule breaking.and outright rule breaking.


Figure 4.4Ethical Considerations in Corporate Entrepreneurship

Source: Donald F. Kuratko and Michael G. Goldsby, “Corporate Entrepreneurs or Rogue Middle Managers? A Framework for Ethical Corporate Entrepreneurship,” Journal of Business Ethics 55 (2004): 18


Effective Corporate EntrepreneurshipEffective Corporate Entrepreneurship• Corporate Entrepreneurship requires:Corporate Entrepreneurship requires:

Establishing the needed flexibility, innovation, and Establishing the needed flexibility, innovation, and support of employee initiative and risk taking.support of employee initiative and risk taking.

Removing the barriers that the entrepreneurial middle Removing the barriers that the entrepreneurial middle manager may face to more closely align personal and manager may face to more closely align personal and organizational initiatives and reduce the need to organizational initiatives and reduce the need to behave unethically.behave unethically.

Including an ethical component to corporate training Including an ethical component to corporate training that will provide guidelines for instituting compliance that will provide guidelines for instituting compliance and values components into state-of-the-art corporate and values components into state-of-the-art corporate entrepreneurship programs.entrepreneurship programs.


Effective Corporate EntrepreneurshipEffective Corporate Entrepreneurship

Including an ethical component to

corporate training

Providing flexibility, innovation, and

support

Removing organizational

barriers

Effective Corporate Entrepreneurship


Ethical Leadership by EntrepreneursEthical Leadership by Entrepreneurs• The Opportunity for Ethical Leadership by The Opportunity for Ethical Leadership by

EntrepreneursEntrepreneurs An owner has the unique opportunity to display An owner has the unique opportunity to display

honesty, integrity, and ethics in all key decisions.honesty, integrity, and ethics in all key decisions. The owner’s actions serve as a model for other The owner’s actions serve as a model for other

employees to follow. employees to follow. An owner’s value system is a critical component of the An owner’s value system is a critical component of the

ethical considerations that surround a business ethical considerations that surround a business decision decision


Table 4.5Issues Viewed by Entrepreneur/Owners

Source: Justin G. Longenecker, Joseph A. McKinney, and Carlos W. Moore,“Ethics in Small Business,” Journal of Small Business Management (January 1989): 30.

Demands StrongEthical Stance

Greater Tolerance Regarding Ethical Position

Faulty investment advice Padded expense account

Favoritism in promotion Tax evasion

Acquiescing in dangerous design flaw Collusion in bidding

Misleading financial reporting Insider trading

Misleading advertising Discrimination against women

Defending healthfulness of cigarette smoking Copying computer software


The Ethics of CaringThe Ethics of Caring• CaringCaring

A feminine alternative to the more traditional and A feminine alternative to the more traditional and masculine ethics that are based on rules and masculine ethics that are based on rules and regulations.regulations.

• Following laws may not lead to building as Following laws may not lead to building as strong of relationships as one could.strong of relationships as one could.

• Entrepreneurs must realize that their Entrepreneurs must realize that their personal integrity and ethical example will personal integrity and ethical example will be the key to their employees’ ethical be the key to their employees’ ethical performance. performance.


Key Terms and ConceptsKey Terms and Concepts• amoral managementamoral management• code of conductcode of conduct• ecovisionecovision• environmental environmental

awarenessawareness• ethicsethics• immoral managementimmoral management• moral managementmoral management• nonrolenonrole

• rationalizationsrationalizations• role assertionrole assertion• role distortionrole distortion• role failurerole failure• social entrepreneurshipsocial entrepreneurship• social obligationsocial obligation• social responsibilitysocial responsibility• social responsivenesssocial responsiveness

2009 south-western, a part of cengage learning. all rights reserved. introduction to...

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