CHAPTER 9

ETHICS, CORPORATE SOCIAL RESPONSIBILITY, ENVIRONMENTAL SUSTAINABILITY, AND STRATEGY

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1. Understand how the standards of ethical behavior in business are no different from the ethical standards and norms of the larger society and culture in which a company operates.

2. Recognize conditions that can give rise to unethical business strategies and behavior.

3. Gain an understanding of the costs of business ethics failures.

4. Learn the concepts of corporate social responsibility and environmental sustainability and how firms balance these duties with economic responsibilities to shareholders.

WHAT DO WE MEAN BY BUSINESS ETHICS?

Business Ethics● Is the application of general ethical principles to the

actions and decisions of businesses and the conduct of their personnel.

● Are not materially different from ethical principles in general because business actions have to be judged in the context of society’s standards of right and wrong.

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CORE CONCEPTS

♦ Ethics concerns principles of right or wrong conduct.

♦ Business ethics involves the application of general ethical principles to the actions and decisions of businesses and the conduct of their personnel.

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WHERE DO ETHICAL STANDARDS COME FROM—ARE THEY UNIVERSAL OR DEPENDENT ON LOCAL NORMS?

The School of Ethical

Universalism

The School of Ethical

Relativism

Integrated Social Contracts

Theory

Sources for Ethical Standards

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THE SCHOOL OF ETHICAL UNIVERSALISM

Ethical Universalism● Holds that common understandings across multiple

cultures and countries about what constitutes right and wrong give rise to universal ethical standards that apply to all societies, all firms, and all businesspeople.

Effect on Business Ethics● Whether a business-related action is right or wrong is

judged by universal standards.

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THE SCHOOL OF ETHICAL RELATIVISM

Ethical Relativism● Holds that differing beliefs, customs, and behavioral

norms across countries and cultures give rise to multiple sets of standards of what is ethically right or wrong.

Effect on Business Ethics● Whether business-related actions are right or wrong

depends on local ethical standards.

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CORE CONCEPT

♦ The school of ethical relativism holds that differing religious beliefs, customs, and behavioral norms across countries and cultures give rise to multiple sets of standards concerning what is ethically right or wrong. These differing standards mean that whether business-related actions are right or wrong depends on the prevailing local ethical standards.

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EXAMPLES OF ETHICAL RELATIVISM ISSUES

The Use of Underage

Labor

The Payment of Bribes and

Kickbacks

Relativism Equates to

Multiple Sets of Standards

The Use of Local Morality

to Guide Ethical Behavior

Variations in Ethical Standards

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ILLUSTRATION CAPSULE 9.1

Apple’s Failures in EnforcingIts Supplier Code of Conduct

♦ How effective has Apple’s Supplier Code of Conduct been is reducing abuses of workers at its supplier facilities?

♦ Is it fair for Apple to prescribe that its suppliers comply with universal standards that are at wide variance relative to local market labor practices and conditions?

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STRATEGIC MANAGEMENT PRINCIPLE

♦ Codes of conduct based on ethical relativism can be ethically dangerous for multinational companies by creating a maze of conflicting ethical standards.

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CORE CONCEPT

♦ According to integrated social contracts theory, universal ethical principles based on the collective views of multiple societies form a “social contract” that all individuals and organizations have a duty to observe in all situations.

♦ Within the boundaries of this social contract, local cultures or groups can specify what additional actions may or may not be ethically permissible.

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STRATEGIC MANAGEMENT PRINCIPLE

♦ According to integrated social contracts theory, adherence to universal or “first-order” ethical norms should always take precedence over local or “second-order” norms.

♦ In instances involving universally applicable ethical norms (like paying bribes), there can be no compromise on what is ethically permissible and what is not.

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INTEGRATIVE SOCIAL CONTRACTS THEORY

Provides a middle-ground balance between universalism and relativism.

Posits that the collective views of multiple societies form universal (first order) ethical principles that all persons have a contractual duty to observe in all situations.

Within the contract, cultures or groups can specify locally ethical (second-order) actions.

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APPLICATION OF INTEGRATED SOCIAL CONTRACTS THEORY TO MULTINATIONAL BUSINESS

Effects on Ethical Standards:● Adherence to universal ethical norms takes

precedence over local norms.

● A local custom is not ethical if it violates universal ethical norms.

● Application of codes of ethics should first follow universal standards with allowance for local ethical diversity and influence.

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HOW AND WHY ETHICAL STANDARDS IMPACT THE TASKS OF CRAFTING AND

EXECUTING STRATEGY

The Ethics Code Litmus Test:● Is what we are proposing to do fully compliant with

our code of ethics? Are there areas of ambiguity?

● Is this action in harmony with our core values? Are any conflicts or potential problems evident?

● Is this action ethically objectionable? Would our stakeholders, our competitors, the SEC under the Sarbanes-Oxley Act, or the news and social media view this action as ethically objectionable?

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CONSEQUENCES OF ETHICALLY QUESTIONABLE STRATEGIES

Sizable civil fines and stockholder

lawsuits

Devastating image and

public relations hits

Sharp stock price drops as investors lose

confidence

Criminal indictments

and convictions

When Strategies Fail the Ethical Litmus Test

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WHAT ARE THE DRIVERS OF UNETHICAL STRATEGIES AND

BUSINESS BEHAVIOR?

Unethical Strategies

and Business Behaviors

Faulty Oversight and Self Dealing

Pressure for Short-term Performance

A Weak or Corrupt Ethical Environment

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WHAT ARE THE DRIVERS OF UNETHICAL STRATEGIES AND

BUSINESS BEHAVIOR?

Drivers of Unethical Business Behavior:● Faulty internal oversight allows self-dealing in the

pursuit of personal gain, wealth, and self-interest.

● Short-termism pressure to meet or beat short-term performance targets.

● A culture that puts profitability and business performance ahead of ethical behavior.

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CORE CONCEPT

♦ Self-dealing occurs when managers take advantage of their position to further their own private interests rather than those of the firm.

♦ Short-termism is the tendency for managers to focus excessively on short-term performance objectives at the expense of longer-term strategic objectives. It has negative implications for the likelihood of ethical lapses as well as company performance in the longer run.

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ILLUSTRATION CAPSULE 9.2Investment Fraud at Bernard L. Madoff Investment Securities and Stanford Financial Group

♦ Which drivers of unethical behavior were active in the Madoff investment fraud scheme?

♦ How did the cultures of the Madoff and Stanford investment firms assist in perpetuating the frauds?

♦ What ethical responsibilities were lacking in the Madoff fraud’s investors that would have helped prevent the frauds?

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♦ What steps has Novo Nordisk taken to ensure that its ethical standards of employee conduct are put into practice?

♦ Why has Novo Nordisk been so successful instilling a culture of ethical conduct in its organization when other firms have not?

♦ What has been the effect of Novo Nordisk’s dedication to ethical business practices on its success in the marketplace?

ILLUSTRATION CAPSULE 9.3 How Novo Nordisk Puts Its Ethical Principles into Practice

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WHY SHOULD COMPANY STRATEGIES BE ETHICAL?

The Moral Case for an Ethical Strategy:● Because a strategy that is unethical is morally wrong

and reflects badly on the character of the firm’s personnel.

The Business Case for Ethical Strategies:● Because an ethical strategy can be both good

business and serve the self-interest of shareholders.

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STRATEGIC MANAGEMENT PRINCIPLE

♦ Conducting business in an ethical fashion is not only morally right—it is in a company’s enlightened self-interest.

♦ Shareholders suffer major damage when a company’s unethical behavior is discovered. Making amends for unethical business conduct is costly, and it takes years to rehabilitate a tarnished company reputation.

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The Costs Companies Incur When Ethical Wrongdoing Is DiscoveredFIGURE 9.1

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STRATEGY, CORPORATE SOCIAL RESPONSIBILITY, AND EVIRONMENTAL

SUSTAINABILITY

Corporate Social Responsibility (CSR)● Is a firm’s duty to operate in an honorable manner,

provide good working conditions for employees, encourage workforce diversity, be a good steward of the environment, and actively work to better the quality of life in the local communities where it operates and in society at large.

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CORE CONCEPT

♦ Corporate social responsibility (CSR) refers to a company’s duty to operate in an honorable manner, provide good working conditions for employees, encourage workforce diversity, be a good steward of the environment, and actively work to better the quality of life in the local communities where it operates and in society at large.

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The Five Components of a Corporate Social Responsibility Strategy

FIGURE 9.2

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♦ How has Burt’s Bees skillful use of corporate social responsibility (CSR) as a strategic tool contributed to its success in the marketplace?

♦ Given that many customers now purchase personal care products online, how do they determine that firms such as Burt’s Bees really are practicing CSR?

♦ Why was there a customer backlash to The Clorox Company’s acquisition of Burt’s Bees?

ILLUSTRATION CAPSULE 9.4 Burt’s Bees: A Strategy Based on Corporate Social Responsibility

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The Triple Bottom Line: Excelling on Three Measures of Company Performance

ProfitProfit PeoplePeople

PlanetPlanet

FIGURE 9.3

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A Selection of Companies Recognized for Their Triple-Bottom-Line Performance in 2011

TABLE 9.1

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WHAT DO WE MEAN BY SUSTAINABILITY AND SUSTAINABLE

BUSINESS PRACTICES?

Sustainability● Is the relationship of a firm to its environment and its

use of natural resources.

Sustainable Business Practices● Are those practices of a firm that meet the needs of

the present without compromising the ability to meet the needs of the future.

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CORE CONCEPTS

♦ Sustainable business practices are those that meet the needs of the present without compromising the ability to meet the needs of the future.

♦ An environmental sustainability strategy consists of a firm’s deliberate actions to protect the environment, provide for the longevity of natural resources, maintain ecological support systems for future generations, and guard against the ultimate endangerment of the planet.

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SUSTAINABILITY AND SUSTAINABLE BUSINESS PRACTICES

Environmental Sustainability Strategy● Consists of the firm’s deliberate actions to:

Protect the environment.

Provide for the longevity of natural resources.

Maintain ecological support systems for future generations.

Guard against ultimate endangerment of the planet.

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CRAFTING CORPORATE SOCIAL RESPONSIBILITY AND SUSTAINABILITY STRATEGIES

Pursuing a Sustainable CSR Strategy in the Firm’s Value Chain Activities

Business Case:Competitive Advantage

Moral Case:Stakeholder

Benefits

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STRATEGIC MANAGEMENT PRINCIPLE

♦ CSR strategies and environmental sustainability strategies that both provide valuable social benefits and fulfill customer needs in a superior fashion can lead to competitive advantage. Corporate social agendas that address only social issues may help boost a company’s reputation for corporate citizenship but are unlikely to improve its competitive strength in the marketplace.

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THE MORAL CASE FOR CSR AND ENVIRONMENTALLY SUSTAINABLE

BUSINESS PRACTICES

Operate ethically and

legally

Provide good work conditions for employees

Be a good environmental

steward

Display good corporate citizenship

The Implied Social Contract:“To Do the Right Thing”

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STRATEGIC MANAGEMENT PRINCIPLE

♦ Every action a company takes can be interpreted as a statement of what it stands for.

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THE BUSINESS CASE FOR CSR AND ENVIRONMENTALLY SUSTAINABLE

BUSINESS PRACTICES

Increased reputation and buyer patronage Reduced risk of reputation-damaging incidents Lower turnover costs and enhanced employee

recruiting and workforce retention Increased revenue enhancement opportunities

due to support of CSR and sustainability CSR and sustainability best serve long-term

interests of shareholders

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COMBATING THE EVASION OF CSR AND SOCIALLY HARMFUL

BUSINESS PRACTICES

Harmful and Unethical Business

Actions and Behaviors

Increased public awareness of misdeeds of

bad behavior by firms

Increased legislation and regulation to correct and

punish firms

Refusal to do business with irresponsible firms

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STRATEGIC MANAGEMENT PRINCIPLE

♦ The higher the public profile of a company or its brand, the greater the scrutiny of its activities and the higher the potential for it to become a target for pressure group action.

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STRATEGIC MANAGEMENT PRINCIPLE

♦ Socially responsible strategies that create value for customers and lower costs can improve company profits and shareholder value at the same time that they address other stakeholder interests.

♦ There’s little hard evidence indicating shareholders are disadvantaged in any meaningful way by a company’s actions to be socially responsible.

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