Chapter 2 - Ethics and Social Responsibility in Business

Ethics

the study of right and wrong and of the morality of the choices individuals make

• An ethical decision or action is one that is “right” according to some standard of behavior.

Business ethics

the application of moral standards to business situations

Ethical issues

often arise out of a business’s relationship with investors, customers, employees, creditors, suppliers, or competitors.

• Each of these stakeholder groups has specific concerns and usually exerts pressure on the organization’s managers.

Fairness and honesty

Businesspeople are expected to refrain from knowingly deceiving, misrepresenting, or intimidating others.

• Example: The Federal Trade Commission ruled that Gerber’s claim that its Good Start Gentle baby formula can prevent or reduce allergies in children lacked scientific evidence and asked the company to remove the statement from its advertising and product labels.

Organizational relationships

Businesspeople should not place their personal welfare above the welfare of others or the welfare of the organization.

Relationships among co-workers often create unethical problems.

Includes:

• Not meeting one’s commitments in a mutual agreement

• Pressuring others to behave unethically

• Plagiarism

Plagiarism

knowingly taking someone else’s words, ideas, or other original material without acknowledging the source

Conflicts of interest

occur when a businessperson takes advantage of a situation for his or her own personal interest rather than for the employer’s interest.

• Examples: a manager dating a subordinate, a firm that advises clients without informing them that it has a relationship with some of the products it recommends

may occur when payments and gifts make their way into business deals.

• Bribes—gifts, favors, or payments offered with the intent of influencing an outcome—are illegal in the U.S. and abroad.

Communications

False and misleading advertising is illegal and unethical.

Example: Advertisers of health-related products must take precautions to guard against deception when using such descriptive terms as low fat, fat free, and light.

Factors affecting ethical behavior

• individual factors

• social factors

• opportunity as a factor

Individual factors affecting ethics

How much an individual knows (personal knowledge)

Moral values and central, value-related attitudes

Personal goals and the manner in which these goals are pursued

Social factors affecting ethics

Cultural norms

Actions and decisions of co-workers

Values and attitudes of “significant others” (spouses, friends, and relatives)

The use of the Internet

Opportunity as a factor affecting ethics

Opportunity – the amount of freedom an organization affords an employee to behave unethically if he or she makes that choice

Degree of enforcement of company policies, procedures, and ethical codes

Government’s role in encouraging ethics

The government can encourage ethical behavior by enacting more stringent regulations.

Sarbanes-Oxley Act of 2002

Sarbanes-Oxley Act of 2002

provides sweeping new legal protection for employees who report corporate misconduct

Trade Associations’ Role in Encouraging Ethics

Trade associations can and often do provide ethical guidelines for their members.

Example: A pharmaceutical trade group adopted a new set of guidelines intended to end the extravagant dinners and expensive gifts sales representatives often give to physicians to persuade them to prescribe a particular medicine.

Individual Companies’ Role in Encouraging Ethics

Codes of ethics are perhaps the most effective way to encourage ethical behavior.

Today, about 95 percent of Fortune 1000 firms have a formal code of ethics or conduct.

In the wake of a number of corporate scandals and the Sarbanes-Oxley Act, many large companies now have created a new executive position, the chief ethics (or compliance) officer.

Employees with high personal ethics may take a controversial step called whistle-blowing.

The Sarbanes-Oxley Act of 2002 protects whistle-blowers who report corporate misconduct.

Federal employees who report misconduct are protected by the Whistleblower Protection Act of 1989.

Code of ethics

a guide to acceptable and ethical behavior as defined by the organization

Whistle-blowing

informing the press or government officials about unethical practices within one’s organization

Guidelines for making ethical decisions

• listen and learn

• identify the ethical issues

• create and analyze options

• identify the best option from your point of view

• explain your decision and resolve any differences that arise

Listen and learn

Recognize the problem or decision-making opportunity that confronts your company, team, or unit. Don’t argue, criticize, or defend yourself—keep listening and reviewing until you are sure that you understand others.

Identify the ethical issues

Explain how co-workers and consumers are affected by the situation or decision at hand. Examine how you feel about the situation, and attempt to understand the viewpoint of those involved in the decision or in the consequences of the decision.

Create and analyze options

Try to put aside strong feelings such as anger or a desire for power and prestige and come up with as many alternatives as possible before developing an analysis. Ask everyone involved for ideas about which options offer the best long-term results for you and the company. Then decide which option will increase your self-respect even if, in the long run, things don’t work out the way you hope they will.

Identify the best option from your pov

Consider it and test it against some established criteria, such as respect, understanding, caring, fairness, honesty, and openness.

Explain your decision and resolve any differences that arise

This may require neutral arbitration from a trusted manager or taking “time out” to reconsider, consult, or exchange written proposals before a decision is reached.

Social responsibility

the recognition that business activities have an impact on society and the consideration of that impact in business decision making

Corporate citizenship

adopting a strategic approach to fulfilling economic, ethical, environmental, and social responsibilities

Interstate Commerce Act (1887)

First federal act to regulate business practices; provided regulation of railroads and shipping rates

Sherman Antitrust Act (1890)

Prevented monopolies or mergers where competition was endangered

Pure Food and Drug Act (1906)

Established limited supervision of interstate sales of food and drugs

Federal Trade Commission Act (1914)

Created the Federal Trade Commission to investigate illegal trade practices

Clayton Antitrust Act (1914)

Eliminated many forms of price discrimination that gave large businesses a competitive advantage over smaller firms

Economic model of social responsibility

the view that society will benefit most when business is left alone to produce and market profitable products that society needs

Socioeconomic model of social responsibility

the concept that business should emphasize not only profits but also the impact of its decisions on society

Pros of social responsibility

Because business is a part of our society, it cannot ignore social issues.

Business has the technical, financial, and managerial resources needed to tackle today’s complex social issues.

By helping resolve social issues, business can create a more stable environment for long-term profitability.

Socially responsible decision making by firms can prevent increased government intervention, which would force businesses to do what they fail to do voluntarily.

Con of social responsibility

Business managers are responsible primarily to stockholders, so management must be concerned with providing a return on owners’ investments.

Corporate time, money, and talent should be used to maximize profits, not to solve society’s problems.

Social problems affect society in general, so individual businesses should not be expected to solve these problems.

Social issues are the responsibility of government officials who are elected for that purpose and who are accountable to the voters for their decisions.

Consumerism

all activities undertaken to protect the rights of consumers

The fundamental issues pursued by the consumer movement fall into three categories:

• Environmental protection

• Product performance and safety

• Information disclosure

Basic rights of consumers

• the right to safety

• the right to be informed

• the right to choose

• the right to be hand

• the right to consumer education

• the right to service

Right to safety

Products that consumers purchase must be safe for their intended use, must include thorough and explicit directions for proper use, and must be tested by the manufacturer to ensure product quality and reliability.

Right to be informed

Consumers must have access to complete information about a product before they buy it.

Right to choose

Consumers must have a choice of products, offered by different manufacturers and sellers, to satisfy a particular need.

Right to be hand

Someone will listen and take appropriate action when customers complain.

Right to consumer education

People are entitled to be fully informed about their rights as consumers.

Right to service

Consumers are entitled to convenience, courtesy, and responsiveness from manufacturers and sellers of consumer products.

Major consumerism forces

Consumer advocates and organizations

Consumer education programs

Consumer laws

Federal Hazardous Substances Labeling Act (1960)

Required warning labels on household chemicals if they were highly toxic

Kefauver-Harris Drug Amendments (1962)

Established testing practices for drugs and required manufacturers to label drugs with generic names in addition to trade names

Cigarette Labeling Act (1965)

Required manufacturers to place standard warning labels on all cigarette packages and advertising

Fair Packaging and Labeling Act (1966)

Called for all products sold across state lines to be labeled with net weight, ingredients, and manufacturer’s name and address

Motor Vehicle Safety Act (1966)

Established standards for safer cars

Truth in Lending Act (1968)

Required lenders and credit merchants to disclose the full cost of finance charges in both dollars and annual percentage rates

Credit Card Liability Act (1970)

Limited credit-card holder’s liability to $50 per card and stopped credit-card companies from issuing unsolicited cards

Required credit bureaus to provide credit reports to consumers regarding their own credit files; also provided for correction of incorrect information

Consumer Product Safety Commission Act (1972)

Established an abbreviated procedure for registering certain generic drugs

Fair Credit Billing Act (1974)

Amended the Truth in Lending Act to enable consumers to challenge billing errors

Equal Credit Opportunity Act (1974)

Provided equal credit opportunities for males and females and for married and single individuals

Provided for minimum disclosure standards for written consumer-product warranties for products that cost more than $15

Amendments to the Equal Credit Opportunity Act (1976, 1994)

Prevented discrimination based on race, creed, color, religion, age, and income when granting credit

Fair Debt Collection Practices Act (1977)

Outlawed abusive collection practices by third parties

Nutrition Labeling and Education Act (1990)

Required the Food and Drug Administration to review current food labeling and packaging focusing on nutrition label content, label format, ingredient labeling, food descriptors and standards, and health messages

Telephone Consumer Protection Act

Prohibited the use of automated dialing and prerecorded-voice calling equipment to make calls or deliver messages

Consumer Credit Reporting Reform Act (1997)

Placed more responsibility for accurate credit data on credit issuers; required creditors to verify that disputed data are accurate and to notify a consumer before reinstating the data

Children’s Online Privacy Protection Act (2000)

Placed parents in control over what information is collected online from their children younger than 13 years; required commercial Web site operators to maintain the confidentiality, security, and integrity of personal information collected from children

Do Not Call Implementation Act

Directed the FCC and the FTC to coordinate so that their rules are consistent regarding telemarketing call practices including the Do Not Call Registry and other lists, as well as call abandonment

Credit Card Accountability, Responsibility, and Disclosure Act

Provided the most sweeping changes in credit card protections since the Truth in Lending Act of 1968

Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010

Promoted the financial stability of the United States by improving accountability and responsibility in the financial system; established a new Consumer Financial Protection Agency to regulate home mortgages, car loans, and credit cards; became Public Law on July 21, 2010

Public health

Many people believe that businesses have a basic responsibility to contribute to the general wellbeing of the public.

Beyond this basic responsibility, however, there is contention with regard to how far businesses’ responsibility to public health extends, especially about issues such as:

• Obesity

• Smoking

• Heart disease

• Alcohol use

• Smartphone use while driving

Employment practices

Over the years, the opportunity to land a job for which he or she is qualified and to be rewarded on the basis of ability and performance has been denied to members of various minority groups.

• Minority

The federal government responded to the outcry of minority groups during the 1960s and 1970s by passing a number of laws forbidding workplace discrimination.

Yet, abuses still exist.

• Disparity in income levels for whites, blacks, Hispanics, and Asians

• Lower income levels and higher unemployment rates for Native Americans, disabled persons, and women

Minority

a racial, religious, political, or other group regarded as different from the larger group of which it is a part and that is often singled out for unfavorable treatment

Affirmative action programs

a plan designed to increase the number of minority employees at all levels within an organization

Employers with federal contracts of more than $50,000 per year must have written affirmative action plans.

Affirmative action programs have been plagued by two problems:

• Quotas

• Lack of support by some businesspeople

Equal Employment Opportunity Commission (EEOC)

a government agency with the power to investigate complaints of employment discrimination and the power to sue firms that practice it

Hard-core unemployed

workers with little education or vocational training and a long history of unemployment

The Workplace Bullying Institute (WBI)

defines bullying in the workplace as repeated work sabotage; verbal abuse; and/or abusive conduct that is threatening, humiliating, or intimidating.

Pollution

the contamination of water, air, or land through the actions of people in an industrialized society

Legislation and regulations

play a crucial role in pollution control.

Environmental Protection Agency (EPA)

the federal agency charged with enforcing laws designed to protect the environment.

National Environmental Policy Act (1970)

Established the Environmental Protection Agency (EPA) to enforce federal laws that involve the environment

Clean Air Amendment (1970)

Provided stringent automotive, aircraft, and factory emission standards

Water Quality Improvement Act (1970)

Strengthened existing water pollution regulations and provided for large monetary fines against violators

Resource Recovery Act (1970)

Enlarged the solid-waste disposal program and provided for enforcement by the EPA

Water Pollution Control Act Amendment (1972)

Established standards for cleaning navigable streams and lakes and eliminating all harmful waste disposal by 1985

Noise Control Act (1972)

Established standards for major sources of noise and required the EPA to advise the Federal Aviation Administration on standards for airplanes

Clean Air Act Amendment (1977)

Established new deadlines for cleaning up polluted areas; also required review of existing air-quality standards

Clean Air Act Amendment (1987)

Established a national air-quality standard for ozone

Oil Pollution Act (1990)

Expanded the nation’s oil-spill prevention and response activities; also established the Oil Spill Liability Trust Fund

Clean Air Act Amendments (1990)

required that motor vehicles be equipped with onboard systems to control about 90 percent of refueling vapors

Food Quality Protection Act (1996)

Amended the Federal Insecticide, Fungicide and Rodenticide Act and the Federal Food Drug and Cosmetic Act; the requirements included a new safety standard—reasonable certainty of no harm—that must be applied to all pesticides used on foods

American Recovery and Reinvestment Act (2009)

Provided $7.22 billion to the EPA to protect and promote “green” jobs and a healthier environment

Recycling

converting used materials into new products or components for new products in order to prevent their unnecessary disposal

Green marketing

the process of creating, making, delivering, and promoting products that are environmentally safe

Social audit

a comprehensive report of what an organization has done and is doing with regard to social issues that affect it

Implementing a Program of Social Responsibility

Securing the commitment of top executives

Planning

Appointing a director

Preparing a social audit