Ethics and Social Responsibility
The Nature of Ethics and Social Responsibility
Core Concepts
Ethical Dilemma: A quandary people find themselves in when they have to decide if they should act in a way that might help another person or group even though doing so might go against their own self-interest.
Ethics: The inner-guiding moral principles, values, and beliefs that people use to analyze or interpret a situation and then decide what is the right or appropriate way to behave.
Dealing with Ethical Issues
There are no absolute or indisputable rules or principles that can be developed to decide if an action is ethical or unethical.
Neither laws nor ethics are fixed principles; they are dynamic and evolve over time.
Stakeholders and Ethics
Stakeholders: The people and groups that supply a company with its productive resources and so have a claim on and stake in the company.
**Types of Company Stakeholders (Figure 4.1):
Stockholders
Managers
Employees
Suppliers and Distributors
Customers
Community, Society, and Nation-State
Detailed Stakeholder Claims and Ethical Responsibilities
**Stockholders:
Want to ensure that managers are behaving ethically and not risking investors’ capital by engaging in actions that could hurt the company’s reputation.
Want to maximize their return on investment ().
**Managers:
Responsible for using a company’s financial capital and human resources to increase its performance.
Have the right to expect a good return or reward by investing their human capital to improve a company’s performance.
Frequently juggle multiple interests.
A significant problem has been that in many companies, corrupt managers focus not on building the company’s capital and stockholder’s wealth but on maximizing their own personal capital and wealth.
**Ethics and Nonprofit Organizations:
Over nonprofits pay their top executives more than a year in salary.
Laws governing disclosure are far weaker for non-profits compared to for-profits.
Many states and the federal government are considering new laws that would subject nonprofits to strict Sarbanes-Oxley-type regulations, forcing the disclosure of issues related to managerial compensation and financial integrity.
**Employees:
Expect to receive rewards consistent with their performance.
Companies can act ethically toward employees by creating an occupational structure that fairly and equitably rewards employees for their contributions.
**Suppliers and Distributors:
Suppliers: Expect to be paid fairly and promptly for their inputs.
Distributors: Expect to receive quality products at agreed-upon prices.
Example: Gap’s Code of Vendor Conduct (Appendix 1): This code outlines principles for factories producing goods for Gap Inc.:
General Principles: Factories must operate in full compliance with the laws of their respective countries and all other applicable laws, rules, and regulations.
Environment: Factories must comply with all applicable environmental laws and regulations; encouraged to meet Gap Inc.’s own standards if local requirements are less stringent.
Discrimination: Factories shall employ workers based on ability, without regard to race, color, gender, nationality, religion, age, maternity, or marital status.
Forced Labor: Factories shall not use any prison, indentured, or forced labor.
Child Labor: Factories shall employ only workers who meet the applicable minimum legal age requirement or are at least years of age, whichever is greater, and comply with all child labor laws. Lawful workplace apprenticeship programs are encouraged for educational benefit, provided participants meet minimum age standards.
Wages & Hours: Factories shall set working hours, wages, and overtime premiums in compliance with all applicable laws. Workers must be paid at least the minimum legal wage or a wage that meets local industry standards, whichever is greater. Overtime should be limited to ensure humane and productive working conditions.
**Customers:
Considered the most critical stakeholder.
Company must work to increase efficiency and effectiveness in order to create loyal customers and attract new ones.
**Community, Society, and Nation-State:
Community: Refers to the physical locations like towns or cities in which companies are located, providing a company with the physical and social infrastructure that allows it to operate.
A company contributes to the economy of the town or region through salaries, wages, and taxes.
Rules for Ethical Decision Making
Managers can utilize four ethical rules to guide their decision-making (Figure 4.2 & Appendix 2):
Utilitarian Rule: An ethical decision should produce the greatest good for the greatest number of people.
Moral Rights Rule: An ethical decision should maintain and protect the fundamental rights and privileges of people.
Justice Rule: An ethical decision should distribute benefits and harm among people in a fair, equitable, and impartial manner.
Practical Rule: An ethical decision should be one that a manager has no hesitation about communicating to people outside the company because the typical person in a society would think the decision is acceptable.
Practical Decision Model Questions: To apply the practical rule, managers should ask:
Does my decision fall within the acceptable standards that apply in business today?
Am I willing to see the decision communicated to all people and groups affected by it?
Would the people with whom I have a significant personal relationship approve of the decision?
Why Managers Should Behave Ethically
The relentless pursuit of self-interest can lead to a collective disaster when one or more people start to profit from being unethical, as this encourages other people to act in the same way.
**Some Effects of Ethical and Unethical Behavior (Figure 4.3 & Appendix 3):
Ethical behavior:
Increases efficiency and effectiveness of production and trade.
Increases company performance.
Increases national standard of living, well-being, and prosperity.
Unethical behavior:
Reduces efficiency and effectiveness of production and trade.
Reduces company performance.
Reduces national standard of living, well-being, and prosperity.
Trust and Reputation
Trust: The willingness of one person or group to have faith or confidence in the goodwill of another person, even though this puts them at risk.
Reputation: The esteem or high repute that individuals or organizations gain when they behave ethically.
Sources of Managerial Ethics
Managerial ethics are drawn from various interacting sources (Figure 4.4):
Societal Ethics: Standards that govern how members of a society should deal with one another in matters involving issues such as fairness, justice, poverty, and the rights of the individual. People behave ethically because they have internalized certain values, beliefs, and norms from their society.
Occupational Ethics: Standards that govern how members of a profession, trade, or craft should conduct themselves when performing work-related activities (e.g., medical and legal ethics).
**Examples of Failures in Professional Ethics (Table 4.2):
For Manufacturing and Materials Management Managers: Releasing products that are not of a consistent quality because of defective inputs; producing product batches that may be dangerous or defective and harm customers; compromising workplace health and safety to reduce costs (e.g., inadequate training for machinery maintenance).
For Sales and Marketing Managers: Knowingly making unsubstantiated product claims; engaging in sales campaigns that use covert persuasive or subliminal advertising; marketing aggressively to target groups such as the elderly, minorities, or children; having ongoing campaigns of unsolicited junk mail, spam, door-to-door, or telephone selling.
For Accounting and Finance Managers: Engaging in misleading financial analysis involving creative accounting or “cooking the books” to hide salient facts; authorizing excessive expenses and perks to managers, customers, and suppliers; hiding the level and amount of top management and director compensation.
For Human Resource Managers: Failing to act fairly, objectively, and uniformly toward different employees because of personal factors; excessively encroaching on employee privacy through non-job-related surveillance or personality, ability, and drug testing; failing to respond to employee observations and concerns surrounding health and safety violations, hostile workplace issues, or inappropriate or even illegal behavior by managers or employees.
Individual Ethics: Personal standards and values that determine how people view their responsibilities to other people and groups, and how they should act in situations when their own self-interests are at stake.
Organizational Ethics: Guiding practices and beliefs through which a particular company and its managers view their responsibility toward their stakeholders. Top managers are especially important in shaping the organization’s code of ethics.
Example: Johnson & Johnson's Credo (Figure 4.5 & Appendix 4): This credo outlines responsibilities in hierarchical order:
First responsibility to doctors, nurses, patients, mothers, fathers, and all others who use their products and services (customers), ensuring high quality, reasonable prices, prompt service, and fair profit for suppliers/distributors.
Responsibility to employees worldwide, viewing everyone as an individual, respecting dignity and merit, ensuring job security, fair compensation, clean/safe working conditions, support for family responsibilities, freedom for suggestions/complaints, equal opportunity, and competent/just/ethical management.
Responsibility to the communities and the world community, acting as good citizens by supporting charities, paying fair taxes, encouraging civic improvements, better health and education, maintaining property, and protecting the environment and natural resources.
Final responsibility to stockholders, ensuring a sound profit, supporting new ideas, research, innovative programs, covering mistakes, investing in new equipment/facilities/products, and creating reserves for adverse times, ultimately aiming for a fair return to stockholders operating under these principles.
Social Responsibility
Social Responsibility: The way a company’s managers and employees view their duty or obligation to make decisions that protect, enhance, and promote the welfare and well-being of stakeholders and society as a whole.
Example: TOMS One for One: This company identifies a global need (children without shoes) and addresses it by establishing a business model where for every pair of shoes purchased, a pair is donated.
**Forms of Socially Responsible Behavior (Table 4.3 & Appendix 4):
Providing severance payments to help laid-off workers.
Giving workers opportunities to enhance skills and acquire additional education.
Allowing employees to take time off, providing health care and pension benefits.
Contributing to charities or civic-minded activities (e.g., Target and Levi Strauss contribute of profits).
Deciding to keep open a factory whose closure would devastate the local community.
Deciding to keep a company's operations in the United States to protect jobs rather than moving abroad.
Expenditure to improve a new factory to prevent environmental pollution.
Declining to invest in countries that have poor human rights records.
Choosing to help poor countries develop an economic base to improve living standards.
Approaches to Social Responsibility
Companies can adopt four main approaches to social responsibility, ranging from low to high (Figure 4.6):
Obstructionist Approach (Lowest Social Responsibility): Companies and their managers choose not to behave in a socially responsible way and instead behave unethically and illegally.
Defensive Approach: Companies and their managers behave ethically to the degree that they stay within the law and strictly abide by legal requirements.
Accommodative Approach: Companies and their managers behave legally and ethically and try to balance the interests of different stakeholders as the need arises.
Proactive Approach (Highest Social Responsibility): Companies and their managers actively embrace socially responsible behavior, going out of their way to learn about the needs of different stakeholder groups and using organizational resources to promote the interests of all stakeholders.
Why Be Socially Responsible?
Demonstrating social responsibility helps a company build a good reputation.
If all companies in a society act socially, the quality of life as a whole increases.
The Role of Organizational Culture and Ethics
Ethical values and norms embedded within an organizational culture help its members to:
Resist self-interested action.
Realize they are part of something bigger than themselves.
Ethics Ombudsman: A role responsible for:
Communicating ethical standards to all employees.
Designing systems to monitor employee conformity to those standards.
Teaching managers and employees at all levels of the organization how to appropriately respond to ethical dilemmas.