Slide 1
Ethics and Corporate Social
Responsibility
Chapter 2
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©2007 Prentice Hall
Chapter 2: Ethics and Corporate Social Responsibility
Slide 2
Chapter 2 Objectives
After studying this chapter, you will be able to:
• Discuss what it means to practice good business
and explain the three factors that influence
ethical behavior
• Identify three steps that businesses are taking to
encourage ethical behavior
• List four questions you might ask yourself when
trying to make an ethical decision
• Explain the difference between an ethical
dilemma and ethical lapse
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©2007 Prentice Hall
Chapter 2 Objectives:
After studying this chapter, you will be able to:
Discuss what it means to practice good business ethics and highlight three
factors that influence ethical behavior
Identify three steps that businesses are taking to encourage ethical behavior and
explain the advantages and disadvantages of whistle-blowing
List four questions you might ask yourself when trying to make an ethical
decision
Explain the difference between an ethical dilemma and an ethical lapse
Slide 3
Chapter 2 Objectives, cont.
• Explain the controversy surrounding corporate
social responsibility
• Discuss how a business can become more
socially responsible
• Define sustainable development and explain the
strategic advantages of managing with
sustainability as a priority
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©2007 Prentice Hall
Chapter 2 Objectives, cont.
Explain the controversy surrounding corporate social responsibility
Discuss how a businesses can become more socially responsible
Define sustainable development and explain the strategic advantages of
managing with sustainability as a priority
Slide 4
Two Sets of Ideals
Social
Responsibility
Ethics
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©2007 Prentice Hall
This chapter explains what it means to conduct business in an ethically and
socially responsible manner and discusses the importance of doing so. Many
people use the terms social responsibility and ethics interchangeably, but the two
are not the same. Social responsibility is the idea that a business has certain
obligations to society beyond the pursuit of profits. Ethics, by contrast, is defined
as the principles and standards of moral behavior that are accepted by society as
right versus wrong. To make the “right choice” individuals must think through the
consequences of their actions. Business ethics is the application of moral
standards to business situations.
This slide includes an animated image. A man in a suit is silhouetted in the back
and looking off to the left. There are two cogs that appear to be rotating in order
with the man’s thought process.
Slide 5
What is Ethical Behavior?
• Definition
• Competing Fairly and
Honestly
• Communicating
Truthfully
• Not Causing Harm to
Others
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©2007 Prentice Hall
In business, besides obeying all laws and regulations, practicing good ethics
means competing fairly and honestly, communicating truthfully, and not causing
harm to others.
Businesses are expected to compete fairly and honestly and not knowingly
deceive, intimidate, or misrepresent customers, competitors, clients, or
employees. While most companies compete within the boundaries of the law,
some do knowingly break laws or take questionable steps in their zeal to
maximize profits and gain a competitive advantage.
Companies that practice good ethical behavior refrain from issuing false or
misleading communications.
According to a recent Business Week/Harris poll, some 79 percent of Americans
believe corporate executives put their own personal interests ahead of workers’
and shareholders’. Placing one’s personal welfare above the welfare of the
organization can cause harm to others. For instance, every year tens of
thousands of people are the victims of investment scams.
Insider trading is illegal and is closely checked by the Securities and Exchange
Commission (SEC). Another way that businesspeople can harm others is by
getting involved in a conflict of interest situation. A conflict of interest exists
when choosing a course of action will benefit one person’s interests at the
expense of another or when an individual chooses a course of action that
advances his or her personal interests over those of his or her employer.
This slide includes an image on the right of the slide showing four
businesspeople sitting at a conference table. A man in a shirt and tie appears to
be talking to the group. He is holding and displaying to the group a sheet of
paper.
Slide 6
Competing Fairly and Honestly
• Trade Secrets
• Industrial Espionage
• Pretexting
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©2007 Prentice Hall
Businesses are expected to compete fairly and honestly and not knowingly
deceive, intimidate, or misrepresent themselves to customers, competitors,
clients, or employees. Practices that raise ethical questions include hiring
employees from competitors to gain trade secrets, engaging in industrial
espionage to spy on other companies, and pretexting—essentially lying about
who you are (such as posing as a journalist) in order to gain access to
information that you couldn’t get otherwise.
Tom Krazit, “FAQ: The HP ‘Pretexting’ Scandal,” ZDNet.com, 6 September 2006
[accessed 26 October 2006] www.zdnet.com.
This slide includes a picture of four diverse and professional looking individuals.
All with a stern, yet friendly facial expression. There are two females and two
males.
Slide 7
Communicating Truthfully
• Tell the Truth, Whole Truth and
Nothing but the Truth
• Transparency
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©2007 Prentice Hall
Today’s companies communicate with a wide variety of audiences, from their
own employees to customers to government officials. Communicating truthfully is
a simple enough concept: Tell the truth, the whole truth, and nothing but the
truth.
This slide includes an image of a dictionary. Over the dictionary is a magnifying
glass that is focused on the word ‘honesty’.
Slide 8
Not Causing Harm to Others
• Insider Trading
• Conflict of Interest
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©2007 Prentice Hall
Specifically, buying or selling a company’s stock based on information that
outside investors lack is known as insider trading, which is not only unethical
but also illegal.
Insider trading is a good example of the ethical trouble that businesspeople can
get into when they face a conflict of interest, a situation in which a choice that
promises personal gain compromises a more fundamental responsibility.
This slide includes an image on the right side that is of a man in a suit dropping
from the sky with a parachute.
Slide 9
Corporate Fraud
Adelphia
WorldCom
Ford and
Firestone
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©2007 Prentice Hall
The new millennium has ushered in a wave of fraud, investment scams, and ethical
lapses unprecedented in scope. Worse yet, such corruption has cost thousands of
employees their jobs, clipped investor stock portfolios by billions, and destroyed the faith
of many in Corporate America and its underlying securities markets.
Adelphia. For 50 years, John Rigas, the founder of the sixth largest U.S. cable
company, lived the American Dream. But he and his two sons—Timothy and Michael—
were accused of committing one of the largest frauds ever perpetrated on investors and
creditors.
WorldCom. This long-distance telecom giant shocked investors when it revealed in
2002 that it had engaged in one of the biggest frauds in corporate history. The company
admitted to overstating cash flow by $3.9 billion by reporting ordinary expenses as
capital expenditures. The accounting fraud allowed WorldCom to post a 2001 profit of
$1.4 billion instead of reporting a loss for that year.
Ford and Firestone. Faulty Firestone tires on Ford Explorers are blamed for 271
deaths and more than 800 injuries worldwide—numbers that investigators said could've
been much lower if both companies had reacted sooner to evidence of product failure.
Firestone blamed the problem on Ford (and on Explorer drivers); Ford blamed the
problem on Firestone. Firestone refused to recall the tires, then Ford stepped in and
replaced the tires on nearly 50,000 vehicles in 16 counties outside the United States—
but neither company bothered to inform U.S. authorities or customers until similar
failures started to show up in this country.
This slide includes an image of a judge sitting at his desk with his gavel raised and what
appears to be a law book that is open and in front of him on the desk.
Slide 10
Corporate Fraud
Enron
Tyco
Arthur Andersen
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©2007 Prentice Hall
The new millennium has ushered in a wave of fraud, investment scams, and ethical
lapses unprecedented in scope. Worse yet, such corruption has cost thousands of
employees their jobs, clipped investor stock portfolios by billions, and destroyed the faith
of many in Corporate America and its underlying securities markets.
Enron. The most highly publicized corporate financial scandal of the new millennium
involved energy-trading giant Enron and its auditors, Arthur Andersen. Company
executives have been charged with grossly inflating company profits by hiding debt and
engaging in numerous accounting shenanigans. The debacle damaged public trust in
Corporate America, setting off a chain of governmental proposals to reform big business.
Tyco. Former Tyco In 2002 CEO L. Dennis Kozlowski and former Tyco CFO Mark H.
Swartz were charged with having stolen more than $170 million from the company and
with defrauding investors by illegally reaping $430 million from company stock sales.
Arthur Andersen. One of the world's oldest and most distinguished public accounting
firms, Arthur Andersen served as both Enron's independent financial auditor and
management advisor (Chapter 13 discusses this conflict of interest in more detail). The
company was indicted for shredding Enron accounting documents and later convicted of
obstruction of justice for hiding information about Enron finances, making it the first
major accounting firm ever convicted of a felony. As a consequence, Arthur Andersen
was required to stop performing public audits—the core of its business—and shed twothirds of its employees.
This slide includes an image of a judge sitting at his desk with his gavel raised and what
appears to be a law book that is open and in front of him on the desk.
Slide 11
Ethical Business Behavior
Organizational
Behavior
Knowledge
Influential Factors
Factors
Influential
Cultural
Differences
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©2007 Prentice Hall
Although a number of factors influence the ethical behavior of businesspeople,
three in particular appear to have the most impact: cultural differences,
knowledge, and organizational behavior.
Globalization exposes businesspeople to a variety of different cultures and
business practices. What does it mean for a business to do the right thing in
Thailand? In Africa? In Norway? What may be considered unethical in the United
States may be an accepted practice in another culture.
In most cases, a well-informed person is in a position to make better decisions
and avoid ethical problems. Making decisions without all the facts or a clear
understanding of the consequences could harm employees, customers, the
company, and other stakeholders.
The foundation of an ethical business climate is ethical awareness.
Organizations that strongly enforce company codes of conduct and provide
ethics training help employees recognize and reason through ethical problems.
Similarly, companies with strong ethical practices set a good example for
employees to follow. On the other hand, companies that commit unethical acts in
the course of doing business open the door for employees to follow suit.
Slide 12
Be an Ethical Leader
• Lead by example
• Don’t tolerate
unethical behavior
• Inspire concretely
• Acknowledge reality
• Communicate
• Be honest
• Hire good people
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©2007 Prentice Hall
Lead by example. Again, nothing is more important than demonstrating your
commitment to ethics than behaving ethically yourself.
Don’t tolerate unethical behavior. At the same time, you have to show that bad decisions
won’t be accepted. Let one go without correction, and you’ll probably see another one
before long.
Inspire concretely. Tell employees how they will personally benefit from participating in
ethics initiatives. People respond better to personal benefits than to company benefits.
Acknowledge reality. Admit errors. Discuss what went right, what went wrong, and how
the company can learn from the mistakes. Solicit employee opinion and act on those
opinions. If you only pretend to be interested, you’ll make matters worse.
Communicate, communicate, communicate. Ethic needs to be a continuous
conversation, not a special topic brought up only in training sessions or when a crisis
hits. Harold Tinkler, the chief ethics and compliance officer at the accounting firm
Deloitte & Touche, says that “Companies need to turn up the volume” when it comes to
talking about ethics.
Be honest. Tell employees what you know as well as what you don’t know. Talk openly
about ethical concerns and be willing to accept negative feedback.
Hire good people. Alan Greenspan, former chairman of the Federal Reserve Board, put
it nicely: “Rules are no substitute for character.” If you hire good people (not people who
are good at their jobs, but people who are good, period) and create an ethical
environment for them, you’ll get ethical behavior. If you hire people who lack good moral
character, you’re inviting ethical lapses, no matter how many rules you write.
This slide includes an image of a gentleman with a megaphone in his right hand and he
is shouting toward the skies.
Slide 13
The Four Questions
• Is the decision legal?
• Is it balanced?
• Can you live with it?
• Is it feasible?
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©2007 Prentice Hall
The time-honored “Golden Rule” of treating others the way you want to be
treated can get you into trouble when others don’t want to be treated the same
way you do. You might also consider asking yourself a series of questions:
Is the decision legal? (Does it break any laws?)
Is it balanced? (Is it fair to all concerned?)
Can you live with it? (Does it make you feel good about yourself?)
Is it feasible? (Will it actually work in the real world?)
This slide includes an image of a stick-figure man that has a balloon over his
head with a question mark inside the balloon. The man is resting his head on his
right hand and has a briefcase in his left hand. He is staring at a road sign that is
offering a left turn or a right turn.
Slide 14
Ethical Situations
Ethical Dilemma
Ethical Lapse
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©2007 Prentice Hall
When making ethical decisions, keep in mind that most ethical situations can be
classified into two general types: ethical dilemmas and ethical lapses. An ethical
dilemma is a situation in which one must choose between two conflicting but
arguably valid sides. All ethical dilemmas have a common theme: the conflict
between the rights of two or more important groups of people. The second type
of situation is an ethical lapse, in which an individual makes a decision that is
clearly wrong, such as divulging trade secrets to a competitor. Be careful not to
confuse ethical dilemmas with ethical lapses. A company faces an ethical
dilemma when it must decide whether to continue operating a production facility
that is suspected, but not proven, to be unsafe. A company makes an ethical
lapse when it continues to operate the facility even after the site has been proven
unsafe.
This slide includes an image of an African American judge who is holding a law
book in his right hand and extending his pointer finger on his left hand. The
picture is taken from above the judge and his is looking up at the camera with
glasses and a stern look on his face.
Slide 15
Business and Society
• Consumers expect benefits that require money.
• Business generates a majority of money in a
free-market economy.
• Standard of living is generally derived from
profit-seeking companies.
• Businesses cannot hope to operate profitably
without the many benefits provided by a safe
and relatively predictable business environment.
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©2007 Prentice Hall
Consumers in contemporary societies enjoy and expect a wide range of benefits,
from education to health care to products that are safe to use. Most of these
benefits share an important characteristic: They require money.
Businesses operating in free-market systems such as the U.S. economy
generate the vast majority of the money in a nation’s economy, either directly or
indirectly. When companies pay taxes or pay for the right to use a public asset
(such as a cell phone company buying the right to use part of the radio
spectrum), they directly contribute to the nation’s economic well-being. When
companies pay employees, those employees spend money on goods and
services and pay income taxes on what they earn as well as a variety of other
taxes on what they buy and own. Either way, profit-seeking companies are the
economic engine that powers modern society. People who expect “the
government” to pay for something need to remember that the government gets
most of its income from taxpayers, both businesses and individuals.
Aside from money, much of what we consider when assessing a society’s
standard of living, from medication to building materials, involves goods and
services created by profit-seeking companies.
Conversely, companies cannot hope to operate profitably without the many
benefits provided by a safe and relatively predictable business environment—
talented and healthy employees, a transportation infrastructure, opportunities to
raise money, protection of assets, and customers with the ability to pay for goods
and services, to name just a few.
Slide 16
Corporate Social Responsibility
Perspectives
• Minimalist
• Defensive
• Cynical
• Conscientious
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Minimalist. According to what might be termed the minimalist view, the only social responsibility of a business is to pay taxes and obey the
law. In a 1970 article that is still widely discussed today, Nobel Prize–winning economist Milton Friedman articulated this view by saying,
“There is only one social responsibility of business: to use its resources and engage in activities designed to increase its profits so long as it
stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” This view, which
tends to reject the stakeholder concept described in Chapter 1, might seem selfish and even antisocial, but it raises a couple of important
questions. First, any business that operates ethically and legally provides society with beneficial goods and services at fair prices. Isn’t that
meeting the business’s primary social obligation? Second, should businesses be in the business of making social policy and spending the
public’s money? Proponents of the minimalist view claim this is actually what happens when companies make tax-deductible contributions
to social causes. Assume a company makes a sizable contribution that nets it a $1 million tax break. That’s $1 million taken out of the
public treasury—where voters and their elected representatives can control how money is spent—and put into whatever social cause the
company chooses to support. Would it be better for society if companies paid full taxes and let the people decide how the money is spent?
Defensive. Many companies today find themselves facing pressure from a variety of activists and nongovernmental organizations
(NGOs), nonprofit groups that provide charitable services or promote causes, and from workers’ rights to environmental protection. One
possible response to this pressure is to engage in CSR activities as a way to avoid further criticism. In other words, the company takes
positive steps to address a particular issue but only because it has been embarrassed into action by negative publicity.
Cynical. Another possible response is purely cynical, in which a company accused of irresponsible behavior promotes itself as being
socially responsible without making substantial improvements in its business practices. For example, environmental activists use the term
greenwash (a combination of green and whitewash, a term that suggests covering something up) as a label for publicity efforts that present
companies as being environmentally friendly when their actions speak otherwise. Ironically, some of the most ardent anti-business activists
and the staunchly pro-business proponents of the minimalist view tend to agree on one point: that many CSR efforts are disingenuous.
Thirty-five years after his provocative article, Friedman said he believed that “most of the claims of social responsibility are pure public
relations.”
Conscientious. In the fourth approach to CSR, company leaders believe they have responsibilities beyond making a profit, and they back
up their beliefs and proclamations with action—without being prompted to by outside forces. John Mackey, CEO of Whole Foods Market, is
a strong proponent of this view: “I believe that the enlightened corporation should try to create value for all of its constituencies,” which he
identifies as customers, employees, vendors, investors, communities, and the environment. From its inception, the company has given 5
percent of profits to a variety of causes. “Whole Foods gives money to our communities because we care about them and feel a
responsibility to help them flourish as well as possible.” Mackey says the minimalist view and Adam Smith’s invisible hand guiding the
marketplace (see Chapter 1) are based on a “pessimistic and crabby view of human nature.” Note that his approach doesn’t have to
compromise profits or returns for investors, either: Whole Foods is the most profitable large grocery chain in the United States.
. Milton Friedman “The Social Responsibility of Business Is to Increase Its Profits,” New York Times Magazine, 13 September 1970
[accessed 15 June 2007] www.umich.edu/~thecore.
. “Social Responsibility: ‘Fundamentally Subversive’?” Interview with Milton Friedman, Business Week, 15 August 2005 [accessed 14 June
2007] www.businessweek.com.
. Milton Friedman, John Mackey, and T. J. Rodgers, “Rethinking the Social Responsibility of Business: A Reason Debate Featuring Milton
Friedman, Whole Foods’ John Mackey, and Cypress Semiconductor’s T. J. Rodgers,” Reason, October 2005 [accessed 14 June 2007]
www.reason.com.
This slide includes an image from below looking up of a tall, modern looking skyscraper with a blue sky and puffy clouds in the background.
Slide 17
Efforts to Increase Social
Responsibility
Social
Audit
Philanthropy
Cause-Related
Cause
Cause-Related
Marketing
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©2007 Prentice Hall
Businesses that give back to society are finding that their efforts can lead
to a more favorable public image and stronger employee morale. Thus, more and
more organizations are attempting to be socially responsible citizens by
conducting a social audit, by engaging in cause-related marketing, or by being
philanthropic.
A social audit is a systematic evaluation and reporting of the company's social
performance. The report typically includes objective information about how the
company's activities affect its various stakeholders. Companies can also engage
in cause-related marketing, in which a portion of product sales help support
worthy causes.
Some companies choose to be socially responsible corporate citizens by being
philanthropic; that is, they donate money, time, goods, or services to charitable,
humanitarian, or educational institutions.
This slide incorporates three evenly sized circles symbolizing the equal
relationship between a social audit, cause-related marketing, and philanthropy.
Slide 18
Reduce Pollution
Industrial Discharges
Vehicle Emissions
Chemical Spills
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©2007 Prentice Hall
Environmental issues exemplify the difficulty that businesses encounter when
they try to reconcile conflicting interests: Society needs as little pollution as
possible from businesses. But producing quality products to satisfy customers’
needs can cause pollution to some degree.
For decades, environmentalists have warned businesses and the general public
about the dangers of pollution (the contamination of the natural environment by
the discharge of harmful substances). Our air, water, and land can easily be
tainted by industrial discharges, aircraft and motor vehicle emissions, and a
number of chemicals that spill out into the environment as industrial waste
products. Moreover, the pollution in any one element can easily taint the others.
For instance, when emissions from coal-burning factories and electric utility
plants react with air, they can cause acid rain, which damages lakes and forests.
This slide includes an image of the earth and pollution.
Slide 19
Responsibility Toward
Consumers
• Consumerism:
 The right to safe products
 The right to be informed
 The right to choose
 The right to be heard
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©2007 Prentice Hall
The 1960s activism that awakened business to its environmental responsibilities also
gave rise to consumerism, a movement that put pressure on businesses to consider
consumer needs and interests. Consumerism prompted many businesses to create
consumer-affairs departments to handle customer complaints. It also prompted state and
local agencies to set up bureaus to offer consumer information and assistance. At the
federal level, President John F. Kennedy announced a "bill of rights" for consumers,
laying the foundation for a wave of consumer-oriented legislation. These rights include
the right to safe products, the right to be informed, the right to choose, and the right to be
heard.
The U.S. government imposes many safety standards that are enforced by the
Consumer Product Safety Commission (CPSC), as well as by other federal and state
agencies.
Consumers have a right to know what is in a product and how to use it. They also have a
right to know the sales price of goods or services and the details of any purchase
contracts. The Food and Drug Administration, the Federal Trade Commission, and the
Agriculture Department are the federal agencies responsible for regulating product
labels to make sure no false claims are made.
How far should the right to choose extend? Are we entitled to choose products that are
potentially harmful, such as cigarettes, liquor, or guns? To what extent are we entitled to
learn about these products? Consumer groups and businesses are concerned about
these questions, but no clear answers have emerged. Moreover, some consumer groups
say that government does not do enough.
Many companies have established toll-free numbers for consumer information and
feedback and print these numbers on product packages. In addition, more and more
companies are establishing websites to provide product information and a vehicle for
customer feedback. Companies use such feedback to improve their products and
services and to make informed decisions about offering new ones.
Slide 20
Responsibility Toward Investors
Fair Profit
Social
Distribution Responsibility
Ethical
Behavior
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©2007 Prentice Hall
Today a growing number of investors are concerned about the business ethics
and social responsibility of the companies in which they invest. Aggrieved
investors are filing lawsuits against the management of companies that admit to
“accounting irregularities,” their boards of directors, and their audit committees.
Clearly, a business can fail its investors by depriving them of their fair share of
the profits.
This slide includes an image of three colored and equally sized circles that shows
the relationship between fair profit distribution, social responsibility and ethical
behavior.
Slide 21
Responsibility Toward
Employees
• Equal Opportunity
 Civil Rights Act
 EEOC
• Affirmative Action
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©2007 Prentice Hall
The Civil Rights Act of 1964 established the Equal Employment Opportunity
Commission (EEOC), the regulatory agency that addresses job discrimination.
The EEOC is responsible for monitoring the hiring practices of companies and for
investigating complaints of job-related discrimination. It has the power to file legal
charges against companies that discriminate and to force them to compensate
individuals or groups who have been victimized by unfair practices. The Civil
Rights Act of 1991 extended the original act by allowing workers to sue
companies for discrimination and by granting women powerful legal tools against
job bias.
In the 1960s, affirmative action programs were developed to encourage
organizations to recruit and promote members of groups whose economic
progress had been hindered through legal barriers or established practices.
This slide includes an image of a two sided scale that is evenly balanced. On the
left side of the scale are three men with their arms extended to their sides and
parallel to the ground. On the right side are three women with their arms
extended at their side and angled upward.
Slide 22
Responsibility Toward
Employees
• People with disabilities
 ADA
• OSHA
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©2007 Prentice Hall
In 1990, people with a wide range of physical and mental difficulties got a boost
from the passage of the federal Americans with Disabilities Act (ADA), which
guarantees equal opportunities in housing, transportation, education,
employment, and other areas for the estimated 50 to 75 million people in the
United States with disabilities.
Every year 5,000–7,000 U.S. workers lose their lives on the job and thousands
more are injured (see Exhibit 2.8). During the 1960s, mounting concern about
workplace hazards resulted in passage of the Occupational Safety and Health
Act of 1970, which set mandatory standards for safety and health and which
established the Occupational Safety and Health Administration (OSHA) to
enforce them .
“Injuries, Illnesses, and Fatalities,” Bureau of Labor Statistics [accessed 12 June
2007] www.bls.gov/iif.
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on his head and bounced off.
Slide 23
Global Responsibilities
• Bribery
• Environmental Abuse
• Unscrupulous
Business Practices
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©2007 Prentice Hall
As complicated as ethics and social responsibility can be for U.S. businesses,
these issues grow even more complex when cultural influences are applied in the
global business environment. Corporate executives may face simple questions
regarding the appropriate amount of money to spend on a business gift or the
legitimacy of payment to “expedite” business. Or they may encounter out-and-out
bribery, environmental abuse, and unscrupulous business practices.
This slide includes an image of a photo of the earth and two human hands
cradling the earth.