19e Section6 LN Chapter09

Chapter 9 Ethics, Corporate Social Responsibility, Environmental Sustainability, and Strategy

CHAPTER 9

ETHICS, CORPORATE SOCIAL RESPONSIBILITY, ENVIRONMENTAL SUSTAINABILITY, AND STRATEGY CHAPTER SUMMARY Chapter 9 focuses on examining what link, if any, there should be between a company’s efforts to craft and execute a winning strategy and its duties to (1) act in an ethical and fair-dealing manner; (2) demonstrate socially responsible behavior by being committed corporate citizens and attending to the needs of non-owner stakeholders—employees, the communities in which it operates, the disadvantaged, and society as a whole; and (3) adopt business practices that conserve natural resources, protect the interests of future generations, and preserve the well-being of the planet.

LECTURE OUTLINE I. What Do We Mean By Business Ethics? 1. Business ethics is the application of general ethical principles and standards to business behavior. 2. Business ethics does not involve a special set of ethical standards applicable only to business situations. 3. Ethical principles in business are not materially different from ethical principles in general.

CORE CONCEPT Business ethics concerns the application of general ethical principles to the actions and decisions of businesses and the conduct of company personnel. II. Where Do Ethical Standards Come from—Are They Universal or Dependent on Local Norms and Situational Circumstances? A. The School of Ethical Universalism 1. According to the school of ethical universalism, some concepts of what is right and what is wrong are universal; that is, they transcend all cultures, societies, and religions. 2. To the extent that there is common moral agreement about right and wrong actions and behaviors across multiple cultures and countries, there exist a set of universal ethical standards to which all societies, all companies, and all individuals can be held accountable.

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CORE CONCEPT The school of ethical universalism holds that that the most fundamental conceptions of right and wrong are universal and apply to members of all societies, all companies, and all businesspeople. 3. Many ethicists believe that the most important moral standards travel well across countries and cultures and are thus universal. 4. Universal norms include honesty or trustworthiness, respecting the rights of others, practicing the Golden Rule, avoiding unnecessary harm to workers or to the users of the company’s product or service, and respect for the environment. B. The School of Ethical Relativism 1. There are meaningful variations in what societies generally agree to be right and wrong in the conduct of business activities. Ethical relativism holds that when there are cross-country or crosscultural differences in what is deemed fair or unfair, what constitutes proper regard for human rights, and what is considered ethical or unethical in business situations, it is appropriate for local moral standards to take precedence over what the ethical standards may be elsewhere.

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 businesses related actions are right or wrong depends on the prevailing local ethical standards.

ILLUSTRATION CAPSULE 9.1

Apple’s Failures in Enforcing Its Supplier Code of Conduct Discussion Question: Do Apple’s actions indicate that their position on business ethics is aligned with the principle of ethical universalism? Answer: Apple has openly declared their core principles in their Supplier Code of Conduct and has voluntarily conducted supplier audits with the intention of enforcing their view of business ethics within their supplier base regardless of conditions within the country of operation. Further, they require immediate remedy of violations of their core principles. This approach indicates that Apple advocates the principles of ethical universalism while recognizing that their global supplier base might not.

2. The strength of ethical universalism is that it draws on the collective views of multiple societies and cultures to put some clear boundaries on what constitutes ethical business behavior and what constitutes unethical business behavior no matter what country market or culture a company or its personnel are operating in.

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3. The Use of Underage Labor a. In industrialized nations, the use of underage workers is considered taboo; social activists are adamant that child labor is unethical and that companies should neither employ children under the age of 18 as full-time employees nor source any products from foreign suppliers that employ underage workers. b. In India, Bangladesh, Botswana, Sri Lanka, Ghana, Somalia, Turkey, and 100-plus other coun­ tries, it is customary to view children as potential, even necessary, workers. c. Many poverty-stricken families cannot subsist without the income earned by young family members. If such children are not able to work they may be forced to take jobs in the “hidden” parts of the economy, beg on the street, or traffic in drugs or prostitution. 3. The Payment of Bribes and Kickbacks a. In many countries in Eastern Europe, Africa, Latin America, and Asia, it is customary to pay bribes to government officials in order to win a government contract, obtain a license or permits, or facilitate an administrative ruling. b. Some people stretch to justify the payment of bribes and kickbacks on grounds that bribing government officials to get goods through customs or giving kickbacks to customer to retail their business or win an order is simply a payment for services rendered. 4. Basing Ethical Standards on Ethical Relativism Is Problematic for Multinational Companies a. The existence of varying ethical norms such as those cited above explains why the adherents of ethical relativism maintain that there are few absolutes when it comes to business ethics and thus few ethical absolutes for consistently judging a company conduct in various countries and markets. c. Under ethical relativism, there can be no one-size-fits-all set of authentic ethical norms against which to gauge the conduct of company personnel. d. A company that adopts the principle of ethical relativism and holds company personnel to local ethical standards necessarily assumes that what prevails as local morality is an adequate guide to ethical behavior. Ethical relativism results in a maze of conflicting ethical standards. C. Ethics and Integrative Social Contracts Theory 1. Social contract theory provides a middle position between the opposing views of universalism and relativism.

CORE CONCEPT According to integrated social contracts theory, universal ethical principles or norms based on the collective views of multiple cultures and societies combine to form a “social contract” that all individuals in all situations 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. 2. The ethical standards a company should try to uphold are governed both by a limited number of universal ethical principles that are widely recognized as putting legitimate ethical boundaries on actions and behavior in all situations and the circumstances of local cultures, tradition, and shared values that further prescribe what constitutes ethically permissible behavior and what does not.

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3. Universal ethical norms take precedence over local ethical norms. 4. These mostly uniform agreements about what is morally right and wrong form a “Social contract” or contract with society that is binding on al individuals, groups, organizations, and businesses in terms of establishing right and wrong and in drawing the line between ethical and unethical behaviors. 5. The strength of integrated social contracts theory is that it accommodates the best parts of ethical universalism and ethical relativism. Moreover, integrative social contracts theory offers managers in multinational companies clear guidance in resolving cross-country ethical differences III. How and Why Ethical Standards impact the Tasks of Crafting and Executing Strategy 1. In the U.S. the Sarbanes-Oxley Act companies whose stock is publicly traded to have a code of ethics or explain to the SEC in writing why they do not. 2. The Litmus test of a company’s code of ethics is the extent to which it is embraced in crafting strategy and in operating the business day to day. 3. It is up to the executives to walk the talk and make a point of considering two sets of questions a. Is what we are proposing to do fully compliant with our code of ethical conduct? Is there anything here that could be considered ethically objectionable? b. Is it apparent that this proposed action is in harmony with our core values? Are any conflicts or concerns evident? c. Is there anything in the proposed action that could be considered ethically objectionable? Would our stakeholders, our competitors, the SEC, or the media view this action as ethically objectionable? IV. What are the Drivers of Unethical Strategies and Business Behavior 1. Apart from “the business of business is business, not ethics” kind of thinking apparent in recent high-profile business scandals, three other main drivers of unethical business behavior also stand out: a. Faulty oversight by top management and the board of directors that implicitly allows the overzealous pursuit of personal gain, wealth, and other self interests. b. Heavy pressures on company managers to meet or beat earnings targets c. A company culture that puts the profitability and good business performance ahead of ethical behavior. 2. Faulty Oversight and the Overzealous Pursuit of Personal Gain, Wealth and Self-Interest a. People who are obsessed with wealth accumulation, power, status, and their own self-interest often push ethical principles aside in their quest for personal gain. Driven by greed and ambition, they exhibit few qualms in skirting the rules or doing whatever is necessary to achieve their goals. b. A general disregard for business ethics can prompt all kinds of unethical strategic maneuvers and behaviors at companies. c. Illustration Capsule 9.2 discusses the high-profile multibillion-dollar Ponzi schemes perpetrated at Bernard L. Madoff Investment Securities and alleged at Stanford Financial Group.

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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.

ILLUSTRATION CAPSULE 9.2

Investment Fraud at Bernard L. Madoff Investment Securities and Stanford Financial Group Discussion Question: What drivers for unethical behavior are evident in reviewing the actions of Bernard Madoff and the managers of the Stanford Financial Group? Answer: Bernard Madoff and Allen Stanford were clearly engaged in overzealous pursuit of personal gain, wealth and welf-interest. His business existed soley for the purpose of funding his lifestyle. Both cases provide a clear picture of the concept of self-dealing. 3. Heavy Pressures on Company Managers to Meet or Beat Earnings Targets a. When key personnel find themselves scrambling to meet the quarterly and annual sales and profit expectations of investors and financial analysts, they often feel enormous pressure to do whatever it takes to protect their reputation for delivering good results. b. Company executives often feel pressured to hit financial performance targets because their compensation depends heavily on the company’s performance. c. The fundamental problem with short-termism —the tendency for managers to focus excessive attention on short-term performance objectives—is that it doesn’t create value for customers or improve the firm’s competitiveness in the marketplace

CORE CONCEPT 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. 4. Company Culture That Put Profitability and Business Performance Ahead of Ethical Behavior: a. When a company’s culture spawns an ethically corrupt or amoral work climate, people have a company-approved license to ignore “what’s right” and engage in most any behavior or employ most any strategy they think they can get away with. b. In contrast, when high ethical principles are deeply ingrained in the corporate culture of a company, culture can function as a powerful mechanism for communicating ethical behavioral norms and gaining employee buy-in to the company’s moral standards, business principles, and corporate values. c. Illustration Capsule 9.3 discusses Novo Nordisk’s approach to building an ethical culture and putting its ethical principles into practice.

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ILLUSTRATION CAPSULE 9.3

How Novo Nordisk Puts Its Ethical Principles into Practice Discussion Question: In what way did Novo Nordisk use ethics as a driver for competitive advantage? Answer: The company instituted a clear ethics policy that stated (1) that high ethical standards be applied consistently across the company’s value chain, (2) that all ethical dilemmas encountered be addressed transparently, and (3) that company officers and employees be held accountable for complying with all laws, regulations, and company rules. As a result of universal enforcement and support for these policy points, the company has ingrained them into their corporate culture. This culture of ethics allows all employees to focus their efforts on the ethical pursuit of corporate objectives without ambiguity. V. Why Should Company Strategies be Ethical? 1. Two reasons why a company’s strategy should be ethical; (1) A strategy that is unethical in is morally wrong and reflects on the character of the company personnel and (2) because an ethical strategy can be good business and serve the self-interest of shareholders. 2. The Moral Case for an Ethical Strategy: Ethical strategy formulation begins with managers who have strong moral character. These managers are advocates of corporate codes of ethics and strong compliance programs. 3. The Business Case for an Ethical Strategy a. Figure 9.1 shows the wide-ranging costs a company can incur when unethical behavior on its part is discovered, the wrongdoings of company personnel are headlined in the media, and it is forced to make amends for its behavior. b. Costs from unethical behavior can be visible, internal administrative costs, and intangible or less visible costs. VI. Strategy, Corporate Social Responsibility and Environmental Sustainability 1. That businesses have an obligation to foster social betterment took root in the 19th century when progressive companies, in the aftermath of the industrial revolution, began to provide workers with housing and other amenities. 2. Today, corporate social responsibility is a concept that resonates in Western Europe, the United States, Canada, and such developing nations as Brazil and India.

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 like in the local communities where it operates and in society at large. A. What Do We Mean By Corporate Social Responsibility? 1. The essence of socially responsible business behavior is that a company should strive to balance the benefits of strategic actions to benefit shareholders against the duty to be a good corporate citizen. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

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Chapter 9 Ethics, Corporate Social Responsibility, Environmental Sustainability, and Strategy

2. Figure 9.2, The Five Components of Corporate Social Responsibility Strategy, depicts a company’s menu for crafting its social responsibility strategy, and includes: a. Efforts to employ an ethical strategy and observe ethical principles in operating the business b. Making charitable contributions, donating money and the time of company personnel to community service endeavors, supporting various worthy organizational causes, and reaching out to make a difference in the lives of the disadvantaged c. Actions to protect or enhance the environment and in particular, to minimize or eliminate any adverse impact on the environment stemming from the company’s own business activities d. Actions to create a work environment that enhances the quality of life for employees and makes the company a great place to work e. Actions to build a workforce that is diverse with respect to gender, race, national origin, and perhaps other aspects that different people bring to the workplace

CORE CONCEPT A company’s CSR strategy is defined by the specific combination of socially beneficial activities it opts to support with its contribution of time, money and other resources.

ILLUSTRATION CAPSULE 9.3

Burt’s Bees: A Strategy Based on Corporate Social Responsibility Discussion Question: In what way did Burt’s Bees use Corporate Social Responsibility to guide the actions of their employees? Answer: The company has not only adopted Corporate Social Responsibility (CSR), it has managed to fully and seamlessly integrate it throughout their organization. The company uses a business model that is centered around a focus on the “greater good” which guides corporate decisions towards practices that are socially responsible.

B. Corporate Social Responsibility and the Triple Bottom Line 1. A rapidly growing number of companies are expanding their exercise of corporate social responsibility and organizations have emerged to help companies with best practices and implementation plans. 2. The triple bottom line is concerned with three types of metrics: economic, social, and environmental with a goal of succeeding in all three at the same time. This is illustrated in Figure 9.3, The Triple Bottom Line: Excelling on Three Measures of Company Performance. 3. The three dimensions of performance are often referred to as the three pillars of: people, planet, and profit. As illustrated in Table 9.1, the Dow Jones Sustainability World Index consists of the top 10 percent of the 2,500 companies listed in the Dow Jones World Index in terms of economic performance, environmental performance, and social performance. C. What Do We Mean by Sustainability and Sustainable Business Practices? 1. Sometimes cost savings and improved profitability are drivers of environmental sustainability strategies. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

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

CORE CONCEPT A company’s environmental sustainability strategy consists of its deliberate actions to protect the environment, provide for the longevity of natural resources, maintain ecological support systems for future generations, and guard against ultimate endangerment of the planet. 2. More often though, the term takes on the meaning of the relationship between the company and its environment and its use of natural resources. 3. Many environmentally conscious companies now make a point of citing the beneficial of their sustainability strategies in press releases and issue special sustainability reports for consumers and investors to review. D. Crafting Corporate Social Responsibility and Sustainability Strategies 1. A company may choose to focus its social responsibility strategy on generic social issues, but social responsibility strategies keyed to points of intersection between a company and society may also contribute to a company’s competitive advantage. 2. Unless a company’s social responsibility initiatives become part of the way it operates its business every day, the initiatives are unlikely to be fully effective. E. The Moral Case for Corporate Social Responsibility and Environmentally Sustainable Business Practices 1. The moral case for why businesses should actively promote the betterment of society and act in a manner that benefits all of the company’s stakeholders boils down to a basic concept—It is the right thing to do. F. The Business Case for Social Responsibility and Environmentally Sustainable Business Behavior 1. There are several reasons why the exercise of social responsibility and sustainability is good business: a. Such actions can lead to increased buyer patronage. b. A strong commitment to socially responsible behavior reduces the risk of reputation-damaging incidents. c. Socially responsible actions and sustainable business practices can lower costs and enhance employee recruiting and workforce retention. d. Opportunities for revenue enhancement may also come from CSR and environmental sustainability strategies. e. Well-conceived CSR strategies and sustainable business practices are in the best long-term interest of shareholders. 2. In sum, companies that take social responsibility and environmental sustainability seriously can improve their business reputations and operational efficiency while also reducing their risk exposure and encouraging loyalty and innovation. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

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ASSURANCE OF LEARNING EXERCISES 1. Ikea is widely known for its commitment to business ethics and environmental sustainability. After reviewing its About Ikea section of its website (http://www.ikea.com), prepare a list of 10 specific policies and programs that help the company achieve its vision of creating a better everyday life for people around the world. Answer: A useful document that students should locate is the IWAY Standard: Minimum Requirements for Environment and Social & Working Conditions when Purchasing Products, Materials and Services. In this document, the company outlines its policies for how employees should be treated, how the company should treat their local environment, and how the company should interact with its suppler base. The comprehensive “Code of Conduct” provides a clear and perspective on acceptable practices across the entire organization. 2. Prepare a one- to two-page analysis of a recent ethics scandal using your university library’s access to LexisNexis or other Internet resources. Your report should (1) discuss the conditions that gave rise to unethical business strategies and behavior and (2) provide an overview of the costs resulting from the company’s business ethics failure. Answer: The student should be able to prepare an analysis similar to the one in Illustration Capsule 9.2 which illustrates how it was possible for Bernie Madoff to deceive Wall Street and his investors for decades and convincingly promise investors that returns would beat the market by 400 to 500 percent. The conditions that existed in this case were a lack of oversight by the Securities and Exchange Commission, trust on the part of clients and the financial community both because of the length of the relationship (decades), and the fact that clients rarely needed to withdraw funds and were simply happy to see such high (and fictitious) paper returns. These conditions led to a culture that bred dishonesty in a man who lacked any ethics. All of the drivers of unethical behavior were present in the Bernie Madoff case – the biggest investment scam in history. The visible costs included the massive investor losses as well as civil and criminal prosecution of the key players. Internal administrative costs included legal costs for both defendants and plaintifs. Intangible costs included new regulations that future investment bankers will need to comply with and the costs associated with their implementation. 3. Based on information provided in Illustration Capsule 9.3, discuss the actions taken by top management at Novo Nordisk to that have allowed the company to be considered a global leader in business ethics. Also, explain how the company’s values encourage employees to act in an ethical manner. What role does the company’s culture have in promoting ethical business behavior? Explain. Answer: Novo Nordisk used ethics as a driver for competitive advantage by establishing a reputation as a global leader in business ethics. The company instituted a clear ethics policy that stated (1) that high ethical standards be applied consistently across the company’s value chain, (2) that all ethical dilemmas encountered be addressed transparently, and (3) that company officers and employees be held accountable for complying with all laws, regulations, and company rules. As a result of universal enforcement and support for these policy points, the company has ingrained them into their corporate culture. This culture of ethics allows all employees to focus their efforts on the ethical pursuit of corporate objectives without ambiguity. 4. Review Microsoft’s statements about its corporate citizenship programs at www.microsoft.com. How does the company’s commitment to CSR provide positive benefits for its stakeholders? Answer: Information contained in this Web site link is comprehensive. Microsoft summarizes its mission as, “Our mission is to help people and businesses throughout the world realize their full potential. This drives our business and guides our corporate citizenship work. As the world’s largest software company, we help create social and economic opportunities wherever we work, live, and do business. Our technology innovations, our people, our partnerships, and our day-to-day business make a meaningful contribution to the prosperity of communities and the sustainability of the planet.” Microsoft defines its contributions © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

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in the following areas: Commitments, Focus, and Actions. The company’s actions have clearly benefited its stakeholders, and specific activities are described in the Actions area: In the Community, Technology Innovation, Operating Responsibly, and Privacy and Security. Microsoft’s Unlimited Potential program “combines advanced technologies and strong partnerships with governments, international organizations, nongovernmental organizations (NGOs), educational institutions, and technology and service partners. Ultimately our mission is to enable sustained social and economic opportunity for those at the middle and bottom of the world’s economic pyramid—the next 5 billion people.” In the short term, Unlimited Potential, “Aims to reach the next 1 billion people by 2015 by exploring solutions in three key interrelated areas. Each is crucial to developing sustained economic opportunity: transforming education; fostering local innovation; enabling jobs and opportunities.” The contributions and scope of the Unlimited Potential program will provide positive benefits to Microsoft shareholders. 5. Go to www.nestle.com and read the company’s latest sustainability report. What are Nestlé’s key environmental sustainable environmental policies? How do these initiatives relate to the company’s principles, values, and culture and its approach to competing in the food industry? Answer: In reviewing the Web site, Nestlé’s overall view of sustainability can be summarized as follows, “We are committed to create shared value over the long term by increasing the world’s access to higher quality food and beverages, while contributing to environmentally sustainable social and economic development, in particular in rural areas.” Three principles guide the company’s approach to environmental stewardship: “our responsibility towards society, present and future; our desire to delight consumers; our dependence on a sustainable environment that can provide the high quality resources we need to make good food and beverages.” Nestlé identifies four priorities related to its food and beverage business: water, agricultural raw materials, manufacturing and distribution of products, and packaging of products (see http://www.nestle. com/Resource.axd?Id=CA5BDB64-6E13-4CDD-B310-CBF5AB826DA3 for specific details). Students should offer support regarding the relationship of these priorities to Nestlé’s approach to competing in the food industry based on the company’s claim, “As the largest food and beverage company in the world, we are determined to continue to provide leadership within our sphere of influence.”

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