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The Effects of Business Ethics Andy Gustafson Creighton University.

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1 The Effects of Business Ethics Andy Gustafson Creighton University

2 Point #1: Business Is Global Effects of Mortgage Securities failure in US: 1. IMF calculates worldwide losses in Trillions 2. Multi-Billion in Rescue Packages in US 3. 572 Billion in Rescue assurances in Ireland 4. France 280 Billion Euro Bank Bailout 5. 90 Billion British rescue package 6. Spain ‘’Bank Assurances” 72 Billion

3 More Effects of US Problems 7. German DAX index -38% 8. Brazillian BM&F Bovespa -40% 9. Shanghai SE Composite -60% 10. Russian RTS -67% 11. US S&P -33% 11. Iceland is perhaps going to go bankrupt 12. Sovereign Wealth Funds have pulled out Billions from US

4 Current Financial Crisis is Due to Ethical Lapses at Every level 1. People borrowing for houses beyond their means 2. Banks and Mortgage Brokers not taking responsibility for shaky loans 3. Financial Firms wrapping shaky loans into debt securities, a novel financial tool. 4. Creative Accounting Irregularities 5. Investment/Financial firms focused on short-term 6. Analysts under-representing risks 7. Wall Street & Stock Consumers acted recklessly 8. Lack of regulation and oversight 9. Conflicts of interests throughout system

5 Root Symptoms Imprudence (unwise risk taking) Taking responsibility without understanding risks Short term view Unrealistic optimism Greed Passing consequences to the unknowing

6 Our Financial Crisis is In part due to ethical Lapses Failure to lead Failure to take responsibility Failure to watch out for interests of others Self centered exuberance

7 What is Ethics? Minimal: What we shouldn’t do Don’t steal, don’t kill, don’t lie Better: What we should do (justice) Be fair, Be honest, Fulfill duties, work hard Best: What we could do to make things excellent for all of us… Improve Current Methods Aim High & Create a Beautiful World as we make $

8 Business: Its purpose/goal The purpose of business is to make me money, and increase stockholder value (Milton Friedman)

9 Business as a Means to Transform Culture and Society How can we use our power, position, and money to leverage real change in the world around us through business decisions which will change the face of our cities and communities where we are?

10 Business Ethics??? Business needs ethics to thrive: 1.Trust is foundational to contracts 2.Customer Satisfaction/loyalty 3.Happy Employees = productive employees 4.Transparency is essential to development 5.Unethical practices ultimately undermine business 6.Globalization requires some common values 7.Many Customers want ethical businesses 8.Ethics is important for branding/marketing

11 Question: Does Ethical perception play a significant role in consumer behaviors? --In other words— Do Customers really buy products according to the ethics of companies??

12 Answer: Yes. 1.Boycotts by ethical shoppers cost big brands at least £2.6bn a year 2.2002 ethical consumption in the UK was worth £19.86bn in 2002 (Co-operative Bank EP Index, 2003)

13 Consumers Care about Ethics In 2002 every household in the UK spent an average £366 ($730) in line with their ethical values In 2006 they spent £664 ($1330) (+ 81 per cent) Co-operative Bank Ethical Consumerism Report

14 The “Ethics Factor” In developed competitive markets, many companies distinguish themselves by positioning their brand as ‘ethical’ or ‘socially concerned’

15 Ethics Rankings The 100 Best Corporate Citizens list ranks firms based on eight categories: 1. Shareholders 2. community 3. governance 4. diversity 5. employees 6. environment 7. human rights 8. product

16 Business Ethics 100 Best Corporate Citizens 2007 1. Green Mountain Coffee 13. Texas Instruments 2. Advanced Micro Devices 14. Herman Miller 3. NIKE15. Rockwell Collins 4. Motorola16. Interface, 5. Intel Corporation 17. Steelcase 6. IBM Inc.18. Dell Inc. 7. Agilent Technologies 19. Cisco 8. Timberland 20. Lam Research 9. Starbucks 21. Johnson & Johnson 10. General Mills 22. Adobe Systems Inc. 11., Inc. 23. Kimberly-Clark Corp 12. Applied Materials 24. Gaiam, Inc.

17 Business Ethics 100 Best Corporate Citizens 2007 25Gap, Inc. (The) 39United Parcel Service 26Chaparral Steel 40Microsoft 27Pitney Bowes, Inc. 41Chittenden, Inc 28Freddie Mac 42PepsiCo, Inc. 29Google, Inc. 43Energy Conversion Devices 303M Company 44McGraw-Hill 31Heartland Financial USA45Ecolab 32Chicago Mercantile Ex46Wells Fargo 33Southwest Airlines Co. 47Autodesk 34Eastman Kodak 48Xilinx, 35Cummins, Inc. 49Xerox Corporation 36American Express 50TradeStation Group 37Northwest Natural Gas 51Kellogg Company 38Wainwright Bank & Trust

18 Most Ethically Perceived Brands United KingdomUnited StatesGermany 1. Co-op 1. Coca Cola 1. Adidas 2. Body Shop 2. Kraft 2. Nike 3. Marks Spencer 3. Procter Gamble 2. Puma 4. Traidcraft 4 Johnson & Johnson 4. BMW 5. Cafédirect 4. Kellogg’s 5. Demeter 6. Ecover 4. Nike 5. gepa 7. Green Black 4. Sony 7. VW 7. Tesco 8. Ford 8. Sony 9. Oxfam 8. Toyota 8. Trigema 10. Sainsbury’s 10. LEVI 10. Bio Produkte 11. Innocent 10. Starbucks 10. Body Shop 12. Waitrose 12. Ben Jerry’s 10. Hipp 13. Clipper Tea 12. Dell 10. Mercedes 14. Asda.. 14. Campbell’s 10. Wrangler

19 BIG Brands want Ethical Brands Cadbury Schweppes bought Green & Black's, a niche but fast growing UK-based organic and fair trade chocolate firm. Nestlé launched Fairtrade certified Partners' Blend coffee Kraft Foods introduced their Kenco Sustainable Development coffee brand

20 Unethical Behavior Costs Companies: Corporate Scandals—United States - Enron - Tyco - Adelphia - Xerox - Rite-Aid - Martha Stewart & Madoff - ImClone - K-Mart - Boeing - WorldCom

21 Corporate Scandals-- Europe - Mannesmann - ELF - Royal Dutch Shell - VW - ABB - France Telecom - ABN-Ambro - Heidelberg Cement - Ahold - Bank of Italy - Siemens - Daimler-Chrysler - Parmalat

22 Recent “Subprime” Scandals AIG Goldman Sachs Bear Stearns Pricewaterhouse Coopers Countrywide

23 These Scandals cost $ Settlements - AIG ($1.6B) - Time Warner-AOL ($510M) - KPMG ($465M) - Adelphia ($715M) - Tyco ($750M) - HCA ($1.7B) - Prudential ($600M) - Tenet ($325M) Marsh McLennan ($850M) Cardinal Health ($600M)

24 Results of Recent Scandals a.Investors have become more demanding about transparency b.Consumers have become more demanding about corporate behaviors (accounting, environment, production methods, etc) c.In U.S., government has become involved to ease investors’ concerns– more regulation for business!!

25 Environmentally “green” “Today, social norms regarding the environment are changing and consumers are increasingly holding brands accountable for what they do … As a result, more and more companies are making investment decisions that incorporate brand impact and brand risk into their equations.” (David Wigder)

26 What Can Be Done? There are a number of ways to improve the ethical image of your brand. Superficial changes are not enough, and authentic ethical commitment of a brand is displayed in real action on the part of companies in order to have real effect.

27 Some Examples

28 Example: CocaCola Coke is proactively redesigning its bottle to reduce material use and pledging to recycle 100% of bottles sold in the US. Results: 1.Reduce Material Costs 10% 2.Improve Public Relations/Image with Public

29 Ethical Production Nike was criticized for sweatshop labor issues in East Asia, and many consumers boycotted Nike.

30 Nike’s Response Nike responded to these criticisms, changed some of their production arrangements, and returned to the list of the “100 most ethical companies” list

31 Financial Honesty and Transparency Bad Example:

32 Financial Honesty and Transparency Wells Fargo Bank is known for its disclosure of financial data.

33 Treatment of Workers Costco is well known for its great treatment of employees

34 vs 48% Insured82% Insured 2 yr wait for ins.6 month wait 66% paid by walmart92% paid by costco 50% Turnover92% Turnover $7.50-11.45/hr$10.50-17/hr

35 Strong Moral Leadership “CEO leads troubled Tyco into turnaround” Ed Breen, CEO “Cleaned House”: Fired Management Fired Board

36 What Causes Unethical Behavior? 1.Irrational exuberance + uninhibited self-interest 2.Arrogance 3.Fraud 4.Conflicts-of-interest 5.Preferential treatment 6.Accounting arbitrage 7.Failure of independent auditors 8.Failure of analysts 9.Failure of rating agencies 10.Failure of regulators 11.Failure of board oversight 12.Culture of greed

37 Corporate Culture and Performance Starbucks Nordstroms FedEx Southwest Airlines Costco Kiewit Google

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