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Corporate Social Responsibility

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2 Corporate Social Responsibility
5 Chapter Corporate Social Responsibility McGraw-Hill/Irwin Business Ethics: Decision-Making for Personal Integrity & Social Responsibility, Copyright © The McGraw-Hill Companies, Inc. All rights reserved.

3 Ethics is tougher than you think . . .
Business has to take account of its responsibilities to society in coming to its decisions, but society has to accept its responsibilities for setting the standards against which those decisions are made. - Sir Adrian Cadbury By `social responsibility,' we mean the intelligent and objective concern for the welfare of society that restrains individual and corporate behavior from ultimately destructive activities, no matter how immediately profitable, and leads in the direction of positive contributions to human betterment, variously as the latter may be defined. - Kenneth R. Andrews

4 Ethics is tougher than you think . . .
Fill your bowl to the brim and it will spill. Keep sharpening your knife and it will be blunt. Chase after money and security and your heart will never unclench. Care about people's approval and you will be their prisoner. Do your work, then step back. The only path to serenity. -Tao Te Ching “You never expect justice from a company, do you? They neither have a soul to lose nor a body to kick.” - Sydney Smith, , English writer, clergyman

5 Chapter Objectives After exploring this chapter, you will be able to:
Define corporate social responsibility Discuss the three models of CSR Discuss the challenge in identifying the object of a corporation’s responsibility. Distinguish key components or elements of the term “responsibility” Explain the role of reputation as one possible motivation behind CSR Evaluate the claims that CSR is “good” for business This chapter addresses the critical questions of whether there exists a social responsibility of business and, if so how firms can meet and evidence their fulfillment of this responsibility. Central to this question is the underlying determination of what responsibility business has to anyone at all. One’s belief about the responsibility of business might be no more than this - a firm should clean up after itself, so to speak. On the other hand, there are some who believe that firms owe something more back to the society that supports it, and that this debt is greater than the debt of the individual members of society.

6 Opening Decision Point: Does Motivation Matter?
What are the key facts relevant to your judgment? What is the ethical issue involved in a firm’s decision to sponsor an event or an organization? Who are the stakeholders? What alternatives does a firm have with regard to the way in which it engages in sponsorship? How do the alternatives compare, how do the alternatives you have identified affect the stakeholders? (Continued)

7 Opening Decision Point: Does Motivation Matter?
Does the law provide any guidance whatsoever in connection with the source of funds for particular causes? What are the consequences of offering greater support to companies that support causes that are important to you? Who benefits from that perception and by your judgment? Do you simply respect the Bank or feel that it is a good corporate citizen based on its choice of how to spend its money? Can a bank have “virtues” as understood by virtue ethics?

8 Is there a social responsibility of business? If so, what is its source?
What is our early concept of a corporation? 1906 definition of the corporation submitted by Ambrose Bierce in his Devil’s Dictionary: a corporation is “an ingenious device for obtaining individual profit without individual responsibility.” In fact, one of the reasons that individuals who engage in business “incorporate,” is to create a legal corporate shield by which to protect themselves from personal liability for the liabilities of the new corporation.

9 Synonyms for CSR – Others, in your language?
Corporate Social Responsibility (CSR), Business Ethics, Corporate Citizenship, Sustainability, Corporate Environmental Management, Business and Society, Business and Governance, Business and Globalization, Stakeholder Management, Governance

10 Defining “Corporate Social Responsibility” (insert obj. 1)
In general terms, CSR encompasses the responsibilities that businesses have to the societies within which these businesses operate. The European Commission defines CSR as “a concept whereby companies decide voluntarily to contribute to a better society and a cleaner environment.” Specifically, CSR suggests that a business identify its stakeholder groups and incorporate their needs and values within its strategic and operational decision-making process.

11 What is the difference between social responsibility and ethics?

12 Why do it? Three Models by which to Define (insert obj. 2)
Advocates for CSR have several bases for their contentions that a business should go above and beyond the maximization of profits or at least that CSR activities contribute to that objective. The models for CSR are based in both ethics (“citizenship”) and economics, and the language used in each tends to vary. Not meant to be exclusionary nor all-encompassing; they simply assist us in discussing areas of differentiation. K

13 The Corporate Citizenship Model of CSR
Some companies engage in CSR efforts solely for the public good and do not expect a commercial return on their contributions. These organizations believe that they play a particular role in the community and that their ability to do good – which derives from the profits they reap – creates a responsibility to do good. This model often exists where there is a strong leader with a sense of responsibility and connection to the community. Example: in Ben & Jerry’s Ice Cream most recent Social & Environmental Assessment, the company explains that it seeks to create a “broader, bolder vision of how it can leverage its reputation and its expertise to advance its Social Mission.” Refer to REALITY CHECK Fairness in Cup of Coffee: Example of the Corporate Citizenship Model The corporate citizenship model is evidenced in a company called Equal Exchange (www.equalexchange.coop) which is a worker-owned and -governed business committed to Fair Trade with small-scale coffee, tea, and cocoa farmers. Its “Vision of Fairness to Farmers” explains its model (see text). K

14 The Social Contract Model of CSR
Second, some CSR proponents argue that corporations reap the benefits of serving as a community citizen and therefore owe a reciprocal obligation to that community. This model holds that the moral rights possessed by various stakeholders create responsibilities on the part of the corporation to respect those rights. In a 2003 study, researchers found that 70% of the public believe that industry and commerce do not pay enough attention to these social responsibilities.[1] [1] MORI (2003) Corporate Social Responsibility: Attitudes of the British Public, 2 Church, C., Cade, A. & Grant, A.

15 The Enlightened Self-Interest Model of CSR
States that the incorporation of CSR can lead to differentiation and competitive market advantage for the business, something that can be branded for the present and future. (Also sometimes termed the economic model) Some companies have implemented a strong CSR policy and have been successful in the establishment of a positive brand. Examples: BP and Nike. In a 2005 announcement about an increase in funding for green technology research, General Electric CEO Jeffrey Immelt explained that it was not a “self-sacrificing attempt to save the planet,” but instead because GE planned “to make money doing it.” Under this larger economics umbrella, one would find arguments based in reduction of risk, market reputation, brand image, stakeholder relationships, and long term strategic interests. Refer to REALITY CHECK Putting your money where your mouth is? Do you make purchases based on a company’s social contributions? Are you more or less likely to buy something if you know that a company supports causes that are (or are not) important to you? Research conducted by MORI in 2003 found that 84% of respondents to its survey said that a company’s level of social responsibility was a “very important” or “fairly important” factor in their decision to purchase a particular product. Perhaps more important is whether you believe that companies care about what is important to you. In that same research, MORI found that 47% of those questioned believed that companies did not listen to the public nor respond to public concerns about social and environmental issues. K

16 Milton Friedman (August, 2005 BusinessWeek article):
“I believe most of the claims of social responsibility are pure public relations.” “The idea that the resources of a company should be distributed by people on some basis other than ownership and by people who are not elected for that purpose -- surely, that is a socialist concept and fundamentally subversive.”

17 Friedman A corporate executive has a “responsibility is to conduct business in accordance with [his or her employer’s] desires, which generally will be to make as much money as possible while conforming to the basic rules of society, both those embodied in law and those embodied in ethical custom.” Do they have any other types of responsibilities?

18 Why do it? The following were cited in a poll throughout eight Western, developed countries by citizens as the main reasons why firms want to be socially responsible, good citizens. Note how most could fall under one umbrella: Company long term strategic interest Reduced risk Market reputation/brand image Relations with stakeholders (attracting & retaining employees, morale, expedited permits, happy regulators) Putting something back The right thing to do/corporate values Offers social capital or license to operate or grow (give and take)

19 Profit = Optimal allocation of resources
This common view of CSR has its roots in the utilitarian tradition and in neoclassical economics. As the agents of the owners of business, managers have primary responsibility to pursue maximum profits for shareholders. By pursuing profits, a business manager functions to allocate resources to their most efficient uses. Consumers who most value a resource will be willing to pay the most for it; thereby profit is the measure of optimal allocation of resources. Over time, the pursuit of profit will continuously work towards the optimal satisfaction of consumer demand, which in one interpretation of utilitarianism, is the optimal social good.

20 Application (consider): “Nestlé chief rejects the need to ‘give back’ to communities”
March 9, 2005, Boston Herald “Companies shouldn’t feel obligated to ‘give back’ to communities because they haven’t taken anything away,” said Nestlé S.A. CEO Peter Braeck-Letmathe “Companies should only pursue charitable endeavors with the underlying intention of making money.” “It is not our money we’re handing out but our investors’.” “A company’s obligation is simply to create jobs and make products. What the hell have we taken away from society by being a successful company that employs people?” Do you agree??

21 To whom does business owe this social responsibility? (Insert obj. 3)
Firms exist in relationships with many stakeholders and these relationships can create a variety of responsibilities. It may not be possible to satisfy the needs of each and every stakeholder in a situation. Therefore, social responsibility would require decisions to prioritize competing and conflicting responsibilities.

22 Prioritization of Stakeholders
The prioritization of stakeholders is often determined by a company’s mission, practice, board or custom. All too often, however, the prioritization is presumed rather than intentionally discussed and challenged, which might lead to entrenchment rather than enhancement of the firm. Examples: Consider the case of the old growth redwood forests and the loggers in the Pacific Northwest:. logging presents a danger to the giant redwoods, but discontinuing logging activities poses a hardship on the logging communities and those connected to them. Many environmentalists consider the interests of society in preserving old growth forests to be predominant, while others consider the interests of the loggers and their communities to be predominant. Whether you are persuaded by the fact that this is a conflict between humans and trees or by the fact that a species might be endangered, business’ social responsibility in this case will depend on which stakeholders are given priority.

23 The Nature and Extent of the Responsibility (Insert obj. 4)
Is profit, legally made, the only guiding principle of socially responsible business activities, or should the impact of a decision on others be considered, even where the law does not require it? What do we mean when we say “responsible?” We might mean that it is reliable, dependable or trustworthy. A second meaning of responsible involves attributing something as a cause for some event or action. A third sense involves attributing liability or accountability for some event or action and creates a responsibility to make things right again. Examples: Shell Oil, for example, spent $100 million in 1995 alone on projects in Nigeria and more than US $20 million on roads, health clinics, schools, scholarships, water schemes and agricultural support projects to help the people of the region, actions that did not seem to have been motivated by any legal duty to act. Instead, Shell seemed to be acting for a socially beneficial end that went beyond legal requirements. However, interestingly enough, a 2000 appellate court decision held that a lawsuit against Shell for allegedly aiding and abetting in the torture and murder of Nigerians activists who opposed drilling on their lands was allowed to proceed.[1] In the time since the activities discussed in that case, Shell has strived to create an awareness regarding corporate social responsibility both for itself and in its industry. “Corporate citizenship is not a luxury, especially in these difficult times,” said P.B. Watts, Chairman, Royal Dutch/Shell Group of Companies, UK, during a recent Annual Shareholder Meeting. “It’s a sensible part of doing business.”[2] In a legendary legal case within the United States (Dodge v. Ford, 1919), stockholders sued Henry Ford seeking to answer this very same type of question. Henry Ford believed that Ford cars should be made for and be affordable by everyone in America. To accomplish this goal, Ford decided to make his automobiles affordable to the average worker by charging a lower price than he might otherwise have charged. At the time of the lawsuit by the Dodge brothers, two of Ford’s largest shareholders, this decision resulted in a reduction in the price of a Ford from $440 to $360 and a refusal to pay stock dividends. John and Horace Dodge believed that Ford’s primary objective should be to make profit for its shareholders and filed a lawsuit to force him to do so. “My ambition,” said Ford, “is to employ still more men, to spread the benefits of this industrial system to the greatest possible number, to help them build up their lives and their homes. To do this, we are putting the greatest share of our profits back in the business.”[1] Ford’s counsel argued that “although a manufacturing corporation cannot engage in humanitarian works as its principal business, the fact that it is organized for profit does not prevent the existence of implied powers to carry on with humanitarian motives such charitable works as are incident to the main business of the corporation.” The court was not persuaded that it should interfere with the reasonable business judgment of the Ford Motor Co. as it did not find that the alleged motives of the directors “menace the interests of the shareholders.” Ford seemingly convinced the court that it was a valid and perhaps laudable claim that “a Ford in every garage” might be an effective long-term business strategy. In fact, consider the long-term gains. If you bought your first car and it was a Ford, you might be more likely to stick with that particular manufacturer; and you might tell others how affordable the cars were, and so on. Investment in loyalty and shared beliefs between the manufacturer and its customers has been shown in countless industries to be a profitable profit-maximizing process. Note that, as their interests seemed to be more short-term than those evidenced by Mr. Ford, the Dodges eventually opened their own firm producing Dodge automobiles to compete directly with Ford. More detail on the meaning of “responsible”: The words “responsible” and “responsibility” are used in several different ways and it will be helpful to sort through them. When we say that some business is responsible, we might mean that it is reliable, dependable or trustworthy. Thus, we might say that a business is very responsible in providing good customer service. A second meaning of responsible involves attributing something as a cause for some event or action. The hurricane was responsible for the flood in New Orleans, or the location of the gas tank was responsible for fires involving the Ford Pinto. A third sense involves attributing liability or accountability for some event or action and creates a responsibility to make things right again. To say, for example, that a business is responsible for a polluted river is not only to say that the business caused the pollution, but that the business is at fault for it and should be held accountable. An unavoidable accident would be a case in which someone was responsible as the cause, but not responsible as being liable or at fault. [1] Dodge v. Ford Motor Co., 204 Mich. 459; 170 N.W. 668 (1919), excerpt. [1] Wiwa v. Royal Dutch Petroleum Co., (2000) [2] “Corporate Citizenship: A Luxury in Difficult Times?” World Economic Forum Knowledge Navigator (4/2/02).

24 The Nature of “Responsibility”
Reference to corporate social responsibility denotes those duties or restrictions that bind us to act in one way rather than another. Responsibilities are those things that we ought, or should, do, even if we would rather not. Responsibilities bind, or compel, or constrain, or require us to act in certain ways. To talk about business’s social responsibilities is to be concerned with society’s interests that restrict or bind business’s behavior. Social “responsibility” is what a business should or ought to do for the sake of society.

25 What should a business do?
Business has the social responsibility to obey the law. Philosophers would contend that we have responsibilities beyond the law and they distinguish between different types of responsibilities, on a scale from more to less demanding and binding. First, we have responsibilities not to cause harm to others. A second, perhaps less binding responsibility, is to prevent harm even in those cases where one is not the cause. Finally, there might be responsibilities to do good. (See next slide)

26 Philosophical priorities in CSR
Do good Maximize economic, social and environmental value Do no harm Even in those cases where one is not the cause Avoid economic, environmental and social harm Example: Consider, as an example, the actions taken by the pharmaceutical firm Merck with its drug Mectizan. Mectizan is a Merck drug that prevents river blindness, a disease prevalent in tropical nations. River blindness infects millions of people annually causing severe rashes, itching, and loss of sight. A single tablet of Mectizan administered once a year can relieve the symptoms and prevent the disease from progressing. On the surface, Mectizan would not be a very profitable drug to bring to market. The once-a-year dosage limits the demand for the drug among those people who require it. Further, the individuals most at risk for this disease are among the poorest people living in the poorest regions of Africa, Asia, Central America and South America. In 1987, Merck began a program that provides Mectizan free of charge to people at risk for river blindness. Cooperating with the World Heath Organization, UNICEF, and the World Bank, Merck’s program has donated more than 700 million tablets of Mectizan distributed to 40 million people each year since The program has also resulted in the development of a health care system, necessary to support and administer the program, in some of the poorest regions of the world. By all accounts, Merck’s Mectizan Donation Program has significantly improved the lives of tens of millions of the most vulnerable people on earth. Merck’s actions were explained by reference to part of its corporate identity statement: “We are in the business of preserving and improving human life.” Clearly Merck was not responsible for causing river blindness and therefore according to the previous standard of CSR discussed, Merck had no social responsibility in this case. But Merck itself saw the issue differently. Given their core business purpose and values, they concluded that they did have a social responsibility to prevent a disease easily controlled by their patented drug.

27 Corporate “Responsibilities”
Even when not explicitly prohibited by law, ethics would demand that we not cause avoidable harm. In practice, this ethical requirement is very close to responsibilities established by the precedents of tort law. Beyond the responsibility to obey the law, a second level of responsibilities would hold that business has a social responsibility not to violate anyone’s rights. But there are also cases in which business is not causing harms, but could easily prevent harms from occurring. A more inclusive understanding of corporate social responsibility would hold that business has a responsibility to prevent harms.

28 A Responsibility to “Do Good?”
Perhaps the most wide-ranging standard of CSR would hold that business has a social responsibility to do good things and to make society a better place. Many of the debates surrounding corporate social responsibility involve the question of whether business really has a responsibility to support such good causes. Some people argue that, like all cases of charity, this is something that deserves praise and admiration, but it is not something that every business ought to do. Refer to Reality check: Corporate Philanthropy How much do Corporations Give? In 2004, total charitable giving in the United States was estimated to be almost $250 billion. Individual contributions totaled $188 billion, or more than 75%. Corporate giving totaled $12 billion, or slightly less than 5% of the total.

29 A Responsibility to “Do Good?”
Philosophers sometimes distinguish between obligations/duties and responsibilities to make exactly this point. We may have a responsibility to be charitable, but it is not obligatory nor is it a duty. Others argue that business does have an obligation to support good causes and “give back” to the community. This sense of responsibility is more akin to a debt of gratitude and thankfulness; something less binding than a legal or contractual obligation perhaps, but more than a simply act of charity.

30 Hmmmm. Who is to decide what is “good” or “responsible?”
Who decides where money should go, what it means to do “good” for society, or what is “harm?”

31 Are motivations relevant? Can a firm have only one motivation?
Exploring Enlightened Self-Interest: Motivation for CSR (Insert obj. 5) There are a variety of arguments to motivate a socially responsible firm. The impact on the bottom line may stem both from customer preference as well as from employee preference. The problem with a focus on preference, however, is that social responsibility becomes merely social marketing. A firm may use the image of social responsibility to garner customer support or employee loyalty while the facts do not evidence a true commitment. In addition to Kenneth Dayton’s argument that CSR increases the sustainability of an organization by meeting the needs of its supporting constituencies, there are other arguments to motivate a socially responsible firm. Employees who are well treated in their work environments may prove more loyal, and more effective and productive in their work. Liz Bankowshi, Director of Social Missions at Ben & Jerry's Homemade Ice Cream Company, claims that 80 to 90 percent of their employees work at Ben & Jerry's because "they feel they are part of a greater good."[1] The impact on the bottom line, therefore, stems not only from customer preference but also from employee preference. [1]Joel Makower, Beyond The Bottom Line (New York, NY: Simon & Schuster 1994) p. 68. Are motivations relevant? Can a firm have only one motivation?

32 Does Motivation Matter?
The practice of caring for the “image” of a firm is sometimes referred to as reputation management. There is nothing inherently wrong with managing one’s firm’s reputation, but observers might challenge firms for engaging in CSR activities solely for the purpose of impacting their reputations. The challenge is based on the fact that reputation management often works! If a firm creates a good image for itself, it builds a type of trust bank where consumers or other stakeholders seem to give it some slack if they then hear something negative about the firm. Similarly, if a firm has a negative image, that image may stick, regardless of what good the corporation may do. Paul Hawken, co-founder of Smith & Hawken gardening stores and an advocate of business social responsibility reminds us that: [y]ou see tobacco companies subsidizing the arts, then later you find out that there are internal memos showing that they wanted to specifically target the minorities in the arts because they want to get minorities to smoke. That's not socially responsible. It's using social perception as a way to aggrandize or further one's own interests exclusively.[1] [1] Joel Makower, Beyond The Bottom Line (New York, NY: Simon & Schuster 1994) p. 15.

33 Personal versus professional choices/reputation
Why does an individual choose to be a good citizen? Is it different from why a firm might so choose? “Saying she was impressed by how much they have contributed to the community, US District Judge Manning declined to impose the maximum 3 year terms on Andreas and Wilson.” (ADM scandal, from Chicago Tribune)

34 "The way to gain a good reputation is to endeavor to be what you desire to appear."   -- Socrates (Greek philosopher, 470? B.C.E.) Does Johnson & Johnson reap a financial benefit from being ranked as the most reputable company in America by Responsibility Inc? When Philip Morris Co. spends $250 million on an advertisement campaign that communicates its charitable activities, do you question why they engaged in the charitable activities in the first place? As you read the opening Decision Point, did you care about why a firm supported a particular sporting event? Consider Procter & Gamble Co., who was harshly criticized by respondents to a survey seeking to rank firms on the basis of their corporate philanthropy. Respondents contended that P&G did “absolutely nothing to help” after the September 11 tragedy.[1] However, in truth, P&G provided more than $2.5 million in cash and products, but simply did not publicize that contribution. The same held true for Honda Motor Co., who donated cash, all-terrain vehicles and generators for use at the World Trade Center site. Seemingly unaware of these efforts, respondents instead believed them to lack compassion for their failure to support America. [1] Ronald Alsop, “For a company, charitable works are best carried out discreetly,” Wall Street Journal (1/16/02), Marketplace Section, p. 1.

35 “Reputation Management or . . . ?”
“Reputation is an idle and most false imposition; oft got without merit and lost without deserving.” Shakespeare (Othello) ‘The judgment good does not originate with those to whom the good has been done. Rather is was the ‘good’ themselves, that is to say the noble, mighty, highly placed and high-minded who decreed themselves and their actions to be good.” Nietzsche Refer to REALITY CHECK Enron: “Best in Show” or “Can’t judge a book by its cover?”? As a firm, would you rather be an unethical firm with a good reputation or an ethical firm with a reputation for injustice? Enron included the following laudatory praises in its 2000 Corporate Responsibility Annual Report. The list drives home the challenges incumbent in any awards mechanism that strives to reward a trait such as “most innovative” or “all-star, most admired” rather than an enduring, measurable element of the corporate environment. On the other hand, awards such as those below can serve as influential motivating factors in corporate financial decisions so many executives in fields impacted by these honors would prefer they remain. (See text for quotes in Reality Check and Figure 5-2, as well.) Refer to REALITY CHECK: Why buy? Note that a reputation is relevant to many stakeholders – not just purchasing consumers. A survey conducted in the United Kingdom found that 33% of workers in that country are “very likely” to seek new employment during the next year because of their current employer’s poor record on corporate social responsibility.[1] Employers are also more likely to seek out new hires with a demonstrated awareness of social and environmental responsibility – in fact, a Wall Street Journal survey found that 77% of corporate recruiters said it is important to their hiring decisions.[2] Moreover, investors are sinking almost $1.3 billion into socially responsible mutual funds, effectively putting their money where their mouths are.[3] [1] The Work Foundation, “The Ethical Employee,” (2002). [2] Ronald Alsop, “Corporations still put profits first, but social concerns gain ground,” Wall Street Journal (10/30/01), p. B12. [3] A.J. Vogl, “Does it pay to be good?” Across the Board (January 2003).

36 Does Good Ethics = Good Business? (Insert obj. 6)
Let us take a look at the evidence – It is somewhat persuasive but one needs to weigh it for one’s self.

37 Vogel says “only a niche market”
David Vogel contends that, while there is a market for firms with strong CSR missions, it is a niche market and one that therefore caters to only a small group of consumers or investors. He argues that CSR is one option for a business strategy that might be appropriate for certain types of firms under certain conditions, such as those with well-known band names, with reputations that are subject to threats by activists. He warns of the exposure a firm might suffer if it then does not live up to its CSR promises. He also cautions against investing in CSR when consumers are not willing to pay higher prices to support that investment. Measurement is critical since the business case is not without its detractors. David Vogel, The Market for Virtue: The Potential and Limits of Corporate Social Responsibility (Brookings, 2005). Does Good Ethics = Good Business?

38 SustainAbility concludes “it does pay!”
Though this perspective is persuasive, a review of the scholarly research on the subject suggests the contrary on numerous counts, most predominantly the overall return on investment to the corporation. Another study found that, in emerging markets, cost savings, productivity improvement, revenue growth and access to markets were the most important business benefits of sustainability activities. The report concludes that it does pay for businesses in emerging markets to pursue a wider role in environmental and social issues, citing cost reductions, productivity, revenue growth, and market access as areas of greatest return for MNEs. The study was entitled, “Developing Value: The Business Case for Sustainability in Emerging Markets,” and was based on a study produced jointly by SustainAbility, the Ethos Institute and the International Finance Corporation. The research found that, in emerging markets, cost savings, productivity improvement, revenue growth and access to markets were the most important business benefits of sustainability activities. Environmental process improvements and human resource management were the most significant areas of sustainability action. The report concludes that it does pay for businesses in emerging markets to pursue a wider role in environmental and social issues, citing cost reductions, productivity, revenue growth, and market access as areas of greatest return for MNEs. Does Good Ethics = Good Business?

39 Additional Positive Relationships
In addition, studies have found that there are a number of expected – and measurable – outcomes to ethics programs in organizations. Some people look to the end results of firms that have placed ethics and social responsibility at the forefront of their activities, while others look to those firms who have been successful and determine the role that ethics might have played. Each of these quantifiable measurements can perhaps serve as proxies for success, to some extent, or at least would be unlikely to occur in a company permeated by ethical lapses. With regard to the first bullet, consider Johnson & Johnson, known for its quick and effective handling of its experience with tainted Tylenol. As highlighted in a Reality Check in Chapter 4, J&J has had more than seven decades of consecutive sales increases, two decades of double-digit earnings increases and four decades of dividend increases. Does Good Ethics = Good Business?

40 Records on Social Issues = Positive Financials
Moreover, a landmark study by Professors Stephen Erfle and Michael Frantantuono found that firms that were ranked highest in terms of their records on a variety of social issues (including charitable contributions, community outreach programs, environmental performance, advancement of women, and promotion of minorities) had greater financial performance as well. Financial performance was better in terms of operating income growth, sales-to-assets ration, sales growth, return on equity, earnings-to-asset growth, return on investment, return on assets and asset growth. Joel Makower, Beyond The Bottom Line (New York, NY: Simon & Schuster 1994) p Does Good Ethics = Good Business?

41 Good Corporate Citizen = Good Financial Performance
Another study by Murphy and Verschoor reports that the overall financial performance of the 2001 Business Ethics Magazine Best Corporate Citizens was significantly better than that of the remaining companies in the S&P 500 index, based on the 2001 BusinessWeek ranking of total financial performance. A follow-up study to validate these findings was conducted by the UK-based Institute of Business Ethics. The IBE found that, from the perspectives of economic value added, market value added and the price-earnings ratio, those companies who had a code of conduct out performed those who did not over a five year period. Curtis Verschoor, Elizabeth Murphy, “The Financial Performance of Large U.S. Firms and Those with Global Prominence: How do the Best Corporations Rate?” Business & Society Review, v. 107, no. 3 ((2002), pp See also Elizabeth Murphy, Curtis Verschoor, “Best Corporate Citizens have Better Financial Performance,” Strategic Finance, v. 83, no. 7 (Jan. 2002), p. 20. Simon Webley and Elise More, Does Business Ethics Pay? (London, UK: Institute of Business Ethics, 2003). Does Good Ethics = Good Business?

42 Discussion of Opening Decision Point: Does Motivation Matter?
The opening Decision Point asks whether you care about why a firm engages in a particularly socially conscious endeavor. The ethical decision-making process suggests that you make sure that you have all of the relevant facts in order to reach a conclusion. Are we asking whether it is important to know a firm’s motivation, or whether a particular motivation is better than another? If the latter, do you know the motivation behind a specific action of an organization? If you are going to judge whether you value the motivation, let’s be sure that we are clear on what it is.

43 Discussion of Opening Decision Point: Does Motivation Matter?
If we care about the motivation, why do we care? Why is motivation important when we consider, for instance, a firm’s decision to sponsor an event or an organization? If you are clear on why this is important to you, then you may be better prepared to find one motivation more desirable than another. Who are the stakeholders when we are considering a firm’s motivation? The stakeholders might change depending on the specific action we are evaluating but, in general, you have the firm itself, its direct stakeholders (such as employees, clients or customers, investors), the recipient of the responsible behavior (the community, for example), the media (or the source of information about the activity). Can you think of a few others? We do not often think of competitors as stakeholders, but certainly they, too, are impacted by a firm’s decision.

44 Discussion of Opening Decision Point: Does Motivation Matter?
The next inquiry involves the alternatives a firm may have with regard to the way in which it engages in sponsorship. One firm might opt to simply add their logo to a program or display a flag, while another firm might have its name on every element involved in the particular activity. Some firms might involve their own executives or employees in an activity, while others leave the hands-on involvement to an non-governmental organization (NGO) or community organization. Do we respond differently, depending on the nature of the firm’s involvement? Why? How do the alternatives compare, how do the alternatives you have identified affect the stakeholders?

45 Discussion of Opening Decision Point: Does Motivation Matter?
What are the consequences of offering greater support to companies that support causes that are important to you? If you support a firm that, in turn, supports your causes, then you are encouraging them to continue to do that. There is an argument that the firm can have a larger impact than any one individual so, by supporting the firm, you are going quite a ways in supporting your particular cause. What is your conclusion? Do you care?

46 Chapter Five Vocabulary Terms
After examining this Chapter, you should have a clear understanding of the following Key Terms and you will find them defined in the Glossary: Corporate citizenship model of CSR Corporate social responsibility Enlightened self-interest model of CSR Ethical custom Reputation management Social contract model of CSR


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