1. Slides developed by Les Wiletzky Wiletzky and Associates Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Ethics and Social Responsibility of Business

2. 7 - 2Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Introduction Businesses organized in the United States are subject to its laws They are also subject to the laws of other countries in which they operate Business persons owe a duty to act ethically in the conduct of their affairs Businesses owe a social responsibility not to harm society

3. 7 - 3Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Law and Ethics Ethics Ethics – A set of moral principles or values that governs the conduct of an individual or a group What is lawful conduct is not always ethical conduct The law may permit something that would be ethically wrong

4. 7 - 4Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. The Caux Round Table Principles for International Business (1 of 2) Principle 1 Principle 1 The Responsibilities of Business Beyond Shareholders Toward Shareholders Principle 2 Principle 2 The Economic and Social Impact of Business: Toward Innovation, Justice, and World Community Principle 3 Principle 3 Business Behavior: Beyond the Letter of Law Toward a Spirit of Trust Principle 1 Principle 1 The Responsibilities of Business Beyond Shareholders Toward Shareholders Principle 2 Principle 2 The Economic and Social Impact of Business: Toward Innovation, Justice, and World Community Principle 3 Principle 3 Business Behavior: Beyond the Letter of Law Toward a Spirit of Trust

5. 7 - 5Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. The Caux Round Table Principles for International Business (2 of 2) Principle 4 Principle 4 Respect for Rules Principle 5 Principle 5 Support for Multilateral Trade Principle 6 Principle 6 Respect for the Environment Principle 7 Principle 7 Avoidance of Illicit Operations Principle 4 Principle 4 Respect for Rules Principle 5 Principle 5 Support for Multilateral Trade Principle 6 Principle 6 Respect for the Environment Principle 7 Principle 7 Avoidance of Illicit Operations

6. 7 - 6Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Ethical Fundamentalism Ethical fundamentalism Ethical fundamentalism - When a person looks to an outside source for ethical rules or commands Critics argue that ethical fundamentalism does not permit people to determine right and wrong for themselves

7. 7 - 7Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Utilitarianism good to society A moral theory that dictates that people must choose the action or follow the rule that provides the greatest good to society This does not mean the greatest good for the greatest number of people Has been criticized because it is difficult to estimate the “good” that will result from different actions

8. 7 - 8Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Kantian Ethics (Duty Ethics) universal rules A moral theory that says people owe moral duties that are based on universal rules Based on the premise that people can use reasoning to reach ethical decisions This theory would have people behave according to the categorical imperative: “Do unto others as you would have them do unto you.”

9. 7 - 9Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Rawls’s Social Justice Theory (1 of 3) Rawls’s social contract Rawls’s social contract A moral theory that says each person is presumed to have entered into a social contract, with all others in society, to obey moral rules that are necessary for people to live in peace and harmony

10. 7 - 10Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Rawls’s Social Justice Theory (2 of 3) Rawls’s Social Justice Theory Rawls’s Social Justice Theory Fairness is considered the essence of justice The principles of justice should be chosen by persons who do not yet know their station in society “veil of ignorance” This “veil of ignorance” would permit the fairest possible principles to be selected

11. 7 - 11Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Rawls’s Social Justice Theory (3 of 3) There are two major criticisms of this theory: 1.Establishing the blind “original position” for choosing moral principles is impossible in the real world 2.Many persons in society would choose not to maximize the benefit to the least advantaged persons in society

12. 7 - 12Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Ethical Relativism (1 of 2) individuals must decide what is ethical based on their own feelings as to what is right or wrong A moral theory that holds that individuals must decide what is ethical based on their own feelings as to what is right or wrong There are no universal ethical rules to guide a person’s conduct If a person meets his or her own moral standard in making a decision, no one can criticize him or her for it

13. 7 - 13Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Ethical Relativism (2 of 2) A criticism of this theory is that an action usually thought to be unethical would not be unethical if the perpetrator thought it was in fact ethical

14. 7 - 14Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Theories of Ethics – Summary (1 of 2) TheoryDescription Ethical fundamentalism Persons look to an outside source or central figure for ethical guidelines. Utilitarianism Persons choose the alternative that would provide the greatest good to society. Kantian ethics A set of universal rules establishes ethical duties. The rules are based on reasoning and require (1) consistency in application and (2) reversibility.

15. 7 - 15Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Theories of Ethics – Summary (2 of 2) TheoryDescription Rawls’s social justice theory Moral duties are based on an implied social contract. Fairness is justice. Rules are established from an original position. Ethical relativism Individuals decide what is ethical based on their own feelings as to what is right or wrong.

16. 7 - 16Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Business Ethics: Sarbanes-Oxley Act of 2002 Makes certain conduct illegal Establishes criminal penalties for violations Prompts companies to encourage senior officers of public companies to act ethically in their dealings with shareholders, employees, and other constituents

17. 7 - 17Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. United Nations Code of Conduct for Transnational Corporations Respect for National Sovereignty Adherence to Socio-Cultural Objectives and Values Respect for Human Rights and Fundamental Freedoms Abstention from Corrupt Practices

18. 7 - 18Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Social Responsibility of Business Business does not operate in a vacuum Decisions made by business have far-reaching effects on society In the past, many business decisions were made solely on a cost-benefit analysis Such decisions may cause negative externalities for others social responsibility Corporations are considered to owe some degree of social responsibility for their actions Business does not operate in a vacuum Decisions made by business have far-reaching effects on society In the past, many business decisions were made solely on a cost-benefit analysis Such decisions may cause negative externalities for others social responsibility Corporations are considered to owe some degree of social responsibility for their actions

19. 7 - 19Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 1. Maximizing Profits 2. Moral Minimum 3. Stakeholder Interest 4. Corporate Citizenship Theories of the Social Responsibility of Business

20. 7 - 20Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Maximizing Profits A theory of social responsibility that says a corporation owes a duty to take actions that maximize profits for shareholders The interests of other constituencies are not important in and of themselves

21. 7 - 21Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Moral Minimum (1 of 2) avoiding harm to others A theory of social responsibility that says a corporation’s duty is to make a profit while avoiding harm to others As long as business avoids or corrects the social injury it causes, it has met its duty of social responsibility

22. 7 - 22Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Moral Minimum (2 of 2) The legislative and judicial branches of government have established laws that enforce the moral minimum of social responsibility on corporations: e.g., Occupational safety laws e.g., Consumer protection laws for product safety

23. 7 - 23Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Stakeholder Interest other than its stockholders A theory of social responsibility that says a corporation must consider the effects its actions have on persons other than its stockholders This theory is criticized because it is difficult to harmonize the conflicting interests of stakeholders other than its stockholders A theory of social responsibility that says a corporation must consider the effects its actions have on persons other than its stockholders This theory is criticized because it is difficult to harmonize the conflicting interests of stakeholders Other stakeholders of business: Employees Suppliers Customers Creditors Local community Other stakeholders of business: Employees Suppliers Customers Creditors Local community

24. 7 - 24Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Corporate Citizenship (1 of 2) A theory of responsibility that says a business has a responsibility to do good Business is responsible for helping to solve social problems Corporations owe a duty to promote the same social goals as do individual members of society

25. 7 - 25Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Corporate Citizenship (2 of 2) This theory argues that corporations owe a debt to society to make it a better place This duty arises because of the social power bestowed on corporations A major criticism of this theory is that the duty of a corporation to “do good” cannot be expanded beyond certain limits

26. 7 - 26Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Theories of Social Responsibility – Summary TheorySocial Responsibility Maximizing profits To maximize profits for stockholders. Moral minimum To avoid causing harm and to compensate for harm caused. Stakeholder interest To consider the interests of all stakeholders, including stockholders, employees, customers, suppliers, creditors, and local community. Corporate citizenship To do good and solve social problems

27. 7 - 27Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. The Corporate Social Audit (1 of 2) moral health Corporate audits should be extended to include the moral health of the corporation Corporations that conduct social audits will be more apt to prevent unethical and illegal conduct by managers, employees, and agents

28. 7 - 28Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. The Corporate Social Audit (2 of 2) The audit would examine how well: Employees have adhered to the company’s code of ethics; and The corporation has met its duty of social responsibility The audit would examine how well: Employees have adhered to the company’s code of ethics; and The corporation has met its duty of social responsibility Such audits would focus on the corporation’s efforts to: Promote employment opportunities for members of protected classes Worker safety Environmental protection Consumer protection Such audits would focus on the corporation’s efforts to: Promote employment opportunities for members of protected classes Worker safety Environmental protection Consumer protection

29. 7 - 29Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Company Procedures for Conducting a Social Audit (1 of 2) An independent outside firm should be hired to conduct the audit This will ensure autonomy and objectivity The company’s personnel should cooperate fully with the auditing firm while the audit is being conducted The auditing firm should report its findings directly to the company’s board of directors

30. 7 - 30Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Company Procedures for Conducting a Social Audit (2 of 2) The results of the audit should be reviewed by the company’s board of directors The board of directors should determine how the company can: Better meet its duty of social responsibility; and Use the audit to implement a program to correct any deficiencies it finds