1. Ethics and Social Responsibility of Corporations
Legal Environment of Business

2. What is Ethics?
The inner-guiding moral principles and values people use to analyze a situation and decide what is “right.”

3. What is Business Ethics?
Business Ethics is simply the application of the standards for moral reasoning to business dilemmas
Moral Standards  Data Moral Judgment
Businesses should develop moral standards for employees working together toward the common goal of profit for the firm
Often, businesses face conflict between the interests of various stakeholders of the business
The business must consider the needs and interests of all its stakeholders in resolving the ethical dilemma it faces

4. Company Stakeholders

5. Schools of Thought on Ethical Behavior
Inherence
Managers act only with shareholders’ interests in mind
Do not get involved in any political or social issues unless in shareholders’ best interests
Enlightened Self-Interest
Serve the shareholders best by being responsive to the larger society
Managers free to address societal issues without the constraint of offending someone
Businesses anticipate social changes and needs and be early advocates for change

6. Social Responsibility
The Invisible Hand
Opposite of Enlightened Self-Interest
Managers believe that business ought to serve the larger society, and it does so best when it serves the shareholders only
Businesses adhere to governmental constraints as a way of maximizing benefits to their shareholders
Social Responsibility
Role of business is to serve the larger society and is best accomplished by being responsive to the larger society
Businesses profit by being responsive to society and its needs
Businesses advocate full disclosure of product information to consumers
Believe that social responsibility contributes to their long-term success

7. Law and Ethics
Businesses organized in the United States are subject to its laws and the laws of other countries in which they operate.
Businesspersons owe a duty to act ethically in the conduct of their affairs and not to harm society.
Not all ethical standards have been enacted as law.
Law and ethics often coincide.
E.g., bribery is illegal and unethical.
Law may permit certain behavior that seems unethical.
E.g., law may permit pollution emissions that pose health risks.
Law may demand certain conduct that seems unethical.
E.g., law prohibits hiring illegal aliens; jobs could assist destitute workers.

8. Law and Ethics

9. Business Ethics
Businesses today not only answerable to shareholders, but to all its stakeholders
Shareholders demand ethical and socially responsible behavior from business to ensure long-term earnings and growth
Customers expect ethical and socially responsible behavior in return for their loyalty
Communities demand responsible behavior for locating and maintaining business facilities in the area.

10. Reasons for Choosing Ethical Behavior
Profitability as a Return on Ethical Behavior
Businesses operate to maximize profits
Pursuit of profit can sometimes distort the perspective of even the most conscientious
Firms that adopt ethical standards perform better financially over the long run
Just like an individual, a firm’s reputation takes a long time to gain, but can be instantly lost over one bad decision
Ethics as a Strategy
Ethical behavior increases long-term earnings
Enables businesses to plan ahead
Anticipate social needs and cultural changes that will require the firm or its product to evolve
Fosters goodwill
Saves company from costly mistakes

11. Business Ethics for Personal Reasons
Business Ethics is really nothing more than a standard of personal behavior applied to a group of people working together to make a profit
Some people are ethical because it enables them to sleep better at night
Some do so because of the fear of getting caught
Some do it because it is simply the correct thing to do

12. Some effects of Ethical & Unethical Behavior

13. Employee Ethics: THE CODE OF ETHICS
Document that helps employees deal with situations in which conduct is technically legal but is improper, unethical, or unfair.
Development of Code of Ethics has become an important part of corporate culture

14. Johnson & Johnson’s Credo

15. Social Responsibility of Business
Decisions made by business have far-reaching effects on society.
In the past, many business decisions were made solely on a cost-benefit analysis.
The attitude of business was that everyone benefitted if business did well.
Such decisions may cause negative externalities for others.
Business regulations have made businesses more accountable, and forced their behavior into a more socially responsible pattern
Today, the statement is, “What’s good for society is good for b

17. Maximizing Profits
Theory that a corporation’s duty is to take actions that maximize profits for shareholders.
The interests of other constituencies are not important in and of themselves.
Friedman: “…one and only social responsibility of business—to use its resources and engage in activities to increase its profits as long as it stays within the rules of the game…”

18. Moral Minimum
Theory that 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.
Laws enforce some moral minimum of social responsibility on corporations.
E.g., occupational safety laws.
E.g., consumer protection laws for product safety.
E.g., Sarbanes-Oxley Act.

19. Sarbanes-Oxley Act
Passed in response to financial fraud scandals of late 1990s, early 2000s
Civil and criminal liability.
Goal of compelling public companies to act ethically in dealings with shareholders, employees, other constituents.
Public companies must disclose whether they have a code of ethics. In response, many companies have adopted such codes.

20. Stakeholder Interest
Theory that a corporation must consider the effects its actions have on persons other than its stockholders.
E.g., employees, suppliers, customers, creditors, local community.
Critics argue that it is difficult to harmonize the conflicting interests of stakeholders.

21. Corporate Citizenship
Theory that a business has a responsibility to do good.
Business is responsible for helping to solve social problems, even those it did not cause.
Corporations owe a duty to promote the same social goals as do individual members of society
Theory argues that corporations owe a debt to society to make it a better place.
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.
E.g., corporate funds are limited.

22. Summary of Theories

23. Social Responsibility Roles
Reactive
Businesses react to social issues when they are presented
Try to resist the implementation of regulation
Possible end up with more regulation than would have resulted if the issue had been addresses prior to regulation
Status Quo
Business does not oppose regulation
Meets only the bare minimum
Do not try to anticipate future problems
Proactive
Some firms adopt a proactive approach
Begin by dealing with social issues within the firm
Do not wait for regulations to be imposed, take actions from before as they feel the need to

24. Corporate Social Audit
Idea that audits should be conducted not only of financial health of corporation, but also of its moral health.
Examine whether corporation has adhered to code of ethics and met duty of social responsibility.
May be difficult to define, measure results in practice.

25. Procedures for Social Audit
Employ independent, outside auditor.
Demand cooperation of company personnel with auditing firm during audit.
Auditor reports findings directly to board of directors.
Board reviews results and implements program to correct any deficiencies found.

26. Summary
Ethical behavior in business means making decisions based on values established by the firm
Different firms deal with ethical dilemmas differently
Ethical behavior can provide returns for all the company’s stakeholders
Firms can benefit shareholders and at the same time recognize their social responsibilities