1. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 1 ETHICS AND SOCIAL RESPONSIBILITY OF BUSINESS © 2010 Pearson Education, Inc., publishing as Prentice-Hall CHAPTER 42

2. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 2 Ethics A set of moral principles or values that governs the conduct of an individual or group.

3. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 3 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.

4. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 4 Law and Ethics (continued) 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.

5. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 5 Law and Ethics (continued)

6. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 6 Major Ethical Theories Ethical Relativism Ethical Fundamentalism Utilitarianism Kantian Ethics Rawls’s Social Justice Theory

7. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 7 Ethical Fundamentalism A person looks to an outside source or a central figure for ethical rules or commands. –E.g., the Bible, the Koran, Karl Marx. Critics argue that ethical fundamentalism does not permit people to determine right and wrong for themselves.

8. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 8 Utilitarianism A person must choose the action or follow the rule that provides the greatest good to society. –Origins in work of Bentham and Mill. –Standard sometimes misstated as “the greatest good for the greatest number of people.” Critics argue that it is difficult to estimate the “good” that will result from different actions, that it is hard to apply, and it treats morality as an impersonal calculation.

9. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 9 Kantian Ethics A person owes moral duties based on universal rules. Premise that people can use reasoning to reach ethical decisions. People should employ categorical imperative: “Do unto others as you would have them do unto you.” –E.g., keeping a promise to abide by a contract is a moral duty, even if the contract turns out to be detrimental to the obligated party.

10. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 10 Kantian Ethics (continued) Universal rules are based on two important principles: 1. Consistency – all cases are treated alike with no exceptions. 2. Reversibility – the actor must abide by the rule he or she uses to judge the morality of someone else’s conduct.

11. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 11 Kantian Ethics (continued) If one is to make an exception for himself, that exception becomes a universal rule that applies to all others. Critics argue that it is hard to reach a consensus as to what the universal rules should be.

12. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 12 Rawls’s Social Justice Theory A person has a social contract with all others in society to obey moral rules that are necessary for people to live in peace and harmony. –Origins in work of Locke and Rousseau. –Rawls was modern proponent. Fairness is the essence of justice. The least advantaged must receive special assistance to allow them to reach their potential.

13. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 13 Rawls’s Social Justice Theory (continued) –The principles of justice should be chosen by persons who do not yet know their station in society. –This veil of ignorance would permit the fairest possible principles to be selected. E.g., the principle of equal opportunity in employment would be promulgated by people who would not yet know if they were in a favored class.

14. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 14 Rawls’s Social Justice Theory (continued) 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.

15. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 15 Ethical Relativism A person must decide what is ethical based on his or her own feelings as to what is right or wrong. 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.

16. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 16 Ethical Relativism (continued) Critics argue that actions widely regarded as unethical (e.g., fraud), seen as ethical under this theory, depending on perpetrator’s viewpoint. Few philosophers advocate ethical relativism as an acceptable moral theory.

17. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 17 Summary of Theories 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.

18. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 18 Summary of Theories (continued) 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.

19. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 19 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. –“Bottom line” impact. Such decisions may cause negative externalities for others. Corporations owe some degree of social responsibility.

20. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 20 Theories of Social Responsibility Maximizing Profits Moral Minimum Stakeholder Interest Corporate Citizenship

21. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 21 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…”

22. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 22 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.

23. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 23 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.

24. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 24 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.

25. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 25 Other Stakeholders of a Business Customers EmployeesSuppliers Local Community Creditors

26. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 26 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.

27. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 27 Corporate Citizenship (continued) 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.

28. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 28 Summary of Theories 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.

29. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 29 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.

30. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 30 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.