CHAPTER 9 ETHICS, CORPORATE SOCIAL RESPONSIBILITY, ENVIRONMENTAL SUSTAINABILITY, AND STRATEGY (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

THIS CHAPTER WILL HELP YOU UNDERSTAND: LO 1 How the standards of ethical behavior in business are no different from the ethical standards and norms of the larger society and culture in which a company operates. LO 2 What drives unethical business strategies and behavior. LO 3 The costs of business ethics failures. LO 4 The concepts of corporate social responsibility and environmental sustainability and how companies balance these duties with economic responsibilities to shareholders. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

WHAT DO WE MEAN BY BUSINESS ETHICS? Is the application of general ethical principles to the actions and decisions of businesses and the conduct of their personnel. Are not materially different from ethical principles in general because business actions have to be judged in the context of society’s standards of right and wrong. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Ethics concerns principles of right or wrong conduct. Business ethics deals with the application of general ethical principles to the actions and decisions of businesses and the conduct of their personnel. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

WHERE DO ETHICAL STANDARDS COME FROM—ARE THEY UNIVERSAL OR DEPENDENT ON LOCAL NORMS? Sources for Ethical Standards The School of Ethical Universalism The School of Ethical Relativism Integrated Social Contracts Theory (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

THE SCHOOL OF ETHICAL UNIVERSALISM Holds that common understandings across multiple cultures and countries about what constitutes right and wrong give rise to universal ethical standards that apply to all societies, all firms, and all businesspeople. Effect on Business Ethics Whether a business-related action is right or wrong is judged by universal standards. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

The school of ethical universalism holds that the most fundamental conceptions of right and wrong are universal and apply to members of all societies, all companies, and all businesspeople. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

THE SCHOOL OF ETHICAL RELATIVISM Holds that differing beliefs, customs, and behavioral norms across countries and cultures give rise to multiple sets of standards of what is ethically right or wrong. Effect on Business Ethics Whether business-related actions are right or wrong depends on local ethical standards. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

The school of ethical relativism holds that differing religious beliefs, customs, and behavioral norms across countries and cultures give rise to multiple sets of standards concerning what is ethically right or wrong. These differing standards mean that whether business-related actions are right or wrong depends on the prevailing local ethical standards. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Under ethical relativism, there can be no one-size-fits-all set of authentic ethical norms against which to gauge the conduct of company personnel. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

EXAMPLES OF ETHICAL RELATIVISM ISSUES The use of underage labor The payment of bribes and kickbacks Relativism equates to multiple sets of standards The use of local morality to guide ethical behavior Variations in Ethical Standards (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

IKEA’s Global Supplier Standards: Maintaining Low Costs While Fighting the Root Causes of Child Labor How effective has IKEA’s IWAY proactive approach to setting global labor standards been in reducing abuses of child workers at its supplier facilities? Is it fair for IKEA to prescribe that its suppliers comply with global standards that are at variance with local market labor practices and conditions? What has IKEA done to help its suppliers overcome the problems that foster the use of child labor? (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Codes of conduct based on ethical relativism can be ethically dangerous for multinational companies by creating a maze of conflicting ethical standards. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

According to integrated social contracts theory, universal ethical principles based on the collective views of multiple societies form a “social contract” that all individuals and organizations have a duty to observe in all situations. Within the boundaries of this social contract, local cultures or groups can specify what additional actions may or may not be ethically permissible. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

According to integrated social contracts theory, adherence to universal or “first-order” ethical norms should always take precedence over local or “second-order” norms. In instances involving universally applicable ethical norms (like paying bribes), there can be no compromise on what is ethically permissible and what is not. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

INTEGRATIVE SOCIAL CONTRACTS THEORY Provides a middle-ground balance between universalism and relativism. Posits that the collective views of multiple societies form universal (first order) ethical principles that all persons have a contractual duty to observe in all situations. Within the contract, cultures or groups can specify locally ethical (second-order) actions. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Effects on Ethical Standards: APPLICATION OF INTEGRATED SOCIAL CONTRACTS THEORY TO MULTINATIONAL BUSINESS Effects on Ethical Standards: Adherence to universal ethical norms takes precedence over local norms. A local custom is not ethical if it violates universal ethical norms. Application of codes of ethics should first follow universal standards with allowance for local ethical diversity and influence. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

In instances involving universally applicable ethical norms (like paying bribes), there can be no compromise on what is ethically permissible and what is not. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

The Ethics Code Litmus Test: HOW AND WHY ETHICAL STANDARDS IMPACT THE TASKS OF CRAFTING AND EXECUTING STRATEGY The Ethics Code Litmus Test: Areas of ambiguity: Is what we are proposing to do fully compliant with our code of ethics? Conflict or potential problem: Is this action in harmony with our core values? Ethically objectionable action: Will our stakeholders, our competitors, the SEC under the Sarbanes-Oxley Act, or the news and social media view this action as ethically objectionable? (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

CONSEQUENCES OF ETHICALLY QUESTIONABLE STRATEGIES Sizable civil fines and stockholder lawsuits Devastating image and public relations hits Sharp stock price drops as investors lose confidence Criminal indictments and convictions When Strategies Fail the Ethical Litmus Test (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

DRIVERS OF UNETHICAL STRATEGIES AND BUSINESS BEHAVIOR Faulty Oversight and Self Dealing Unethical Strategies and Business Behaviors Pressure for Short-term Performance A Weak or Corrupt Ethical Environment (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

WHAT ARE THE DRIVERS OF UNETHICAL STRATEGIES AND BUSINESS BEHAVIOR? Drivers of Unethical Business Behavior: Faulty internal oversight allows self-dealing in the pursuit of personal gain, wealth, and self- interest. Short-termism pressure to meet or beat short- term performance targets. A culture that puts profitability and business performance ahead of ethical behavior. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Self-dealing occurs when managers take advantage of their position to further their own private interests rather than those of the firm. Short-termism is the tendency for managers to focus excessively on short-term performance objectives at the expense of longer-term strategic objectives. It has negative implications for the likelihood of ethical lapses as well as company performance in the longer run. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

How Novo Nordisk Puts Its Ethical Principles into Practice What steps has Novo Nordisk taken to ensure that its ethical standards of employee conduct are put into practice? Why has Novo Nordisk been so successful instilling a culture of ethical conduct in its organization when other firms have not? What has been the effect of Novo Nordisk’s dedication to ethical business practices on its success in the marketplace? (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

WHY SHOULD COMPANY STRATEGIES BE ETHICAL? The Moral Case for an Ethical Strategy: A strategy that is unethical is morally wrong and reflects badly on the character of the firm’s personnel. The Business Case for Ethical Strategies: An ethical strategy can be both good business and serve the self-interest of shareholders. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Conducting business in an ethical fashion is not only morally right—it is in a company’s enlightened self-interest. Shareholders suffer major damage when a company’s unethical behavior is discovered. Making amends for unethical business conduct is costly, and it takes years to rehabilitate a tarnished company reputation. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

The Costs Companies Incur When Ethical Wrongdoing Is Discovered FIGURE 9.1 The Costs Companies Incur When Ethical Wrongdoing Is Discovered (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Corporate Social Responsibility (CSR) STRATEGY, CORPORATE SOCIAL RESPONSIBILITY, AND EVIRONMENTAL SUSTAINABILITY Corporate Social Responsibility (CSR) Is a firm’s duty to operate in an honorable manner, provide good working conditions for employees, encourage workforce diversity, be a good steward of the environment, and actively work to better the quality of life in the local communities where it operates and in society at large. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Corporate social responsibility (CSR) refers to a company’s duty to operate in an honorable manner, provide good working conditions for employees, encourage workforce diversity, be a good steward of the environment, and actively work to better the quality of life in the local communities where it operates and in society at large. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

The Five Components of a Corporate Social Responsibility Strategy FIGURE 9.2 The Five Components of a Corporate Social Responsibility Strategy (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Burt’s Bees: A Strategy Based on Corporate Social Responsibility How has Burt’s Bees skillful use of corporate social responsibility (CSR) as a strategic tool contributed to its success in the marketplace? Given that many customers now purchase personal care products online, how do they determine that firms such as Burt’s Bees really are practicing CSR? Why was there a customer backlash to The Clorox Company’s Burt’s Bees acquisition? (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

A company’s CSR strategy is defined by the specific combination of socially beneficial activities the company opts to support with its contributions of time, money, and other resources. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Profit People Planet FIGURE 9.3 The Triple Bottom Line: Excelling on Three Measures of Company Performance Profit People Planet (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

TOMS’s Well-Balanced Triple Bottom Line What unique marketing factors are driving the sales growth of TOMS? How does TOMS use its environmental sustainability approach to set it apart from its competitors? How much of TOMS’s success is due to its focus on catering to a market niche of loyal lifestyle consumers? Does TOMS’ environmental sustainability strategy limit its expansion into other footwear market segments? (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

(c) 2016 by McGraw-Hill Education (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

WHAT DO WE MEAN BY SUSTAINABILITY AND SUSTAINABLE BUSINESS PRACTICES? Is the relationship of a firm to its environment and its use of natural resources. Sustainable Business Practices Are those practices of a firm that meet the needs of the present without compromising the ability to meet the needs of the future. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Sustainable business practices are those that meet the needs of the present without compromising the ability to meet the needs of the future. An environmental sustainability strategy consists of a firm’s deliberate actions to protect the environment, provide for the longevity of natural resources, maintain ecological support systems for future generations, and guard against the ultimate endangerment of the planet. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

SUSTAINABILITY AND SUSTAINABLE BUSINESS PRACTICES Environmental Sustainability Strategy Consists of the firm’s deliberate actions to: Protect the environment. Provide for the longevity of natural resources. Maintain ecological support systems for future generations. Guard against ultimate endangerment of the planet. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

CRAFTING CORPORATE SOCIAL RESPONSIBILITY AND SUSTAINABILITY STRATEGIES Pursuing a Sustainable CSR Strategy in the Firm’s Value Chain Activities Moral Case: Stakeholder Benefits Business Case: Competitive Advantage (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

CSR strategies and environmental sustainability strategies that both provide valuable social benefits and fulfill customer needs in a superior fashion can lead to competitive advantage. Corporate social agendas that address only social issues may help boost a company’s reputation for corporate citizenship but are unlikely to improve its competitive strength in the marketplace. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

THE MORAL CASE FOR CSR AND ENVIRONMENTALLY SUSTAINABLE BUSINESS PRACTICES Operate ethically and legally Provide good work conditions for employees Be a good environmental steward Display good corporate citizenship The Implied Social Contract: “It’s the right thing to do” (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Every action a company takes can be interpreted as a statement of what it stands for. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Increased buyer patronage THE BUSINESS CASE FOR CSR AND ENVIRONMENTALLY SUSTAINABLE BUSINESS PRACTICES Increased buyer patronage Reduced risk of reputation-damaging incidents Lower turnover costs and enhanced employee recruiting and workforce retention Increased revenue enhancement opportunities due to support of CSR and sustainability CSR and sustainability best serve long-term interests of shareholders (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

COMBATING THE EVASION OF CSR AND SOCIALLY HARMFUL BUSINESS PRACTICES Increased public awareness of misdeeds of bad behavior by firms Harmful and Unethical Business Actions and Behaviors Increased legislation and regulation to correct and punish firms Refusal to do business with irresponsible firms (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

The higher the public profile of a company or its brand, the greater the scrutiny of its activities and the higher the potential for it to become a target for pressure group action. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Socially responsible strategies that create value for customers and lower costs can improve company profits and shareholder value at the same time that they address other stakeholder interests. There’s little hard evidence indicating shareholders are disadvantaged in any meaningful way by a company’s actions to be socially responsible. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.