Prentice Hall, Inc. © STRATEGIC MANAGEMENT & BUSINESS POLICY 10 TH EDITION THOMAS L. WHEELEN J. DAVID HUNGER CHAPTER 3 Ethics & Social Responsibility

Prentice Hall, Inc. © Ethics & Social Responsibility

Prentice Hall, Inc. © Social Responsibility Dr. Milton Friedman (1931-) “Business should not assume direct responsibility on both practical and theoretical grounds” “THE BUSINESS OF BUSINESS IS BUSINESS ”

Prentice Hall, Inc. © Social Responsibility Acting from motives other than economic may, in the long run, harm the very society the firm is trying to help. By taking on the burden of these social costs, the business becomes less efficient – either prices go up to pay for the increased costs or investment in new activities and research is postponed. The results negatively affect – perhaps fatally – the long-term efficiency of a business.

Prentice Hall, Inc. © Social Responsibility There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud. Milton Friedman

Prentice Hall, Inc. © Corporate Governance Dr. Keith Davis “Social responsibility goes hand in hand with social power, and since business is the most powerful force in contemporary life, it has the obligation to assume corresponding social responsibility.”

Prentice Hall, Inc. © Corporate Governance Broader responsibility -- Private corporations have responsibility to society that extend beyond making a profit

Prentice Hall, Inc. © Corporate Governance DEGREES OF CORPORATE SOCIAL RESPONSABILITY INVOLVEMENT Social Obligation Approach : Meet only legal obligations, Social Responsibility Approach : Meet legal obligations and current social obligations that directly effect business Social Responsiveness Approach : Meet legal obligations and anticipated social obligations related to emerging trends/problems even if only indirectly affect business

Prentice Hall, Inc. © Carroll’s 4 Responsibilities … in order of priority …

Prentice Hall, Inc. © Carroll’s 4 Responsibilities Both Friedman and Carroll consider socially responsible actions on firm’s profits: -For Friedman socially responsible actions hurts firms profitability -For Carroll lack of it will cause increased government intervention, which in turn reduce firm’s efficacy

Prentice Hall, Inc. © Corporate Governance Porter & Kramer “Social and economic goals are not inherently conflicting, but integrally connected.” Being known as a socially responsible firm may provide a company with social capital, the goodwill of key stockholders, that can used for competitive advantage.

Prentice Hall, Inc. © Corporate Governance Porter & Kramer -Environmental concerns may make consumers pay high prices and confirm brand loyalty. -Trustworthiness may help the firm generate enduring relationships with suppliers and distributors. -Firm may attract good employees. -They can utilize the goodwill of public officials for support in difficult times. -They are more likely to attract capital infusions from investors.

Prentice Hall, Inc. © Corporate Governance Carroll’s 4 Responsibilities –Economic Economic responsibilities of a business are to produce goods services of value to society –Legal Legal responsibilities are defined by governments in laws that management is expected to obey –Ethical Ethical responsibilities of a business are to follow the generally held beliefs about behavior in society –Discretionary Purely voluntary obligations. (Philanthropic, etc)

Prentice Hall, Inc. © Corporate Stakeholders Affect or are affected by the achievement of the corporation’s objectives

Prentice Hall, Inc. © Organizational Stakeholders

Prentice Hall, Inc. © Corporate Stakeholders Stakeholder Analysis – –Primary stakeholder Sufficient bargaining power to affect outcomes (Customers, Employees, Suppliers, Shareholders, Creditors) –Secondary stakeholder Indirect stake but are affected by corporation’s actions (Governments, NGO’s, Activists, Local communities, trade associations, Competitors) –Stakeholder Input Determine whether input is necessary WHAT SEEMS AT FIRST TO BE THE BEST DECISION BECAUSE IT APPEARS TO BE THE MOST PROFITABLE MAY ACTUALLY RESULT IN THE WORST SET OF CONSEQUENCES TO THE CORPORATION

Prentice Hall, Inc. © Ethical Behavior “business ethics” Business Ethics – principles and standards that determine acceptable conduct in business

Prentice Hall, Inc. © What is Ethical Behavior? Competing Fairly and Honestly CommunicatingTruthfully Not Harming Others

Prentice Hall, Inc. © Ethical Behavior “business ethics” –Argument that there is no such thing … it is an oxymoron

Prentice Hall, Inc. © Reasons for Unethical Behavior 70% of executives representing 111 diverse nations and multinational corporations reported that they bend the rules to attain their objectives. The three most common reasons given were: –Organizational performance required it – 74% –Rules were ambiguous or out of date – 70% –Pressure from others and everyone does it – 47%

Prentice Hall, Inc. © Ethical Decision Making Corporate practices -- –Massive write-downs and restatements of profit –Misclassification of expenses as capital expenditures –Pirating corporate assets for personal gain

Prentice Hall, Inc. © Ethical Decision Making Recent Survey Results -- –70% distrust business executives –Enron –WorldCom (creative to aggressive to fraudulent)

Prentice Hall, Inc. © Reasons for Unethical Behavior Provocative Question -- –Why are businesspeople perceived to be acting unethically?

Prentice Hall, Inc. © Reasons for Unethical Behavior Perceptions caused by -- –Not aware of impropriety –Cultural norms and values vary –Governance systems based on rule or relationships –Differences in values between businesspeople and key stakeholders

Prentice Hall, Inc. © Reasons for Unethical Behavior Allport-Vernon-Lindzey Study of Values -- –Aesthetic –Economic –Political –Religious –Social –Theoretical US and UK executives consistently score highest on economic values and lowest on social values

Prentice Hall, Inc. © Moral Relativism Morality is relative to some personal, social, or cultural standard and there is no method for deciding whether one decision is better than another.

Prentice Hall, Inc. © Kohlberg’s Levels of Moral Development 1. Preconvention level –Characterized by a concern for self Personal interest Avoidance of punishment 2. Conventional level –Characterized consideration of society’s values External code of conduct 3. Principled level –Characterized by adherence to internal moral code Universal values or principles

Prentice Hall, Inc. © Encouraging Ethical Behavior Codes of Ethics –Specifies how an organization expects its employees to behave on the job.

Prentice Hall, Inc. © Encouraging Ethical Behavior Guidelines for Ethical Behavior –Ethics Consensually accepted standards of behavior for an occupation, a trade, or a profession –Morality Precepts of personal behavior based on religious or philosophical grounds –Law Formal codes that permit or forbid certain behaviors

Prentice Hall, Inc. © Encouraging Ethical Behavior Approaches to Ethical Behavior –Utilitarian Judged by consequences (Does it optimize the satisfaction of all stakeholders?) –Individual Rights Fundamental rights in all decisions (Does it respect the rights of the individuals involved?) –Justice Distribution in equitable fashion (Does it consistent with the canons of justice?)

Prentice Hall, Inc. © Encouraging Ethical Behavior Approaches to Ethical Behavior –Categorical imperative (Immanuel Kant) “golden rule” Treat others as you would like them to treat you Means - Ends A person should never treat other human beings as means for advancing his or her own interests

Prentice Hall, Inc. © Strategy Bits Improving Ethical Behavior in Business Ethical decisions in an organizations are influenced by three key factors

Prentice Hall, Inc. © Responsibility Toward Consumers Freedom of Choice Freedom of Choice Right to Be Heard Right to Be Heard Accurate Information Accurate Information Product Safety Product Safety

Prentice Hall, Inc. © Strategy Bits 192 U.S. companies surveyed -- –92% monitored employees use of /Internet –26% monitored employees electronic activities all the time –Almost none had checks in place to protect employees privacy