Stakeholders, Ethics, and Corporate Social Responsibility 4 Chapter Stakeholders, Ethics, and Corporate Social Responsibility McGraw-Hill/Irwin Principles of Management © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.

Learning Objectives Identify stakeholders in an organization. Describe the most common types of ethical issues managers confront. Explain how managers can incorporate ethical factors into their decision making. Outline the main segments for and against corporate social responsibility. Explain what managers can do to behave in a socially responsible manner.

Stakeholders Government General public Employees Customers Distributors The Firm Creditors Suppliers See Learning Objective 1: Identify stakeholders in an organization. See text page: 82 Shareholders Local communities

Evaluating Stakeholders Claims Identify stakeholders interests and concerns Identify claims stakeholders place on the organization Identify Stakeholders Take actions, starting with those that address the claims of the most important stakeholders See Learning Objective 1: Identify stakeholders in an organization. See text page: 84 Weight stakeholders by their importance to the firm Identify actions to satisfy claims of various stakeholders

Question Identify and evaluate the stakeholder claims for your university. See Learning Objective 1: Identify stakeholders in an organization. See text page: 84 Question This should be an interesting exercise for the students. They should be able to see the bigger picture with regards to all the parties that have stakes in a university other than students, faculty, and the administrators.

Business Ethics Accepted principles of right or wrong governing the conduct of businesspeople. Principles of right and wrong are codified into laws Tort law Contract law Intellectual property law Antitrust law Securities law Many actions, although legal, may not seem ethical See Learning Objective 2: Describe the most common types of ethical issues managers confront. See text page: 86

Are We Ethical? 27 % 24 % See Learning Objective 2: Describe the most common types of ethical issues managers confront. Are we Ethical? This slide presents a survey of 740 respondents to simple questions or issues we deal with everyday. What we read about in newspapers are really big issue but do we act ethically in our everyday lives? The responses indicate yes to these questions. Less than 25% of all respondents indicated no to all questions. Ask the students – how often do they use “little white lies”? Eventually, they build up. Source: Fast Company, May 2005 35 % Source: Fast Company, May 2005

Ethics in Management Most issues arise due to potential conflict between the goals and the rights of stakeholders. Stakeholders have basic rights that should be respected, and it is unethical to violate those rights. See Learning Objective 2: Describe the most common types of ethical issues managers confront. See text page: 86

Ethical Rights of Stakeholders Shareholders – right to timely and accurate information about their investments Customers – right to be fully informed about the products and services they purchase Employees – right to safe working conditions, fair compensation, and to be treated in a just manner See Learning Objective 2: Describe the most common types of ethical issues managers confront. See text page: 86

Ethical Rights of Stakeholders (cont) Suppliers – right to expect contracts to be respected Competitors – right to expect that a firm will abide by the rules of competition and not violate antitrust laws Communities – right to expect companies will not violate the basic expectations of society See Learning Objective 2: Describe the most common types of ethical issues managers confront. See text page: 86

Corporate Wrongdoers Martha Stewart – served five-months sentence for lying to government investigators about a suspicious stock sale. Her company’s sales sunk. Tyco International CEO, Dennis Kozlowski – became a poster boy for excess with $2 million birthday party. Charges – Stealing $600 million form the company and the shareholders Former CEO of Enron, Bernard Ebbers – Charges: conspiracy, securities fraud, making false regulatory filings, ring leader in an $11 billion accounting fraud See Learning Objective 2: Describe the most common types of ethical issues managers confront. Corporate Wrongdoers This slide presents three of the most prominent scandal examples in corporate America in the recent history. Ask the students – Which stakeholders were duped and suffered in each of these examples? Just about every stakeholder in some way has lost and suffered. Ask the students – What other similar examples have they heard or read about? (Other corporate examples are Ken Lay at Enron, Richard Scrushy at Healthsouth, and Frank Quattrone at Credit Suisse First Boston.) Source: Business Week, January 10, 2005 Source: Business Week, January 10, 2005

Ethical Issues of Managers Self-dealing Information manipulation Anticompetitive behavior Opportunistic Exploitation Substandard working conditions Environmental degradation Corruption See Learning Objective 2: Describe the most common types of ethical issues managers confront. See text pages: 87-89

Examples of Self-dealing Senior managers who treat corporate funds as their own personal treasury Senior managers who use their control over the compensation committee of the board of directors to award themselves multimillion-dollar pay increases or stock option grants that are out of promotion with their contribution to the corporation Instances where individual managers award business contracts not to the most efficient supplier but to the one that provides the largest kickback See Learning Objective 2: Describe the most common types of ethical issues managers confront. See text page: 87

Self Dealings Lacrad International sold gospel music and religious sermons on CDs. The owner Rodney Dixon admitted to a judge that most of his business was a lie. The company’s revenue never exceeded $100,000 per year, however, he told lenders that revenues were in millions to get a $2.25 million loan for a corporate jet. Former Tyco International’s CEO Dennis Koslowski became a poster boy for excess with stories of his $2 million birthday party and $6,000 shower curtain during his last trial. See Learning Objective 2: Describe the most common types of ethical issues managers confront. Self Dealings This slide presents examples of self dealings. Ask the students – Which stakeholders were duped and suffered in each of these examples? Just about every stakeholder in some way has lost and suffered. Ask the students – What other similar examples have they heard or read about? Source: Fast Company, May 2005; Business Week, January 10, 2005 Source: Fast Company, May 2005; Business Week, January 10, 2005

Corruption The Foreign Corrupt Practices Act was enacted in 1977. What is considered gift in one country can be a bribe in another. Only 34 cases have gone to trial since the law was enacted. Most are settled out of court with fines and penalties. InVision Technologies allegedly bribed crooked officials in China, the Philippines, and Thailand. See Learning Objective 2: Describe the most common types of ethical issues managers confront. Corruption This slide presents example of corruption and bribery. InVision Technologies, makers of security scanning technologies, allegedly bribed crooked officials in China, the Philippines, and Thailand to help sell the company’s bomb sniffing machines. The company cooperated with the federal authorities and paid $1.9 million in fines. InVision was bought out by GE for about $900 million. Ask the students – What other similar examples have they heard or read about? (IBM, Lucent, Accenture, and Xerox have also disclosed potential violations of this law.) Source: San Jose Mercury News, March 13, 2005 Source: San Jose Mercury News, March 13, 2005

Roots of Unethical Behavior Employees with poor personal ethics Immoral leadership Unethical behavior See Learning Objective 2: Describe the most common types of ethical issues managers confront. See text pages: 90 Unrealistic performance goals Unethical organization culture Failure to consider ethical issues

Philosophical Approaches to Ethics (1) Utilitarian approach – the view that the moral worth of actions or practices is determined by their consequences An action is judged to be desirable if it leads to the best possible balance of good over bad consequences Committed to maximization of good, and the minimization of harm The best decisions are those that produce the greatest good for the greatest number of people See Learning Objective 2: Describe the most common types of ethical issues managers confront. See text pages: 92-93

Philosophical Approaches to Ethics (2) Rights theory – the view that human beings have fundamental rights and privileges Something that takes precedence over, or ‘trumps’ a collective good For example, since we have the right to free speech, we are also obligated to make sure we respect the free speech of others Certain people or institutions are obligated to provide benefits or services that secure the rights of others See Learning Objective 2: Describe the most common types of ethical issues managers confront. See text pages: 92-93

Philosophical Approaches to Ethics (3) Justice theories – theories that focus on attaining a just distribution of economic goods and services A just distribution is one that is considered fair and equitable All economic goods and services should be distributed equally except when an unequal distribution would work to everyone’s advantage Veil of ignorance – everyone is imagined to be ignorant of all his or her particular characteristics See Learning Objective 2: Describe the most common types of ethical issues managers confront. See text pages: 92-93

Question Jerry Jamesway, CEO, Jamesway International, believes that the best decisions are those that produce the greatest good for the greatest number of people. Jerry prescribes to which of these approaches to ethics? Opportunistic exploitation Rights theories Utilitarian Justice theories See Learning Objective 2: Describe the most common types of ethical issues managers confront. See text pages: 92-93 Answer: C

Behaving Ethically What managers can do to make sure that ethical issues are considered: Establish an ethics officer Have leaders promote ethical behavior Develop strong governance processes Promote moral courage Consider ethical aspects of business decisions Promote an ethical organization culture Hire and promote ethical individuals See Learning Objective 3: Explain how managers can incorporate ethical factors into their decision making. See text pages: 94

Ethical Decisions It is considered ethical when a businessperson can answer YES to each of the following questions: Does my decision fall within the accepted values or standards that typically apply in the organizational environment? Am I willing to see the decision communicated to all stakeholders affected by it? Would the people with whom I have significant personal relationship approve of the decision? See Learning Objective 3: Explain how managers can incorporate ethical factors into their decision making. See text pages: 96

Not all ethical dilemmas have a clean and obvious solution Uncertainty Not all ethical dilemmas have a clean and obvious solution In these cases a premium is placed on the ability of managers to make sense out of complex messy situations and make balanced decisions that are as just as possible. See Learning Objective 4: Outline the main segments for and against corporate social responsibility. See text page: 97

Social Responsibility A sense of obligation on the part of managers to build certain social criteria into their decision making. When managers evaluate decisions, there should be a presumption in favor of adopting courses of action that enhance the welfare of society at large. See Learning Objective 4: Outline the main segments for and against corporate social responsibility. See text page: 97

Giving Back Mark Benioff, CEO, Salesforce.com 1% of equity into public charity 1% of time (4 hours per month) per employee to paid volunteerism 1% of profits to nonprofit organizations See Learning Objective 4: Outline the main segments for and against corporate social responsibility. Giving Back This slide presents an example of giving back by the CEO of Salesforce.com. It also illustrates the point that ethical behavior and social responsibility starts at the top. Ask the students – how many of them volunteer? Why do they do it? Do they give time only or money as well? Source: Newsweek, April 18, 2005

Arguments for SR Right way for a business to behave Need to give back to the society that helped make their company It can lead to better financial performance Ignoring this may generate ill will and opposition See Learning Objective 4: Outline the main segments for and against corporate social responsibility. See text page: 98

Global Labor Monitoring Nike, Patagonia, Gap and Five other companies have joined forces with six leading anti-sweatshop groups to devise a single set of labor standard with a common factory inspection system. Goal – To replace today’s overlapping hodgepodge of approaches with something that’s easier and cheaper to use See Learning Objective 4: Outline the main segments for and against corporate social responsibility. Global Labor Monitoring This slide presents an effort by organizations to right the wrong. Nike has been the poster company for a while for using sweatshops. Ask the students – Is it okay for a company to abuse the system and then come forward to do the right thing? (Everybody deserves a chance and if the step is in the right direction, it should be welcomed.) Source: Business Week, May 23, 2005

The Friedman Doctrine Rejects the idea that businesses should undertake social expenditures beyond those mandated by law The firm should maximize its profits If shareholders want to use proceeds for social investments that should be there choice; managers should not make that decision for them See Learning Objective 5: Explain what managers can do to behave in a socially responsible manner. See text page: 99