Making Ethical Decisions and Managing a Socially Responsible Business Chapter 2 Making Ethical Decisions and Managing a Socially Responsible Business Making Ethical Decisions and Managing a Socially Responsible Business CHAPTER 2 © Workbook Stock / Jupiterimages Chapter 2 focuses on ethical and socially responsible decision making in businesses, and the responsibilities businesses have to their stakeholders. The Future of Business The Essentials 4th Edition Gitman & McDaniel Prepared by Deborah Baker Chapter 2 Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved

Learning Goals CHAPTER 2 1 What philosophies and concepts shape personal ethical standards? 2 How can organizations encourage ethical business behavior? 3 What is social responsibility? How do businesses met their social responsibilities to various stakeholders? 5 What are the trends in ethics and social responsibility? CHAPTER 2

Learning Goals Appendix 6 How does the legal system govern business transactions and settle business disputes? 7 What are the required elements of a valid contract; and what are the key types of business law? 8 What are the most common taxes paid by businesses? CHAPTER 2

Understanding Business Ethics 1 What philosophies and concepts shape personal ethical standards? 1

Understanding Business Ethics Chapter 2 Making Ethical Decisions and Managing a Socially Responsible Business ethics A set of moral standards for judging whether something is right or wrong. Every day, managers and business owners make business decisions based on what they believe to be right and wrong. Through their actions, they demonstrate to their employees what is and is not acceptable behavior and shape the moral standard of the organization. Ethics is a set of moral standards for judging whether something is right or wrong. 1

Factors Influencing Business Ethics Chapter 2 Making Ethical Decisions and Managing a Socially Responsible Business Individual Rights Deontology Utilitarianism Justice Individual business ethics are shaped by personal choices and the environments in which we live and work. In addition, the laws of our society are guideposts for choosing between right and wrong. Justice influences individual business ethics. Justice is what is considered fair according to the prevailing standards of society. One of the philosophies that may influence choices between right and wrong is utilitarianism, which focuses on the consequences of an action taken by a person or organization. The notion that “people should act so as to generate the greatest good for the greatest number” is derived from utilitarianism. However, when an action affects the majority adversely, it is morally wrong. Problems of utilitarianism: It is impossible to predict how a decision will affect a large number It always involves winners and losers Some “costs” are so negative that some segments of society find them unacceptable The philosophy that says people should meet their obligations and duties when analyzing an ethical dilemma is called deontology. This means that a person will follow his/her obligations because upholding one’s duty is what is considered ethically correct. Individuals and groups have certain rights that exist under certain conditions regardless of any external circumstances. These rights serve as guides when making individual ethical decisions. Legal rights include: freedom of religion, speech and assembly Protection from improper arrest, searches and seizures Proper access to counsel, confrontation of witnesses Cross-examination in criminal prosecutions Right to privacy in many matters Rights applied without regard to race, color, creed, gender, or ability 1

Factors Influencing Business Ethics deontology The philosophy that says people should meet their obligations and duties when analyzing an ethical dilemma. 1

CONCEPT check 1 How are individuals’ business ethics formed? What is utilitarianism? How can you recognize unethical activities? 1

How Organizations Influence Ethical Conduct 2 How can organizations encourage ethical business behavior? 2

How Organizations Influence Ethical Conduct Chapter 2 Making Ethical Decisions and Managing a Socially Responsible Business How Organizations Influence Ethical Conduct Lead by example Offer ethics training programs Establish a formal code of ethics Conduct informal and formal programs Poor business ethics can create a negative image for a company, can be expensive, and can result in bankruptcy and jail time for offenders. Organizations can reduce the potential for these types of liability claims by educating their employees about ethical standards, by leading through example, and through various informal and formal programs. 2

Establishing a Formal Code of Ethics Chapter 2 Making Ethical Decisions and Managing a Socially Responsible Business Establishing a Formal Code of Ethics code of ethics A set of guidelines prepared by a firm to provide its employees with the knowledge of what the firm expects in terms of their responsibilities and behavior toward fellow employees, customers, and suppliers. A code of ethics is a set of guidelines that provides employees with the knowledge of what the firm expects in terms of their responsibilities and behavior toward fellow employees, customers, and suppliers. Many people believe that codes of ethics make employees behave in a more ethical manner. Others feel that they are public relations gimmicks. 2

Top Best Corporate Citizens Chapter 2 Making Ethical Decisions and Managing a Socially Responsible Business Green Mountain Coffee Roasters, Inc. Advanced Micro Devices, Inc. NIKE, Inc. Motorola, Inc. Intel Corporation International Business Machines Corporation Agilent Technologies, Inc, Timberland Company (The) Starbucks Corporation General Mills Incorporated The top corporate citizens in 2007, according to Business Ethics magazine, are listed on this slide. Cummins is one of 19 companies named every year since the list was created in 2000. 2 Business Ethics Magazine 2007

CONCEPT check What is the role of top management in organizational ethics? What is a code of ethics? 2

Managing a Socially Responsible Business 3 What is social responsibility? 3

Managing a Socially Responsible Business Chapter 2 Making Ethical Decisions and Managing a Socially Responsible Business Managing a Socially Responsible Business social responsibility The concern of businesses for the welfare of society as a whole. It consists of obligations beyond those required by law or contracts. Social responsibility is the concern of businesses for the welfare of society as a whole. It consists of obligations beyond those required by law or union contract. This definition makes two important points: First social responsibility is voluntary. Second, the obligations of social responsibility are broad. Social responsibility is voluntary Obligations of social responsibility are broad 3

Social Responsibility Chapter 2 Making Ethical Decisions and Managing a Socially Responsible Business Ethical Legal Economic Philanthropic Economic performance is the foundation for the other three social responsibilities. At the same time that a business pursues profits (economic responsibility), it is expected to obey the law (legal responsibility), to do what is right, just and fair (ethical responsibility), and to be a good corporate citizen (philanthropic responsibility). If the company does not make a profit, then the other three responsibilities are moot. 3 Exhibit 2.3

Social Responsibility Chapter 2 Making Ethical Decisions and Managing a Socially Responsible Business Social Responsibility Illegal and Irresponsible Behavior Irresponsible but Legal Behavior Legal and Responsible Behavior Using these two dimensions, three behaviors are described: Legal and responsible behavior: Most business activities fall into this category. Consumers are likely to buy brands that have excellent track records and community involvement. Irresponsible but legal behavior: Companies may act responsibly, but act legally. For example, a company that finances cars to customers with credit problems may fit this category. Illegal and irresponsible behavior: Even though it is difficult to conceive of a company that acts in illegal and irresponsible ways, the actions of companies such as Enron, WorldCom, and Tyco fall into this category. Federal, state, and local laws determine the legality of activities. 3

CONCEPT check 3 What are the four components of social responsibility? Give an example of legal but irresponsible behavior. 3

Responsibilities to Stakeholders 4 How do businesses met their social responsibilities to various stakeholders? 4

Stakeholders 4 stakeholders Employees Chapter 2 Making Ethical Decisions and Managing a Socially Responsible Business stakeholders Individuals or groups to whom a business has a responsibility. Investors General Public Customers Employees Stakeholders are the individuals or groups to whom a business has a responsibility. The stakeholders of a business are its employees, its customers, the general public, and its investors. An organization’s first responsibility is to provide a job to employees. Enron is an example of a company that violated this responsibility. A company must also satisfy its customers, deliver what it promises, and be honest and forthright. A business is responsible to society by providing jobs, goods, and services, and by paying taxes that support schools, hospitals, and better roads. Other societal responsibilities include protecting and improving the world’s environment, as well as corporate philanthropy. Although a company's economic responsibility to make a profit might seem its main obligation to its shareholders, many investors are putting more emphasis on other aspects of social responsibility. Investors are limiting their investments to securities that fit within their beliefs about ethical and social responsibility. This is called social investing. 4

America’s Top Ten Best Places to Work Chapter 2 Making Ethical Decisions and Managing a Socially Responsible Business Google Quicken Loans Wegmans Food Markets Edward Jones Genentech Cisco Systems Starbucks Qualcomm Goldman Sachs Methodist Hospital System Results from an annual survey by Fortune is shown in Exhibit 2.4. Unusual benefits, such as camping and recreation areas, are offered by some companies. Exhibit 2.4 Source: Robert Levering and Milton Moskowitz, “The 100 Best Companies to Work For,” Fortune (February 4, 2008), p.75. 4

Responsibility to Society corporate philanthropy The practice of charitable giving by corporations; includes contributing cash, donating equipment and products, and supporting the volunteer efforts of company employees. 4

Responsibilities to Investors Chapter 2 Making Ethical Decisions and Managing a Socially Responsible Business Responsibilities to Investors social investing The practice of limiting investments to securities of companies that behave in accordance with the investor’s beliefs about ethical and social responsibility. 4

CONCEPT check How do businesses carry out their social responsibilities to consumers? What is corporate philanthropy? Is a company’s only responsibility to its investors to make a profit? Why or why not? 4

Trends in Ethics and Social Responsibility 5 What are the trends in ethics and social responsibility? 5

Trends in Ethics and Social Responsibility Chapter 2 Making Ethical Decisions and Managing a Socially Responsible Business Corporate philanthropy New social contract between employers and employees Growth of global ethics and social responsibility Today, the focus of corporate philanthropy is shifting to strategic giving, which ties philanthropy more closely to the corporate mission or goals and targets donations to regions where a company operates. One of the biggest events in corporate philanthropy is Warren Buffett’s gift of more than $30 billion to the Bill and Melinda Gates Foundation. Bill Gates' focus is “creative capitalism.” Companies will be encouraged to design products and establish businesses that help the poor while generating business profits. Another trend in social responsibility is the effort by organizations to redefine their relationship with their employees. Now, companies are telling employees that they also have a responsibility when it comes to job security. The new social contract goes like this: “There will never be job security. You will be employed by us as long as you add value to the organization, and you are continuously responsible for finding ways to add value. In return, you have the right to demand interesting and important work, the freedom and resources to perform it well, pay that reflects your contribution, and the experience and training needed to be employable here or elsewhere.” When American businesses expand into global markets, they must take their corporate code of ethics and social responsibility with them. © Digital Vision / Getty Images 5

Changes in Corporate Philanthropy strategic giving The practice of tying philanthropy closely to the corporate mission or goals and targeting donations to regions where a company operates. 5

Changes in Corporate Philanthropy Chapter 2 Making Ethical Decisions and Managing a Socially Responsible Business Changes in Corporate Philanthropy cause-related marketing The cooperative efforts of a “for-profit” firm and a “nonprofit organization” for mutual benefit. Used as any marketing effort for social or other charitable causes. Cause-related marketing is a subset of social responsibility. It is the cooperative efforts of “for profit” firms and “nonprofit organizations” for mutual benefit. It is not based on a straight donation. Some of the benefits include creating good public relations and brand sales for the firm. 5

Global Ethics and Social Responsibility Chapter 2 Making Ethical Decisions and Managing a Socially Responsible Business Responsibilities of a Multinational Corporation Respect local practices and customs Ensure harmony between staff and host population Provide management leadership Develop local managers who will be a credit to the community Commit to a long-term relationship by involving stakeholders Implement ethical guidelines within the organization in the host country Balance conflicting interests, such as human rights The world is increasingly becoming a global community. Multinational corporations have several responsibilities, as listed on this slide. 5

CONCEPT check 5 Describe strategic giving. What role do employees have in improving their job security? How do multinational corporations demonstrate social responsibility in a foreign country? 5

Appendix: Understanding the Legal and Tax Environment Chapter 2 Making Ethical Decisions and Managing a Socially Responsible Business Appendix: Understanding the Legal and Tax Environment 6 How does the legal system govern business transactions and settle business disputes? The legal system affects everyone who lives and does business in the United States. The purpose of the law is to keep the system stable while allowing orderly change. In addition to banning, regulating, or allowing certain practices, it also helps settle disputes. 6

The Legal System laws The rules governing a society’s conduct that are created and enforced by a controlling authority, usually the government. 6

Business Law 6 business law The body of law that governs commercial dealings. 6

Business Law 6 Uniform Commercial Code (UCC) Chapter 2 Making Ethical Decisions and Managing a Socially Responsible Business Uniform Commercial Code (UCC) A model set of rules that apply to commercial transactions between businesses and between businesses and individuals. It covers the sale of goods, bank deposits and collections, letters of credit, documents of title, and investment securities. The UCC is adopted by all states except Louisiana, which uses only part of it. It simplifies the process of doing business across state lines. 6

Federal and State Courts The Court System Chapter 2 Making Ethical Decisions and Managing a Socially Responsible Business Nonjudicial methods Arbitration Mediation Federal and State Courts Trial courts Appellate courts Supreme Court The judiciary is the branch of government that is responsible for settling disputes by applying and interpreting points of law. It consists of the court system. The U.S. court system includes both state and federal courts, each organized into three levels. Most court cases start in trial courts. Appellate courts are the courts of appeals for decisions made by the trial courts. No cases start in appellate courts, which review decisions of the lower courts. The Supreme Court is the highest court in the nation, and is the only court established by the U.S. Constitution. Its main function is to review decisions by the U.S. circuit courts of appeals. Settling disputes in court is expensive and time consuming. Many organizations now use nonjudicial methods as alternatives to litigation. Nonjudicial methods of settling disputes include arbitration and mediation. With arbitration, parties agree to present their case to an impartial third party and are required to accept the arbitrator’s decision. Mediation is similar, but the parties are not bound by the mediator’s decision. 6

Nonjudicial Methods 6 arbitration mediation A method of settling disputes in which the parties agree to present their case to an impartial third party and are required to accept the arbitrator’s decision. mediation A method of settling disputes in which the parties submit their case to an impartial third party but are not required to accept the mediator’s decision. 6

Appendix: Contracts and Business Law Chapter 2 Making Ethical Decisions and Managing a Socially Responsible Business Appendix: Contracts and Business Law 7 What are the required elements of a valid contract; and what are the key types of business law? 7

Contracts 7 express contract implied contract Chapter 2 Making Ethical Decisions and Managing a Socially Responsible Business Contracts express contract Specifies the terms of the agreement in either written or spoken words implied contract Depends on the acts and conduct of the parties to show agreement A contract is an agreement that sets forth the relationship between parties regarding the performance of a specified action. It creates a legal obligation and is enforceable in a court of law. A contract can be an express contract or an implied contract. 7

The Elements of a Contract Chapter 2 Making Ethical Decisions and Managing a Socially Responsible Business Legal form Legal purpose Consideration Capacity Mutual assent Contracts are an important and frequent part of business dealings. The requirements of a value contract include: Mutual assent: voluntary agreement by both parties to the terms of the contract Capacity: legal ability of a party to enter into contracts Consideration: exchange of some legal value or benefit between the parties Legal purpose: absence of illegality Legal form: oral or written form, as required 7

Remedies for Breach of Contract Chapter 2 Making Ethical Decisions and Managing a Socially Responsible Business Payment of Damages Specific Performance Restitution A breach of contract occurs when one party to a contract fails to fulfill the terms of the agreement. The other party has a right to seek a remedy in the courts. The remedies for breach of contract are: payment of damages. Money awarded to the party who was harmed by the breach of contract specific performance of the contract. A court order requiring the breaching party to perform the duties under the terms of the contract restitution. Canceling the contract and returning to the situation that existed before the contract 7

Warranties 7 express warranties implied warranties Specific statements of fact or promises about a product by the seller. implied warranties Guarantees that are imposed on sales transactions by statute or court decision. Neither written nor oral. 7

Patents, Copyrights, and Trademarks Chapter 2 Making Ethical Decisions and Managing a Socially Responsible Business Patents, Copyrights, and Trademarks patent A form of protection established for inventors; gives an inventor the exclusive right to manufacture, use, and sell an invention for 17 years. copyright A form of protection for creators of works of art, music, literature, or intellectual property; gives the creator the exclusive right to use, produce, and sell the creation during the creator’s lifetime and for 50 years thereafter. The U.S. Constitution protects authors, inventors, and creators of intellectual property by giving them the rights to their creative works. Patents, copyrights, and trademark registration are legal protection for key business assets. 7

Patents, Copyrights, and Trademarks Chapter 2 Making Ethical Decisions and Managing a Socially Responsible Business Patents, Copyrights, and Trademarks trademark A design, name, or other distinctive mark that a manufacturer uses to identify its goods in the marketplace. servicemark A symbol, name, or design that identifies a service rather than a tangible object. 7

Chapter 2 Making Ethical Decisions and Managing a Socially Responsible Business Tort Law tort law Settles disputes involving civil acts that harm people or their property. Torts include physical injury, mental anguish, and defamation. A tort is a civil or private act that harms other people or their property. Torts are part of common law and are not the result of a breach of contract. Examples include medical malpractice, slander, libel, product liability, and fraud. Although torts are generally not a crime, some acts can be both torts and crimes. 7

Other Laws 7 Product liability law Bankruptcy law Chapter 2 Making Ethical Decisions and Managing a Socially Responsible Business Other Laws Product liability law Bankruptcy law Fair competition laws Consumer protection laws Deregulation of industries Regulation of the Internet Product liability refers to manufacturers’ and sellers’ responsibility for defects in products they make and sell. It combines aspects of contracts, warranties, torts, and statutory law. Bankruptcy is the legal procedure that relieves debts if individuals and businesses cannot meet their financial obligations. Two types are Chapter 7 (liquidation) and Chapter 11 (reorganization). Fair competition laws include antitrust regulation. The first act was the Sherman Antitrust Act, which prevented large companies from dominating an industry. The Clayton Act added specific provisions, as shown on the following slide. Consumer protection laws, which describe sellers and buyers rights and powers, are described beginning on Slide 53. Deregulation removes rules and regulations governing business competition. Widely used during the 1980s and 1990s, it has drastically changed transportation, telecommunications, and financial services industries. Piracy of music and illegal distribution of copyright-protected products through the Internet are concerns of government. 7

Appendix: Taxation of Business 8 What are the most common taxes paid by businesses? 8

Common Taxes 8 Income Taxes Property Taxes Payroll Taxes Sales Taxes Chapter 2 Making Ethical Decisions and Managing a Socially Responsible Business Excise Taxes Sales Taxes Payroll Taxes Property Taxes Income Taxes The federal government is the largest collector of taxes. The average American family pays about 37 percent of its income for taxes. 8