Chapter Ethics and Social Responsibility

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-2 Overview Why it’s important to behave ethically How ethics and law are related Ranking stakeholder groups your company affects in a given situation McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved.

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-3 Overview Four rules to help you and your company act in ethical ways Four main approaches a company can take to social responsibility McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved.

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-4 The Blind Eye “All that is needed for evil to prosper is that good men do nothing.” Edmund Burke 18 th century British philosopher and statesman

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-5 Doing Wrong While “Good Men do nothing” Stalin:15 million dead Hitler:6 million dead Mao:50 million dead Pol Pot: 5 million dead

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-6 The Nature of Ethics Ethics Values that help people analyze situations and decide the right way to behave Your “moral compass” that always points to true north

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-7 The Nature of Ethics Ethical Dilemma: Deciding to sacrifice you self-interest to help another person

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-8 Dealing with Ethical Issues Like law – most ethics are embedded in national culture, so making an ethical decision often requires knowledge of the current context But a few ethical principles are absolute and indisputable worldwide Relative versus immutable

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4-9 Ethics and the Law 1. Neither ethics nor law are fixed 2. Both slowly evolve. 3. Ethics lead law. 4. Ethics>Law>Regulation

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Ethics and the Law Ethical beliefs lead to the creation of laws and regulations designed to encourage or discourage certain behaviors. Laws can change or disappear as ethical beliefs change.

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Stakeholders and Ethics Stakeholders: People and groups who supply a company’s resources or reason for being and have a claim on those resources: those with a stake in the success or failure of the company: shareholders, customers, communities, employees, suppliers ___________________________

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Stakeholders and Ethics Making an ethical decision, frequently requires you to balance the rights and interests of stakeholder groups You must rank order them based on the context Who’s number one?

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Stakeholders and Ethics When the law does not specify how companies should behave, managers must decide the ethical way to treat people affected by their actions Toyota’s practice -- “Make every decision as if a customer is standing beside you”-- implies a stakeholder hierarchy Many always rank shareholders -- not customers – first among stakeholders

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Stock (share) holders… Want to maximize the return on their investment Want to ensure that managers are behaving ethically and not risking investors’ capital with actions that could hurt the company’s reputation and long-term success But catering to this stakeholder group can develop management with a short-term viewpoint focused on quarterly profit statements >What are the implications? >What kind of management actions may this viewpoint encourage?

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Managers Responsible for using company financial capital and human resources to increase performance Have the right to expect reward for investing their human capital to improve company performance Lurking danger is that managers sometimes focus on self, not company, interests.

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Discussion Question: Managers Is it ethical for top managers to receive vast amounts of money from their companies?

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Employees Companies can act ethically toward employees by fairly and equitably rewarding them (in various ways) for their contributions Assure equality when sacrifice is called for

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Suppliers and Distributors Suppliers Deserve to be paid fairly and promptly to maintain an adequate profit margin Distributors Deserve to receive good, marketable, fairly priced products to maintain an adequate profit margin Example treatment of suppliers by GM, Honda and Toyota

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Customer Most critical stakeholder for corporate success Company must work to increase efficiency, effectiveness and quality in order to attract customers and keep them over time By satisfying customers, you build brand strength, maximizing chance for success and benefiting all stakeholders

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Community, Society, Nation A company contributes to the economy of the communities where it has facilities that employ people, pay wages, pay taxes and help support local non-profits. In return, the communities provide the company the physical infrastructure and social approval that enable it to operate This is the implied social contract

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved The Social Contract Peter Drucker “There are management tools and techniques, concepts and principles, and perhaps even a universal discipline called management…But management also is a culture and a system of values and beliefs…through which society makes productive its own values and beliefs…to serve the common purposes of mankind.”

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Ethical Decision Models Key Questions  How do you measure benefits and harms delivered to each stakeholder group?  How do you evaluate the rights and importance of each group?

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Ethical Decision Models Utilitarian Rule Decision produces the greatest good for the greatest number. Moral Rights Rule Decision best maintains and protects the fundamental or inalienable rights and privileges of the people affected by it. Justice Rule Decision impartially and fairly distributes benefits and harms among people and groups.

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Ethical Decision Models Practical rule (the red-face test) Manager has no hesitation about communicating decision to people outside the company because the typical person would think it is acceptable

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Practical Decision Model 1. Does my decision fall within acceptable standards that apply in business today? 2. Am I willing to see the decision communicated to all people and groups affected by it? 3. Would people with whom I have a significant personal relationship approve of the decision? (The Mom test) 4. Does it pass my “red-face test?” Think of a front- page story in the New York Times linking your name to the decision.

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Why should managers behave ethically? The relentless pursuit of self-interest can create a collective disaster. When one or more people start to profit from being unethical, others are prone to act in the same way. Example: Enron, “Where’s mine?”

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Trust and Reputation Trust – person’s confidence and faith in another person’s goodwill (Credo) Reputation – esteem or high repute individuals or organizations gain when they behave ethically – the single most valuable corporate asset!

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Societal Ethics Standards that govern how members of a society should deal with one another in matters involving fairness, justice, poverty, and the rights of the individual People behave ethically because they have internalized certain values, beliefs, and norms (or they are afraid of getting caught) To some degree this varies from country to country.

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Occupational Ethics Standards that govern how members of a profession, trade, or craft should conduct themselves when performing work-related activities (Medical and legal ethics)

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Personal Ethics Personal standards and values that determine how people view their responsibilities to other people and groups Determines how they are likely to act in situations affecting their self-interest

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Organizational Ethics Guiding practices and beliefs through which a particular company and its managers view their responsibilities to stakeholders  A vital part of corporate culture  Constructed day-by-day, one brick at a time from individual decisions  Through example, top managers play a crucial role in establishing and maintaining a company’s ethics (Walk your talk)

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Ethics Ombudsman Many companies appoint a Chief Ethics Officer to: > Communicate ethical standards to all employees > Design systems to monitor compliance > Train employees to appropriately respond to ethical dilemmas > Enforce company ethics in a zero-tolerance manner

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Corporate Social Responsibility The way a company views its duty or obligation to make decisions that protect, enhance, and promote the welfare and well-being of stakeholders and society as a whole

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Approaches to Social Responsibility Obstructionist approach Companies choose not to behave in a socially responsible way, but instead behave unethically and illegally.

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Approaches to Social Responsibility Defensive approach Companies behave ethically to the degree that they abide with legal requirements In the letter, but not the spirit, of the law

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Approaches to Social Responsibility Accommodative approach Companies behave legally and ethically and try to balance the interests of different stakeholders as the need arises.

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Approaches to Social Responsibility Proactive approach Companies actively embrace socially responsible behavior, going out of their way to learn about the needs of different stakeholder groups and using organizational resources to promote the interests of all stakeholders.

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Social Responsibility Evolves Public expectations regarding Corporate Social Responsibility (CSR) continuously evolve Some believe it is unethical to use shareholder money (i.e., corporate profit) to underwrite corporate CSR programs shareholders have no say in selecting Others believe companies need to undertake more CSR Ignoring public opinion regarding this debate is risky (example: Wal-Mart) Best to monitor and slowly evolve

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Discovering your Prejudices Assignment: We all have hidden prejudices. Use Google and go to the Project Implicit website. Take one of the tests and be prepared to talk about what you discover. I will randomly pick a few of you to come up and share what you find out about yourself.