Business in a Changing World

Business in a Changing World
Part 1 Business in a Changing World We continue part 1 of your textbook, Business in a Changing World. © 2015 McGraw-Hill Education.

CHAPTER 1 CHAPTER 2 CHAPTER 2 APPENDIX CHAPTER 3
The Dynamics of Business and Economics CHAPTER 2 Business Ethics and Social Responsibility CHAPTER 2 APPENDIX The Legal and Regulatory Environment CHAPTER 3 Business in a Borderless World Welcome to Chapter two. In this chapter, we will explore and discuss the role of business ethics and social responsibility in business decision making.

Learning Objectives LO 2-1 Define business ethics and social responsibility and examine their importance. LO Detect some of the ethical issues that may arise in business. LO Specify how businesses can promote ethical behavior. LO Explain the four dimensions of social responsibility. LO Debate an organization’s social responsibilities to owners, employees, consumers, the environment and the community. We will first define business ethics and examine why it is important to understand ethics’ role in business. Next we explore a number of business ethics issues to help you learn to recognize such issues when they arise. Finally, we consider steps businesses can take to improve ethical behavior in their organizations. The second half of the chapter focuses on social responsibility. We survey some important responsibility issues and detail how companies have responded to them.

Business Ethics Business Ethics
Principles and standards that determine acceptable conduct in business Acceptable behavior is determined by: The organization The individual’s personal principles Customers and interest groups Competitors Government regulators Let’s begin with a definition. Business ethics refers to principles and standards of behavior that determine acceptable conduct in business. Acceptable business behavior is defined by customers, competitors, government regulators, interest groups, the public, and each individual’s personal moral principles and values.

American Trust in Different Institutions
Business Ethics American Trust in Different Institutions In business, trust is the glue that holds the customer relationship together The recent global financial crisis took a toll on consumer trust of financial services companies Good Ethics leads to trust and in business, trust is the glue that holds the company-customer relationship together. The recent global financial crisis took a toll on consumer trust of financial services companies. In this graph, you can see that trust in banks is lower than in other industries.

Social Responsibility
A business’s obligation to maximize its positive impact and minimize its negative impact on society Ethics refers to individual’s or work group’s decisions Social responsibility is the impact of the entire organization’s activities on society Social responsibility and ethics are not the same Many consumers and social advocates believe that businesses should not only make a profit but also consider the social implications of their activities. We define social responsibility as a business’s obligation to maximize its positive impact and minimize its negative impact on society. Social responsibility and business ethics are not the same Business ethics refer to an individual’s or a work group’s decisions Social responsibility is the impact of the entire organization’s activities on society

Laws and Regulations Sarbanes-Oxley Act Dodd-Frank Act
Criminalized securities fraud and stiffened penalties for corporate fraud Enacted after the accounting scandals in the early 2000’s Sarbanes-Oxley Act Passed to reform the financial industry and offer consumers protection against complex and/or deceptive financial products Enacted after the most recent recession Dodd-Frank Act Most legal issues arise as choices that society deems unethical, irresponsible, or otherwise unacceptable. However, all actions deemed unethical by society are not necessarily illegal, and, as this table shows, both legal and ethical concerns change over time. This table shows some of the issues of the past and how society’s concerns have changed. The government steps in when necessary to pass laws and regulations that encourage businesses to conform to society’s standards, values, and attitudes. The Sarbanes-Oxley Act was enacted after several accounting scandals at well-known firms in the early 2000s shook public confidence. The act criminalized securities fraud and stiffened penalties for corporate fraud The Dodd-Frank Act was enacted after the most recent recession and was passed to reform the financial industry and offer consumers protection against complex and/or deceptive financial products.

The Role of Ethics in Business
Growing concerns about legal and ethical issues in business strengthen the public’s perceptions that ethical standards and the level of trust in business need to be raised Recent Legal and Ethical Issues Subprime loans and foreclosures Accounting fraud Cybercrimes Deceptive advertising Unfair competitive practices Learning to recognize and resolve ethical issues is a key step in evaluating ethical decisions Well-publicized incidents of unethical and illegal activity strengthen the public’s perceptions that ethical standards and the level of trust in business need to be raised. However, it is important to understand that business ethics goes beyond legal issues. Some acts or conduct are readily identifiable as unethical or illegal, such as some of the examples here; accounting fraud, deceptive advertising and cybercrimes. Learning to recognize and resolve ethical issues is a key step in evaluating ethical decisions in business.

Recognizing Ethical Issues
An identifiable problem, situation, or opportunity that requires a person to choose from among several actions that may be evaluated as right or wrong, ethical or unethical Many issues seem straightforward but in reality are very complex One of the principal causes of unethical behavior is overly aggressive financial or business objectives We define an ethical issue as an identifiable problem, situation, or opportunity that requires a person to choose from among several actions that may be evaluated as right or wrong, ethical or unethical. Many issues seem straightforward but in reality are quite complex. One of the principal causes of unethical behavior is overly aggressive financial or business objectives.

Retired NFL player Tiki Barber was one of 2,000 players who sued the NFL for knowledge about head injuries The ethical issue here is whether the NFL hid information that linked head injuries to subsequent damages such as memory loss, permanent head trauma and dementia Retired NFL player Tiki Barber, shown here, was one of 2,000 players to sue the NFL over knowledge of head injuries. The ethical issue here is whether the NFL hid information linking head injuries to subsequent damage such as memory loss, permanent head trauma and dementia.

Percentage of U.S. Workforce Observing Specific Forms of Misconduct, 2009–2011
One of the principal causes of unethical behavior is overly aggressive financial or business objectives but ethical issues involve all types of organizations including non-profits, government, schools and universities. The National Business Ethics Survey found that workers witness many instances of ethical misconduct in their organizations, this table shows some of the more common issues.

Actions Associated with Bullies
Abusive and intimidating behaviour is difficult to assess and manage due to diversity in culture and lifestyle but as the table shows, bullying can use a mix of verbal, nonverbal and manipulative threatening expressions.

Misuse of Company Time Estimated to cost hundreds of billions a year in lost productivity Misuse of Company Resources Company policies help prevent company resource abuse Conflict of Interest Exists when a person must choose whether to advance their own interests or those of others Bribery is a form of conflict of interest Misuse of company time is the number one area of misconduct observed in the workplace. Examples include internet use that is not work related, late arrivals, leaving early, long lunch breaks, inappropriate sick days and excessive socializing. While difficult to measure, lost productivity is estimated to cost hundreds of billions annually. Misuse of company resources may include using company computers for personal use, submitting personal expenses on company expense reports, or using the company copier for personal use. Companies must have policies in place to prevent company resource abuse Conflict of interest exists when a person must choose whether to advance his or her own personal interests or those of others. To avoid conflicts of interest, employees must separate their personal interests with their business dealings. Insider trading is a perfect example of conflict of interest. Bribery is a form of conflict of interest. Bribes are payments, gifts or special favors intended to influence the outcome of a decision. Bribes are illegal in the United States but commonplace in other parts of the world. Bribery Payments, gifts or special favors intended to influence the outcome of a decision

Fairness and Honesty Companies Must
Use fair competition practices Give full disclosure of potential harm by a product Be truthful in advertising Keep company secrets Meet obligations Avoid undue pressure forcing others to act unethically Fairness and Honesty are at the heart of business ethics and relate to the general values of decision makers. Employees must abide by the laws and regulations, cause no harm through dishonest behavior, and use company resources honestly. Companies must use fair competition practices and give full disclosure of potential harm caused by product use. Honest communications includes truth in advertising and labeling and truthfulness about product safety and quality. Fair and honest business relationships include keeping company secrets, meeting obligations, and avoiding undue pressure forcing others to act unethically. Plagiarism is a form of dishonest, unethical behavior.

Fairness and Honesty Employees Must Abide by the laws Cause no harm through dishonesty Use company resources fairly and honestly Be aware of company policies Recognize ethical behavior Employees must abide by the laws and regulations, cause no harm through dishonest behavior, and use company resources honestly. Employees should be aware of policies and recognize how decisions relate to ethical behavior.

Fairness and Honesty Many people felt Toyota was not honest with consumers about its vehicles’ accelerator problem – a problem leading to a massive recall and a public-relations nightmare A later investigation by the National Highway Traffic Safety Administration blamed most of the crashes on driver error Many people felt Toyota was not honest with consumers about its vehicles’ accelerator problem – a problem leading to a massive recall a public-relations nightmare. A later investigation by the National Highway Traffic Safety Administration blamed most of the crashes on driver error.

Greenwashing There are two levels of greenwashing:
When a company claims they are green because they have a few green practices such as recycling but not water or energy conservation Hotel chains: Encouraging visitors on an extended stay to not have their towels or bedclothes washed every day in order to help the hotel save water, while at the same time serving breakfast with Styrofoam cups and plastic utensils When a company puts a façade on their products/services that looks and claims to be green, when in fact there is nothing green about it Beauty products: A lot of beauty products have misleading words in their names such as “natural”, “herbal”, “pure”, etc., when they actually contain chemicals and harsh components that are not derived from nature Greenwashing There are two levels of greenwashing: when a company claims they are green because they have a few green practices such as recycling but not water or energy conservation; or when a company puts a façade on their products/services that looks and claims to be green, when in fact there is nothing green about it. An example of the first level is hotel chains. Some will put out signs encouraging visitors on an extended stay to not have their towels or bedclothes washed every day in order to help the hotel save water, while at the same time serving breakfast with Styrofoam cups and plastic utensils. An example of the other kind of greenwashing is beauty products. A lot of beauty products have misleading words in their names such as “natural”, “herbal”, “pure”, etc., when they actually contain chemicals and harsh components that are not derived from nature. SOURCE: Candice Marie. “Misleading Marketing: Beware the Greenwash!”. February 12, (accessed September 24, 2013). SOURCE: Candice Marie. “Misleading Marketing: Beware the Greenwash!”. February 12, (accessed September 24, 2013).

Making Decisions about Ethical Issues
It can be difficult to recognize specific ethical issues and people often need years of experience to accurately recognize and react to ethical situations It can be difficult to recognize specific ethical issues, most people need years of experience to accurately recognize and react to ethical situations. Once a person has recognized an ethic issue and can openly discuss it with others, they have begun the process of resolving the issue. This table lists some questions you may want to ask when trying to determine if an action is ethical.

Improving Ethical Behavior in Business
Three factors that influence business ethics Many employees use different ethical standards at work than they do at home The activities and examples set by managers and co-workers are critical in gaining consistent ethical compliance If a company fails to provide good examples and direction, confusion and conflict will develop Leading to unethical choices in business As this table shows, three factors have a big influence on ethical or unethical choices The first part, Individual Standards and Values, is different for everyone and many employees utilize different ethical standards at work than they do at home The portion in green, Managers’ and Co-workers’ Influence, refers to the activities and examples set by managers and co-workers. These modeled ethical behaviors are critical in gaining consistent ethical compliance. If the company fails to provide good examples and direction for appropriate conduct, confusion and conflict will develop resulting in the opportunity for misconduct, the blue portion of this table.

Employees must have established ethics policies if employees are to determine what conduct is acceptable Code of Ethics Formalized rules and standards that describe what a company expects of its employees Whistleblowing The act of an employee exposing an employer’s wrongdoing to outsiders, such as the media or government regulatory agencies It is difficult for employees to determine what conduct is acceptable if a firm does not have established ethics polices and standards. Professional Codes of ethics are formalized rules and standards that describe what a company expects of its employees. Codes of ethics, policies on ethics and ethics training programs advance ethical behavior. Whistleblowing is the act of an employee exposing an employer’s wrongdoing to outsiders, such as the media or government regulatory agencies, strengthened in the recent Dodd-Frank Act.

The current trend is to move away from legally based ethical programs to cultural or integrity-based programs that make ethics a core organizational value Effective business ethics programs are good for business performance Firms that develop higher levels of trust function more efficiently and effectively and avoid damaged company reputations and product images The current trend is to move away from legally based ethical programs to cultural or integrity-based programs that make ethics a core organizational value because effective business ethics programs are good for business performance. Firms that develop higher levels of trust function more efficiently and effectively and avoid damage to their company’s reputation and product image.

The Nature of Social Responsibility
The four dimensions of social responsibility are illustrated using figure 2.3 in your text and here on this slide. This pyramid model is called the Pyramid of Social Responsibility. Earning profits is the economic foundation of the pyramid and complying with the law is the next step. Business ethics and avoiding harm is the next level. At the top of the pyramid are voluntary responsibilities which are additional activities that may not be required but which promote human welfare or goodwill.

Corporate Citizenship The extent to which businesses meet the legal, ethical, economic, and voluntary responsibilities placed on them by their stakeholders Involves action and measurement of how deeply the firm embraces the corporate citizenship philosophy Then follows through by implementing citizenship initiatives We define corporate citizenship as the extent to which businesses meet the legal, ethical, economic, and voluntary responsibilities placed on them by their stakeholders. Involves action and measurement of how deeply the firm embraces the corporate citizenship philosophy Then follows through by implementing citizenship initiatives

Although the concept of social responsibility is receiving more and more attention, it is still not universally accepted. This table lists some of the arguments for and against social responsibility. The main argument for social responsibility is that business helped create many of the social problems, so it should play a significant role in solving them, especially in the areas of pollution reduction and cleanup. The main argument against social responsibility is that these programs distract from the primary goal of business – earning profits.

Social Responsibility
Social responsibility is a voluntary action taken on by companies to varying degrees and it characterized by actions showing concern for all stakeholders such as employees, consumers, the environment and the community Supply chains and all the people that compose it are also considered stakeholders The Rana Plaza factory in Bangladesh, which collapsed in 2012, is part of the supply chain for many global companies In September of 2013, 29 companies associated with the factory were invited to a meeting in Geneva to discuss contributing to a fund for the victims of the disaster that caused over 1,000 deaths and twice as many injuries Only nine of the companies attended the meeting and only one made a contribution to the fund--this lack of action on the part of the companies indicates a lack of concern to all of their stakeholders Social Responsibility Social responsibility is a voluntary action taken on by companies to varying degrees and it characterized by actions showing concern for all stakeholders such as employees, consumers, the environment and the community. Supply chains and all the people that compose it are also considered stakeholders. The Rana Plaza factory in Bangladesh, which collapsed in 2012, is part of the supply chain for many global companies. In September of 2013, 29 companies associated with the factory were invited to a meeting in Geneva to discuss contributing to a fund for the victims of the disaster that caused over 1,000 deaths and twice as many injuries. Only nine of the companies attended the meeting and only one made a contribution to the fund. This lack of action on the part of the companies indicates a lack of concern to all of their stakeholders. SOURCE: Jian Ghomeshi and Q staff. “Clothing Corporations Need to Step Up for Bangladesh Factory Collapse Victims”. September 18, (accessed September 24, 2013). SOURCE: Jian Ghomeshi and Q staff. “Clothing Corporations Need to Step Up for Bangladesh Factory Collapse Victims”. September 18, (accessed September 24, 2013).

Social Responsibility Issues
The company’s responsibilities to owners and stockholders Maintaining proper accounting procedures Providing investors with all relevant information Protecting owner’s rights and investments Social responsibility is dynamic and issues change constantly in response to society’s demands Businesses must first be responsible to their owners, who are primarily concerned with earning a profit or a return on their investment in a company. A business’s responsibilities to its owners and investors, as well as to the financial community at large, include maintaining proper accounting procedures, providing all relevant information to investors about the current and projected performance of the firm, and protecting the owners’ rights and investments. In short, the business must maximize the owners’ investment in the firm.

Company’s responsibilities to employees Provide a safe workplace and pay them adequately Provide equal opportunities for all employees Keep them informed of what is happening in the company Listen to their grievances and treat them fairly While the owners are indeed important, without employees a business cannot carry out its goals. Employees expect businesses to provide a safe workplace. Congress has passed several laws regulating safety in the workplace, many of which are enforced by the Occupational Safety and Health Administration (OSHA). Employees expect to be paid adequately for their work. Labor unions have made significant contributions to improving wages and benefits as well as achieving safety in the workplace. Workers want equal opportunities for all employees. The Equal Employment Opportunity Commission (EEOC) covers this point. Workers also want to know what is happening in the company and they want employers to listen to their grievances and treat them fairly.

Company’s responsibility to consumers Provide them with satisfying, safe products Respect their rights as consumers While stakeholder relationships with owners and employees are important, a critical issue today, is business’ responsibility to customers. Customers look to business to provide them with satisfying, safe products and to respect their rights as consumers.

John F. Kennedy’s 1962 Consumer Bill of Rights The right to safety The right to be informed The right to choose The right to be heard Many of the desires of those involved in the consumer movement have a foundation in John F. Kennedy’s 1962 consumer bill of rights, which highlighted four rights. The right to safety means that a business must not knowingly sell anything that could result in personal injury or harm to consumers. The right to be informed gives consumers the freedom to review complete information about a product before they buy it. The right to choose ensures that consumers have access to a variety of products and services at competitive prices. The right to be heard assures consumers that their interests will receive full and sympathetic consideration when the government formulates policy.

Consumerism The activities individuals, groups and organizations undertake to protect their rights as consumer Write letters Lobby government agencies Make public service announcements Boycott irresponsible companies The activities that independent individuals, groups, and organizations undertake to protect their rights as consumers are known as consumerism. Activities could include writing letters to companies, lobbying government agencies, making public service announcements and boycotting companies deemed irresponsible.

Sustainability Conducting activities in a way that allows for the long-term well-being of the natural environment, including all biological entities Involves the assessment and improvement of business strategies, economic sectors, work practices, technologies and lifestyles so they maintain the health of the natural environment We define sustainability as conducting activities in such as way as to provide for the long-term wellbeing of the natural environment, including all biological entities. Sustainability involves the interaction among nature and individuals, organizations, and business strategies and includes the assessment and improvement of business strategies, economic sectors, work practices, technologies, and lifestyles, so that they maintain the health of the natural environment.

Home Depot has adopted eight core values as the foundation for its ethical culture, including a strong emphasis on sustainability The Home Depot’s Values Taking care of our people Giving back to our communities Doing the right thing Excellent customer service Creating shareholder value Building strong relationships Entrepreneurial spirit Respect for all people Home Depot has adopted eight core values as the foundation for its ethical culture, including a strong emphasis on sustainability. The eight values are listed here and in more depth in your textbook. The values are: Taking care of our people Giving back to our communities Doing the right thing Excellent customer service Creating shareholder value Building strong relationships Entrepreneurial spirit Respect for all people

Sustainability issues Pollution Water – society is demanding clean water Air – acid rain and global warming Land – garbage, strip mining and poor forest conservation Alternative energy Reducing carbon emissions forces alternative energy sources Two main sustainability issues are pollution and alternative energy. First, pollution: Water pollution results from dumping toxic chemicals and raw sewage into rivers and oceans, oil spills, and the burial of industrial waste in the ground where it may filter into underground water supplies. Society is demanding clean water. Air pollution is usually the result of smoke and other pollutants emitted by manufacturing facilities, as well as carbon monoxide and hydrocarbons emitted by motor vehicles. These pollutants result in acid rain and may global warming. Land pollution results from the dumping of residential and industrial waste, strip mining, forest fires and poor forest conservation. Alternative energy is the other main sustainability issue. With ongoing plans to reduce global carbon emissions, countries and companies alike are looking toward alternative energy sources. These sources include wind power, solar power, nuclear power, biofuels, electric cars, and hydro and geothermal power.

Company’s Responses to Sustainability Issues Making processes more eco-friendly is called “green” business Recycling aluminum, paper and glass Using green power sources when available Larger companies may have a Vice President of Environmental Affairs Greenwashing is creating a positive green association for non-green products Partly in response to federal legislation such as the National Environmental Policy Act of 1969 and partly due to consumer concerns, businesses are responding to environmental sustainability issues. Some companies are finding that environmental consciousness can even save them money. Efforts to make products, packaging and processes more environmentally friendly are called “green” business. Many businesses recycle aluminium, paper and glass for reuse and some are turning to green power sources where available. Some large companies have created a new executive position, a vice president of environmental affairs, to help them achieve their business goals in an environmentally responsible manner. Environmentalists are concerned that some companies are merely greenwashing, or “creating a positive association with environmental issues for an unsuitable product, service, or practice.”

Company’s responsibility to the general welfare of their communities Donations to local and national charities Volunteer support of local causes Another significant issue for businesses are their responsibilities to the general welfare of the communities and societies in which they operate. The most common way businesses show their community responsibility is through donations to local and national charitable organizations. Small companies participate through donations and volunteer support.

Volunteers at Habitat for Humanity construct a house on Detroit’s east side Many companies encourage their employees to volunteer for charitable organizations such as Habitat for Humanity Volunteers at Habitat for Humanity construct a house on Detroit’s east side. Many companies encourage their employees to volunteer for charitable organizations such as Habitat for Humanity.

Unemployment, while an economic issue, carries ethical implications Some companies refuse to hire unemployed workers due to lack of experience rather than hiring and then training them Factory closures are seen as unethical because it contributes to unemployment Protesters say unemployment leads to the growing gap between rich and poor Unemployment has become a significant problem. While unemployment is an economic issue, it also carries ethical implications. Hiring standards are coming under fire because companies are not hiring unemployed workers due to their lack of experience. While it is important for employees to have certain skills, many feel that businesses must be willing to train employees if they want to fill vacancies and decrease the unemployment rate. Factory closures are seen as unethical because it contributes to unemployment. Protesters say unemployment adds to the growing gap between rich and poor.

Discussion Do you think that business should regulate its own activities or that the federal government should establish and enforce ethical standards? Discuss the arguments for and against social responsibility by business? Do you think that business should regulate its own activities or that the federal government should establish and enforce ethical standards? Student answers will vary. Students who might favor businesses regulating their own activities might argue that businesses understand their industries better and would therefore have a better understanding of which ethical standards to adopt. Businesses could also come up with unique and creative ways to meet the needs of their stakeholders than if they were constrained by regulation. Those who favor government regulation might point toward the many business scandals that have occurred in recent years and the necessity for government regulation to close loopholes and keep businesses from advancing their own interests at the expense of society. Discuss the arguments for and against social responsibility by business.? Arguments for social responsibility include (1) business helped create problems and should help to solve them; (2) business has the financial and technical resources to help solve problems; (3) as a member of society, business should do its fair share to help others; (4) social responsibility can help prevent increased government regulation; and (5) social responsibility helps to ensure economic survival. Arguments against social responsibility include (1) social responsibility detracts from the profit-making objectives of business; (2) participation in social responsibility programs gives business power at the expense of other segments of society; (3) business may not have the expertise to solve social problems; and (4) social problems are the responsibility of government agencies. Students may be able to offer additional arguments for or against being socially responsible.

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