1. Part I: Organization of a Business Introduction to Business 3e 3 Copyright © 2004 South-Western. All rights reserved. Business Ethics and Social Responsibility

2. Copyright © 2004 South-Western. All rights reserved.3–2 Learning Goals Describe responsibilities of firms to: –Customers –Employees –Stockholders and creditors –The environment –Their communities Explain the costs that firms incur in fulfilling their social responsibilities.

3. Copyright © 2004 South-Western. All rights reserved.3–3 Impact of Ethical Values and Acceptance of Social Responsibilities on a Firm

4. Copyright © 2004 South-Western. All rights reserved.3–4 Business Decisions Recognize how business decisions affect society. Follow a set of ethical principles when making business decisions.

5. Copyright © 2004 South-Western. All rights reserved.3–5 Rationale for Business Decisions Unethical business decisions usually result in a benefit to one or more employees but have an adverse impact on other stakeholders or on the environment.

6. Copyright © 2004 South-Western. All rights reserved.3–6 Common Unethical Decisions Car dealer tries to sell car at sticker price–receives high commission. Computer salesperson sells more expensive computer than customer needs. Manager hires friend who is not the most qualified. Manager tries to avoid paying employees.

7. Copyright © 2004 South-Western. All rights reserved.3–7 Impact of Unethical Decisions Customers may avoid buying firm’s products in the future. Firm may have difficulty hiring new employees. Firm may be unable to obtain funding in the future. Firm possibly subject to severe penalties imposed by the government.

8. Copyright © 2004 South-Western. All rights reserved.3–8 Impact on Firm Value Columbia Hospital –Overbilled for services –Numerous employee resignations –Value of stock declined substantially Sunbeam –Overstated earnings to enhance compensation of top managers –Many stockholders sold their shares–drove the stock price down

9. Copyright © 2004 South-Western. All rights reserved.3–9 Columbia’s Stock Price after Overbilling Exhibit 3.2

10. Copyright © 2004 South-Western. All rights reserved.3–10 Sunbeam’s Stock Price after It Was Accused of Overstating Its Revenues Exhibit 3.3

11. Copyright © 2004 South-Western. All rights reserved.3–11 Responsibility to Customers Responsible production practices –Ensure customer safety –Proper warning labels Responsible sales practices –Discourage overly aggressive sales tactics –Discourage deceptive advertising –Use customer satisfaction surveys

12. Copyright © 2004 South-Western. All rights reserved.3–12 Ensure Responsibility Establish a code of responsibilities –Guidelines for product quality –Guidelines about how to treat employees, customers, owners Monitor complaints Obtain and utilize customer feedback

13. Copyright © 2004 South-Western. All rights reserved.3–13 Factors Impacting Responsibility Role of Consumerism –Collective demand by consumers that businesses satisfy their needs Role of Government –Regulation of product safety –Regulation of advertising –Regulation of industry competition  Monopolies and anti-trust

14. Copyright © 2004 South-Western. All rights reserved.3–14 Key Antitrust Laws Sherman Antitrust Act (1890) Clayton Act (1914) Federal Trade Commission Act (1914) Robinson-Patman Act (1936) Celler-Kefauver Act (1950) Exhibit 3.5

15. Copyright © 2004 South-Western. All rights reserved.3–15 Responsibility to Employees Employee Safety –Check machinery and equipment –Require safety glasses or other equipment to prevent injury –Emphasize safety precautions in training –Reduce accidents –Improve quality of life

16. Copyright © 2004 South-Western. All rights reserved.3–16 Responsibility to Employees Proper Treatment of Employees –Diversity training –Prevention of sexual harassment  Unwelcome comments or actions of a sexual nature –Equal opportunity  Prohibit discrimination based on national origin, race, gender, or religion  Applies to hiring, promotion, raises

17. Copyright © 2004 South-Western. All rights reserved.3–17 Proportion of Women and Minorities in Various Occupations Exhibit 3.6

18. Copyright © 2004 South-Western. All rights reserved.3–18 Ensure Responsibility to Employees Code of Responsibility –Hiring decisions made without bias –Hire most qualified person Grievance Policy –Mediation process Conflict With Employee Layoffs

19. Copyright © 2004 South-Western. All rights reserved.3–19 Responsibility to Stockholders Make decisions that are in the best interest of the owners –Tie employee compensation to firm performance –Release accurate information about financial condition

20. Copyright © 2004 South-Western. All rights reserved.3–20 Ensure Responsibility to Stockholders Shareholder Activism –Active efforts by shareholders to influence a firm’s management policies Institutional Investors –Financial institutions that purchase large amounts of stock –Managers may be more willing to listen to these large investors.

21. Copyright © 2004 South-Western. All rights reserved.3–21 Impact of Executive Salaries on a Firm’s Performance Exhibit 3.7

22. Copyright © 2004 South-Western. All rights reserved.3–22 Conflict With Excessive Executive Compensation Compensation of executives has increased dramatically –1980: 42 times the average compensation of employees –1990: 85 times the average compensation of employees –2000: 500 times the average compensation of employees

23. Copyright © 2004 South-Western. All rights reserved.3–23 Responsibility to Creditors Meeting financial obligations to creditors –Inform creditors if firm is having difficulty meeting obligations –If firm does not pay creditors what it owes them–may have to file for bankruptcy

24. Copyright © 2004 South-Western. All rights reserved.3–24 business online

25. Copyright © 2004 South-Western. All rights reserved.3–25 Violations of Responsibility Providing misleading financial information that exaggerates financial condition –Enron –Oracle –Global Crossing –ImClone

26. Copyright © 2004 South-Western. All rights reserved.3–26 Responsibility to the Environment Production processes, as well as products, can harm the environment –Air Pollution  Change production processes –Land Pollution  Revise production and packaging processes to reduce waste  Recycle

27. Copyright © 2004 South-Western. All rights reserved.3–27 Monsanto’s Stock Price after Receiving Bad Publicity about Its Effects on the Environment Exhibit 3.8

28. Copyright © 2004 South-Western. All rights reserved.3–28 Responsibility to the Community Maximizing social responsibility may conflict with maximizing firm value –May reduce firm’s ability to provide products at reasonable prices Support for charitable organizations can improve company image

29. Copyright © 2004 South-Western. All rights reserved.3–29 Effect of Environmental Expenses on Business Performance Exhibit 3.9

30. Copyright © 2004 South-Western. All rights reserved.3–30 Social Responsibility: Examples Apple and IBM –Invest in education programs Home Depot –Donates to community programs for housing projects –Provided supplies and equipment to 9/11 rescue efforts Checkers –Provides jobs for inner-city residents Coca-Cola –Sponsors Boys and Girls Clubs

31. Copyright © 2004 South-Western. All rights reserved.3–31 Social Responsibility: Examples Ace Hardware –Foundation has donated more than $20 million to communities it serves –9/11 donated three tractor-trailer loads of equipment Dow Chemical Corporation –Created Community Advisory Panel –Funds education programs in South America –Habitat for Humanity project in Korea –New art center in West Virginia

32. Copyright © 2004 South-Western. All rights reserved.3–32 Responsibilities in International Environment Be aware of cultural differences Avoid unethical payoffs to suppliers or customers Establish global reputation for running an ethical business

33. Copyright © 2004 South-Western. All rights reserved.3–33 Cost of Social Responsibility Complaint resolution process Customer and employee satisfaction surveys Product liability lawsuits Change production techniques to comply with government regulations about environmental impact Periodic disclosure of financial information Sponsoring community activities

34. Copyright © 2004 South-Western. All rights reserved.3–34 Lawsuits Common Lawsuits –Product defects –Deceptive advertising –Employee discrimination Cost of Lawsuits –Court imposed fines –Out-of-court settlements –Hiring attorney to defend firm –Decline in demand for product because of bad publicity

35. Copyright © 2004 South-Western. All rights reserved.3–35 Possible Expenses Incurred as a Result of Social Responsibilities Exhibit 3.10

36. Copyright © 2004 South-Western. All rights reserved.3–36 Summary Business ethics influence decisions Firms have basic responsibilities –Provide safe working conditions –Treat work workers properly –Provide equal opportunity for employees –Make decisions in best interest of stockholders –Maintain a clean environment