Chapter Four

Ethics and Corporate

Responsibility

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Ethics

Ethics- the moral principles and standards that guide the behavior of an individual or groupl

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Telling the Truth and Lying: Possible Outcomes

Exhibit 4.1

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It’s a Personal Issue

Most of us think we are good decision makers, ethical, and unbiased.

But most people have unconscious biases that favor themselves and their own group.

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It’s a Personal Issue

Managers often: Hire people who are like them Think they are immune to conflicts of interest Take more credit than they deserve Blame others when they deserve some blame

themselves

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It’s a Personal Issue

Is it ethical to: Shop online during company time? Using office equipment for personal use? Read personal emails while at work?

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Ethics

Ethical issue Situation, problem, or opportunity in which an

individual must choose among several actions that must be evaluated as morally right or wrong

Business ethics The moral principles and standards that guide

behavior in the world of business.

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Ethical Systems

Moral philosophy Principles, rules, and values people use in

deciding what is right or wrong

Universalism The ethical system stating that all people should

uphold certain values, such as honesty, rules against murder, deceit, oppression, etc. and other values that society needs to function.

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Caux Principles

Caux Principles Ethical principles established by international

executives based in Caux, Switzerland, in collaboration with business leaders from Japan, Europe, and the United States.

Two basic ethical ideals underpin the Caux Principles:• Kyosei• Human Dignity

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Caux Principles

Kyosei living and working

together for the common good, allowing cooperation and mutual prosperity to coexist with healthy and fair competition

Human dignity concerns the value of

each person as an end, not a means to the fulfillment of others’ purposes

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Core ethical principles found in all societies: Truthfulness Responsibility Fairness Respectfulness Compassion

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Ethical Systems

Egoism an ethical principle holding that individual self-

interest is the actual motive of all conscious action. “Take action that promotes the greatest good for oneself.”

Utilitarianism An ethical system stating that the greatest good

for the greatest number should be the overriding concern of decision makers.

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Ethical Systems

Relativism Philosophy that bases ethical behavior on the

opinions and behaviors of relevant other people

Virtue ethics perspective that what is moral comes from what

a mature person with “good” moral character would deem right

Moral individuals can transcend rules by appling their personal virtues such as faith, honesty, and integrity

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Ethical Systems

Kohlberg’s model of cognitive moral development classification of people based on their level of

moral judgment

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Kohlberg’s Stages of Moral Development

Exhibit 4.2

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Business ethics matter

Ethical dilemmas Questions of ethics in business have been prominent in

the news in recent years. Insider trading, illegal campaign contributions, bribery,

famous court cases and other scandals have created a perception that business leaders use illegal means to gain competitive advantage, increase profits, or improve their personal positions.

Shareholders tended to ignore fraudulent financial reporting, as long as profits and market share didn’t suffer.

Most business leaders believe they uphold ethical standards in business practices, and they deal with a wide range of ethical issues everyday.

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Ethical Dilemmas

BrandsCEO PayCommercialism in schoolsRel;igion at workSweatshopsWages

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Ethics and the law

Sarbanes-Oxley ActPassed by Congress in 2002, this act establishes

an array of strict accounting and reporting rules in order to make senior managers more accountable and to improve and maintain investor confidence.

Law requires that companies and their auditors provide reports to financial statement users about the effectiveness of internal controls over financial reporting procedures.

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The Ethical Climate InfluencesEmployees

Ethical climate In an organization, the

processes by which decisions are evaluated and made on the basis of right and wrong

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Danger Signs

1. Excessive emphasis on short-term revenues over longer-term considerations.

2. Failure to establish a written code of ethics.3. A desire for simple, “quick fix” solutions to

ethical problems.4. An unwillingness to take an ethical stand that

may impose financial costs.

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Danger Signs (cont.)

5. Consideration of ethics solely as a legal issue or a public relations tool

6. Lack of clear procedures for handling ethical problems.

7. Responsiveness to the demands of shareholders at the expense of other constituencies

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Managers Shape Behavior

Ethical leadership Business ethics are valued but sometimes lacking Society demands an ethical climate

Corporate ethical standards organizations must be explicit regarding their

standards and expectations.

Ethical leader One who is both a moral person and a moral

manager influencing others to behave ethically.

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Ethics Programs

Compliance-based ethics programs Company mechanisms typically designed by

corporate counsel to prevent, detect, and punish legal violations.

Effective ethics programs include: formal ethics codes ethics committees to develop policies evaluation of actions ethics officers or ombudspersons to investigate

allegations ethics training programs disciplinary processes

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Ethics Programs

Integrity-based ethics programs Company mechanisms

designed to instill in people a personal responsibility for ethical behavior

With such a program, companies and people govern themselves through set of guiding principles that they embrace.

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Ethical Decision Making

Making ethical decisions takes: Moral awareness

realizing the issue has ethical implications

Moral judgment knowing what actions are morally defensible

Moral character the strength and persistence to act in accordance

with your ethics despite the challenges

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A Process for Ethical Decision Making

Exhibit 4.3

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The Business Costs of Ethical Failure

Exhibit 4.4

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Evaluating Ethical Decisions

Evaluating your ethical duties requires looking for actions that meet the following criteria:

• You would be proud to see widely reported in newspapers• It would build a sense of community among those involved• It would generate the greatest social good• You would be willing to see others take the same action

when you might be the victim• It doesn’t harm “the least among us”• It doesn’t interfere with the right of all others to develop

their skills to the fullest.

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Courage

Behaving ethically requires not just moral awareness and moral judgment but also moral character, including the courage to take actions consistent with your ethical decisions

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Corporate Social Responsibility

Corporate social responsibility (CSR) Obligation toward

society assumed by business.

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Corporate Social Responsibility

Economic responsibilities To produce goods and

services that society wants at a price that perpetuates the business and satisfies its obligations to investors.

Legal responsibilities To obey local, state,

federal, and relevant international laws

Four levels of corporate social responsibility:

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Corporate Social Responsibility

Ethical responsibilities Meeting other social expectations, not written as

law.

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Corporate Social Responsibility

Philanthropic responsibilities Additional behaviors

and activities that society finds desirable and that the values of the business support.

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Pyramid of Global Corporate SocialResponsibility and Performance

Figure 4.5

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Corporate Social Responsibility

Transcendent education An education with five higher goals that balance self-

interest with responsibility to others• Empathy

– feeling your decisions as potential victims might feel them, to gain wisdom

• Generativity– Learning how to give as well as take, to others in the present as

well as to the future generations• Mutuality

– Viewing success not merely as personal gain, but a common victory

• Civil aspiration– Thinking not just in terms of “don’ts”(lie, cheat, steal, kill), but

also in terms of positive contributions• Intolerance of ineffective humanity

– Speaking out against unethical actions

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Contrasting Views

Shareholder model- holds that managers act as agents for shareholders and, as such, are obligated to maximize the present value of the firmStakeholder model – holds that managers are obliged to look beyond profitability to help their organizations succeed by interacting with groups that have a stake in the organization

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You can Do Good and Do Well

Profit maximization and corporate social responsibility used to be regarded as leading to opposing policies. But the two views can converge

Recent attention has also been centered on the possible competitive advantage of socially responsible actions

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The Natural Environment

Economic activity has environmental consequences A risk society is one in which the creation and

distribution of wealth generate by-products that can cause injury, loss, or danger to people and the environment.

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Ecocentric Management

Ecocentric management Goal is the creation of sustainable economic

development and improvement of quality of life worldwide for all organizational stakeholders.

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Ecocentric Management

Sustainable growth Economic growth and development that meet

present needs without harming the needs of future generations

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Ecocentric Management

Life-cycle analysis (LCA) A process of analyzing all inputs and outputs,

though the entire “cradle-to-grave” life of a product, to determine total environmental impact

Some organizations set environmental agendas Companies not only have the ability to solve

environmental problems; they are coming to see and acquire the motivation as well.

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Video: Hewlett Packard

Why should an investor be concerned with a potential $40 million severance package for an exiting CEO?

Should severance clauses in an executive contact be considered unethical?