(Normative not descriptive) ( p )

Business / Management Ethics

What is the proper role of business in society?

Corporate Responsibility

Corporate Responsibility
Much debate. Eg: Cadbury, 1909; Davis, 1973; Eg: Carroll, 1979, 2000; etc 1960s activist movement questioned the singular economic objective of business
Asbestos Tobacco companies Discrimination Napalm/Dow Chemical

Today managers regularly confront decisions re philanthropy, pricing, employee relations, product hil th i i l l ti d t quality, environment, operations in countries with oppressive govts, etc. govts, etc.
Example: GE Citizenship Report, 2005 stressed long term health of society and the enterprise

CSR nomenclature & drivers

Corporate Corporate C t Corporate Corporate Co po te Questions social responsibility responsibility ibilit citizenship governance go e n n e driving the CSR debate:

Is all profit legitimate? Is all profit generated within the law legitimate? What is a fair distribution of a corps wealth between shareholders, employees & society? Should companies put part of wealth back into the communities in which they operate? p p ( ,p , Can markets be relied upon to set fair prices (labour, products, resources?) Can governments reliably decide the public interest?

CSR OR CR
http://www.darden.virginia.edu/corpor ateateethics/Video_Waddock_Difference_Ma kers/index.html / http://www.ti.com/corp/docs/csr/index http://www ti com/corp/docs/csr/index .shtml?DCMP=corp_general&HQS=Not Applicable+OT+csr

Corporate Responsibility Do managers have overriding ethical responsibility to serve interests of stockholders? Society? Do managers serve societys g y interests by serving the interests of stockholders? Contemporary Examples??

CR & Ethics
Ethical theory provides an overarching framework within which CR is situated. CR also embraces management theory and practice & the social context d ti th i l t t within which business operates (leadership, (l d hi organisational culture, i ti l lt values, learning, moral development, decision- ki decision d i i -making, etc). t )

CR: A definition
The voluntary assumption of h l i f responsibilities that go beyond the purely economic and legal responsibilities of business.
Consistent with earning a satisfactory level of profit. Implies willingness to forgo a certain measure of profit f non-economic ends. f f for non Integration of values (integrity, honesty, fairness, respect etc ) fairness respect, etc.) into policies, practices & decisiondecision-making.

CR: A definition
CSR is a concept whereby companies integrate social and p g environmental concerns in their p business operations and in their interaction with their y stakeholders on a voluntary basis (European Commission, 2001 cited in Tencati, Perrini & Tencati, Pogutz, Pogutz, 2004).

CSR: A definition
The C Th Canadian Business for Social di B i f S i l Responsibility defines CSR as, a companys commitment t operating it t to ti in an economically, socially and environmentally sustainable manner while recognising the interests of its stakeholders, stakeholders including investors, investors customers, employees, business p partners, local communities, the , , environment and society at large.

Prominent areas of CSR today y

Business ethics Legal compliance Philanthropy & community investment Employee rights and welfare Environmental management g Sustainability Human rights g Animal rights Market relations Corruption Corporate governance

Example
http://www.campbellsoupcompany.co m/csr/pdfs/Campbells_2010_Social_Re / /p / p sponsibility_Report.pdf

NOTE: NOTE SEE E-RESERVE ON MOODLE EFOR SEVERAL READINGS, INCLUDING ONES BY CARROLL CARROLL.

Corporate Responsibility p p y Continuum

Classical economic view

Socioeconomic view

Maximal social view

Moral minimum

NB: Carroll (1979) Economic, legal, ethical & discretionary responsibilities (Non hierarchical? Evolutionary?)

3 Viewpoints on CSR
What purpose should corporations serve?
Narrow, Classical Economic View
(Smith, Friedman Levitt) (Smith Friedman, Max. profits within the law Goods & services that society wants + job creation, not just profits profits.

Broader SocioBroader Socio-economic View

(Simon, et al, Stone, Arrow, Goodpaster, Bowie) Do no harm (moral minimum) a Prevent harm Do what is right & fair not just $$$

Broad Maximal View (Mulligan)

Do good, solve social problems

The Classical View: 3 key points View:

Business organisations, goals & g g behaviour are separate from others Performance criteria are economic efficiency and growth Primary goal is profit
Engage in purely economic activity and be judged in purely economic terms. Social concerns should be left to other institutions.

MILTON FRIEDMAN
1912 - 2006

25 books 19 honorary degrees y g champion of capitalism advisor to presidents 1946-76 - Univ. of Chicago 19461976 - Nobel Prize, Economics 1988 - U.S. Medal of Freedom

Milton Friedmans view of CSR: CSR: 3 arguments in more detail

1. Free Society Argument

The doctrine of social responsibility p y does not differ in philosophy from the most explicitly collectivist doctrines Defenders of CSR are unwitting puppets D f d f i i of socialism (Friedman, 1970). Capitalism is a necessary condition for political freedom (Friedman, 1962:10).
Free society = free market economic system.

The Classical View

Socially responsible actions lower efficiency: reduce profit -- shareholders lose reduce wages -- employees lose prices rise -- consumers lose sales drop -- everybody loses Best left to liti l B t l ft t political representatives t ti Imposes unequal costs among competitors & I l t tit hidden costs to stakeholders let the market decide advertising, safety, hr, environment, etc eg sale of govt land

Milton Friedmans view of CSR: CSR: 3 arguments in more detail 2. Agent-principal Argument Agent-p g p g
Managers are agents of the owners of the corporation (stockholders) Agents are responsible to act on behalf of their principals, in accordance with their desires. Corporate stockholders desire max legal RoI. l lR I Managers who sacrifice profits for CSR not required by law, are stealing from t i db l t li f stockholders (stealing is wrong).

Milton Friedmans view of CSR: CSR: 3 arguments in more detail 3. Taxation Argument
A manager who sacrifices profits for CSR is imposing a cost on

stakeholders. k h ld

Imposing a cost = imposing a tax. Imposing taxes without consent is taxing without representation, contrary to democracy. democracy Managers are not trained in social re-engineering/redistribution. re-engineering/redistribution

Milton Friedmans view of CSR: CSR: . In a free society there is society there

one and only one social responsibility of business to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to game say, engages in open and free competition without deception or fraud.

Milton Friedmans Free Society y Friedman is defending a free market economic system charactersised by: Open & f O free competition titi Numerous buyers & sellers Who have perfect information Who are all rational utility maximisers Absence of external costs & market regulation. regulation

Milton Friedmans Free Society: critique

The mandate to profit maximise ignores: Reality f i R lit of imperfect competition (resulting in f t titi ( lti i unequal distribution of income) Social i ffi i S i l inefficiencies due to imbalance of i d t i b l f knowledge between buyers & sellers UnUn-costed externalities eg pollution Manufacturers create false demand (excessive & unsustainable consumption Advertising is coercive restricting free consumer choice
http://www.theage.com.au/business/competition- casualty-in-beer-warshttp://www.theage.com.au/business/competition-a-casualty-in-beer-warsxenophon-20110323xenophon-20110323-1c5ry.html

Review to Date
Narrow Classical Economic View
Max shareholder value, uphold law & ethical custom, enlightened long-term value max. long Friedmans free society, agent-principal and agenttax arguments. Critique of Friedmans free market Critique of maximising ones self-interest: selfutilitarian principle, Kant, individual rights. Non fiduciary responsibilities of managers (eg dont lie, cheat, steal, harm, coerce)

The Classical View Grounded i f G d d in free market, k t neoclassical economic theory Adam Smith (1723-90) (1723 The Wealth of Nations (1776) (1776) the best economic system recognises individual self interest Role of the invisible hand in coordinating self interest for common good

The Classical View Appeals to utilitarianism and individual rights to freedom and property for ethical foundations Utilitarian defence
if we all pursue our own business interests, society would be better served d an invisible hand would coordinate individual self-interested behaviour selfso that social good resulted

Critique of utilitarian defence

Market failures cause harm and less utility:
External diseconomies eg pollution Not all goods and services can be sufficiently produced through free market process, eg social goods (clean air etc) Pursuit of self interest harm Tragedy of interest.harm. the commons. Cooperation or regulation needed

Imperfect competition Imbalance of knowledge between buyer and seller Unjust distribution of the greatest good

Adam Smith and CR

Is Smiths work misrepresented?
The Theory of Moral Sentiments
The defining ethic or virtue is not self interest, but sympathy (compassion, justice) [the roots of morality y p y( p ,j )[ y
are found in empathy, Hoffman, 1984] The impartial (objective) spectator (shades of Kant & Rawls)

The Wealth of Nations

economic actors must exercise prudence, benevolence, restraint, respect for others, justice

Can corporations be licensed to always act only in their best interests without regard for the interests of others?

Rights defence and critique

Rights to liberty and property are natural and inalienable. Free market defends these rights g However Rights are not absolute; they are limited by the rights of others EG OH&S. OH&S Hierarchy of rights Nozicks libertarian view of justice

Corporate Responsibility p p y Continuum

Classical economic view

Socioeconomic view

Maximal social view

Moral minimum

NB: Carroll (1979) Economic, legal, ethical & discretionary responsibilities (Non hierarchical? Evolutionary?)

SocioSocio-economic View of Corporate Responsibility

Responsibility of business includes more than profit making. How much more?
The Moral Minimum: do no harm e o a u o a Affirmative duties: prevent harm Affirmative duties: do good

Simon, Powers & Gunneman (1972)

Obligation to adhere to moral minimum Negative injunctions not causing harm Affirmative duties prevent harm promoting g p g good Obligation not to cause harm involves taking active steps to prevent potentially harmful activities

Moral minimum
Affirmative duties vs negative injunctions (prevent harm/do no harm) Example: BHP Billitons environmental policy Billiton s (2005) states that its duty is to,

ensure it has management systems to ensure identify, control, and monitor environmental risks arising from its operations and to conduct research and establish programs to conserve resources, resources minimise waste, improve waste processes, and protect the environment.

Simon, Powers & Gunneman (1972) However duties of citizens are not openopen-ended Obligation to prevent harm capability need proximity last resort Kew Garden Principles Garden

Avoidable Harm Criteria

Ought implies can
Car companies not responsible for driver p p error

SP&G include not causing harm and preventing harm

Obli ti Obligation to build safer cars t b ild f

Limited by Kew Garden principles

need, proximity, capability, last resort http://www.youtube.com/watch?v=http://www.youtube.com/watch?v=_gU50mfehI (Milton Friedman)

Reformulating the Classical View Bowie and D k (1990) B i d Duska

in addition to making a profit, business has three obligations b i h th bli ti
act in accordance with justice cause no avoidable, unjustifiable harm avoidable prevent harm in certain conditions (Ok to do good but not obliged)

Bowie (1991)
Now argues that part of corporate social responsibility is to help solve social problems but all stakeholders p should have a say in how money is to be spent

Reformulating the Classical View The bli ti Th obligation not to harm tt h

the middle ground

Obligations in ascending order Obli i i di d

(Frankena)

avoid harm prevent harm remove harm do good

As the difficulty increases the obligation decreases

Review to Date
Narrow Classical Economic View
Max shareholder value, uphold law & ethical , p custom, enlightened long-term value max. long Friedmans free society argument and agentagentprincipal and tax argument. argument

SocioSocio-Economic View
Stakeholder interests should be explicitly incorporated in the organizations purposes. organization s

Review to Date
Socio Economic View (cont)
- Moral minimum

Do no harm Prevent harm eg BHPBilliton policy on envir.

- Affirmative duties not open-ended openp

. Simon, Powers & Gunnemann
. Need, proximity, capability, last resort.

- B i & Duska Bowie D k

. Profit-making within the law but recognise nonProfitnong ,j , g economic ends of rights, justice, negative and affirmative duties, common good.

- Stakeholder Theory

Stakeholder Theory y
Business has myriad social relationships Relationships carry obligations
employees suppliers consumers local community / society y y investors

Classical model: benefit stockholders Stakeholder: benefit all who have a stake in the business

Stakeholder Roles Owners have a financial stake in the corporation and expect a return on their investment. Employees have their jobs and usually their livelihood at stake. Suppliers provide raw materials to the corporation, thus the corporation is vital to the supplier's success. success

Stakeholder Roles
Customers exchange resources for the products or services of th firm and i d t i f the fi d in return receive the benefits of the products or services. Local community grants the corporation the right to build facilities in their area; in turn, the community benefits from the tax base and economic contributions of the corporation. Managers must look after the health of the corporation and carefully balance p y the conflicting claims of all stakeholders.

Stakeholder Theory

In the stakeholder theory, the y, function of business is the harmonisation of the interests of the various stakeholders. But how?

Evan and Freeman

Both stockholders and stakeholders have a right to demand certain actions from management because all have a vested stake in the corporation. The law recognises duties to stakeholders Utilitarianism demands that all stakeholders be given equal consideration and that mgt consider the consequences g q for all affected. Rights theory demands equal rights for all and that people not be used as a means to anothers end.

John R. Boatright

Shareholders As Owners
Equity Argument Managers do not appear to have a special fiduciary responsibility to shareholders because the shareholders already have built-in protections that other builtstakeholders do not possess.
Shareholders are sufficiently protected by the right they have to elect the board of directors, vote on shareholder , resolutions, etc.

Challenges to Stakeholder Theory Th

Primacy of stockholders interests y Too general and vague. Little practical use to management.
Problems identifying stakeholders and their interests How to balance those interests? Note: Friedmanites treat stakeholders well to make $$; stakeholder theory, because it is the a e sta e o de t eo y, t st e right thing to do.

What Wicks and Freeman say

http://www.darden.virginia.edu/corporatehttp://www.darden.virginia.edu/corporateethics/Video_Stakeholder_Responsibility/index. html http://www.darden.virginia.edu/corporatehttp://www.darden.virginia.edu/corporateethics/Video_Stakeholder_Theory/index.html

Revision of Classical Theory y

Business has a primary responsibility to make a profit, but in doing so cannot resort to coercion or fraud, and must respect the rights of all those who have a stake in the business, treating them justly and fairly, compensating for past injuries, doing no harm, and, where required, preventing harm. q ,p g
(Bowie & Duska, 1990:42)

Corporate Responsibility p p y Continuum

Classical economic view

Socioeconomic view

Maximal social view

Moral minimum

NB: Carroll (1979) Economic, legal, ethical & discretionary responsibilities (Non hierarchical? Evolutionary?)

Broad Maximal View of CSR

Obligation to help solve social problems
to do good or shape society.

Arguments for: A t f
Corporate citizenship: business & society interwoven Duty of gratitude Social power (balance power with responsibility) p y) Prudent stewardship of societys resources Discourages Govt. regulation Promotes long-term profits for business long Corrects social problems caused by business

Broad Maximal View of CSR

The largest 100 companies in the world have annual revenues that exceed the GDP of 50% of the worlds nation states. 359 corporations account for 40% of world trade. 10 corporations control almost every aspect of the worldwide food chain (M I t h L i i (McIntosh, Leipziger, Jones & J

Colman (1998).

Current Trends in CSR

Focus on internal and external stakeholders, including the community eg Nike in Pakistan community, Millennium Poll on CSR interviewed 25,000 people in , p p 23 countries on 6 continents about expectations of corporations. Most thought corporations should contribute to society in addition to making a profit and obeying laws Combine principles, processes & outcomes written standards and corporate ethics programs CSR initiatives will be strategically focussed, not PR

Millennium Poll
http://www.globescan.com/news_arch ives/MPExecBrief.pdf / p

Current Trends in CSR (cont.)

Increase in voluntary and mandatory reporting (annual reports and audits on ti ( l t d dit CSR performance eg St James Ethics Center, Reputex) Center Reputex) Reputex). ). > public expectations about corporate leadership sol ing leade ship in solving social problems. p oblems > emphasis on the effectiveness of corporate ethics i iti ti t thi initiatives. http://www.corporatehttp://www.corporateresponsibility.com.au/content/participantresponsibility.com.au/content/participantibilit / t t/ ti i t videovideo-2008

St James Ethics Center Reputex FTSE

http://www.ethics.org.au/ http://www.reputex.com.au/ http://news.theage.com.au/breakinghttp://news.theage.com.au/breakingnews-world/aussie-bank-tickingnews-world/aussie-bank-tickingglobal-corporate-boxes-20110406global-corporate-boxes-201104061d4ld.html

Government Regulation or Self Regulation?

Government Initiatives
Parliamentary Joint Committee on Corporations and Financial Services (Aust.) ( ) http://www.aph.gov.au/Senate/committee/corp orations_ctte/corporate_responsibility/report/in dex.htm dex htm ASX: all listed companies to have a Code of Conduct and a Code of Ethics in place and on website (2004). US Federal Sentencing Guidelines for O ga sat o s ( SGO), 99 , 00 Organisations (FSGO), 1991, 2004
http://www.wcsr.com/downloads/pdfs/csmemo45.p df

FSGO, 2005
1. 2. 2 3.

4. 5.

6. 7.

Establishment of written standards Communication and training of ws Periodic auditing, monitoring & enforcement and provision of anonymous reporting mechanisms Enforcement through incentives & discipline Appropriate and timely responses to violations Oversight by senior management Due care in delegating discretional authority

Government Regulation Hand of government approach. Societys interests best served by g g legal regulation of business rather than the free market (invisible hand). Milton Friedman
government to enforce the moral minimum

Advantages of Govt Regulation Govt. Protects socially responsible corporations from competitive disadvantages Forces a moral minimum on indifferent corporations Reflects generally accepted moral g y p standards and therefore in tune with the greater market

Disadvantages of Govt. g Regulation

Expensive to implement and enforce Reduces efficiency, costs must be passed on d Cumbersome and contradictory Interfere with freedom of private I t f ith f d f i t enterprise Encourage minimalistic approach to social responsibility
if its not illegal, its okay

Difficult to draft and avoid bias

Self Regulation Arguments in support

Principle of autonomy ( p y (linked to responsibility Knowledge and experience of rule makers within industry Proximity to the market allows rapid / flexible approach pp Ownership of rules has positive impact on attitudes and compliance Cheaper for taxpayer

Self Regulation Arguments against

Standards may be too low May exclude new market entrants Identity of wrongdoers may be protected Punishment may be lenient

Code of Ethics Advantages:

Provide stable, long-term guides to longdecisiondecision-making Through peer pressure motivate compliance Provide guidance in ambiguous situations Protect employees from employers obliging to act unethically Clarify and specify what corporate social responsibility involves Limit the need for government regulation

Major C iti i M j Criticism

Cannot be adequately enforced