*

Chapter Four

*
Demanding Ethical &
Socially Responsible
Behavior
 WHAT are ETHICS? Ethical Standards
are Fundamental

LG1
• Ethics -- The standards of moral behavior. Behaviors that are
accepted by society as right versus wrong. Ethical standards are
set based on the code of conduct or the commonly accepted
principles of behavior by society, firm, industry and individual
personal values.
Common factors of basic moral values: Integrity, Respect for human life,
Self-control, honesty, courage, and self-sacrifice are right. However,
cheating, cowardice and cruelty are wrong.
.
Business Ethics: The principles and standards
that define acceptable conduct in business.
Social Responsibility: A business’s obligation to
maximize its positive impact and minimize its negative
impact on society.

4-2
 Ethics Begins
Facing ethical questions with Each of Us

LG2

• Ask yourself these questions:

- Is it legal?
- Most basic question of business ethics
- Are you violating any rule?
- Is it balanced?
- Am I acting fairly?
- Does it benefits all?
- How will it make me feel about myself ?
Would I feel proud if my family & friends this decision?

4-3
What is Ethical Behavior in business?
1.Competing Fairly
and Honestly
2.Communicating
Truthfully
3.Not Harming Others
• In business, besides obeying all laws and regulations, practicing good ethics means
competing fairly and honestly, communicating truthfully, and not causing harm to
others.
• Businesses are expected to compete fairly and honestly and not knowingly deceive,
intimidate, or misrepresent customers, competitors, clients, or employees. While
most companies compete within the boundaries of the law, some do knowingly
break laws or take questionable steps in their zeal to maximize profits and gain a
competitive advantage.
• Today’s companies communicate with a wide variety of audiences. Communicating
truthfully is a simple concept: tell the truth, the whole truth, and nothing but the
truth. However, sometimes matters are not so clear. The timing and content of
business messages are important.
• Placing one’s personal welfare above the welfare of the organization can cause
harm to others. For instance, every year tens of thousands of people are the victims
of investment scams. Insider trading is illegal and is closely checked by the
Securities and Exchange Commission (SEC). Another way that businesspeople can
harm others is by getting involved in a conflict of interest situation. A conflict of
interest exists when choosing a course of action will benefit one person’s interests
at the expense of another or when an individual chooses a course of action that
advances his or her personal interests over those of his or her employer.
 Ethics Begins
ETHICS and YOU with Each of Us

LG2

• Plagiarizing from Internet materials is the most

common form of cheating in schools today.

• Studies found a strong

relationship between
academic dishonesty
and dishonesty at work.

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 Factors Influencing Ethical Behavior
• Cultural Differences
• Knowledge/communication Gap
• Corporate Behavior/relation
• Reporting Systems
• Although a number of factors influence the ethical behavior of businesspeople, four in particular appear to
have the most impact: cultural differences, knowledge, organizational behavior, and legislation.
• Globalization exposes businesspeople to a variety of different cultures and business practices. What does it
mean for a business to do the right thing in Thailand? In Africa? In Norway? What may be considered
unethical in the United States may be an accepted practice in another culture.
• In most cases, a well-informed person is in a position to make better decisions and avoid ethical problems.
Making decisions without all the facts or a clear understanding of the consequences could harm employees,
customers, the company, and other stakeholders.
• The foundation of an ethical business climate is ethical awareness. Organizations that strongly enforce
company codes of conduct and provide ethics training help employees recognize and reason through ethical
problems. Similarly, companies with strong ethical practices set a good example for employees to follow.
On the other hand, companies that commit unethical acts in the course of doing business open the door for
employees to follow suit.
• Another way companies support ethical behavior is by establishing a system for reporting unethical or
illegal actions at work, such as an ethics hotline. Companies that value ethics will try to correct reported
problems. If a serious problem exists, or in cases where management may be involved in the act, an
employee may choose to blow the whistle. Whistle-blowing is an employee’s disclosure to the media or
government authorities of illegal, unethical, or harmful practices by the company.
 Reasons for Not Reporting
Observed Misconduct
The most common types of observed misconduct are
lying, withholding information, and abusive /
intimidating behavior.
1. Fear of not being considered a team player
2. Didn’t believe corrective action would be taken
3. Feared retribution or retaliation from supervisor or
management
4. No one else cares about business ethics so why
should I
5. Didn’t trust organization to keep report confidential
 Ethical Situations
Ethical Dilemma An ethical dilemma is a situation in
which one must choose between two conflicting but
arguably valid sides. All ethical dilemmas have a
common theme: the conflict between the rights of two or
more important groups of people . Example: A company
faces an ethical dilemma when it must decide whether to
continue operating a production facility that is suspected,
but not proven, to be unsafe.
• Ethical Lapse type of situation is an ethical lapse, in
which an individual makes a decision that is clearly
wrong, such as divulging trade secrets to a competitor.
Example; A company makes an ethical lapse when it
continues to operate the facility even after the site has
been proven unsafe.
 Factors That Cause Workers
To Act Unethically

• Pressure to meet sales, budget or profit goals

• Lack of recognition
• Personal financial worries
• Balancing work & family
• Poor Communication
 Top Five Unethical/Illegal Behaviors of
Workers

Cut corners in quality control

Covered up incidents
Abused or lied about sick days
Lied to or deceived customers
Put inappropriate pressure on others
 LIFE AFTER SCANDAL Ethics is More
Than Legality

• Scandals have shaken the real estate,

mortgage and banking industries.
• How do we restore trust in the free market
system?
- Punish those who have broken the law.
- Make accounting records more
transparent.
- Consider what is ethical, not just what
is legal.
• Trust between workers and managers must
be based on fairness, honesty, openness
and moral integrity. Leadership can help
instill corporate values in employees.

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 PAYING the PRICE
(Legal Briefcase)

• Enron: One executive was serving a 24 year sentence for

accounting fraud while another released in October 2011.
• Arthur Andersen: Convicted of tampering with witnesses,
the company was dissolved and about 28,000 people lost
their jobs.
• Tyco International: Two executives stole $600 million from
the company and are scheduled to be released from prison
in 2030.
• Adelphia Communication: Two executives were convicted
of conspiracy, bank and securities fraud and given
sentences of 15 and 20 years.
• WorldCom: Former CEO was convicted of fraud,
conspiracy and false filings and sentenced to 25 years.

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Fostering Ethical Behavior
• Leadership
• Codes of Conduct
– Compliance-based
– Integrity-Based
• Social Audits (Workplace issues, environment, product
safety, community service and respect for the rights of citizenry).

• Whistle Blowing
Whistleblowers: Insiders who report illegal or unethical behavior to top
management in an organization. (Sarbanes-Oxley Act-2002)
 ETHICS CODES
LG4

• An increasing number of companies have

adopted written codes of ethics.

• Compliance-Based Ethics Code -- Emphasize

preventing unlawful behavior by increasing control
and by penalizing wrongdoers.

• Integrity-Based Ethics Code -- Define the

organization’s guiding values, create an environment
that supports ethically sound behavior and stress a
shared accountability among employees.

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 SOCIAL AUDITING Social Auditing

LG5
• Social Audit -- A systematic evaluation of an organization’s
progress toward implementing programs that are socially
responsible and responsive.

• Many consider workplace issues, the environment, product safety,

community relations, military weapons contracting, human rights and
respect for the rights of local people.

• Four Types of Social Audit Watchdogs

- Socially conscious investors- SRI (Social responsibility investing)

- Environmentalists- RAN (Rainforest Action Network)

- Union officials
- Customers

4-16
Factors Influencing Managerial Ethics

Individual Organizational Environmental

Values Top Level Competition

Mgmt. Philosophy
Economic
Work
The Firm’s Conditions
Background
Reward System
Social/Cultural
Family Status Job Dimensions Institutions
Personality
Business Ethics & Social Responsibility

• Ethics- Values/Principles

• Responsibility- Consequences of
Actions
 Ethical Decision/dilemma Resolved
Through:

• Religious Teachings

• Individual Rights

• Legislation

• Court Decisions
 Classifying Business Decisions

Ethical Ethical Ethical

but and
Illegal Legal

Unethical Unethical
and but
Unethical Illegal Legal

Illegal Legal
 Steps to Improve Business Ethics

1. Top Management 4. Ethics Office

1. Employees 5. Outsiders

2. Managers 6. Enforcement
HOW to IMPROVE BUSINESS ETHICS

1. Top management must adopt and unconditionally

support an explicit corporate code of conduct.

2. Employees must understand that senior

management expects all employees to act
ethically.

3. Managers and others must be trained to consider

the ethical implications of all business decisions.

(continued)
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 HOW to IMPROVE BUSINESS ETHICS

4. An ethics office must be set up with which

employees can communicate anonymously.
Whistleblowers -- People who report illegal or
unethical behavior.
5. Involve outsiders such as
suppliers, subcontractors,
distributors and customers.
6. The ethics code must be
enforced.

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 Social Responsibility in Business
Early20th Century-----Maximize Profit
Middle20th Century---Provide Jobs and Pay Taxes
Early21st Century---Balance Ethics and Profits
• People with equally good intentions can arrive at different conclusions based on different assumptions
about the role of business in society. These perspectives can be grouped into three general categories: (1)
the only responsibility of business is to make money, (2) business has a larger responsibility to society (and
ethical behavior leads to financial success) and (3) businesses must balance social responsibility and
financial objectives.
• In the nineteenth and early twentieth centuries, the prevailing view among U.S. industrialists was that
business had only one responsibility: to make a profit. Caveat emptor was the rule of the day—"Let the
buyer beware." If you bought a product, you paid the price and took the consequences. No consumer groups
or government agencies would help you if the product was defective or caused harm.
• In the mid-twentieth century, Milton Friedman’s view of a company’s responsibility toward society was
representative and remained influential for many years: “There is only one social responsibility of
business,” said Friedman. “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 say, engages in open and free competition without
deception or fraud.” As he saw it, the only social responsibility of business was to provide jobs and pay
taxes.
• Most people in the USA now reject the notion that a corporation’s only role is to make money. Therefore,
investors and managers support a broader view of social responsibility. They argue that a company has an
obligation to society beyond the pursuit of profits and that becoming more socially responsible can actually
improve a company’s profits. An emerging perspective is called dynamically balancing ethics and profits.
This “third view” asserts that ethics needs to be one of the cornerstones of business but that in the real
world, profits and ethics are often at odds. Therefore, managers need to evaluate every situation with the
context of the organization’s “moral personality.”
 The Nature of Social
Responsibility
• Four Dimensions:
1. Economic – earn profits
2. Legal – comply with the law
3. Ethical – not just “for profit” only
4. Voluntary & Philanthropic – promote human
welfare and goodwill
 Arguments for Social
Responsibility
1. Business helped to create many of the social problems that exist today, so it
should play a significant role in solving them, especially in the areas of
pollution reduction and cleanup.
2. Businesses should be more responsible because they have the financial and
technical resources to help solve social problems.
3. As members of society, businesses should do their fair share to help others.
4. Socially responsible decision making by businesses can prevent increased
government regulation.
5. Social responsibility is necessary to ensure economic survival: If
businesses want educated and healthy employees, customers with money
to spend, and suppliers with quality goods and services in years to come,
they must take steps to help solve the social and environmental problems
that exist today.
 Arguments Against Social
Responsibility
1. It sidetracks managers from the primary goal of business–
earning profits. Every money donated to social causes or
otherwise spent on society's problems is a money less for
owners and investors.
2. Participation in social programs gives businesses greater
power, perhaps at the expense of particular segments of
society.
3. Some people question whether business has the expertise
needed to assess and make decisions about social problems.
4. Many people believe that social problems are the
responsibility of government agencies and officials, who can
be held accountable by voters.
 Three Levels of
Social Responsibility

Societal Responsibility

Stakeholder Responsibility

General Profit Responsibility Ecological

Customers Employees
Public Environment
Owners/Stockholders

Suppliers/Distributors

Public Interest Groups

Source: Marketing, 5/E by Berkowitz, Kerin, Hartley, and Rudelius.
 Balancing Business and Stakeholders’
Rights
Business

Investors Consumers Employees Society

Profits Informed Equity Clean
Fair Purchase- Health & Environment
Disclosure Safe Safety
product and
product
choice
 Responsibility to Employees

• Working Conditions • Economic Security

• Equal Employment • Child Care/Parental
Opportunity Leave
• Affirmative Action • Employee Dignity
• Diversity Training • Conflict of Interest
Responsibility to Customers/Environment

• Right To Safety
– Right to Safety protects the consumer from products, manufacturing practices or services
that could prove detrimental to the health or life of the individual consumer.

– Right To Be Informed
– Companies supply all of the information that would be necessary to make an intelligent
decision about purchasing a particular product.

– Right to Choose
– Ensures that consumers be able to choose from a variety of products and
services.

Right To Be Heard
– Means that government entities should hold the consumer's interests at heart
when implementing policies. Also, businesses should address customer
concerns in the development and production of goods and services.
Responsibility to Society, Investors, &
Suppliers

• Fairness
• Honesty
• Timely Action
• Appropriate Compensation
• Philanthropy
 International Ethics & Social
Responsibilities

• U.S. not unique

– Japan/S. Korea/China = influence peddling
– Mexico = child labor
• Leaders being held to new/higher standards
– Chinese prison labor
– McDonald’s using rain forest land for cattle
grazing
 INTERNATIONAL ETHICS
LG6

• Many businesses want socially responsible

behavior from their international suppliers.
• The Joint Initiative on Corporate Accountability
and Workers’ Rights was designed to make
creating a single set of labor standards and
inspecting factories easier.
• In the 1970s, the Foreign Corrupt Practices Act
criminalized the act of paying foreign
businesses or government leaders in order to
get business.
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