The school of ethical relativism holds that

CHAPTER 9 Ethics, Corporate Social Responsibility, Environmental Sustainability, and Strategy

LEARNING OBJECTIVES

THIS CHAPTER WILL HELP YOU UNDERSTAND:

How the standards of ethical behavior in business are no different from the ethical standards and norms of the larger society and culture in which a company operates

What drives unethical business strategies and behavior

The costs of business ethics failures

The concepts of corporate social responsibility and environmental sustainability and how companies balance these duties with economic responsibilities to shareholders

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WHAT DO WE MEAN BY BUSINESS ETHICS?

Business ethics

Is the application of general ethical principles to the actions and decisions of businesses and the conduct of their personnel

Are not materially different from ethical principles in general because business actions have to be judged in the context of society’s standards of right and wrong

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CORE CONCEPT (1 of 8)

Ethics concerns principles of right or wrong conduct.

Business ethics deals with the application of general ethical principles to the actions and decisions of businesses and the conduct of their personnel.

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WHERE DO ETHICAL STANDARDS COME FROM—ARE THEY UNIVERSAL OR DEPENDENT ON LOCAL NORMS?

The school of ethical universalism

The school of ethical relativism

Integrated social contracts theory

Sources for Ethical Standards

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THE SCHOOL OF ETHICAL UNIVERSALISM

Ethical universalism

Holds that common understandings across multiple cultures and countries about what constitutes right and wrong give rise to universal ethical standards that apply to all societies, all firms, and all businesspeople

Effect on business ethics

Whether a business-related action is right or wrong is judged by universal standards

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Core Concept (2 of 8)

The school of ethical universalism holds that the most fundamental conceptions of right and wrong are universal and apply to members of all societies, all companies, and all businesspeople.

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THE SCHOOL OF ETHICAL RELATIVISM

Ethical relativism

Holds that differing beliefs, customs, and behavioral norms across countries and cultures give rise to multiple sets of standards of what is ethically right or wrong

Effect on business ethics

Whether business-related actions are right or wrong depends on local ethical standards

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Core Concept (3 of 8)

The school of ethical relativism holds that differing religious beliefs, customs, and behavioral norms across countries and cultures give rise to multiple sets of standards concerning what is ethically right or wrong.

These differing standards mean that whether business-related actions are right or wrong depends on the prevailing local ethical standards.

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Strategic Management Principle (1 of 9)

Under ethical relativism, there can be no one-size-fits-all set of authentic ethical norms against which to gauge the conduct of company personnel.

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EXAMPLES OF ETHICAL RELATIVISM ISSUES

The use of underage labor

The payment of bribes and kickbacks

Relativism can result in multiple sets of standards

The use of local morality to guide ethical behavior

Variations in Ethical Standards

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IKEA’s Global Supplier Standards: Maintaining Low Costs While Fighting the Root Causes of Child Labor

How effective has IKEA’s IWAY proactive approach to setting global labor standards been in reducing abuses of child workers at its supplier facilities?

Is it fair for IKEA to prescribe that its suppliers comply with global standards that are at variance with local market labor practices and conditions?

What has IKEA done to help its suppliers overcome the problems that foster the use of child labor?

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Strategic Management Principle (2 of 9)

Codes of conduct based on ethical relativism can be ethically problematic for multinational companies by creating a maze of conflicting ethical standards.

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Strategic Management Principle (3 of 9)

According to integrated social contracts theory, adherence to universal or “first-order” ethical norms should always take precedence over local or “second-order” norms.

In instances involving universally applicable ethical norms (like paying bribes), there can be no compromise on what is ethically permissible and what is not.

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INTEGRATIVE SOCIAL CONTRACTS THEORY

Provides a middle-ground balance between universalism and relativism

Posits that the collective views of multiple societies form universal (first order) ethical principles that all persons have a contractual duty to observe in all situations

Within the contract, cultures or groups can specify locally ethical (second-order) actions

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APPLICATION OF INTEGRATED SOCIAL CONTRACTS THEORY TO MULTINATIONAL BUSINESS

Effects on ethical standards

Adherence to universal ethical norms takes precedence over local norms.

A local custom is not ethical if it violates universal ethical norms.

Application of codes of ethics should first follow universal standards with allowance for local ethical diversity and influence.

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CORE CONCEPT (4 of 8)

According to integrated social contracts theory, universal ethical principles based on the collective views of multiple societies form a “social contract” that all individuals and organizations have a duty to observe in all situations.

Within the boundaries of this social contract, local cultures or groups can specify what additional actions may or may not be ethically permissible.

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Strategic Management Principle (4 of 9)

In instances involving universally applicable ethical norms (like paying bribes), there can be no compromise on what is ethically permissible and what is not.

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HOW AND WHY ETHICAL STANDARDS IMPACT THE TASKS OF CRAFTING AND EXECUTING STRATEGY

The ethics code litmus test

Areas of ambiguity: Is what we are proposing to do fully compliant with our code of ethics?

Conflict or potential problem: Is this action in harmony with our core values?

Ethically objectionable action: Will our stakeholders, our competitors, the SEC under the Sarbanes-Oxley Act, or the news and social media view this action as ethically objectionable?

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CONSEQUENCES OF ETHICALLY QUESTIONABLE STRATEGIES

Sizable civil fines and stockholder lawsuits

Devastating image and public relations hits

Sharp stock price drops as investors lose confidence

Criminal indictments and convictions

When Strategies Fail the Ethical Litmus Test

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DRIVERS OF UNETHICAL STRATEGIES AND BUSINESS BEHAVIOR

Unethical Strategies and Business Behaviors

Faulty oversight and self dealing

Pressure for short-term performance

A weak or corrupt ethical environment

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WHAT ARE THE DRIVERS OF UNETHICAL STRATEGIES AND BUSINESS BEHAVIOR?

Drivers of unethical business behavior

Faulty internal oversight allows self-dealing in the pursuit of personal gain, wealth, and self-interest.

Short-termism pressures one to meet or beat short-term performance targets.

A culture that puts profitability and business performance ahead of ethical behavior.

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Core Concepts (5 of 8)

Self-dealing occurs when managers take advantage of their position to further their own private interests rather than those of the firm.

Short-termism is the tendency for managers to focus excessively on short-term performance objectives at the expense of longer-term strategic objectives. It has negative implications for the likelihood of ethical lapses as well as company performance in the longer run.

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How Novo Nordisk Puts Its Ethical Principles into Practice

What steps has Novo Nordisk taken to ensure that its ethical standards of employee conduct are put into practice?

Why has Novo Nordisk been so successful in instilling a culture of ethical conduct in its organization when other firms have not?

What has been the effect of Novo Nordisk’s dedication to ethical business practices on its success in the marketplace?

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WHY SHOULD COMPANY STRATEGIES BE ETHICAL?

The moral case for an ethical strategy

A strategy that is unethical is morally wrong and reflects badly on the character of the firm’s personnel.

The business case for ethical strategies

An ethical strategy can be both good business and serve the self-interest of shareholders.

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STRATEGIC MANAGEMENT PRINCIPLE (5 of 9)

Conducting business in an ethical fashion is not only morally right, it is in a company’s enlightened self-interest.

Shareholders suffer major damage when a company’s unethical behavior is discovered. Making amends for unethical business conduct is costly, and it takes years to rehabilitate a tarnished company reputation.

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THE VISIBLE COSTS COMPANIES INCUR WHEN ETHICAL WRONGDOING IS DISCOVERED

Visible costs

Government fines and penalties

Civil penalties arising from class-action lawsuits and other litigation aimed at punishing the company for its offense and the harm done to others

The costs to shareholders in the form of a lower stock price (and possibly lower dividends)

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THE INTERNAL COSTS COMPANIES INCUR WHEN ETHICAL WRONGDOING IS DISCOVERED

Internal administrative costs

Legal and investigative costs incurred by the company

The costs of providing remedial education and ethics training to company personnel

The costs of taking corrective actions

Administrative costs associated with ensuring future compliance

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THE INTANGIBLE COSTS COMPANIES INCUR WHEN ETHICAL WRONGDOING IS DISCOVERED

Intangible or less visible costs

Customer defections

Loss of reputation

Lower employee morale and higher degrees of employee cynicism

Higher employee turnover

Higher recruiting costs and difficulty in attracting talented employees

Adverse effects on employee productivity

The costs of complying with harsher government regulations

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STRATEGY, CORPORATE SOCIAL RESPONSIBILITY, AND ENVIRONMENTAL SUSTAINABILITY

Corporate social responsibility (CSR)

Is a firm’s duty to operate in an honorable manner, provide good working conditions for employees, encourage workforce diversity, be a good steward of the environment, and actively work to better the quality of life in the local communities where it operates and in society at large.

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Core Concept (6 of 8)

Corporate social responsibility (CSR) refers to a company’s duty to operate in an honorable manner, provide good working conditions for employees, encourage workforce diversity, be a good steward of the environment, and actively work to better the quality of life in the local communities where it operates and in society at large.

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FIGURE 9.2 The Five Components of a Corporate Social Responsibility Strategy

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Warby Parker: Combining Corporate Social Responsibility with Affordable Fashion

How has Warby Parker’s skillful use of CSR as a strategic tool contributed to its success in the marketplace?

How strongly is customer loyalty affected by Warby Parker’s CSR practices?

Is the firm’s dedication to outcomes outside of profit likely to be acceptable to outside investors?

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Core Concept (7 of 8)

A company’s CSR strategy is defined by the specific combination of socially beneficial activities the company opts to support with its contributions of time, money, and other resources.

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FIGURE 9.3 The Triple Bottom Line: Excelling on Three Measures of Company Performance

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TABLE 9.1 A Selection of Companies Recognized for Their Triple-Bottom-Line Performance in 2013 (1 of 2)

NAME MARKET SECTOR COUNTRY
Volkswagen AG Automobiles & Components Germany
Australia & New Zealand Banking Group Ltd. Banks Australia
Siemens AG Capital Goods Germany
Adecco SA Commercial & Professional Services Switzerland
Panasonic Corp. Consumer Durables & Apparel Japan
Tabcorp. Holdings Ltd. Consumer Services Australia
Citigroup Inc. Diversified Financials United States
BG Group PLC Energy United Kingdom
Woolworths Ltd. Food & Staples Retailing Australia
Nestlé SA Food, Beverage, & Tobacco Switzerland
Abbott Laboratories Health Care Equipment & Services United States
Henkel AG & Co. KGaA Household & Personal Products Germany
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TABLE 9.1 A Selection of Companies Recognized for Their Triple-Bottom-Line Performance in 2013 (2 of 2)

NAME MARKET SECTOR COUNTRY
Allianz SE Insurance Germany
Akzo Nobel NV Materials Netherlands
Telenet Group Holding NV Media Belgium
Roche Holding AG Pharmaceutical, Biotechnology, & Life Sciences Switzerland
Stockland Real Estate Australia
Lotte Shopping Co. Ltd. Retailing Republic of Korea
Taiwan Semiconductor Manufacturing Co. Ltd. Semiconductors & Semiconductor Equipment Taiwan
SAP AG Software & Services Germany
Alcatel-Lucent Technology Hardware & Equipment France
KT Corp. Telecommunication Republic of Korea
Air France-KLM Transportation France
EDP-Energias de Portugal SA Utilities Portugal
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WHAT DO WE MEAN BY SUSTAINABILITY AND SUSTAINABLE BUSINESS PRACTICES?

Sustainability

Is the relationship of a firm to its environment and its use of natural resources

Sustainable business practices

Are those practices of a firm that meet the needs of the present without compromising the ability to meet the needs of the future

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Unilever’s Focus on Sustainability

How has the Unilever Sustainable Living Plan (USLP) for implementing its comprehensive triple-bottom-line approach toward sustainable farm management affected the company’s long-term profitability?

What place in business thinking should sustainability occupy in strategic planning that seeks to maximize profits?

What internal forces could mitigate against pursuing sustainability goals if benchmark indices are controlled by external parties?

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Core Concepts (8 of 8)

Sustainable business practices are those that meet the needs of the present without compromising the ability to meet the needs of the future.

An environmental sustainability strategy consists of a firm’s deliberate actions to protect the environment, provide for the longevity of natural resources, maintain ecological support systems for future generations, and guard against endangerments leading to the ultimate destruction of the planet.

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SUSTAINABILITY AND SUSTAINABLE BUSINESS PRACTICES

Environmental sustainability strategy

Consists of the firm’s deliberate actions to:

Protect the environment

Provide for the longevity of natural resources

Maintain ecological support systems for future generations

Guard against ultimate endangerment of the planet

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CRAFTING CORPORATE SOCIAL RESPONSIBILITY AND SUSTAINABILITY STRATEGIES

Pursuing a Sustainable CSR Strategy in the Firm’s Value Chain Activities

Business case: competitive advantage

Moral case: stakeholder benefits

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Strategic Management Principle (6 of 9)

Both CSR strategies and environmental sustainability strategies provide valuable social benefits and fulfill customer needs in a superior fashion can lead to competitive advantage.

Corporate social agendas that address only social issues may help boost a company’s reputation for corporate citizenship but are unlikely to improve its competitive strength in the marketplace.

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THE MORAL CASE FOR CSR AND ENVIRONMENTALLY SUSTAINABLE BUSINESS PRACTICES

Operate ethically and legally

Provide good work conditions for employees

Be a good environmental steward

Display good corporate citizenship

The Implied Social Contract: “It’s the right thing to do”

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Strategic Management Principle (7 of 9)

Every action a company takes can be interpreted as a statement of what it stands for.

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THE BUSINESS CASE FOR CSR AND ENVIRONMENTALLY SUSTAINABLE BUSINESS PRACTICES

Increased buyer patronage

Reduced risk of reputation-damaging incidents

Lower employee turnover costs and enhanced recruiting and workforce retention

Increased revenue enhancement opportunities due to the use of CSR and sustainability

CSR and sustainability best serve long-term interests of shareholders

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COMBATING THE EVASION OF CSR AND SOCIALLY HARMFUL BUSINESS PRACTICES

Harmful and Unethical Business Actions and Behaviors

Increased public awareness of misdeeds and bad behavior by firms

Increased legislation and regulation to correct and punish firms

Refusal to do business with irresponsible firms

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STRATEGIC MANAGEMENT PRINCIPLE (8 of 9)

The higher the public profile of a company or its brand, the greater the scrutiny of its activities and the higher the potential for it to become a target for pressure group action.

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Strategic Management Principle (9 of 9)

Socially responsible strategies that create value for customers and lower costs can improve company profits and shareholder value at the same time that they address other stakeholder interests.

There’s little hard evidence indicating shareholders are disadvantaged in any meaningful way by a company’s actions to be socially responsible.

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Appendix 1 Where Do Ethical Standards Come from—Are They Universal or Dependent On Local Norms?

The sources for ethical standards are: the school of ethical universalism, the school of ethical relativism, and the integrated social contracts theory.

Return to slide

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Appendix 2 Examples of Ethical Relativism Issues

Variations in ethical standards include:

The use of underage labor

The payment of bribes and kickbacks

Relativism can result in multiple sets of standards

The use of local morality to guide ethical behavior

Return to slide

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Appendix 3 Consequences of Ethically Questionable Strategies

Four examples of strategies failing the ethical litmus test are:

Sizable civil fines and stockholder lawsuits

Devastating image and public relations hits

Sharp stock price drops as investors lose confidence

Criminal indictments and convictions

Return to slide

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Appendix 4 Drivers of Unethical Strategies and Business Behavior

Faulty oversight and self dealing, pressure for short-term performance, and a weak or corrupt ethical environment are all examples of unethical strategies and business behaviors.

Return to slide

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Appendix 5 Figure 9.2 The Five Components of a Corporate Social Responsibility Strategy

Actions to ensure the company operates honorably and ethically

Actions to support philanthropy, participate in community service, and better the quality of life worldwide

Actions to protect and sustain the environment

Actions to enhance employee well-being and make the company a great place to work

Actions to promote workforce diversity

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Appendix 6 Figure 9.3 The Triple Bottom Line: Excelling on Three Measures of Company Performance

A company is measured by three dimensions of performance: economic (profit), social (people), and environmental (planet). The goal is to achieve excellence in all three of these performance dimensions, represented by the circle in the middle of the diagram.

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Appendix 7 Crafting Corporate Social Responsibility and Sustainability Strategies

Two primary reasons for pursuing a sustainable CSR strategy in the firm's value chain activities are:

The moral case, which focuses on stakeholder, not just shareholder, benefits

The business case, which focuses on valuable competitive advantages gained from the CSR

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Appendix 8 The Moral Case for CSR and Environmentally Sustainable Business Practices

The implied social contract means a company will:

Operate ethically and legally

Provide good work conditions for employees

Be a good environmental steward

Display good corporate citizenship

Return to slide

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Appendix 9 Combating the Evasion of CSR and Socially Harmful Business Practices

Harmful and unethical business actions and behaviors can lead to increased public awareness of misdeeds of bad behavior by firms; increased legislation and regulation to correct and punish firms; and a refusal by others to do business with irresponsible firms.