This chapter explains what it means to conduct business in an ethically and socially responsible manner and discusses the importance of doing so. Many people use the terms social responsibility and ethics interchangeable, but the two are not the same. Social responsibility is the idea that business has certain obligations to society beyond the pursuit of profits. Ethics, by contrast, is defined as the principles and standards of moral behavior that are accepted by society as right versus wrong. To make the “right choice” individuals must think through the consequences of their actions. Business ethics is the application of moral standards to business situations.
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. Companies that practice good ethical behavior refrain from issuing false or misleading communications. According to a recent Business Week/Harris poll, some 79 percent of Americans believe corporate executives put their own personal interests ahead of workers’ and shareholders. 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.
Although a number of factors influence the ethical behavior of businesspeople, three in particular appear to have the most impact: cultural differences, knowledge, and organizational behavior. 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.
Ethical behavior starts at the top. The CEO and other senior managers must set the tone for people throughout the company. More than 80 percent of large companies have adopted a written code of ethics, which defines the values and principles that should be used to guide decisions. By itself, however, a code of ethics can't accomplish much. To be effective, a code must be supported by employee communications efforts, a formal training program, employee commitment to follow it, and a system through which employees can get help with ethically difficult situations. Some companies have created an official position—the ethics officer—to guard morality. Originally hired to oversee corporate conduct—from pilfering company pens to endangering the environment to selling company secrets—many ethics officers today function as corporate coaches for ethical decision making. Another way companies support ethical behavior is by establishing a system for reporting unethical or illegal actions at work, such as an ethics hot line.
Even though legal considerations will resolve some ethical questions, you'll often have to rely on your own judgment and principles. You might consider asking yourself a series of questions: 1. Is the decision legal? (Does it break any laws?) 2. Is it balanced? (Is it fair to all concerned?) 3. Can you live with it? (Does it make you feel good about yourself?) 4. Is it feasible? (Will it actually work in the real world?) When you need to determine the ethics of any situation, these questions will get you started. You may also want to consider the needs of stakeholders, and you may want to investigate one or more philosophical approaches such as those mentioned in the table above. These approaches are not mutually exclusive alternatives. On the contrary, most businesspeople combine them to reach decisions that will satisfy as many stakeholders as possible without violating anyone's rights or treating anyone unjustly.
When making ethical decisions, keep in mind that most ethical situations can be classified into two general types: ethical dilemmas and ethical lapses. 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. The second 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. Be careful not to confuse ethical dilemmas with ethical lapses. 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. A company makes an ethical lapse when it continues to operate the facility even after the site has been proven unsafe.
Social responsibility is a concept with decades-old roots. 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—&quot;Let the buyer beware.&quot; 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. Many investors and managers now 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.
Companies must be profitable businesses to advance their social mission, and their socially responsible activities should enhance the business. Companies that support this line of thinking link the pursuit of socially responsible goals with their overall strategic planning. Such socially responsible companies are just as dedicated to building a viable, profitable business as they are to hewing to a mission—and they think strategically to make both happen. Increasingly, companies and employees are caring about their communities and want to be a part of the greater cause. The table above shows that executives generally support the notion that companies should serve their communities and be socially responsible citizens in a number of ways. They want to be good corporate citizens and satisfy shareholders’ needs for a return on their investment. Still, finding the right balance can be challenging.
Exactly how much can businesses contribute to social concerns? This is a difficult decision for most companies because they have limited resources. They must allocate their resources to a number of goals, such as upgrading facilities and equipment, developing new products, marketing existing products, and rewarding employee efforts, in addition to contributing to social causes. This juggling act is a challenge that every business faces. For example, if a company consistently ignores its stakeholders, its business will suffer and eventually fold. If the company disregards society's needs (such as environmental concerns), voters will clamor for laws to limit the offensive business activities, consumers who feel their needs and values are being ignored will spend their money on a competitor's products, investors who are unhappy with the company's performance will invest elsewhere, and employees whose needs are not met will become unproductive or will quit and find other jobs. As this slide shows, stakeholders' needs sometimes conflict. In such cases, which stakeholders should be served first—society, consumers, investors, or employees?
Businesses that give back to society are finding that their efforts can lead to a more favorable public image and stronger employee morale. Thus, more and more organizations are attempting to be socially responsible citizens by conducting a social audit, by engaging in cause-related marketing, or by being philanthropic. A social audit is a systematic evaluation and reporting of the company's social performance. The report typically includes objective information about how the company's activities affect its various stakeholders. Companies can also engage in cause-related marketing, in which a portion of product sales help support worthy causes. Some companies choose to be socially responsible corporate citizens by being philanthropic; that is, they donate money, time, goods, or services to charitable, humanitarian, or educational institutions.
Environmental issues exemplify the difficulty that businesses encounter when they try to reconcile conflicting interests: Society needs as little pollution as possible from businesses. But producing quality products to satisfy customers’ needs can cause pollution to some degree. For decades, environmentalists have warned businesses and the general public about the dangers of pollution (the contamination of the natural environment by the discharge of harmful substances). Our air, water, and land can easily be tainted by industrial discharges, aircraft and motor vehicle emissions, and a number of chemicals that spill out into the environment as industrial waste products. Moreover, the pollution in any one element can easily taint the others. For instance, when emissions from coal-burning factories and electric utility plants react with air, they can cause acid rain, which damages lakes and forests.
Widespread concern for the environment has been growing since the 1960s with the popularization of ecology, or the study of the balance of nature. In 1963 federal, state, and local governments began enacting laws and regulations to reduce pollution. In December 1970 the federal government established the Environmental Protection Agency (EPA) to regulate air and water pollution by manufacturers and utilities, supervise the control of automobile pollution, license pesticides, control toxic substances, and safeguard the purity of drinking water.
While some companies must be pressured by the federal government or private citizens to stop polluting the environment, others do a good job regulating themselves. Many companies are addressing environmental concerns by taking the following actions: Considering environmental issues a part of everyday business and operating decisions. Accepting environmental staff members as full-fledged partners in improving the company's competitiveness. Measuring environmental performance. Tying compensation to environmental performance. Determining the long-term environmental costs before such costs occur. Considering environmental impact in the product-development process. Challenging suppliers to improve environmental performance. Conducting environmental training and awareness programs. In addition to these actions, companies are reducing the amount of solid waste they send to landfills by implementing company-wide recycling programs. Hundreds of thousands of tons of waste have also been eliminated through conservation and more efficient production.
The 1960s activism that awakened business to its environmental responsibilities also gave rise to consumerism, a movement that put pressure on businesses to consider consumer needs and interests. Consumerism prompted many businesses to create consumer-affairs departments to handle customer complaints. It also prompted state and local agencies to set up bureaus to offer consumer information and assistance. At the federal level, President John F. Kennedy announced a &quot;bill of rights&quot; for consumers, laying the foundation for a wave of consumer-oriented legislation. These rights include the right to safe products, the right to be informed, the right to choose, and the right to be heard.
Today a growing number of investors are concerned about the ethics and social responsibility of the companies in which they invest. Allegations range from executives dumping stock ahead of bad news to companies using dirty accounting tricks to misrepresenting the investment.
For some companies, the past 30 years have brought dramatic changes in the attitudes and composition of the workforce. These changes have forced businesses to modify their recruiting, training, and promotion practices, as well as their overall corporate values and behaviors. The Civil Rights Act of 1964 established the Equal Employment Opportunity Commission (EEOC)—the regulatory agency that battles job discrimination. The Civil Rights Act of 1991 extended the original act by allowing workers to sue companies for discrimination and by granting women powerful legal tools against job bias. In the 1960s, affirmative action programs were developed to encourage organizations to recruit and promote members of minority groups. In addition to affirmative action programs, about 75 percent of U.S. companies have established diversity initiatives. In 1990 people with a wide range of physical and mental difficulties got a boost from the passage of the federal Americans with Disabilities Act (ADA), which guarantees equal opportunities for an estimated 50 million to 75 million people who have or have had a condition that might handicap them. During the activist 1960s, mounting concern about workplace hazards resulted in passage of the Occupational Safety and Health Act of 1970, which set mandatory standards for safety and health and which established the Occupational Safety and Health Administration (OSHA) to enforce them.
As complicated as ethics and social responsibility can be for U.S. businesses, these issues grow even more complex when cultural influences are applied in the global business environment. Corporate executives may face simple questions regarding the appropriate amount of money to spend on a business gift or the legitimacy of payment to “expedite” business. Or they may encounter out-and-out bribery, environmental abuse, and unscrupulous business practices. In Chapter 3 we discuss global business and highlight how a country’s ethical codes of conduct, laws, and cultural differences are indeed put to test as more and more companies transact business around the globe.
Business in Action Ch2
Practicing Ethical Behavior and Social Responsibility
Two Important Concepts Social Responsibility Ethical Behavior
What Is Ethical Behavior? Competing Fairly and Honestly Communicating Truthfully Not Causing Harm to Others
Factors Influencing Ethical Behavior Cultural Differences Knowledge Organizational Behavior
Business Ethics Top-Management Commitment Reporting System Code of Ethics Compliance Officer
Making Ethical Decisions Is It Ethical? Philosophical Approaches Stakeholder Issues Outsiders Supervisors Employees Utilitarianism Individual, Legal and Human Rights Principles of Justice Legality and Balance Acceptability Feasibility
Types of Ethical Situations Ethical Dilemma Ethical Lapse
Social Responsibility in Business Early 20 th Century Middle 20 th Century Early 21 st Century Maximize Profits Provide Jobs and Pay Taxes Balance Profits and Social Issues
Percentage of Executives Who “Strongly Agree” or “Agree” That Companies Should: <ul><li>Be environmentally responsible </li></ul><ul><li>Be ethical in operations </li></ul><ul><li>Earn profits </li></ul><ul><li>Employ local residents </li></ul><ul><li>Pay taxes </li></ul><ul><li>Encourage and support employee volunteering </li></ul><ul><li>Contribute money and leadership to charities </li></ul><ul><li>Be involved in economic development </li></ul><ul><li>Be involved in public education </li></ul><ul><li>Involve community representatives in business decisions </li></ul><ul><li>Target a portion of purchasing toward local vendors </li></ul><ul><li>Help improve quality of life for low-income populations </li></ul>Percentage 100 100 96 94 94 89 85 75 73 62 61 54
Balancing Business and Stakeholders’ Rights Business Safe Products Product Choice Consumers Informed Purchase Employees Equity Health & Safety Investors Profits Fair Disclosure Society Clean Environment
Efforts to Increase Social Responsibility Social Audit Philanthropy Cause-Related Marketing
Causes of Pollution Industrial Discharges Vehicle Emissions Chemical Spills
Government Efforts to Reduce Pollution The Environmental Protection Agency Regulate Air and Water Reduce Automobile Emissions License Pesticides Control Toxic Substances Safeguard Drinking Water
Business Efforts to Reduce Pollution Environmental Issues Environmental Staff Performance Expectations Performance Rewards Long-Term Cost Product Development Supplier Expectations Training and Awareness
Responsibility Toward Consumers The Right to Safe Products The Right to Be Informed The Right to Choice The Right to Be Heard
Responsibility Toward Investors Social Responsibility Business Ethics
Responsibility Toward Employees Equal Employment Opportunity Affirmative Action Occupational Health and Safety Americans with Disabilities Act
Global Ethics and Social Responsibility Bribery Environmental Abuse Unscrupulous Business Practices