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Chapter 5: Ethics and Corporate Social

Responsibility

Nagiah Ramasamy

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Learning Outcomes

5.1 Explain the special areas of concern in managerial ethics.

5.2 Explain the moral principles defining the ethicality of behavior.

5.3 Describe the common ethical dilemmas in the workplace.

5.4 Describe the stages in moral development.

5.5 Explain how ethical behavior can be improved in organizations.

5.6 Differentiate the two opposing views of social responsibility.

5.7 Explain why organizations are embracing sustainability.

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Concern for Ethical and Societal Issues

Fraud cases have increased by nearly 100% in Malaysia over the past three years. Some companies in Malaysia believe that the best way to win contracts is by

giving kickbacks.

Foreign companies too have been indicted for unethical practices in Malaysia. French engineering group Alstom Network Schweiz AG fined RM133 million

by Swiss authorities for bribing civil servants in at least three cases. Telecommunications firm Alcatel-Lucent paid RM435 million to resolve US

criminal and civil probes.

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The Contemporary Ethical Environment

Malaysian society – increasingly more critical about how companies manage their business operations.

IMDB, Transmile Group, Kenmark Industrial Co (M) Bhd, Port Klang Free Zone, and National Feedlot Corporation, for example, appeared in the news for the wrong reasons.

Concerns over ethical practices, social responsibility and corporate governance issues.

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Wall Street Fleet Street Main Street: Corporate Integrity at a Crossroads

Among the key findings of the 500 financial services professionals: 26% had observed or had first-hand knowledge of wrongdoing in the

workplace; 24% believed they may need to engage in unethical or illegal conduct

in order to be successful; 16% would commit insider trading, a crime, if they could get away with

it; 30% reported feeling pressured to compromise ethical standards or

violate the law as a result of their bonus or compensation plans.

http://labaton.com/en/about/press/upload/US-UK-Financial-Services-Industry-Survey.pdf.

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Business Ethics

A set of moral principles, values and beliefs that define right and wrong decisions and behavior of an individual or group.

Ethical behavior is behavior that conforms to society’s principles of good or right as opposed to bad or wrong.

Responsibilities of a business extends to its stakeholders: E.g. employees, customers, suppliers, investors and to the wider

society.

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Factors that shape business ethics

1. By individuals weighing what’s right and wrong before deciding or taking action.

2. By the ethical climate, the prevailing combination of a company’s stated beliefs and its real actions, for example, leadership by example.

3. By a firm’s codes of conduct, usually made up of statements in which the “right thing to do” is encouraged and applauded.

4. By a firm’s framework designed to encourage, or demand, high ethical standards from its workers, for example, recruitment, training, discipline and rewards systems, and whistle-blowing policy.

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Exhibit 5.1 Differences in business ethics across organizational types

Large corporations

Small business Civil society organizations

Public sector organizations

Main priorities in addressing ethical issues

Financial integrity, employee/ customer issues

Employee issues

Delivery of mission to clients; integrity of tactics; legitimacy and accountability

Rule of law, corruption, conflicts of interest; procedural issues, accountability

Approach to managing ethics

Formal, public relations and/or systems-based

Informal, trust-based

Informal, values-based Formal, bureaucratic

Responsible and/or accountable to

Shareholders and other stakeholders

Owners Donors and clients General public, higher level government organizations

Main constraintsShareholders orientation; size and complexity

Lack of resources and attention

Lack of resources and formal training

Inertia, lack of transparency

Source: Andrew Crane and Dirk Matten (2010) Business Ethics: Managing Corporate Citizenship and Sustainability in the Age of Globalization, 3e, Oxford: Oxford University Press, p. 17.

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Managerial ethics

Refers to the standards of behavior that guide individual managers in their work (Refer to Exhibit 5.2).

Three areas of special concern for managers:

How the organization treats its employees How employees treat the organization, and How the organization and its employees treat other economic

agents

Special areas of concern for managers

1. How an organization treats its employees• Determined by the behavior of its managers, and HR practices.

2. How employees treat the organization• Unethical practices involving employees, unauthorized use of organizational

resources, etc.

3. How the organization treats other economic agents• Including customers, competitors, suppliers, dealers and trade unions.

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Source: Ricky W Griffin (2013) Management 11e, Ohio, USA: South-Western Cengage, p. 91.

Exhibit 5.2 Special areas of concern for managers

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Managerial Ethical Perspectives

What constitutes ethical and unethical behavior can differ depending on the set of moral principles used as the basis for judgment.

At least four views to defining the ethicality of behavior have been proposed. Utilitarian view Rights view Theory of justice view Integrative social contracts theory

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Utilitarian View of Ethics Ethical decisions made solely on the basis of their outcomes or

consequences. If the consequences are good, the action is right; if they are bad, the action

is wrong. Uses a quantitative approach to ethical decision making, describes

what rational people do in making ethical decisions. Ought to act in a way that promotes the maximum net expectable utility,

i.e., the greatest net benefits or the lowest net costs, for the broadest community affected by their actions.

Utility or happiness, however, is difficult to quantify.

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Utilitarian View of Ethics Often criticized for ignoring or dismissing the rights of the minority.

Examples: the state decides to construct a dam across a river to supply electricity

to a large urban population, o but ignores the views of the small indigenous tribe who have been lived

in the area for ages. a CEO decides to downsize 15% of the firm’s workers to reduce the

company’s labor cost, increase the firm’s financial performance and possibly improve job security for the remaining workers, o results in the rights of some other stakeholders being ignored.

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Rights View of Ethics Concerned with respecting and protecting individual liberties and

privileges, for example: rights to life, liberty, safety, liveable environment, privacy, free speech, free

assembly, property and fair legal process.

UN Universal Declaration of Human Rights (UDHR): Preamble states “Whereas recognition of the inherent dignity and of the

equal and inalienable rights of all members of the human family is the foundation of freedom, justice and peace in the world...”

Article 1 states “All human beings are born free and equal in dignity and rights.”

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Rights View of Ethics A right is an entitlement to act or have others act in a certain way. Rights usually result in the duty of other actors to respect them.

• Therefore rights are sometimes seen as related to duties: rights of one person can result in a corresponding duty on other persons to respect, protect or facilitate these rights. • E.g. a person’s right to property imposes a duty on others to refrain from

gathering personal information about that person’s private life without his or her consent.

Employers and employees have certain rights. • Employers have rights to conduct their business as they deem fit and to

make hiring decisions as long as they operate within the legal framework • Employees have rights to safe work environment, to organize and to engage

in collective bargaining.

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Theory of Justice View

Giving each person his or her due : “treating equals equally, and unequals, unequally.” • Essentially, people get what they deserve.

Managers evaluated based on whether they implement a fair system in the distribution of benefits and burdens,• without displaying unjust favoritism toward, or biasness against, others. • not base their decisions on vague or arbitrary factors such as race, religion,

gender, marital status or personal favorites.

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Theory of Justice View

Identify fairness in two main ways. In fair procedures:

o established according to whether people have been free to acquire rewards for their endeavors.

o referred to as procedural justice.

In fair outcomes: o determined according to whether the consequences (whether positive or

negative) are distributed in a just manner, according to some underlying principle such as merit or need.

o referred to as distributive justice.

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Theory of Justice View Compared to the utilitarian theory, the theory of justice is generally

taken to be more important. E.g., sweatshops are often thought to be unjust - makes use of socially

unacceptable working conditions where workers are often abused, even if this would make that society more productive, is very likely to be criticized if not condemned.

Protects the interests of those stakeholders who may be underrepresented or disadvantaged. E.g., women, the disabled and the aborigines. However, can lead to a sense of privilege or entitlement – may make them

less willing to engage in innovation or take risks.

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Integrative Social Contracts Theory Based on the integration of two "contracts“:

The general social contract that allows businesses to operate and defines the acceptable ground rules, and

A more specific contract among members of a community that addresses acceptable ways of behaving, o proposes that ethical decisions should be based on empirical (what is) and normative

(what should be) factors.

Differs from the other three views. Suggests that managers need to look at existing ethical norms in industries

and companies in order to determine what constitutes right and wrong decisions and actions.

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Integrative Social Contracts Theory More easily and closely related to the world of business than are

other approaches to ethical decision making because of its relevance to real business situations and a focus on various

communities affected by decisions. Largely focused on the problems inherent in a globalized economy,

especially the ethical problems encountered by MNCs when operating in developing countries.

Application includes the appropriateness of businesses participating in corrupt practices,

environmental protection, wage rates and living conditions of employees, and cultural issues of international business to the corporate governance and ethical issues present in all forms of economic systems.

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Common On-the-job Ethical Challenges

1. Conflict of interest. An employee’s private interests are significant enough to interfere with the

job duties of the employee to the detriment of the organization.2. Honesty and integrity.

Honest employee is expected to tell the truth, but an employee with integrity goes beyond mere truthfulness by sticking to deeply felt ethical principles, and acting on them.

Warren Buffet, Chairman and CEO of Berkshire Hathaway, on the importance of integrity: “In looking for people to hire, look for three qualities: integrity, intelligence, and energy. And if they don’t have the first one, the other two will kill you.”

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Common On-the-job Ethical Challenges

3. Loyalty versus truth. Employers expect their employees to be loyal and to act in their organization’s

best interests. Conflicts arise when employees believe the interest of the community morally

outweighs their loyalty to their organization,- they have to choose between loyalty to their organization and being truthful.

4. Whistle-blowing. Employees’ disclosure of information about perceived wrongdoing in an

organization, - because they lack the influence or authority to directly change organizational

practices.

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Exhibit 5.3 Costs of Unethical Behavior and Benefits of Ethical Behavior

Costs of Unethical Behavior Benefits of Ethical Behavior Loss in market share Loss of business reputation Increased regulations by regulatory

authorities Loss of consumer confidence, and consumer

boycott of products Employee turnover Abuse of the environment Decreased returns on investment to

shareholders Compensation or damages to those harmed

Avoid lawsuits and expensive settlements Avoid damage to reputation of the business Attract and retain good employees Boost employee morale, trust and loyalty Longer term business performance and

sustainability Goodwill between the business and its

community Benefits all stakeholders

Source: Stephen Robbins, Rolf Bergman, Ian Stagg and Mary Coulter (2006) Management, 4e, NSW: Pearson Prentice-Hall, pp.160-162.

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Exhibit 5.4 Kohlberg’s stages of moral development

LEVEL 3Post-conventional (Principled)

Stage 6. Following self-chosen ethical principles even if violate law. Universal ethical principles.Stage 5. Valuing rights of others and upholding non-relative values and rights

regardless of majority’s opinion.

LEVEL 2Conventional

Stage 4. Maintaining conventional order by fulfilling obligations. Authority and social-order maintaining orientation: Law and order

morality. Stage 3. Living up to what is expected by people close to you. Interpersonal accord and conformity: The good boy/good girl attitude.

LEVEL 1Pre-conventional

Stage 2. Following rules only when it’s in your immediate interest. Self-interest orientation: What's in it for me? Stage 1. Sticking to rules to avoid physical punishment. Obedience and punishment orientation: How can I avoid punishment?

Adapted from Lawrence Kohlberg, "Moral Stages and Moralization: The Cognitive-Development Approach”, in Thomas Lickona (ed.) (1976) Moral Development and Behavior: Theory, Research, and Social Issues. New York: Holt, Rinehart & Winston, p. 35.

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Exhibit 5.6 A Multisystem Approach – Improving ethical behavior in organizations

Formal Systems Informal Systems

Executive Leadership Selection System Policies/Codes Orientation/Training Performance Management Authority Structure Decision-making Processes

Role Models and Heroes Norms Rituals Myths/Stories LanguageEthical/Unethical

Behavior

Alignment?

Source: Linda K. Trevino and Katherine A. Nelson (2014) Managing Business Ethics, 6e. New Jersey: Wiley, p. 153.

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The two opposing views of social responsibilityThe debate over corporate responsibility involves two key elements:

NARROW VIEW The classical, narrow or purely economic

view that management's only social responsibility is to maximize profits.

Also viewed as the traditional shareholder model - construed narrowly to cover only profit maximization.

Friedman argues that managers' primary responsibility is to operate businesses in the best interests of the shareholders, being viewed as the true owners of those businesses.

BROAD VIEW The socioeconomic position holds that

management's responsibility goes well beyond making profits to include protecting and improving society's welfare.

Such a position is also referred to as the broad view, social entity model or the stakeholders’ model.

To include acting morally, refraining from socially undesirable behavior, and contributing actively and directly to the public good.

Exhibit 5.8 Some examples of corporate social responsibilities to stakeholdersResponsibility to Employees Responsibility to

Customers/EnvironmentResponsibility of business

to Society, Investors, & Suppliers

Working Conditions Equal Employment

Opportunity Affirmative Action Diversity Training Economic Security Child Care/Parental Leave Employee Dignity Conflict of Interest

Right To Safety Right To Be Informed Right To Choose Right To Be Heard Quality Of Life Ecology/Pollution

Fairness Honesty Timely Action Appropriate

Compensation Philanthropy

Source: William Nickels, James McHugh and Susan McHugh (2012) Understanding Business, 10e. New York: McGraw Hill/Irwin.

Exhibit 5.9 Arguments For and Against Social Responsibility

For AgainstPublic expectations Violation of profit maximizationLong-run profits Dilution of purposeEthical obligation CostsPublic image Too much powerBetter environment Lack of skillsDiscouragement of further governmental regulation Lack of accountability

Balance of responsibility and powerStockholder interestsPossession of resourcesSuperiority of prevention over cures

Source: Stephens P. Robbins and Mary Coulter (2012) Management, 11e. New Jersey:

Prentice-Hall, p. 126.

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Socially Responsible Business Benefits

Includes: Enhanced reputations and goodwill. Reduced risks and costs. Protection from their own employees and agents. Stronger competitive positions. Expanded access to capital, credit, and foreign investment. Increased profits. Sustained long-term growth. International respect for enterprises and emerging markets.

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Sustainable development“...development that meets the needs of the present without compromising the ability of future generations to meet their own needs" (Gro Bruntland, 1987).

We inherit the Earth from previous generations have an obligation to pass it on in reasonable condition to future

generations. encourages organizations to be more aware of their long-term roles

in the world’s ecology and communities emphasis is on conserving and protecting natural resources.

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Sustainable development - Triple Bottom Line

Managers should pay attention not only to financial results but also to environmental and social issues.

Focuses organizations on the economic value they add, and environmental and social value they add or destroy. Demands a whole set of values, systems, and processes that take into

consideration the needs of all the organization’s stakeholders – shareholders, customers, employees, business partners, governments, local communities and the public.

Organisations have tremendous impact as employers, users of resources, and designers and suppliers of products In a unique position to influence the use of the world’s resources for the

better.

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Sustainable development

Modern industries provided humanity with tremendous

amount of material prosperity, but created unparalleled environmental

threats to the present and future generations,

threaten the welfare of human beings , plant and animal life.

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Threats to the environment Come from two sources:

pollution and resource depletion.

Pollution: the undesirable and unintended contamination of the environment by the manufacture or use of commodities covers pollution of the air, water and land. Asian Rare Earth Sdn Bhd’s rare earth refinery in Bukit Merah

Blamed for birth defects and eight leukaemia cases within 5 years in a community of 11,000 people.

Mitsubishi Chemical shut down the refinery in 1992; an estimated $100 million spent in the largest radiation clean up in the rare earth industry in Malaysia.

Reached an out-of-court settlement with residents in Bukit Merah by agreeing to donate $164,000 to the community’s schools, while denying any responsibility for illnesses.

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Threats to the environment

Resource depletion refers to the consumption of finite or scarce resources. include the depletion of species and habitats, the depletion of fossil fuels and

the depletion of minerals. Estimated

Extinct since 1600 A.D., at least:o 63 major identifiable species of mammals o 88 major identifiable species of birds

the earth’s rainforests - destroyed at the rate of about 1% per annum.