CHAPTER 9 Ethics,

Corporate Social Responsibility, Environmental Sustainability, and Strategy

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LEARNING OBJECTIVES

THIS CHAPTER WILL HELP YOU UNDERSTAND:1. 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

2. What drives unethical business strategies and behavior

3. The costs of business ethics failures

4. 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.