Chapter 3

Corporate Social Responsibility and Business Ethics

Chapter Summary

People in an organization set the legal, ethical, and moral tones in the workplace. Just as individuals try to shape their neighborhoods, schools, political and social organizations, and religious institutions, employees need to help determine the major issues of corporate social responsibility and business ethics.

Strategic decisions involve trade-offs. We pursue one goal while subordinating another. Individual employees must work to achieve the outcomes that they want. By choosing proper behaviors, employees help to build an organization that can be respected and economically viable in the long run.

Often, the concern is expressed that business activities tend to be illegal or unethical and individuals’ failure to follow that pattern will leave them at a competitive disadvantage. The reality is that business conduct is, as a rule, honorable and honest. Rare, highly publicized criminal acts in business settings mask this reality. This chapter studies corporate social responsibility. It attempts to understand it and learn how our businesses can use their resources to make positive impacts on society. The chapter also looks at business ethics to gain an appreciation for the importance of maintaining and promoting social values in the workplace.

Learning Objectives

1. Understand the importance of the stakeholder approach to social responsibility.2. Explain the continuum of social responsibility and the effect of various options on

company profitability. 3. Describe a social audit and explain its importance.4. Discuss the effect of the Sarbanes-Oxley Act of 2002 on the ethical conduct of

business.5. Compare the advantages of collaborative social initiatives with alternative approaches

to CSR.6. Explain the five principles of collaborative social initiatives.7. Compare the merits of different approaches to business ethics.8. Explain the relevance of business ethics to strategic management practice.

Lecture Outline

I. The Stakeholder Approach to Social Responsibility

A. In defining or redefining the company mission, strategic managers must recognize the legitimate rights of the firm’s claimants. These include outside stakeholders affected by the firm’s actions.

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1. According to a survey of 2,361 directors in 291 of the largest southeastern U.S. companies,

a) Directors perceived the existence of distinct stakeholder groupsb) Directors have high stakeholder orientationsc) Directors view some stakeholders differently, depending on their

occupation (CEO or non-CEO) and type (inside or outside)

2. The study also found that perceived stakeholders were, in order of their importance:

a) Customers and governmentb) Stockholdersc) Employeesd) Society

3. When a firm attempts to incorporate the interests of these groups into its mission statement, broad generalizations are insufficient. The firm should take these steps:

a) Identification of stakeholders

(1) The left-hand column of Exhibit 3.1, A Stakeholder View of Company Responsibility, lists the commonly encountered stakeholder groups, to which the executive officer group often is added.

(2) Every business faces a slightly different set of stakeholder groups, which vary in number, size, influence, and importance.

(3) In defining the company, strategic managers must identify all stakeholder groups and weigh their relative rights and relative ability to affect the firm’s success.

b) Understanding stakeholders’ specific claims vis-à-vis the firm

(1) The concerns of the principal stakeholder groups tend to center on the general claims listed in the right-hand column of Exhibit 3.1, A Stakeholder View of Company Responsibility.

(2) Strategic decision makers should understand the specific demands of each group if the are to initiate satisfactory actions.

c) Reconciliation of these claims and assignment of priorities

(1) Unfortunately, the claims of various stakeholder groups often conflict.

(2) For objectives and strategies to be internally consistent and precisely focused, the statement must display a single-minded, though multidimensional approach to the firm’s aims.

(3) There are hundreds, if not thousands, of claims on any firm—high wages, pure air, job security, product quality, community service, taxes, OSHA regulations, equal employment opportunity regulations, product variety, wide markets, career opportunities, company growth, investment security, high ROI, and many more.

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(4) Not every claim can be pursued with equal emphasis.

(5) Priorities must be assigned in accordance with the relevant emphasis that the firm will give them.

(6) Emphasis is reflected in the criteria that the firm uses in its strategic decision making; in the firm’s allocation of its human, financial, and physical resources; and in the firm’s long-term objectives and strategies.

d) Coordination of the claims with other elements of the company mission

(1) The demands of stakeholder groups constitute only one principal set of inputs to the company mission.

(2) The other principal sets are the managerial operating philosophy and the determinants of the product-market offering.

(3) The key question is, “How can the firm satisfy its claimants and at the same time optimize its economic success in the marketplace?”

B. The Dynamics of Social Responsibility

1. As indicated in Exhibit 3.2, Inputs to the Development of the Company Mission, the various stakeholders of a firm can be divided into inside stakeholders and outside stakeholders.

a) Insiders are individuals or groups that are stockholders or employees of the firm.

b) Outsiders are all the other individuals or groups that the firm’s actions affect.

c) The extremely large and often amorphous set of outsiders makes the general claim that the firm be socially responsible.

2. Corporate social responsibility is the idea that a business has a duty to serve society in general as well as the financial interests of its stockholders.

3. The stakeholder approach offers the clearest perspective on such issues.

a) Broadly stated, outsiders often demand that insiders’ claims be subordinated to the greater good of the society (outsiders).

b) Outsiders believe issues like pollution and conservation of natural resources should be principal considerations in strategic decision making.

c) Insiders tend to believe that the competing claims of outsiders should be balanced against one another in a way that protects the company mission.

d) Some insiders also argue that the claims of society, as expressed in government regulation, provide tax money that can be used to eliminate water pollution and the like if the general public wants this to be done.

4. Issues are numerous, complex, and contingent on specific situations. Therefore, rigid rules of business conduct cannot deal with them.

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a) Each firm, regardless of size, must decide how to meet its perceived social responsibility.

b) While large, well-capitalized companies may have easy access to environmental consultants, this is not an affordable strategy for smaller firms.

c) The experience of many small businesses demonstrates that it is feasible to accomplish significant pollution prevention and waste reduction without big expenditures and without hiring consultants.

d) Once a problem area is identified, a company’s line employees frequently can develop a solution.

e) Making pollution prevention a social responsibility can be beneficial to small and large companies.

5. Different approaches adopted by different firms reflect differences in competitive position, industry, country, environmental and ecological pressures, and a host of other factors.

a) They will reflect both situational factors and differing priorities in the acknowledgement of claims.

b) Many marketers have already discovered new marketing realities by adopting strategies called the “4 E’s”:

(1) Make it easy for the consumer to be green(2) Empower consumers with solutions(3) Enlist the support of the consumer(4) Establish credibility with all publics and help to avoid a backlash

c) Despite differences in their approaches, most American firms now try to assure outsiders that they attempt to conduct business in a socially responsible manner.

II. Types of Social Responsibility

A. To better understand the nature and range of social responsibilities for which they must plan, strategic managers can consider four types of social commitment: economic, legal, ethical, and discretionary social responsibilities.

1. Economic responsibilities are the most basic social responsibilities of business.

a) Economic responsibilities are the duty of managers, as agents of the company owners, to maximize stockholder wealth.

b) The essential responsibility of business is assumed to be providing goods and services to society at a reasonable cost.

c) In discharging its economic responsibility, the company emerges as socially responsible by providing productive jobs for its workforce, and tax payments for its local, state, and federal governments.

2. Legal responsibilities reflect the firm’s obligations to comply with the laws that regulate business activities.

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a) The consumer and environmental movements focused increased public attention on the need for social responsibility in business by lobbying for laws that govern business in the areas of pollution control and consumer safety.

b) The intent of consumer legislation has been to correct the “balance of power” between buyers and sellers in the marketplace.

c) Among the most important laws are the Federal Fair Packaging and Labeling Act that regulates labeling procedures, and the Consumer Product Safety Act that protects consumers against unreasonable risks of injury.

d) The environmental movement has had a similar affect: it achieved stricter enforcement of existing environmental protections and it spurred the passage of new, more comprehensive laws.

e) The National Environmental Policy Act is devoted to preserving the United State’s ecological balance and making environmental protection a federal policy goal.

f) Legal responsibilities are supplemental to the requirement that businesses and their employees comply fully with the general civil and criminal laws that apply to all individuals and institutions in the country.

g) Exhibit 3.3, An Overview of Corporate Scandals, presents an overview of seven cases that involved executives from Adelphia, Arthur Andersen, Global Crossing, ImClone, Merrill Lynch, WorldCom, and Xerox.

3. Ethical responsibilities reflect the company’s notion of right and proper business behavior. a) Ethical responsibilities are obligations that transcend legal requirements. b) Firms are expected, but not required, to behave ethically. c) Some actions that are legal might be considered unethical.d) The topic of management ethics receives attention later in the chapter.

4. Discretionary responsibilities are those that are voluntarily assumed by a business organization. a) These responsibilities include public relations, good citizenship, and full

corporate responsibility. b) Discretionary responsibilities have a self-serving dimension. c) A commitment to full corporate responsibility requires strategic managers

to attack social problems with the same zeal in which they attack business problems.

d) It is important to remember that the categories on the social responsibility continuum overlap, creating many gray areas where societal expectations on organizational behavior are difficult to categorize.

B. Corporate Social Responsibility and Profitability

1. CSR and the Bottom Line

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a) The goal of every firm is to maintain viability through long-run profitability. Until all costs and benefits are accounted for, however, profits may not be claimed.

b) Corporate social responsibility (CSR), is the idea that business has a duty to serve society in general as well as the financial interests of stockholders.

c) The dynamic between CSR and success (profit) is complex. They are not mutually exclusive, and they are not prerequisites of each other.

d) View CSR as a component in the decision-making process of business that must determine, among other objectives, how to maximize profits.

e) Attempts to undertake a cost-benefit analysis of CSR have not been very successful. Several factors complicate the process:

(1) Some CSR activities incur no dollar costs at all. (2) Philanthropic activities of a corporation, which have been a

traditional mainstay of CSR, are undertaken at a discounted cost to the firm since they are often tax deductible. The benefits can be enormous.

(3) Socially responsible behavior does not come at a prohibitive cost. (4) Socially responsible practices may create savings, and, as a result,

increase profits. (5) Proponents argue that CSR costs are more than offset in the long

run by an improved company image and increased community goodwill.

(6) The mission statement of Johnson & Johnson is provided as Exhibit 3.4, Strategy in Action.

2. Performance

a) How do managers measure the financial effect of corporate social performance?

b) Critics of CSR believe companies that behave in a socially responsible manner, and portfolios comprising these companies’ securities, should perform more poorly financially than those that do not.

c) The restrictive natures of portfolios based on social criteria should increase portfolio risk and reduce return, according to critics or CSR.

3. CSR Today

a) CSR has become a priority with American businesses. b) The Resurgence of Environmentalism

(1) Since the Exxon Valdez disaster, the Coalition for Environmentally Responsible Economies (CERES) was formed to establish new goals for environmentally responsible corporate behavior.

(2) This group drafted the CERES Principles to “establish and environmental ethic with criteria by which investors and others can assess the environmental performance of companies. Companies that sign these Principles pledge to go voluntarily beyond the requirements of the law.”

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c) Increasing Buying Power

(1) The rise of the consumer movement has meant that buyers—consumers and investors—are increasingly flexing their economic muscle.

(2) Consumers are becoming more interested in buying products from socially responsible companies.

(3) The Council on Economic Priorities (CEP) helps consumers make more informed buying decisions through publications.

(4) CEP also sponsors the annual Corporate Conscience Awards, which recognize socially responsible companies.

(5) Investors represent a type of influential consumer. (6) While social investing wields relatively low power as an individual

private act (selling one’s own shares of ExxonMobil does not affect the company), it can be very powerful as a collective public act.

(7) Social investors comprise both individuals and institutions, including educational institutions and large pension funds.

(8) Large-scale social investing can be broken down into two broad areas of guideline portfolio investing and shareholder activism.

(9) Screens for guideline portfolio investing may be negative or combine negative and positive elements.

(10) In contrast to passive guideline portfolio investors, shareholder activists seek to directly influence corporate social behavior.

d) The Globalization of Business

(1) Management issues have become more complex as companies increasingly transcend national borders: It is difficult enough to come to a consensus on what constitutes socially responsible behavior in one culture, let alone determine common ethical values across cultures.

(2) One of the most contentious social responsibility issues confronting multinational firms pertains to human rights.

(3) While Chinese workers are happy to earn manufacturer wages in China, and U.S. customers are pleased by the lower prices charged for foreign manufactured goods, others believe such firms are failing to satisfy their social responsibilities.

(4) The dynamic between CSR and success (profit) is complex. They are not mutually exclusive, and they are not prerequisites of each other.

(5) Exhibit 3.5, Strategy in Action, discusses these pressures (from union and human rights advocates, for example) sometimes take the form of law suits.

III. Sarbanes-Oxley Act of 2002

A. Following a string of wrongdoings by corporate execs in 2000-2002, and subsequent failures of those firms, Washington lawmakers proposed more than 50 policies to assure investors. The successful bill was called the Public Company Accounting Reform and Investor Protection Act of 2002. It was changed to the Sarbanes-Oxley Act of 2002.

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1. The law revised and strengthened auditing and accounting standards.

2. Law applies to public companies with securities registered under Section 12 of the Securities Act of 1934 and those required to file reports under section 15(d) of the Exchange Act.

3. The Act includes required certifications for financial statements, new corporate regulations, disclosure requirements, and penalties for failure to comply.

4. Exhibit 3.6, Strategy in Action, provides more details on the SOA.

5. Features of SOA:

a. The CEO and CFO must certify every report containing the company’s financial statements. They must attest to the report’s accuracy and reliability.

(1) Based on the officer’s knowledge, the report is a reliable source of the company’s financial condition and result of operations for the period represented.

(2) The certification also makes the officers responsible for establishing and maintaining internal controls such that they are aware of any material information relating to the company.

(3) The officers must evaluate the effectiveness of the internal controls within 90 days of the release of the report and present their conclusions of the effectiveness of the controls.

(4) The officers must disclose any fraudulent material, deficiencies in the reporting of the financial reports, or problems with the internal control to the company’s auditors and auditing committee.

(5) The officers must indicate any changes to the internal controls or factors that could affect them.

b. The corporate control of executives, accounting firms, auditing committees, and attorneys is restricted.

(1) The Act bans personal loans for executives. (2) Executive officers and directors are not permitted to purchase, sell,

acquire, or transfer any equity security during any pension fund blackout period.

(3) Executives are required to notify fund participants of any blackout period and the reasons for the blackout period.

(4) The SEC will provide the company’s executives with a code of ethics for the company to adopt. Failure to meet the code must be disclosed to the SEC.

c. The Act limits some and issues new duties of the registered public accounting firms that conduct the audits of the financial statements.

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(1) Accounting firms are prohibited from performing bookkeeping or other accounting services related to the financial statements, designing or implementing financial systems, appraising, internal auditing, brokering banking services, or providing legal services unrelated to the audit.

(2) All critical accounting policies and alternative treatments of financial information within generally accepted accounting principle (GAAP), and written communication between the accounting firm and the company’s management must be reported to the audit committee.

d. The Act defines the composition of the audit committee and specifies its responsibilities.

(1) The members of the audit committee must be members of the company’s board of directors.

(2) At least one member of the committee should be classified as a “financial expert.”

(3) The audit committee is directly responsible for the work of any accounting firm employed by the company, and the accounting firm must report directly to the audit committee.

(4) The audit committee must create procedures for employee complaints or concerns over accounting or auditing matters.

(5) Upon discovery of unlawful acts by the company, the audit committee must report and be supervised in its investigation by a Public Company Accounting Oversight Board.

e. The Act includes rules for attorney conduct.

(1) If a company’s attorneys find evidence of securities violations, they are required to report the matter to the chief legal counsel or CEO.

(2) If there is not an appropriate response, the attorneys must report the information to the audit committee or the board of directors.

f. Disclosure periods for financial operations and reporting are stipulated.

(1) Relevant information relating to changes in the financial condition or operations of a company must be immediately reported in plain English.

(2) Off-balance sheet transactions, correcting adjustments, and pro-forma information must be presented in the annual and quarterly financial reports.

(3) The information must not contain any untrue statements, must not omit material facts, and must meet GAAP standards.

g. Stricter penalties have been issued for violations of the SOA.

(1) If a company must restate its financial statements due to noncompliance, the CEO and CFO must relinquish any bonus or incentive-based compensation or realized profits from the sale of

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securities during the 12-month period following filing with the SEC.

(2) Other securities fraud, such as destruction or falsification or records, results in fines and prison sentences up to 25 years.

B. The New Corporate Governance Structure

1. A major consequence of the 2000-2002 accounting scandals was SOA. A major consequence of the legislation has been restructuring governance structure in American corporations.

2. The most significant change is the heightened role of corporate internal auditors, as depicted in Exhibit 3.7, Strategy in Action.

3. In the past, internal auditors reviewed financial reports generated by other corporate accountants.

a. Auditors considered professional accounting and financial practices, as well as relevant aspects of corporate law, and then presented their findings to the CFO.

b. Historically, the CFO reviewed the audits and determined the financial data and information that was to be presented to top management, directors, and investors.

4. Because Sarbanes-Oxley requires that CEOs and audit committees sign off on financial results, auditors now routinely deal directly with top corporate officials, as show in the new structure in Exhibit 3.8, Strategy in Action.

a. Approximately 75 percent of senior corporate auditors now report directly to the Board’s audit committee.

b. To eliminate the potential for accounting problems, companies are establishing direct lines of communication between top managers and the board and auditors that inform the CFO but that are not depended on CFO approval or authorization.

5. The new structure also provides the CEO information provided directly by the company’s chief compliance and chief accounting officers.

a. The CFO, who is responsible for ultimately approving all company payments, is not empowered to be the sole provider of data for financial evaluations by the CEO and board.

C. CSR’s Effect on the Mission Statement

1. The mission statement not only identifies what product or service a company produces, how it produces it, and what market it serves, it also embodies what the company believes.

a. It is essential that the mission statement recognize the legitimate claims of its external stakeholders, which may include creditors, customers,

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suppliers, government, unions, competitors, local communities, and elements of the general public.

b. This stakeholder approach has become widely accepted by U.S. businesses.

c. Customers, government, stockholders, employees, and society, in that order, were perceived by directors to be the most important stakeholders according to a survey of 291 of the largest southeastern U.S. companies.

2. In developing mission statements, managers must identify all stakeholder groups and weigh their relative rights and abilities to affect the firm’s success.

a. Some companies are proactive in their approach to CSR, making it an integral part of their raison d’être.

b. Other firms are reactive, adopting socially responsible behavior only when they must.

D. Social Audit

1. A social audit is an attempt to measure a company’s actual social performance against its social objectives.

a. A social audit may be performed by the company itself; however, one conducted by an outside consultant who will impose minimal biases may prove more beneficial to the firm.

b. As with a financial audit, an outside auditor brings credibility to the evaluation.

c. Credibility is essential if management is to take the results seriously and if the general public is to believe the company’s public relations pronouncements.

2. Careful, accurate monitoring and evaluation of a company’s CSR actions are important not only because the company wants to be sure it is implementing CSR policy as planned, but also because CSR actions by their nature are open to intense public scrutiny.

3. Once the social audit is complete, it may be distributed internally or both internally and externally, depending on the firm’s goals and situation.

a. Some firms include a section in their annual report devoted to social responsibility activities.

b. Other firms public a separate periodic report on their social responsiveness.

c. Companies publishing separate social audits include GM, Bank of America, Atlantic Richfield, Control Data, and Aetna Life and Casualty Company.

d. Nearly all Fortune 500 corporations disclose social performance information in their annual reports.

4. Large firms are not the only companies employing the social audit.

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a. Ben & Jerry’s, a CSR pioneer, publishes a social audit in its annual report.

b. The audit is conducted by an outside consultant. c. The audit scores company performance in such areas as employee

benefits, plant safety, ecology, community involvement, and customer service.

d. The report is published unedited.

5. The social audit may be used for more than simply monitoring and evaluating firm social performance.

a. Managers use social audits to scan the external environment, determine firm vulnerabilities, and institutionalize CSR within the firm.

b. Companies themselves are not the only ones who conduct social audits; public interest groups and the media also watch companies who claim to be socially responsible very closely to see if they practice what they preach.

c. These organizations include consumer groups and socially responsible investing firms that construct their own guidelines for evaluating companies.

IV. Management Ethics

A. The Nature of Ethics in Business

1. Central to the belief that companies should be operated in a socially responsive way for the benefit of all stakeholders is the belief that managers will behave in an ethical manner.

2. The term ethics refers to the moral principles that reflect society’s beliefs about the actions of an individual or group that are right and wrong.

3. The values of one individual, group, or society may be at odds with the values of another.

4. Ethical standards reflect not a universally accepted code, but rather the end product of a process of defining and clarifying the nature and content of human interaction.

V. Satisfying Corporate Social Responsibility

A. Executives face conflicting pressures to contribute to social responsibility while honoring their duties to maximize shareholder value.

1. These days they face many belligerent critics who challenge the idea of a single-minded focus on profits.

2. They also face skeptics who contend that CSR initiatives are chiefly a convenient marketing gloss.

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3. The reality is that most executives are eager to improve their CSR effectiveness.

4. The issues are not whether firms will engage in socially responsible activities, but how.

5. For most firms, the challenge is how best to achieve the maximum social benefit from a given amount of resources available for social projects.

B. The Core of the CSR Debate

1. The proper role of CSR—the actions of a company to benefit society beyond the requirements of the law and the direct interests of shareholders—has generated a century’s worth of philosophically and economically intriguing debates.

a. Since steel baron Andrew Carnegie published The Gospel of Wealth in 1899, the argument that businesses are the trustees of social property that should be managed for the public good has been seen as one end of a continuum with, at the other end, the belief that profit maximization is management’s only legitimate goal.

b. The CSR debates had been largely confined to the background for most of the twentieth century.

2. The debates surfaced in more positive ways in the last 30 years as new businesses set up shop with altruism very much in mind and on display.

3. More executives have come to understand the value of their companies’ reputations with customers—and with investors and employees.

4. In the past, research on the financial effect of CSR produced inconsistent findings.

a. Some studies reported a positive relationship, others a negative one, and others no relationship at all.

b. Since the mid-1990s, improvements in theory, research designs, data, and analysis have produced empirical research with more consistent results.

c. Importantly, a recent meta-analysis (a methodological technique that aggregates findings on multiple studies) of more than 10 studies found that on balance, positive relationships can be expected from CSR initiatives but that the primary vehicle for achieving superior financial performance from social responsibility is via reputation efforts.

5. There is no shortage of options with which businesses can advance their CSR goals.

6. Exhibit 3.8, Continuum of Corporate Social Responsibility Commitments, shows a simple illustration of the range of options available to corporations as they consider their CSR commitments.

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7. Managers need a model that they can use to guide them in selecting social initiatives and through which they can exploit their companies’ core competencies for the maximum positive impact.

C. Mutual Advantages of Collaborative Social Initiatives

1. The term social initiative describes major initiatives that take a collaborative approach.

a. Research on alliances and networks among companies in competitive commercial environments tells us that each partner benefits when the other brings resources, capabilities, or other assets that it cannot easily attain on its own.

b. These combinative capabilities allow the company to acquire and synthesize resources and build new applications from those resources, generating innovative responses to rapidly evolving environments.

2. While neither companies nor non-profits are well-equipped to handle escalating social or environmental problems, each participant has the potential to contribute valuable material resources, services, or individuals’ voluntary time, talents, energies, and organizational knowledge.

a. Those cumulative offerings are vastly superior to cash-only donations, which are a minimalist solution to the challenges of social responsibility.

b. Social initiatives involve ongoing information and operational exchanges among participants and are especially attractive because of their potential benefit for both the corporate and not-for-profit partners.

3. There is strong evidence to show that CSR activities increasingly confer benefits beyond enhanced reputation.

a. For some participants, they can be a tool to attract, retain, and develop managerial talent.

b. The PricewaterhouseCooper (PwC) Project Ulysses is a leadership development program that sends small teams of PwC partners to developing countries to apply their expertise to complex social and economic challenges.

D. Five Principles of Successful Collaborative Social Initiatives

1. There are five principles that are central to successful CSIs, as shown in Exhibit 3.9, Five Principles of Successful Corporate Social Responsibility Collaboration.

2. When CSR initiatives include most or all of these elements, companies can indeed maximize the effects of their social contributions while advancing broader strategic goals.

a. Identify a Long-Term Durable Mission

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(1) Companies make the greatest social contribution when they identify an important, long-standing policy challenge and they participate in its solution over the long term.

(2) Ron Alsop argues that companies that are interested in contributing to corporate responsibility and thus burnishing their reputations should “own the issue.”

(3) Companies that step up to tackle problems that are clearly important to society’s welfare and that require substantial resources are signaling to internal and external constituencies that he initiative is deserving of the company’s investment.

b. Contribute “What We Do”

(1) Companies maximize the benefits of their corporate contributions when they leverage core capabilities and contribute products and services that are based on expertise used in or generated by their normal operations.

(2) Such contributions create a mutually beneficial relationship between the partners; the social-purpose initiatives receive the maximum gains while the company minimizes costs and diversions.

(3) It is not essential that these services be synonymous with those of the company’s business, but they should build upon some aspect of its strategic competencies.

c. Contribute Specialized Services to a Large-Scale Undertaking

(1) Companies have the greatest social impact when they make specialized contributions to large-scale cooperative efforts.

(2) Those that contribute to initiatives in which other private, public, or nonprofit organizations area also active have an effect that goes beyond their limited contributions.

(3) Although it is tempting for a company to identify a specific cause that will be associated only with its own contributions, such a strategy is likely to be viewed as a “pet project” and not as a contribution to a large problem where a range of players have important interests.

d. Weigh Government’s Influence

(1) Government support for corporate participation in CSIs—or at least its willingness to remove barriers—can have an important positive influence.

(2) Tax incentives, liability protection, and other forms of direct and indirect support for businesses all help to foster business participation and contribute to the success of CSIs.

(3) Endorsements can also be very valuable.

e. Assemble and Value the Total Package of Benefits

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(1) Companies gain the greatest benefits from their social contributions when they put a price on the total benefit package.

(2) The valuation should include both the social contributions delivered and the reputation effects that solidify or enhance the company’s position among its constituencies.

(3) Positive reputation is driven by genuine commitment rather than episodic or sporadic interest.

(4) Consumers and other stakeholders see through nominal commitments designed simply to garner short-term positive goodwill.

E. Assembling the Components

1. A range of corporate initiatives lend themselves to the CSI model because they share most of the five key attributes we have described here:

a. they have long-term objectivesb. they are sufficiently large to allow a company to specialize in its

contributionsc. they provide many opportunities for the company to contribute from its

current activities or productsd. they enjoy government support e. they provide a package of benefits that adds value to the companyf. Exhibit 3.10, Five Successful Collaborative Social Initiatives ,

summarizes five very successful CSI programs and their performance against each of the five principles.

2. Of the five principles, the most important by far is the second one.

a. Companies must apply what they do best in their normal commercial operations to their social responsibility undertakings.

b. The tenet is consistent with research that argues that social activities most closely related to the company’s core mission are most efficiently administered through internalization or collaboration.

F. The Limits of CSR Strategies

1. Some companies have embedded social responsibility and sustainability commitments deeply in their core strategies.

a. Research suggests that such single-minded devotion to CSR may be unrealistic for large, more established corporations.

2. Larger companies must move beyond the easy options of charitable donations but also steer clear of overreaching commitments.

a. This is not to suggest that companies should not think big—research shows that projects can be broad in scale and scope and still succeed.

b. Companies need to view their commitments to corporate responsibility as one important part of their overall strategy but not let the commitment obscure their broad strategic business goals.

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c. By starting with a well-defined CSR strategy and developing the collaborative initiatives that support that strategy by meeting the five criteria identified above, companies and their leaders can make important contributions to the common good while advancing their broader financial and market objectives.

3. CSR strategies can also run afoul of the skeptics, and the speed with which information can be disseminated via the Web—and accumulated in Web logs—makes this an issue with serious ramifications for reputation management.

G. The Future of CSR

1. CSR is firmly and irreversibly part of the corporate fabric.

a. Managed properly, CSR programs can confer significant benefits to participants in terms of corporate reputation; in terms of hiring, motivation, and retention; and as a means of building and cementing valuable partnerships.

b. The benefits extend well beyond the boundaries of the participating organizations, enriching many lives, communities, and pushing back threatening social problems.

2. The prickly aspect of CSR is that for all of their resources and capabilities, corporations will face growing demands for social responsibility contributions far beyond simple cash or in-kind donations.

a. Aggressive protestors will keep the issues hot, employees will continue to have their say, and shareholders will pass judgment with their investments and their votes.

3. The challenge for management is to know how to meet the company’s obligations to all stakeholders without compromising the basic need to earn a fair return for its owners.

4. A collaborative approach is most effective.

5. The public’s perception of ethics in corporate America is near its all-time low.

6. Exhibit 3.11, Strategy in Action, describes the most notorious case of corporate failure—the Enron Corporation.

7. A CEO who succeeded brilliantly in restoring his company’s credibility is Tyco’s Edward Breen, as discussed in Exhibit 3.12, Top Strategist.

8. External stakeholders are not the only critics of business ethics today.

9. Exhibit 3.13, Strategy in Action, presents the findings of a major survey of HR managers.

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10. Even when groups agree on what constitutes human welfare, the means they choose to achieve it may differ.

H. Approaches to Questions of Ethics

1. Managers report that the most critical quality of ethical decision making is consistency.

2. Managers who adopt the utilitarian approach judge the effects of a particular action on the people directly involved, in terms of what provides the greatest good for the greatest many.

a. This approach focuses on actions rather than motives. b. Potentially positive results are weighed against potentially negative

ones. c. If the positive outweighs negative, the managers will likely proceed with

the action. d. That some people might be adversely affected is accepted as inevitable.

3. Managers who subscribe to the moral rights approach judge whether decisions and actions are in keeping with the maintenance of fundamental individual and group rights and privileges.

a. The moral rights approach (also called deontology) includes the rights of human beings to life and safety, a standard of truthfulness, privacy, freedom of expression, freedom of speech, and private property.

4. Managers who take the social justice approach judge how consistent actions are with equity, fairness, and impartiality in the distribution of rewards and costs among individuals and groups.

a. These ideas stem from two principles known as the liberty principles and the difference principle.

b. The liberty principle states that individuals have certain basic liberties compatible with similar liberties by other people.

c. The difference principle states that social and economic inequities must be addressed to achieve a more equitable distribution of goods and services.

5. In addition to these defining principles, three implementing principles are essential to the social justice approach.

a. According to the distributive-justice principle, individuals should not be treated differently on the basis of arbitrary characteristics, such as race, sex, religion, or national origin. This is embodied in the Civil Rights Act.

b. The fairness principle means that employees must be expected to engage in cooperative activities according to rules of the company, assuming that the company rules are deemed fair.

c. The natural-duty principle points up a number of general obligations, including the duty to help others who are in need or danger, the duty not

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to cause unnecessary suffering, and the duty to comply with the just rules of an institution.

VI. Code of Business Ethics

A. To help ensure consistence in the application of ethical standards, an increasing number of professional associations and businesses are establishing codes of ethical conduct.

1. Associations of chemists, funeral directors, law enforcement agents, migration agents, hockey players, Internet providers, librarians, military arms sellers, philatelists, physicians, and psychologists all have such codes.

2. Nike’s code is presented in Exhibit 3.14, Strategy in Action.

B. Major Trends in Codes of Ethics

1. The increased interest in codifying business ethics has led to both the proliferation of formal statements by companies and to their prominence among business documents.

2. Such codes used to be found solely in employee handbooks, for the most part.

3. Companies are adding enforcement measures to their codes.

4. Increased attention by companies in improving employees’ training in understanding their obligations under the company’s code of ethics.

Questions for Discussion

1. Define the term social responsibility. Find an example of a company action that was legal but not socially responsible. Defend your example on the basis of your definition.

The chapter discusses social responsibility and an organization’s role in acting responsibly. While an organization has inside and outside stakeholders (see Exhibit 3.2, Inputs to the Development of the Company Mission, on page 52), social responsibility means that the claims of insiders be subordinated to the greater good of society. What this means is that such issues as pollution, the disposal of solid and liquid wastes, and the conservation of natural resources should be the principal considerations in strategic decision making (page 52).

To look at a company that acted legally but not in a socially responsible manner is an interesting exercise. An example may be a paper company that cuts trees that it has under contract (legal) but does not plant new trees (not acting in a socially responsible manner). This can be assigned as an individual or a group exercise.

2. Name five potentially valuable indicators of a firm’s social responsibility and describe how company performance in each could be measured.

Indicators of a firm’s social responsibility may include:

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The company’s environmental policy – indicator could be its access to environmental consultants, its environment budget, etc.

A packaging company’s recycling policy – its approach to cycling, its marketing budget to educate consumers to recycle

A global company’s interaction with several local communities that it does business in – does the organization have a manager in charge of local liaison, or does it have a “buy local” policy?

Interaction with stockholders – does it have a code of conduct to deal with such as institutional stockholders?

A company’s interface with its employees – what is the company’s policy in hiring minorities? How many minorities does it have in managerial positions?

3. Do you think a business organization in today’s society benefits by defining a socially responsible role for itself? Why or why not?

The section “Corporate Social Responsibility and Profitability” (pages 54-59) provides insight into this issue. It identifies three reasons why managers should be concerned about the socially responsible behavior of their firms. First, a company’s right to exist depends on its responsiveness to the external environment. Second, federal, state, and local governments threaten increased regulation if business does not evolve to meet changing social standards. Third, a responsive corporate social policy may enhance a firm’s long-term viability. Of these, the second is probably the most pertinent to this question. If the company does not define a socially responsible role for itself, one or more external bodies may force it to act in a socially responsible manner, which may be expensive for the company.

4. Which of the three basic philosophies of social responsibility would you find most

appealing as the chief executive of a large corporation? Explain.

The stakeholder approach is probably the best because it approaches social responsibility from the stakeholders’ point-of-view. As the CEO of a large corporation, one would identify the organization’s stakeholders, know their demands and try to set up processes that meet their demands. If the company does it proactively, their efforts are likely to pay off in the long run.

5. Do you think society’s expectations for corporate social responsibility will change in the next decade? Explain.

Society’s expectations for corporate social responsibility are likely to increase in the next decade. This is because stakeholders are likely to become more powerful and vociferous. For example, institutional investors (pension funds, mutual funds) invest heavily in companies and have the power to demand changes. Abuses of power by companies such as Wal-Mart (which stands accused of bullying suppliers and sub par treatment of employees) may bring out strident activists who may demand changes. The Internet allows for easier and faster communication among individuals – so gathering support for an action that forces companies to employ fair labor practices becomes easier. These and other similar factors may increase society’s expectations of companies.

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6. How much should social responsibility be considered in evaluating an organization’s overall performance?

While measuring a company’s social responsibility is still a sticky issue, its importance in evaluating an organization’s overall performance should not be under estimated because if a company does not act in a socially responsible manner, society will force it to do so at a much higher cost. Opinions may vary, though, as to how heavily social responsibility should be weighted in a firm’s overall performance.

7. Is it necessary that an action be voluntary to be termed socially responsible? Explain.

The section titled “Types of Social Responsibilities” (pages 53-54) identifies four types of social commitment: economic, legal, ethical, and discretionary.

Discretionary responsibilities are those that are voluntarily assumed by a business organization. It appears that this is the highest form of social responsibility because no external agency demands this of the organization. It is done proactively by the organization. However, it does not mean that an action has to be voluntary to be termed socially responsible. An example may be that a company which manufactures its goods in Third World countries may not honestly know that the local contractors are abusing their workers. But if the abuse is pointed out by an activist group, and if the company then takes corrective action immediately, one can argue that the company has acted in a socially responsible manner.

8. Do you think an organization should adhere to different philosophies of corporate responsibility when confronted with different issues, or should its philosophy always remain the same? Explain.

There is a lot of merit in having one consistent philosophy that covers various issues, which allows the company to act quickly and consistently. In contrast, having multiple philosophies for different issues may lead to inconsistent action.

9. Describe yourself as a stakeholder in a company. What kind of stakeholder role do you play now? What kind of stakeholder roles do you expect to play in the future?

The most common stakeholder role that a student may play now is that of an employee (an inside stakeholder). Later on in his/her career, the student may play the role of a stockholder. If the student becomes active in the community, then he/she may play yet another role.

10. What sets the affirmative philosophy apart from the stakeholder philosophy of social responsibility? In what areas do the two philosophies overlap?

The two would differ on the origin of social responsibility: external versus internal (or voluntary). The two philosophies would overlap in the actions taken by the company, in that both philosophies would require the company to take action.

11. Cite examples of both ethical and unethical behavior drawn from your knowledge of current business events.

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Examples of ethical behavior are hard to find simply because the business press appears to focus on unethical behavior of executives. One example of ethical behavior is the brave action of Sharron Watkins who blew the whistle on Enron. She did this because, even though her job was in jeopardy, she thought this was the right thing to do. In contrast, examples of unethical behavior include: Dennis Kozlowski’s abuse of Tyco and the shenanigans of several top executives at Enron, Arthur Andersen, and WorldCom. The instructor may wish to assign students to collect information on each of these incidents.

12. How would you describe the contemporary state of business ethics?

The business press has reported several cases of egregious abuse of corporate power by managers: Martha Stewart, Dennis Kozlowski at Tyco, several top executives at Enron, etc. These seem to suggest that in today’s America, regard for ethics is at an all time low. Managers are abusing the agency relationship to enrich themselves. However, since these abuses have been heavily chronicled and publicized, there is a possibility that the tide will change.

13. How can business self-interest also serve social interests?

Business self-interest can also serve social interests when it becomes clear to corporate executives that if the organization does not act in a socially responsible manner, it will be forced to do so, often at a higher cost. When proactive socially responsible behavior is rewarded, the message will get through that it pays to be socially responsible.

Chapter 3 Discussion Case – “Wal-Mart vs. Class Actions: The retail giant’s novel defense in a massive suit could rewrite the playbook”

Case Summary

This case discusses what could be a landmark case for corporate America. Wal-Mart is in the middle of a class action sex discrimination case that will be heard soon by the U.S. Ninth Circuit Court of Appeals. This type of case has plagued Boeing, Coca-Cola, and dozens of other large employers over the years. What is so important about this particular case? Wal-Mart’s ambitious legal strategy strikes at the heart of what it means to file a class action. The company claims its constitutional rights would be violated if the court allows a suit to go forward involving up to 1.5 million of the retailing giant’s former and current female employees. The logic is that the case would deprive the company of its rights to defend itself against each woman’s claims. Instead, the company says that it would be appropriate to argue cases on a store-by-store basis.

A few other companies have tried similar arguments in bits and pieces and have gotten nowhere. Wal-Mart is the first to tackle the constitutional issues of class actions head-on. The Ninth Circuit is more liberal, and so the company faces stiff odds. The firm is likely hoping to be heard in the more conservative U.S. Supreme Court. The big question is whether Wal-Mart’s suggested store-by-store idea makes sense. The resulting thousands of mini class actions could clog the U.S. courts for years.

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The case began in 2001, when a group of female Wal-Mart employees sued, claiming that the world’s largest retailer systematically paid women less than men in the same jobs and promoted men ahead of similarly talented women. Last June the plaintiffs were granted class status, allowing them to sue on behalf of all women who had worked at Wal-Mart’s U.S. stores since December, 1998.

Wal-Mart says that if they lose, they could be forced to pay for something the company didn’t do. That would be a violation of the company’s due-process rights in the Fifth Amendment. One Wal-Mart lawyers said: “When you’re talking about taking money from one citizen and giving it to another, you can’t just rely on aggregate statistics, which don’t tell you who is actually discriminated against.” The plaintiffs’ argument is that broad workforce data are actually more reliable than individual hearings in such cases as these. At issue is Wal-Mart’s alleged “tap-on-the-shoulder” method of promoting hourly workers. The two sides disagree just as strongly about which approach would be fairer to the individual women involved. There is little doubt that employers of all sizes could benefit if Wal-Mart wins the case.

Key Issues Addressed

Identify the various types of social responsibility and classify Wal-Mart’s actions accordingly. Please refer to the section titled “Types of Social Responsibility” on pages 53-54.

Explain the relationship between corporate social responsibility and the company’s profitability. Define the factors determining this relationship. Please refer to the section titled “Corporate Social Responsibility” on pages 54-59.

This case can help to demonstrate the value of a social audit. Please refer to the section titled “Social Audit” on pages 64-65.

Identify which companies subscribe to which philosophies regarding CSR and ethics in general. Please refer to the section titled “Approaches to Questions of Ethics” on pages 77-78.

Case Discussion Questions

1. Does Wal-Mart use the stakeholder approach to social responsibility? How can you tell?

No, Wal-Mart does not subscribe wholly to the stakeholder approach. The firm probably does have a list of various stakeholders, and has identified what their claims they try to hold on the company. However, the firm does not attempt to incorporate the interests of these groups into the demonstrated mission of the firm. The following steps should be taken in incorporating stakeholders’ interests:

1. Identification of stakeholders2. Understanding the stakeholders’ specific claims vis-à-vis the firm3. Reconciliation of these claims and assignment of priorities to them4. Coordination of the claims with other elements of the company mission (Refer

to the section titled “The Stakeholder Approach to Social Responsibility.)

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While the firm likely performs step one and maybe step two, they have not demonstrated steps three or four, at least from what we can tell from the case. Unfortunately, this has had a negative financial impact on the firm in the sense that their public image is suffering, and they are experience real financial costs as a result of the class action itself (legal fees, etc.) so far.

2. There are four main types of social responsibility: economic, legal, ethical, and discretionary. Which responsibilities does the Wal-Mart case deal with? How could Wal-Mart’s position be changed for the better?

The text section titled “Types of Social Responsibility” (pages 53-54) will help with this discussion. It lists and explains the four types of social responsibility. Economic responsibilities are the most basic social responsibilities of business. They deal with the managers’ duty as agents to maximize stockholder wealth. Second, legal responsibilities involve the firm’s obligations to comply with laws. Ethical responsibilities are the way the company handles “proper” business behavior—a notion of right and wrong. Lastly, discretionary responsibilities are those that an organization assumes voluntarily.

The case shows that Wal-Mart is dealing primarily with its legal responsibilities. The issue of ethics is not directly confronted in this case. However, we can assume that this is a matter of ethics by the definition provided on page 65 in the text under the section titled “Management Ethics.” Ethical responsibilities (text page 54) reflect the company’s notion of right and proper business behavior. They are obligations beyond legal obligations that the firm is not required to assume. Some actions are legal that might be considered unethical. In this case, most students would agree that Wal-Mart’s actions in getting into this legal position in the first place are the result of unethical behavior. The case mentions the firm’s “tap-on-the-shoulder” method of promoting hourly wage workers. This means some workers never get to apply for positions, and others are chosen before the position is even created. (Please refer to page 82, paragraph 8 of the case.) With regard to the class action itself, the firm says that it would be more fair to the individual women involved if the court dealt with situations case-by-case or store-by-store rather than nationally. It is for the courts to decide what laws are applicable in determining the case; but it is for the rest of Corporate America to determine what position to take regarding firm’s ethical and discretionary positions.

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