Download Chapter 5: Ethics and Corporate Social Responsibility

CHAPTER 5
ETHICS AND CORPORATE
SOCIAL RESPONSIBILITY
Nagiah Ramasamy
Principles of Management
|
1
Learning Outcomes
• Explain the special areas of concern in managerial ethics.
• Explain the moral principles defining the ethicality of behavior.
• Describe the common ethical dilemmas in the workplace.
• Describe the stages in moral development.
• Explain how ethical behavior can be improved in organizations.
• Differentiate the two opposing views of social responsibility.
• Explain why organizations are embracing sustainability.
Principles of Management
|
2
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.
Principles of Management
|
3
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.
Principles of Management
|
4
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.
Principles of Management
|
5
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.
Principles of Management
|
6
Factors that shape business ethics
• By individuals weighing what’s right and wrong before deciding or
taking action.
• By the ethical climate, the prevailing combination of a company’s
stated beliefs and its real actions, for example, leadership by example.
• By a firm’s codes of conduct, usually made up of statements in which
the “right thing to do” is encouraged and applauded.
• 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.
Principles of Management
|
7
Exhibit 5.1 Differences in business ethics across
organizational types
Main priorities in
addressing ethical
issues
Approach to
managing ethics
Responsible and/or
accountable to
Main constraints
Large corporations
Small business
Civil society organizations
Public sector organizations
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
Formal, public
relations and/or
systems-based
Shareholders and
other stakeholders
Informal, trustbased
Informal, values-based
Formal, bureaucratic
Owners
Donors and clients
General public, higher level
government organizations
Shareholders
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.
Principles of Management
|
8
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
Principles of Management
|
9
Special areas of concern for managers
• How an organization treats its employees
• Determined by the behavior of its managers, and HR practices.
• How employees treat the organization
• Unethical practices involving employees, unauthorized use of organizational
resources, etc.
• How the organization treats other economic agents
• Including customers, competitors, suppliers, dealers and trade unions.
Principles of Management
|
Exhibit 5.2 Special areas of concern for managers
Source: Ricky W Griffin (2013)
Management 11e, Ohio, USA:
South-Western Cengage, p. 91.
Principles of Management
|
11
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
Principles of Management
|
12
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.
Principles of Management
|
13
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,
• 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,
• results in the rights of some other stakeholders being ignored.
Principles of Management
|
14
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.”
Principles of Management
|
15
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.
Principles of Management
|
16
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.
Principles of Management
|
17
Theory of Justice View
• Identify fairness in two main ways.
• In fair procedures:
• established according to whether people have been free to acquire rewards for their
endeavors.
• referred to as procedural justice.
• In fair outcomes:
• 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.
• referred to as distributive justice.
Principles of Management
|
18
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.
Principles of Management
|
19
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,
• 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.
Principles of Management
|
20
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.
Principles of Management
|
21
Common On-the-job Ethical Challenges
• 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.
• 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.”
Principles of Management
|
22
Principles of Management
|
Common On-the-job Ethical Challenges
• 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.
• Whistle-blowing.
• Employees’ disclosure of information about perceived wrongdoing in an
organization,
• - because they lack the influence or authority to directly change organizational
practices.
Principles of Management
|
24
Exhibit 5.3 Costs of Unethical Behavior and
Benefits of Ethical Behavior
Costs of Unethical 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
Benefits of Ethical Behavior





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.
Principles of Management
|
25
Exhibit 5.4 Kohlberg’s stages of moral
development
LEVEL 3
Post-conventional
(Principled)
LEVEL 2
Conventional
LEVEL 1
Preconventional
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.
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.
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.
Principles of Management
|
26
Exhibit 5.6 A Multisystem Approach –
Improving ethical behavior in organizations
Formal Systems
Executive Leadership
 Selection System
 Policies/Codes
 Orientation/Training
 Performance Management
 Authority Structure
 Decision-making Processes
Informal Systems
Ethical/Unethical
Behavior
Role Models and Heroes
 Norms
 Rituals
 Myths/Stories
 Language
Alignment?
Source: Linda K. Trevino and Katherine A. Nelson (2014) Managing Business Ethics, 6e. New Jersey: Wiley, p. 153.
Principles of Management
|
27
The two opposing views of social responsibility
• The 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.
Principles of Management
|
28
Exhibit 5.8 Some examples of corporate social
responsibilities to stakeholders
Responsibility to Employees
 Working Conditions
 Equal Employment
Opportunity
 Affirmative Action
 Diversity Training
 Economic Security
 Child Care/Parental Leave
 Employee Dignity
 Conflict of Interest
Responsibility to
Customers/Environment






Right To Safety
Right To Be Informed
Right To Choose
Right To Be Heard
Quality Of Life
Ecology/Pollution
Responsibility of business
to Society, Investors, &
Suppliers
 Fairness
 Honesty
 Timely Action
 Appropriate
Compensation
 Philanthropy
Source: William Nickels, James McHugh and Susan McHugh (2012) Understanding Business, 10e. New York: McGraw Hill/Irwin.
Principles of Management
|
Exhibit 5.9 Arguments For and Against Social
Responsibility
For
Public expectations
Long-run profits
Ethical obligation
Public image
Better environment
Discouragement of further governmental
regulation
Balance of responsibility and power
Stockholder interests
Possession of resources
Superiority of prevention over cures
Against
Violation of profit maximization
Dilution of purpose
Costs
Too much power
Lack of skills
Lack of accountability
Source: Stephens P. Robbins and Mary Coulter (2012) Management, 11e. New Jersey: Prentice-Hall, p. 126.
Principles of Management
|
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.
Principles of Management
|
31
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.
Principles of Management
|
32
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.
Principles of Management
|
33
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.
Principles of Management
|
34
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.
Principles of Management
|
35
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:
• 63 major identifiable species of mammals
• 88 major identifiable species of birds
• the earth’s rainforests - destroyed at the rate of about 1% per annum.
Principles of Management
|
36