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CHAPTER 2
SOCIAL RESPONSIBILITY AND BUSINESS ETHICS
WHAT IS BUSINESS’S SOCIAL RESPONSIBILITY?
“Social Responsibility is the concept that business is part of the larger
society in which it exists and is accountable to society for its
performance.”
 Businesses are part of a larger society in which they operate
 They exist within a society and therefore they should be
accountable for their activities and the impacts of their activities
on the society
 Businesses and societies may have conflicting interests
 Businesses are profit motivated and they are responsible to their
shareholders
 Societies on the other hand, watch for the wellbeing of its
people, inhabitants
WHICH ONE SHOULD HAVE THE PRIORITY?
PROFIT OR SOCIETY’S NEED
There are three perspectives on corporate Social Responsibility
1. The only responsibility of business is to make money
Business has only one responsibility and that is to make
profit (19th and early 20th century philosophy)
“The public be damned”
“I am working for the shareholders”
“Let the buyers beware” are the logic behind this approach.
Milton Friedman in 1970 advocated a similar approach by
saying that the only responsibility of a business is to
provide jobs and pay taxes.
2. Business has a larger responsibility to society- and
ethical behavior leads to financial success
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This is a more contemporary perspective which also
suggests that ethics pay. It advocates that not only
businesses have social responsibility to society but also by
doing good for society helps companies to do good for
themselves. The New York Times headline: “Do Good?
Do Business? No Do Both!” explains this approach
3. Business should balance social responsibility and financial
objectives
This is considered an emerging perspective where ethics
and profits are dynamically balanced.
Depending on the perspective taken the evaluation of corporate social
responsibility will differ. However from these explanations it is
evident that no priority can be set; you can not put one in front of the
other. You can not be successful if you can not do them both.
Let us consider the case of 1999 Earthquake which took place in
Western Turkey. A large number of companies joined in aid projects
to help the victims by providing food, clothing, shelter in tents or
prefabricated houses, heating equipment, etc.
The money donated to these aid projects was tax-deductible and
companies took this opportunity to pay lower or no tax to the
government on these grounds.
In such cases of social aid and support;
Firms build credibility with their publics, as it was the case in
Turkey during the Earthquake. Large companies that could afford to
spend the money had an advantageous position in the eyes of the
public. Most of these companies publicized their donations through
advertising or articles in the press (E.g. Hiltons offer published in the
Turkish Daily News) an example of good PR
Government regulations step in; In Turkey the government put a
limit to the amount of such aid and imposed rather heavy taxes to
finance the social aid to be provided by the state.
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Despite the three perspectives summarized above, there are two
different views in general on this delicate subject:
Proponents’ View on Social Responsibility
Proponents of business’ social responsibility believe the firms must be
held accountable to their stakeholders which include;
 Owners
 Customers
 Suppliers
 Employees
 All other groups that are affected by the activities of the firm.
Supporting Arguments:
 People in businesses make decisions at every level from
corporate CEO to the down-level clerks.
 Their decisions have economic as well as social impacts in
the larger business environment and therefore they have
influence over the population’s wellbeing and welfare.
 While pursuing profitable activities they must also
consider the values and objectives of the society.
Opponents’ View of Social Responsibility
Whether a corporate social responsibility is advocated by political
activists or the CEO, there is a cost involved. Businesses to act in a
socially responsible manner must install equipment to prevent
environmental pollution, allocate funds for better work environment
and contribute to the social and economic development of the
community. All these activities are additional cost items for firms.
The cost of these expenditures, which do not increase the value of the
company or its stock, will be passed on to:
 Customers by way of higher prices
 Employees as lower wages
 Shareholders as lower return
The problem arises when these expenditures are passed on to the
customers as price increase or quality deficiency. In such cases the
rights of consumers will have to be protected.
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Consumer Protection Legislations in Turkey
The Law Numbered 4077 on the Protection of Consumers (February
23, 1995)
The Regulation Regarding the Formation of the Arbitration
Committees (Uzlaştırma Komiteleri) (August 15, 1995)
CONSUMERISM
The organized efforts of consumers to demand honest and fair
practice is called consumerism.
Studies concerning the protection of consumers go back to 1960s. In
the USA pressure was put on businesses to consider consumer needs
and interests. As a result of this pressure two things happened:
 Many businesses established “consumer affairs departments”
to handle consumer complaints
 State and local agencies set up Bureaus to offer consumer
information and assistance
Consumers were also supplied with rights under the following
headings:
 The right to safe products
 The right to be informed
 The right to choose
 The right to be heard
CONSUMER RIGHTS
Product Safety or the Right to Safe Products:
 Legal requirements are imposed on product safety
 The non-complying firms are forced to take corrective actions
 The threat of “product-liability suits” and declining sales
motivate companies to meet safety standards
 Poor safety records damage product image and company’s
reputation
Fair Packaging
(the Right to be informed)
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Information about the product refers to the right to know what is in
a product (ingredients) and how to use it. Information printed on the
product labels are read by 2/3rd of the consumers who purchase the
product for the first time.
Health Hazard Information: If a product is sufficiently dangerous, a
warning label is required as it is the case with Cigarettes and the
surgeon general warning on packages.
Storage Requirement (use of containers, bottles, carton and wider
storage facilities)
Hygiene: (disinfection, cleanliness at work environment). E.g.
minimum standards applied to food production centers, sensitive
goods such as fish markets.
Marketers must understand:
The changing population: More educated, more sophisticated, more
litigated
Demographic changes; (aging population)
Life-style changes
 Single households
 Single parent families
 Two career households
Cultural Values
Globalization exposes business people to a variety of different
cultures and business practices. What may be unethical in one
culture may be considered acceptable in another.
Culture is a society’s sum total of knowledge, beliefs, values,
customs and artifacts that people use in adapting to their
environment and hand down to succeeding generations.
Social Responsibility
Business obligations to society beyond the profit making objective is
called social responsibility.
It is also business’s contribution to the wellbeing of the society.
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Consumerism and Ecology: (consumer preference of organically
produced products and sensitivity towards an ecologically balanced
nature).
Ecology is the study of relationship between organisms and the
natural environment.
WHAT IS BUSINESS ETHICS
Business ethics is a system of “ought”- a collection of principles
and rules of conduct based on beliefs about what is right and what
is wrong in business behavior.
Recently unethical conducts leading to scandals especially in Banking
and Financial industries were covered extensively by the Turkish
media.
The Central Bank guaranty for all deposits encouraged banks to
engage in illegal money transactions-transfers made to managers
private businesses etc.
As a result of these misconducts and unethical business practices, the
government formed a number of Independent Regulatory
Organizations one of which has been given the responsibility to audit
banking operations. (BDDK-Bankacılık Düzenleme ve Denetleme Kurulu)
An example to an international scandal caused by unethical business
conduct is the Enron case (the giant energy conglomerate) the
company collapsed in 2001 for the following reasons:
 Overstating profits
 Inside trading
 Management mistakes
A public accounting firm, Arthur Andersen which was the
independent financial auditor and Management advisor of Enron
went down as well for the unethical business conduct.
Ethical behavior could also be defined as “an action which does the
most good for most of the people and society”.
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ETHICAL CODE
A Code of Ethics is a formal, published collection of values and
rules that are used to upgrade and guide behavior.
A firm’s Code of Ethics sets standards for dealing with its
stakeholders.
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ETHICS AND CUSTOMERS
A firm interacts with its customers mainly through its sales
people and marketing department.
Some of these interactions are governed by laws, rules and
regulations.
o E.g. rules declaring false advertising or misleading
advertising illegal
However, there many other areas of interactions that are not
covered by laws, rules and regulations.
In such incidents where there are no laws or any other
regulations, ethics guide the business behavior.
Code of Ethics is consisted of values and principles that
should be used to guide decisions. “written statement setting
forth the principles that guide an organizations decisions”
 E.g. advertising to Children and Teenagers require ethical
behavior
 Advertising professional services
 Tobacco and alcohol advertising
 How a product should be marketed? Such issues are all matters
of concern in terms of ethical behavior. There are rules and
regulations covering certain aspects of these issues while a great
deal is left to the code of ethics. (here one may look into the
effects of mass media on consumers, teenagers and children
especially in relation to violence and crimes)
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ETHICS AND SUPPLIERS
Price cut demands by larger firms
Large organizations doing business with small firms have the power to
negotiate price cuts on the items they buy from these sources.
E.g. large tour operators negotiate price cuts from the Turkish tourism
industry especially during the economic and social crisis.
In such cases small companies are faced with a dilemma either to
loose income or to loose the business. (unethical use of power!)
Pressure for Quality (TQM)
Total Quality Management (TQM) is a quality management approach
in which all departments and employees share responsibility for
quality. TQM was firs practiced in Japan by TOYOTA to market
quality product. They established Quality Circle departments to check
every product produced by the company before it was put on the
market.
Only plants with TQM certificates were allowed to produce Toyota
cars.
The plants where the quality dropped were immediately warned and
their certificates were revoked.
 How to evaluate total quality for the tourism product: the
performance of all components of the industry must be kept
at high levels.
Slotting allowances
Should the supermarkets charge extra for space made available for
goods placed on their shelves. (this has to do with product positioning)
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ETHICS AND COMPETITORS
Competitor’s Intelligence
The process of scanning public information (trade journals,
classified ads, newspaper articles, databases, government filings etc.)
and extracting information from customers and suppliers to keep
abreast of the competition is the subject of ethical behavior. This is
not the same as industrial espionage which is illegal.
There are examples where information obtained in this way has been
returned to original company.
E.g. Information gathered from waste bins within the company
premises versus outside the company premises.
Corporate Dirty Tricks
Spreading rumors about a rival or a rival’s product is an example
to corporate dirty tricks. Rumors about a particular firm supporting
certain political party have lead people to refrain from buying their
products.
Rumors by one of Turkey’s neighboring countries about the
existence of a contagious disease (cholera epidemic) in Turkey have
resulted in decrease of demand for tourism. These are examples to
dirty tricks.
Questionable Competitive Practices
Cases where hospitals have issued overcharged bills to the Social
Security Institute in Turkey for the medical treatment provided to
workers covered by social Insurance policy. Such practices have put
the whole social security system of Turkey under a great pressure.
EMPLOYER – EMPLOYEE ETHICS
Ethics and Small Business
Small businesses usually have a distinguishing quality of practicing
admirable business ethics.
Business ethics become the heart and soul of company culture and can
mean the difference between success and failure.
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Recognizing the significance of business ethics as a tool for achieving
your desired outcome is only the beginning. A small business that
instills a deep-seated theme of business ethics within its strategies and
policies will be evident among customers. It's overall influence will
lead to a profitable, successful company. By recognizing the value of
practicing admirable business ethics, and following each of the 7
principles, your success will not be far off.
Benefits of Practicing Business Ethics
In the research study, "Does Business Ethics Pay?" by The Institute of
Business Ethics (IBE), it was found that companies displaying a "clear
commitment to ethical conduct" consistently outperform companies
that do not display ethical conduct. The Director of IBE, Philippa
Foster Black, stated: "Not only is ethical behaviour in business life the
right thing to do in principle, we have shown that it pays off in
financial returns." These findings deserve to be considered as an
important insight for companies striving for long-term success and
growth.
7 Principles of Admirable Business Ethics
1. Be Trustful: Recognize customers want to do business with a
company they can trust; when trust is at the core of a company, it's
easy to recognize. Trust defined, is assured reliance on the character,
ability, strength, and truth of a business.
2. Keep An Open Mind: For continuous improvement of a company,
the leader of an organization must be open to new ideas. Ask for
opinions and feedback from both customers and team members and
your company will continue to grow.
3. Meet Obligations: Regardless of the circumstances, do everything
in your power to gain the trust of past customer's and clients,
particularly if something has gone awry. Reclaim any lost business by
honoring all commitments and obligations.
4. Have Clear Documents: Re-evaluate all print materials including
small business advertising, brochures, and other business documents
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making sure they are clear, precise and professional. Most important,
make sure they do not misrepresent or misinterpret.
5. Become Community Involved: Remain involved in communityrelated issues and activities, thereby demonstrating that your business
is a responsible community contributor. In other words, stay involved.
6. Maintain Accounting Control: Take a hands-on approach to
accounting and record keeping, not only as a means of gaining a
better feel for the progress of your company, but as a resource for any
"questionable " activities. Gaining control of accounting and record
keeping allows you to end any dubious activities promptly.
7. Be Respectful: Treat others with the utmost of respect. Regardless
of differences, positions, titles, ages, or other types of distinctions,
always treat others with professional respect and courtesy.
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the founder of The Moment Group, a consulting firm dedicated to
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Sexual Harrasment and sexism
The phrase did not exist prior to 1964
What exactly is sexual harassment?
 Narrow Sense:
 Unwelcome pressure on a person to engage in sexual activity
 Broader sense
 Hostile work environment
Issues of sexism and sexual harassment have been in the news
very often
 President Clinton
 Other ministers and senators
In Turkey the Labor Law 4857 clearly states that “the employer
has the right to terminate the employee’s employment contract
without notice; if the employee sexually harasses another employee of
the employer”
Other measures imposed by the Law 4857
Child Care – Need for nurseries with the increasing number of both
parents in the work force
Affirmative Action Plan – A firm’s detailed statement describing
how it will recruit minorities, women and upgrade the jobs they
currently hold.
Managing Diversity – The process of creating a work environment in
which women, minorities and other non traditional employees can
succeed on the job.
Health and Safety
The Turkish Labor Law (No. 4857) states that “with a view to ensure
occupational health and safety in their establishments, employers shall
take all necessary measures and maintain all the needed means and
tools in full; and employees are under the obligation to obey and
observe all the measures taken in the field of occupational health and
safety.”
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Regulations concerning
 Temporaries, Part-timers and Retirees
 Old workers (discrimination on the basis of age-often coded as
overqualified)
 Drugs and Alcohol Abuse
Article 25 0f the Labor Law 4857 states that employment will be
terminated upon “ ….. Loose living or drunkenness, and as a result of
absence for three consecutive days or for more than 5 working days in
a month.”
 Recruitment and Training Techniques: (Internal training, onthe-job training
 Employee Privacy (not making public the employees records to
those other than authorized personnel) Firms must restrict access
to records to a limited number of individuals
 Honesty Tests (Polygraph and Honesty Testing-lying produces
stress and turn causes observable physical changes)
 Whistle Blowing: Individuals who report real or perceived
wrongs committed by their employer.
ETHICS AND INVESTORS
As discussed earlier, the main responsibility of businesses is to make
money for their investors.
Any action directed to misleading the investors is cheating them out of
their profits.
This subject can be discussed under two headings:
1) Cheating the Investor
2) Overdoing Hunt for Profit
1. Cheating the Investor
There are number of ways to cheat investors in order to obtain more
funds
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 Misrepresentation of the financial status is the most common
way. Investors convinced of the company strength invest more
funds. Every year a large number of residents are lured into
investing in what is called Housing Cooperatives in the suburbs
of large cities or at summer resort areas. While some accomplish
their projects successfully most are vanished in the process
leaving the investors at loss. Similarly the financial crisis with
banks in 2000 and 2001 was the result of the misleading of the
public on the financial situations of these firms. People were
attracted to these firms with high interest rates, high returns
which were based on false pretenses.
The “hose-operation” was conducted by the government to
investigate the matter. Despite these crisis companies still use
“Managing the book for a short-term” or “Cooking the books”
type of means to show the firms in a better financial situation
than they are. People on the other hand keep investing in high
risk areas.
 Diverting the earnings or assets of the company is another
way
Management who has control of company earnings and assets
may take this opportunity to use these resources for personal
benefits.
This can be done either by overcharging the expense account,
pumping invoices or using inside information to play in the stock
market.
2. Overdoing Hunt for Profit
 Some executives may be in the habit of violating ethical
principles or rules of good conduct in order to maximize their
profits.
 They may resort to Bribery to get business from the government
or a foreign company official. There are numerous examples,
more in less developed societies. Some companies issue warning
statements to prevent such practices carried out under personal
gifts or tokens of courtesy. (see the example as attachment to
lecture notes)
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The Environment Conservation
Protection of natural resources
Preventing soil erosion through wind and rain (TEMA Foundation)
Recycling
Processing used materials for reuse: collecting cans, paper and bottles
to be processed and recycled. The process provides additional funds
for municipalities and local communities out of waste treatments.
Pollution
 Pollution is the Contamination of the natural environment by
humans through deposits of harmful substances that endanger
human health and lives. Main categories of pollution are:
 Air pollution (low grade coal used by individuals and
businesses CO2 )
 Water pollution (Industry discharge of untreated waste to
rivers, lakes and seas)
 Pollution of the land (landfill, household wastes etc.)
QUESTIONS FOR DISCUSSION:
What is done by Businesses?
Business and Environmentalists! Is there a common ground that they
may work together?
Paying for a Cleaner Environment
Morality in the Entertainment Industry
 The news reported by Tabloid or Week-end papers giving a
highly wrong impression of the people living in large urban
centers creates serious right violations and raises ethical issues
 The life-style of self-proclaimed stars and artists in the news is
usually considered invasion of privacy and an unethical behavior
Education (see the distribution)
 Poverty is on the rise
 Education is no longer the priority for many lower class families
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 Half of the young population has not finished the secondary
school
 Vocational Schools by private organizations are offering some
solutions as to provide opportunity for youngsters to gain skills
and training for certain professions.
All these developments raise social responsibility and ethical
issues
Business-Government Ethics
Should people who leave a government job take upon a job with the
private sector?
THE GLOBAL DIMENTION OF BUSINESS ETHICS
Business Ethics applied by a firm can not be the same throughout
the world. Different countries will have different cultural norms
and standards.
 Dressing codes
 Traditions and habits of doing business
 Expectations of the government official to conclude formalities
will vary from one country to the next
 The need for providing gifts or additional benefits to officials
 Transporting petroleum product over the Bosphorus Bridge
There are certain unethical practices simply overlooked for the
purpose of getting things done.