® Academy o/ Management Executive. 2004. Vol. 18. No. 2

Business ethics and customerstakeholders

O.C. Ferrell

A common view of the firm holds that employees,customers, shareholders, and suppliers are key or-ganizational stakeholders.^ While obligations tothese stakeholders are sometimes considered to bemotivated by organizational self-interest, the ethi-cal perspective asserts the rightness or wrongnessof specific firm actions independently of any socialor stakeholder obligations.^ Customers are keystakeholders that help establish the firm's reputa-tion and identification. For example, today Procterand Gamble is considered a textbook market-driven global powerhouse with billion-dollarbrands such as Bounty, Olay, Tide, Crest, and Folg-ers.^ Understanding customer needs and wantsand providing customers with high-quality prod-ucts are the key to the company's success. A mar-ket orientation focuses on an understanding ofcustomers' expressed and latent needs and devel-opment of superior solutions to the needs.* Such anapproach selects to elevate the interests of onestakeholder—the customer—over those of others.

The ethical perspective asserts therightness or wrongness of specific firmactions independently of any social orstakeholder obligations.

While market orientation is considered a keystrategic component of marketing strategy, the im-portance of customers in the development of ethi-cal programs and social responsibility is not al-ways clear. Although one study found the ethicalclimate of the firm to be positively associated withcustomer loyalty,^ there are many other determi-nants of customer loyalty. As companies engage incompetitive markets, market orientation and a cus-tomer focus have been recognized as key drivers ofmarketing performance. However, intense compe-tition sometimes breeds unethical behavior evenwhen a customer orientation is in play. When PizzaHut and Papa John's aggressively attacked one

another in advertising campaigns, each declaredthat they provided the 'freshest' ingredients. Thematter was taken to court and resolved throughcivil litigation. The importance of creating cus-tomer relationships and creating value for the cus-tomer as a part of market orientation should leadto increased performance. This article provides in-sights on foundations for ethical customer relation-ships, contingent knowledge about customers asstakeholders, and insights on establishing a bal-anced stakeholder orientation from a managerialperspective.

Foundations for Ethical Customer StakeholderRelationships

The relationship between a customer and a firmexists because of mutual expectations built ontrust, good faith, and fair dealing in their interac-tion. In fact, there is an implied covenant of goodfaith and fair dealing, and performance cannotsimply be a matter of the firm's own discretion. Notonly is this an ethical requirement but it has beenlegally enforced in some states. The implied cove-nant of good faith and fair dealing is to enforce thecontract or transaction in a manner consistent withthe parties' reasonable expectations.^

From this perspective, ethically questionable ac-tions toward consumers can be addressed in civillitigation. Therefore we do know that ethical judg-ments of inappropriate conduct have a foundationfor legal resolution. For example, in a recent year,Wal-Mart was involved with roughly twelve law-suits per day or one every two hours. Wal-Mart isthe most sued organization except for the U.S. Gov-ernment.'̂ The lawsuits stem from every aspect ofcustomer interaction and the claim from some cus-tomers that something wrong has happened intheir role as Wal-Mart customers.

Ethical responsibilities to consumers have astrong foundation of legal protection. At the fed-eral level, the Federal Trade Commission (FTC)enforces consumer protection laws. Within this

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agency, the Bureau of Consumer Protection worksto protect consumers against unfair, deceptive, orfraudulent practices. In addition to the FTC, otherfederal agencies such as the Food and Drug Ad-ministration, the Consumer Product Safety Com-mission, and the Federal Communications Com-mission try to assist consumers in addressingdeceptive, fraudulent, or damaging conduct. At thestate level, consumer protection statutes exist, anddeceptive trade practices laws exist in most states.Key issues addressed in consumer protection in-clude product liability, which refers to a business'legal responsibility for the performance of its prod-ucts. Communications that are false or misleadingcan destroy stakeholders' trust in an organizationand may at times even be considered fraudulent.False and misleading advertising is increasinglya key issue in organizational communications.Abuses in advertising can range from exaggeratedclaims and concealed facts to outright lying. Suchabuses range from the unethical, which theyclearly are, to the illegal, which they may be. TheFederal Trade Commission stepped in when KFCpromoted the health benefits and low carbohy-drate content of its chicken with the slogan, "Ifyou're watching carbs and going high-protein, goKFC." Two pieces of fried chicken (skin removed)were being compared to the original Burger KingWhopper. Small print at the bottom of the ad noted"a balanced diet and exercise are necessary forgood health and that KFC chicken is not a low fat,low sodium, low cholesterol food." The FTC re-quired KFC to stop running the advertising, indi-cating the deceptive nature of the advertisement.^

False and misleading advertising isincreasingly a key issue inorganizational communications. Abusesin advertising can range from,exaggerated claims and concealed factsto outright lying.

Ethical issues that have the support of the gov-ernment include various laws and statementsmade to encourage ethical behavior. New federalregulations that hold both organizations and theiremployees responsible for misconduct require or-ganizations to assess areas of ethical and legalrisk and develop programs to manage those risks.Based on both the 2002 Sarbanes-Oxley Act and theUnited States Sentencing Commission guidelines,there are strong directives to encourage ethicalleadership. If ethical leadership fails, especially incorporate governance, there are significant penal-

ties. When organizations communicate to employ-ees that certain issues are important, the intensityof the issues is elevated. The more employees ap-preciate the importance of an issue, the less likelythey are to engage in questionable behavior asso-ciated with the issue. Under the Sarbanes-OxleyAct, boards of directors are required to provideoversight for all auditing activities and are respon-sible for developing ethical leadership. In addi-tion, court decisions related to the Federal Sen-tencing Guidelines for Organizations hold boardmembers responsible for the ethical and legalcompliance programs of the firms they oversee.

In 1962, President John F. Kennedy proclaimed aconsumer bill of rights, which includes the rightsto choose, to safety, to be informed, and to beheard. Kennedy established the Consumer Advi-sory Council to integrate consumer concerns intogovernment regulations and processes. These fourrights established a philosophical basis on whichstate and local consumer protection regulationswere developed.^ All U.S. presidents since Kennedyhave confirmed the four basic consumer rights andexpanded this philosophical concept, focusing onissues such as healthcare and consumer financialissues, paying particular attention to children,teens, and senior citizens.

Contingent Knowledge About CustomerStakeholders

While there has been concern with corporate rep-utation, there is limited research to determine ifcustomers increase their active support based onthe ethical conduct of an organization. Customersdo evaluate the ethical practices of companies,and research in marketing ethics has shown thatsome customers are aware of the importance ofenvironmental issues, level of service quality, andother responsibility issues that impact the pur-chasing and consumption of products. In a Cone-Roper national survey of consumer attitudes, 81per cent of consumers indicated they would belikely to switch to brands associated with a goodcause if price and quality were equal.i° Examiningcustomers from the perspective of a stakeholderorientation provides an opportunity to better un-derstand the importance of customers in shapingthe ethical conduct of the firm.

Research has demonstrated that consumersidentify with organizations and may perceive anoverlap between organizational attributes andtheir individual attributes." The concept of organ-izational identification is important because con-sumers often seek organizational images that arecongruent with their self-identity. Organizational

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disidentification may occur when individuals per-ceive a conflict between their defining attributesand the attributes defining the organization.^^ Thisdisidentification represents a separation of a per-son's self-concept from that of the organization andtranslates into negative perceptions of the organi-zation.̂ 3 Companies such as Enron, WorldCom,Parmalat, and HealthSouth have been confrontedwith scandal and assumed disidentification fromcustomers, as well as from other stakeholders suchas investors and employees. Overall, business eth-ics practices emerge as a useful instrument to mar-ket the organization to customers and to avoidcustomer disidentification and sanctions.^*

Research has demonstrated thatconsumers identify with organizationsand may perceive an overlap betweenorganizational attributes and theirindividual attributes.

Companies with poor reputations with custom-ers or the general public may still be rewarded byinvestors if the bottom line looks attractive. Whilethe S&P stock index posted a 28.7 per cent return in2003, the so-called "Feds index" consisting of com-panies under investigation for wrongdoing in-creased more than twice that, with a 59.8 per centrise. The index developed by the equity depart-ment at Guardian Life Insurance included Tyco,HealthSouth, Owest, and Computer Associates, aswell as other firms in trouble. Although the indexwas only developed to capture the mood of themarket and was not all-inclusive of firms underinvestigation, it appears that investors are forgiv-ing. ̂ ^ This potentially creates a conflict betweenstakeholders' interests and businesses limitingtheir ethical responsibility initiatives to please themost powerful and visible stakeholder interests. Ifshareholders reward firms in the short run forearnings or financial performance without any re-gard for ethics, then this may be a signal to man-agement that ethical behavior is not a key factor insuccess. Customers may be able to withhold pur-chasing from an unethical firm but may lack infor-mation and coordination of efforts to systemati-cally influence a firm's performance.

Wal-Mart has experienced ethical and legal al-legations concerning employment issues, includ-ing issues related to forcing employees to work offthe clock, as well as discrimination againstwomen and minorities in promotions to manage-ment positions. Wal-Mart workers generally re-ceive lower pay and fewer benefits than workers at

other retail stores. Because of the vast Wal-Martwork force of over 1.4 million, these policies havebeen blamed for driving down retail wages acrossAmerica. On the other hand, the Wal-Mart philos-ophy squeezes suppliers and helps directly or in-directly save customers possibly over $100 billionper year.i^ There may be a big difference betweenwhat a company can do for success and what thecompany should do for success in the long run inbalancing the interests of all stakeholders. In thecase of Wal-Mart, customers appear to have morepower than employees, or at least customers arethe preferred stakeholders. Wal-Mart's suppliersdo not feel 'preferred,' communities boycott to pre-vent Wal-Mart from opening new stores, and em-ployee treatment is under scrutiny.

Establishing a Balanced Stakeholder Orientation

There are potential conflicts between customerstakeholders and other stakeholders such as em-ployees, shareholders, suppliers, and communitiesconcerned about the natural environment or eco-nomic development. Some customers may take aself-centered approach and look for the best value,quality products, and service without regard toother stakeholders. While some customer groupsengage in organized communication and actionrelated to the exchange relationships, consumeractions such as boycotts or abstaining from pur-chasing and using products are not widespread.Nike, as well as other contract manufacturers, hasbeen boycotted by consumer groups concernedabout child labor practices and working conditionsin developing countries. In general, however, cus-tomer groups are not organized and do not speakwith one voice. Therefore, there is a danger thatmore powerful stakeholders will influence ethicaldecisions to a greater extent and perhaps in amanner not in the overall best interests of consum-ers. Resource-dependent theory states that "an or-ganization must attend to the demands of those inits environment that provide resources necessaryand important for its continued survival."i'' Cus-tomers provide financial resources, loyalty, andenhanced reputation that can help create positivefirm images related to ethics and responsibility.Stakeholder groups need to demonstrate that theycan influence business activities in order to bepowerful enough to influence organizational deci-sions. In some cases, such as Wal-Mart, customersmay be powerful, but shareholders, employees, oreven suppliers may have the upper hand in otherfirms.

The development of organizational ethics pro-grams has become increasingly popular for ethical

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relationships with all stakeholders. Organizationscreate ethical or unethical corporate culturesbased on leadership and the commitment to valuesthat stress the importance of stakeholder relation-ships. Establishing and implementing a strategicapproach to improving organizational ethics isbased on establishing, communicating, and moni-toring ethical values and legal requirements thatcharacterize the firm's history, culture, and operat-ing environment. Without such programs and uni-form standards of conduct, it will be difficult tomaintain satisfactory relationships with all stake-holders. While many ethics programs focus on re-lationships with employees, suppliers, share-holders, and regulators, it is also important todetermine appropriate conduct toward customers.Key issues that exist today related to customersinclude privacy, identity theft, disclosure of prod-uct information, and appropriate methods of ad-dressing conflict, as well as all issues associatedwith the Kennedy Consumer Bill of Rights. Devel-oping an ethical climate that addresses the needsof customers must be built on a foundation of val-ues that make concrete connections between stan-dards and the actions of employees that servecustomers.

The development of an ethics program should bebased on a balanced stakeholder orientation thataligns the demands and needs of all stakeholders.There is a need to conduct formal research, includ-ing surveys, focus groups, Internet searches, orother methods to generate data about stakeholdergroups and assess the firm's effects on thesegroups. Distribution of this information throughoutthe firm can provide a basis for organizationalresponsiveness and ethical behavior.

Endnotes

' Henrique, 1., & Sadorsky, P. 1999. The relationship betweenenvironmental commitment and managerial perceptions ofstakeholder importance. Academy of Management Journal,42(1); 89-99.

^ Donaldson, T., & Dunfee, T. W. 1994. Toward a unified con-ception of business ethics; Integrative social contracts theory.Academy of Management Review, 19(2); 252-284; Swanson, D. L.1995. Addressing a theoretical problem by reorienting the cor-porate social performance model. Academy of ManagementReview, 20(1); 43-64.

^ Neff, J. 2004. P&G profits by paradox. Advertising Age, 23February 2004; 18-19, 31.

'' Slater, S. F., & Narver, J. C. 1999. Market-oriented is morethan being customer-led. Strategic Management Journal, 20;1165-1168.

^Maignan, I., Ferrell, O. C, & Hult, G. T. 1999. Corporatecitizenship; Cultural antecedents and business benefits. Jour-nal of the Academy of Marketing Science, 27(4); 455-469.

^ 1998 WL 1991608 Mich. App.^France, M. 2001. The litigation machine. Business Week, 29

January 2001; 116-118; Willing, R. 2001. Lawsuits follow growthcurve of Wal-Mart. USA Today, 14 August 2001; Al, 2.

^FTC looks into KFC health claims, November 19, 2003.www.guic]cs(ar(.ciari.net/gs_se/wejbnews/wed/cw/L/us-]c/c.flyxii_DNJ.html, accessed 12 February 2004.

^ Meier, K. J., Garman, E. T., & Keiser, L. R. 1998. Regulationand consumer protection: Politics, bureaucracy and economics.Houston, TX: Dame Publications.

'° Gardyn, R. 2002. Philanthrophy post-Sept 11. American De-mographics, 24(February 2002): 16-17.

" Ashforth, B. E., & Mael, F. 1989. Social identity theory andthe organization. Academy of Management Review, 14(1): 20-39.

'̂ Bhattacharya, C. B., & Elsbach, K. D. 2002. Us versus them:The roles of organizational identification and disidentificationin social marketing initiatives. Journal of Public Policy andMarketing, 21(Spring): 26-36; Elsbach, K. D., & Bhattacharya,C. B. 2001. Defining who you are by what you're not; A study oforganizational disidentification and the NRA. OrganizationalScience, 12(4): 393-413.

" Bhattacharya & Elsbach, 2002.'•* Maignan, I., & Ferrell, O. C. 2004. Corporate social respon-

sibility and marketing: An integrative framework. Journal of theAcademy of Marketing Science, 32(1): 3-19.

'̂ McLean, B. 2004. When bad companies go up. Fortune, 10February 2004, via http:llwvrw.fortune.comlfortunelsubslprintl0,15935,589385,00.html, accessed 24 February 2004.

'̂ Bianco, A. 2003. Is Wal-Mart too powerful? Business Week,6 October 2003: 102-110; Daniels, C. 2003. Women vs. Wal-Mart.Fortune, 21 July 2003: 79-82; Fishman. C. 2003. The Wal-Mart youdon't know; Why low prices have a high cost. Fast Company,December 2003; 70-80.

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O.C. Ferrell is chair and profes-sor of marketing and co-directorof the Center for Business Eth-ics and Social Issues at Colo-rado State University. He re-ceived his Ph.D. in marketingfrom Louisiana State Univer-sity. His research interests cen-ter on business ethics, organi-zational compliance programs,and stakeholder orientation. Hehas co-authored numerous arti-cles and three books on thesetopics. Contact; OC.FerreJJ@coJostate.edu.