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Strategic Management:

Part III: Strategic Actions: Strategy Implementation

CHAPTER 17 ETHICS & SOCIAL

RESPONSIBILITIES

“There is one and only one social

responsibility of business – to use its

resources and engage in activities designed

to increase its profits so long as it stays

within the rules of the game, which is to say

engages in free and open competition,

without deception or fraud.”

Milton Friedman, Nobel Prize-winning economist

Chapter Roadmap What Do We Mean by Business Ethics? Where Do Ethical Standards Come From – Are

They Universal or Dependent on Local Norms and Situational Circumstances?

The Three Categories of Management Morality Do Company Strategies Need to be Ethical? Why Should Company Strategies Be Ethical? Linking a Company’s Strategy to its Ethical

Principles and Core Values Strategy and Social Responsibility

BUSINESS ETHICS

Linking Strategy to Ethics and Social Responsibility

Should there be a link between a company’s efforts to craft and execute a winning strategy and its duties to

Conduct activities in an ethical manner?

Demonstrate socially responsible behavior by

Being a committed corporate citizen?

Attending to needs of non-owner stakeholders?

Key IssuesKey Issues

What Is Business Ethics?

Business ethics involves applying general ethical principles and standards to business behavior

Ethical principles in business are not different from ethical principles in general

Business actions are judged

By general ethical standards of society

Not by a set of rules businesspeopleapply to their own conduct

SOURCE/ GENERATION OF

ETHICAL THOUGHTS

Are Ethical Standards Universal or Dependent on Local Norms?

Three schools of thought regarding extentto which ethical standards can be applied . . .

Ethical UniversalismEthical Universalism

Ethical RelativismEthical Relativism

Integrative Social Contracts Theory

Integrative Social Contracts Theory

1. Concept of Ethical Universalism According to the school of ethical universalism .

Same standards of what is ethical and what is unethical resonate with peoples of most societies regardless of

Local traditions and

Cultural norms

Thus, common ethical standards can be used to judge conduct of personnel at companies operating in a variety of

Country markets and

Cultural circumstances

Examples of Universal Ethical Principles or Norms

Honesty Trustworthiness Treating people with dignity and respect Respecting rights of others Practicing the Golden Rule Avoiding unnecessary harm to

Workers Users of a company’s product or service

Respecting the environment

What Is the Appeal of Ethical Universalism?

Draws on collective views of multiple societies and cultures to place clear boundaries on what constitutes Ethical business behavior and Unethical business behaviorRegardless of what country a company is operating in

Whenever basic moral standards do not vary significantly according to local cultural beliefs, traditions, or religious convictions, a multinational company can Apply a code of ethics more or less evenly across its

worldwide operations

2. Concept of Ethical Relativism

According to the school of ethical relativism . . .

Different societies/cultures/countries

Put more/less emphasis on some values than others

Have different standards of right and wrong

Have different social mores and behavioral norms

What is ethical or unethical

Must be judged in light of localcustoms and social mores and

Can vary from one country to another

A thorny ethical problem is faced by multinational companies

Degree of cross-country variability in payingbribes as part of business transactions

Companies forbidding payment of bribes in their codes of ethics face a formidable challenge in countries where payments are entrenched as a local custom

Foreign Corrupt Practices Act prohibits U.S. companies from paying bribes in all countries where they do business

Payment of Bribes and Kickbacks

Test Your KnowledgePaying bribes and kickbacks to grease business transactions

A. violates ethical principles of right and wrong in all countries.

B. is ethically acceptable according to the principle of ethical universalism.

C. is acceptable to immoral managers but not to amoral managers.

D. should be considered ethically appropriate by a company so long as such payments are normal and customary in the countries where such payments are made.

E. may be ethically acceptable according to the principle of ethical relativism if paying bribes and kickbacks is normal and customary practice in a country.

Ethical Relativism = Multiple Sets of Ethical Standards

Proponents of the ethical relativism school maintain there are Few ethical absolutes to judge a company’s

conduct in various countries Plenty of situations where ethical norms are

contoured to fit Local customs and traditions Local beliefs about what is fair Local standards of “right” and “wrong”

Ethical problems in business cannot be fully resolved without appealing to the shared convictions of the parties in question

Drawbacks of Ethical Relativism The ethical relativism rule of “when in Rome, do

as the Romans do” presents problems When the envelope is pushed, it is

tantamount to rudderless ethical standards

It is ethically dangerous for company personnel to assume that local ethical standards are an adequate guide to ethical behavior

What if local standards condone kickbacks and bribery? What if local standards blink at environmental degradation?

From a global markets perspective, ethical relativism results in a maze of conflicting ethical standards for multinational companies wanting to address the issue of what ethical standards to enforce companywide

3. Concept of Integrative Social Contracts Theory

According to the integrative social contractstheory, the ethical standards a company should try to uphold are governed by both A limited number of universal ethical principles that

are widely recognized as putting legitimate ethicalboundaries on actions and behavior in all situations

and

The circumstances of local cultures, traditions, andshared values that further prescribe what constitutes

Ethically permissible behavior and

What does not

Appeal of Integrative Social Contracts Theory

Universal ethical principles establish “moral free space” based on the collective view of multiple societies and cultures

Commonly held views about morality and ethical principles combine to form a “social contract” with society

It is appropriate for societies or companies to go beyond universal ethical principles and specify local or second-order ethical norms Where firms have developed ethical codes, the

standards they call for provide appropriate ethical guidance

Social contracts theory maintains adherence touniversal or first-order ethical norms should

alwaystake precedence over local or second-order norms!

CATEGORIES OF MANAGEMENT

MORALITY

Moral manager

Amoral manager

Immoral manager

Three Categories of Management Morality

Managerial ethical

and moral

principles

Dedicated to high standards of ethical behavior in

Own actions

How the company’s business is to be conducted

Considers it important to

Be a steward of ethical behavior

Demonstrate ethical leadership

Pursues business success

Within confines of both letter and spirit of laws

With a habit of operating well above what laws require

1. Characteristics of a Moral Manager

2. Characteristics of an Immoral Manager

Actively opposes ethical behavior in business Willfully ignores ethical principles in making

decisions Views legal standards as barriers to overcome Pursues own self-interests Is an example of capitalistic greed Ignores interests of others Focuses only on bottom line – making one’s

numbers Will trample on others to avoid being trampled

upon

Believes business and ethics should not be mixed since different rules apply to Business activities Other realms of life

Does not factor ethical considerations into own actions since business activity lies outside sphere of moral judgment

Views ethics as inappropriate for tough, competitive business world

Concept of right and wrong is lawyer-driven (what can we get by with without running afoul of the law)

3. Characteristics of an Intentionally Amoral Manager

Is blind to or casual about ethics of decision-making and business actions

Displays lack of concern regarding whether ethics applies to company actions

Sees self as well-intentioned or personally ethical

Typical beliefs

Do what is necessary to comply with laws and regulations

Government provides legal framework stating what society will put up with—if it is not illegal, it is allowed

Characteristics of an Unintentionally Amoral Manager

Evidence of Managerial Immorality

in the Global Business Community

Evidence exists a sizable majority of managers are either

Amoral or

Immoral

Results of the 2005 Global Corruption Report indicate corruption is widespread across the world

Corruption extends beyond bribes and kickbacks

DRIVERS OF UNETHICAL

STRATEGIES & BUSINESS BEHAVIOR

Do Company Strategies Need to Be Ethical?

Approaches of most company managers Ensure a company’s strategy is legal May or may not ensure all elements of strategies are

ethical

Approach of senior executives with strong ethical convictions Insist all aspects of strategy fall within ethical boundaries

Approach of immoral or amoral senior executives Use shady strategies if they think they can get by with it Use unethical or borderline business practices Hide ethically questionable actions

Large numbers of immoral and amoral business people

Large numbers of immoral and amoral business people

Overzealous pursuit of personal gain, wealth, and other selfish interests

Overzealous pursuit of personal gain, wealth, and other selfish interests

Heavy pressures on company managers to meet or beat earnings targets

Heavy pressures on company managers to meet or beat earnings targets

Company cultures that place profits and good performance ahead of ethical

behavior

Company cultures that place profits and good performance ahead of ethical

behavior

What Are the Drivers of Unethical Strategies and Business Behavior?

People obsessed with wealth accumulation, greed, power, and status often

Push ethical principles aside in their quest for self gain

Exhibit few qualms in doing whatever is necessary to achieve their goals

Look out for their own best interests

Have few scruples and ignore welfare of others

Engage in all kinds of unethical strategic maneuvers and behaviors

2. Overzealous Pursuit of Personal Gain, Wealth, and

Selfish Interests

Managers often feel enormous pressure to do whatever it takes to deliver good financial performance

Actions often taken by managers Cut costs wherever savings show up immediately Squeeze extra sales out of early deliveries Engage in short-term maneuvers to make the numbers Stretch rules to extreme, until limits of ethical conduct are overlooked

Executives feel pressure to hit performance targets since their compensation depends heavily on company performance

Fundamental problem with a “make the numbers” syndrome Company does not serve its customers or shareholders well by placing

top priority on the bottom line

3. Heavy Pressures on Company Managers

to Meet or Beat Earnings Targets

4. Company Culture Places Profits and Good Performance Ahead of Ethical

Behavior In an ethically corrupt or amoral work climate,

people have a company-approved license to Ignore “what’s right” and stretch rules Engage in most any behavior or employ most any

strategy they think they can get away with Play down relevance of ethical strategic actions and

business conduct

Pressures to conform to cultural norms can prompt otherwise honorable people to Make ethical mistakes Succumb to the many opportunities to engage in

unethical practices and shady behavior

APPROACHES TO MANAGING A

COMPANY’S ETHICAL CONDUCT

Approaches to Managing a Company’s Ethical Conduct

Unconcerned or non-issue approachUnconcerned or non-issue approach

Damage control approachDamage control approach

Compliance approachCompliance approach

Ethical culture approachEthical culture approach

1. Characteristics of Unconcerned Approach

Prevalent at companies whose executives are immoral and unintentionally amoral

Notions of right and wrong in business matters are defined by government via prevailing laws and regulations — after that, anything goes

If the law permits “unethical behavior,” why stand on ethical principles

Companies are usually out to make greatest possible profit at most any cost

Strategies used, while legal, may embrace elements that are ethically shady

2. Characteristics of Damage Control Approach

Favored at companies whose managers are intentionally amoral but who fear scandal

May adopt a code of ethics as window-dressing Adept at using “spin” to “explain away” the use

of unethical strategy elements or discount the impact of shady actions

Executives look the other way when shady behavior occurs

Executives may condone questionable actions that help a company reach earnings targets or bolster its market standing

3. Characteristics of Compliance Approach

From light to forceful compliance is favoredat companies whose managers Lean toward being somewhat amoral but are highly concerned

about having ethically upstanding reputations or Are moral and see strong compliance methods as best way to

impose and enforce high ethical standards

Emphasis is on securing broad compliance and measuring degree to which ethical standards are upheld

Commitment to eradicate unethical behavior stems from a desire to Avoid cost and damage associated with unethical conduct or Gain favor from stakeholders from having a highly regarded

reputation for ethical behavior

Pursuing a Compliance Approach:Typical Actions

Make code of ethics a visible and regular part of communications with employees

Implement ethics training programs

Appoint a chief ethics officer

Have ethics committees to give guidance on ethics matters

Institute formal procedures for investigating alleged ethics violations

Conduct ethics audits to measure and document compliance

Give ethics awards to employees for outstanding efforts to create an ethical climate

Install ethics hotlines to help detect and deter violations

Potential Weakness of Compliance Approach

Moral control resides in a company’s code of ethics and in the ethics compliance system rather than in

Strong peer pressures for ethical behavior that come from ingraining a highly ethical corporate culture and

An individual’s own moral responsibility for ethical behavior

4. Characteristics of Ethical Culture Approach

Top executives believe high ethical principles must Be deeply ingrained in the corporate culture Function as guides for “how we do things around

here”

Company seeks to gain employee buy-in to Company’s ethical standards Business principles Corporate values

4. Characteristics of Ethical Culture Approach (cont.)

Ethical principles in company’s code of ethics are Integral to day-to-day operations Promoted as “business as usual”

Strategy must be ethical

Employees must display ethical behaviors in executing the strategy

IMPORTANCE OF ETHICAL STRATEGY(Linking a Company’s Strategy to its

Ethical Principles and Core Values)

Why Should Company Strategies Be Ethical?

An unethical strategy

Is morally wrong

Reflects badly on the character of company personnel

An ethical strategy is

Good business

In the best interest of shareholders

Test Your KnowledgeWhich one of the following is false when it comes to making a case for why a company’s strategy should be ethical?

A. An unethical strategy can put a company’s reputation at risk and do lasting damage, especially when the misdeeds get into the public spotlight and make media headlines.

B. An ethical strategy is in the best interest of shareholders.

C. An unethical strategy reflects badly on the character of the company personnel involved.

D. Shareholders profits are not greatly reduced by using ethical strategies.

E. A strategy that is unethical in whole or in part is morally wrong.

Characteristics of Managers Committedto Ethical Approaches to Strategy-

Making Possess strong moral and ethical characteristics Strongly advocate a corporate code of ethics

and strict ethics compliance Display genuine commitment to certain corporate

values and business practices Walk the talk in

Displaying a company’s stated values Living up to ethical business principles and standards

Adopt values statements/ethics codes that truly paint the white lines for a company’s business practices

Consciously opt for strategic actions passing moral scrutiny

Fig. 10.1: The Business Costs of Ethical Failures

Linking Strategy to Ethics and Values

If ethical standards are to have more than a cosmetic role, boards of directors and top executives must work diligently to see they are scrupulously observed in Crafting a company’s strategy and Conducting every facet of a company’s business

Two sets of questions must be considered by senior executives when reviewing a new strategic initiative Is what we are proposing to do fully compliant with our code

of ethical conduct? Is there anything here that could be considered ethically objectionable?

Is it apparent this proposed action is in harmony with our core values? Are any conflicts or concerns evident?

For Discussion: Your Opinion

Is it unethical for a high school or college coach to accept a “talent fee” or similar type of payment from a maker of sports apparel or sports equipment when the coach has authority to determine which brand of apparel or equipment to use for his/her team and subsequently chooses the brand of the company making the payment?

Is it unethical for the maker of the sports apparel or equipment to make such payments in expectation that the coach will reciprocate by selecting the company’s brand? (Would you answer be different if “everybody” is doing it?)

For Discussion: Your Opinion

Is it unethical for a credit card company to aggressively try to sign up new accounts when, after an introductory period of interest-free or low-interest charges on unpaid monthly balances, the interest rate on unpaid balances jumps to 1.5 percent or more monthly (even though such high rates of 18 percent or more annually are disclosed in fine print)?

STRATEGY AND SOCIAL

RESPONSIBILITY

What Is Corporate Social Responsibility?

The notion that corporate executives should balance interests of all stakeholders began to blossom in the 1960s

Social responsibility as it applies to businesses concerns a company’s duty to Operate in an honorable manner Provide good working conditions for employees Be a good steward of the environment Actively work to better quality of life in

Local communities where it operates and Society at large

What Is Socially Responsible Business Behavior?

A company should strive to balance strategic actions To benefit shareholders against any possible adverse

impacts on other stakeholders To be a good corporate citizen

Socially responsible behaviors include Corporate philanthropy Actions to earn trust and respect of stakeholders for a firm’s

efforts to improve the general well-being of Customers Employees Local communities Society Environment

Fig. 10.2: Categories of Socially Responsible Business Behavior

Linking Strategy and Social Responsibility

The combination of socially responsible endeavors a company elects to pursue defines its social responsibility strategy

Management should match a company’s social responsibility strategy to its Core values Business mission Overall strategy

Some companies are integrating social responsibility objectives into their Missions Performance targets Strategies

Businesses should promote the betterment of society, acting in ways to benefit all their stakeholders because It’s the right thing to do!

Based on an implied social contract, society Grants a business the right to conduct its business affairs Agrees not to unreasonably restrain a business’ pursuit of a fair

profit

In return for a “license to operate,”a business should Act as a responsible citizen Do its fair share to promote the general welfare

The Moral Case for Corporate Social Responsibility

Reasons to Behave in a Socially Responsible Manner

Generates internal benefits Enhances recruitment of quality employees Increases retention of employees Improves employee productivity Lowers costs of recruitment and trainings

Reduces risk of reputation-damaging incidents, leading to increased buyer patronage

Works in best interest of shareholders Minimizes costly legal and regulatory actions Provides for increased investments by socially conscious

mutual funds and pension benefit managers Focusing on environment issues may enhance earnings

Test Your KnowledgeWhich one of the following is false as concerns the merits of why acting in a socially responsible manner is “good business”?

A. To the extent that a company’s socially responsible behavior wins applause from consumers and fortifies its reputation, a company may win additional patronage.

B. Acting in a socially responsible manner reduces the risk of reputation-damaging incidents.

C. Acting in a socially responsible manner is in the overall best interest of shareholders.

D. Acting in a socially responsible manner is unlikely to have any effect (positive or negative) on a company’s profitability.

E. Acting in a socially responsible manner can generate internal benefits (as concerns employee recruiting, workforce retention, training, and improved worker productivity).

Four different views exist regarding use of company resources by “do-good” executives in pursuit of a better world

1. Any money authorized for social responsibility initiatives is theft from a company’s shareholders

2. Caution should be exercised in pursuing various societal obligations since this Diverts valuable resources Weakens a company’s competitiveness

3. Social responsibilities are best satisfied through conventional business activities (doing what businesses are supposed to do, which does not include social engineering)

4. Spending money for social causes Muddies decision making by diluting focus on a firm’s business

mission Thrusts executives into role of social engineers

But Do We Really Want “Do-Good” Executives — Is There a Downside?

How Much Attention to Social Responsibility Is Enough?

What is the appropriate balance between Creating value for shareholders? Obligation to contribute to the larger social good?

What fraction of a firm’s resources ought to be aimed at Addressing social concerns? Bettering the well-being of society and the

environment? Approaches to fund a social responsibility

strategy can Allocate a specified percentage of profits Avoid committing a specified percentage of profits

No widely accepted standard for judging if a company

has fulfilled its citizenship responsibilities exists!

Linking Social Performance Targets

to Executive Compensation A surefire way to enlist a genuine commitment to

corporate social responsibility initiatives is to Link achievement of social performance targets to

executive compensation

Key role of board of directors Incorporate measures of a company’s social and

environmental performance into its evaluation of top executives

Key role of top executives Use compensation incentives to enlist support of down-the-

line company personnel to craft and execute a social responsibility strategy

THANK YOU