Strategy, Ethics, and Social Responsibility

1. Strategy, Ethics, and Social Responsibility Bill Todorovic, Ph.D. Indiana Purdue Fort Wayne

2. “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

3. 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

4. Linking Strategy to Ethicsand 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 Issues

5. 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

6. Ethical Universalism Ethical Relativism Integrative Social Contracts Theory Are Ethical Standards Universal or Dependent on Local Norms? Three schools of thought regarding extentto which ethical standards can be applied . . .

7. 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

8. Examples of UniversalEthical 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

9. What Is the Appealof Ethical Universalism? • Draws on collective views of multiple societies and cultures to place clear boundaries on what constitutes • Ethical business behavior and • Unethical business behavior Regardless 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

10. 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

11. Payment of Bribes and Kickbacks • A thorny ethical problem is facedby 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

12. Test Your Knowledge Paying 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.

13. Ethical Relativism =Multiple Sets of Ethical Standards • Proponents of the ethical relativism school maintain there are • Few ethical absolutes to judge a company’sconduct in various countries • Plenty of situations where ethicalnorms 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

14. Drawbacks of Ethical Relativism • The ethical relativism rule of “when in Rome, doas the Romans do” presents problems • When the envelope is pushed, it istantamount 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

15. Concept of IntegrativeSocial 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 thatare 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

16. Appeal of IntegrativeSocial 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 maintainsadherence touniversal or first-order ethical normsshould alwaystakeprecedenceoverlocal or second-order norms!

17. Three Categories of Management Morality Moral manager Managerial ethical and moral principles Immoral manager Amoral manager

18. Characteristics of a Moral Manager • 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

19. 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

20. Characteristics of anIntentionally Amoral Manager • Believes business and ethics should notbe mixed since different rules apply to • Business activities • Other realms of life • Does not factor ethical considerations intoown actions since business activity liesoutside 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)

21. Characteristics of an Unintentionally Amoral Manager • Is blind to or casual about ethics ofdecision-making and business actions • Displays lack of concern regardingwhether 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

22. Evidence of Managerial Immoralityin 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

26. Do Company StrategiesNeed 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

27. Large numbers of immoraland amoral business people Overzealous pursuit of personal gain, wealth, and other selfish interests Heavy pressures on company managersto meet or beat earnings targets Company cultures that place profits andgood performance ahead of ethical behavior What Are the Drivers of Unethical Strategies and Business Behavior?

28. Overzealous Pursuit of Personal Gain, Wealth, and Selfish Interests • 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 whateveris 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 unethicalstrategic maneuvers and behaviors

29. Heavy Pressures on Company Managersto Meet or Beat Earnings Targets • Managers often feel enormous pressure to do whateverit 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

30. 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 mostany strategy they think they can get away with • Play down relevance of ethical strategicactions and business conduct • Pressures to conform to cultural norms can prompt otherwise honorable people to • Make ethical mistakes • Succumb to the many opportunities to engagein unethical practices and shady behavior

31. Unconcerned or non-issue approach Damage control approach Compliance approach Ethical culture approach Approaches to Managing a Company’s Ethical Conduct

33. Characteristics of Unconcerned Approach • Prevalent at companies whose executives areimmoral 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 makegreatest possible profit at most any cost • Strategies used, while legal, may embraceelements that are ethically shady

34. Characteristics ofDamage 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

35. Characteristics ofCompliance Approach • From light to forceful compliance is favoredat companies whose managers • Lean toward being somewhat amoral but are highlyconcerned about having ethically upstanding reputations or • Are moral and see strong compliance methods as bestway to impose and enforce high ethical standards • Emphasis is on securing broadcompliance and measuring degreeto which ethical standards are upheld • Commitment to eradicate unethicalbehavior 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

36. Pursuing a Compliance Approach:Typical Actions • Make code of ethics a visible and regularpart 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

37. Potential Weaknessof Compliance Approach • Moral control resides in a company’scode of ethics and in the ethicscompliance system rather than in • Strong peer pressures for ethicalbehavior that come from ingraininga highly ethical corporate culture and • An individual’s own moralresponsibility for ethical behavior

38. Characteristics ofEthical 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 • 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 ethicalbehaviors in executing the strategy

39. 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

40. Test Your Knowledge Which 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.

41. Characteristics of Managers Committedto Ethical Approaches to Strategy-Making • Possess strong moral and ethical characteristics • Strongly advocate a corporate codeof 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 codesthat truly paint the white lines for acompany’s business practices • Consciously opt for strategicactions passing moral scrutiny

42. Fig. 10.1: The Business Costs of Ethical Failures

43. 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?

44. 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?)

45. 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)?

46. 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 dutyto • 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

47. What Is Socially ResponsibleBusiness 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 fora firm’s efforts to improve the general well-being of • Customers • Employees • Local communities • Society • Environment

48. Fig. 10.2: Categories of Socially Responsible Business Behavior

49. 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’ssocial responsibility strategy to its • Core values • Business mission • Overall strategy • Some companies are integrating socialresponsibility objectives into their • Missions • Performance targets • Strategies

50. The Moral Case forCorporate Social Responsibility • 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