10

Strategy,
Chapter Title
Ethics, and
Social
Responsibility
Screen graphics created by:
16/e PPT Jana F. Kuzmicki, Ph.D.
Troy University-Florida Region
McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
“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
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 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
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 Linking Strategy to Ethics
and Social Responsibility

Key Issues
 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?

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 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 businesspeople

apply to their own conduct
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 Are Ethical Standards Universal or
Dependent on Local Norms?
Three schools of thought regarding extent
to which ethical standards can be applied . . .

Ethical Universalism

Ethical Relativism

Integrative Social Contracts Theory

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 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
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 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
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 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 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
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 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 local
customs and social mores and
 Can vary from one country to another

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 Payment of Bribes and Kickbacks
A thorny ethical problem is faced
by multinational companies
 Degree of cross-country variability in paying
bribes 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
 ForeignCorrupt Practices Act prohibits U.S.
companies from paying bribes in all countries
where they do business
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 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.
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 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
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 Drawbacks of Ethical Relativism
 Theethical 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
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 Concept of Integrative
Social Contracts Theory
 According to the integrative social contracts
theory, 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 ethical
boundaries on actions and behavior in all situations
and
 The circumstances of local cultures, traditions, and
shared values that further prescribe what constitutes
 Ethically permissible behavior and
 What does not

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 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 to
universal or first-order ethical norms should always
take precedence over local or second-order norms!
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Three Categories of Management Morality

Moral manager

Managerial
ethical and Immoral
moral manager
principles

Amoral manager

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 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
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 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
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 Characteristics of an
Intentionally Amoral Manager
 Believesbusiness 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)
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 Characteristics of an
Unintentionally Amoral Manager
 Isblind to or casual about ethics of
decision-making and business actions
 Displayslack 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
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 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

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10-25
 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
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What Are the Drivers of Unethical
Strategies and Business Behavior?

Large numbers of immoral

and amoral business people

Overzealous pursuit of personal gain,

wealth, and other selfish interests

Heavy pressures on company managers

to meet or beat earnings targets

Company cultures that place profits and

good performance ahead of ethical behavior
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 Overzealous Pursuit of Personal Gain,
Wealth, and Selfish Interests
 Peopleobsessed 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
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 Heavy Pressures on Company Managers
to Meet or Beat Earnings Targets
 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
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 Company Culture Places Profits and Good
Performance Ahead of Ethical Behavior
 Inan 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
 Pressuresto 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
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 Approaches to Managing a
Company’s Ethical Conduct

Unconcerned or non-issue approach

Damage control approach

Compliance approach

Ethical culture approach

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10-32
 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
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 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
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 Characteristics of
Compliance Approach
 From light to forceful compliance is favored
at 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
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 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
 Instituteformal 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
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 Potential Weakness
of Compliance Approach

 Moralcontrol 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

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 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
 Ethical principles in company’s code of ethics are
 Integral to day-to-day operations
 Promoted as “business as usual”
 Strategymust be ethical
 Employees must display ethical
behaviors in executing the strategy
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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

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 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.
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 Characteristics of Managers Committed
to 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
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Fig. 10.1: The Business Costs of Ethical Failures

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 Linking Strategy to Ethics and Values

 Ifethical 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?
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 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?)

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 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)?

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 What Is Corporate Social Responsibility?

 Thenotion 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
10-46
 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
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Fig. 10.2: Categories of Socially Responsible Business Behavior

10-48
 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

10-49
 The Moral Case for
Corporate 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
 Inreturn for a “license to operate,”
a business should
 Act as a responsible citizen
 Do its fair share to promote the general welfare
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 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
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 Test Your Knowledge

Which 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).
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 But Do We Really Want “Do-Good”
Executives — Is There a Downside?
 Fourdifferent 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

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 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!
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 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
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