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Lecture Notes for Chapter 9

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Chapter
Chapter Summary

Ethical Business Strategies, Corporate Social Responsibility, and Environmental Sustainability


Chapter nine focuses on examining what link, if any, there should be between a companys efforts to craft and execute a winning strategy and its duties to (1) conduct its activities in an ethical manner; (2) demonstrate socially responsible behavior by being committed corporate citizens; and (3) limit its strategic initiatives to those that meet the needs of consumers without depleting resources needed by future generations.

Lecture Outline
I. Business Ethics and the Tasks of Crafting and Executing Strategy 1. Business ethics is the application of general ethical principles and standards to business behavior. 2. Ethical principles in business are not materially different from ethical principles in general. 3. Business ethics does not involve a special set of ethical standards applicable only to business business situations

Core Concept
Business ethics concerns the application of general ethical principles and standards to the actions and decisions of companies and the conduct of company personnel.

A. Drivers of Unethical Strategies and Business Behavior 1. Apart from the business of business is business, not ethics kind of thinking apparent in recent high-prole business scandals, three other main drivers of unethical business behavior also stand out: Faulty oversight by top management and the board of directors that implicitly allows the overzealous pursuit of personal gain, wealth, and other self-interests. Heavy pressures on company managers to meet or beat performance targets. A company culture that puts protability and good business performance ahead of ethical behavior.
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2. Overzealous Pursuit of Personal Gain, Wealth and Self-Interest: A general disregard for business ethics can prompt all kinds of unethical strategic maneuvers and behaviors at companies. This, combined with people who are obsessed with wealth accumulation, greed, power, status, and other self interests often push ethical principles aside to achieve their goals. The CEO of Tyco, Intl, conspired with the companys CFO to steal more than $170 million from the company. 3. Heavy pressures on Company Managers to Meet or Beat Earnings Targets: Performance expectations of Wall Street Analysts and investors may create enormous pressure on management to do whatever it takes to sustain the companys reputation for delivering good nancial reports. Company executives often feel pressured to hit nancial performance targets because their compensation depends on companys performance. 4. Company Cultures That Put the Bottom Line Ahead of Ethical Behavior: When a companys culture spawns an ethically corrupt or amoral work climate, people have a company-approved license to ignore whats right and engage in most any behavior or employ most any strategy they think they can get away with.

Concepts & Connections 9.1, Investment Fraud at Bernard L Madoff Investment Securities and Stanford Financial Group
Discussion Question: How was it possible for Bernie Madoff to deceive Wall Street and his investors for decades? How was Madoff able to convincingly promise investors that returns would beat the market by 400 to 500 percent? Answer: Lack of oversight by the Securities and Exchange Commission, trust on the part of clients and the nancial community both because of the length of the relationship (decades) and the fact that clients rarely needed to withdraw funds and were simply happy to see such high (and ctitious) paper returns led to a culture that bred dishonesty in a man who lacked any ethics. All of the drivers of unethical behavior were present in the Bernie Madoff case the biggest investment scam in history.

II. The Business Case for Ethical Strategies and Ethical Operating Practices 1. There are strong business reasons to adopt ethical strategies even if most company managers are not of strong moral character and personally committed to high ethical standards. Pursuing unethical strategies not only damages a companys reputation but it can also have costly consequences that are wide ranging, some visible and others hidden and difcult to track down. A. The School of Ethical Universalism 1. According to the school of ethical universalism, some concepts of what is right and what is wrong are universal; that is, they transcend all cultures, societies, and religions. a. To the extent that there is common moral agreement about right and wrong actions and behaviors across multiple cultures and countries, there exists a set of universal ethical standards to which all societies, all companies, and all individuals can be held accountable.

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Core Concept
According to the school of ethical universalism, the same standards of whats ethical and whats unethical resonate with peoples of most societies regardless of local traditions and cultural norms; hence, common ethical standards can be used to judge the conduct of personnel at companies operating in a variety of country markets and cultural circumstances.

2. The strength of ethical universalism is that it draws on the collective views of multiple societies and cultures to put some clear boundaries on what constitutes ethical business behavior and what constitutes unethical business behavior no matter what country market or culture a company or its personnel are operating in. B. The School of Ethical Relativism 1. There are meaningful variations in what societies generally agree to be right and wrong in the conduct of business activities. Ethical relativism holds that when there are cross-country or cross-cultural differences in what is deemed ethical or unethical, what constitutes proper regard for human rights, and what is considered ethical or unethical in business situations, it is appropriate for local moral standards to take precedence over what the ethical standards may be elsewhere.

Core Concept
According to the school of ethical relativism different societal cultures and customs have divergent values and standards of right and wrongthus what is ethical or unethical must be judged in the light of local customs and social mores and can vary from culture or nation to another.

C. Integrative Social Contracts Theory 1. Social contract theory provides a middle position between the opposing views of universalism and relativism. 2. The ethical standards a company should try to uphold are governed both by 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, tradition, and shared values that further prescribe what constitutes ethically permissible behavior and what does not. 3. First-order universal ethical norms take precedence over second-order local ethical norms. 4. These mostly uniform agreements about what is morally right and wrong form a Social contract or contract with society that is binding on all individuals, groups, organizations, and businesses in terms of establishing right and wrong and in drawing the line between ethical and unethical behaviors. 5. It is indisputable that cultural differences impact how business is conducted in various parts of the world and that these cultural differences sometimes give rise to different ethical norms. 6. There are many instances where cross-country differences in ethical norms create gray areas where it is tough to draw a line in the sand between right and wrong decisions, actions, and business practice.

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Core Concept
According to integrative social contracts theory, universal ethical principles or norms based on the collective views of multiple combine to form a social contract that all employees in all country markets have a duty to observe. Within the boundaries of this social contract, there is room for host country culture to exert some inuence in setting their own moral and ethical standards. However, rst-order universal ethical norms always take precedence over second-order local ethical norms in circumstances where local ethical norms are more permissive.

III. Social Responsibility and Corporate Citizenship 1. That businesses have an obligation to foster social betterment took root in the 19th century when progressive companies, in the aftermath of the industrial revolution, began to provide workers with housing and other amenities. 2. The essence of the theory of corporate social responsibility is that a company should strive for balance between (1) its economic responsibility to reward shareholders with prots, (2) its legal responsibility to comply with the laws of countries where it operates, (2) The ethical responsibility to abide by societys norms, and (4) a philanthropic responsibility to contribute to the noneconomic needs society.

Core Concept
Corporate citizenship requires a corporate commitment to go beyond meeting societys expectations for ethical strategies and business behavior to demonstrating good citizenship by addressing unmet noneconomic needs of society

3. Common corporate social responsibility programs involve: Actions to protect or enhance the environment and in particular, to minimize or eliminate any adverse impact on the environment stemming from the companys own business activities Actions to create a work environment that enhances the quality of life for employees. Actions to build a workforce that is diverse with respect to gender, race, national origin, and perhaps other aspects that different people bring to the workplace. IV. Corporate Sustainability and the Environment 1. A rapidly growing number of multinational companies are expanding their understanding of social responsibility to include the impact of their strategies and operations on future generations. 2. Sustainability initiatives undertaken by companies are frequently directed at improving the companys Triple-P performancepeople, planet, and prot. 3. Sometimes cost savings and improved protability are drivers of environmental sustainability strategies. 4. Many environmentally conscious companies now make a point of citing the benets of their sustainability strategies in press releases and issue special sustainability reports for consumers and investors to review.

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Core Concept
A companys environmental sustainability strategy consists of its deliberate actions to meet the current needs of customers, suppliers, shareholders, employees, and other stakeholders in a manner that protects the environment, provides for the longevity of natural resources, maintains ecological support systems for future generations, and guards against ultimate endangerment of the planet.

5. The Dow Jones Sustainability World Index consists of the top 10 percent of the 2,500 companies listed in the Dow Jones World Index in terms of economic performance, environmental performance, and social performance (Table 9.2). C. Crafting Social Responsibility and Sustainability Strategies 1. A company may choose to focus its social responsibility strategy on generic social issues, but social responsibility strategies keyed to points of intersection between a company and society may also contribute to a companys competitive advantage. 2. Unless a companys social responsibility initiatives become part of the way it operates its business every day, the initiatives are unlikely to be fully effective. 3. Whole Food Markets social responsibility strategy is evident in almost every segment of its company value chain and is a big part of its differentiation strategy. D. The Business Case for Socially Responsible Behavior 1. There are several reasons why the exercise of social responsibility and corporate citizenship is good business: a. It generates internal benets particularly as concerns employee recruiting, workforce retention, and training costs b. It reduces the risk of reputation-damaging incidents and can lead to increased buyer patronage c. It is in the best interest of shareholders

Assurance of Learning Exercises


1. Assume that you are the sales manager at a European company that makes sleepwear products for children. Company personnel discover that the chemicals used to ameproof the companys line of childrens pajamas might cause cancer if absorbed through the skin. Following this discovery, the pajamas are then banned from sale in the European Union and the United States, but senior executives of your company learn that the childrens pajamas in inventory and the remaining ameproof material can be sold to sleepwear distributors in certain East European countries where there are no restrictions against the materials use. Your superiors instruct you to make the necessary arrangements to sell the inventories of banned pajamas and ameproof materials to East European distributors. Would you comply if you felt that your job would be in jeopardy if you didnt? In their responses, students should carefully evaluate the concepts of deferring responsibility for ethics in the workplace to the employer under the guise of following orders. Students should demonstrate that they considered the implications of standing up to an employer based on personal ethics. Student responses could also include a discussion of universalism versus relativism in ethics, including the appropriateness or inappropriateness of imposing one cultures ethics on another.

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2. Review Microsofts statements about its corporate citizenship programs at www.microsoft.com/ about/corporatecitizenship. How does the companys commitment to global citizenship provide positive benets for its stakeholders? How does Microsoft plan to improve social and economic empowerment in developing countries through its Unlimited Potential program? Why is this important to Microsoft shareholders? Information contained in this Web site link is comprehensive. Microsoft summarizes its mission as, Our mission is to help people and businesses throughout the world realize their full potential. This drives our business and guides our corporate citizenship work. As the worlds largest software company, we help create social and economic opportunities wherever we work, live, and do business. Our technology innovations, our people, our partnerships, and our day-to-day business make a meaningful contribution to the prosperity of communities and the sustainability of the planet. Microsoft denes its contributions in the following areas: Commitments, Focus, and Actions. The companys actions have clearly beneted its stakeholders, and specic activities are described in the Actions area: In the Community, Technology Innovation, Operating Responsibly, and Privacy and Security. Microsofts Unlimited Potential program combines advanced technologies and strong partnerships with governments, international organizations, nongovernmental organizations (NGOs), educational institutions, and technology and service partners. Ultimately our mission is to enable sustained social and economic opportunity for those at the middle and bottom of the worlds economic pyramidthe next 5 billion people. In the short term, Unlimited Potential, Aims to reach the next 1 billion people by 2015 by exploring solutions in three key interrelated areas. Each is crucial to developing sustained economic opportunity: transforming education; fostering local innovation; enabling jobs and opportunities. The contributions and scope of the Unlimited Potential program will provide positive benets to Microsoft shareholders. 3. Go to www.nestle.com and read the companys latest sustainability report. What are Nestls key sustainable environmental policies? How is the company addressing sustainable social development? How do these initiatives relate to the companys principles, values, and culture and its approach to competing in the food industry? In reviewing the Web site, Nestls overall view of sustainability can be summarized as follows, We are committed to create shared value over the long term by increasing the worlds access to higher quality food and beverages, while contributing to environmentally sustainable social and economic development, in particular in rural areas. Three principles guide the companys approach to environmental stewardship: our responsibility towards society, present and future; our desire to delight consumers; our dependence on a sustainable environment that can provide the high quality resources we need to make good food and beverages. Nestl identies four priorities related to its food and beverage business: water, agricultural raw materials, manufacturing and distribution of products, and packaging of products (see http://www.nestle.com/Resource.axd?Id=CA5BDB646E13-4CDD-B310-CBF5AB826DA3 for specic details). Students should offer support regarding the relationship of these priorities to Nestls approach to competing in the food industry based on the companys claim, As the largest food and beverage company in the world, we are determined to continue to provide leadership within our sphere of inuence.