Managers,

Society, and
Sustainability

Chapter 2

FALL 2017
Chris Newman MSe
Room 1.10
Christian.newman@webster.ac.at

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 FUNDAMENTALS OF
SOCIAL RESPONSIBILITY
• Social Responsibility
The managerial obligation to take action that protects and improves both the
welfare of society as a whole and the interests of the organization
• Areas of Social Responsibility
– Urban/Consumer Affairs, Community Volunteerism, Employment Practices
– Ecology Conservation

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Varying Opinions on Social Responsibilites

Arguments VS. Business performing

Socially Responsible Activities:
 Businesses being socially
responsible conflict with profit
interests of business owners
 Socially responsible public activities
conflict with private organizational
objectives
 Unethical to use ones profits for
society’s interests

Milton Friedman
1912-2006

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„Being good is good Business“

Anita Roddick 1942 – 2007

Founder of The Body Shop

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Varying Opinions on Social Responsibilites
Arguments FOR Business performing
Socially Responsible Activities:
 Businesses as a whole are a subset
of society
 Businesses have a responsibility to
help maintain and improve the
overall welfare of society
 Performing social responsibility
activities earns greater
organizational profits

Conclusions:
• Perform all legally required social responsibility activities
• Consider voluntarily performing socially responsible activities beyond legally
required
• Inform all relevant individuals of the extent to which their organization will
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 Voluntarily Performing Social
Responsibility Activities

• Adhering to legislative mandates is

the minimum standard managers
must achieve
• Managers need to ask themselves
how far above the minimum they
are willing to go
• Managers need a well-defined
position and need to communicate
that vision

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 Determining if a Social
Responsibility Exists
 Stakeholder: all individuals and groups directly or indirectly affected by an
organization’s decisions

 Obligations based on:

 Business situation
 Impact on stakeholders

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 Stakeholder theory of the firm:

Traditional Management Model Stakeholder Model

Share- Government Competitors

Customers
holders
Shareholders Customers
Firm
Firm
Suppliers Employees
Civil society
Suppliers Employees

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 Stakeholder theory of the firm:
a network model

Customer
stakeholder
1
Government Competitors

Customer
stakeholder
Shareholder Customers
3
s Firm
Employee
Suppliers stakeholder
Employees 1
Civil society
Supplier Employee
stakeholder stakeholder
Civil society 2
1 Civil society stakeholder
stakeholder 1
2
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 Why Sustainability?
 Increased profits
 Increased
productivity
 Increased innovation

Steps to Sustainability
• Set sustainability goals
• Hire organization members who can help
organization become more sustainable
• Reward employees who contribute to
organization's sustainability goals
• Track progress in reaching sustainability
goals

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 SUSTAINABLE ORGANIZATION
CHALLENGE
The Triple Bottom-Line (John
Elkington in 1994): accounting
framework with 3 parts:
 social,
 environmental
 economics.

Used by companies to evaluate

their performance and to create
greater business value.

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 Approaches to Meeting
Social Responsibilities
• Incorporate social goals into
annual planning process
• Seek comparative industry
norms for social programs
• Present reports to owners and
stakeholders
• Experiment with different
approaches
• Attempt to measure cost of
social programs

Requirement - Recognition - Firm has Believing -Firm has

Firm only does obligations to pursue both profit and social
what is required both profit and social goals
by law goals

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 Navigating Business Ethics

• Should businesses profit from problem gambling?

• Is ethical shopping a luxury we can't afford?
• Should fashion retailers use suppliers who don't
pay a living wage?
• Should supermarkets dispose of out-of-date
groceries or give them to food banks?
• Should models be skinny?
• Should advertisement focus on children or the
elderly?

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 MANAGERS AND ETHICS
Ethics: Capacity to reflect on values in the corporate decision-making process, to
determine how these values and decisions affect various stakeholder groups, and to
establish how managers can use these observations in day-to-day company
management.

Benefits of Ethics in Management

Practices
 Increased Productivity
 Stakeholder Relations
 Government Regulation

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 Enron Case Study
• Enron was a Houston-Based natural gas pipeline company formed in 1985 when
InterNorth acquired Houston Natural Gas. Kenneth Lay became CEO.
• World’s major electricity, natural gas, communications, pulp and paper company .
Leader in energy trading. Claimed $111 billion in revenues in 2000
• By 2001 had 20,000 employees
• Fortune Magazine selected Enron as "America's most innovative company" for six
straight years from 1996 to 2001.

Kenneth Lee "Ken" Lay – CEO Enron

1942-2006 Sourced in part from: http://www.slideshare.net/ernwa1/enron-ppt

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 The Architects
• Skilling worked as a consultant for McKinsey & Company with Enron in 1987. Impressed by Skilling,
Kenneth Lay hired him in 1990 as chairman and CEO of Enron Finance Corp.
• In 1990 Skilling hired Andrew Fastow who was well acquainted by fast growing deregulated energy
market.
• 1993 Fastow established numerous subsidiaries. To these he would transfer liabilities to make them
disappear on the accounts. Debts moved to offshore accounts.
• Skilling began advocating a novel idea: the company didn't really need any "assets". With an aggressive
investment strategy, he made Enron the largest wholesaler of gas and electricity, with $27 billion traded
in a quarter. On February 12, 2001, Skilling was named CEO of Enron, receiving $132 million during a
single year.
• Silenced critics through network of accountants, lawyers and financial media.

Jeffrey Skilling; ENRON Andrew Fastow CFO

COO and CEO
ENRON
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 Building a House of Cards
• Corporate Governance: On paper, Enron had a model board of directors
comprising predominantly of outsiders with significant ownership stakes and a
talented audit committee. In its 2000 review of best corporate boards, Chief
Executive included Enron among its 5 best boards.
• Executive compensation: Enron's compensation and performance
management system through large bonuses and stock options was designed to
retain and reward its most valuable employees but it contributed to a
dysfunctional corporate culture obsessed with short-term earnings to maximize
bonuses.
• Risk management: Before its scandal, Enron was lauded for its sophisticated
financial risk management tools but in essence Enron implemented hedges
with itself.
• Financial audit: Enron's auditor firm, Arthur Andersen a conflict of interest due
to its consulting fees from Enron. In 2000 it earned $25 million in audit fees and
$27 million in consulting fees (27% of its audit revenues at the Houston office).
Enron hired numerous Certified Public Accountants (CPAs) who had worked on
developing accounting rules with the Financial Accounting Standards Board
(FASB) to search for new ways to save the company money, including
capitalizing on loopholes found in GAAP.

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 The Whistleblower
1993-2001 Enron used creative accounting methods to create an
illusion of a profitable company:
• Reduced tax payments
• Inflate income and profits
• Inflate stock price and credit rating
• Hide losses in off-balance subsidiaries
• August 2001, Watkins alerted then-
Enron CEO Kenneth Lay of accounting
irregularities in financial reports.
• Watkins has been criticized for not
reporting the fraud to government
authorities and not speaking up
publicly sooner about her concerns, as
her memo did not reach the public
until five months after it was written
Sherron Watkins VP
Corporate Development

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 The House of Cards Falleth
• Oct. 16, 2001 Enron
announces 3rd Quarter
loss of $618 million
• Oct. 22, 2001 Securities
and Exchange
Commission (SEC)
begins inquiry into
Enron‘S accounting
practices
• Dec. 2, 2001 Enron files
for bankruptcy

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 The Aftermath
• 4500 employees lost their jobs.
• Investors lost some 60 billion dollars within a few days; for many it meant losing
their old-age security.
• The pension fund for the company's employees was obliterated.
• Citizen’s trust in the American economic system was destroyed.
• Losses on the financial market amounted to the worst stock value loss in peaceful
times.
• Banks were suspected of collusion.
• The auditing firm Arthur Anderson lost its accreditation. McKinsey implicated.
• The rules for company financial reporting were drastically sharpened: Sarbanes-
Oxley Act (2002).
• The close ties of the company's founder, Kenneth Lay, to US President George W.
Bush – Lay was an important financial supporter of Bush – came under sharp
criticism.

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 Who‘s to Blame?
• Arthur Andersen for lax accounting?
• „Rogue“ AA auditor David Duncan (fired 1/15/02)
• Enron‘S senior managment – for hiding losses in off-balance
partnerships?
• CFO Andrew Fastow for setting up the partnerships (6 year prison
sentence)
• CEO Jeff Skilling (24 year prison sentence)
• CEO Kenneth Lay ( died 2006 with charges pending)
• Media – for exaggerating
• Stock analysts (for pushing Enron Stock)?

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 Creating an Ethical Workplace
Business Ethics: (1) capacity to reflect on values in corporate decision making process, (2) to
determine how these values & decisions affect various stakeholders & (3) to establish how
managers can use these observations in daily company management
Structure: Philosophy/Attitude: Tools and Techniques:
• Chief Ethics • Integrity and Trust: Conduct business • Reporting and Audit
Officer affairs with honesty and a commitment to • Corporate Governance
treating every customer fairly. • Decision-Making Process:
• CSR Training
• Diversity : HSBC Group, "the world is a rich Framework for ethical decision-
and diverse place full of interesting making as a useful method for
cultures and people, who should be exploring ethical dilemmas and
treated with respect and from whom there identifying ethical courses of
is a great deal to learn."
action:
• Compliance and Governance Issues:  Recognizes an ethical issue
Businesses expected to comply with
environmental laws, safety regulations,  Gets the facts
fiscal and monetary reporting statutes and  Evaluate alternative actions
all applicable civil rights laws.  Makes a decision
• Ethical Standards: Utilitarian, Rights,  Tests it – how does it reflects
Virtues on the outcome."

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 Corporate Governance
Corporate governance describes the process by which shareholders seek to ensure that
‘their’ corporation is run according to their intentions. It includes: goal definition,
supervision, control, and sanctioning.
• Worldwide no unified definition. It can be understood as the unification of all national and
international rules, regulations, values and principles for good business practice and how these
are monitored.
• Governance defines rights and responsibilities of different stakeholders in corporation (e.g. board,
managers, shareholders, creditors, auditors, regulators, etc.).
• Rules and procedures for making decisions in corporate affairs

Seeks profits, rising share price, etc.

Principal: Agent:

Shareholder Manager

Seeks remuneration, power, esteem etc.

Features of agency relations
1. Inherent conflict of interest
2. Informational asymmetry
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 Executive Accountability and Control
• Anglo-American model: single-tier board dominated by non-executive directors elected by
shareholders. Some C-level executives may be included but do not hold key positions.
• Continental European model: two-tier boards:
 Lower Tier = Executive Directors (Vorstand) made up of company executives running day-to-day
operations;
 Upper Tier = Supervisory Board (Aufsichtsrat) made up of non-executive directors representing
shareholders and employees, hires and fires the members of the executive board, determines
their compensation, and reviews major business decisions

• While the Anglo-American model focuses on protecting the

interests of the shareholders, the Continental European
models tend to include other stakeholders besides
shareholders (e.g. suppliers, employees, customers,
managers, community)
Main ethical issue: how to guarantee independence of
supervisory, non-executive board members.

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 How do businesses ensure that its directors,
managers and employees act ethically?

Guide for the ethics of how people

should act and make decisions
A common approach is to implement
a Code of Practice or Code of Ethics.
Ethical codes are increasingly popular
– particularly with larger businesses
and cover areas such as:
• Corporate social responsibility
• Dealings with customers and
supply chain
• Environmental policy & actions
• Rules for personal and corporate
integrity

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