MOD 4 BE

What is Foreign Investment and its Types

Foreign investment refers to the investment made by foreign entities, such as individuals or
corporations, into a domestic economy. These investments can be made through various
channels and have the potential to bring substantial benefits to both the investor and the
recipient country.

It plays a critical role in the global economy, as it provides countries with access to capital,
technology, and expertise. By understanding the different types of foreign investment,
countries can create policies and regulations that encourage investment and promote
economic growth.

There are four types of foreign investment:

 Foreign Direct Investment (FDI)

 Foreign Portfolio Investment (FPI)
 Foreign Indirect Investment
 Sovereign Wealth Funds

Foreign Direct Investment (FDI):

 FDI is when a foreign entity makes a direct investment in a company or organization located
in a foreign country.
 This type of investment is long-term and often involves significant capital investments.
 It can take various forms, such as the acquisition of a foreign company, the establishment of a
new company, or the purchase of real estate.
 The foreign entity has a significant degree of control and ownership over the investment.

Foreign Portfolio Investment (FPI):

 Foreign Portfolio Investment (FPI) is an investment in a foreign country’s financial markets,

such as stocks, bonds, and other securities.
 Unlike FDI, FPI does not involve direct ownership or control over the investment.
 Instead, FPI investors buy and sell securities on the open market with the hope of generating
profits from changes in the market price.

Foreign Indirect Investment:

 Foreign Indirect Investment refers to investment made through an intermediary or a third

party.
 It could be in the form of mergers and acquisitions (M&A), or when a foreign investor
invests in a domestic company, which in turn invests in another company located in a foreign
country.

Sovereign Wealth Funds:

 Sovereign Wealth Funds are state-owned investment funds that invest in foreign countries.
 They are typically funded by foreign currency reserves, natural resource revenues, or other
sources of income.
 Sovereign Wealth Funds are long-term investors, and they often make significant investments
in infrastructure projects, real estate, and other strategic assets.

Importance of Foreign Investment in India

Foreign investment has played a crucial role in the economic development of India over the
past few decades. Here are some reasons why foreign investment is important for India:

 Economic Development

Foreign investment can help boost economic development by providing the necessary capital
and resources to finance new projects, expand existing ones, and modernize infrastructure.
This can lead to increased productivity, job creation, and overall economic growth.

 Infrastructure Development

Help in the development of infrastructure, including roads, ports, airports, and power plants.
This can improve connectivity and logistics, which can make it easier for domestic
companies to do business and attract more foreign investment.

 Employment Generation

Foreign investment can create employment opportunities in India, particularly in labor-

intensive sectors. This can help reduce unemployment and poverty, and also improve living
standards for workers.

 Technology Transfer

Bring new technology and expertise to India, which can help improve productivity and
competitiveness. This can be particularly beneficial for developing countries like India which
may lack the resources or knowledge to develop new technologies or products.

 Access to International Markets

Foreign investment can provide Indian companies with access to international markets, which
can help them expand their customer base and increase their exports. This can be particularly
 beneficial for small and medium-sized enterprises that may lack the resources or expertise to
penetrate foreign markets on their own.

Foreign Investment Example

Foreign Investment in India can take many forms one of them is foreign aid. This form of
investment can bring many benefits to India, including increased capital, new technology and
expertise, and support for development projects and humanitarian assistance. Let’s see how-

Foreign Aid Received by India

 Foreign aid refers to the financial assistance provided by foreign governments or international
organizations to support development projects or provide humanitarian assistance.
 India has received significant foreign aid over the years, particularly in the areas of health,
education, and disaster relief. Some examples of foreign aid received by India include:
 The United States Agency for International Development (USAID) provided $174 million in
assistance to India in 2020, including support for COVID-19 response efforts.
 The World Bank provided a $1 billion loan to India in 2020 to support India’s efforts to
mitigate the impact of COVID-19 on poor and vulnerable households.
 The United Nations Development Programme (UNDP) provided $200 million in assistance to
India in 2020 to support its COVID-19 response and recovery efforts.

Factors Attracting Foreign Investment

Political stability, economic policies, market size, and labour force availability are all
important factors that can attract foreign investment. By creating a favourable business
environment and promoting these factors, countries can increase their chances of attracting
foreign investment and promoting economic growth. Let’s examine these factors closely:

 Political Stability

Political stability is a key factor that can attract foreign investment.

Investors are typically looking for countries with stable political systems, as political
instability can create uncertainty and increase risk.

Countries with a stable government, strong legal framework, and a low level of corruption are
more likely to attract foreign investment.

 Economic Policies

Economic policies, including tax policies, trade policies, and investment regulations, can
have a significant impact on foreign investment.
 Countries that have a favorable business environment, with clear and consistent economic
policies, are more likely to attract foreign investment.

 Market Size

The size of a country’s market is another important factor that can attract foreign investment.
Countries with large and growing consumer markets are attractive to foreign investors
because they offer opportunities for expansion and increased sales.

 Labor Force Availability

The availability of a skilled and educated workforce is also an important factor that can
influence foreign investment.

Countries with a large pool of skilled workers and a strong education system are more likely
to attract foreign investment in industries such as technology, healthcare, and manufacturing.

Disadvantages of Foreign Direct Investment

While FDI has many potential benefits, various disadvantages must be considered. One of the
main concerns is the potential for exploitation and loss of control by the host country.

When a foreign company invests in a local business, it may have significant control over the
operations and decision-making processes. This can lead to the transfer of profits and
resources from the host country, ultimately weakening their economy and limiting their
ability to make independent decisions.

Moreover, FDI can also create dependency on foreign companies and technologies, hindering
the development of local industries and limiting their competitiveness. This can lead to the
domination of certain industries by foreign companies, further reducing the host country's
control over its own economy. Additionally, FDI can also contribute to income inequality, as
the benefits of FDI may not always reach the local population and may instead be
concentrated in the hands of a few foreign investors.

So, while FDI can bring many advantages, you must carefully consider and address these
potential disadvantages to ensure a mutually beneficial relationship between the host country
and foreign investors.

Evaluating Attractiveness

Because capital is always in short supply and is highly mobile, foreign investors have
standard criteria when evaluating the desirability of an overseas destination for FDI and FPI,
which include:
 Economic factors: the strength of the economy, GDP growth trends, infrastructure,
inflation, currency risk, foreign exchange controls
 Political factors: political stability, government’s business philosophy, track record
 Incentives for fore
ign investors: taxation levels, tax incentives, property rights
 Other factors: education and skills of the labor force, business opportunities, local
competition

Differences Between FDI and FPI

Although FDI and FPI are similar in that they both involve foreign investment, there are
some very fundamental differences between the two.

The first difference arises in the degree of control exercised by the foreign investor. FDI
investors typically take controlling positions in domestic firms or joint ventures and are
actively involved in their management. FPI investors, on the other hand, are
generally passive investors who are not actively involved in the day-to-day operations and
strategic plans of domestic companies, even if they have a controlling interest in them.

The second difference is that FDI investors have to take a long-term approach to their
investments since it can take years from the planning stage to project implementation. On
the other hand, FPI investors may profess to be in for the long haul but often have a much
shorter investment horizon, especially when the local economy encounters some turbulence.

This brings us to the final point. FDI investors cannot easily liquidate their assets and depart
from a nation, since such assets may be very large and quite illiquid. FPI investors can exit a
nation literally with a few mouse clicks, as financial assets are highly liquid and widely
traded.

Pros and Cons of FDI and FPI

FDI and FPI are both important sources of funding for most economies. Foreign capital can
be used to develop infrastructure, set up manufacturing facilities and service hubs, and
invest in other productive assets such as machinery and equipment, which contributes to
economic growth and stimulates employment.

However, FDI is obviously the route preferred by most nations for attracting foreign
investment, since it is much more stable than FPI and signals long-lasting commitment. But
for an economy that is just opening up, meaningful amounts of FDI may only result once
overseas investors have confidence in its long-term prospects and the ability of the local
government.

Though FPI is desirable as a source of investment capital, it tends to have a much higher
degree of volatility than FPI. In fact, FPI is often referred to as “hot money” because of its
tendency to flee at the first signs of trouble in an economy. These massive portfolio flows
can exacerbate economic problems during periods of uncertainty.

Recent Trends

As of 2020, China is the leading FDI recipient worldwide having brought in $163 billion in
inflows, compared to the $134 billion attracted by the United States. This number is a
significant change from 2019 when the United States had $251 billion in inflows while
China received $140 billion.1

FDI as a percentage of gross domestic product (GDP) is a good indicator of a nation’s

appeal as a long-term investment destination. The Chinese economy is currently smaller
than the U.S. economy, but FDI as a percentage of GDP is 1.31% for China as of 2019,
compared with a slightly higher 1.64% for the U.S.23

Trading Economics. "China - Foreign Direct Investment, Net Inflows (% Of GDP) ."
For smaller, dynamic economies like Singapore or Cyprus, FDI as a percentage of GDP is
significantly higher: 32.17% for Singapore and a whopping 103.93% for Cyprus (the highest
value as of 2019).4

Cautionary Signs for Investors

Investors should be cautious about investing heavily in nations with high levels of FPI, and
deteriorating economic fundamentals. Financial uncertainty can cause foreign investors to
head for the exits, with this capital flight putting downward pressure on the domestic
currency and leading to economic instability.

The Asian Crisis of 1997 remains the textbook example of such a situation. The plunge in
currencies like the Indian rupee and Indonesian rupiah in the summer of 2013 is another
example of the havoc caused by “hot money” outflows. In May 2013, after Federal Reserve
Chair Ben Bernanke hinted at the possibility of winding down the Fed’s massive bond-
buying program, foreign investors began closing out their positions in emerging markets,
since the era of near-zero interest rates (the source of cheap money) appeared to be coming
to an end.

Foreign portfolio managers first focused on nations like India and Indonesia, which were
perceived to be more vulnerable because of their widening current account deficits and high
inflation. As this hot money flowed out, the rupee sank to record lows against the U.S.
dollar, forcing the Reserve Bank of India to step in and defend the currency. Although the
rupee had recovered to some extent by year-end, its steep depreciation in 2013 substantially
eroded returns for foreign investors who had invested in Indian financial assets.

The Bottom Line

While FDI and FPI can be sources of much-needed capital for an economy, FPI is much
more volatile, and this volatility can aggravate economic problems during uncertain times.
Since this volatility can have a significant negative impact on their investment portfolios,
retail investors should familiarize themselves with the differences between these two key
sources of foreign investment.

Investment of money is vital for the growth of an economy and each country encourages
domestic industries to invest in various facets of economic growth. However, sometimes the
domestic investment is not sufficient to achieve the desired level of growth. Hence, these
countries invite foreign investors to invest in their country, who brings additional capital.
These investors use two methods to invest namely foreign direct investment and foreign
portfolio investment.

Foreign Direct Investment

Foreign Direct Investment (FDI) is an investment made by a foreign company or an

individual in a foreign country with the intention of establishing a long-term business interest.
In FDI, the investor acquires a controlling interest in a foreign company by purchasing at
least 10% of the company's shares. This gives the investor a say in the management of the
company, and the investment is made with the objective of establishing a long-term business
interest in the foreign country.

FDI can take several forms, including mergers and acquisitions, greenfield investments, and
joint ventures. Mergers and acquisitions involve the purchase of an existing company or
merging with a local company to establish a new company. Greenfield investments involve
the establishment of a new company in a foreign country. Joint ventures involve partnering
with a local company to establish a new company.

FDI has several advantages. Firstly, it helps create jobs, transfer technology, and know-how,
and boost the economy of the host country. Secondly, FDI provides a stable source of
investment capital and enhances the competitive advantage of local companies by introducing
new business practices and technology. Thirdly, FDI allows investors to access the local
market, which may not be accessible through other forms of investment.

FDI, however, has some disadvantages. Firstly, it involves a significant investment in

infrastructure, plant, and equipment, which may be costly. Secondly, FDI is subject to
political, economic, and regulatory risks in the host country. Thirdly, FDI is a long-term
investment, and the investor may not see returns on investment for several years.

Foreign Portfolio Investment

Foreign Portfolio Investment (FPI) is an investment made by foreign investors in foreign

securities, such as stocks, bonds, and other financial assets. Unlike FDI, FPI does not involve
the acquisition of a controlling interest in the company. FPI is a short-term investment, with
investors buying and selling securities based on short-term market trends.
 FPI can take several forms, including equity investments, debt investments, and other
investments such as mutual funds, exchange-traded funds, and real estate investment trusts.
Equity investments involve buying shares in foreign companies. Debt investments involve
buying bonds issued by foreign governments or companies.

FPI advantage is that it provides diversification of investment portfolios, reducing risk

exposure. FPI allows investors to participate in the growth of foreign economies without the
need for a long-term commitment. FPI provides liquidity, as investors can buy and sell
securities quickly.

FPI, however, has some disadvantages. Firstly, it is subject to the volatility of the financial
markets and can be affected by currency fluctuations, interest rates, and other macroeconomic
factors. Secondly, FPI does not provide the same level of control as FDI, and investors have
no say in the management of the companies in which they invest. Thirdly, FPI does not
promote economic growth, job creation, or technology transfer in the host country.

Difference between FDI and FPI

Though both of these looks alike in terms of accessing a foreign market, both of these terms
have few differences as mentioned below.

1. Level of control: In FDI, the investor acquires a controlling interest in a foreign company by
purchasing at least 10% of the company's shares. This gives the investor a say in the
management of the company. In FPI, the investor does not have any control over the
company's management, and the investment is subject to the performance of the financial
markets.
2. Investment horizon: FDI is a long-term investment, while FPI is a short-term investment.
FDI is usually a strategic investment, as it allows the investor to have a long-term interest in
the company and access the local market. In contrast, FPI is subject to short-term market
trends, and investors buy and sell securities based on short-term market movements.
3. Purpose of investment: FDI is typically made to establish a long-term business interest in a
foreign country. This includes setting up a manufacturing facility, acquiring a local company,
or establishing a joint venture. FPI is typically made to diversify investment portfolios,
participate in the growth of foreign economies, and take advantage of short-term market
opportunities.
4. Risks: FDI involves higher risks than FPI. FDI requires a significant investment in
infrastructure, plant, and equipment. It is also subject to political, economic, and regulatory
risks in the host country. FPI, on the other hand, is subject to the volatility of the financial
markets and can be affected by currency fluctuations, interest rates, and other macroeconomic
factors.
In conclusion, FDI and FPI are two different types of investments that involve investing in
foreign countries. FDI involves a long-term commitment to establish a business interest in the
foreign country, while FPI is a short-term investment that aims to diversify investment
portfolios and participate in the growth of foreign economies. Investors should carefully
 consider the advantages and disadvantages of both types of investments before investing their
money.

What Is Business Ethics?

Business ethics studies appropriate business policies and practices regarding potentially
controversial subjects, including corporate governance, insider trading, bribery,
discrimination, corporate social responsibility, fiduciary responsibilities, and much more.
The law often guides business ethics, but at other times business ethics provide a basic
guideline that businesses can follow to gain public approval.

KEY TAKEAWAYS

 Business ethics refers to implementing appropriate business policies and practices with
regard to arguably controversial subjects.
 Some issues that come up in a discussion of ethics include corporate governance, insider
trading, bribery, discrimination, social responsibility, and fiduciary responsibilities.
 The law usually sets the tone for business ethics, providing a basic guideline that businesses
can choose to follow to gain public approval.

Understanding Business Ethics

Business ethics ensure that a certain basic level of trust exists between consumers and
various forms of market participants with businesses. For example, a portfolio manager must
give the same consideration to the portfolios of family members and small individual
investors as they do to wealthier clients. These kinds of practices ensure the public receives
fair treatment.

The concept of business ethics began in the 1960s as corporations became more aware of a
rising consumer-based society that showed concerns regarding the environment, social
causes, and corporate responsibility. The increased focus on "social issues" was a hallmark
of the decade.

Since that time, the concept of business ethics has evolved. Business ethics goes beyond just
a moral code of right and wrong; it attempts to reconcile what companies must do legally vs.
maintaining a competitive advantage over other businesses. Firms display business ethics in
several ways.

Business ethics ensure a certain level of trust between consumers and corporations,
guaranteeing the public fair and equal treatment.

Principles of Business Ethics

 It's essential to understand the underlying principles that drive desired ethical behavior and
how a lack of these moral principles contributes to the downfall of many otherwise
intelligent, talented people and the businesses they represent.

There are generally 12 business ethics principles:

 Leadership: The conscious effort to adopt, integrate, and emulate the other 11 principles to
guide decisions and behavior in all aspects of professional and personal life.
 Accountability: Holding yourself and others responsible for their actions. Commitment to
following ethical practices and ensuring others follow ethics guidelines.
 Integrity: Incorporates other principles—honesty, trustworthiness, and reliability. Someone
with integrity consistently does the right thing and strives to hold themselves to a higher
standard.
 Respect for others: To foster ethical behavior and environments in the workplace,
respecting others is a critical component. Everyone deserves dignity, privacy, equality,
opportunity, compassion, and empathy.
 Honesty: Truth in all matters is key to fostering an ethical climate. Partial truths, omissions,
and under or overstating don't help a business improve its performance. Bad news should be
communicated and received in the same manner as good news so that solutions can be
developed.
 Respect for laws: Ethical leadership should include enforcing all local, state, and federal
laws. If there is a legal grey area, leaders should err on the side of legality rather than
exploiting a gap.
 Responsibility: Promote ownership within an organization, allow employees to be
responsible for their work, and be accountable for yours.
 Transparency: Stakeholders are people with an interest in a business, such as shareholders,
employees, the community a firm operates in, and the family members of the employees.
Without divulging trade secrets, companies should ensure information about their financials,
price changes, hiring and firing practices, wages and salaries, and promotions are available
to those interested in the business's success.
 Compassion: Employees, the community surrounding a business, business partners, and
customers should all be treated with concern for their well-being.
 Fairness: Everyone should have the same opportunities and be treated the same. If a
practice or behavior would make you feel uncomfortable or place personal or corporate
benefit in front of equality, common courtesy, and respect, it is likely not fair.
 Loyalty: Leadership should demonstrate confidentially and commitment to their employees
and the company. Inspiring loyalty in employees and management ensures that they are
committed to best practices.
 Environmental concern: In a world where resources are limited, ecosystems have been
damaged by past practices, and the climate is changing, it is of utmost importance to be
aware of and concerned about the environmental impacts a business has. All employees
should be encouraged to discover and report solutions for practices that can add to damages
already done.
 Why Is Business Ethics Important?

There are several reasons business ethics are essential for success in modern business. Most
importantly, defined ethics programs establish a code of conduct that drives employee
behavior—from executives to middle management to the newest and youngest employees.
When all employees make ethical decisions, the company establishes a reputation for ethical
behavior. Its reputation grows, and it begins to experience the benefits a moral establishment
reaps:

 Brand recognition and growth

 Increased ability to negotiate
 Increased trust in products and services
 Customer retention and growth
 Attracts talent
 Attracts investors

When combined, all these factors affect a business' revenues. Those that fail set ethical
standards and enforce them are doomed to eventually find themselves alongside Enron,
Arthur Andersen, Wells Fargo, Lehman Brothers, Bernie Madoff, and many others.

Types of Business Ethics

There are several theories regarding business ethics, and many different types can be found,
but what makes a business stand out are its corporate social responsibility practices,
transparency and trustworthiness, fairness, and technological practices.

Corporate Social Responsibility

Corporate social responsibility (CSR) is the concept of meeting the needs of stakeholders
while accounting for the impact meeting those needs has on employees, the environment,
society, and the community in which the business operates. Of course, finances and profits
are important, but they should be secondary to the welfare of society, customers, and
employees—because studies have concluded that corporate governance and ethical practices
increase financial performance.

Businesses should hold themselves accountable and responsible for their environmental,
philanthropic, ethical, and economic impacts.

Transparency and Trustworthiness

It's essential for companies to ensure they are reporting their financial performance in a way
that is transparent. This not only applies to required financial reports but all reports in
general. For example, many corporations publish annual reports to their shareholders.

Most of these reports outline not only the submitted reports to regulators, but how and why
decisions were made, if goals were met, and factors that influenced performance. CEOs
write summaries of the company's annual performance and give their outlooks.
Press releases are another way companies can be transparent. Events important to investors
and customers should be published, regardless of whether it is good or bad news.

Technological Practices and Ethics

The growing use of technology of all forms in business operations inherently comes with a
need for a business to ensure the technology and information it gathers is being used
ethically. Additionally, it should ensure that the technology is secured to the utmost of its
ability, especially as many businesses store customer information and collect data that those
with nefarious intentions can use.

Fairness
A workplace should be inclusive, diverse, and fair for all employees regardless of race,
religion, beliefs, age, or identity. A fair work environment is where everyone can grow, be
promoted, and become successful in their own way.

How to Implement Good Business Ethics

Fostering an environment of ethical behavior and decision-making takes time and effort—it
always starts at the top. Most companies need to create a code of conduct/ethics, guiding
principles, reporting procedures, and training programs to enforce ethical behavior.

Once conduct is defined and programs implemented, continuous communication with

employees becomes vital. Leaders should constantly encourage employees to report concern
behavior—additionally, there should be assurances that if whistle-blowers will not face
adversarial actions.

A pipeline for anonymous reporting can help businesses identify questionable practices and
reassure employees that they will not face any consequences for reporting an issue.

Monitoring and Reporting Unethical Behavior

When preventing unethical behavior and repairing its adverse side effects, companies often
look to managers and employees to report any incidences they observe or experience.
However, barriers within the company culture (such as fear of retaliation for reporting
misconduct) can prevent this from happening.

Published by the Ethics & Compliance Initiative (ECI), the Global Business Ethics Survey
of 2021 surveyed over 14,000 employees in 10 countries about different types of misconduct
they observed in the workplace. 49% of the employees surveyed said they had observed
misconduct and 22% said they had observed behavior they would categorize as abusive.
86% of employees said they reported the misconduct they observed. When questioned if
they had experienced retaliation for reporting, 79% said they had been retaliated against.

Indeed, fear of retaliation is one of the primary reasons employees cite for not reporting
unethical behavior in the workplace. ECI says companies should work toward improving
their corporate culture by reinforcing the idea that reporting suspected misconduct is
beneficial to the company. Additionally, they should acknowledge and reward the
employee's courage in making the report.

What Is Business Ethics?

Business ethics concerns ethical dilemmas or controversial issues faced by a company.

Often, business ethics involve a system of practices and procedures that help build trust with
the consumer. On one level, some business ethics are embedded in the law, such as
minimum wages, insider trading restrictions, and environmental regulations. On another,
business ethics can be influenced by management behavior, with wide-ranging effects across
the company.

What Are Business Ethics and Example?

Business ethics guide executives, managers, and employees in their daily actions and
decision-making. For example, consider a company that has decided to dump chemical
waste that it cannot afford to dispose of properly on a vacant lot it has purchased in the local
community. This action has legal, environmental, and social repercussions that can damage
a company beyond repair.

What Are the 12 Ethical Principles?

Business ethics is an evolving topic. Generally, there are about 12 ethical principles:
honesty, fairness, leadership, integrity, compassion, respect, responsibility, loyalty, law-
abiding, transparency, and environmental concerns.

The Bottom Line

Business ethics concerns employees, customers, society, the environment, shareholders, and
stakeholders. Therefore, every business should develop ethical models and practices that
guide employees in their actions and ensure they prioritize the interests and welfare of those
the company serves.

Doing so not only increases revenues and profits, it creates a positive work environment and
builds trust with consumers and business partners.

What are ethical issues in business?

Ethical issues in business occur when a decision, activity or scenario conflicts with the
organisation's or society's ethical standards. Both organisations and individuals can become
involved in ethical issues since others may question their actions from a moral viewpoint.
Complex ethical issues include diversity, compliance, governance and empathetic decision-
making that align with the organisation's core values.
 Ethical conflicts may pose a risk for an organisation, as they may imply non-compliance with
relevant legislation. In other instances, ethical issues may not have legal consequences but
may cause an adverse reaction from third parties. It may be challenging to effectively manage
ethical issues when no guidelines exist. For this reason, as an HR or management
professional, you can help develop policies to guide employees to make the right decision
when faced with moral issues.

Examples of ethical issues in business

It's essential to understand what these issues are to manage them when they arise in the
organisation you work for. Knowing how to detect and deter these issues before they become
problematic can help you and your colleagues focus on business success and growth instead
of remediation. Here are eight examples of ethical issues that can occur in a business setting:

1. Discrimination and harassment

Two of the most significant ethical issues that HR professionals and managers face are
discrimination and harassment. The consequences of discrimination and harassment in the
workplace can negatively impact the finances and reputation of the organisation. Many
countries have anti-discrimination laws to protect employees from unfair treatment. Some
anti-discrimination areas include:

 Age: Organisations and internal policies cannot discriminate against employees who are
older.
 Disability: To prevent disability discrimination, it's important to accommodate and provide
equal treatment for employees with mental or physical disabilities.
 Equal pay: Equal pay focuses on ensuring that all employees receive equal compensation for
similar work, regardless of religion, gender or race.
 Pregnancy: Pregnant employees have a right not to be discriminated against on account of
their pregnancy.
 Race: Employees should receive equal treatment, regardless of ethnicity or race.
 Religion: Employees' religious beliefs should not affect how anyone within the organisation
treats them.
 Sex and gender: An employee's sex and gender identity should not influence their treatment
while working at an organisation.

As an HR professional or senior manager, you can educate employees on these issues and
encourage a positive work culture to fight discrimination. All employees require an
understanding of the disciplinary consequences of discriminative behaviour. You can make
an effort to hire people with different backgrounds, characteristics and nationalities to ensure
a diverse workforce. It's also crucial to consider factors such as age, religion and culture
when developing internal policies to be more aware and flexible regarding employees' needs.
 2. Workplace health and safety

All employees have a right to a safe working environment and work conditions. Some of the
most common employee safety considerations include:

 Fall protection: This involves measures to protect employees against falls, such as guard
rails.
 Hazard communication: Identify any harmful substances employees work with and
communicate how to handle these hazardous materials safely.
 Scaffolding: The HR department in construction or maintenance organisations is obliged to
guide employees about the maximum weight numbers structures can handle.
 Respiratory protection: If relevant, provide guidelines about emergency procedures and the
standards applicable to the use of respiratory equipment.
 Lockout, tag out: This involves specifying the control procedures for dangerous machines
and hazardous energy sources, such as gas and oil.
 Industrial trucks: It's important to ensure that the required safety standards for trucks are in
place to protect employees.
 Ladders: Before using ladders, employees must be given an understanding of the weight that
the ladder can support.
 Electrical wiring methods: Create procedures for electrical and wiring tasks. For example,
these guidelines can specify how employees can create a circuit to reduce electromagnetic
interference.
 Machine guarding: It's important to provide operation guarding instructions for items such
as guillotine cutters, power presses, shears and other devices where applicable.
 General electrical regulations: Developing general electrical regulations for employees is
critical for safety in work environments that require the frequent use of electrical equipment.
For example, employees should never place conductors or equipment in damp or wet
locations.

Health and safety guidelines don't only cover physical harm to employees. It's also important
to consider psychosocial risks, work-related stress and mental health issues. Factors such as
high work demands, job insecurity, effort-reward imbalance and low levels of autonomy can
contribute to health-related behavioural risks.

3. Whistle-blowing or social media rants

Using social media has become widespread, making employees' online conduct a critical
consideration in their employment status. The consequences of punishing employees for
inappropriate social media posts remains an ethical issue, and the implications of a negative
social media post may influence the treatment of the employee. When an employee's social
media posts result in a loss of business or give the organisation a negative reputation, you
may decide to fire them.
This is why it's helpful to specify inappropriate social media behaviour in company policies
to ensure employees know what to avoid. As an HR professional or management figure, you
cannot penalise employees who become whistle-blowers to regulators or authorities. This is
also the case for employees who raise awareness of workplace violations online unless it
reduces the amount of business the organisation receives.

4. Ethics in accounting practices

Laws require organisations to maintain accurate bookkeeping practices. Unethical accounting

practices are a serious issue, especially for publicly traded companies. The legislation
specifies financial report requirements aimed at protecting shareholders and consumers. All
organisations have to keep accurate financial records and pay taxes to attract investment and
business partners regardless of the size of the company.

5. Corporate espionage and nondisclosure

Many organisations are at risk that current and former employees may steal information, such
as client data, for use by competitors. Stealing an organisation's intellectual property or
illegally distributing private client information constitutes corporate espionage. This is why it
can be helpful to require mandatory nondisclosure agreements. As an HR professional or
manager, you may also wish to set strict financial penalties for violations to discourage these
types of ethical violations.

6. Technology and privacy practices

Developments in an organisation's technological security capabilities may pose privacy

concerns for both employees and clients. You can monitor employees' activity on their work
computers and devices provided by the company. As a manager or HR professional, you can
use this method of electronic surveillance to ensure productivity and efficiency if it doesn't
violate the employee's privacy.

Electronic surveillance includes monitoring Internet connections and tracking keystrokes,

content or time spent using the keyboard. When implementing these types of surveillance,
you can act ethically by being transparent about it with employees. To ensure that employee
surveillance doesn't become an ethical issue, it's helpful to encourage all levels of employees
to consider the benefits of the surveillance system.

7. Nepotism or favouritism

As a hiring manager or HR professional, you may want to employ an acquaintance or family

member because of your connection to them. Even if you adhere to recruitment policies to
ensure a fair process, some employees may still consider this as nepotism or favouritism.
Favouritism occurs when managers treat some employees better than others for no
professional reason. This can reduce productivity and job satisfaction in other employees,
which may negatively impact the entire organisation.
 8. Environmental responsibility

Many organisations are increasing corporate social responsibility activities. You can help
create policies that ensure the organisation you work for acts in a responsible way towards
employees, the community and the environment. If you work for a large company in the oil
or farming sectors, you have a more significant corporate social responsibility because of the
organisation's significant impact on the environment. If you work for a smaller organisation,
you may wish to reduce the company's impact on air and water quality.

How HR and management professionals can manage ethical issues

As an HR or management professional, you can address ethical issues by evaluating

management systems to identify methods to become more responsible. This can involve
reviewing the company's policies and processes to ensure it covers ethical issues in the work
environment. You can help set environmentally friendly goals and decide on actions that may
help with the transition. You can then monitor progress towards these goals regularly.

Daily actions your team can take to identify and deter ethical issues include communication
and enforcing a robust code of ethics for decision-making. You can ensure it continuously
complies with relevant legislation relating to these ethical issues. You can also collaborate
with accountants to ensure transparency and honesty when compiling financial reports for the
company.

 Social responsibility means that besides maximizing shareholder value, businesses should
operate in a way that benefits society.
 Socially responsible companies should adopt policies that promote the well-being of society
and the environment while lessening negative impacts on them.
 Companies can act responsibly in many ways, such as by promoting volunteering, making
changes that benefit the environment, engaging in ethical labor practices, and engaging in
charitable giving.
 Consumers are more actively looking to buy goods and services from socially responsible
companies, hence impacting their profitability.
 Critics assert that practicing social responsibility is the opposite of why businesses exist.
In this era of globalization, Corporate Social Responsibility (CSR) has managed to
integrate itself into the corporate culture and has evolved as an integral aspect of
corporate performance reviews. It is a voluntary concept to be adopted by organizations.
It integrates the social and environmental dimensions of a business in its operational
activities. CSR and stakeholder theory both highlight the significance of conducting
business operations by taking into consideration the larger societal benefits.
The scope of CSR has now evolved to become a more inclusive concept involving
various stakeholders, and ensuring that businesses are operating in an ethical and
sustainable manner . With customers becoming more socially and environmentally aware,
 companies increasingly getting more customer-centric. A key tool towards superior
customer service is to integrate CSR in bringing about radical changes and benefits to the
company; and the overall socio-environmental arena.
While implementing CSR as a part of their corporate culture, organizations face many
challenges. Three key challenges faced by organizations have been discussed here, which
necessitate the need for applying stakeholder theory in implementing CSR successfully.
Aligning business goals with employees’ goals
Firstly, the foremost challenge for organizations is to conduct normal business operations
while making its workforce aware of their responsibilities towards the fulfilment of social
and environmental concerns.
Maintaining clear communication about the scope of CSR
Secondly, due to instances of inadequate communication between an organization and the
community, issues arise which hamper the conduct of CSR activities in a proper manner .
There is also a lack of proper awareness and consensus of the CSR activities and the
related long-term use amongst the various stakeholders, including employees,
shareholders, community, customers, etc. This leads to slowing down the various
initiatives and duplication in work done by corporates adding to confusion .
Maintaining transparency in the conduct
Thirdly, the lack of transparency in matters of disclosure of various initiatives to be
undertaken by the company under its CSR initiatives impacts trust between companies
and their stakeholders. These issues can be mitigated by considering the stakeholder
theory of CSR . This helps the leadership to come to a consensus on the
desired CSR actions considering the interests of all the stakeholders.

The stakeholder theory approach to CSR

Stakeholder theory is a concept that emphasizes the interrelationship between a business
and its various stakeholders, including investors, customers, employees, suppliers, etc .
The stakeholder theory stresses the fact that an organization should create value for its
various stakeholders who are affected by its business actions and decisions, and not only
its shareholders. The theory talks about the necessity of managers to be held liable to the
various stakeholders for safeguarding stakeholder interests. It works from the point of
three perspectives for a business:

 stakeholders who have an impact on the business operations of the firm

 how such interconnections have an impact on key stakeholders and the organisation; and

 how the viewpoints of key stakeholders have an impact on the success of the firm’s
strategic measures.
Businesses should hence plan strategies to deal with key stakeholders in an appropriate
manner to improve efficiency and effectiveness in carrying out business operations
successfully over the long term.
The interrelationship between stakeholder theory and CSR
The stakeholders are a critical aspect of the success of CSR initiatives as seen in Figure 2.
Organizations would not be able to achieve their CSR goals without the participation,
expertise, know-how, and loyalty of their various stakeholders. One important aspect
of CSR is that the business is accountable to all its stakeholders who have a valid interest
in it and the business decisions impact their interests .

Figure 2: Interrelationship between stakeholder theory and CSR

Still, there are similarities between the two concepts. CSR emphasizes the benefit to
society at large whereas stakeholder theory works on building relationships and value
between a business and its various stakeholders (Freeman & Dmytriyev, 2017). Though
there are certain differences between the two concepts, they can be aligned to work for
the betterment of the company and society.
The various challenges in implementing CSR initiatives can be mitigated by aligning the
concept with stakeholder theory as this enables leaders to have a more pragmatic
approach considering the interests of all its stakeholders and planning their actions
accordingly. Stakeholder theory addresses the issue of a lack of awareness of the benefits
of CSR (Harrison, et al., 2019). CSR aligned with stakeholder theory generates the
maximum benefits in the form of societal development as well as creating a motivated
workforce, better company branding, larger sales and profitability, satisfied customers,
etc (Nikolova & Arsić, 2017). Thus, CSR is an integral part of corporate responsibility
which involves the participation of various stakeholders for its successful
implementation.
Case example of CSR and stakeholder theory: McDonald’s
McDonald’s, one of the oldest companies in operations in the global food industry, is
seen as a pioneer in implementing CSR initiatives. The various stakeholders at
McDonald’s have an impact on consumer perception. To address its stakeholders’
interests and fulfil its social responsibilities, the company has undertaken
various CSR initiatives (McDonald’s CSR Report, 2018). The company considers its
employees as its key stakeholder and works on improving its interests through career
development programs, providing training and development, and good compensation. It
works on improving customer satisfaction by providing them with affordable and healthy
food choices.
Its CSR initiatives include affordable products through standardization and having a
robust supply chain, boosting employment for the local workforce. It addresses the
interests of its shareholders by having stable business operations and increasing
profitability and revenues. In addition, McDonald’s undertakes community development
support and environmental programs for the betterment of the larger community. For
instance, the company initiated a global program called Scale for Good to overcome
global societal challenges (McDonald’s CSR Report, 2018). These initiatives show that
the company takes its CSR responsibility towards its various stakeholders seriously.

What Is Carroll's Pyramid of CSR?

To survive, every business must at least make a profit and meet its legal
responsibilities. But what it does with those profits, and what higher values it
demonstrates to its employees, customers, community and market, will vary
enormously.

According to Professor Archie Carroll, CSR "... can only become a reality if managers
become moral instead of amoral or immoral."

It's not enough to simply focus on one area of the business. CSR must encompass all
organizational activities, processes and goals. To help organizations to clarify their
responsibilities, Carroll designed a model known as the Pyramid of CSR (see figure 1,
below), which demonstrates on organization's hierarchy of responsibilities. He
asserted that only by carrying out all of these responsibilities together would effective
CSR be achieved.
 Carroll's Pyramid of Corporate Social Responsibility, reproduced with permission
from Carroll, A.B. (1991). "The Pyramid of Corporate Social Responsibility: Toward
the Moral Management of Organizational Stakeholders."

How to Use Carroll's Pyramid of CSR

Carroll's Pyramid breaks down an organization's responsibilities into four key areas.
The organization must be accountable for all of these in order to ensure successful
CSR.

Let's take a look at each of these four key areas in more detail and explain how you
can make them work for you.

Economic Responsibilities

Forming the base of the pyramid are your economic responsibilities. Simply put, this
is about ensuring that your organization remains profitable and financially transparent.
Responsibilities in this slice of the pyramid should include:

 Keeping your costs to a minimum.

 Maximizing income.
 Investing in developing and growing the business in the long term.
 Ensuring financial risks are managed correctly.
 Providing a return to your owners and/or shareholders.

Being economically responsible enables you to create and sustain jobs in the
community, and contribute useful, non-harmful products and services to society.

Everyone in an organization, from the top down, can help to deliver this responsibility
by ensuring that finances are managed in an ethical and fair way. This means asking
yourself – are you profitable and legal? Are you profitable and legal, but also acting
ethically? For example, a company may keep costs down by using low-cost supply
chains, but this may mean using suppliers who utilize low-cost, cheap labor and poor
working practices.

To excel in this area, think about the pinnacle of the pyramid! Are you also
encouraging, supporting or carrying out far-reaching beneficial programs, beyond the
basic legislative requirements?

For instance, Hewlett-Packard, which is currently ranked first on the KnowtheChain

ICT benchmark for forced labor, and sector leader on the Dow Jones Sustainability
World Index, has invested $1.9 billion researching and developing next-generation
technologies. These have included things like new silicon designs, photonics
(technology and science of light generation, which is often used in consumer
 electronics), and Memory-Driven Computing, all of which will massively improve
computer processing but also reduce energy usage. [3]

Legal Responsibilities

This is also straightforward and a minimum requirement for all businesses: to obey the
law.

Responsibilities covered by this area of the pyramid entail:

 Being truthful and transparent about the safety and security of the products or services
you sell.
 Keeping your employees and customers safe.
 Ensuring that you meet environmental, health and safety requirements.
 Paying your taxes.

At the very least, it's about protecting your organization from prosecution or penalty,
which would impact its profits and reputation, and could even lead to it being shut
down. The best way to meet these responsibilities is to report on your performance
and activities in an open and transparent way.

One of the best examples to demonstrate responsibility in this area is environmental

regulation. Organizations are often required by law to meet certain environmental
standards relating to pollution and emissions. But many go over and above these legal
requirements.

For instance, Johnson & Johnson has set an organizational goal of "net-zero carbon"
across its value chain by 2045. The company already has a number of environmental
projects underway to support this goal, including acquiring Colbeck Corner's wind
farm in Texas which supplies 60 percent of the company's renewable energy. It is also
expanding its geothermal energy operations and solar panel infrastructure, and has
continued to invest in Leadership and Energy & Environmental Design (LEED)
certification across several of its office sites. [4]

Ethical Responsibilities

This extends your obligations to doing what is right and fair, even if it's not required
by law. To attend to this responsibility, you'll need the "moral" outlook that Carroll
refers to.

An example would be avoiding structuring your company so that it pays little or no

taxes, even if that would be allowed by the letter of the law. Or, on a smaller scale,
supporting flexible working for your team members so that they can juggle caregiving
responsibilities with their jobs.
 Some ethical issues are harder to tease out . For example, you could be making your
product safely and efficiently, selling it at a fair price, and treating your people well.
But what if that product is a food item that has a lot of sugar in it – should you change
the recipe?

Coca-Cola, for instance, has invested significantly in reducing the sugar content of its
drinks, and removed nearly 125,000 tons of added sugar through recipe changes in
2020. This has enabled it to reduce sugar content by up to 30 percent in some of its
leading brands, including Coca-Cola, Fanta, Sprite, and Fuze Tea. [5]

However, while Coca-Cola has done well in this area, it has still come under heavy
criticism for the amount of plastic waste it's responsible for. The company is working
hard to address this issue, too, announcing in 2021 that it's collaborating with tech
partners to produce bottles that are made from 100 percent renewable plant-based
materials. [6]

Philanthropic Responsibilities

This is the highest level of responsibility and goes beyond any legal or regulatory
expectations. It's about being a "good corporate citizen," actively improving the world
around you.

Examples of philanthropic CSR would be:

 Enabling team members to take part in volunteering programs during work time.
 Sponsoring community initiatives.
 Offering mentoring expertise to nonprofits.
 Entering into community or charitable partnerships.
 Donating to charity, and offering employee donation-match schemes.
 Tackling wider global issues, such as poverty, climate change, racism, or gender
inequality.

Some organizations even establish their own philanthropic or charitable foundations,

such as the Ford Foundation , the Bill and Melinda Gates Foundation , and the Conrad
N. Hilton Foundation .

Biopharmaceutical company Gilead Sciences is consistently one of the top corporate

givers in the world, donating $388 million to good causes in 2020, equating to 2.9
percent of its pre-tax profit. [7] And it announced a further investment of $200 million
in its charitable arm, the Gilead Foundation, in 2021, with the money going toward
supporting health justice, community giving, and its employee donation-match
scheme. [8]

The Benefits of Carroll's Pyramid of CSR

 Carroll's pyramid builds responsibility upon responsibility, and is intended to be
applied as a whole. This means that succeeding at one or two areas is not enough.

Clearly, meeting your economic responsibilities while overlooking your legal

responsibilities, or vice versa, will mean that your organization runs into difficulties
sooner or later. This may mean that ethical and philanthropic responsibilities are seen
as optional. But fulfilling them can provide a number of benefits, too, such as:

 Building and Improving Your Reputation. Demonstrating that you're an ethical and
philanthropic organization can imply that you're committed to operating in a
responsible way, which can help to build trust in your product, too. It can also give
you a competitive edge, and enable you to attract consumers who are also ethically
minded.
 Increasing sustainability. Being "green" can have direct financial benefits. Cutting
your carbon emissions and using energy from renewable sources can save costs, as can
improving production and supply-chain efficiency, and reducing your carbon taxes.
Investing in your "triple bottom line" is a good way to deliver these benefits and set
organizational goals that are built around profit, people and the planet.
 Attracting and retaining talent. Embracing CSR can position you as an "employer of
choice." People will aspire to work for you and, once they join, they'll feel proud
and purposeful , and will want to stay. They'll also be able to enjoy interesting
opportunities beyond their formal roles (for example, through volunteering initiatives
or company charity drives) and talk positively about you to family and friends. That
means you'll always have the pick of the best candidates for vacancies!

The Challenges of Implementing Carroll's CSR Pyramid

Simultaneously addressing all four responsibilities covered by Carroll's Pyramid is the

biggest challenge. This is because ethical principles can sometimes conflict with your
organization's economic priorities. For example, will a promising new contract, an
investment opportunity, or utilizing a low-cost supplier conflict with your ethical
stance ?
Investing in CSR can also take up resources, and even shift your focus away from
your core activities. A major corporation may be able to allocate a budget, and even a
dedicated team, to its CSR activities. But a smaller organization won't have that
luxury.

Worse still, if you cynically promote your CSR credentials but don't deliver, or if
you're found to be neglecting the basics, you'll be accused of "greenwashing." This
means hiding a dirty reality under a clean, but shallow, facade. And, if you're found
guilty of it, your reputation will be wrecked. For example, your certified organic
cotton fabric won't matter one bit if your employees are making clothes from it in
sweatshop conditions. Similarly, an employee volunteer program can't be a substitute
for decent wages or working conditions.
 Key Points

Corporate Social Responsibility (CSR) is a key part of most organizations' strategies

and operations nowadays. But it's often not enough to just focus on one area of the
business to achieve successful CSR. It must encompass all organizational activity,
processes and goals.

Carroll's Pyramid of CSR provides a framework that organizations can use to clarify
and improve their responsibilities across four key areas:

1. Economic.
2. Legal.
3. Ethical.
4. Philanthropic.

Carroll argues that successful CSR can only be achieved by ensuring organizational
responsibility in all four of these areas. Furthermore, doing so can bring with it a
number of benefits, such as building and improving brand reputation, increasing
sustainability, cutting costs, and increasing your ability to attract and retain talent.