ETHICS AND SOCIAL RESPONSIBILITY

 The organisation operates within an environment

and that organisation will need to behave
ethically in the long term or that environment
will reject it and the organisation will cease to be.
 Most organizations fail within a very limited time
span (10 years ) and research has suggested that a
significant factor contributing to that has been the
failure to act with social responsibility.
 The suggestion is that social responsibility is
the key factor to ensure the long-term survival
of the organization.
 Lack of it implies a short-terminst viewpoint
and systems need to be deployed to ensure a
broader perspective in setting strategy for an
organization
THE PROBLEM
 Ethical behaviour definitions will:
• Vary between cultures and individuals;
• Vary over time within those cultures and be
subject to continual slow adaptation;
• Be influenced by emotion and so lack rationality;
• Lead to ‘pressure groups’ pressing for certain
kinds of behaviour that may eventually lead to
open conflict.
 Most believe that public sector organizations
have social responsibility as one of their
primary objectives (or should have).
 Not all believe that private companies should

have social responsibility on their agendas.

Milton Friedman argues:
 ‘The business of business is business’
 He sees the only responsibility as being to the
shareholder and views donations to charity and
‘the Arts’ as being ‘fundamentally subversive’.
 The organization will need to consider the
ethical context of their strategy and ensure that
they understand how society may change in
the future and how they themselves may need
to adapt.
 Consider
 Is it ethical to:
 Experiment on animals?
 Drill for oil?
 Build roads through the countryside?
 Allow smoking in public areas?
 Pay senior executives large increases in salary?
 Train students to pass exams?
 Different groups of people will respond in
different ways. The management team will need to
consider these viewpoints in developing their
strategies.
Ethics
 Ethics ,in business refers to taking decisions

for the right moral reasons that is taking into

account the wider needs of all stakeholders.
 In an ever changing global environment,

being ethical not only helps maintain corporate

image, but also enable business to maintain a
competitive advantage over rivals.
 Ethical behavior is the lubricant that keeps the

economy running.
 Absence of ethical behaviour causes the
economy to operate much less efficiently that
is less goods and services to consumers, low
quality goods, high prices.
 Thus businesses must be conducted in an

ethical framework which builds and sustain

trust.
 NB, Management Accountants have ethical

responsibility in four areas namely:

--1) to maintain a high level of professional
competence.
 2)to treat sensitive matters with confidentiality.
 3) to maintain personal integrity.
 4) to disclose information in a creditable
fashion.
 If ethical rules are not followed in business,
then the economy and all of us would suffer..
 ETHICS IN PRACTICE
 Effects of not abiding by ethics
 1) if employees could not be trusted with
confidential information--- top management
would not distribute such information within
the company and as a result, decisions would
be based on incomplete information and
operations would deteriorate.
 2) if employees accepted bribes from suppliers
or lectures accepts bribes from students----
contracts would go to those who pay the
highest bribes rather than to the most
competent suppliers or students.
 ------ who would employee such graduates
who passed because they paid highest bribes.
 --- what would happen to CUT if its graduates
produces the highest shoddy work.
 If the CEOs of companies routinely lied in their
annual reports and financial statements-if
investors could not rely on the basic integrity of
a company’s financial statement they would
have little basis for making informed decisions.
 Suspecting the worst, rational investors would
pay less for securities issued by the company
and may not be willing to invest at all.
 As a result companies would have less money
for productive investments, leading to slower
economic growth, fewer goods and services and
higher prices
 NB. The numbers that managers rely on for
planning, control and decision making are
meaningless unless they have been
completely ,objectively and honestly gathered,
analyzed and reported.
CORPORATE SOCIAL RESPONSIBILITY

 Is a concept whereby organizations consider

the needs of all stakeholders when making
decisions.
 CSR extents beyond legal compliance to
include voluntary actions that satisfy
stakeholder expectations.
 Stakeholders are customers, employees,
suppliers, communities, environmental and
human rights advocates whose interest are tied
to company’s performance.
 For example, if a company pollutes the
environment or fails to provide safe and
humane working conditions for its employees ,
the negative publicity from environmental and
human rights activists could cause the
company’s customers to defect and its “best
and brightest” job candidates to apply else
where which could both harm company’s
financial performance.
 CSR IN PRACTICE
Customers
 Safe, high quality products that are fairly

priced.
 Competent , courteous and rapid delivery of

products and services.

 Full disclosure of products-related risks.

 Easy to use information systems for shopping

and tracking orders.

SUPPLIERS
 Fair contract terms and prompt payments.
 Reasonable time to prepare orders.
 Hassle free acceptance of timely and complete
deliveries.
 Co-operative rather than unilateral actions.
STOCKHOLDERS
 Competent management.
 Easy access to complete and accurate financial
information.
 Full disclosure of enterprise risk.
 Honest answers to knowledgeable questions.
EMPLOYEES
 Safe , and humane working conditions, non
discriminatory treatment and the right to organise
and file grievances.
 Fair compensation.
 Opportunities for training, promotion and
personal development.
COMMUNITIES
 Payment of fair taxes.
 Honest information about plans such as plant
closings.
 Resources that support charities, schools, and
civic activities.
 Reasonable access to media sources.
ENVIRONMENTAL AND HUMAN RIGHTS ADVOCATES.

 Greenhouse gas emissions data.

 Recycling and resource conservation data
 Child labour transparency.
 Full disclosure of suppliers located in
marginalised areas.
 Central to achieving strategic success is the
idea of fulfilling customer and consumer needs
(the marketing concept). One of those needs
may well be a requirement for ethical
behaviour by the organisation.
 The social responsibility argument benefits the
company in the following ways:
 Product safety – can be used as a core
competence and as a basis for differentiation.
 Working conditions – can be used to attract
higher calibre staff.
 Honesty in approach – can lead to brand
strengthening.
 Avoiding pollution – will save costs in the
long run and win business in increasingly
sophisticated markets where this is now a
threshold competence.
 Avoiding discrimination – gives access to a
wider human resource base.
 Sponsorship – tax deductible, staff rewarding

and advertising.
Social responsibility and financial value
 The value of the firm will be the present value

of the future perceived cash flows.

 This will involve taking the perceived future

cash flows and adjusting with a risk-adjusted

cost of capital.
 Anything that can reduce the cost of capital
will add value – being socially responsible will
reduce the risk of adverse environmental
reaction and so the cost of capital must come
down.
• Anything that extends the perceived value of
the future cash flows will add value.
 A socially responsible organization will be

allowed to operate longer within society and

so there will be.
more years of cash flow in the future.
 A misbehaving organization will be closed

down by the disgruntled ‘keep satisfied’

stakeholder groups.
CSR IN ACTION
 In his book , Capitalism and Freedom economics
Milton Friedman wrote on page 133:”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-----------engages in open and free competition,
without deception and fraud”.
 Explain why you agree or disagree with this
quote.
QUESTION 1
Ethical issues and Mendelow’s matrix – Plastic Ware Plc,
 Plastic Ware Plc is a private company which has been

manufacturing plastic toys for the last three years. Its

factory is located in a city called Harare. It sells goods
worldwide.
 In spite of having many competitors, the company has

been making good profits since its first year of operation.

 Plastic Ware Plc’s strategy is to keep its costs at a

minimum and compete on the basis of price.

 Boss has recently been appointed as the CEO of Plastic
Ware Plc, after retiring as the CEO of a very successful
toy making company. In Plastic Ware Plc, she has
observed the following:
 A substandard material is used in making the toys.
This material may be dangerous to health if children
put the toys in their mouths. However, the company has
not given any warning on the packaging of the toys.
 Rather, Plastic Ware Plc products are advertised as
being safe and are claimed to improve children’s
memory and motor skills at a faster rate than the toys
manufactured by other companies (which has not been
scientifically proven).
 All the workers (including child labourers) are required to
work for more than 100 hours a week which is far above
the maximum working hours prescribed through
legislation.
 Since unemployment is high in Harare, people staying
there are prepared to work for lower wage rates.
 Plastic Ware Plc is successful in keeping its costs at a
minimum by employing people in Harare at minimum
cost (without paying fair wages or bonuses).
 Every year Plastic Ware Plc donates $15,000 to a political
party whose leader is Carnival. This is because Carnival is
also the chairman of Easy-money, a financing company,
which provides finance to Plastic Ware Plc, at low interest
rates.
 Furthermore, the company has recently received
adverse publicity through a local newspaper which
reported that the emissions from the factory are
polluting the environment of Harare.
 There is no emission treatment plant in Plastic Ware
Plc. In addition, the material used by Plastic Ware Plc,
is bad for the environment.
 The newspaper has also highlighted, and published
photographic evidence of, the poor hygiene conditions
in Plastic Ware Plc, and the fact that female workers
who have young children are allowed to bring their
children inside the factory, which could be dangerous.
 After becoming aware of all the above facts and reading the
newspaper, Boss immediately called a board meeting and
communicated her view that “our dream is for the company to
grow by leaps and bounds and become a market leader.
 However, this can only be achieved by incurring some cost in the
short term and therefore we should stamp out all unethical
practices.”
 However, Milko, the finance director disagreed, stating that “we
are running the business for profit.
 If we give up all these practices, our costs will increase and will
directly affect our performance.
 In addition, although we are asking workers to work for more
than the maximum working hours, this helps them to earn more
money, without which they might not be able to provide for their
families.”
 About 80% of the shares in Plastic Ware Plc,
are held by the directors (excluding Boss) and
the remaining 20% of the shares are held by
people outside Plastic Ware Plc.
 There is no substantial holding by any
shareholder; rather many people each hold a
few shares.
 As a result, the directors are in a dominant
position when it comes to taking strategic
decisions (the external shareholders are
dormant).
 Required:
(a) Discuss the ethical issues with reference to
the case given above and their impact on the
performance of Plastic Ware Plc, (long-term
as well as short-term). (10 marks)
(b) Using Mendelow’s matrix, map the following
stakeholders of Plastic Ware Plc:
 (i) employees

 (ii) customers

 (iii) directors of Plastic Ware Plc,

 (iv) shareholders (other than directors)
 (v) the government (15 marks)
 END AMEN