Transcript Ethics and Social Responsibility of Corporations

Ethics and Social Responsibility
of Corporations
Legal Environment of Business
What is Ethics?
The inner-guiding moral
principles and values
people use
to analyze a situation
and decide what is
“right.”
What is Business Ethics?
• Business Ethics is simply the application of the standards for
moral reasoning to business dilemmas
• Moral Standards  Data Moral Judgment
• Businesses should develop moral standards for employees
working together toward the common goal of profit for the
firm
• Often, businesses face conflict between the interests of
various stakeholders of the business
• The business must consider the needs and interests of all its
stakeholders in resolving the ethical dilemma it faces
Company Stakeholders
Schools of Thought on Ethical Behavior
• Inherence
– Managers act only with shareholders’ interests in mind
– Do not get involved in any political or social issues unless
in shareholders’ best interests
• Enlightened Self-Interest
– Serve the shareholders best by being responsive to the
larger society
– Managers free to address societal issues without the
constraint of offending someone
– Businesses anticipate social changes and needs and be
early advocates for change
• The Invisible Hand
– Opposite of Enlightened Self-Interest
– Managers believe that business ought to serve the larger society, and
it does so best when it serves the shareholders only
– Businesses adhere to governmental constraints as a way of maximizing
benefits to their shareholders
• Social Responsibility
– Role of business is to serve the larger society and is best accomplished
by being responsive to the larger society
– Businesses profit by being responsive to society and its needs
– Businesses advocate full disclosure of product information to
consumers
– Believe that social responsibility contributes to their long-term success
Law and Ethics
• Businesses organized in the United States are subject to its
laws and the laws of other countries in which they operate.
• Businesspersons owe a duty to act ethically in the conduct of
their affairs and not to harm society.
• Not all ethical standards have been enacted as law.
• Law and ethics often coincide.
• E.g., bribery is illegal and unethical.
• Law may permit certain behavior that seems unethical.
• E.g., law may permit pollution emissions that pose health
risks.
• Law may demand certain conduct that seems unethical.
• E.g., law prohibits hiring illegal aliens; jobs could assist
destitute workers.
Law and Ethics
Business Ethics
• Businesses today not only answerable to shareholders, but to
all its stakeholders
• Shareholders demand ethical and socially responsible
behavior from business to ensure long-term earnings and
growth
• Customers expect ethical and socially responsible behavior in
return for their loyalty
• Communities demand responsible behavior for locating and
maintaining business facilities in the area.
Reasons for Choosing Ethical Behavior
• Profitability as a Return on Ethical Behavior
– Businesses operate to maximize profits
– Pursuit of profit can sometimes distort the perspective of even the most
conscientious
– Firms that adopt ethical standards perform better financially over the long
run
– Just like an individual, a firm’s reputation takes a long time to gain, but can
be instantly lost over one bad decision
• Ethics as a Strategy
– Ethical behavior increases long-term earnings
– Enables businesses to plan ahead
– Anticipate social needs and cultural changes that will require the firm or
its product to evolve
– Fosters goodwill
– Saves company from costly mistakes
• Business Ethics for Personal Reasons
– Business Ethics is really nothing more than a standard of personal
behavior applied to a group of people working together to make a
profit
– Some people are ethical because it enables them to sleep better at
night
– Some do so because of the fear of getting caught
– Some do it because it is simply the correct thing to do
Some effects of Ethical &
Unethical Behavior
Employee Ethics: THE CODE OF ETHICS
• Document that helps employees deal with
situations in which conduct is technically legal
but is improper, unethical, or unfair.
• Development of Code of Ethics has become an
important part of corporate culture
Johnson & Johnson’s Credo
Social Responsibility of Business
• Decisions made by business have far-reaching effects on
society.
• In the past, many business decisions were made solely on a
cost-benefit analysis.
• The attitude of business was that everyone benefitted if
business did well.
• Such decisions may cause negative externalities for others.
• Business regulations have made businesses more
accountable, and forced their behavior into a more socially
responsible pattern
• Today, the statement is, “What’s good for society is good for b
Theories of Social Responsibility
Maximizing
Profits
Moral
Minimum
Corporate
Citizenship
Stakeholder
Interest
Maximizing Profits
• Theory that a corporation’s duty is to take actions that
maximize profits for shareholders.
• The interests of other constituencies are not important in and
of themselves.
• Friedman: “…one and only social responsibility of business—
to use its resources and engage in activities to increase its
profits as long as it stays within the rules of the game…”
Moral Minimum
• Theory that a corporation’s duty is to make a profit while
avoiding harm to others.
• As long as business avoids or corrects the social injury it
causes, it has met its duty of social responsibility.
• Laws enforce some moral minimum of social responsibility on
corporations.
• E.g., occupational safety laws.
• E.g., consumer protection laws for product safety.
• E.g., Sarbanes-Oxley Act.
• Sarbanes-Oxley Act
– Passed in response to financial fraud scandals of late 1990s, early
2000s
– Civil and criminal liability.
– Goal of compelling public companies to act ethically in dealings with
shareholders, employees, other constituents.
– Public companies must disclose whether they have a code of ethics. In
response, many companies have adopted such codes.
Stakeholder Interest
• Theory that a corporation must consider the effects its actions
have on persons other than its stockholders.
• E.g., employees, suppliers, customers, creditors, local
community.
• Critics argue that it is difficult to harmonize the conflicting
interests of stakeholders.
Corporate Citizenship
• Theory that a business has a responsibility to do good.
• Business is responsible for helping to solve social problems,
even those it did not cause.
• Corporations owe a duty to promote the same social goals as
do individual members of society
• Theory argues that corporations owe a debt to society to
make it a better place.
• Duty arises because of the social power bestowed on
corporations.
• A major criticism of this theory is that the duty of a
corporation to “do good” cannot be expanded beyond certain
limits.
• E.g., corporate funds are limited.
Summary of Theories
Theory
Maximizing profits
Social Responsibility
To maximize profits for stockholders.
Moral minimum
To avoid causing harm and to
compensate for harm caused.
To consider the interests of all
stakeholders, including stockholders,
employees, customers, suppliers,
creditors, and local community.
Stakeholder interest
Corporate citizenship To do good and solve social problems.
Social Responsibility Roles
• Reactive
– Businesses react to social issues when they are presented
– Try to resist the implementation of regulation
– Possible end up with more regulation than would have resulted if the
issue had been addresses prior to regulation
• Status Quo
– Business does not oppose regulation
– Meets only the bare minimum
– Do not try to anticipate future problems
• Proactive
– Some firms adopt a proactive approach
– Begin by dealing with social issues within the firm
– Do not wait for regulations to be imposed, take actions from before as
they feel the need to
Corporate Social Audit
• Idea that audits should be conducted not only of financial
health of corporation, but also of its moral health.
• Examine whether corporation has adhered to code of ethics
and met duty of social responsibility.
• May be difficult to define, measure results in practice.
Procedures for Social Audit
• Employ independent, outside auditor.
• Demand cooperation of company personnel with auditing
firm during audit.
• Auditor reports findings directly to board of directors.
• Board reviews results and implements program to correct any
deficiencies found.
Summary
• Ethical behavior in business means making decisions
based on values established by the firm
• Different firms deal with ethical dilemmas differently
• Ethical behavior can provide returns for all the
company’s stakeholders
• Firms can benefit shareholders and at the same time
recognize their social responsibilities