Chapter 11 Ethics and Social Responsibility Edited and

Chapter 11 Ethics and Social Responsibility Edited and dapted by Prof. Romie Frederick Littrell, Department of Management 11 -1

Learning Objectives p p p Examine the broad foundations of ethical behavior Demonstrate the cultural and legal foundations of ethical behavior Discuss the importance of social responsibility when operating internationally, especially in the areas of sustainability Discuss key issues in the social activities and consequences of globalized business Examine corporate responses to globalization in the form of codes of conduct, among other things 11 -2

Business and Society p "Business cannot succeed in societies that fail. Likewise, where and when business is stifled, societies fail to thrive"…"Society cannot succeed without business as a committed solutions provider". --Bjorn Stigson, Chairman, Stigson & Partners AB; Former President, World Business Council for Sustainable Development (WBCSD) 1995 2011, © Copyright 2013 Stigson & Partners, http: //www. stigsonpartners. com/aboutstigson-partners/ 11 -3

Introduction • The business of business is business but to what extent does that include managing environmental interdependence? • Is it possible to reach some kind of consensus on moral and ethical behaviour or do we all go round and round endlessly in our own ethnocentric circles? • At the very least organisations should have codes of conduct for all who work or deal with them. 11 -4

CSR—Corporate Social Responsibility p Visser (2006) commented that a survey of CSR education in Europe found 50 different labels for CSR modules, 40 different labels for CSR programmes and numerous CSR synonyms When discussing corporate social responsibility (CSR) p Visser, W. (2005) Revisiting Carroll’s CSR Pyramid: An African Perspective. In Esben Rahbek Pedersen & Mahad Huniche, Corporate Citizenship in a Development Perspective. Copenhagen: Copenhagen Business School Press. 11 -5

CSR—Corporate Social Responsibility p • • By CSR: I refer to a generic definition encompassing a company's (of any size) overarching responsibility to its community, broadly defined. This is often expanded through various levels from the immediate local community to the country and to the world as a whole. A company's corporate citizenship includes passive acts such as avoiding pollution, and positive acts such as building kindergartens, public sports fields, and perhaps even schools near its buildings and grounds. A company may engage in CSR activities for charitable or philanthropic reasons, and may also do so in an attempt to protect its profits, in the belief that products and shares of stock from a company known for poor corporate citizenship are less attractive to consumers and stockholders. 11 -6

Frederick, Davis & Post Model of CSR • • • Frederick, Davis & Post (1988) proposed two principles which contributed to our current views on CSR. The first is the principle of charity, which is rooted in the Christian and Judaic biblical tradition of wealth redistribution, which suggests that those who have plenty should give to those who do not have plenty. And the Third Pillar of the Five Pillars of Islam: Compulsory Charity 11 -7

“Captains of Industry” or “Robber Barons” p In the USA a robber baron, by definition, was an American capitalist at the turn of the 19 th century who enriched himself upon the sweat of others, exploited natural resources, or possessed unfair government influence. p However, often this enrichment was due to exceptional entrepreneurial and business skills. 8

“Robber Barons”—Philanthropists in the USA p p p Andrew Carnegie was a Scottish-American industrialist. Carnegie led the expansion of the American steel industry in the late 19 th century and is often identified as one of the richest people ever. wikipedia. org Born: November 25, 1835, Dunfermline, Fife, Scotland. Died: August 11, 1919, Lenox, Massachusetts, United States Net worth: $310 billion (celebritynetworth. com) p John D. Rockefeller was born in 1839 in Moravia, a small town in New York. Rockefeller entered the workforce at the bottom as a clerk in a Cleveland shipping firm. Always thrifty, he saved enough money to start his own business, and parlayed his business and entrepreneurial skills into the petroleum refining industry building Standard Oil Co. which became the largest business in the USA. 9

“Robber Barons”—Philanthropists in the USA p p p Andrew Carnegie After retiring in 1901 at the age of 66 as the world's richest man, Andrew Carnegie wanted to become a philanthropist, a person who gives money to good causes. He believed in the "Gospel of Wealth, " which meant that wealthy people were morally obligated to give their money back to others in society. Giving his money away became his new occupation. p p John D. Rockefeller Before his death in 1937, Rockefeller gave away nearly half of his fortune. Churches, medical foundations, universities, and centers for the arts received hefty sums of oil money. Whether he was driven by good will, conscience, or his devout faith in God is unknown. Regardless, he became a hero to many enterprising Americans. 10

Frederick, Davis & Post Model of CSR: Principle of Charity p The philanthropy in the USA of both Carnegie and Rockefeller, for example, were strongly influenced by their religious beliefs (Chernof, 1998; Fosdick, 1952). p Under this principle, members of the business community use their corporate power and wealth for the social or collective good. 11 -11

Frederick, Davis & Post Model of CSR p • • p A second principle that shapes CSR is the principle of stewardship. This principle asserts that organisations have an obligation to see that the public’s interests are served by corporate actions and through the way in which profits are spent. Corporations have significant power and wealth through their control of vast resources. As this power and wealth came from their operations within society, they have an obligation to serve, act as stewards of society’s needs, the managers and corporations becoming the stewards, or trustees, of society. 11 -12

Hay & Gray (1974)—An evolutionary model p • • Hay & Gray Phase I is labelled the Profit-Maximising Management Phase. For contemporary developed countries this phase occurred during the period of general economic scarcity in the nineteenth century, when business managers believed that they should have one objective: to maximise profits. The origin of this view was Adam Smith’s (1776) notion that each individual business person acting in his or her own selfish interest would be guided by an invisible hand (the market mechanism) to contribute to generating the greatest possible wealth of nations. 11 -13

Hay & Gray (1974)—An evolutionary model p Phase I thrived in the United States as the common national goal during the Phase I period was to eliminate economic scarcity. p Neither the principle of charity nor the principle of stewardship played an influential role in shaping CSR during this period, as managers essentially felt that was good for business was good for the country. p This business ethos was shaken by the Great Depression of the 1930 s. 11 -14

Phase II: Trusteeship Management Phase p Phase II can be characterised as a Trusteeship Management Phase; this phase in, • for example, the USA in the 1920 s and 1930 s, responding to the growth of pluralism and the increasing spread of stock ownership in society. 11 -15

Phase II: Trusteeship Management Phase p • • Continuing to employ the USA as an example, as a consequence of the Great Depression, the number of privately held United States corporations began to decline, and organisations had to respond to the demands of both internal and external groups, such as stockholders, customers, suppliers, creditors and community, instead of to a single owner. This phase is characterised by the belief that corporate managers are not just responsible to the stockholders but are required to acknowledge accountability to all with a stake in the organisation, as time passes this list 11 -16 continues to expand.

Phase II: Trusteeship Management Phase • Organisations had to shift their orientation from solely generating revenue and profit to more aspects of social responsibility, resulting in emergence of Trusteeship Management. • Trusteeship management proposes that the job of the corporate manager is to maintain an equitable balance amongst the competing interests of all groups with a stake in the organisation. 11 -17

Phase II: Trusteeship Management Phase p Senior managers are seen as trustees for the various stakeholder groups rather than merely agents for the owners. p Consequently, pressure from stakeholder groups led to the use of some of the economic wealth generated by businesses to meet wider societal needs. 11 -18

The third phase can be characterised as emphasising Quality-Of-Life Management. By the 1960 s, in our example, the United States as the global economic leader had shifted focus from the issue of aggregate economic scarcity to issues such as environmental pollution, racial discrimination, poverty, worker and product safety, urban deterioration and other signs of social deprivation. p • With this new set of priorities the pressure on managers to behave in socially responsible ways intensified. 11 -19

The third phase can be characterised as emphasising Quality-Of-Life Management. p. The consensus of society was that managers had to do more than achieve narrow economic goals. • Activist portions of society were demanding that businesses play a larger role in meeting social needs, and helping to develop remedies for society’s ills. • In this phase the principles of both charity and stewardship were firmly in place, at least in the wealthy, developed USA. 11 -20

Carroll (1991) defined his Pyramid of CSR which is a hierarchal model of increasing detachment from the shareholder value approach, depicted in the figure: 11 -21

Dahlsrud’s (2008) five dimensions of CSR with Example Phrases 1. The environmental dimension, refers to the natural environment: “a cleaner environment”, “environmental stewardship”, “environmental concerns in business; operations” 2. The social dimension, refers to the relationship between business and society: “contribute to a better society”, “integrate social concerns in their business operations”, “consider the full scope of their impact on communities” 3. The economic dimension, refers to socio-economic or financial aspects, including describing CSR as a business operation: “contribute to economic development”, “preserving profitability”, “business operations”; 11 -22

Dahlsrud’s (2008) five dimensions of CSR with Example Phrases 3. The stakeholder dimension, refers to interactions with stakeholders or stakeholder groups: “interaction with their stakeholders”, “how organizations interact with their employees, suppliers, customers and communities”, “treating the stakeholders of the firm”; 4. The voluntariness dimension, refers to actions not prescribed by law: “based on ethical values”, “beyond legal obligations”, “voluntary”. 11 -23

Ethics • Ethics are moral principles, value-systems and orientations • They express concepts of right and wrong accepted by individuals or social groups to govern acceptable conduct. • How are international managers to know which set of ethics to apply when those of host and home countries operate on different lines? Case Study: Kangaroo Trading • 11 -24

Social responsibility p How businesses try to balance commitments in their social environments. • 'Corporate social responsibility': business leaders should not function amorally, but contribute through their firms to the welfare of their communities • voluntary approach by which they may choose to meet or exceed stakeholder expectations by integrating social, ethical, and environmental concerns with required revenue, profit and legal obligations. 11 -25

The challenge • The effect on organisations is devastating when their leaders lack personal ethics and social responsibility • The shock waves are felt all the way down through levels of management to the most junior employee • Unfortunately too often in business the culprits walk away with fat prizes while the discredited firm is left to pick up the broken pieces 11 -26

To choose or refuse to accept corporate social responsibility üOBSTRUCTIONIST STANCE: Do as little as possible; deny or avoid responsibility. üDEFENSIVE STANCE: Firms carry out their legal, but not necessarily ethical, requirements. üACCOMMODATIVE STANCE: Firms exceed minimum social requirements only by special request. üPROACTIVE STANCE: Firms as citizens in society, actively seeking opportunities to contribute. 11 -27

The 'invisible hand' theory • A socially responsible approach is to do “the most good for your company and your cause” • BUT the ‘invisible hand’ theory suggests that under capitalism, those who pursue their own good tend also to do good for their communities • Thus multinationals have a positive impact on world economy, especially in developing countries, by providing local infrastructures, employment, training, investment capital and new technology. • There is no need to do more! 11 -28

The power of the transnationals • • • Of the 100 largest economies in the world, 51 are corporations; only 49 are countries. The Top 200 corporations' sales are growing at a faster rate than overall global economic activity. Multinationals and transnationals exercise enormous power over world economy. Many have a greater capacity than local governments to induce change for good or for ill. As wielders of so much power, the challenge for international managers is how best to make their own and corporate behaviour more responsible. 11 -29

Global interdependence, social responsibility and the law: voluntary international agreements • The UN and its agencies have struck hundreds of agreements with private firms for joint development projects and other initiatives. • A ‘global compact’ between corporations and the UN has been signed by hundreds of companies • But critics argue the UN compromises its integrity by providing a cover for corporate malefactors. 11 -30

Business exists to create profit • • But international agreement is needed on ethical and socially responsible conduct. Multinational operations have both positive and negative effects on different economies. For every complaint a potential benefit can be identified, if corporate leaders are willing to act ethically and with social responsibility. Major problems worldwide are: • poverty • lack of equal employment opportunities • threats to the environment • consumer concerns • lack of employee safety and welfare 11 -31

Managing environmental interdependence • Difficult to force private companies to deal responsibly with hazardous waste from their operations • such as mining, drilling, side effects of pesticides • international pressure is growing on multinationals to look for alternative raw materials for new methods of recycling and expand use of by-products 11 -32

If all transnationals were to adopt sound environmental policies… ü At least 1/4 of the world’s assets would be better managed environmentally ü 70% of the products in international trade would be better labelled ü 80% of the world’s export-oriented crops would use fewer toxic pesticides ü more sustainable agricultural policies ü a large share of the world’s new technological innovations would be better evaluated for their health and safety effects 11 -33

Reaching consensus on moral and ethical behaviour: moral universalism • Moral assessment of people should be on fundamental principles • Should not discriminate against particular people or groups • But whose principles? • US government believes that fundamental principles include the need for economies to be under democratic control and that life-threatening poverty should not be permitted within any society • But how to prevent it? 11 -34

Child labor • Another focus of criticism, usually in developing economies • Most western-composed international codes of conduct forbid it • • this moral universalism is controversial • children's earnings may represent families' only income may be better to improve children’s working conditions while planning long term for them to stop working and receive full-time education 11 -35

Ethnocentrism and ethical relativism • Ethnocentrism: Companies apply standards of morality from their home countries • But almost all are western capitalist democracies Host countries may hold different values • Western codes of conduct may not be applicable. • • Ethical relativism: No such thing as an objective standard for measuring a culture’s “goodness. ” • All standards are culture bound, hence relative 11 -36

Bribery • Ethical problem in international business • • • How strictly should international managers stick to their own ethical standards? How much to follow local ways to be competitive? In some societies gift giving is common and incurs obligation BUT a bribe is different from a gift • • • briber gains unfair advantage; bribed pockets the price bribes hurt reputations and degrade markets taking and giving bribes is illegal in most countries 11 -37

Whistle blowing • Whistle blowing: Speaking out in the public interest to expose corruption or malpractice • Whistleblowers often face hostility and abuse from managers and co-workers • Example: teachers bullied to keep quiet on problem schools. 11 -38

Confucian heritage in Asian firms • 5 major Asian economies share a Confucian cultural heritage • • China Hong Kong Taiwan Korea Japan Corporate governance cannot conform to western models without modification Nature of western societies is relatively open; Asian societies are more closed Obedience, family, relationships, more important than in the west 11 -39

Thick Face, Black Heart p Historical influences on CSR in Chinese cultures. -Beyond the time available in this course; see the course website at www. crossculturalcentre. homestead. com 11 -40

The Organisation for Economic Co-operation and Development (OECD ) • Can an Anglo-Saxon model of corporate governance be applied to non-western countries? • The OECD and the World Bank propose four principles of governance: 1. fairness 2. transparency 3. accountability 4. responsibility While relevant worldwide, differences in interpretations of meanings need to be negotiated • 11 -41

Generally accepted code of workplace behaviour ü ü ü ü ü Obey the law of the land Avoid conflicts of interest Don't use the firm's resources for personal gain Deal with everybody fairly and impersonally Refuse to offer or accept bribes Safeguard the firm's non-public information Protect the reputation of the Company Keep accurate records Refrain from any action that is likely to receive unfavourable publicity 11 -42

Corporate social audits • Formal and thorough analyses of effectiveness of firm’s social performance • usually conducted by a task force of high-level managers within the firm 11 -43

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Summary of key points 1. Multinationals have positive impact on world economy through their activities; more is not required 2. Corporate behaviour is becoming more responsible but problem remains In some countries, huge senior executive rewards without the need for accountability 3. Government legal intervention often hotly resisted by the private sector BUT it is accepted (if only to maintain competition and the legitimacy of the market) 11 -45

Summary of key points Irresponsible corporate behaviour more visible through mass communication media 4. • 5. led to the drafting and adoption of the Basel Convention and the Kyoto Protocol as treaty to limit greenhouse gas emissions Smaller local companies are quicker to realise importance of social responsibility because of the greater need to remain competitive by producing goods and services of high quality, and attracting and retaining workers 11 -46

Summary of key points Moral universalism: no moral discrimination between particular people or groups 6. but hypocritical for wealthy nations to argue child labour is wrong everywhere when people in poor nations may starve if their children do not work • p 7. Two other approaches to doing business across cultures are those of 1. 2. p Ethnocentrism: home based standards apply elsewhere Ethical relativism: international managers should simply adopt the local moral code 11 -47

Summary of key points 8. Goal of anti-corruption legislation is to stop international managers from contributing to corruption in foreign countries and to upgrade the image of the relevant country and its companies operating overseas 9. Even when managers are faced with questionable or unfamiliar ways of doing business, in their decisions they must obey the laws of home and the host countries • They should follow International Codes of Conduct and their own company’s code of ethics 11 -48

Intra-company management of CSR programs p https: //www. youtube. com/watch? v=uj. N 7 f HI 6 ABU 49

Ch 11 – textbook: 11 -50

Foundations of Ethical Behavior Individuals and companies must behave responsibly, based on certain ethical codes of conduct (what is right or wrong) p Our moral reasoning guiding our decisions and actions can be…. p Teleological-decisions are based on the consequences of the action p Utilitarianism-an action is right if produces greatest amount of good p Deontological-moral reasoning occurs per se, independently, consequence is not an issue p 11 -51

Cultural Foundations of Ethical Behavior p Cultural relativism holds that ethical truths depend upon the groups subscribing to them; thus, intervention by outsiders is unethical. p Cultural normativism holds that there are universal standards of behavior that all cultures should follow 11 -52

Legal Foundations of Ethical Behavior p p Law is a good basis for ethical behavior. It is an embodiment of local cultural values. But everything that is legal is not necessarily ethical. Why and when the laws of the land can be perceived as inadequate? Arguments for and against. p Definition-moral concepts may not defined properly p Time-it takes time to develop a law p Application-how court interprets law p Bias-could be majority biased 11 -53

Extraterritoriality p Extraterritoriality n imposing domestic legal and ethical practices on the foreign subsidiaries of companies headquartered in their jurisdictions n U. S. Foreign Corrupt Practices Act 1977 11 -54

Corruption and Bribery p Corruption n p Bribes n n the misuse of entrusted power for private gain payments or promises to pay cash or anything of value. Occurs to obtain government contracts or to get public officials to do what they should be doing anyway Impact of corruption on economic development, wellbeing of the people, business performance 11 -55

Corruption and Bribery Where Bribes Are (and Are Not) Business As Usual 11 -16

Corruption and Bribery p International accords to stop bribery n n n p Regional initiatives include n n p OECD Anti-Bribery Convention ICC code of rules UN Convention against Corruption EU efforts U. S. Foreign Corrupt Practices Act and Sarbanes-Oxley legislation Industry initiatives include n 2005 World Economic Forum zero tolerance pact 11 -57

Ethics and Environment p Companies compromise the environment n n p Effect of natural resource extraction n p contamination of air, soil, or water during manufacturing products that emit fossil-fuel contaminants renewable versus non-renewable Sustainability-meeting the needs of the present without compromising the ability of future generations to meet their own needs 11 -58

Global Warming, Kyoto Protocol p Kyoto Protocol (1997) n p signed to require countries to cut greenhouse gas emissions to 5. 2% below 1990 levels between 2008 and 2012 Some countries have adopted stricter requirements n others have not ratified the agreement including p the U. S. , China, India 11 -59

Ethical Dimensions of Labor Conditions p p Labor issues include: Wages, Child labor, Working conditions, Working hours, Freedom of association Child labor – ILO estimates 250 million children aged 5– 17 years work Some companies avoid operating in countries where child labor is common. IKEA has responsible policies. Some companies refuse to hire individuals who want to work long hours. 11 -60

Corporate Codes of Ethics How should a company behave? p The UN Global Compact establishes guidelines for appropriate behavior in human rights p n n n p labor the environment anti-corruption Social Media is playing a constructive role in guiding the corporations 11 -61

The Pyramid of Corporate Social Responsibility Source: Archie B. Carroll, “The Pyramid of Corporate Social Responsibility: Toward the Moral Management of Organizational Stakeholders, ” adaptation of Figure 3, p. 42. Reprinted from Business Horizons, July/Aug. 1991. Copyright © 1991 by the Foundation 11 -62 for the School of Business at Indiana University. Reprinted with permission.

Motivations for Corporate Responsibility p Unethical and irresponsible behavior could n n p result in legal sanctions result in consumer boycotts lower employee morale cost sales because of bad publicity A code of conduct n n sets global policy that must be complied with communicates the code to employees, suppliers, and subcontractors ensures that policies are carried out reports results to external stakeholders 11 -63

Chapter 11: Discussion Questions 1. 2. 3. 4. Discuss the three approaches in moral reasoning. Which appeals to you most and why? Define cultural relativism and normativism. Explain how the concept can be used by the multinationals in a foreign country. What is corruption? What can we do to combat corruption? Explain. Discuss the legal and ethical dimension of Corporate Social Responsibility in a globalized world. 64

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