CHAPTER 3 Ethics Social Responsibility STRATEGIC MANAGEMENT BUSINESS

Corporate Governance Broader responsibility -Private corporations have responsibility to society that extend beyond making

Social Responsibility Milton Friedman 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 stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud. Corporate Social Responsibility – “fundamentally a subversive doctrine” Prentice Hall, Inc. © 2006 3 -3

Corporate Governance Carroll’s 4 Responsibilities –Economic – produce goods and services of value to society repay creditors and shareholders –Legal defined by government laws –Ethical follow the generally held beliefs of about behavior in society –Discretionary purely voluntary obligations that a corporation assumes Prentice Hall, Inc. © 2006 3 -4

Carroll’s 4 Responsibilities in order of priority Why be socially responsible? • Avoid Governmental

Corporate Stakeholders versus Stockholders Corporate Stakeholders Affect or are affected by the achievement of

Corporate Stakeholders Stakeholder Analysis – 1. Primary stakeholder (economic) Sufficient bargaining power to affect outcomes 2. Secondary stakeholder (legal, ethical, discretionary) Indirect stake but are affected by corporation’s actions 3. Estimate the impact on each group Stakeholder Input - Determine whether input is necessary Prentice Hall, Inc. © 2006 3 -7

Ethical Behavior “business ethics” –Real or Fiction? ? ? Prentice Hall, Inc. © 2006

Ethical Decision Making Corporate practices -–Massive write-downs and restatements of profit –Misclassification of expenses as capital expenditures –Pirating corporate assets for personal gain Recent Survey Results -– 70% distrust business executives –Enron – investor trust? –World. Com – Weekend at Bernie’s Prentice Hall, Inc. © 2006 3 -9

Ethical Decision Making Stock Purchase Loans Shares @ $10/sh. Buy Margin/Borrow 100 200 $1000 $2000 $100 $200 (20% ROI=200/1000) 100 200 $2000 $4000 Dividend $1/sh. $100 Sale @ $20/sh. -$1000 loan $3000 (300% ROI=3000/1000) ROI = 2100/1000 = 210% Prentice Hall, Inc. © 2006 ROI = 3200/1000 = 320% +110% 3 -10

Reasons for Unethical Behavior Provocative Question -Why are businesspeople perceived to be acting unethically? Perceptions caused by -- –Not aware of impropriety –Cultural norms and values vary –Differences in values between businesspeople and key stakeholders –Governance systems based on rule or relationships Prentice Hall, Inc. © 2006 3 -11

Reasons for Unethical Behavior Opacity Index (Kurtzman Group) Measures risk associated with business transparency Relationship-based governance versus Rule-based governance Prentice Hall, Inc. © 2006 3 -12

Reasons for Unethical Behavior Allport-Vernon-Lindzey Study of Values -- –Aesthetic –Economic –Political –Religious –Social

Reasons for Unethical Behavior Most common reasons for bending rules -- –Organizational performance required it –Ambiguous or out of date rules –Pressure from others – everyone else does it “ 82% of firms meet or exceed by 1% the Analyst expectation for profit” • Just lucky? • Great planning? • Other… “frogs in boiling water” Prentice Hall, Inc. © 2006 3 -14

Moral Relativism Morality is relative to some personal, social, or cultural standard and there is no method for deciding whether one decision is better than another. “everything may be moral in the right context” Prentice Hall, Inc. © 2006 3 -15

Kohlberg’s Levels of Moral Development 1. Preconventional level – Characterized by a concern for self • Personal interest (Child) • Avoidance of punishment 2. Conventional level – Characterized consideration of society’s values • External code of conduct 3. Principled level – Characterized by adherence to internal moral code • Universal values or principles Prentice Hall, Inc. © 2006 3 -16

Kohlberg’s Levels of Moral Development Ev olv ing Principled 20% of Adults Conventional Most

Encouraging Ethical Behavior Codes of Ethics –Clarify the company expectations –Recognize the ethical dimension

Encouraging Ethical Behavior Guidelines for Ethical Behavior –Ethics consensually accepted standards of behavior for an occupation, trade or profession –Morality the precepts of personal behavior based on religious or philosophical grounds –Law Formal codes that permit or forbid behaviors (may or may not enforce ethics or morality) Prentice Hall, Inc. © 2006 3 -19

Encouraging Ethical Behavior Approaches to Ethical Behavior –Utilitarian • Judged by consequences • CEO values – power, legitimacy, urgency –Individual Rights • Fundamental rights in all decisions • What are ”fundamental rights”? –Justice • Distributive Justice and Fairness • Retributive Justice • Compensatory Justice Prentice Hall, Inc. © 2006 3 -20

Encouraging Ethical Behavior Approaches to Ethical Behavior –Cavanaugh’s three questions 1. Utility: does it maximize satisfaction for all. 2. Rights: respects the rights of all. 3. Justice: is consistent with the canons of justice –Categorical imperative 1. Action is acceptable for anyone in the same position. 2. Never treat others as a means to an end. Prentice Hall, Inc. © 2006 3 -21

Strategy Bits 192 U. S. companies surveyed -– 92% monitored employees use of e-mail/Internet – 26% monitored employees electronic activities all the time –Almost none had checks in place to protect employees privacy Prentice Hall, Inc. © 2006 3 -22