Managing Social Responsibility and Ethics Copyright 2012 Pearson

Should Organizations Be Socially Involved? SRI funds usually will not invest in companies involved in liquor, gambling, tobacco, nuclear power, weapons, price fixing, fraud, or in companies that have poor product safety, employee relations, and environmental track records Sin funds? Copyright © 2012 Pearson Education, Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall Inc. Publishing as Prentice Hall 5 -2

Should Organizations Be Socially Involved Arguments For • Public expectations • Long-run profits • Ethical obligation • Public image • Better environment • Discouragement of further governmental regulation Arguments Against • Violation of profit maximization • Dilution of purpose • Costs • Too much power • Lack of skills • Lack of accountability Copyright © 2012 Pearson Education, Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall Inc. Publishing as Prentice Hall 5 -3

Encouraging Ethical Behavior • Employee Selection - an opportunity to learn about an individual’s level of moral development, personal values, ego strength, and locus of control • Code of ethics - a formal statement of an organization’s primary values and the ethical rules it expects its employees to follow Copyright © 2012 Pearson Education, Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall Inc. Publishing as Prentice Hall 5 -4

Codes of Ethics Copyright © 2012 Pearson Education, Copyright © 2014 Pearson Education, Inc.

Codes of Ethics (cont. ) Copyright © 2012 Pearson Education, Copyright © 2014 Pearson

Business Ethics • Ethics is the study of right and wrong behavior; whether an action is fair, right or just. • In business, ethical decisions are the application of moral and ethical principles to the marketplace and workplace. 7

From Obligation to Responsiveness to Responsibility • Social obligation - the obligation of a business to meet its economic and legal responsibilities and nothing more. • Classical view - the view that management’s only social responsibility is to maximize profits Copyright © 2012 Pearson Education, Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall Inc. Publishing as Prentice Hall 5 -8

9 Two opposite views on the role of ethics in business Friedman Stakeholders

1 0 Milton Friedman (1970) Only purposes of a business is to make a profit and obey the law. Charitable duties are for the individual stockholder…

Why is Business Ethics Important? • Directors and Officers owe a complex set of ethical duties to the company, shareholders, customers, community, employees, and suppliers. • These parties are called “stakeholders” • When these duties conflict, ethical dilemmas are created. 11

Organizational Stakeholders Copyright © 2012 Pearson Education, Copyright © 2014 Pearson Education, Inc. publishing

From Obligation to Responsiveness to Responsibility (cont. ) • Social responsibility - a business’s intention, beyond its legal and economic obligations, to do the right things and act in ways that are good for society. Copyright © 2012 Pearson Education, Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall Inc. Publishing as Prentice Hall 5 -13

Setting the Right Ethical Tone • Importance of Ethical Leadership. – Attitude of Top Management. • Howard Schultz, Starbuck’s CEO dropped his pay to $10, 000 (1/2009) – Looking the Other Way. – In Re The Exxon Valdez 14

Exhibit 5 -9 Being an Ethical Leader Copyright © 2012 Pearson Education, Copyright ©

Approaches to Ethical Reasoning Duty Based Ethics = (Deontological ethics) derived from religious and philosophical duties. – Religious Ethical Standards. – Kantian Ethics. – Rights Principles. Outcome-Based Ethics: Utilitarianism. – Seeks to ensure a given outcome. 16

Religious Ethical Standards • The rightness or wrongness of an action is judged according to its conformity to an absolute rule. • The motive of the actor is irrelevant. 17

Kantian Ethics • The categorical imperative is a central postulate of Kantian ethics. – The rightness or wrongness of an action is judged by estimating the consequences that would follow if everyone in a society performed the act under consideration. Very similar to “The Golden Rule” 18

Principle of Rights • This principle derives from the belief that every duty gives rise to a corresponding right. • The belief in fundamental rights is a deeply embedded feature of Western culture. • The ethicality of an action is judged by how the consequences of the action will affect the rights of others. 19

2 0 Do you mind if I smoke? Principle of Rights says if everyone around consents, there is nothing wrong with the behavior Ex: Victimless crimes…

Outcome-based Ethics: Utilitarianism • A cost-benefit analysis must be performed to determine the effects of competing alternatives on the persons affected. • The best alternative is the one that produces the greatest good for the greatest number. 21

2 2 Economics as a discipline is Utilitarian Utility Curves Cost-Benefit Analysis Supply and Demand Morality in Economics?

Utilitarian Dilemna • Schadenfreude 23

Corporate Social Responsibility • CSR is the idea that those who manage corporations should be accountable to society for their actions. – Stakeholder Approach: corporations have a duty not only to shareholders but other groups (stakeholders) affected by corporate actions. – Corporate Citizenship: promote goals that society considers worthwhile and take positive steps towards solving problems. 24

Creating Ethical Codes • Creating Ethical Codes of Conduct. – Providing Employee Ethics Training. – Johnson and Johnson: web-based ethical training. • Sarbanes-Oxley Act (slang, SOX, the law was a response to Enron) and web-based reporting systems. 25

A Long Time Ago. . . • • • Kenneth Lay Sweetheart of Wall Street $2 m to Bush/Cheney On Bush’s White House Transition Handpicked appointed regulators in energy • Harvard Business School • Enron Field (Houston Astros Park) 26

Enron’s Dubious Accounting Arthur Anderson 27

Enron’s False Transactions & Bonuses Kenneth Lay: $400, 000 in Bonuses 28

CSR Example: Hershey School Started in 1909 for “Healthy, white male orphans between 8 and 18. ” Started with 10 kids Now 1700+ Donated fortune (now $7. 8 B) in 1915 when his wife died. He died in 1945 29

Ethics in an International Context • Ethical standards are not universal – Social and cultural differences determine acceptable behaviors. Copyright © 2012 Pearson Education, Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall Inc. Publishing as Prentice Hall 5 -30

The Ten Principles of the United Nations Global Compact Copyright © 2012 Pearson Education,

International • Foreign Corrupt Practices Act. – Bribes and Accounting Practices. – Blat – Krysha – Guanxi – Fakelakia 32

FCPA Foreign Corrupt Practices Act Started in 1977 (Jimmy Carter) http: //www. youtube. com/watch? v=g 1 n 0 kat_i 4 s

FCPA Two main provisions: Transparency for SEC companies Bribery of foreign officials prohibited

Applies to: Any business controlled by SEC (publicly traded stock) Any business located in US Any business conducting sales in US Any one acting on behalf of US business

How far does jurisdiction go? An involvement with a US bank or Through a US internet provider is enough SEC v Elek Staub (decided Feb 8, 2013)

Key: is the payment quid pro quo for some discretionary action by the foreign official

When is a payment not a bribe? Payment to expedite a non-discretionary action (Facilitation payment) Lawful under the host country Bona-fide expenditure directly related to a contract

FCPA – Recent Violators Include: Ralph Lauren Philips Electronics Eli Lilly Allianz Tyco Oracle Walmart Pfizer Morgan Stanley Siemens Rockwell York International Dow Chemical Electronic Data Systems Monsanto Bell South Johnson & Johnson Tyson Foods Lucent General Electric Chrysler Avery Novo Nordisk ITT Halliburton Fiat Volvo Westinghouse Chevron Ingersoll Rand Chiquita Avon IBM

Walmart bribed Mexican authorities to get construction permits and then bribed those who investigated the crisis Hewlett Packard paid >$10 m to Prosecutor General of Russia to get government contracts

Ralph Lauren in Argentina (2013) Self-reported $593 k in gifts over four years (2005 -2009) NPA Require public admission (potential lawsuits) $1. 6 m in fines

Wall Street Journal, April 7, 2014 Glaxo. Smith. Kline (UK) pharma Bribed a lot of folks in Iraq to get drugs approved there Hired 16 people as “consultants” who were actually full time workers for the Iraq government in charge of medical regulations

Strange Twist Smith & Wesson forced to pay $2 m fine Bribed someone in Pakistan and Indonesia, But never got the contracts Still had to pay the fine… Wall Street Journal, July 28, 2014

How does it work? US Department of Justice Violations of Bribery: Company – criminal fines of $2 m Individuals – criminal fines of $100 k & five years in prison (Fines may increase to double the amount of the expected gain from the bribe!) Violations of Record Keeping: Company – fines of $25 m Individuals – fines of $5 m and up to 20 years in prison

Ignored? From 1977 -1998, DOJ only did 25 cases on FCPA Average one case a year… In June 2010, DOJ had 150 cases in progress

Why the new interest? Profit Disgorgement (Take back profits from corrupt gain) Siemens - $800 million fine in 2008

Other governments handle corruption http: //www. youtube. com/watch? v=Dio. Kr 9 Rdb. WA http: //www. youtube. com/watch? v=unp. QPu 7 TXls

Reality If USA has a law against bribery, so we do not invest in “Country X” But Russia does invest (and bribes) What changed? USA business lost opportunity Bribes still persist