Chapter 4

Social Auditing 2

In addition to social audits conducted by companies themselves, five types of groups serve as watchdogs to monitor how well companies enforce their ethical and social responsibility policies: Socially conscious investors Socially conscious research organizations Environmentalists Union officials Customers

How will it make me feel about myself?

Would I feel proud if my family learned of my decision? My friends? Could I discuss the proposed situation or action with my supervisor? The company's clients? Will I have to hide my actions? Has someone warned me not to disclose them? What if my decision were announced on the evening news? Am I feeling unusually nervous? Decisions that go against our sense of right and wrong make us feel bad—they erode our self-esteem. That is why an ethical businessperson does what is proper as well as what is profitable.

Ethics Begins with Each of Us 3

Plagiarizing material from the Internet, including cutting and pasting information from websites without giving credit, is the most common form of cheating in schools today. To fight this problem, many instructors now use services like Turnitin, which scans students' papers against more than 40 billion online sources to provide evidence of copying in seconds.5

Socially conscious research organizations

, such as Ethisphere, analyze and report on corporate social responsibility efforts.34

Managing Businesses Ethically and Responsibly (reason)

A business should be managed ethically for many reasons: to maintain a good reputation; to keep existing customers and attract new ones; to avoid lawsuits; to reduce employee turnover; to avoid government intervention in the form of new laws and regulations controlling business activities; to please customers, employees, and society; and simply to do the right thing.

Responsibility to Investors 2

A few investors, however, have chosen unethical means to improve their financial health. For example, insider trading uses private company information to further insiders' own fortunes or those of their family and friends.

Social Auditing 1

A social audit is a systematic evaluation of an organization's progress toward implementing socially responsible and responsive programs. One of the major problems of conducting a social audit is establishing procedures for measuring a firm's activities and their effects on society. What should a social audit measure? Many consider workplace issues to include areas such as the environment, product safety, community relations, military weapons contracting, international operations and human rights, and respect for the rights of local people.

Responsibility to Investors 4

After the deluge of insider trader cases was made public in the early 2000s, the SEC adopted a new rule called Regulation FD (for "fair disclosure"). The rule doesn't specify what information can and cannot be disclosed. It simply requires companies that release any information to share it with everybody, not just a few select people. In other words, if companies tell anyone, they must tell everyone—at the same time.

Setting Corporate Ethical Standards

Although these codes vary greatly, they can be placed into two categories: compliance-based and integrity-based (see Figure 4.3). Compliance-based ethics codes Page 93emphasize preventing unlawful behavior by increasing control and penalizing wrongdoers. Integrity-based ethics codes define the organization's guiding values, create an environment that supports ethically sound behavior, and stress shared accountability.

Is it balanced?

Am I acting fairly? Would I want to be treated this way? Will I win everything at the expense of another? Win-lose situations often become lose-lose situations and generate retaliation from the loser. Not every situation can be completely balanced, but the health of our relationships requires us to avoid major imbalances over time. An ethical businessperson has a win-win attitude and tries to make decisions that benefit all.

Responsibility to Society and the Environment 1

Businesses are also partly responsible for promoting social justice. Many companies believe they have a role in building communities that goes well beyond simply "giving back." To them, charity is not enough. Their social contributions include cleaning up the environment, building community toilets, providing computer lessons, caring for elderly people, and supporting children from low-income families.

Corporate Social Responsibility 4

CSR defenders acknowledge that businesses have deep obligations to investors and should not attempt government-type social responsibility projects. However, they also argue that CSR makes more money for investors in the long run. Studies show that companies with good ethical reputations attract and retain better employees, draw more customers, and enjoy greater employee loyalty.

Corporate Social Responsibility 3

CSR defenders, in contrast, believe that businesses owe their existence to the societies they serve and cannot succeed in societies that fail.14 Firms have access to society's labor pool and its natural resources, in which every member of society has a stake. Even Adam Smith, the father of capitalism, believed that self-interested pursuit of profit was wrong and that benevolence was the highest virtue.

International Ethics and Social Responsibility 1

Ethical problems and issues of social responsibility are not unique to the United States. Influence-peddling or bribery charges have been brought against top officials in Japan, South Korea, China, Italy, Brazil, Pakistan, and Zaire.

Managing Businesses Ethically and Responsibly (def)

Ethics is caught more than it is taught. That is, people learn their standards and values from observing what others do, not from hearing what they say. This is as true in business as it is at home. Organizational ethics begins at the top, and the leadership and example of strong managers can help instill corporate values in employees. Page 92 Trust and cooperation between workers and managers must be based on fairness, honesty, openness, and moral integrity. The same applies to relationships among businesses and between nations.

Ethics Begins with Each of Us 2

Even though volunteerism is at an all-time high according to the U.S. Census Bureau, three of every four citizens do not give any time to the community in which they live because they think it will take too much time or they don't think they are qualified.4

Responsibility to Employees 3

Few disgruntled workers are desperate enough to commit violence in the workplace, but a great number relieve their frustrations in subtle ways: blaming mistakes on others, not accepting responsibility, manipulating budgets and expenses, making commitments they intend to ignore, hoarding resources, doing the minimum needed to get by, and making results look better than they are. The loss of employee commitment, confidence, and trust in the company and its management can be costly indeed. Employee fraud costs U.S. businesses approximately $6.3 billion (5 percent of annual revenue) according to the Association of Certified Fraud Examiners.

International Ethics and Social Responsibility 4 (questions)

For example, a gift in one culture can be a bribe in another. Is it always ethical for companies to demand compliance with the standards of their own countries? What about countries where child labor is accepted and families depend on children's salaries for survival? Should foreign companies doing business in the United States expect U.S. companies to comply with their ethical standards? Since multinational corporations span different societies, should they conform to any society's standards? Why is Sears applauded for not importing goods made in Chinese prisons when there are many prison-based enterprises in the United States? None of these questions are easy to answer, but they suggest the complexity of Page 103social responsibility in international markets.

Ethics is More Than Legality 3 exp

For example, gossiping about your neighbor or sharing something told to you in confidence is unethical, but not illegal.

Ethics is More Than Legality 1

In the early 2000s, the U.S. public was shocked to learn that Enron, the giant energy trading company, had created off-the-books partnerships to unlawfully hide its debts and losses. The Enron disgrace was soon followed by more scandals at major companies such as WorldCom, Tyco International, and Lehman Brothers (see Figure 4.1 for a summary of a few of the largest corporate scandals). Greedy borrowers and lenders alike were among those who brought the real estate, mortgage, and banking industries to the edge of a financial crisis that threatened the entire United States and world economies in 2008.1

Ethics Begins with Each of Us 6 questions to ask

Is my proposed action legal? Is it balanced? How will it make me feel about myself?

Ethics Begins with Each of Us 1

It is easy to criticize business and political leaders for moral and ethical shortcomings. Both managers and workers often cite low managerial ethics as a major cause of U.S. businesses' competitive woes. But employees also frequently violate safety standards and goof off during the work week. U.S. adults in general are not always as honest or honorable as they should be.

Responsibility to Customers 4

It's not enough for companies to brag about their social responsibility efforts; they must live up to the expectations they raise or face the consequences. Customers prefer to do business with companies they trust and, even more important, don't want to do business with those they don't trust. Companies earn customers' trust by demonstrating credibility over time; they can lose it at any point.

Corporate Social Responsibility 1

Just as you and I need to be good citizens, contributing what we can to society, corporations need to be good citizens as well. Corporate social responsibility (CSR) is the concern businesses have for the welfare of society, not just for their owners. CSR goes well beyond being ethical. It is based on a commitment to integrity, fairness, and respect.

Ethics is More Than Legality 3

One danger in writing new laws to correct behavior is that people may begin to think that any behavior that is within the law is also acceptable. The measure of behavior then becomes "Is it legal?" A society gets into trouble when people consider only what is illegal and not also what is unethical. Ethics and legality are two very different things. Although following the law is an important first step, behaving ethically requires more than that. Ethics reflects people's proper relationships with one another: How should we treat others? What responsibility should we feel for others? Legality is narrower. It refers to laws we have written to protect ourselves from fraud, theft, and violence. Many immoral and unethical acts fall well within our laws.

Responsibility to Employees 1

One of the most powerful influences on a company's effectiveness and financial performance is responsible human resource management. We'll discuss this in Chapter 11.

Responsibility to Customers 1

President John F. Kennedy proposed four basic rights of consumers: (1) the right to safety, (2) the right to be informed, (3) the right to choose, and (4) the right to be heard.

Corporate Social Responsibility 2

Some critics of CSR believe that a manager's sole role is to compete and win in the marketplace. The late U.S. economist Milton Friedman made the famous statement that the only social responsibility of business is to make money for stockholders. He thought doing anything else was moving dangerously toward socialism. Other CSR critics believe that managers who pursue CSR are doing so with other people's money—which they invested to make more money, not to improve society. In this view spending money on CSR activities is stealing from investors.

Managing Businesses Ethically and Responsibly (onto management)

Some managers think ethics is a personal matter—either individuals have ethical principles or they don't. These managers believe that they are not responsible for an individual's misdeeds and that ethics has nothing to do with management. But a growing number of people think ethics has everything to do with management. Individuals do not usually act alone; they need the implied, if not the direct, cooperation of others to behave unethically in a corporation.

Responsibility to Investors 3

The U.S. Securities and Exchange Commission (SEC) filed charges against the secretary, her husband, and 23 others. Four defendants settled out of court by paying penalties of twice their profits. Prosecutors are increasingly pursuing insider trading cases to ensure that the securities market remains fair and equally accessible to all. A 2016 Supreme Court ruling made it easier to prosecute some insider trading cases. The court ruled that people who share inside information with others who profit from it are guilty of insider trading even if they themselves don't profit.

International Ethics and Social Responsibility 3

The fairness of requiring international suppliers to adhere to U.S. ethical standards is not as clear-cut as you might think.

Responsibility to Customers 2

The payoff for socially conscious behavior, however, can be new customers who admire the company's social efforts—a powerful competitive edge. Consumer behavior studies show that, all else being equal, a socially conscious company is likely to be viewed more favorably than others. In fact, a recent GT Nexus survey showed that 50 percent of the consumers surveyed were willing to pay more for goods from socially responsible companies.23

Corporate Social Responsibility examples

The problems corporations cause get so much news coverage that people tend to get a negative view of their impact on society. But businesses make positive contributions too. In fact, many companies allow employees to give part-time help to social agencies of all kinds. The recent recession changed the way that many corporations approach corporate philanthropy.20 Now they are often likely to give time and goods rather than money.

Ethical Standards Are Fundamental 1

We define ethics as society's accepted standards of moral behavior; that is, behaviors accepted by society as right rather than wrong. Many Americans today have few moral absolutes. Many decide situationally whether it's OK to steal, lie, or text and drive. They seem to think that what is right is whatever works best for the individual—that each person has to work out for himself or herself the difference between right and wrong. Such thinking may be part of the behavior that has led to scandals in government and business.

International Ethics and Social Responsibility 2

What is new about the moral and ethical standards by which government leaders are being judged? They are much stricter than in the past. Top leaders are now being held to higher standards. Many U.S. businesses also demand socially responsible behavior from their international suppliers, making sure they don't violate U.S. human rights and environmental standards.

Ethical Standards Are Fundamental 2

When Thomas Jefferson wrote that all men have the right to life, liberty, and the pursuit of happiness, he declared it to be a self-evident truth. Going back even further in time, the Ten Commandments were not called the "Ten Highly Tentative Suggestions."

Environmentalists

apply pressure by naming companies that don't abide by environmentalists' standards. After months of protests coordinated by the San Francisco-based Rainforest Action Network (RAN), JPMorgan Chase & Co. adopted guidelines that restrict its lending and underwriting practices for industrial projects likely to have a negative impact on the environment. RAN activists first go after an industry leader, like JPMorgan, then tackle smaller companies. "We call it, 'Rank'em and spank'em,'" says RAN's executive director.35

Ethical Standards Are Fundamental 3

common statements of basic moral values: Integrity, respect for human life, self-control, honesty, courage, and self-sacrifice are right. Cheating, cowardice, and cruelty are wrong. Furthermore, all the world's major religions support a version of what some call the Golden Rule: Do unto others as you would have them do unto you.3

Union officials

hunt down violations and force companies to comply to avoid negative publicity.

Corporate social initiatives

include enhanced forms of corporate philanthropy. Corporate social initiatives differ from traditional philanthropy in that they are more directly related to the company's competencies.

Corporate philanthropy

includes charitable donations to nonprofit groups of all kinds. Eighty percent of the business leaders surveyed in a recent study said that their companies participate in philanthropic activities. Some make long-term commitments to one cause, such as McDonald's Ronald McDonald Houses for families whose critically ill children require treatment away from home. The Bill & Melinda Gates Foundation is by far the nation's largest philanthropic foundation, with assets of approximately $40 billion.

Corporate responsibility

includes essentially everything that has to do with acting responsibly within society—for example, treating employees fairly and ethically. This is especially true of businesses that operate in other countries with different labor laws than those in the United States.

Socially conscious investors

insist that a company extend its own high standards to its suppliers. Social responsibility investing (SRI) is on the rise, with about $6.6 trillion invested in SRI funds in the United States already.33

Customers

make buying decisions based on their social conscience. Many companies surveyed are adjusting their environmental and social responsibility strategies because of the number of customers that factor these into their buying decisions.

Corporate policy

refers to the position a firm takes on social and political issues. For example, Patagonia's corporate policy includes this statement: "A love of wild and beautiful places demands participation in the fight to save them, and to help reverse the steep decline in the overall environmental health of our planet. We donate our time, services and at least 1% of our sales to hundreds of grassroots environmental groups all over the world who work to help reverse the tide."18

six steps many believe can improve U.S. business ethics:

1. Top management must adopt and unconditionally support an explicit corporate code of conduct. 2. Employees must understand that expectations for ethical behavior begin at the top and that senior management expects all employees to act accordingly. 3. Managers and others must be trained to consider the ethical implications of all business decisions. 4. An ethics office must be set up with which employees can communicate anonymously. Whistleblowers (insiders who report illegal or unethical behavior) must feel protected from retaliation. The Sarbanes-Oxley Act protects whistleblowers by requiring all public corporations to allow employee concerns about accounting and auditing to be submitted confidentially and anonymously. The act also requires reinstatement and back pay to people who were punished by their employers for passing information about fraud on to authorities. (We cover Sarbanes-Oxley in more detail in Chapter 17.) In 2010 the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law (read more detail about Dodd-Frank in Chapter 18). The law includes a "bounty" provision that allows corporate whistleblowers who provide information that leads to a successful enforcement action to collect 10-30 percent of the total penalty for violations that exceed $1 million.11 A whistleblower in the Enron case received a $1 million reward from the IRS (and, yes, it is taxable). 5. Outsiders such as suppliers, subcontractors, distributors, and customers must be told about the ethics program. Pressure to put aside ethical considerations often comes from the outside, and it helps employees resist such pressure when everyone knows what the ethical standards are. 6. The ethics code must be enforced with timely action if any rules are broken. That is the most forceful way to communicate to all employees that the code is serious.

Is my proposed action legal?

Am I violating any law or company policy? Whether you're thinking about having a drink and driving home, gathering marketing intelligence, designing a product, hiring or firing employees, getting rid of industrial waste, or using a questionable nickname for an employee, think about the legal implications. This is the most basic question in business ethics, but it is only the first.9

Ethics Code reason

An important factor in enforcing an ethics code is selecting an ethics officer. The most effective ethics officers set a positive tone, communicate effectively, and relate well to employees at every level. They are equally comfortable as counselors and investigators and can be trusted to maintain confidentiality, conduct objective investigations, and ensure fairness.

Responsibility to Society and the Environment 2

As concern about climate change increased, the green movement emerged in nearly every aspect of daily life. What makes a product green? Some believe that a product's carbon footprint (the amount of carbon released during production, distribution, consumption, and disposal) defines how green it is. However, making those choices means sorting through the many and confusing claims made by manufacturers. The noise in the marketplace challenges even the most dedicated green activists, but taking the easy route of buying what's most readily available violates the principles of the green movement. Environmental efforts may increase a company's costs, but they also allow the company to charge higher prices, increase market share, or both. The green movement can have a positive impact on the U.S. labor force. Emerging renewable-energy and energy-efficiency industries currently account for 9 million jobs and by 2030 may create as many as 40 million more in engineering, manufacturing, construction, accounting, and management, according to a green-collar job report by the American Solar Energy Society.32

Responsibility to Investors 1

Ethical behavior doesn't subtract from the bottom line; it adds to it. In contrast, unethical behavior, even if it seems to work in the short term, does financial damage. Many investors believe that it makes financial as well as moral sense to invest in companies that plan ahead to create a better environment. By choosing to put their money into companies whose goods and services benefit the community and the environment, investors can improve their own financial health while improving society's.25

Ethics is More Than Legality 2

Given the ethical lapses prevalent today, how can we restore trust in the free-market system and in leaders in general? First, those who have broken the law should be punished accordingly. New laws making accounting records more transparent (easy to read and understand) and businesspeople and others more accountable for their actions may also help. But laws alone don't make people honest, reliable, or truthful. If they did, crime Page 89would disappear. While the number of accounting fraud cases pursued by the Securities and Exchange Commission (SEC) fell from its typical level of more than 25 percent of the SEC's enforcement efforts before the Great Recession to just 11 percent in 2013, it rose to 17 percent in 2015.2 Why? One reason is that new data mining technology allows the SEC to more easily identify companies that may be making earnings misstatements.

Responsibility to Employees 2

If a company treats employees with respect, those employees usually will respect the company as well. Mutual respect can make a huge difference to a company's profit. In their book Contented Cows Still Give Better Milk, Bill Catlette and Richard Hadden compared "contented cow" companies with "common cow" companies. The companies with contented employees outgrew their counterparts by four to one for more than 10 years. They also outearned the "common cow" companies by nearly $40 billion and generated 800,000 more jobs. Catlette and Hadden attribute this difference in performance to the commitment and caring the outstanding companies demonstrated for their employees.

Ethics Begins with Each of Us 5

Imagine that your supervisor has asked you to do something you feel is unethical. You've just taken out a mortgage on a new house to make room for your first baby, due in two months. Not carrying out your supervisor's request may get you fired. What should you do? Sometimes there is no easy alternative in such ethical dilemmas because you must choose between equally unsatisfactory alternatives.

Ethics Begins with Each of Us 4

In a recent study, most teens said they were prepared to make ethical decisions in the workforce, but an alarming 51 percent of high school students admit that they have cheated on tests in the last year.6 Studies have found a strong relationship between academic dishonesty among undergraduates and dishonesty at work.

Responsibility to Customers 3

One tool many companies use to raise awareness of their social responsibility efforts is social media. The primary value of using social media to communicate CSR efforts is that it allows companies to reach broad and diverse groups, allows them to connect directly with customers in a low-cost, efficient way, and enables them to interact with specific groups more easily than through more traditional efforts.24