Chapter 3 -social responsibility and ethics in Strategic Management

According to Porter and Kramer,

"social and economic goals are not inherently conflicting, but integrally connected. *) Being known as a socially responsible firm may provide a company with social capital, the goodwill of key stakeholders, that can be used for competitive advantage.

The three most common reasons given were:

*) Organizational performance required it—74% *) Rules were ambiguous or out of date—70% *) Pressure from others and everyone does it—47%

1. Utilitarian approach:

*) Proposes that actions and plans should be judged by their consequences. *) People should therefore behave in a way that will produce the greatest benefit to society and produce the least harm or the lowest cost. *) A problem with this approach is the difficulty in recognizing all the benefits and the costs of any particular decision.

Carroll's Four Responsibilities of Business

*) profits are merely a means to an end, not an end in itself. *) "Maximizing profits is like maximizing food." so, cannot be the primary obligation of business.

Recent in-depth analysis by Margolis and Walsh of 127 studies found that

"there is a positive association and very little evidence of a negative association between a company's social performance and its financial performance."

Such codes are

(1) clarifies company expectations of employee conduct in various situations and (2) makes clear that the company expects its people to recognize the ethical dimensions in decisions and actions.

Being socially responsible does provide a firm a more positive overall reputation.

(1) goodwill that opened doors in local communities and (2) an enhanced reputation with consumers.20 Another survey of 140 U.S. *) firms revealed that being more socially responsible regarding environmental sustainability resulted not only in competitive advantages but also in cost savings. *) For example, companies that take the lead in being environmentally friendly, such as by using recycled materials, preempt attacks from environmental groups and enhance their corporate image. *) Programs to reduce pollution, for example, can actually reduce waste and maximize resource productivity.

Both Friedman and Carroll argue their positions based on the impact of socially responsible actions on a firm's profits.

*) Friedman says that socially responsible actions hurt a firm's efficiency. *) Carroll proposes that a lack of social responsibility results in increased government regulations, which reduce a firm's efficiency.

Why are many business people perceived to be acting unethically?

*) It may be that the involved people are not even aware that they are doing something questionable. *) There is no worldwide standard of conduct for business people. *) Cultural norms and values vary between countries and even between different geographic regions and ethnic groups within a country. *) Relationship-based countries tend to be less transparent and have a higher degree of corruption than do rule-based countries. *) Differences in values between business people and key stakeholders. *) Some businesspeople may believe profit maximization is the key goal of their firm, whereas concerned interest groups may have other priorities, such as the hiring of minorities and women or the safety of their neighborhoods. *) This difference in values can make it difficult for one group of people to understand an other's actions.

3. Justice approach

*) Proposes that decision makers be equitable, fair, and impartial in the distribution of costs and benefits to individuals and groups. *) It follows the principles of distributive justice (people who are similar on relevant dimensions such as job seniority should be treated in the same way) and fairness (liberty should be equal for all persons). *) The justice approach can also include the concepts of retributive justice (punishment should be proportional to the offense) and compensatory justice (wrongs should be compensated in proportion to the offense).

2. Individual rights approach

*) Proposes that human beings have certain fundamental rights that should be respected in all decisions. *) A particular decision or behavior should be avoided if it interferes with the rights of others. *) A problem with this approach is in defining "fundamental rights." The U.S.

According to Carroll

*) Social responsibility, therefore, includes both ethical and discretionary, but not economic and legal, responsibilities. *) A firm can fulfill its ethical responsibilities by taking actions that society tends to value but has not yet put into law. *) When ethical responsibilities are satisfied, a firm can focus on discretionary responsibilities

SUSTAINABILITY: MORE THAN ENVIRONMENTAL?

*) Sometimes impossible to address the sustainability of the natural environment without considering the social and economic aspects of relevant communities and their activities. *) In order for a business corporation to be sustainable, that is, to be successful over a long period of time, it must satisfy all of its economic, legal, ethical, and discretionary responsibilities. *) Sustainability thus involves many issues, concerns, and tradeoffs—leading us to an examination of corporate stakeholders.

Moral relativism

*) The view that there is no absolute or universal moral law or truth, resulting in a morality determined by cultural factors or personal preference. *) There are no moral standards that apply to all situations and circumstances. There are no objectively good or evil actions.

Other examples of benefits received from being socially responsible are:

*) Their environmental concerns may enable them to charge premium prices and gain brand loyalty (for example, Ben & Jerry's Ice Cream). *) Their trustworthiness may help them generate enduring relationships with suppliers and distributors without requiring them to spend a lot of time and money policing contracts. *) They can attract outstanding employees who prefer working for a responsible firm (for example, Procter & Gamble and Starbucks). *) They are more likely to be welcomed into a foreign country (for example, Levi Strauss). *) They can utilize the goodwill of public officials for support in difficult times. *) They are more likely to attract capital infusions from investors who view reputable companies as desirable long-term investments. For example, mutual funds investing only in socially responsible companies more than doubled in size from 1995 to 2007 and outperformed the S&P 500 list of stock

CORPORATE STAKEHOLDERS

*) corporation's task environment includes a large number of groups with interest in a business organization's activities. These groups are referred to as stakeholders because they affect or are affected by the achievement of the firm's objectives. *) corporations owe something to their workers and the communities in which they operate and that they should sometimes sacrifice some profit for the sake of making things better for their workers and communities. *) "Responsible to whom?" In order to answer this question, the corporation may need to craft an enterprise strategy—an overarching strategy that explicitly articulates the firm's ethical relationship with its stakeholders. This requires not only that management clearly state the firm's key ethical values, but also that it understands the firm's societal context, and undertakes stakeholder analysis to identify the concerns and abilities of each stakeholder.

Ethical Decision Making

*) helps people make difficult choices when faced with an ethical dilemma, a situation in which there is no clear right or wrong answer.

Categorical imperatives to guide our actions:

1. A person's action is ethical only if that person is willing for that same action to be taken by everyone who is in a similar situation. Treat others as you would like them to treat you. 2. A person should never treat another human being simply as a means but always as an end. This means that an action is morally wrong for a person if that person uses others merely as means for advancing his or her own interests.

Carroll proposes that the managers of business organizations have four responsibilities:

1. Economic 2. Legal 3. Ethical 4. Discretionary

Kohlberg's Levels of Moral Development

1. The preconventional level: This level is characterized by a concern for self. Small children and others who have not progressed beyond this stage evaluate behaviors on the basis of personal interest—avoiding punishment or quid pro quo. 2. The conventional level: This level is characterized by considerations of society's laws and norms. Actions are justified by an external code of conduct. 3. The principled level: This level is characterized by a person's adherence to an internal moral code. An individual at this level looks beyond norms or laws to find universal values or principles.

the three basic approaches to ethical behavior:

1. Utilitarian approach 2. Individual rights approach 3. Justice approach

Cavanagh proposes that we solve ethical problems by asking the following three questions regarding an act or a decision:

1. Utility: Does it optimize the satisfactions of all stakeholders? 2. Rights: Does it respect the rights of the individuals involved? 3. Justice: Is it consistent with the canons of justice?

Stakeholder Analysis steps:

1. identify primary stakeholders, those who have a direct connection with the corporation and who have sufficient bargaining power to directly affect corporate activities. 2. identify the secondary stakeholders—those who have only an indirect stake in the corporation but who are also affected by corporate activities. *) Because the corporation's relationship with each of these stakeholders is usually not covered by any written or verbal agreement, there is room for misunderstanding. 3. analysis is to estimate the effect on each stakeholder group from any particular strategic decision. *) Because the primary decision criteria are typically economic, this is the point where secondary stakeholders may be ignored or discounted as unimportant. *) For a firm to fulfill its ethical or discretionary responsibilities, it must seriously consider the needs and wants of its secondary stakeholders in any strategic decision.

Carroll lists these four responsibilities in order of priority

A business firm must *) first make a profit to satisfy its economic responsibilities. *) To continue in existence, the firm must follow the laws, thus fulfilling its legal responsibilities. *) There is evidence that companies found guilty of violating laws have lower profits and sales growth after conviction.

Friedman's Traditional View of Business Responsibility

A business person who acts "responsibly" by cutting the price of the firm's product to prevent inflation, or by making expenditures to reduce pollution, or by hiring the hard-core unemployed, according to Friedman, is spending the shareholder's money for a general social interest. *) These results negatively affect—perhaps fatally—the long-term efficiency of a business.

Stakeholder Input

A group is more likely to accept or even help implement a decision if it has some input into which alternative is chosen and how it is to be implemented. *) Therefore, before making a strategic decision, strategic managers should consider how each alternative will affect various stakeholder groups. *) What seems at first to be the best decision because it appears to be the most profitable may actually result in the worst set of consequences to the corporation.

Social group relativism:

Based on a belief that morality is simply a matter of following the norms of an individual's peer group, social group relativism argues that a decision is considered legitimate if it is common practice, regardless of other considerations ("everyone's doing it").

Cultural relativism:

Based on the belief that morality is relative to a particular culture, society, or community, adherents of cultural relativism argue that people should understand the practices of other societies, but not judge them.

Role relativism:

Based on the belief that social roles carry with them certain obligations to that role.

What are the responsibilities of a business firm and how many of them must be fulfilled?

Milton Friedman and Archie Carroll offer two contrasting views of the responsibilities of business firms to society.

Friedman thus referred to the social responsibility of business as a "fundamentally subversive doctrine" and stated that:

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. *) Friedman's contention that the primary goal of business is profit maximization is only one side of an ongoing debate regarding corporate social responsibility (CSR).

Secondary stakeholder

These usually include nongovernmental organizations (NGOs, such as Greenpeace), activists, local communities, trade associations, competitors, and governments. *) Although these stakeholders may not directly affect a firm's short-term profitability, their actions could determine a corporation's reputation and thus its long-term performance.

Primary stakeholders

are directly affected by the corporation and usually include customers, employees, suppliers, shareholders, and creditors. *) (Government is not usually considered a primary stakeholder because laws apply to all in a category and usually cannot be negotiated.)

Naïve relativism:

based on the belief that all moral decisions are deeply personal and that individuals have the right to run their own lives.

Strategic decisions often affect more than just the corporation.

for example, affects not only the firm's workforce but also the communities where the plants are located and the customers with no other source for the discontinued product.

A person's ethical behavior is affected by

his or her level of moral development, certain personality variables, and such situational factors as the job itself, the supervisor, and the organizational culture.

Morality

in contrast, is the precepts of personal behavior based on religious or philosophical grounds.

Ethics

is defined as the consensually accepted standards of behavior for an occupation, a trade, or a profession.

Another reason why some business people might be seen as unethical

is that they may have no well-developed personal sense of ethics.

Stakeholder Analysis

is the identification and evaluation of corporate stakeholders. This can be done in a three-step process.

Social responsibility

proposes that a private corporation has responsibilities to society that extend beyond making a profit.

2. Legal

responsibilities are defined by governments in laws that management is expected to obey. *) For example, U.S. business firms are required to hire and promote people based on their credentials rather than to discriminate on non-job-related characteristics such as race, gender, or religion.

4. Discretionary

responsibilities are the purely voluntary obligations a corporation assumes. *) Examples are philanthropic contributions, training the hard-core unemployed, and providing day-care centers. *) The difference between ethical and discretionary responsibilities is that few people expect an organization to fulfill discretionary responsibilities, whereas many expect an organization to fulfill ethical ones.

1. Economic

responsibilities of a business organization's management are to produce goods and services of value to society so that the firm may repay its creditors and shareholders.

3. Ethical

responsibilities of an organization's management are to follow the generally held beliefs about behavior in a society. *) For example, society generally expects firms to work with the employees and the community in planning for layoffs, even though no law may require this. The affected people can get very upset if an organization's management fails to act according to generally prevailing ethical values.

Codes of Ethics

specifies how an organization expects its employees to behave while on the job.

As societal values evolve, the discretionary responsibilities of today may become

the ethical responsibilities of tomorrow.

Law refers

to formal codes that permit or forbid certain behaviors and may or may not enforce ethics or morality