Chapter 2

Business Ethics and Social Responsibility

Tanveer Hussain
M.Phil (A & F)
  Explain the concepts of business ethics and social
responsibility.
 Describe the factors that influence business ethics.
 List the stages in the development of ethical standards, and
Learning discuss how organizations shape ethical behavior.

Objectives  Describe how businesses’ social responsibility is measured,

and summarize the responsibilities of business to the general
public, customers, and employees.
 Explain why investors and the financial community are
concerned with business ethics and social responsibility
  Business ethics: Standards of conduct and moral values
regarding right and wrong actions in the work environment.
Concern for  These issues are at the heart of social responsibility, whose

Ethical and primary objective is the enhancement of society’s welfare

through philosophies, policies, procedures, and actions.
Societal Issues  Firms have many responsibilities—to customers, to employees,
to investors, and to society as a whole.
  Business ethics are now in the spotlight as never before.
 Johnson & Johnson has abided by the same basic code of

The ethics, its well-known Credo, for more than 50 years.

 In the fall of 2009, Walmart announced a plan to pursue three
Contemporary sustainability goals:
Ethical  to use only renewable energy sources
 to recycle all of its waste
Environment  to sell products that “sustain people and the environment,” according
to Matt Kistler, the company’s senior vice president for
sustainability.
  The Sarbanes-Oxley Act of 2002 established new rules and
regulations for securities trading and accounting practices.
 Companies are now required to publish their code of ethics, if
The they have one, and inform the public of any changes made to it.

Contemporary  Many companies now adopt a three-pronged approach to ethics

Ethical and social responsibility:

 engaging in traditional corporate philanthropy, which involves
Environment giving to worthy causes
 anticipating and managing risks
 identifying opportunities to create value by doing the right thing.
  Compliance standards and procedures. Establish standards and
procedures, such as codes of ethics and identification of areas
of risk, capable of reducing misconduct or criminal activities.
 High-level personnel responsibility. Assign high-level
personnel, such as boards of directors and top executives, the
Minimum overall responsibility to actively lead and oversee ethics
Requirements for compliance programs.
Ethics Compliance  Due care in assignments. Avoid delegating authority to
Programs individuals with a propensity for misconduct or illegal
activities.
 Communication of standards and procedures. Communicate
ethical requirements to high-level officials and other employees
through ethics training programs or publications that explain in
practical terms what is required.
  Establishment of monitoring and auditing systems and reporting
system. Monitor and review ethical compliance systems, and
establish a reporting system employees can use to notify the
organization of misconduct without fear of retribution.
 Enforcement of standards through appropriate mechanisms.
Consistently enforce ethical codes, including employee
Minimum discipline.
Requirements for  Appropriate responses to the offense. Take reasonable steps to
Ethics Compliance respond to the offense and to prevent and detect further
Programs violations.
 Self-reporting.Report misconduct to the appropriate
government agency.
 Applicable industry practice or standards. Follow government
regulations and industry standards
  In today’s business environment, individuals can make the
difference in ethical expectations and behavior.
 As executives, managers, and employees demonstrate their
Individuals  personal ethical principles

Make a  or lack of ethical principles

 the expectations and actions of those who work for and with them
Difference can change

 Some rationalize questionable behavior by saying,

“Everybody’s doing it.”
  Individuals typically develop ethical standards in the three
stages

Development  the preconventional,

 conventional,
of Individual  postconventional

Ethics  An individual’s stage in moral and ethical development is

determined by a huge number of factors. Experiences help
shape responses to different situations.
 Stages of  The preconventional stage: individuals primarily consider their
Moral and own needs and desires in making decisions.

Ethical  They obey external rules only because they are afraid of
punishment or hope to receive rewards if they comply.
Development
  The conventional stage: individuals are aware of and act in
Stages of response to their duty to others, including their obligations to
their family members, coworkers, and organizations.
Moral and  The expectations of these groups influence how they choose
Ethical between what is acceptable and unacceptable in certain

Development situations. Self-interest, however, continues to play a role in

decisions.
  The postconventional stage: represents the highest level of
ethical and moral behavior.
 The individual is able to move beyond mere self-interest and
Stages of duty and take the larger needs of society into account as well.

Moral and  He or she has developed personal ethical principles for

determining what is right and can apply those principles in a
Ethical wide variety of situations.

Development  One issue that you may face at work is an ethically

compromised or “sticky” situation; the “Business Etiquette”
feature lists some tips to consider in deciding how to handle
such a dilemma.
  Suzy Welch suggests the following steps if you suspect
unethical behavior in the office
 Get all the facts. Ask tactful questions of people you know are
trustworthy—not sources of rumors or gossip. In return, beware of

What Can You revealing anything told to you in confidence. Talk to your
company’s human resources department. Be investigative, not

Do about an aggressive.
 When you have the facts, ask yourself, Is this really a moral
Ethical dilemma? Or is it a case of office politics? What may look like an

Dilemma? ethical problem could be a power play in disguise.

 If the situation really is an ethical dilemma, explain the issue to a
trusted friend outside the company—and outside your family.
That person may be able to take an unbiased view and advise you
about what to do next.
  Conflict of Interest: Situation in which an employee must
Common choose between a business’s welfare and personal gain.

Business  Honesty and Integrity: An employee who is honest can be

counted on to tell the truth.
Ethical  . Having integrity means adhering to deeply felt ethical
Challenge principles in business situations
  Loyalty versus Truth: Business people expect their employees
to be loyal and to act in the best interests of the company.

Common  Individuals may have to decide between loyalty to the company

Business and truthfulness in business relationships.

 an ethical conflict can arise
Ethical  Some place the highest value on loyalty, even at the expense of

Challenge truth.
 People may emphasize truthfulness and actively disclose negative
information, especially if the cost of silence is high
Common
 Whistle-blowing is an employee’s disclosure to company
Business officials, government authorities, or the media of illegal,
Ethical immoral, or unethical practices.

Challenge
  Development of a corporate culture to support business ethics
How happens on four levels:

Organizations  Ethical awareness

 Ethical reasoning
Shape Ethical  Ethical action

Conduct  Ethical leadership

  Code of conduct: Formal statement that defines how an
organization expects its employees to resolve ethical issues
 Johnson & Johnson’s Credo
 specify ground rules for acceptable behavior, such as identifying
the laws and regulations that employees must obey.

Ethical  The aerospace giant Lockheed Martin

Awareness  The code of conduct emphasizes “maintaining a culture of

integrity” and defines three basic core values: “do what’s right;
respect others; perform with excellence.”

 Harley-Davidson
 “Tell the truth, keep your promises, be fair, respect the individual
and encourage intellectual curiosity.”
  Businesses must provide the tools employees need to evaluate
the options and arrive at suitable decisions.
 Many firms have either instituted their own ethics training
programs or hired organizations such as Syrus Global, which
provides outsourced ethics and compliance programs to

Ethical businesses.

Education  It also helps companies develop appropriate ethics codes with

ethics training customized to each company’s needs, including
specialized online, interactive training systems.
 training can give employees the chance to practice applying
ethical values to hypothetical situations before they face
realworld situations
  firms must provide structures and approaches that allow
decisions to be turned into ethical actions.
 Texas Instruments gives its employees a reference card
 Is the action legal?
 Does it comply with our values?
Ethical Action  If you do it, will you feel bad?
 How will it look in the newspaper?
 If you know it’s wrong, don’t do it!
 If you’re not sure, ask.
 Keep asking until you get an answer
  Executives must not only talk about ethical behavior but also
demonstrate it in their actions.
 the damage from ethical misconduct can powerfully affect a
firm’s stakeholders—customers, investors, employees, and the
public—pressure is exerted on businesses to act in acceptable

Ethical ways.
 Harvard Business School interviewed corporate leaders in their
Leadership native India and Pakistan
 Use clear, explicit language rather than euphemisms for corrupt
behavior
 Encourage behavior that generates and fosters ethical values
 Practice moral absolutism, insisting on doing right, even if it proves
financially costly.