Ch05

Chapter 5
Managing Ethics and Social Responsibility

Managerial Ethics
• Ethics - code of moral principles and values that

govern the behaviors of right or wrong
• Standards about good/bad
• Ethical issues can be complex
• People in organizations have divergent views
about right/wrong
Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved. 2

5.1 Three Domains of
Human Action

Ethical Management Today
• Ethical scandals during the last decade have

been pervasive
• Corporations and people have become
associated with greed, deceit, irresponsibility,
and lack of moral conscience
• Managers carry a big responsibility for setting an
ethical climate
• Ethical crises have brought ethical management
to the forefront
5.2 Examples of Unethical and
Illegal Organizational Behavior

Ethical Dilemmas
You are the moral agent, what would you do?

Your company requires a terrorist watch list that
screens all new customers and takes approximately 24
hours from the time an order is placed. You can close
a lucrative deal with a potential long-term customer
overnight, even though that means the required
watch-list screening will have to be done after the fact.

Criteria for Ethical
Decision Making
• Utilitarian Approach – moral behavior produces the

greatest good for the greatest number
• Individualism Approach – acts are moral if they

promote the individu al’s
long-term interest
• Moral-Rights Approach – humans have

fundamental rights and liberties that cannot
be taken away by an individual's decision
Criteria for Ethical
Decision Making
• Justice Approach – moral decisions must be

based on standards of equity, fairness, and
impartiality
• Virtue Ethics Approach– moral behavior stems

from personal virtues
• Practical Approach– bases decisions on

prevailing standards, society, and all stakeholders

A Manager’s Ethical Choices
 Individuals bring their own personality and traits

to organizations
 Personal needs, family influence, and religious
background shape individuals
 Personality characteristics like ego, confidence,
and independence

5.3 Three Levels of Personal
Moral Development

What is Corporate Social
Responsibility (CSR)?
• Distinguishing right from wrong; doing right
• Good corporate citizenship
• Make choices that contribute to society and

stakeholders
• Stakeholders – any group within or outside

5.4 Major Stakeholders Relevant to
Monsanto Company

The Green Movement
• Going GREEN is a new business imperative

– Change in social attitudes
– New governmental policies
– Climate change
• Information technology immediately spreads the
negative decisions of corporations
• More organizations are embracing sustainability

The Ethic of Sustainability
Sustainability – economic development

that generates wealth and meets the needs
of current population while preserving the
environment for the needs of future
generations

5.5 Criteria of Corporate
Social Performance

Managing Company Ethics and Social
Responsibility
Code of Ethics – a formal statement of the

company’s values regarding ethics and
social issues
Ethical Structures – systems, positions, and

programs like ethics training
Whistle-blowing – employee disclosure of

illegal, immoral, or illegitimate practices

5.6 Building an Ethical Organization

The Business Case for Ethics and Social
Responsibility
 Ethics and social responsibility are

important business issues
 Stakeholders are pushing more
initiatives and issues
 The connection between ethics and
financial performance has been
widely debated
 What do you THINK?

Enron Scandal - Arthur Anderson
Scandal (2001)
• Enron – an energy brokerage house that was top ten in

Fortune 500 list as of 2001.
• Arthur Anderson – the most prestigious accounting firm
at the time; Enron was its client
• Illegal collusion between Enron & Arthur Anderson
• System Failure: Arthur Anderson provided consulting
services that helped Enron cook the financials, which
was supposed to be audited by Arthur Anderson.
• Investors lost confidence on financial information, and
fled the stock.
Sarbanes-Oxley Act (SOX, 2001)
• 3 Major Impacts by SOX [Lee, 2012]:

1. Internal Control System
2. No longer consulting services
3. Accountability
• SOX helped restore investors’ confidence in the stock
market.

Lincoln Law - Whistle Blow Act
• Background – Civil War; President Lincoln drafted this

law to punish war profiteers who ripped off the U.S.
federal government.
• When you discover your firm’s wrongdoings such as tax
evasion, you hire a Lincoln law specialist lawyer, and file
a lawsuit against your firm; the judge will rule in favor of
you, and grant big reward to you.
• Big reward = about half of the money that the federal
government would recover from your firm.

Tax, Corporate Responsibility, &
Economic Sustainability
• “Tax loopholes – Big corporations’ business at offshore” [WSJ

article, 2012.09.20]
• Who gets most benefit from the government? => Big corporations
• Big corporations argue less tax & smaller government, but who
protects their wealth (police)? Who trains their workforce (public
education: K-12 & state universities)? Who provide infrastructures
(road, utility, Internet fiber optics cables, etc.)?
• Using such tax loopholes will make them hard to gain respect &
support from customers & American people, which leads to the
serious risk to their economic sustainability.
• 2 minute speech on Fair Taxation by Professor Elizabeth Warren
of Harvard Law School: http://www.youtube.com/watch?v=htX2usfqMEs

Fair Taxation: Marginal Tax vs. Flat Tax
• Marginal Tax - 40% with deductions:

– Suppose you made $1,000,000.
– With help of creative accounting, you made deductions of $900,000
– Taxable income is only $100,000.
– You pay about 30% tax, $30,000. In short, your effective tax rate is only 3%; that is,
$30,000 tax on $1,000,000 income.
– This is how billionaires pay less than 5% with help by creative accountants & tax
lawyers, while most pay above 15% effective tax rates.
– Is this really a progressive system?
– Note: Ordinary middle class citizens do not afford to hire such expensive
accountants & tax lawyers, ending up only standard deductions.
• Flat Tax – say, 10% on revenue or income; no deduction;
– Big corporations, billionaires all pay 10% on their income, no matter what. No
deductions what so ever!
– In the above case, you will pay $100,000 tax.

Tax Evasion & Economic Sustainability
[Lee, 2012]
• Suppose you are an owner/president of a private firm; You made $1,000,000 in net
profit, which is taxable at 40%. $400,000 is expected to pay the tax.
• Now, you want to reduce the tax amount. It is human nature to be greedy.
• You coerce the staff (in-house accountants) to cook the numbers by manipulating &
increasing the deductions, e.g. creating fake expense accounts, etc.
• Once you steal the firm’s money, your staff will start to steal the money. Soon,
everyone will steal the company money & resources.
• Even when you discover the steals, you cannot charge them to the police because you
initiated this illegal activity yourself, & the staff threats that they will report your
wrongdoings to the police.
• Economic Sustainability: The company cannot sustain with such wrongdoings when
everyone steals from it.
• Conclusion: If you want to leave the firm to your son & to grandson, (1) set the high
ethical standards, and show you actually are serious about the ethics. (2) Build an
internal control system to make everyone keep honest. Do not make employees
tempted to embezzle the company money. Don’t evade the tax!

Ethics & The U.S. Economic
Sustainability [Lee, 2012]
• The U.S. may not look perfect, but still the U.S. stock
markets and corporate culture are most admired by the
world because they are more transparent, more system-
controlled, and less corrupt than any other countries.
• The U.S. economic sustainability entirely depends on
maintaining such high ethical standards in government
and industry.
• Do not forget a lesson from the fall of the Roman
Empire: Corruptions, greed & unethical behavior by the
ruling class ruined the Roman Empire.

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Chapter 5

Managing Ethics and Social Responsibility

• Ethics - code of moral principles and values that

Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved. 2

Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved. 3

• Ethical scandals during the last decade have

Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved. 5

You are the moral agent, what would you do?

Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved. 6

• Utilitarian Approach – moral behavior produces the

• Individualism Approach – acts are moral if they

• Moral-Rights Approach – humans have

• Justice Approach – moral decisions must be

• Virtue Ethics Approach– moral behavior stems

• Practical Approach– bases decisions on

Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved. 8

 Individuals bring their own personality and traits

Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved. 9

Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved. 10

• Distinguishing right from wrong; doing right

• Good corporate citizenship

• Make choices that contribute to society and

Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved. 11

Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved. 12

• Going GREEN is a new business imperative

Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved. 13

Sustainability – economic development

Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved. 14

Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved. 15

Code of Ethics – a formal statement of the

Ethical Structures – systems, positions, and

Whistle-blowing – employee disclosure of

Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved. 16

Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved. 17

 Ethics and social responsibility are

Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved. 18

• Enron – an energy brokerage house that was top ten in

• 3 Major Impacts by SOX [Lee, 2012]:

Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved. 20

• Background – Civil War; President Lincoln drafted this

Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved. 21

• “Tax loopholes – Big corporations’ business at offshore” [WSJ

Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved. 22

• Marginal Tax - 40% with deductions:

Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved. 23

Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved. 24

Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved. 25

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