Ethics and Social Responsibility of Corporations

Legal Environment of Business

What is Ethics?

The inner-guiding moral principles and values

people use to analyze a situation

and decide what is “right.”

What is Business Ethics?

• Business Ethics is simply the application of the standards for moral reasoning to business dilemmas

• Moral Standards Data Moral Judgment• Businesses should develop moral standards for employees

working together toward the common goal of profit for the firm

• Often, businesses face conflict between the interests of various stakeholders of the business

• The business must consider the needs and interests of all its stakeholders in resolving the ethical dilemma it faces

Company Stakeholders

Schools of Thought on Ethical Behavior

• Inherence– Managers act only with shareholders’ interests in mind– Do not get involved in any political or social issues unless in

shareholders’ best interests

• Enlightened Self-Interest– Serve the shareholders best by being responsive to the larger

society– Managers free to address societal issues without the

constraint of offending someone– Businesses anticipate social changes and needs and be early

advocates for change

• The Invisible Hand– Opposite of Enlightened Self-Interest– Managers believe that business ought to serve the larger society, and

it does so best when it serves the shareholders only– Businesses adhere to governmental constraints as a way of maximizing

benefits to their shareholders

• Social Responsibility– Role of business is to serve the larger society and is best accomplished

by being responsive to the larger society– Businesses profit by being responsive to society and its needs– Businesses advocate full disclosure of product information to

consumers– Believe that social responsibility contributes to their long-term success

Law and Ethics• Businesses organized in the United States are subject to its

laws and the laws of other countries in which they operate.• Businesspersons owe a duty to act ethically in the conduct of

their affairs and not to harm society.• Not all ethical standards have been enacted as law.• Law and ethics often coincide.• E.g., bribery is illegal and unethical. • Law may permit certain behavior that seems unethical.• E.g., law may permit pollution emissions that pose health

risks.• Law may demand certain conduct that seems unethical.• E.g., law prohibits hiring illegal aliens; jobs could assist

destitute workers.

Law and Ethics

Business Ethics

• Businesses today not only answerable to shareholders, but to all its stakeholders

• Shareholders demand ethical and socially responsible behavior from business to ensure long-term earnings and growth

• Customers expect ethical and socially responsible behavior in return for their loyalty

• Communities demand responsible behavior for locating and maintaining business facilities in the area.

Reasons for Choosing Ethical Behavior

• Profitability as a Return on Ethical Behavior– Businesses operate to maximize profits– Pursuit of profit can sometimes distort the perspective of even the most

conscientious – Firms that adopt ethical standards perform better financially over the long run– Just like an individual, a firm’s reputation takes a long time to gain, but can be

instantly lost over one bad decision

• Ethics as a Strategy– Ethical behavior increases long-term earnings– Enables businesses to plan ahead– Anticipate social needs and cultural changes that will require the firm or its

product to evolve– Fosters goodwill– Saves company from costly mistakes

• Business Ethics for Personal Reasons– Business Ethics is really nothing more than a standard of personal

behavior applied to a group of people working together to make a profit

– Some people are ethical because it enables them to sleep better at night

– Some do so because of the fear of getting caught– Some do it because it is simply the correct thing to do

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Employee Ethics: THE CODE OF ETHICS

• Document that helps employees deal with situations in which conduct is technically legal but is improper, unethical, or unfair.

• Development of Code of Ethics has become an important part of corporate culture

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Social Responsibility of Business

• Decisions made by business have far-reaching effects on society.

• In the past, many business decisions were made solely on a cost-benefit analysis.

• The attitude of business was that everyone benefitted if business did well.

• Such decisions may cause negative externalities for others.• Business regulations have made businesses more

accountable, and forced their behavior into a more socially responsible pattern

• Today, the statement is, “What’s good for society is good for b

Theories of Social Responsibility

Maximizing Profits

Moral Minimum

Stakeholder Interest

Corporate Citizenship

Maximizing Profits

• Theory that a corporation’s duty is to take actions that maximize profits for shareholders.

• The interests of other constituencies are not important in and of themselves.

• Friedman: “…one and only social responsibility of business—to use its resources and engage in activities to increase its profits as long as it stays within the rules of the game…”

Moral Minimum

• Theory that a corporation’s duty is to make a profit while avoiding harm to others.

• As long as business avoids or corrects the social injury it causes, it has met its duty of social responsibility.

• Laws enforce some moral minimum of social responsibility on corporations.

• E.g., occupational safety laws.• E.g., consumer protection laws for product safety.• E.g., Sarbanes-Oxley Act.

• Sarbanes-Oxley Act– Passed in response to financial fraud scandals of late 1990s, early

2000s– Civil and criminal liability.– Goal of compelling public companies to act ethically in dealings with

shareholders, employees, other constituents.– Public companies must disclose whether they have a code of ethics. In

response, many companies have adopted such codes.

Stakeholder Interest

• Theory that a corporation must consider the effects its actions have on persons other than its stockholders.

• E.g., employees, suppliers, customers, creditors, local community.

• Critics argue that it is difficult to harmonize the conflicting interests of stakeholders.

Corporate Citizenship• Theory that a business has a responsibility to do good.• Business is responsible for helping to solve social problems,

even those it did not cause.• Corporations owe a duty to promote the same social goals as

do individual members of society• Theory argues that corporations owe a debt to society to

make it a better place.• Duty arises because of the social power bestowed on

corporations.• A major criticism of this theory is that the duty of a

corporation to “do good” cannot be expanded beyond certain limits.

• E.g., corporate funds are limited.

Summary of Theories

Theory Social Responsibility

Maximizing profits To maximize profits for stockholders.

Moral minimum To avoid causing harm and to compensate for harm caused.

Stakeholder interest To consider the interests of all stakeholders, including stockholders, employees, customers, suppliers, creditors, and local community.

Corporate citizenship To do good and solve social problems.

Social Responsibility Roles

• Reactive– Businesses react to social issues when they are presented– Try to resist the implementation of regulation– Possible end up with more regulation than would have resulted if the issue

had been addresses prior to regulation

• Status Quo– Business does not oppose regulation – Meets only the bare minimum– Do not try to anticipate future problems

• Proactive– Some firms adopt a proactive approach– Begin by dealing with social issues within the firm– Do not wait for regulations to be imposed, take actions from before as they

feel the need to

Corporate Social Audit

• Idea that audits should be conducted not only of financial health of corporation, but also of its moral health.

• Examine whether corporation has adhered to code of ethics and met duty of social responsibility.

• May be difficult to define, measure results in practice.

Procedures for Social Audit

• Employ independent, outside auditor.• Demand cooperation of company personnel with auditing

firm during audit.• Auditor reports findings directly to board of directors.• Board reviews results and implements program to correct any

deficiencies found.

Summary

• Ethical behavior in business means making decisions based on values established by the firm

• Different firms deal with ethical dilemmas differently

• Ethical behavior can provide returns for all the company’s stakeholders

• Firms can benefit shareholders and at the same time recognize their social responsibilities