Understanding Canadian Business

Chapter 5

Ethics and Social Responsibility

Learning Goals• After you have studied this chapter, you should

be able to:

1. Explain why legality is only the first step in behaving ethically and ask the three questions one should answer when faced with a potentially unethical action.

2. Describe management’s role in setting ethical standards and distinguish between compliance-based and integrity-based ethics codes.

3. List the six steps in setting up a corporate ethics code.

4. Define corporate social responsibility and examine corporate responsibility to various stakeholders.

5. Discuss the responsibility that business has to customers, investors, employees, society, and the environment.

Ethics

Standards of moral behaviour, that is, behaviour that is accepted by society as right versus wrong.

Ethics and Legality Are Two Different Things

Ethics is More Than Legality• It is not uncommon to hear of instances where

business people are involved in unethical behaviour.

• After two years of denying accusations, WestJet Airlines admitted to spying on Air Canada.

– WestJet was accessing a confidential Air Canada website designated for reservations.

• As part of the settlement WestJet will pay Air Canada’s investigation and litigation costs of $5.5 million and make a $10 million donation in the name of both airlines to children’s charities across Canada.

Ethics is More Than Legality

• Given that ethical lapses happen, what can be done to restore trust in the free-market system and leaders in general?

– People who break the law should be punished. No one should be above the law.

• Laws don’t make people honest, reliable or truthful. If laws were a big deterrent, there would be much less crime.

Ethical Standards Are Fundamental

Moral Values – Right• Integrity

• Respect for human life

• Self-control

• Honesty

• Courage and

• Self-Sacrifice

Moral Values - Wrong• Cheating

• Cowardice and

• Cruelty

Ethics Begins withEach of Us

• Ethical behaviour should be exhibited in our daily lives, not just in a business environment.

• The average annual donation in Canada is $1,656.

– It is interesting that, as with volunteering, the numbers of those who give are dropping but those who do give are more generous.

Ethics Begins with Each of Us• Young people learn from the behaviour of others. In

a study conducted on one college campus, 80% of students surveyed admitted to cheating.

• Downloading from the Internet is the most common form of cheating today.

– One school reported that half of its plagiarism cases involved students cutting and pasting information from a website without crediting the source.

– To fight this problem, many instructors now use services such as Turnitin.com, which scans students’ papers against 6 billion pages of documents and provides evidence of copying in seconds.

Ethics Begins withEach of Us

We cannot expect society to become more moral and ethical unless we as individuals commit to becoming more moral and ethical ourselves.

Ethical Dilemma

No desirable alternative.

You must choose between equally unsatisfactory alternatives.

Ethical Dilemma Questions

1. Is it legal?

2. Is it balanced?

3. How will it make you feel about yourself?

Ethical Dilemma Questions

1. Is it legal?

– Am I violating any law or company policy?

– Whether you are thinking about:

• having a drink and then driving home

• gathering marketing intelligence or

• hiring or firing employees

– It is necessary to think about the legal implications of what you do.

– This question is the most basic one in behaving ethically in business.

Ethical Dilemma Questions2. Is it balanced?

– Am I acting fairly?

– Would I want to be treated this way?

– Will I win everything at the expense of another party?

– Win-lose situations often end up as lose-lose situations.

• There is nothing like a major loss to generate retaliation from the loser. For example many companies that were merely suspected of wrong doing have seen their stock drop dramatically.

• Not every situation can be completely balanced, but it is important to the health of our relationships that we avoid major imbalances over time.

– An ethical business person has a win-win attitude trying to benefit all parties involved.

Ethical Dilemma Questions3. How will it make me feel about myself?

– Would I feel proud if my family or friends learned of my decision?

– Would I be able to discuss the proposed situation or action with my immediate supervisor? The company’s clients?

– How would I feel if my decision were announced on the news?

– Will I have to hide my actions?

– Am I feeling unusually nervous?

• Decisions that go against our sense of right and wrong make us feel bad – they corrode our self-esteem.

• An ethical business person does what is proper as well as what is profitable.

Progress Assessment

• What is ethics?

• How does ethics differ from legality?

• When faced with ethical dilemmas, what questions can you ask yourself that might help you make ethical decisions?

Managing Businesses Ethically & Responsibly

People learn their standards and values from observing what others do, not from what they say.

Managing BusinessesEthically & Responsibly

• A business should be managed ethically for many reasons to:

– Maintain a good reputation

– Keep existing customers

– Attract new customers

– Avoid lawsuits

– Reduce employee turnover

– Avoid government intervention

– Please customers, employees and society and

– Do the right thing

Setting Corporate Ethical Standards

• Although ethics codes vary greatly, they can be classified into two major categories:

– Compliance-based ethics codes• ethical standards that emphasize preventing

unlawful behaviour by increasing control and by penalizing wrongdoers.

– Integrity-based ethics codes• ethical standards that define the organization’s

guiding values, create an environment that supports ethically sound behaviour, and stress a shared accountability among employees.

Help Improve Business Ethics1. Top management must adopt and unconditionally

support an explicit corporate code of conduct.

2. Employees must understand that expectations for ethical behaviour begin at the top and that senior management expect 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.

5. Outsiders such as suppliers, subcontractors, and customers must be told about the ethics program.

6. The ethics code must be enforced.

Ethics Officers• The most effective ethics officers:

– set a positive tone

– communicate effectively

– relate well with employees at every level of the company

– equally comfortable serving as counsellors or as investigators

– trusted to maintain confidentially

– can conduct objective investigations and ensure the process is fair and

– can demonstrate to stakeholders that ethics is important in everything the company does

The Sarbanes-Oxley Act (SOX) of the United States

SOX requires all public corporations to provide a system that allows employees to submit concerns regarding accounting and auditing issues both confidentially and anonymously.

Whistle-blowing Legislation in Canada

• Bill C-11 was passed in November 2005.

• It provides for significant powers to investigate wrongdoing; it contains clear legal prohibition of reprisal against those who make good-faith allegations of wrongdoing; and it proposes measures to protect the identity of persons making disclosures.

Progress Assessment

• How are compliance-based ethics codes different from integrity-based ethics codes?

• What are the six steps to follow in establishing an effective ethics program in a business?

• What protection is being offered to whistle-blowers in the public sector?

Corporate Social Responsibility (CSR)

A business’s concern for the welfare of society as a whole.

The Social Performance of a Company:

Dimension DescriptionCorporate philanthropy includes charitable donations to non-profit groups

of all kinds.

Corporate social initiatives

include enhanced forms of corporate philanthropy in that they are more directly related to the company’s competencies.

Corporate responsibility

includes everything from hiring minority workers to making safe products, minimizing pollution, using energy wisely, and providing a safe working environment. Everything that has to do with acting responsible within society and toward employees.

Corporate policy Refers to the position a firm takes on social and political issues.

Corporate Responsibility in the Twenty-first Century

• There are different views of corporate responsibility to stakeholders:

1. The strategic approach requires that management’s primary orientation be toward the economic interests of shareholders.

2. The pluralist approach recognizes the special responsibility of management to optimize profits, but not at the expense of employees, suppliers, and members of the community. This view says that corporations can maintain their economic viability only when they fulfill their moral responsibilities to society as a whole.

Responsibility to Customers• Customers prefer to do business with companies they

trust and, even more important, do not want to do business with companies they don’t trust.

• One responsibility of business is to satisfy customers by offering them goods and services of value.

• One of the surest ways of failing to please customers is not being totally honest with them.

• The payoff of socially conscious behaviour could result in new business as customers switch from rival companies simply because they admire the company’s social efforts – a powerful competitive edge.

Responsibility to Investors

• Ethical behaviour is good for shareholder wealth.

• Unethical behaviour may seem to work for the short term, but it guarantees eventual failure.

• In the 2005 Canada’s Most Respected Corporations survey, 89% of Canadian CEOs agreed with the statement that “companies that are more respected by the public enjoy a premium in their share price”.

Insider Trading

An unethical activity in which insiders use private company information to further their own fortunes or those of their family and friends.

Responsibility of Employees• Once a company creates, jobs, it has an obligation to ensure that

hard work and talent are fairly rewarded.

• Part of treating employees well is ensuring that employers of all sizes provide a safe work environment.

– The Canadian Labour Congress (CLC) believes that there are well over 1,000 workers who die annually from workplace causes and there are more than one million who suffer workplace injuries.

• When employees feel they’ve been treated unfairly, they often strike back.

– How do you think employees would strike back against the company?

Responsibility of Society• Businesses need to develop long-term

profitable relationships with their customers by establishing repeat business.– Repeat business is based on buying safe and value-

laden products, at reasonable prices.

• Many companies believe business has a role in building a community that goes well beyond giving back.– Their social contributions include cleaning up the

environment, building community toilets, providing computer lessons, caring for the elderly, and supporting children from low-income families.

Responsibility to the Environment• Businesses are often criticized for their

role in destroying the environment.

– The Sydney Tar Ponds are North America’s largest hazardous waste site.

• More than 80 years of discharges from the steel-producing coke ovens near the harbour have filled Muggah Creek with contaminated sediments.

• Two decades later, there have been several attempts and more than $100 million spent to clean up this toxic site.

• In May 2004, the governments of Canada and Nova Scotia committed $400 million to the cleanup. It is expected that this cleanup will take ten years.

Social Auditing• A social audit is a systematic evaluation of an

organization’s progress toward implementing programs that are socially responsible and responsive.

• There are four types of groups that serve as watchdogs regarding how well companies enforce their ethical and social responsibility policies:

1. Socially conscious investors who insist that a company extend its own high standards to all its suppliers.

2. Environmentalists who apply pressure by naming names of companies that don’t abide by the environmentalists’ standards.

3. Union officials who hunt down violations and force companies to comply to avoid negative publicity.

4. Customers who take their business elsewhere if a company demonstrates unethical or socially irresponsible practices.

Progress Assessment

• What is corporate social responsibility, and how does it relate to each of a business’s major stakeholders?

• How does the strategic approach differ from the pluralist approach?

• What is a social audit, and what kinds of activities does it monitor?

International Ethics and Social Responsibility

• Prime Minister Stephen Harper introduced legislation to make the government more honest and transparent through the Federal Accountability Act.

– This Act promises to end undue influence on government by big business, unions, and industry lobbyists.

• The former Liberal federal government supported the Kyoto Protocol

– The first global agreement that established legally binding targets for cutting greenhouse gas emissions believed to upset the Earth’s climate and temperature, and committed to decrease gas emissions between 2008 and 2012.

– The election of a Conservative government in early 2006 brought about a reversal in Canada’s climate change policy.

International Ethics and Social Responsibility

• Many businesses are demanding socially responsible behaviour from their international suppliers by ensuring that suppliers do not violate domestic human rights and environmental standards.

• In contrast to companies that demand their suppliers demonstrate socially responsible behaviour are those that have been criticized for exploiting workers in less developed countries.

– Nike, has been accused by human rights and labour groups of treating its workers poorly while lavishing millions of dollars on star athletes to endorse its products.

– Nike is working to improve its reputation, in part by joining forces companies and six leading anti-sweatshop groups to create a single set of labour standards with a common factory-inspection system.

International Ethics and Social Responsibility

• The justness of requiring international suppliers to adhere to domestic ethical standards is not as clear-cut as you might think.

– Is it always ethical for companies to demand compliance with the standards of their own countries?

– What about countries in which child labour is an accepted part of the society and families depend on the children’s salaries for survival?

– What about foreign companies doing business in Canada – should these companies comply with Canadian ethical standards? What about multinational corporations?

• The International Standards Organization (ISO) developed a new standard on social responsibility that includes guidelines on product manufacturing, fair pay rates, appropriate employee treatment, and hiring practices.

– These standards are advisory only and will not be used for certification purposes.

International Ethics and Social Responsibility

The formation of a single set of international rules governing multinational corporations is unlikely in the near future.

In many places, “Fight corruption” remains just a slogan, but even a slogan is a start.

Summary

1. Explain why legality is only the first step in behaving ethically and ask the three questions one should answer when faced with the potentially unethical action.

2. Describe management’s role in setting ethical standards and distinguish between compliance-based and integrity-based ethics codes.

3. List the six steps in setting up a corporate ethics code.

4. Define corporate social responsibility and examine corporate responsibility to various stakeholders.

5. Discuss the responsibility that business has to customers, investors, employees, society, and the environment.