Weiss4thEd-ch04

7/28/2019 Weiss4thEd-ch04

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Chapter Four

The Corporat ion

and

External Stakeho ldersManaging Moral Responsib i l i ty in

the Marketplace

Business Ethics: A Stakeholder and Issues Management Approach, 4e, Joseph W. Weiss

Copyright 2006 by South-Western, a division of Thomson Business & Economics. All rights reserved.


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Top 10 Best Corporate Citizens Who

Serve Stakeholders Well (2004)

1. Fannie Mae

2. Proctor & Gamble

3. Intel Corporation

4. St. Paul Companies

5. Green Mountain Coffee Roasters Inc.

6. Deere & Company

7. Avon Products, Inc.8. Hewlett Packard

9. Agilent Technologies

10.Ecolab Inc.


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Figure 4.1: External Stakeholders, Moral Stakes,

and Corporate Responsibilities

Source: Based on the Caux Round Tables Principles for Business. The principles are printed in

Business Ethics magazine, 52 S. 10th St. #110, Minneapolis, MN 55403.


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Competitive Advantages for

Socially Responsible Firms

1. Reputation

2. Successful social investment portfolios3.Ability to attract quality employees


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The Social Contract

A set of rules and assumptions aboutbehavior patterns among the variouselements of society

Often involves a quid pro quo(something for something) exchange

Often based on implicit as well as

explicit agreements between acorporation and its stakeholders


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Covenantal Ethic

Related to the social contract

Central to a stakeholder management

approach Focuses on the importance of

relationships between businesses,

customers, and stakeholders


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Pragmatic Principles

Make a profit

-----------

Act justly

Cause no avoidable or unjustifiable harm

Prevent harm when possible

Ought implies can

Moral minimum standard


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Moral Basis for Social

Responsibility

Trustee for societys resources

Two-way open system, open disclosure

Social costs and benefitsConsumer pays for consumption and

effects on society

Social involvement in core competencyareas


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Best Practices for

Corporate Governance

1. Separating the role of chairman of the board whenthe CEO is also a board member

2. Setting tenure rules for board members

3. Regularly evaluating itself and the CEOsperformance

4. Prohibiting directors from serving as consultants tothe companies which they serve

5. Compensating directors with both cash and stock

6. Prohibiting retired CEOs from continuing boardmembership

7. Assigning independent directors to the majority ofmembers who meet periodically without the CEO


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The Role of Laws and the Regulatory

System in Corporate Governance

Regulate competition

Protect consumers

Promote equity and safety Protect the natural environment

Ethics and compliance programs to

deter and provide for enforcementagainst misconduct


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Summary of the

Sarbanes-Oxley Act Establishes an independent public company

accounting board to oversee audits of public

companies

Requires one member of the audit committee to be

an expert in finance Requires full disclosure to stockholders of complex

financial transactions

Requires CEOs and CFOs to certify in writing the

validity of their companies financial statements Prohibits accounting firms from offering other

services, like consulting, while also performing

audits


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Summary of the

Sarbanes-Oxley Act (cont)

Requires ethics codes, registered with the Securitiesand Exchange Commission (SEC), for financialofficers

Provides a 10-year penalty for wire and mail fraud

Requires mutual fund professionals to disclose theirvote on shareholder proxies, enabling investors toknow how their stocks influence decisions

Provides whistle-blower protection for individuals

who report wrongful activities to authorities Requires attorneys of companies to disclose

wrongdoing to senior officers and to the board ofdirectors, if necessary


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Cons and Pros of Sarbanes-Oxley

Pros The costs of implementing is minimal

compared to the costs of not havingit

The changes required to implementthis law are difficult

The data does not support the

argument that this law presents acompetitive disadvantage to globalfirms

Financial officers who complainabout the requirements of Sarbanes-Oxley may in fact be suffering from

the lack of internalcontrols they hadbefore

If a company uses the Sarbanes-Oxley Act as a reason to not gopublic, the firm should not go publicor use investors funds

Cons It is too costly

Government costs also increaseto regulate the law

It impacts negatively on a firmsglobal competitiveness

CFOs are overburdened andpressured by having to enforceand assume accountability by

the law

An exodus will occur of publiccompanies returning to privateownership


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1991 Original Seven Criteria

of the Revised Guidelines1. Established standards and procedures capable of reducing the

chances of criminal conduct

2. Appointment of compliance officer(s) to oversee plans

3. Took due care not to delegate substantial discretionaryauthority to individuals who are likely to engage in criminalconduct

4. Established steps to effectively communicate the organizationsstandards and procedures to all employees

5. Took steps to ensure compliance through monitoring andauditing

6. Employed consistent disciplinary mechanisms7. When an offense was detected, took steps to prevent future

offenses, including modifying the compliance plan, ifappropriate


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Responsibility toward

Consumers

Duty to inform fully and truthfully

Duty not to misrepresent or withhold

information

Duty not to force or take undue advantage of

through fear or stress

Duty to take due care to prevent

foreseeable injuries


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Consumer Rights

Right to safety

Right to free and rational choice

Right to know, access information

Right to be heard (complain)

Right be to compensated for harm


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Free Market Theory

Minimal moral restraints Full competitiveness with entry and exit

Relevant information available to everyone

Accurate reflection of all production costs in

prices(assumes an equal balance of power,knowledge, and sophistication of choice inbuying and selling of products and

services)


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Problems with the Free

Market Theory

Resource-rich firms create unequalinformation

Advertising is used questionably

Invisible hand does not exist for allsituations (imperfect markets)


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Five Goals of Government Policy

Makers toward Consumers

1. Providing consumers with reliable

information about purchases

2. Providing legislation to protect consumers

against hazardous products

3. Providing laws to encourage competitive

pricing

4. Providing laws to promote consumer choice5. Protecting consumers privacy


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U.S. Consumer Protection Agencies

1. The Federal Trade Commission (FTC) deals with online

privacy, deceptive trade practices, and competitive pricing

2. TheFood and Drug Administration (FDA) regulates andenforces the safety of drugs, foods, and food additives, andsets standards for toxic chemical research

3. The National Highway Traffic Safety Administration (NHTSA)deals with motor vehicle safety standards

4. The National Transportation Safety Board (NTSB) handlesairline safety

5. The Consumer Product Safety Commission sets and enforcessafety standards for consumer products

6. The Department of Justice (DOJ) enforces consumer civilrights and fair competition


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External Corporate

Responsibility Areas

Advertising

Product safety and liability Environmental concerns


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Advertising

Inform vs. persuade (two purposes)

FTC guidelines: (claims must be substantiated)

Deception: Mislead customers

Affect consumers behavior or decisions

Unfair: Substantial injury

Injury not outweighed by other benefits

Injury is reasonably avoidable


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Pros and Cons of

Advertising

Pros Informs consumers about

products

Enables companies to be

competitive Increases consumption and

spending, which in turn createseconomic growth

Helps a nations balance oftrade and debt payments

Customers pay for the imagesas well as the products

Consumers are not ignorant;they have freedom of choice

Cons

Thin line between puffery

and deception

Targeting unsophisticated

buyers (children and youth) Intentional deception and

half-truths


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Advertising Issues

Pop-up and pop-under ads on the Internet

Telemarketing

School sporting events, hallways, etc.

(obesity)

Movie theaters

Dangerous products (e.g., tobacco, firearms)

Life-required products (e.g., drugs)

Child-focused advertising


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Ethics and Advertising

Is the consumer being treated as a means toan end or as an end? What and whose end?

Whose rights are being protected or violatedintentionally and inadvertently? At what and

whose cost? Are consumers being justly and fairly

treated?

Are the public welfare and good taken intoconsideration for the effects as well as theintention of advertisements?

Has anyone been harmed, and can this harmbe proven?


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Justice Powells Four-Step

Test (Free Speech Argument)

1. Is the ad accurate, and does it promote alawful product?

2. Is the governments interest in banning or

restricting the commercial speech important,nontrivial, and substantial?

3. Does the proposed restriction of commercialspeech assist the government in obtaining a

public policy goal?4. Is the proposed restriction of commercial

speech limited only to achieving thegovernments purpose?


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Product Safety and Liability

Marginal value of product = Marginal cost of life or function

National Commission on Product Safetys steps to

assess product safety: How much safety is technically attainable, and how can it

be specifically obtained for this product or service?

What is the acceptable risk level for society, the

consumer, and the government regarding this product?

Does the product meet societal and consumer standards?


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External Review and Control

1972 CPS Act, CPS Commission

EPA, NHTSA, FDA, OSHA

Why are external review processes (i.e.,governmental regulatory oversight) needed? Childrens products (car seats, toys, cribs,

highchairs, etc.)

Automobiles (Firestone, Ford Explorers) Drugs (Fen-Phen, etc.)


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Liability and Negligence

Negligence all parties can be held liable ifreasonable care is not observed in producing orselling a product

Strict Liability the manufacturer is liable for a

persons injury or death if a product with a known orknowable defect gets to market1. Injury happened

2. Injury resulted from a product defect

3. Defective product delivered by manufacturer

Absolute liability the manufacturer is liable for notwarning of product danger even though the dangerwas scientifically unknown at the time of production

and sale of the product


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Environmental Issues

Toxic air pollution Water pollution

Hazardous waste and land pollution

Laws: The Federal Water Pollution Control Act of 1972

The Safe Drinking Water Act of 1974 and 1996

The Toxic Substances Control Act of 1976 The Resource Conservation and Recovery Act

of 1976

Chemical Safety Information, Site Security, andFuels Regulatory Relief Act of 1999

C f E i t l


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Causes of Environmental

Pollution

1. Consumer affluence

2. Materialistic cultural values

3. Urbanization4. Population explosion

5. New and uncontrolled technologies

6. Industrial activities


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The Ethics of Ecology

Responsibilities go beyond production ofgoods and services at a profit

Include helping to solve important socialproblems, especially those they create

Broader constituency than stockholders

Impact more than just marketplace

Serve a wider range of human values than

just economic values

Figure 4 7: 5 Stages of Environmental


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Figure 4.7: 5 Stages of Environmental

Corporate Commitment

Source: Adapted from Christopher B. Hunt and Ellen R. Auster, Proactive Environmental Management: Avoiding the Toxic Trap,Sloan Management Review Winter 1990 p 9 Permission granted by the publisher Copyright 1990 by the Sloan Management

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