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CHAPTER 9

Ethics,
Corporate Social
Responsibility,
Environmental
Sustainability,
and Strategy
LEARNING OBJECTIVES
THIS CHAPTER WILL HELP YOU UNDERSTAND:
1. How the standards of ethical behavior in business are
no different from the ethical standards and norms of the
larger society and culture in which a company operates
2. What drives unethical business strategies and behavior
3. The costs of business ethics failures
4. The concepts of corporate social responsibility and
environmental sustainability and how companies
balance these duties with economic responsibilities to
shareholders

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WHAT DO WE MEAN BY BUSINESS ETHICS?
♦ Business ethics
● Is the application of general ethical principles to the
actions and decisions of businesses and the conduct
of their personnel
● Are not materially different from ethical principles in
general because business actions have to be judged
in the context of society’s standards of right and wrong

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CORE CONCEPT (1 of 8)
Ethics concerns principles of right or wrong
conduct.
Business ethics deals with the application of
general ethical principles to the actions and
decisions of businesses and the conduct of their
personnel.

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WHERE DO ETHICAL STANDARDS COME
FROM—ARE THEY UNIVERSAL OR
DEPENDENT ON LOCAL NORMS?

Sources for Ethical Standards

The school of The school of Integrated


ethical ethical social contracts
universalism relativism theory

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THE SCHOOL OF ETHICAL UNIVERSALISM
♦ Ethical universalism
● Holds that common understandings across multiple
cultures and countries about what constitutes right and
wrong give rise to universal ethical standards that
apply to all societies, all firms, and all businesspeople
♦ Effect on business ethics
● Whether a business-related action is right or wrong is
judged by universal standards

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CORE CONCEPT (2 of 8)
The school of ethical universalism holds that the
most fundamental conceptions of right and wrong
are universal and apply to members of all
societies, all companies, and all businesspeople.

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THE SCHOOL OF ETHICAL RELATIVISM
♦ Ethical relativism
● Holds that differing beliefs, customs, and behavioral
norms across countries and cultures give rise to
multiple sets of standards of what is ethically right or
wrong
♦ Effect on business ethics
● Whether business-related actions are right or wrong
depends on local ethical standards

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CORE CONCEPT (3 of 8)
The school of ethical relativism holds that
differing religious beliefs, customs, and behavioral
norms across countries and cultures give rise to
multiple sets of standards concerning what is
ethically right or wrong.
These differing standards mean that whether
business-related actions are right or wrong
depends on the prevailing local ethical standards.

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STRATEGIC MANAGEMENT PRINCIPLE (1 of 9)
Under ethical relativism, there can be no one-size-
fits-all set of authentic ethical norms against which
to gauge the conduct of company personnel.

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EXAMPLES OF ETHICAL RELATIVISM ISSUES

Variations in
Ethical Standards

Relativism can The use of


The use of The payment
result in local morality
underage of bribes and
multiple sets to guide ethical
labor kickbacks
of standards behavior

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IKEA’s Global Supplier Standards:
Maintaining Low Costs While Fighting the
Root Causes of Child Labor

♦ How effective has IKEA’s IWAY proactive approach to


setting global labor standards been in reducing abuses of
child workers at its supplier facilities?
♦ Is it fair for IKEA to prescribe that its suppliers comply
with global standards that are at variance with local
market labor practices and conditions?
♦ What has IKEA done to help its suppliers overcome the
problems that foster the use of child labor?

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STRATEGIC MANAGEMENT PRINCIPLE (2 of 9)
Codes of conduct based on ethical relativism can
be ethically problematic for multinational
companies by creating a maze of conflicting ethical
standards.

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STRATEGIC MANAGEMENT PRINCIPLE (3 of 9)
♦ According to integrated social contracts theory,
adherence to universal or “first-order” ethical
norms should always take precedence over local
or “second-order” norms.
♦ In instances involving universally applicable
ethical norms (like paying bribes), there can be
no compromise on what is ethically permissible
and what is not.

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INTEGRATIVE SOCIAL CONTRACTS THEORY
♦ Provides a middle-ground balance between
universalism and relativism
♦ Posits that the collective views of multiple
societies form universal (first order) ethical
principles that all persons have a contractual duty
to observe in all situations
♦ Within the contract, cultures or groups can
specify locally ethical (second-order) actions

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APPLICATION OF INTEGRATED
SOCIAL CONTRACTS THEORY
TO MULTINATIONAL BUSINESS
♦ Effects on ethical standards
● Adherence to universal ethical norms takes
precedence over local norms.
● A local custom is not ethical if it violates universal
ethical norms.
● Application of codes of ethics should first follow
universal standards with allowance for local ethical
diversity and influence.

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CORE CONCEPT (4 of 8)
According to integrated social contracts theory,
universal ethical principles based on the collective
views of multiple societies form a “social contract”
that all individuals and organizations have a duty
to observe in all situations.
Within the boundaries of this social contract, local
cultures or groups can specify what additional
actions may or may not be ethically permissible.

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STRATEGIC MANAGEMENT PRINCIPLE (4 of 9)
In instances involving universally applicable ethical
norms (like paying bribes), there can be no
compromise on what is ethically permissible and
what is not.

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HOW AND WHY ETHICAL STANDARDS
IMPACT THE TASKS OF CRAFTING AND
EXECUTING STRATEGY
♦ The ethics code litmus test
● Areas of ambiguity: Is what we are proposing to do
fully compliant with our code of ethics?
● Conflict or potential problem: Is this action in harmony
with our core values?
● Ethically objectionable action: Will our stakeholders,
our competitors, the SEC under the Sarbanes-Oxley
Act, or the news and social media view this action as
ethically objectionable?

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CONSEQUENCES OF ETHICALLY
QUESTIONABLE STRATEGIES

When Strategies Fail


the Ethical Litmus Test

Sizable Devastating Sharp stock Criminal


civil fines and image and price drops as indictments
stockholder public relations investors lose and
lawsuits hits confidence convictions

© McGraw-Hill Education. Jump to Appendix 3 long image description


DRIVERS OF UNETHICAL STRATEGIES AND
BUSINESS BEHAVIOR

Faulty oversight
and self dealing

Unethical
Pressure for short- Strategies and
term performance Business
Behaviors
A weak or corrupt
ethical environment

© McGraw-Hill Education. Jump to Appendix 4 long image description


WHAT ARE THE DRIVERS OF UNETHICAL
STRATEGIES AND BUSINESS BEHAVIOR?

♦ Drivers of unethical business behavior


● Faulty internal oversight allows self-dealing in the
pursuit of personal gain, wealth, and self-interest.
● Short-termism pressures one to meet or beat short-
term performance targets.
● A culture that puts profitability and business
performance ahead of ethical behavior.

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CORE CONCEPTS (5 of 8)
Self-dealing occurs when managers take
advantage of their position to further their own
private interests rather than those of the firm.
Short-termism is the tendency for managers to
focus excessively on short-term performance
objectives at the expense of longer-term strategic
objectives. It has negative implications for the
likelihood of ethical lapses as well as company
performance in the longer run.

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How Novo Nordisk Puts Its Ethical
Principles into Practice

♦ What steps has Novo Nordisk taken to ensure that its


ethical standards of employee conduct are put into
practice?
♦ Why has Novo Nordisk been so successful in instilling a
culture of ethical conduct in its organization when other
firms have not?
♦ What has been the effect of Novo Nordisk’s dedication
to ethical business practices on its success in the
marketplace?

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WHY SHOULD COMPANY
STRATEGIES BE ETHICAL?
♦ The moral case for an ethical strategy
● A strategy that is unethical is morally wrong and
reflects badly on the character of the firm’s personnel.
♦ The business case for ethical strategies
● An ethical strategy can be both good business and
serve the self-interest of shareholders.

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STRATEGIC MANAGEMENT PRINCIPLE (5 of 9)
Conducting business in an ethical fashion is not only
morally right, it is in a company’s enlightened self-interest.
Shareholders suffer major damage when a company’s
unethical behavior is discovered. Making amends for
unethical business conduct is costly, and it takes years to
rehabilitate a tarnished company reputation.

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THE VISIBLE COSTS COMPANIES
INCUR WHEN ETHICAL WRONGDOING
IS DISCOVERED

♦ Visible costs
● Government fines and penalties
● Civil penalties arising from class-action lawsuits and
other litigation aimed at punishing the company for its
offense and the harm done to others
● The costs to shareholders in the form of a lower stock
price (and possibly lower dividends)

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THE INTERNAL COSTS COMPANIES
INCUR WHEN ETHICAL WRONGDOING
IS DISCOVERED
♦ Internal administrative costs
● Legal and investigative costs incurred by the
company
● The costs of providing remedial education and ethics
training to company personnel
● The costs of taking corrective actions
● Administrative costs associated with ensuring future
compliance

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THE INTANGIBLE COSTS COMPANIES
INCUR WHEN ETHICAL WRONGDOING
IS DISCOVERED
♦ Intangible or less visible costs
● Customer defections
● Loss of reputation
● Lower employee morale and higher degrees of
employee cynicism
● Higher employee turnover
● Higher recruiting costs and difficulty in attracting
talented employees
● Adverse effects on employee productivity
● The costs of complying with harsher government
regulations
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STRATEGY, CORPORATE SOCIAL
RESPONSIBILITY, AND ENVIRONMENTAL
SUSTAINABILITY

♦ Corporate social responsibility (CSR)


● Is a firm’s duty to operate in an honorable manner,
provide good working conditions for employees,
encourage workforce diversity, be a good steward of
the environment, and actively work to better the quality
of life in the local communities where it operates and in
society at large.

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CORE CONCEPT (6 of 8)
Corporate social responsibility (CSR) refers to a
company’s duty to operate in an honorable
manner, provide good working conditions for
employees, encourage workforce diversity, be a
good steward of the environment, and actively
work to better the quality of life in the local
communities where it operates and in society at
large.

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FIGURE 9.2 The Five Components of a
Corporate Social Responsibility Strategy

Jump to Appendix 5 long image description


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Warby Parker: Combining Corporate Social
Responsibility with Affordable Fashion

♦ How has Warby Parker’s skillful use of CSR as a


strategic tool contributed to its success in the
marketplace?
♦ How strongly is customer loyalty affected by Warby
Parker’s CSR practices?
♦ Is the firm’s dedication to outcomes outside of profit
likely to be acceptable to outside investors?

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CORE CONCEPT (7 of 8)
A company’s CSR strategy is defined by the
specific combination of socially beneficial activities
the company opts to support with its contributions
of time, money, and other resources.

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FIGURE 9.3 The Triple Bottom Line: Excelling on
Three Measures of Company Performance

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TABLE 9.1 A Selection of Companies Recognized
for Their Triple-Bottom-Line Performance in 2013
(1 of 2)
NAME MARKET SECTOR COUNTRY

Volkswagen AG Automobiles & Components Germany

Australia & New Zealand Banking Group Banks Australia


Ltd.

Siemens AG Capital Goods Germany

Adecco SA Commercial & Professional Services Switzerland

Panasonic Corp. Consumer Durables & Apparel Japan

Tabcorp. Holdings Ltd. Consumer Services Australia

Citigroup Inc. Diversified Financials United States

BG Group PLC Energy United Kingdom

Woolworths Ltd. Food & Staples Retailing Australia

Nestlé SA Food, Beverage, & Tobacco Switzerland

Abbott Laboratories Health Care Equipment & Services United States

Henkel AG & Co. KGaA Household & Personal Products Germany

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TABLE 9.1 A Selection of Companies Recognized
for Their Triple-Bottom-Line Performance in 2013
(2 of 2)
NAME MARKET SECTOR COUNTRY
Allianz SE Insurance Germany

Akzo Nobel NV Materials Netherlands

Telenet Group Holding NV Media Belgium


Roche Holding AG Pharmaceutical, Biotechnology, & Life Switzerland
Sciences

Stockland Real Estate Australia

Lotte Shopping Co. Ltd. Retailing Republic of Korea


Taiwan Semiconductor Manufacturing Semiconductors & Semiconductor Taiwan
Co. Ltd. Equipment
SAP AG Software & Services Germany
Alcatel-Lucent Technology Hardware & Equipment France
KT Corp. Telecommunication Republic of Korea

Air France-KLM Transportation France

EDP-Energias de Portugal SA Utilities Portugal

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WHAT DO WE MEAN BY SUSTAINABILITY
AND SUSTAINABLE BUSINESS PRACTICES?
♦ Sustainability
● Is the relationship of a firm to its environment
and its use of natural resources
♦ Sustainable business practices
● Are those practices of a firm that meet the
needs of the present without compromising
the ability to meet the needs of the future

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Unilever’s Focus on Sustainability

♦ How has the Unilever Sustainable Living Plan (USLP)


for implementing its comprehensive triple-bottom-line
approach toward sustainable farm management
affected the company’s long-term profitability?
♦ What place in business thinking should sustainability
occupy in strategic planning that seeks to maximize
profits?
♦ What internal forces could mitigate against pursuing
sustainability goals if benchmark indices are controlled
by external parties?

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CORE CONCEPTS (8 of 8)
Sustainable business practices are those that
meet the needs of the present without
compromising the ability to meet the needs
of the future.
An environmental sustainability strategy
consists of a firm’s deliberate actions to protect the
environment, provide for the longevity of natural
resources, maintain ecological support systems for
future generations, and guard against
endangerments leading to the ultimate destruction
of the planet.

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SUSTAINABILITY AND SUSTAINABLE
BUSINESS PRACTICES

♦ Environmental sustainability strategy


● Consists of the firm’s deliberate actions to:
 Protect the environment
 Provide for the longevity of natural resources
 Maintain ecological support systems for future
generations
 Guard against ultimate endangerment of the
planet

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CRAFTING CORPORATE SOCIAL
RESPONSIBILITY AND
SUSTAINABILITY STRATEGIES

Pursuing a Sustainable CSR Strategy


in the Firm’s Value Chain Activities

Moral case: Business case:


stakeholder competitive
benefits advantage

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STRATEGIC MANAGEMENT PRINCIPLE (6 of 9)
Both CSR strategies and environmental sustainability
strategies provide valuable social benefits and fulfill
customer needs in a superior fashion can lead to
competitive advantage.
Corporate social agendas that address only social issues
may help boost a company’s reputation for corporate
citizenship but are unlikely to improve its competitive
strength in the marketplace.

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THE MORAL CASE FOR CSR AND
ENVIRONMENTALLY SUSTAINABLE
BUSINESS PRACTICES

The Implied Social Contract:


“It’s the right thing to do”

Operate Provide good Be a good Display good


ethically and work conditions environmental corporate
legally for employees steward citizenship

© McGraw-Hill Education. Jump to Appendix 8 long image description


STRATEGIC MANAGEMENT PRINCIPLE (7 of 9)
Every action a company takes can be interpreted as a
statement of what it stands for.

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THE BUSINESS CASE FOR CSR AND
ENVIRONMENTALLY SUSTAINABLE
BUSINESS PRACTICES
♦ Increased buyer patronage
♦ Reduced risk of reputation-damaging incidents
♦ Lower employee turnover costs and enhanced
recruiting and workforce retention
♦ Increased revenue enhancement opportunities
due to the use of CSR and sustainability
♦ CSR and sustainability best serve long-term
interests of shareholders

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COMBATING THE EVASION OF CSR AND
SOCIALLY HARMFUL BUSINESS PRACTICES

Increased public
awareness of misdeeds
and bad behavior by firms
Harmful and
Increased legislation and Unethical
regulation to correct and Business
punish firms Actions and
Behaviors
Refusal to do business
with irresponsible firms

© McGraw-Hill Education. Jump to Appendix 9 long image description


STRATEGIC MANAGEMENT PRINCIPLE (8 of 9)
The higher the public profile of a company or its
brand, the greater the scrutiny of its activities and
the higher the potential for it to become a target for
pressure group action.

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STRATEGIC MANAGEMENT PRINCIPLE (9 of 9)
Socially responsible strategies that create value for
customers and lower costs can improve company
profits and shareholder value at the same time that
they address other stakeholder interests.
There’s little hard evidence indicating shareholders
are disadvantaged in any meaningful way by a
company’s actions to be socially responsible.

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