Chapter 4Stakeholders, Ethics, and

Corporate Social Responsibility

McGraw-Hill/IrwinPrinciples of Management

© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.

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Learning Objectives

1. Identify stakeholders in an organization.

2. Describe the most common types of ethical issues managers confront.

3. Explain how managers can incorporate ethical factors into their decision making.

4. Outline the main segments for and against corporate social responsibility.

5. Explain what managers can do to behave in a socially responsible manner.

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Stakeholders

The Firm

Employees

Local communities

Gener

al public

Government

Customers Distributors

Creditors Suppliers

Shareholders

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Evaluating Stakeholders Claims

Identify Stakeholders

Identify stakeholders interests and

concerns

Identify claims stakeholders place on the organization

Weight stakeholders by their importance

to the firm

Identify actions to satisfy claims

of various stakeholders

Take actions, starting with those

that address the claims of the most

important stakeholders

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Question

Identify and evaluate the stakeholder claims for your university.

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Business Ethics

• Accepted principles of right or wrong governing the conduct of businesspeople.

• Principles of right and wrong are codified into laws- Tort law- Contract law- Intellectual property law- Antitrust law- Securities law

• Many actions, although legal, may not seem ethical

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Are We Ethical?

0 10 20 30 40

Instruct assisant to say you're "Ina meeting" when you are not

Given good Performance reviewto a worker who didn't desrve it

Fudged the size of your currentsalary when discussing with

potential new employers 27 %

24 %

35 %

Source: Fast Company, May 2005

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Ethics in Management

Most issues arise due to potential conflict between the goals and

the rights of stakeholders.

Stakeholders have basic rights that should be respected, and it

is unethical to violate those rights.

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Ethical Rights of Stakeholders

• Shareholders – right to timely and accurate information about their investments

• Customers – right to be fully informed about the products and services they purchase

• Employees – right to safe working conditions, fair compensation, and to be treated in a just manner

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Ethical Rights of Stakeholders (cont)

• Suppliers – right to expect contracts to be respected

• Competitors – right to expect that a firm will abide by the rules of competition and not violate antitrust laws

• Communities – right to expect companies will not violate the basic expectations of society

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Corporate Wrongdoers

• Martha Stewart – served five-months sentence for lying to government investigators about a suspicious stock sale. Her company’s sales sunk.

• Tyco International CEO, Dennis Kozlowski – became a poster boy for excess with $2 million birthday party. Charges – Stealing $600 million form the company and the shareholders

• Former CEO of Enron, Bernard Ebbers – Charges: conspiracy, securities fraud, making false regulatory filings, ring leader in an $11 billion accounting fraud

Source: Business Week, January 10, 2005

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Ethical Issues of Managers

• Self-dealing

• Information manipulation

• Anticompetitive behavior

• Opportunistic Exploitation

• Substandard working conditions

• Environmental degradation

• Corruption

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Examples of Self-dealing

1. Senior managers who treat corporate funds as their own personal treasury

2. Senior managers who use their control over the compensation committee of the board of directors to award themselves multimillion-dollar pay increases or stock option grants that are out of promotion with their contribution to the corporation

3. Instances where individual managers award business contracts not to the most efficient supplier but to the one that provides the largest kickback

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Self Dealings

• Lacrad International sold gospel music and religious sermons on CDs. The owner Rodney Dixon admitted to a judge that most of his business was a lie. The company’s revenue never exceeded $100,000 per year, however, he told lenders that revenues were in millions to get a $2.25 million loan for a corporate jet.

• Former Tyco International’s CEO Dennis Koslowski became a poster boy for excess with stories of his $2 million birthday party and $6,000 shower curtain during his last trial.

Source: Fast Company, May 2005; Business Week, January 10, 2005

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Corruption

• The Foreign Corrupt Practices Act was enacted in 1977.

• What is considered gift in one country can be a bribe in another.

• Only 34 cases have gone to trial since the law was enacted. Most are settled out of court with fines and penalties.

• InVision Technologies allegedly bribed crooked officials in China, the Philippines, and Thailand.

Source: San Jose Mercury News, March 13, 2005

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Roots of Unethical Behavior

Unethical behavior

Immoral leadership

Unrealistic performance

goals

Failure to consider

ethical issues

Unethical organization

culture

Employees with poor personal

ethics

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Philosophical Approaches to Ethics (1)

• Utilitarian approach – the view that the moral worth of actions or practices is determined by their consequences

- An action is judged to be desirable if it leads to the best possible balance of good over bad consequences

- Committed to maximization of good, and the minimization of harm

- The best decisions are those that produce the greatest good for the greatest number of people

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Philosophical Approaches to Ethics (2)

• Rights theory – the view that human beings have fundamental rights and privileges

- Something that takes precedence over, or ‘trumps’ a collective good

- For example, since we have the right to free speech, we are also obligated to make sure we respect the free speech of others

- Certain people or institutions are obligated to provide benefits or services that secure the rights of others

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Philosophical Approaches to Ethics (3)

• Justice theories – theories that focus on attaining a just distribution of economic goods and services

- A just distribution is one that is considered fair and equitable

- All economic goods and services should be distributed equally except when an unequal distribution would work to everyone’s advantage

- Veil of ignorance – everyone is imagined to be ignorant of all his or her particular characteristics

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Question

Jerry Jamesway, CEO, Jamesway International, believes that the best decisions are those that produce the greatest good for the greatest number of people. Jerry prescribes to which of these approaches to ethics?a. Opportunistic exploitationb. Rights theoriesc. Utilitariand. Justice theories

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Behaving Ethically

What managers can do to make sure that ethical issues are considered:

1. Establish an ethics officer2. Have leaders promote ethical behavior3. Develop strong governance processes4. Promote moral courage5. Consider ethical aspects of business decisions6. Promote an ethical organization culture7. Hire and promote ethical individuals

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Ethical Decisions

It is considered ethical when a businessperson can answer YES to each of the following questions:

1. Does my decision fall within the accepted values or standards that typically apply in the organizational environment?

2. Am I willing to see the decision communicated to all stakeholders affected by it?

3. Would the people with whom I have significant personal relationship approve of the decision?

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Uncertainty

Not all ethical dilemmas have a clean and obvious solution

• In these cases a premium is placed on the ability of managers to make sense out of complex messy situations and make balanced decisions that are as just as possible.

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Social Responsibility

• A sense of obligation on the part of managers to build certain social criteria into their decision making.

• When managers evaluate decisions, there should be a presumption in favor of adopting courses of action that enhance the welfare of society at large.

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Giving Back

•Mark Benioff, CEO, Salesforce.com-1% of equity into public charity-1% of time (4 hours per month) per employee to paid volunteerism

-1% of profits to nonprofit organizations

Source: Newsweek, April 18, 2005

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Arguments for SR

• Right way for a business to behave

• Need to give back to the society that helped make their company

• It can lead to better financial performance

• Ignoring this may generate ill will and opposition

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Global Labor Monitoring

• Nike, Patagonia, Gap and Five other companies have joined forces with six leading anti-sweatshop groups to devise a single set of labor standard with a common factory inspection system.

• Goal – To replace today’s overlapping hodgepodge of approaches with something that’s easier and cheaper to use

Source: Business Week, May 23, 2005

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The Friedman Doctrine

• Rejects the idea that businesses should undertake social expenditures beyond those mandated by law

• The firm should maximize its profits

• If shareholders want to use proceeds for social investments that should be there choice; managers should not make that decision for them