Chapter 3

Corporate Social Responsibility and Business Ethics

0Chapter Summary

People in an organization set the legal, ethical, and moral tones in the workplace. Just as
individuals try to shape their neighborhoods, schools, political and social organizations, and
religious institutions, employees need to help determine the major issues of corporate social
responsibility and business ethics.

Strategic decisions involve trade-offs. We pursue one goal while subordinating another.
Individual employees must work to achieve the outcomes that they want. By choosing proper
behaviors, employees help to build an organization that can be respected and economically
viable in the long run.

Often, the concern is expressed that business activities tend to be illegal or unethical and
individuals’ failure to follow that pattern will leave them at a competitive disadvantage. The
reality is that business conduct is, as a rule, honorable and honest. Rare, highly publicized
criminal acts in business settings mask this reality. This chapter studies corporate social
responsibility. It attempts to understand it and learn how our businesses can use their
resources to make positive impacts on society. The chapter also looks at business ethics to
gain an appreciation for the importance of maintaining and promoting social values in the
workplace.

0Learning Objectives

1. Understand the importance of the stakeholder approach to social responsibility.

2. Explain the continuum of social responsibility and the effect of various options on
company profitability.
3. Describe a social audit and explain its importance.
4. Discuss the effect of the Sarbanes-Oxley Act of 2002 on the ethical conduct of
business.
5. Compare the advantages of collaborative social initiatives with alternative approaches
to CSR.
6. Explain the five principles of collaborative social initiatives.
7. Compare the merits of different approaches to business ethics.
8. Explain the relevance of business ethics to strategic management practice.

0Lecture Outline

I0. The Stakeholder Approach to Social Responsibility

A0. In defining or redefining the company mission, strategic managers must recognize the
legitimate rights of the firm’s claimants. These include outside stakeholders affected
by the firm’s actions.

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10. According to a survey of 2,361 directors in 291 of the largest southeastern U.S.
companies,

a0) Directors perceived the existence of distinct stakeholder groups

b0) Directors have high stakeholder orientations
c0) Directors view some stakeholders differently, depending on their
occupation (CEO or non-CEO) and type (inside or outside)

2. The study also found that perceived stakeholders were, in order of their
importance:

a) Customers and government

b) Stockholders
c) Employees
d) Society

3. When a firm attempts to incorporate the interests of these groups into its mission
statement, broad generalizations are insufficient. The firm should take these
steps:
a) Identification of stakeholders
(1) The left-hand column of Exhibit 3.1, A Stakeholder View of
Company Responsibility, lists the commonly encountered
stakeholder groups, to which the executive officer group often is
added.
(2) Every business faces a slightly different set of stakeholder groups,
which vary in number, size, influence, and importance.
(3) In defining the company, strategic managers must identify all
stakeholder groups and weigh their relative rights and relative ability
to affect the firm’s success.
b) Understanding stakeholders’ specific claims vis-à-vis the firm
(1) The concerns of the principal stakeholder groups tend to center on the
general claims listed in the right-hand column of Exhibit 3.1, A
Stakeholder View of Company Responsibility.
(2) Strategic decision makers should understand the specific demands of
each group if the are to initiate satisfactory actions.
c) Reconciliation of these claims and assignment of priorities
(1) Unfortunately, the claims of various stakeholder groups often conflict.
(2) For objectives and strategies to be internally consistent and precisely
focused, the statement must display a single-minded, though
multidimensional approach to the firm’s aims.
(3) There are hundreds, if not thousands, of claims on any firm—high
wages, pure air, job security, product quality, community service,
taxes, OSHA regulations, equal employment opportunity regulations,
product variety, wide markets, career opportunities, company growth,
investment security, high ROI, and many more.

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 (4) Not every claim can be pursued with equal emphasis.
(5) Priorities must be assigned in accordance with the relevant emphasis
that the firm will give them.
(6) Emphasis is reflected in the criteria that the firm uses in its strategic
decision making; in the firm’s allocation of its human, financial, and
physical resources; and in the firm’s long-term objectives and
strategies.
d) Coordination of the claims with other elements of the company mission
(1) The demands of stakeholder groups constitute only one principal set
of inputs to the company mission.
(2) The other principal sets are the managerial operating philosophy and
the determinants of the product-market offering.
(3) The key question is, “How can the firm satisfy its claimants and at the
same time optimize its economic success in the marketplace?”
B. The Dynamics of Social Responsibility

1. As indicated in Exhibit 3.2, Inputs to the Development of the Company

Mission, the various stakeholders of a firm can be divided into inside
stakeholders and outside stakeholders.

a) Insiders are individuals or groups that are stockholders or employees of

the firm.
b) Outsiders are all the other individuals or groups that the firm’s actions
affect.
c) The extremely large and often amorphous set of outsiders makes the
general claim that the firm be socially responsible.

2. Corporate social responsibility is the idea that a business has a duty to serve
society in general as well as the financial interests of its stockholders.

3. The stakeholder approach offers the clearest perspective on such issues.

a) Broadly stated, outsiders often demand that insiders’ claims be

subordinated to the greater good of the society (outsiders).
b) Outsiders believe issues like pollution and conservation of natural
resources should be principal considerations in strategic decision
making.
c) Insiders tend to believe that the competing claims of outsiders should be
balanced against one another in a way that protects the company
mission.
d) Some insiders also argue that the claims of society, as expressed in
government regulation, provide tax money that can be used to eliminate
water pollution and the like if the general public wants this to be done.

4. Issues are numerous, complex, and contingent on specific situations.

Therefore, rigid rules of business conduct cannot deal with them.

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 a) Each firm, regardless of size, must decide how to meet its perceived
social responsibility.
b) While large, well-capitalized companies may have easy access to
environmental consultants, this is not an affordable strategy for smaller
firms.
c) The experience of many small businesses demonstrates that it is feasible
to accomplish significant pollution prevention and waste reduction
without big expenditures and without hiring consultants.
d) Once a problem area is identified, a company’s line employees
frequently can develop a solution.
e) Making pollution prevention a social responsibility can be beneficial to
small and large companies.

5. Different approaches adopted by different firms reflect differences in

competitive position, industry, country, environmental and ecological
pressures, and a host of other factors.

a) They will reflect both situational factors and differing priorities in the
acknowledgement of claims.
b) Many marketers have already discovered new marketing realities by
adopting strategies called the “4 E’s”:

(1) Make it easy for the consumer to be green

(2) Empower consumers with solutions
(3) Enlist the support of the consumer
(4) Establish credibility with all publics and help to avoid a backlash

c) Despite differences in their approaches, most American firms now try to

assure outsiders that they attempt to conduct business in a socially
responsible manner.

II0. Types of Social Responsibility

A0. To better understand the nature and range of social responsibilities for which they
must plan, strategic managers can consider four types of social commitment:
economic, legal, ethical, and discretionary social responsibilities.

10. Economic responsibilities are the most basic social responsibilities of business.

a0) Economic responsibilities are the duty of managers, as agents of the

company owners, to maximize stockholder wealth.
b0) The essential responsibility of business is assumed to be providing goods
and services to society at a reasonable cost.
c0) In discharging its economic responsibility, the company emerges as
socially responsible by providing productive jobs for its workforce, and tax
payments for its local, state, and federal governments.

2. Legal responsibilities reflect the firm’s obligations to comply with the laws
that regulate business activities.

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 a0) The consumer and environmental movements focused increased public
attention on the need for social responsibility in business by lobbying for
laws that govern business in the areas of pollution control and consumer
safety.
b0) The intent of consumer legislation has been to correct the “balance of
power” between buyers and sellers in the marketplace.
c0) Among the most important laws are the Federal Fair Packaging and
Labeling Act that regulates labeling procedures, and the Consumer Product
Safety Act that protects consumers against unreasonable risks of injury.
d) The environmental movement has had a similar affect: it achieved stricter
enforcement of existing environmental protections and it spurred the
passage of new, more comprehensive laws.
e) The National Environmental Policy Act is devoted to preserving the United
State’s ecological balance and making environmental protection a federal
policy goal.
f) Legal responsibilities are supplemental to the requirement that businesses
and their employees comply fully with the general civil and criminal laws
that apply to all individuals and institutions in the country.
g) Exhibit 3.3, An Overview of Corporate Scandals, presents an overview
of seven cases that involved executives from Adelphia, Arthur Andersen,
Global Crossing, ImClone, Merrill Lynch, WorldCom, and Xerox.

3. Ethical responsibilities reflect the company’s notion of right and proper

business behavior.

a0) Ethical responsibilities are obligations that transcend legal requirements.

b0) Firms are expected, but not required, to behave ethically.
c0) Some actions that are legal might be considered unethical.
d) The topic of management ethics receives attention later in the chapter.

4. Discretionary responsibilities are those that are voluntarily assumed by a

business organization.

a0) These responsibilities include public relations, good citizenship, and full
corporate responsibility.
b0) Discretionary responsibilities have a self-serving dimension.
c0) A commitment to full corporate responsibility requires strategic managers
to attack social problems with the same zeal in which they attack business
problems.
d) It is important to remember that the categories on the social responsibility
continuum overlap, creating many gray areas where societal expectations
on organizational behavior are difficult to categorize.

B. Corporate Social Responsibility and Profitability

1. CSR and the Bottom Line

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 a) The goal of every firm is to maintain viability through long-run
profitability. Until all costs and benefits are accounted for, however,
profits may not be claimed.
b) Corporate social responsibility (CSR), is the idea that business has a
duty to serve society in general as well as the financial interests of
stockholders.
c) The dynamic between CSR and success (profit) is complex. They are not
mutually exclusive, and they are not prerequisites of each other.
d) View CSR as a component in the decision-making process of business
that must determine, among other objectives, how to maximize profits.
e) Attempts to undertake a cost-benefit analysis of CSR have not been very
successful. Several factors complicate the process:

(1) Some CSR activities incur no dollar costs at all.

(2) Philanthropic activities of a corporation, which have been a
traditional mainstay of CSR, are undertaken at a discounted cost to
the firm since they are often tax deductible. The benefits can be
enormous.
(3) Socially responsible behavior does not come at a prohibitive cost.
(4) Socially responsible practices may create savings, and, as a result,
increase profits.
(5) Proponents argue that CSR costs are more than offset in the long
run by an improved company image and increased community
goodwill.
(6) The mission statement of Johnson & Johnson is provided as
Exhibit 3.4, Strategy in Action.

2. Performance

a) How do managers measure the financial effect of corporate social

performance?
b) Critics of CSR believe companies that behave in a socially responsible
manner, and portfolios comprising these companies’ securities, should
perform more poorly financially than those that do not.
c) The restrictive natures of portfolios based on social criteria should
increase portfolio risk and reduce return, according to critics or CSR.

3. CSR Today

a) CSR has become a priority with American businesses.

b) The Resurgence of Environmentalism

(1) Since the Exxon Valdez disaster, the Coalition for Environmentally
Responsible Economies (CERES) was formed to establish new
goals for environmentally responsible corporate behavior.
(2) This group drafted the CERES Principles to “establish and
environmental ethic with criteria by which investors and others can
assess the environmental performance of companies. Companies
that sign these Principles pledge to go voluntarily beyond the
requirements of the law.”

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 c) Increasing Buying Power

(1) The rise of the consumer movement has meant that buyers—
consumers and investors—are increasingly flexing their economic
muscle.
(2) Consumers are becoming more interested in buying products from
socially responsible companies.
(3) The Council on Economic Priorities (CEP) helps consumers make
more informed buying decisions through publications.
(4) CEP also sponsors the annual Corporate Conscience Awards,
which recognize socially responsible companies.
(5) Investors represent a type of influential consumer.
(6) While social investing wields relatively low power as an individual
private act (selling one’s own shares of ExxonMobil does not affect
the company), it can be very powerful as a collective public act.
(7) Social investors comprise both individuals and institutions,
including educational institutions and large pension funds.
(8) Large-scale social investing can be broken down into two broad
areas of guideline portfolio investing and shareholder activism.
(9) Screens for guideline portfolio investing may be negative or
combine negative and positive elements.
(10) In contrast to passive guideline portfolio investors, shareholder
activists seek to directly influence corporate social behavior.

d) The Globalization of Business

(1) Management issues have become more complex as companies

increasingly transcend national borders: It is difficult enough to
come to a consensus on what constitutes socially responsible
behavior in one culture, let alone determine common ethical values
across cultures.
(2) One of the most contentious social responsibility issues confronting
multinational firms pertains to human rights.
(3) While Chinese workers are happy to earn manufacturer wages in
China, and U.S. customers are pleased by the lower prices charged
for foreign manufactured goods, others believe such firms are
failing to satisfy their social responsibilities.
(4) The dynamic between CSR and success (profit) is complex. They
are not mutually exclusive, and they are not prerequisites of each
other.
(5) Exhibit 3.5, Strategy in Action, discusses these pressures (from
union and human rights advocates, for example) sometimes take
the form of law suits.

III. Sarbanes-Oxley Act of 2002

A. Following a string of wrongdoings by corporate execs in 2000-2002, and subsequent

failures of those firms, Washington lawmakers proposed more than 50 policies to
assure investors. The successful bill was called the Public Company Accounting
Reform and Investor Protection Act of 2002. It was changed to the Sarbanes-
Oxley Act of 2002.

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1. The law revised and strengthened auditing and accounting standards.

2. Law applies to public companies with securities registered under Section 12

of the Securities Act of 1934 and those required to file reports under section
15(d) of the Exchange Act.

3. The Act includes required certifications for financial statements, new

corporate regulations, disclosure requirements, and penalties for failure to
comply.

4. Exhibit 3.6, Strategy in Action, provides more details on the SOA.

5. Features of SOA:

a. The CEO and CFO must certify every report containing the company’s
financial statements. They must attest to the report’s accuracy and
reliability.

(1) Based on the officer’s knowledge, the report is a reliable source of

the company’s financial condition and result of operations for the
period represented.
(2) The certification also makes the officers responsible for
establishing and maintaining internal controls such that they are
aware of any material information relating to the company.
(3) The officers must evaluate the effectiveness of the internal controls
within 90 days of the release of the report and present their
conclusions of the effectiveness of the controls.
(4) The officers must disclose any fraudulent material, deficiencies in
the reporting of the financial reports, or problems with the internal
control to the company’s auditors and auditing committee.
(5) The officers must indicate any changes to the internal controls or
factors that could affect them.

b. The corporate control of executives, accounting firms, auditing

committees, and attorneys is restricted.

(1) The Act bans personal loans for executives.

(2) Executive officers and directors are not permitted to purchase, sell,
acquire, or transfer any equity security during any pension fund
blackout period.
(3) Executives are required to notify fund participants of any blackout
period and the reasons for the blackout period.
(4) The SEC will provide the company’s executives with a code of
ethics for the company to adopt. Failure to meet the code must be
disclosed to the SEC.

c. The Act limits some and issues new duties of the registered public
accounting firms that conduct the audits of the financial statements.

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 (1) Accounting firms are prohibited from performing bookkeeping or
other accounting services related to the financial statements,
designing or implementing financial systems, appraising, internal
auditing, brokering banking services, or providing legal services
unrelated to the audit.
(2) All critical accounting policies and alternative treatments of
financial information within generally accepted accounting
principle (GAAP), and written communication between the
accounting firm and the company’s management must be reported
to the audit committee.

d. The Act defines the composition of the audit committee and specifies its
responsibilities.

(1) The members of the audit committee must be members of the

company’s board of directors.
(2) At least one member of the committee should be classified as a
“financial expert.”
(3) The audit committee is directly responsible for the work of any
accounting firm employed by the company, and the accounting
firm must report directly to the audit committee.
(4) The audit committee must create procedures for employee
complaints or concerns over accounting or auditing matters.
(5) Upon discovery of unlawful acts by the company, the audit
committee must report and be supervised in its investigation by a
Public Company Accounting Oversight Board.

e. The Act includes rules for attorney conduct.

(1) If a company’s attorneys find evidence of securities violations, they

are required to report the matter to the chief legal counsel or CEO.
(2) If there is not an appropriate response, the attorneys must report the
information to the audit committee or the board of directors.

f. Disclosure periods for financial operations and reporting are stipulated.

(1) Relevant information relating to changes in the financial condition

or operations of a company must be immediately reported in plain
English.
(2) Off-balance sheet transactions, correcting adjustments, and pro-
forma information must be presented in the annual and quarterly
financial reports.
(3) The information must not contain any untrue statements, must not
omit material facts, and must meet GAAP standards.

g. Stricter penalties have been issued for violations of the SOA.

(1) If a company must restate its financial statements due to

noncompliance, the CEO and CFO must relinquish any bonus or
incentive-based compensation or realized profits from the sale of

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 securities during the 12-month period following filing with the
SEC.
(2) Other securities fraud, such as destruction or falsification or
records, results in fines and prison sentences up to 25 years.

B. The New Corporate Governance Structure

1. A major consequence of the 2000-2002 accounting scandals was SOA. A

major consequence of the legislation has been restructuring governance
structure in American corporations.

2. The most significant change is the heightened role of corporate internal

auditors, as depicted in Exhibit 3.7, Strategy in Action.

3. In the past, internal auditors reviewed financial reports generated by other

corporate accountants.

a. Auditors considered professional accounting and financial practices, as

well as relevant aspects of corporate law, and then presented their
findings to the CFO.
b. Historically, the CFO reviewed the audits and determined the financial
data and information that was to be presented to top management,
directors, and investors.

4. Because Sarbanes-Oxley requires that CEOs and audit committees sign off on
financial results, auditors now routinely deal directly with top corporate
officials, as show in the new structure in Exhibit 3.8, Strategy in Action.

a. Approximately 75 percent of senior corporate auditors now report

directly to the Board’s audit committee.
b. To eliminate the potential for accounting problems, companies are
establishing direct lines of communication between top managers and
the board and auditors that inform the CFO but that are not depended on
CFO approval or authorization.

5. The new structure also provides the CEO information provided directly by the
company’s chief compliance and chief accounting officers.

a. The CFO, who is responsible for ultimately approving all company

payments, is not empowered to be the sole provider of data for financial
evaluations by the CEO and board.

C. CSR’s Effect on the Mission Statement

1. The mission statement not only identifies what product or service a company
produces, how it produces it, and what market it serves, it also embodies what
the company believes.

a. It is essential that the mission statement recognize the legitimate claims

of its external stakeholders, which may include creditors, customers,

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 suppliers, government, unions, competitors, local communities, and
elements of the general public.
b. This stakeholder approach has become widely accepted by U.S.
businesses.
c. Customers, government, stockholders, employees, and society, in that
order, were perceived by directors to be the most important stakeholders
according to a survey of 291 of the largest southeastern U.S. companies.

2. In developing mission statements, managers must identify all stakeholder

groups and weigh their relative rights and abilities to affect the firm’s
success.

a. Some companies are proactive in their approach to CSR, making it an

integral part of their raison d’être.
b. Other firms are reactive, adopting socially responsible behavior only
when they must.

D. Social Audit

1. A social audit is an attempt to measure a company’s actual social

performance against its social objectives.

a. A social audit may be performed by the company itself; however, one

conducted by an outside consultant who will impose minimal biases may
prove more beneficial to the firm.
b. As with a financial audit, an outside auditor brings credibility to the
evaluation.
c. Credibility is essential if management is to take the results seriously and
if the general public is to believe the company’s public relations
pronouncements.

2. Careful, accurate monitoring and evaluation of a company’s CSR actions are

important not only because the company wants to be sure it is implementing
CSR policy as planned, but also because CSR actions by their nature are open
to intense public scrutiny.

3. Once the social audit is complete, it may be distributed internally or both

internally and externally, depending on the firm’s goals and situation.

a. Some firms include a section in their annual report devoted to social

responsibility activities.
b. Other firms public a separate periodic report on their social
responsiveness.
c. Companies publishing separate social audits include GM, Bank of
America, Atlantic Richfield, Control Data, and Aetna Life and Casualty
Company.
d. Nearly all Fortune 500 corporations disclose social performance
information in their annual reports.

4. Large firms are not the only companies employing the social audit.

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 a. Ben & Jerry’s, a CSR pioneer, publishes a social audit in its annual
report.
b. The audit is conducted by an outside consultant.
c. The audit scores company performance in such areas as employee
benefits, plant safety, ecology, community involvement, and customer
service.
d. The report is published unedited.

5. The social audit may be used for more than simply monitoring and evaluating
firm social performance.

a. Managers use social audits to scan the external environment, determine

firm vulnerabilities, and institutionalize CSR within the firm.
b. Companies themselves are not the only ones who conduct social audits;
public interest groups and the media also watch companies who claim to
be socially responsible very closely to see if they practice what they
preach.
c. These organizations include consumer groups and socially responsible
investing firms that construct their own guidelines for evaluating
companies.

IV. Management Ethics

A. The Nature of Ethics in Business

1. Central to the belief that companies should be operated in a socially

responsive way for the benefit of all stakeholders is the belief that managers
will behave in an ethical manner.

2. The term ethics refers to the moral principles that reflect society’s beliefs
about the actions of an individual or group that are right and wrong.

3. The values of one individual, group, or society may be at odds with the values
of another.

4. Ethical standards reflect not a universally accepted code, but rather the end
product of a process of defining and clarifying the nature and content of
human interaction.

V. Satisfying Corporate Social Responsibility

A. Executives face conflicting pressures to contribute to social responsibility while

honoring their duties to maximize shareholder value.

1. These days they face many belligerent critics who challenge the idea of a
single-minded focus on profits.

2. They also face skeptics who contend that CSR initiatives are chiefly a
convenient marketing gloss.

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 3. The reality is that most executives are eager to improve their CSR
effectiveness.

4. The issues are not whether firms will engage in socially responsible activities,
but how.

5. For most firms, the challenge is how best to achieve the maximum social
benefit from a given amount of resources available for social projects.

B. The Core of the CSR Debate

1. The proper role of CSR—the actions of a company to benefit society beyond

the requirements of the law and the direct interests of shareholders—has
generated a century’s worth of philosophically and economically intriguing
debates.

a. Since steel baron Andrew Carnegie published The Gospel of Wealth in

1899, the argument that businesses are the trustees of social property
that should be managed for the public good has been seen as one end of
a continuum with, at the other end, the belief that profit maximization is
management’s only legitimate goal.
b. The CSR debates had been largely confined to the background for most
of the twentieth century.

2. The debates surfaced in more positive ways in the last 30 years as new
businesses set up shop with altruism very much in mind and on display.

3. More executives have come to understand the value of their companies’

reputations with customers—and with investors and employees.

4. In the past, research on the financial effect of CSR produced inconsistent

findings.

a. Some studies reported a positive relationship, others a negative one, and

others no relationship at all.
b. Since the mid-1990s, improvements in theory, research designs, data,
and analysis have produced empirical research with more consistent
results.
c. Importantly, a recent meta-analysis (a methodological technique that
aggregates findings on multiple studies) of more than 10 studies found
that on balance, positive relationships can be expected from CSR
initiatives but that the primary vehicle for achieving superior financial
performance from social responsibility is via reputation efforts.

5. There is no shortage of options with which businesses can advance their CSR
goals.

6. Exhibit 3.8, Continuum of Corporate Social Responsibility

Commitments, shows a simple illustration of the range of options available
to corporations as they consider their CSR commitments.

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 7. Managers need a model that they can use to guide them in selecting social
initiatives and through which they can exploit their companies’ core
competencies for the maximum positive impact.

C. Mutual Advantages of Collaborative Social Initiatives

1. The term social initiative describes major initiatives that take a collaborative
approach.

a. Research on alliances and networks among companies in competitive

commercial environments tells us that each partner benefits when the
other brings resources, capabilities, or other assets that it cannot easily
attain on its own.
b. These combinative capabilities allow the company to acquire and
synthesize resources and build new applications from those resources,
generating innovative responses to rapidly evolving environments.

2. While neither companies nor non-profits are well-equipped to handle

escalating social or environmental problems, each participant has the
potential to contribute valuable material resources, services, or individuals’
voluntary time, talents, energies, and organizational knowledge.

a. Those cumulative offerings are vastly superior to cash-only donations,

which are a minimalist solution to the challenges of social responsibility.
b. Social initiatives involve ongoing information and operational
exchanges among participants and are especially attractive because of
their potential benefit for both the corporate and not-for-profit partners.

3. There is strong evidence to show that CSR activities increasingly confer

benefits beyond enhanced reputation.

a. For some participants, they can be a tool to attract, retain, and develop
managerial talent.
b. The PricewaterhouseCooper (PwC) Project Ulysses is a leadership
development program that sends small teams of PwC partners to
developing countries to apply their expertise to complex social and
economic challenges.

D. Five Principles of Successful Collaborative Social Initiatives

1. There are five principles that are central to successful CSIs, as shown in
Exhibit 3.9, Five Principles of Successful Corporate Social Responsibility
Collaboration.

2. When CSR initiatives include most or all of these elements, companies can
indeed maximize the effects of their social contributions while advancing
broader strategic goals.

a. Identify a Long-Term Durable Mission

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 (1) Companies make the greatest social contribution when they
identify an important, long-standing policy challenge and they
participate in its solution over the long term.
(2) Ron Alsop argues that companies that are interested in contributing
to corporate responsibility and thus burnishing their reputations
should “own the issue.”
(3) Companies that step up to tackle problems that are clearly
important to society’s welfare and that require substantial resources
are signaling to internal and external constituencies that he
initiative is deserving of the company’s investment.

b. Contribute “What We Do”

(1) Companies maximize the benefits of their corporate contributions

when they leverage core capabilities and contribute products and
services that are based on expertise used in or generated by their
normal operations.
(2) Such contributions create a mutually beneficial relationship
between the partners; the social-purpose initiatives receive the
maximum gains while the company minimizes costs and
diversions.
(3) It is not essential that these services be synonymous with those of
the company’s business, but they should build upon some aspect of
its strategic competencies.

c. Contribute Specialized Services to a Large-Scale Undertaking

(1) Companies have the greatest social impact when they make
specialized contributions to large-scale cooperative efforts.
(2) Those that contribute to initiatives in which other private, public,
or nonprofit organizations area also active have an effect that goes
beyond their limited contributions.
(3) Although it is tempting for a company to identify a specific cause
that will be associated only with its own contributions, such a
strategy is likely to be viewed as a “pet project” and not as a
contribution to a large problem where a range of players have
important interests.

d. Weigh Government’s Influence

(1) Government support for corporate participation in CSIs—or at least

its willingness to remove barriers—can have an important positive
influence.
(2) Tax incentives, liability protection, and other forms of direct and
indirect support for businesses all help to foster business
participation and contribute to the success of CSIs.
(3) Endorsements can also be very valuable.

e. Assemble and Value the Total Package of Benefits

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 (1) Companies gain the greatest benefits from their social contributions
when they put a price on the total benefit package.
(2) The valuation should include both the social contributions
delivered and the reputation effects that solidify or enhance the
company’s position among its constituencies.
(3) Positive reputation is driven by genuine commitment rather than
episodic or sporadic interest.
(4) Consumers and other stakeholders see through nominal
commitments designed simply to garner short-term positive
goodwill.

E. Assembling the Components

1. A range of corporate initiatives lend themselves to the CSI model because

they share most of the five key attributes we have described here:

a. they have long-term objectives

b. they are sufficiently large to allow a company to specialize in its
contributions
c. they provide many opportunities for the company to contribute from its
current activities or products
d. they enjoy government support
e. they provide a package of benefits that adds value to the company
f. Exhibit 3.10, Five Successful Collaborative Social Initiatives,
summarizes five very successful CSI programs and their performance
against each of the five principles.

2. Of the five principles, the most important by far is the second one.

a. Companies must apply what they do best in their normal commercial

operations to their social responsibility undertakings.
b. The tenet is consistent with research that argues that social activities
most closely related to the company’s core mission are most efficiently
administered through internalization or collaboration.

F. The Limits of CSR Strategies

1. Some companies have embedded social responsibility and sustainability

commitments deeply in their core strategies.

a. Research suggests that such single-minded devotion to CSR may be

unrealistic for large, more established corporations.

2. Larger companies must move beyond the easy options of charitable donations
but also steer clear of overreaching commitments.

a. This is not to suggest that companies should not think big—research

shows that projects can be broad in scale and scope and still succeed.
b. Companies need to view their commitments to corporate responsibility
as one important part of their overall strategy but not let the commitment
obscure their broad strategic business goals.

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 c. By starting with a well-defined CSR strategy and developing the
collaborative initiatives that support that strategy by meeting the five
criteria identified above, companies and their leaders can make
important contributions to the common good while advancing their
broader financial and market objectives.

3. CSR strategies can also run afoul of the skeptics, and the speed with which
information can be disseminated via the Web—and accumulated in Web logs
—makes this an issue with serious ramifications for reputation management.

G. The Future of CSR

1. CSR is firmly and irreversibly part of the corporate fabric.

a. Managed properly, CSR programs can confer significant benefits to

participants in terms of corporate reputation; in terms of hiring,
motivation, and retention; and as a means of building and cementing
valuable partnerships.
b. The benefits extend well beyond the boundaries of the participating
organizations, enriching many lives, communities, and pushing back
threatening social problems.

2. The prickly aspect of CSR is that for all of their resources and capabilities,
corporations will face growing demands for social responsibility
contributions far beyond simple cash or in-kind donations.

a. Aggressive protestors will keep the issues hot, employees will continue
to have their say, and shareholders will pass judgment with their
investments and their votes.

3. The challenge for management is to know how to meet the company’s

obligations to all stakeholders without compromising the basic need to earn a
fair return for its owners.

4. A collaborative approach is most effective.

5. The public’s perception of ethics in corporate America is near its all-time

low.

6. Exhibit 3.11, Strategy in Action, describes the most notorious case of

corporate failure—the Enron Corporation.

7. A CEO who succeeded brilliantly in restoring his company’s credibility is

Tyco’s Edward Breen, as discussed in Exhibit 3.12, Top Strategist.

8. External stakeholders are not the only critics of business ethics today.

9. Exhibit 3.13, Strategy in Action, presents the findings of a major survey of

HR managers.

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 10. Even when groups agree on what constitutes human welfare, the means they
choose to achieve it may differ.

H. Approaches to Questions of Ethics

1. Managers report that the most critical quality of ethical decision making is
consistency.

2. Managers who adopt the utilitarian approach judge the effects of a

particular action on the people directly involved, in terms of what provides
the greatest good for the greatest many.

a. This approach focuses on actions rather than motives.

b. Potentially positive results are weighed against potentially negative
ones.
c. If the positive outweighs negative, the managers will likely proceed with
the action.
d. That some people might be adversely affected is accepted as inevitable.

3. Managers who subscribe to the moral rights approach judge whether

decisions and actions are in keeping with the maintenance of fundamental
individual and group rights and privileges.

a. The moral rights approach (also called deontology) includes the rights of
human beings to life and safety, a standard of truthfulness, privacy,
freedom of expression, freedom of speech, and private property.

4. Managers who take the social justice approach judge how consistent actions
are with equity, fairness, and impartiality in the distribution of rewards and
costs among individuals and groups.

a. These ideas stem from two principles known as the liberty principles and
the difference principle.
b. The liberty principle states that individuals have certain basic liberties
compatible with similar liberties by other people.
c. The difference principle states that social and economic inequities must
be addressed to achieve a more equitable distribution of goods and
services.

5. In addition to these defining principles, three implementing principles are

essential to the social justice approach.

a. According to the distributive-justice principle, individuals should not be

treated differently on the basis of arbitrary characteristics, such as race,
sex, religion, or national origin. This is embodied in the Civil Rights
Act.
b. The fairness principle means that employees must be expected to engage
in cooperative activities according to rules of the company, assuming
that the company rules are deemed fair.
c. The natural-duty principle points up a number of general obligations,
including the duty to help others who are in need or danger, the duty not

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 to cause unnecessary suffering, and the duty to comply with the just
rules of an institution.

VI. Code of Business Ethics

A. To help ensure consistence in the application of ethical standards, an increasing

number of professional associations and businesses are establishing codes of
ethical conduct.

1. Associations of chemists, funeral directors, law enforcement agents,

migration agents, hockey players, Internet providers, librarians, military arms
sellers, philatelists, physicians, and psychologists all have such codes.

2. Nike’s code is presented in Exhibit 3.14, Strategy in Action.

B. Major Trends in Codes of Ethics

1. The increased interest in codifying business ethics has led to both the
proliferation of formal statements by companies and to their prominence
among business documents.

2. Such codes used to be found solely in employee handbooks, for the most part.

3. Companies are adding enforcement measures to their codes.

4. Increased attention by companies in improving employees’ training in

understanding their obligations under the company’s code of ethics.

Questions for Discussion

10. Define the term social responsibility. Find an example of a company action that was
legal but not socially responsible. Defend your example on the basis of your definition.

The chapter discusses social responsibility and an organization’s role in acting

responsibly. While an organization has inside and outside stakeholders (see Exhibit 3.2,
Inputs to the Development of the Company Mission, on page 52), social responsibility
means that the claims of insiders be subordinated to the greater good of society. What
this means is that such issues as pollution, the disposal of solid and liquid wastes, and
the conservation of natural resources should be the principal considerations in strategic
decision making (page 52).

To look at a company that acted legally but not in a socially responsible manner is an
interesting exercise. An example may be a paper company that cuts trees that it has
under contract (legal) but does not plant new trees (not acting in a socially responsible
manner). This can be assigned as an individual or a group exercise.

2. Name five potentially valuable indicators of a firm’s social responsibility and describe
how company performance in each could be measured.

Indicators of a firm’s social responsibility may include:

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 • The company’s environmental policy – indicator could be its access to
environmental consultants, its environment budget, etc.
• A packaging company’s recycling policy – its approach to cycling, its marketing
budget to educate consumers to recycle
• A global company’s interaction with several local communities that it does
business in – does the organization have a manager in charge of local liaison, or
does it have a “buy local” policy?
• Interaction with stockholders – does it have a code of conduct to deal with such as
institutional stockholders?
• A company’s interface with its employees – what is the company’s policy in hiring
minorities? How many minorities does it have in managerial positions?

3. Do you think a business organization in today’s society benefits by defining a socially

responsible role for itself? Why or why not?

The section “Corporate Social Responsibility and Profitability” (pages 54-59) provides
insight into this issue. It identifies three reasons why managers should be concerned
about the socially responsible behavior of their firms. First, a company’s right to exist
depends on its responsiveness to the external environment. Second, federal, state, and
local governments threaten increased regulation if business does not evolve to meet
changing social standards. Third, a responsive corporate social policy may enhance a
firm’s long-term viability. Of these, the second is probably the most pertinent to this
question. If the company does not define a socially responsible role for itself, one or
more external bodies may force it to act in a socially responsible manner, which may be
expensive for the company.

4. Which of the three basic philosophies of social responsibility would you find most
appealing as the chief executive of a large corporation? Explain.

The stakeholder approach is probably the best because it approaches social

responsibility from the stakeholders’ point-of-view. As the CEO of a large corporation,
one would identify the organization’s stakeholders, know their demands and try to set
up processes that meet their demands. If the company does it proactively, their efforts
are likely to pay off in the long run.

5. Do you think society’s expectations for corporate social responsibility will change in the
next decade? Explain.

Society’s expectations for corporate social responsibility are likely to increase in the
next decade. This is because stakeholders are likely to become more powerful and
vociferous. For example, institutional investors (pension funds, mutual funds) invest
heavily in companies and have the power to demand changes. Abuses of power by
companies such as Wal-Mart (which stands accused of bullying suppliers and sub par
treatment of employees) may bring out strident activists who may demand changes. The
Internet allows for easier and faster communication among individuals – so gathering
support for an action that forces companies to employ fair labor practices becomes
easier. These and other similar factors may increase society’s expectations of
companies.

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6. How much should social responsibility be considered in evaluating an organization’s
overall performance?

While measuring a company’s social responsibility is still a sticky issue, its importance
in evaluating an organization’s overall performance should not be under estimated
because if a company does not act in a socially responsible manner, society will force it
to do so at a much higher cost. Opinions may vary, though, as to how heavily social
responsibility should be weighted in a firm’s overall performance.

7. Is it necessary that an action be voluntary to be termed socially responsible? Explain.

The section titled “Types of Social Responsibilities” (pages 53-54) identifies four types
of social commitment: economic, legal, ethical, and discretionary.

Discretionary responsibilities are those that are voluntarily assumed by a business

organization. It appears that this is the highest form of social responsibility because no
external agency demands this of the organization. It is done proactively by the
organization. However, it does not mean that an action has to be voluntary to be termed
socially responsible. An example may be that a company which manufactures its goods
in Third World countries may not honestly know that the local contractors are abusing
their workers. But if the abuse is pointed out by an activist group, and if the company
then takes corrective action immediately, one can argue that the company has acted in a
socially responsible manner.

8. Do you think an organization should adhere to different philosophies of corporate

responsibility when confronted with different issues, or should its philosophy always
remain the same? Explain.

There is a lot of merit in having one consistent philosophy that covers various issues,
which allows the company to act quickly and consistently. In contrast, having multiple
philosophies for different issues may lead to inconsistent action.

9. Describe yourself as a stakeholder in a company. What kind of stakeholder role do you

play now? What kind of stakeholder roles do you expect to play in the future?

The most common stakeholder role that a student may play now is that of an employee
(an inside stakeholder). Later on in his/her career, the student may play the role of a
stockholder. If the student becomes active in the community, then he/she may play yet
another role.

10. What sets the affirmative philosophy apart from the stakeholder philosophy of social
responsibility? In what areas do the two philosophies overlap?

The two would differ on the origin of social responsibility: external versus internal (or
voluntary). The two philosophies would overlap in the actions taken by the company, in
that both philosophies would require the company to take action.

11. Cite examples of both ethical and unethical behavior drawn from your knowledge of
current business events.

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 Examples of ethical behavior are hard to find simply because the business press appears
to focus on unethical behavior of executives. One example of ethical behavior is the
brave action of Sharron Watkins who blew the whistle on Enron. She did this because,
even though her job was in jeopardy, she thought this was the right thing to do. In
contrast, examples of unethical behavior include: Dennis Kozlowski’s abuse of Tyco
and the shenanigans of several top executives at Enron, Arthur Andersen, and
WorldCom. The instructor may wish to assign students to collect information on each of
these incidents.

12. How would you describe the contemporary state of business ethics?

The business press has reported several cases of egregious abuse of corporate power by
managers: Martha Stewart, Dennis Kozlowski at Tyco, several top executives at Enron,
etc. These seem to suggest that in today’s America, regard for ethics is at an all time
low. Managers are abusing the agency relationship to enrich themselves. However, since
these abuses have been heavily chronicled and publicized, there is a possibility that the
tide will change.

13. How can business self-interest also serve social interests?

Business self-interest can also serve social interests when it becomes clear to corporate
executives that if the organization does not act in a socially responsible manner, it will
be forced to do so, often at a higher cost. When proactive socially responsible behavior
is rewarded, the message will get through that it pays to be socially responsible.

Chapter 3 Discussion Case – “Wal-Mart vs. Class Actions: The retail giant’s
novel defense in a massive suit could rewrite the playbook”

Case Summary
This case discusses what could be a landmark case for corporate America. Wal-Mart is in the
middle of a class action sex discrimination case that will be heard soon by the U.S. Ninth
Circuit Court of Appeals. This type of case has plagued Boeing, Coca-Cola, and dozens of
other large employers over the years. What is so important about this particular case? Wal-
Mart’s ambitious legal strategy strikes at the heart of what it means to file a class action. The
company claims its constitutional rights would be violated if the court allows a suit to go
forward involving up to 1.5 million of the retailing giant’s former and current female
employees. The logic is that the case would deprive the company of its rights to defend itself
against each woman’s claims. Instead, the company says that it would be appropriate to argue
cases on a store-by-store basis.

A few other companies have tried similar arguments in bits and pieces and have gotten
nowhere. Wal-Mart is the first to tackle the constitutional issues of class actions head-on. The
Ninth Circuit is more liberal, and so the company faces stiff odds. The firm is likely hoping
to be heard in the more conservative U.S. Supreme Court. The big question is whether Wal-
Mart’s suggested store-by-store idea makes sense. The resulting thousands of mini class
actions could clog the U.S. courts for years.

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The case began in 2001, when a group of female Wal-Mart employees sued, claiming that the
world’s largest retailer systematically paid women less than men in the same jobs and
promoted men ahead of similarly talented women. Last June the plaintiffs were granted class
status, allowing them to sue on behalf of all women who had worked at Wal-Mart’s U.S.
stores since December, 1998.

Wal-Mart says that if they lose, they could be forced to pay for something the company
didn’t do. That would be a violation of the company’s due-process rights in the Fifth
Amendment. One Wal-Mart lawyers said: “When you’re talking about taking money from
one citizen and giving it to another, you can’t just rely on aggregate statistics, which don’t
tell you who is actually discriminated against.” The plaintiffs’ argument is that broad
workforce data are actually more reliable than individual hearings in such cases as these. At
issue is Wal-Mart’s alleged “tap-on-the-shoulder” method of promoting hourly workers. The
two sides disagree just as strongly about which approach would be fairer to the individual
women involved. There is little doubt that employers of all sizes could benefit if Wal-Mart
wins the case.

Key Issues Addressed

• Identify the various types of social responsibility and classify Wal-Mart’s actions
accordingly. Please refer to the section titled “Types of Social Responsibility” on pages 53-
54.

• Explain the relationship between corporate social responsibility and the company’s
profitability. Define the factors determining this relationship. Please refer to the section
titled “Corporate Social Responsibility” on pages 54-59.

• This case can help to demonstrate the value of a social audit. Please refer to the section
titled “Social Audit” on pages 64-65.

• Identify which companies subscribe to which philosophies regarding CSR and ethics in
general. Please refer to the section titled “Approaches to Questions of Ethics” on pages 77-
78.

Case Discussion Questions

1. Does Wal-Mart use the stakeholder approach to social responsibility? How can you tell?

No, Wal-Mart does not subscribe wholly to the stakeholder approach. The firm probably
does have a list of various stakeholders, and has identified what their claims they try to
hold on the company. However, the firm does not attempt to incorporate the interests of
these groups into the demonstrated mission of the firm. The following steps should be
taken in incorporating stakeholders’ interests:

1. Identification of stakeholders
2. Understanding the stakeholders’ specific claims vis-à-vis the firm
3. Reconciliation of these claims and assignment of priorities to them
4. Coordination of the claims with other elements of the company mission (Refer
to the section titled “The Stakeholder Approach to Social Responsibility.)

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 While the firm likely performs step one and maybe step two, they have not
demonstrated steps three or four, at least from what we can tell from the case.
Unfortunately, this has had a negative financial impact on the firm in the sense that their
public image is suffering, and they are experience real financial costs as a result of the
class action itself (legal fees, etc.) so far.

20. There are four main types of social responsibility: economic, legal, ethical, and
discretionary. Which responsibilities does the Wal-Mart case deal with? How could
Wal-Mart’s position be changed for the better?

The text section titled “Types of Social Responsibility” (pages 53-54) will help with this
discussion. It lists and explains the four types of social responsibility. Economic
responsibilities are the most basic social responsibilities of business. They deal with the
managers’ duty as agents to maximize stockholder wealth. Second, legal responsibilities
involve the firm’s obligations to comply with laws. Ethical responsibilities are the way
the company handles “proper” business behavior—a notion of right and wrong. Lastly,
discretionary responsibilities are those that an organization assumes voluntarily.

The case shows that Wal-Mart is dealing primarily with its legal responsibilities. The
issue of ethics is not directly confronted in this case. However, we can assume that this
is a matter of ethics by the definition provided on page 65 in the text under the section
titled “Management Ethics.” Ethical responsibilities (text page 54) reflect the
company’s notion of right and proper business behavior. They are obligations beyond
legal obligations that the firm is not required to assume. Some actions are legal that
might be considered unethical. In this case, most students would agree that Wal-Mart’s
actions in getting into this legal position in the first place are the result of unethical
behavior. The case mentions the firm’s “tap-on-the-shoulder” method of promoting
hourly wage workers. This means some workers never get to apply for positions, and
others are chosen before the position is even created. (Please refer to page 82, paragraph
8 of the case.) With regard to the class action itself, the firm says that it would be more
fair to the individual women involved if the court dealt with situations case-by-case or
store-by-store rather than nationally. It is for the courts to decide what laws are
applicable in determining the case; but it is for the rest of Corporate America to
determine what position to take regarding firm’s ethical and discretionary positions.

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