Business Ethics and Social Responsibility

Introduction to Business .
Chapter 3: BUSINESS ETHICS AND SOCIAL RESPONSIBILITY

Handout 3.1
Business decisions should be guided by business ethics. Unethical decisions usually
occur when the decision maker makes a decision that is intended to benefit himself or
herself, rather than the firms stakeholders. Some form of monitoring may be required
to ensure that decision makers of firms maintain their responsibilities to their
stakeholders and to the environment. Exhibit 3.1 provides some examples of unethical
decisions and who they benefit and who they adversely impact.
Impact of Unethical Practices on Firm Value: Unethical business practices can
adversely affect a firms value. Exhibit 3.2 and Exhibit 3.3 provide two examples of how
a firms value (as measured by its stock price) declined when it was accused of
unethical practices.
I.
Responsibility to Customers
A.
Firms have a social responsibility to ensure that their products, services,

and actions affect society in a beneficial way.
B.
Responsible production practices include proper warning labels to

prevent accidents that could result from misuse.
C.
Responsible sales practices are established by guidelines that

discourage employees from using unnecessarily aggressive sales
strategies or deceptive advertising.
A.
How Firms Ensure Responsibility toward Customers
D.
1.
Establish a code of ethics that sets guidelines for product quality

and customer relations. Exhibit 3.4 is an example of a corporate
code of ethics.
2.
Monitor Complaints from customers regarding the quality of the

product or treatment received from employees. Follow-up can then
identify the necessary corrective action.
3.
Gather customer feedback via customer questionnaires regarding

the products or services customers have recently purchased, even
if the customers did not register a complaint. Again, corrective
action would be taken to deal with identified problems.
The collective demand of consumers that businesses satisfy their needs is

an example of how consumerism ensures responsibility toward
customers.
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E.
How the Government Ensures Responsibility toward Customers

1.
Government regulation of product safety is achieved by

monitoring the quality of selected products by government agencies
such as the Food and Drug Administration (FDA).
2.
Government regulation of advertising by the Federal Trade

Commission (FTC) strives to eliminate deceptive or misleading
advertising.
3.
Government Regulation of Industry Competition

a.
b.
c.
II.
Competition benefits consumers by providing prices and

quality that maximize consumers' satisfaction. Firms that
charge excessive prices or produce inferior-quality goods will
not survive in a competitive environment.
Government antitrust laws are aimed at restricting
monopolies, a market condition where there is a sole
provider of a good or service. Exhibit 3.5 summarizes many
of the laws passed to restrict monopolies.
Relaxing government regulations, deregulation, is another
technique used by the government to encourage
competition.
Responsibility to Employees
A.
Employee safety can be improved upon by closely monitoring the

production process to provide a safe working environment. This will
minimize on-the-job injuries and improve the morale of the employees.
B.
Proper Treatment by Other Employees

1.
Diversity refers to the impact of the increase in the number of

women and minorities in the workplace. Exhibit 3.6 presents the
proportions of various job categories held by women, African
Americans, and Hispanics. Many firms have responded to this
labor force diversity by providing employee seminars designed to
"remove barriers that separate people and find new ways to engage
teams to maximize productivity and profitability."
2.
An area that has received much public attention due to expensive

and embarrassing lawsuits is the prevention of sexual
harassment. Sexual harassment represents any unwelcome
comments or actions of a sexual nature by one employee directed
toward another employee. Firms have offered seminars in this area
to help employees recognize how some statements or behavior

may be considered offensive by other employees.
C.
Equal opportunity for all prospective employees regardless of their

national origin, race, gender, or religion is provided for by the Civil Rights
Act of 1964 and enforced by the Equal Employment Opportunity
Commission (EEOC). In an effort to increase opportunities for minorities
and women, many firms have adopted affirmative action programs.
D.
Firms can ensure that their responsibility toward employees will be

fulfilled by disclosing their commitment through a code of responsibility
and the creation of a step-by-step grievance policy for employees who
believe they are not being given equal opportunities.
E.
Being responsible to so many different groups can create a tug-of-war

environment for the firm. An example of this is the conflict with
employee layoffs. Firms are often criticized for not serving employee
interests when employee layoffs (downsizing) are necessary for the firm to
cut costs in order to survive.
Introduction to Business .
Chapter 3: BUSINESS ETHICS AND SOCIAL RESPONSIBILITY
Handout 3.2
III.
IV.
Responsibility to Stockholders
A.
In an effort to ensure responsibility to stockholders, employee decisions

are monitored to ensure that they are made in the best interests of the
owners (i.e., maximizing the firm's value).
B.
Shareholder activism is one way that stockholders ensure

responsibility. Shareholder activism refers to the active role that
stockholders take to influence a firm's management policies. The
stockholders who have been the most active are institutional investors,
a term that refers to financial institutions that purchase large amounts of
stock.
C.
A major concern of some stockholders is the conflict with excessive

executive compensation. Some customers and stockholders argue that
firms that pay top executives excessively high salaries are not meeting
their social responsibilities. The potential negative impact of excessive
executive compensation is summarized in Exhibit 3.7. The
counterargument is that these executives deserve high salaries because
of their unique talents and contributions to the value and profitability of the
firm.
Responsibility to Creditors
This refers to firms meeting their financial obligations to their creditors, those who
have provided loans to the firm.
V.
Responsibility to the Environment

D.
E.
Air Pollution
1.
To prevent air pollution, firms have implemented changes in their

production processes in order to minimize airborne emissions.
2.
The 1970 Environmental Protection Agency's (EPA) enforcement of

stringent pollution standards is an example of how the
government prevents air pollution.
Land Pollution
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VI.
1.
As a result of the production techniques used by certain firms,

nearby land has been polluted by toxic waste. This waste, along
with solid waste that does not quickly deteriorate, damages the
land's usefulness for other purposes. Exhibit 3.8 illustrates how
environmental irresponsibility can adversely affect a firms stock
value.
2.
To prevent land pollution, businesses have spent millions of

dollars on environmental protection programs. The best of these
programs create a win-win environment, where inefficient, polluting
production techniques are replaced by efficient, cost-saving, less
polluting methods.
3.
The conflict with environmental responsibility is reflected by a

firm's desire to earn large profits for the owners and simultaneously
meet the challenge of minimizing the environmental impact of its
production processes. Exhibit 3.9 illustrates the conflict between
profit and environmental responsibility.
Responsibility to the Community

This is demonstrated by firms sponsoring local events and donating to local
charities.
This financial commitment is designed to enhance the image of the
organization in the eyes of the firm's consumers. However, decisions to
maximize a firm's social responsibility expenditures could conflict with the goal of
maximizing a firm's profits for its owners.
VII.
Summary of Business Responsibilities

Business responsibilities are incorporated into an organization by procedures
designed to bring attention to responsible management decisions. One example
of this is the creation of a new position called the "Corporate Value Officer, put
in place to ensure that social responsibilities are fulfilled.
VIII.
The Cost of Fulfilling Social Responsibilities

The cost of ensuring social responsibilities is illustrated by the millions of dollars
expended to avoid, defend, and settle lawsuits by customers, employees, and the
government. Exhibit 3.10 lists a summary of possible expenses incurred as a
result of social responsibilities.
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Learning Goals
Describe
Part I: Organization of a Business
Business Ethics and

Social Responsibility
responsibilities of firms to:
Customers
Employees
Stockholders and creditors
The environment
Their communities
Explain
the costs that firms incur in

fulfilling their social responsibilities.
Introduction to Business 3e
Jeff Madura
Copyright 2004 South-Western. All rights reserved.
32
Business Decisions
Impact of Ethical Values and Acceptance

of Social Responsibilities on a Firm
Recognize
how business decisions affect

society.
Follow a set of ethical principles when
making business decisions.
33
Rationale for Business Decisions
Common Unethical Decisions
Unethical
business decisions usually

result in a benefit to one or more
employees but have an adverse impact
on other stakeholders or on the
environment.
Car
dealer tries to sell car at sticker

pricereceives high commission.
Computer
salesperson sells more

expensive computer than customer
needs.
Manager
hires friend who is not the most
Manager
tries to avoid paying employees.
qualified.
34
35
36
3/24/14
Impact of Unethical Decisions
Impact on Firm Value

Columbia
Customers
may avoid buying firms

products in the future.
Firm
may have difficulty hiring new

employees.
Sunbeam
Firm
may be unable to obtain funding in

the future.
Overstated earnings to enhance

compensation of top managers
Many stockholders sold their sharesdrove
the stock price down
Firm
possibly subject to severe penalties

imposed by the government.
37
Exhibit 3.2
39
Responsibility to Customers
Responsible
production practices
Establish
Exhibit 3.3
310
a code of responsibilities
Guidelines for product quality

Guidelines about how to treat employees,
customers, owners
sales practices
Monitor
complaints
Obtain and utilize customer feedback
Discourage overly aggressive sales tactics

Discourage deceptive advertising
Use customer satisfaction surveys
38
Ensure Responsibility
Ensure customer safety

Proper warning labels
Responsible
Sunbeams Stock Price after It Was

Accused of Overstating Its Revenues
Columbias Stock Price after Overbilling
Hospital
Overbilled for services

Numerous employee resignations
Value of stock declined substantially
311
312
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Key Antitrust Laws
Factors Impacting Responsibility

Role
of Consumerism
Sherman
Antitrust Act (1890)

Act (1914)
Federal Trade Commission Act (1914)
Robinson-Patman Act (1936)
Celler-Kefauver Act (1950)
Clayton
Collective demand by consumers that

businesses satisfy their needs
Role
of Government
Regulation of product safety

Regulation of advertising
Regulation of industry competition
Monopolies
and anti-trust
313
Employee
314
Safety
Proper
Check machinery and equipment

Require safety glasses or other equipment to
prevent injury
Emphasize safety precautions in training
Reduce accidents
Improve quality of life
Exhibit 3.5
Treatment of Employees
Diversity training
Prevention of sexual harassment
Unwelcome
comments or actions of a sexual nature
Equal opportunity
Prohibit
discrimination based on national origin,

race, gender, or religion
Applies to hiring, promotion, raises
315
Proportion of Women and Minorities

in Various Occupations
316
Ensure Responsibility to Employees

Code
of Responsibility
Hiring decisions made without bias

Hire most qualified person
Grievance
Policy
Mediation process
Conflict
Exhibit 3.6
317
With Employee Layoffs
318
3/24/14
Ensure Responsibility
to Stockholders
Responsibility to Stockholders
Make
decisions that are in the best

interest of the owners
Shareholder
Tie employee compensation to firm

performance
Release accurate information about financial
condition
Activism
Active efforts by shareholders to influence a

firms management policies
Institutional
Investors
Financial institutions that purchase large

amounts of stock
Managers may be more willing to listen to
these large investors.
319
Impact of Executive Salaries

on a Firms Performance
320
Conflict With Excessive

Executive Compensation
Compensation
of executives has
increased dramatically
1980: 42 times the average compensation of
employees
1990: 85 times the average compensation of
employees
2000: 500 times the average compensation
of employees
Exhibit 3.7
321
financial obligations to creditors
Inform creditors if firm is having difficulty

meeting obligations
If firm does not pay creditors what it owes
themmay have to file for bankruptcy
323
322
e-business
business online
Responsibility to Creditors
Meeting
324
3/24/14
Violations of Responsibility
Responsibility to
the Environment
Providing
misleading financial information

that exaggerates financial condition
Production
processes, as well as
products, can harm the environment
Enron
Oracle
Global Crossing
ImClone
Air Pollution
Change
production processes
Land Pollution
Revise
production and packaging processes to

reduce waste
Recycle
325
326
Responsibility to the Community
Monsantos Stock Price after Receiving Bad

Publicity about Its Effects on the Environment
Maximizing
social responsibility may

conflict with maximizing firm value
May reduce firms ability to provide products
at reasonable prices
Support
for charitable organizations can

improve company image
Exhibit 3.8
327
Effect of Environmental Expenses

on Business Performance
328
Social Responsibility: Examples
Apple and IBM
Home Depot
Invest in education programs

Donates to community programs for housing
projects
Provided supplies and equipment to 9/11 rescue
efforts
Checkers
Coca-Cola
Provides jobs for inner-city residents

Sponsors Boys and Girls Clubs
Exhibit 3.9
329
330
3/24/14
Social Responsibility: Examples

Ace
Responsibilities in
International Environment
Hardware
Foundation has donated more than $20 million to

communities it serves
9/11 donated three tractor-trailer loads of equipment
Dow
Be
aware of cultural differences

unethical payoffs to suppliers or
customers
Establish global reputation for running an
ethical business
Avoid
Chemical Corporation
Created Community Advisory Panel

Funds education programs in South America
Habitat for Humanity project in Korea
New art center in West Virginia
331
Cost of Social Responsibility
Lawsuits
Complaint resolution process

Customer and employee satisfaction surveys
Product liability lawsuits
Change production techniques to comply with
government regulations about environmental
impact
Periodic disclosure of financial information
Sponsoring community activities
332
Common Lawsuits
Product defects
Deceptive advertising
Employee discrimination
Cost of Lawsuits
Court imposed fines
Out-of-court settlements
Hiring attorney to defend firm
Decline in demand for product because of bad
publicity
333
Possible Expenses Incurred as a

Result of Social Responsibilities
334
Summary
Business
ethics influence decisions

Firms have basic responsibilities
Provide safe working conditions
Treat work workers properly
Provide equal opportunity for employees
Make decisions in best interest of
stockholders
Maintain a clean environment
Exhibit 3.10
335
336

Business Ethics and Social Responsibility

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Introduction to Business .

Chapter 3: BUSINESS ETHICS AND SOCIAL RESPONSIBILITY

Firms have a social responsibility to ensure that their products, services,

Responsible production practices include proper warning labels to

Responsible sales practices are established by guidelines that

How Firms Ensure Responsibility toward Customers

Establish a code of ethics that sets guidelines for product quality

Monitor Complaints from customers regarding the quality of the

Gather customer feedback via customer questionnaires regarding

The collective demand of consumers that businesses satisfy their needs is

How the Government Ensures Responsibility toward Customers

Government regulation of product safety is achieved by

Government regulation of advertising by the Federal Trade

Government Regulation of Industry Competition

Competition benefits consumers by providing prices and

Employee safety can be improved upon by closely monitoring the

Proper Treatment by Other Employees

Diversity refers to the impact of the increase in the number of

An area that has received much public attention due to expensive

to help employees recognize how some statements or behavior

Equal opportunity for all prospective employees regardless of their

Firms can ensure that their responsibility toward employees will be

Being responsible to so many different groups can create a tug-of-war

In an effort to ensure responsibility to stockholders, employee decisions

Shareholder activism is one way that stockholders ensure

A major concern of some stockholders is the conflict with excessive

Responsibility to the Environment

To prevent air pollution, firms have implemented changes in their

The 1970 Environmental Protection Agency's (EPA) enforcement of

As a result of the production techniques used by certain firms,

To prevent land pollution, businesses have spent millions of

The conflict with environmental responsibility is reflected by a

Responsibility to the Community

Summary of Business Responsibilities

The Cost of Fulfilling Social Responsibilities

Part I: Organization of a Business

Business Ethics and

responsibilities of firms to:

the costs that firms incur in

Copyright 2004 South-Western. All rights reserved.

Impact of Ethical Values and Acceptance

how business decisions affect

Copyright 2004 South-Western. All rights reserved.

Rationale for Business Decisions

Copyright 2004 South-Western. All rights reserved.

Common Unethical Decisions

business decisions usually

dealer tries to sell car at sticker

salesperson sells more

hires friend who is not the most

tries to avoid paying employees.

Copyright 2004 South-Western. All rights reserved.

Copyright 2004 South-Western. All rights reserved.

Impact of Unethical Decisions

Impact on Firm Value

may avoid buying firms

may have difficulty hiring new

may be unable to obtain funding in

Overstated earnings to enhance

possibly subject to severe penalties

Copyright 2004 South-Western. All rights reserved.

Copyright 2004 South-Western. All rights reserved.

Guidelines for product quality

Discourage overly aggressive sales tactics