CHAPTER 5

ETHICS AND CORPORATE

SOCIAL RESPONSIBILITY
Nagiah Ramasamy

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Learning Outcomes
Explain the special areas of concern in managerial ethics.
Explain the moral principles defining the ethicality of behavior.
Describe the common ethical dilemmas in the workplace.
Describe the stages in moral development.
Explain how ethical behavior can be improved in
organizations.
Differentiate the two opposing views of social responsibility.
Explain why organizations are embracing sustainability.
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Concern for Ethical and Societal Issues

Fraud cases have increased by nearly 100% in Malaysia
over the past three years.
Some companies in Malaysia believe that the best way to win
contracts is by giving kickbacks.

Foreign companies too have been indicted for unethical

practices in Malaysia.
French engineering group Alstom Network Schweiz AG fined
RM133 million by Swiss authorities for bribing civil servants in
at least three cases.
Telecommunications firm Alcatel-Lucent paid RM435 million to
resolve US criminal and civil probes.
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The Contemporary Ethical Environment

Malaysian society increasingly more critical about how
companies manage their business operations.
IMDB, Transmile Group, Kenmark Industrial Co (M) Bhd,
Port Klang Free Zone, and National Feedlot Corporation,
for example,
appeared in the news for the wrong reasons.

Concerns over ethical practices, social responsibility

and corporate governance issues.
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Wall Street Fleet Street Main Street: Corporate Integrity at

a Crossroads
Among the key findings of the 500 financial services
professionals:
26% had observed or had first-hand knowledge of
wrongdoing in the workplace;
24% believed they may need to engage in unethical or
illegal conduct in order to be successful;
16% would commit insider trading, a crime, if they
could get away with it;
30%
reported feeling pressured to compromise ethical
http://labaton.com/en/about/press/upload/US-UK-Financial-Services-Industry-Survey.pdf.
standards or violate the law as a result of
theirof bonus
or5
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Business Ethics
A set of moral principles, values and beliefs that define
right and wrong decisions and behavior of an individual
or group.
Ethical behavior is behavior that conforms to societys
principles of good or right as opposed to bad or wrong.
Responsibilities of a business extends to its
stakeholders:
E.g. employees, customers, suppliers, investors and to the
wider society.
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Factors that shape business ethics

By individuals weighing whats right and wrong before
deciding or taking action.
By the ethical climate, the prevailing combination of a
companys stated beliefs and its real actions, for
example, leadership by example.
By a firms codes of conduct, usually made up of
statements in which the right thing to do is
encouraged and applauded.
By a firms framework designed to encourage, or
demand, high ethical standards from its Principles
workers,
for
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Exhibit 5.1 Differences in business ethics across organizational

types

Large
corporations
Financial
Main priorities integrity,
in addressing
employee/
ethical issues
customer issues
Approach to
managing
ethics
Responsible
and/or
accountable to
Main
constraints

Small
business
Employee
issues

Civil society
organizations
Delivery of mission to
clients; integrity of
tactics; legitimacy and
accountability

Public sector
organizations
Rule of law, corruption,
conflicts of interest;
procedural issues,
accountability

Formal, public
Informal, trustrelations and/or
based
systems-based
Shareholders and Owners
other
stakeholders

Informal, valuesbased

Formal, bureaucratic

Donors and clients

General public, higher

level government
organizations

Shareholders
orientation; size
and complexity

Lack of resources and

formal training

Inertia, lack of
transparency

Lack of
resources and
attention

Source: Andrew Crane and Dirk Matten (2010) Business Ethics: Managing Corporate Citizenship and Sustainability in the Age of
Globalization, 3e, Oxford: Oxford University Press, p. 17.

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Managerial ethics
Refers to the standards of behavior that guide individual
managers in their work (Refer to Exhibit 5.2).
Three areas of special concern for managers:
How the organization treats its employees
How employees treat the organization, and
How the organization and its employees treat other economic
agents

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Special areas of concern for managers

How an organization treats its employees
Determined by the behavior of its managers, and HR
practices.

How employees treat the organization

Unethical practices involving employees, unauthorized use of
organizational resources, etc.

How the organization treats other economic agents

Including customers, competitors, suppliers, dealers and trade
unions.
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Exhibit 5.2 Special areas of concern for managers

Source: Ricky W Griffin

(2013) Management 11e,
Ohio, USA: South-Western
Cengage, p. 91.

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Managerial Ethical Perspectives

What constitutes ethical and unethical behavior can
differ depending on the set of moral principles used as
the basis for judgment.
At least four views to defining the ethicality of behavior
have been proposed.

Utilitarian view
Rights view
Theory of justice view
Integrative social contracts theory
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Utilitarian View of Ethics

Ethical decisions made solely on the basis of their
outcomes or consequences.
If the consequences are good, the action is right; if they are
bad, the action is wrong.

Uses a quantitative approach to ethical decision

making, describes what rational people do in making
ethical decisions.
Ought to act in a way that promotes the maximum net
expectable utility, i.e., the greatest net benefits or the lowest
net costs, for the broadest community affected by their
actions.
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Utility or happiness, however, is difficult to quantify.
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Utilitarian View of Ethics

Often criticized for ignoring or dismissing the rights of
the minority. Examples:
the state decides to construct a dam across a river to supply
electricity to a large urban population,
but ignores the views of the small indigenous tribe who have been
lived in the area for ages.

a CEO decides to downsize 15% of the firms workers to

reduce the companys labor cost, increase the firms financial
performance and possibly improve job security for the
remaining workers,
results in the rights of some other stakeholders being ignored.
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Rights View of Ethics

Concerned with respecting and protecting individual
liberties and privileges, for example:
rights to life, liberty, safety, liveable environment, privacy,
free speech, free assembly, property and fair legal process.

UN Universal Declaration of Human Rights (UDHR):

Preamble states Whereas recognition of the inherent dignity
and of the equal and inalienable rights of all members of the
human family is the foundation of freedom, justice and peace
in the world...
Article 1 states All human beings are born free and equal in
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Rights View of Ethics

A right is an entitlement to act or have others act in a certain way.
Rights usually result in the duty of other actors to respect them.
Therefore rights are sometimes seen as related to duties: rights of one
person can result in a corresponding duty on other persons to respect,
protect or facilitate these rights.
E.g. a persons right to property imposes a duty on others to refrain from gathering
personal information about that persons private life without his or her consent.

Employers and employees have certain rights.

Employers have rights to conduct their business as they deem fit and to
make hiring decisions as long as they operate within the legal framework
Employees have rights to safe work environment, to organize and to
engage in collective bargaining.
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Theory of Justice View

Giving each person his or her due : treating equals
equally, and unequals, unequally.
Essentially, people get what they deserve.

Managers evaluated based on whether they implement

a fair system in the distribution of benefits and burdens,
without displaying unjust favoritism toward, or biasness
against, others.
not base their decisions on vague or arbitrary factors such as
race, religion, gender, marital status or personal favorites.
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Theory of Justice View

Identify fairness in two main ways.
In fair procedures:
established according to whether people have been free to acquire
rewards for their endeavors.
referred to as procedural justice.

In fair outcomes:
determined according to whether the consequences (whether positive
or negative) are distributed in a just manner, according to some
underlying principle such as merit or need.
referred to as distributive justice.
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Theory of Justice View

Compared to the utilitarian theory, the theory of justice
is generally taken to be more important.
E.g., sweatshops are often thought to be unjust - makes use of
socially unacceptable working conditions where workers are
often abused, even if this would make that society more
productive, is very likely to be criticized if not condemned.

Protects the interests of those stakeholders who may be

underrepresented or disadvantaged.
E.g., women, the disabled and the aborigines.
However, can lead to a sense of privilege or entitlement may
make them less willing to engage in innovation or take risks.
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Integrative Social Contracts Theory

Based on the integration of two "contracts:
The general social contract that allows businesses to operate
and defines the acceptable ground rules, and
A more specific contract among members of a community that
addresses acceptable ways of behaving,
proposes that ethical decisions should be based on empirical (what is)
and normative (what should be) factors.

Differs from the other three views.

Suggests that managers need to look at existing ethical norms
in industries and companies in order to determine what
constitutes right and wrong decisions and actions.
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Integrative Social Contracts Theory

More easily and closely related to the world of business than are
other approaches to ethical decision making
because of its relevance to real business situations and a focus on various
communities affected by decisions.

Largely focused on the problems inherent in a globalized economy,

especially the ethical problems encountered by MNCs when operating in
developing countries.

Application includes
the appropriateness of businesses participating in corrupt practices,
environmental protection, wage rates and living conditions of employees,
and cultural issues of international business to the corporate governance
and ethical issues present in all forms of economic systems.
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Common On-the-job Ethical Challenges

Conflict of interest.
An employees private interests are significant enough to
interfere with the job duties of the employee to the detriment
of the organization.

Honesty and integrity.

Honest employee is expected to tell the truth, but an
employee with integrity goes beyond mere truthfulness by
sticking to deeply felt ethical principles, and acting on them.
Warren Buffet, Chairman and CEO of Berkshire Hathaway, on
the importance of integrity: In looking for people to hire, look
for three qualities: integrity, intelligence, and energy. And if
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they dont have the first one, the other two Principles
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Common On-the-job Ethical Challenges

Loyalty versus truth.
Employers expect their employees to be loyal and to act in
their organizations best interests.
Conflicts arise when employees believe the interest of the
community morally outweighs their loyalty to their
organization,
- they have to choose between loyalty to their organization and being
truthful.

Whistle-blowing.
Employees disclosure of information about perceived
wrongdoing in an organization,
- because they lack the influence or authority toPrinciples
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Exhibit 5.3 Costs of Unethical Behavior and

Benefits of Ethical Behavior
Costs of Unethical Behavior
Loss in market share
Loss of business reputation
Increased regulations by regulatory
authorities
Loss of consumer confidence, and
consumer boycott of products
Employee turnover
Abuse of the environment
Decreased returns on investment to
shareholders
Compensation or damages to those
harmed

Benefits of Ethical Behavior

Avoid lawsuits and expensive
settlements
Avoid damage to reputation of the
business
Attract and retain good employees
Boost employee morale, trust and
loyalty
Longer term business performance
and sustainability
Goodwill between the business and
its community
Benefits all stakeholders

Source: Stephen Robbins, Rolf Bergman, Ian Stagg and Mary Coulter (2006) Management, 4e, NSW: Pearson Prentice-Hall,
pp.160-162.

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Exhibit 5.4 Kohlbergs stages of moral

development
LEVEL 3
Post-conventional
(Principled)

Stage 6. Following self-chosen ethical principles even if violate

law.
Universal ethical principles.
Stage 5. Valuing rights of others and upholding non-relative
values and rights regardless of majoritys opinion.

Stage 4. Maintaining conventional order by fulfilling obligations.

Authority and social-order maintaining orientation: Law
LEVEL 2
and order morality.
Conventional
Stage 3. Living up to what is expected by people close to you.

Interpersonal accord and conformity: The good boy/good

girl attitude.
Stage 2. Following rules only when its in your immediate interest.
LEVEL 1
Self-interest orientation: What's in it for me?
PreStage 1. Sticking to rules to avoid physical punishment.
conventio
Adapted from Lawrence Kohlberg, "Moral Stages
and Moralization:
Cognitive-Development
Approach,
in Thomas
Obedience
andThe
punishment
orientation:
How
can I Lickona
avoid(ed.)
nal
(1976) Moral Development and Behavior: Theory, Research, and Social Issues. New York: Holt, Rinehart & Winston, p. 35.
punishment?
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Exhibit 5.6 A Multisystem Approach Improving

ethical behavior in organizations
Formal Systems
Executive Leadership
Selection System
Policies/Codes
Orientation/Training
Performance
Management
Authority Structure
Decision-making
Processes

Informal Systems

Ethical/Unet
hical
Behavior

Role
Models
Heroes
Norms
Rituals
Myths/Stories
Language

and

Alignment?

Source: Linda K. Trevino and Katherine A. Nelson (2014) Managing Business Ethics, 6e. New Jersey: Wiley, p. 153.

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The two opposing views of social responsibility

The debate over corporate responsibility involves two
key elements:
NARROW VIEW
BROAD VIEW
The classical, narrow or purely
The socioeconomic position holds
economic view that management's
that management's responsibility
only social responsibility is to
goes well beyond making profits to
maximize profits.
include protecting and improving
Also viewed as the traditional
society's welfare.
Such a position is also referred to
shareholder model - construed
narrowly to cover only profit
as the broad view, social entity
maximization.
model or the stakeholders model.
Friedman argues that managers'
To include acting morally,
primary responsibility is to operate
refraining from socially undesirable
businesses in the best interests of
behavior, and contributing actively
the shareholders, being viewed as
and directly to the public good.
the true owners of those
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Exhibit 5.8 Some examples of corporate social responsibilities to

stakeholders
Responsibility to
Employees

Responsibility to
Customers/Environ
ment

Responsibility of
business to
Society, Investors,
& Suppliers
Fairness
Honesty
Timely Action
Appropriate
Compensation
Philanthropy

Working Conditions Right To Safety

Equal Employment
Right To Be
Opportunity
Informed
Affirmative Action
Right To Choose
Diversity Training
Right To Be Heard
Economic Security
Quality Of Life
Child Care/Parental Ecology/Pollution
Leave
Employee Dignity
Source: William Nickels, James McHugh and Susan McHugh (2012)
Conflict of Interest
York: McGraw Hill/Irwin.

Understanding Business, 10e. New

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Exhibit 5.9 Arguments For and Against Social Responsibility

For
Public expectations
Long-run profits
Ethical obligation
Public image
Better environment
Discouragement of further governmental
regulation
Balance of responsibility and power
Stockholder interests
Possession of resources
Superiority of prevention over cures

Against
Violation of profit maximization
Dilution of purpose
Costs
Too much power
Lack of skills
Lack of accountability

Source: Stephens P. Robbins and Mary Coulter (2012) Management, 11e. New Jersey: Prentice-Hall, p.
126.
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Socially Responsible Business Benefits

Includes:
Enhanced reputations and goodwill.
Reduced risks and costs.
Protection from their own employees and agents.
Stronger competitive positions.
Expanded access to capital, credit, and foreign investment.
Increased profits.
Sustained long-term growth.
International respect for enterprises and emerging markets.
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Sustainable Development
...development that meets the needs of the present
without compromising the ability of future generations
to meet their own needs" (Gro Bruntland, 1987).
We inherit the Earth from previous generations
have an obligation to pass it on in reasonable condition to
future generations.

encourages organizations to be more aware of their

long-term roles in the worlds ecology and communities
emphasis is on conserving and protecting natural resources.
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Sustainable development - Triple Bottom Line

Managers should pay attention not only to financial results but also
to environmental and social issues.
Focuses organizations on the economic value they add, and
environmental and social value they add or destroy.
Demands a whole set of values, systems, and processes that take into
consideration the needs of all the organizations stakeholders
shareholders, customers, employees, business partners, governments, local
communities and the public.

Organisations have tremendous impact as employers, users of

resources, and designers and suppliers of products
In a unique position to influence the use of the worlds resources for the
better.
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Sustainable development
Modern industries
provided humanity with
tremendous amount of material
prosperity,
but created unparalleled
environmental threats to the
present and future generations,
threaten the welfare of human
beings , plant and animal life.

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Threats to the environment

Come from two sources:
pollution and resource depletion.

Pollution: the undesirable and unintended contamination of the

environment by the manufacture or use of commodities
covers pollution of the air, water and land.
Asian Rare Earth Sdn Bhds rare earth refinery in Bukit Merah
Blamed for birth defects and eight leukaemia cases within 5 years in a community of
11,000 people.
Mitsubishi Chemical shut down the refinery in 1992; an estimated $100 million spent
in the largest radiation clean up in the rare earth industry in Malaysia.
Reached an out-of-court settlement with residents in Bukit Merah by agreeing to
donate $164,000 to the communitys schools, while denying any responsibility for
illnesses.
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Threats to the environment

Resource depletion
refers to the consumption of finite or scarce resources.
include the depletion of species and habitats, the depletion of
fossil fuels and the depletion of minerals.

Estimated
Extinct since 1600 A.D., at least:
63 major identifiable species of mammals
88 major identifiable species of birds

the earths rainforests - destroyed at the rate of about 1% per

annum.
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