Chapter 5   Managing Social Responsibility and Ethics

How important is it for organizations and managers to be socially responsible and ethical? In this chapter, we’re going to look at what it means to be socially responsible and ethical and what role managers play in both. Focus on the following learning outcomes as you read and study this chapter.

LEARNING OUTCOMES 

5.1 Discuss what it means to be socially responsible and what factors influence that decision.
5.2 Explain green management and how organizations can go green.
5.3 Discuss the factors that lead to ethical and unethical behavior.
5.4 Describe management’s role in encouraging ethical behavior.
5.5 Discuss current social responsibility and ethics issues.

A MANAGER’S DILEMMA 

Chapter 5 presents contemporary concepts of managerial ethics and social responsibility to help your students explore and appreciate the critical role of these issues in today’s complex business environment. The opening case in “A Manager’s Dilemma” highlights TOMS Shoes unique idea to promote corporate social responsibility.  For each pair of shoes it sells, it donates a pair to a child in need.  Founded by Blake Mycoskle, who experienced firsthand the injuries that children suffer when they have no shoes, the business concept is one of mixing charity with commerce.  TOMS is popular with teens and twenty-somethings and has donated almost half a million shoes so far.  For Blake Mycoskle, the ability for TOMS to produce a profit is just as important as his commitment to social responsibility.  A question for TOMS concerns their ability to stay profitable and still be socially responsible.  Encourage students to think about the value that TOMS gives to its customers and underprivileged children.  Can companies afford to be both for profit and at the same time heavily promote a charity at the expense of corporate profits?  Another way to ask this question is can companies afford NOT to be both for profit and promote other causes.

In studying this chapter, your students will have the opportunity to consider how socially responsible an organization needs to be in the light of the impact of social involvement on managerial decision making and economic performance. Issues such as the greening of management and values-based management are examined as well.

In addition, Chapter 5 probes the ethical dimensions of managerial decision making. Students will read about factors that have the potential to influence an individual’s ethics and actions and to improve the ethical behavior of an organization. As the chapter closes, timely issues of social responsibility and ethics are presented, and students are challenged to think about how they will manage responsibly and ethically as future managers in a changing world.

CHAPTER OUTLINE 

INTRODUCTION
 This chapter discusses issues involving social responsibility and managerial ethics and their effect on managerial decision making. Both social responsibility and ethics are responses to a changing environment and are influenced by organizational culture.

5.1 WHAT IS SOCIAL RESPONSIBILITY?
 Managers regularly face decisions that have dimensions of social responsibility.  Examples include employee relations, philanthropy, pricing, resource conservation, product quality and safety, and doing business in countries that violate human rights.  There are two opposing views of social responsibility.  The classical view is the view that management’s only social responsibility is to maximize profits. Economist and Nobel laureate Milton Friedman is the most outspoken advocate of this view. Friedman argues that managers’ primary responsibility is to operate the business in the best interests of the stockholders—the true owners of the organization. The socioeconomic view is the view that management’s social responsibility goes beyond the making of profits to include protecting and improving society’s welfare. This view purports that corporations are not independent entities responsible only to stockholders.

A. From Obligations to Responsiveness to Responsibility. Social obligation occurs when a firm engages in social actions because of its obligation to meet certain economic and legal responsibilities. Social responsiveness is seen when a firm engages in social actions in response to some popular social need. Social responsibility is a business’s intention, beyond its legal and economic obligations, to do the right things and act in ways that are good for society.

B. Should Organizations be Socially Involved?  How do socially responsible activities affect a company’s economic performance? Exhibit 5-1 details the arguments for and against social responsibility. A majority of studies have found a positive relationship between social involvement and economic performance, but some caution in this regard is necessary because of methodological questions associated with the measurement of social responsibility and economic performance. Another way to address this issue is to evaluate socially responsible investment (SRI) funds. These mutual funds provide a way for individual investors to support socially responsible companies. These funds typically use social screening—applying social criteria (screens) to investment decisions.  The conclusion is that there is little evidence to say that a company’s socially responsible actions will hurt an organization’s long-term economic performance.

5.2  GREEN MANAGEMENT AND SUSTAINABILITY
A number of companies have announced plans to move more environmentally sustainable products and service including Coca-Cola’s new HFC-free vending machines, Fairmont Hotel’s use of rooftop beehives to help dwindling honeybee populations, and GE’s program of Ecomagination to reduce greenhouse gases at the company by 30-percent.   These companies are practicing green management, which considers the company’s impact on the natural environment.

A. How Organizations Go Green. Approaches include the legal (or light green) approach, the market approach, the stakeholder approach, and the activist approach. See Exhibit 5-2 for a continuum of green approaches.
B. Evaluating the Greening of Management. As organizations become “greener,” they are reporting their commitment to being green in several ways, including fulfilling of guidelines issued by the Global Reporting Initiative (GRI); meeting ISO 14001 standards; and appearing on the list of the 100 Most Sustainable Corporations in the World.

LEADERS WHO MAKE A DIFFERENCE

Recent events have cast a bad light on the ethical behavior of today’s CEO’s.  A contradiction to this view is Yvon Chouinard, founder and president of Patagonia.   Chouinard realized early that everything his company did had a negative effect on the environment. In response, he redefined his company’s mission to be proactive terms of the environment. . Since 1985, Patagonia has donated 1 percent of its annual sales to grassroots environmental groups and has gotten more than 1,200 companies to follow its lead as part of its “1% for the Planet” group.

5.3 MANAGERS AND ETHICAL BEHAVIOR
The term ethics refers to principles, values, and beliefs that define what is right and wrong behavior. This section examines the ethical dimensions of managerial decision making.
A. Factors That Affect Employee Ethics. Exhibit 5-3 shows the complex interactions that influence whether a person acts ethically or unethically when faced with an ethical dilemma.
1. Stages of Moral Development. Research confirms three levels of moral development (see Exhibit 5-4).  Each level has two stages.
a. The first level is called preconventional. At this level, the individual’s choice between right or wrong is based on personal consequences involved.
b. At the second stage, which is labeled conventional, moral values reside in maintaining expected standards and living up to the expectations of others.
c. At the third level—the principled level—the individual makes a clear effort to define moral principles apart from the authority of the groups to which the person belongs.
d. Research on the stages of moral development indicates that people proceed sequentially through the six stages of these three levels, with no guarantee of continued development at any stage. The majority of adults are at Stage 4. The higher the stage an employee reaches, the more likely that he or she will behave ethically.

2. Individual Characteristics. A person joins an organization with a relatively entrenched set of values.
a. Values are basic convictions about what is right and wrong. Values are broad and cover a wide variety of issues.
b. Ego strength is a personality measure of the strength of a person’s convictions. Individuals who score high on ego strength are likely to resist impulses to act unethically and will likely do what they themselves think is right.
c. Locus of control is a personality attribute that measures the degree to which people believe they control their own fate. Individuals with an internal locus of control think that they control their destiny, while persons with an external locus of control are less likely to take personal responsibility for the consequences of their behavior and are more likely to rely on external forces. Externals believe that what happens to them is due to luck or chance.

3. A third factor influencing managerial ethics is structural variables. The existence of structural variables such as formal rules and regulations, job descriptions, written codes of ethics, performance appraisal systems, and reward systems can strongly influence ethical behavior.

4. The content and strength of an organization’s culture influences ethical behavior.
a. An organizational culture most likely to encourage high ethical standards is one that is high in risk tolerance, control, and conflict tolerance.
b. A strong culture exerts more influence on managers than does a weak one.
c. However, in organizations with weak cultures, work groups and departmental standards strongly influence ethical behavior.

5. Finally, issue intensity influences ethical behavior.  Not all issues are strongly held by everyone.  Exhibit 5-5 shows six characteristics that determine issue intensity. When an ethical issue is important, employees are more likely to behave ethically.

C. Ethics in an International Context
 Are ethical standards universal? Hardly! Social and cultural differences between countries are environmental factors that play an influential role in determining ethical and unethical behavior.

Exhibit 5-6 lists the nine principles of The Global Compact. At the 1999 World Economic Forum, the United Nations Secretary-General challenged world business leaders to “embrace and enact” this particular document that gives guidelines for doing business globally in the areas of human rights, labor, and anti-corruption.
5.4 ENCOURAGING ETHICAL BEHAVIOR
Organizations can take a number of actions to cultivate ethical behavior among members. In this section of the text, eight suggestions are explored:
A. The selection process for bringing new employees into organizations should be viewed as an opportunity to learn about an individual’s level of moral development, personal values, ego strength, and locus of control.
B. A code of ethics is a formal statement of an organization’s primary values and the ethical rules it expects employees to follow. In addition, decision rules can be developed to guide managers in handling ethical dilemmas in decision making. Exhibit 5-7 lists the variables included in the three content categories found common to various corporate codes of ethics.
C. Top management’s leadership and commitment to ethical behavior is extremely important since the cultural tone for an organization is established by its top managers.
D. Employees’ job goals should be tangible and realistic, because clear and realistic goals reduce ambiguity and motivate rather than punish. Job goals are usually a key issue in the performance appraisal process.
E. If an organization wants employees to uphold high ethical standards, this dimension must be included in the appraisal process. Performance appraisals should include this dimension, rather than focusing solely on economic outcomes.
F. Ethics training should be used to help teach ethical problem solving and to present simulations of ethical situations that could arise. At the least, ethics training should increase awareness of ethical issues.
G. Independent social audits evaluate decisions and management practices in terms of the organization’s code of ethics and can be used to deter unethical behavior.
H. Organizations can provide formal protective mechanisms so that employees with ethical dilemmas can do what is right without fear of reprisal.

5.5 SOCIAL RESPONSIBILITY AND ETHICS ISSUES IN TODAY’S WORLD
A. Managing ethical lapses and social responsibilities.  Ethical lapses are not just confined to the CEO’s of large companies, like Enron.  Employees at all levels of the organization have admitted to lapses such as falling asleep at work or spreading rumors about a co-worker.  And such behavior is not limited to work; studies also show that business schools have their share of bad behavior, including cheating.  One survey showed that only 19 percent of students would report a classmate who cheated.

1. Ethical Leadership. Above all, managers must set an ethical example by modeling appropriate behavior and rewarding employees who act ethically. Exhibit 5-9 gives some suggestions on how managers can provide ethical leadership.
2. Protecting Employees Who Raise Ethical Issues. Managers must assure employees who raise ethical concerns that they will not encounter personal or career risks.  These individuals are called whistleblowers.
 
B. Social Entrepreneurship. A social entrepreneur is an individual or organization who seeks out opportunities to improve society by using practical, innovative, and sustainable approaches.
C. Businesses promoting positive change. Managers are increasingly expected to act responsibly in the way they conduct business. Managers using a social impact management approach examine the social impacts of their decisions and actions.
1. Corporate Philanthropy. Giving to charitable foundations and causes is not limited to individuals.  Organizations, through their ability to coordinate large projects and their access to capital, have made great strides in improving community and social efforts.
2.  Employee Volunteering Efforts.  Employees in many organizations are encouraged to volunteer their time to promote social change.  Some organizations even allow employees to spend part of their workday toward volunteer efforts.

Let’s Get Real:
John Emerman
Owner
The Stone Oven
Bakery & Café
Cleveland, OH

As the owner of his own Store, John loves the creative aspects of what he does for his company.  He designed the interior of his bakery and even gets to work on technical aspects like programming a new cash register.  Most business owner’s take on TOMS approach to charity would be – “How can you afford to give away shoes?”  John’s answer is more practical, it depends on the market.  Some customers can pay the extra costs and the key is finding the right customers and educating them on the cause the company is trying to promote.

ANSWERS TO REVIEW AND DISCUSSION QUESTIONS 

1. Differentiate between social obligation, social responsiveness, and social responsibility.

These terms differ by degree to which the organization is willing to go past what is legally required and engage in behavior is more altruistic and serving the public good.  Social obligation occurs when a firm engages in social actions because of its obligation to meet certain economic and legal responsibilities. Social responsiveness is seen when a firm engages in social actions in response to some popular social need. Social responsibility is a business’s intention, beyond its legal and economic obligations, to do the right things and act in ways that are good for society.

2. What does social responsibility mean to you personally? Do you think business organizations should be socially responsible? Explain.

Students’ answers to this question will vary. Their responses should indicate an understanding that social responsibility means going “beyond the minimum required by law.” Students should pinpoint and discuss why they feel business firms should or should not be socially responsible.

3. What is green management and how can organizations go green?

Green management occurs when organization align their goals with those that preserve the natural environment.  Approaches to going green include the legal (or light green) approach, the market approach, the stakeholder approach, and the activist approach. Each of these varies with respect the company’s commitment to protecting the environment.  Organizations can go green by producing products that are safer for the environment or produce less waste, encourage employees and customers to engage in environmentally friendly behavior (i.e. drive less and bike to work), or donate to foundations that promote projects for saving the natural environment.

4. What factors influence whether a person behaves ethically or unethically? Explain all relevant factors.
This issue is addressed in Section 5.3 and Exhibit 5-3 shows the complex interactions that influence whether a person acts ethically or unethically when faced with an ethical dilemma.  Students may focus on all eight factors or choose those that they see as more pertinent.

5. Do you think values-based management is just a “do-gooder” ploy? Explain your answer.

If viewed as an actual approach to managing and not just a series of guidelines, values-based management can be much more than a “do-gooder” ploy. When an organization actually practices values-based management, managers use the company’s shared values as they make decisions and do their jobs.

6. Discuss specific ways managers can encourage ethical behavior.

The text list eight suggestion: employee selection, establishing a code of ethics, top management leadership and commitment, realistic employee goals, aligning performance appraisals with high ethical standards, ethics training, independent social audits, and protective mechanisms to help employees who report ethical violations within the company. Companies may use a variety of methods to encourage ethical behavior and are not limited to those given in the text.

7. Internet file sharing programs are popular among college students. These programs work by allowing non-organizational users to access any local network where desired files are located. Because these types of file sharing programs tend to clog bandwidth, local users’ ability to access and use a local network is reduced. What ethical and social responsibilities does a university have in this situation? To whom do they have a responsibility? What guidelines might you suggest for university decision makers?

Students will probably come up with different answers to this question. Answers may indicate whether they believe the network system belongs to them, based on the payment or nonpayment of campus computing fees. A discussion of the particular view of ethics (utilitarian versus rights) should be included. You may also want to discuss current offerings of various Internet file sharing programs, the concept of unlimited access on demand, and related litigation issues.

8. What are some problems that could be associated with employee whistle-blowing for (a) the whistle-blower and (b) the organization?

The whistleblower might find that peers, managers, and other company employees ostracize him or her. For example, the whistleblower may encounter difficulty in accomplishing tasks and/or obtaining needed resources while remaining employed at the organization.

The organization itself may struggle with a tarnished reputation if the whistle-blowing incident becomes public. Other employees may watch to see what happens and how the organization treats whistleblowers. A pattern for future ethical or unethical behavior can be set by the organization’s response to a whistleblower.

9. Describe the characteristics and behaviors of someone you consider to be an ethical person. How could the types of decisions and actions this person engages in be encouraged in a workplace?

Ethical individuals are likely to have a strong values system that they use to distinguish right from wrong. Ethical persons will probably be in Stage 4, 5, or 6 of moral development. These individuals will likely have strong convictions; that is, their ego strength will be high. This person will probably have an internal locus of control.

Ethical managers make decisions and engage in work activities that support their values. These managers probably challenge what they perceive as ethically questionable decisions or actions. If an organization wants its managers to uphold high ethical standards, ethics must be included in the organization’s performance appraisal process.

10. Explain the ethical and social responsibility issues facing managers today.

These issues fall within three categories: managing ethical lapses, social entrepreneurship and promoting positive change.  Ethical lapses can occur at all levels of the organization, however, we certainly hear more about the unethical behavior of top management and leaders than individuals with less power.  Included with the issue of ethical lapses are the people who raise ethical issues of organizations in the press (i.e. whistleblowers).  Social entrepreneurs are individuals who seek opportunities to improve society, for example the opening Manager’s Dilemma and CEO of TOMS shoes.  Promoting positive social change is another important issue and includes the efforts of the organization which donate to charitable organizations and individual employees who volunteer their own time to make an impact.

ETHICS DILEMMA 

Most students will be familiar with Apple products and some may know about the health issues of CEO Steve Jobs.  The questions presented in this dilemma revolve around the right to privacy and the investors need to know about the stability of leadership.  Students may also be asked how they would feel if their private health information was required by their employer or worse yet, if it was required to be posted on the internet!

SKILLS EXERCISE:  DEVELOPING YOUR  POLITICAL SKILLS 

In this exercise, students are asked to work on their trust skills as it relates to ethical employee behavior.  Students are given eight steps in practicing trust and then presented with a scenario and asked to write a paper on how they would handle the situation. Students should be encouraged to review section 5.3 on the factors that lead to ethical behaviors and section 5.4 on how organizations can encourage ethical behavior.  In the case, students should focus on what the organization can do to promote a more positive culture in light of the change.

WORKING TOGETHER:  TEAM EXERCISE 

Students are presented with scenario in which employees are pressured into giving to a charitable cause supported by the company. Students are asked to address this situation as a manager of employees who are not financially able to make a donation.  The following questions are to be considered:
• How would they handle the situation?
• What ethical guidelines might you suggest for individual and organizational contributions in such a situation?
• Create a company policy statement that expresses your ethical guidelines.

Students should work in groups of three to four individuals address these questions.

YOUR TURN TO BE A MANAGER 

• Find five different examples of organizational codes of ethics. Using Exhibit 5–9, describe what each contains. Compare and contrast the examples.

• Using the examples of codes of ethics you found, create what you feel would be an appropriate and effective organizational code of ethics. In addition, create your own personal code of ethics that you can use as a guide to ethical dilemmas found in each chapter. Write a response to each of the dilemmas and include these responses in your portfolio.

• Take advantage of volunteer opportunities and be sure to include them on your résumé. If possible, try to do things in volunteer positions that will improve your managerial skills in planning, organizing, leading, or controlling.

• Go to the Global Reporting Initiative Web site, www.globalreporting.org, and choose three businesses from the list of organizations that have filed reports. Look at those reports and describe/evaluate what’s in them. In addition, identify the stakeholders that might be affected and how they might be affected by the company’s actions.

• Find out what green management activities your school or employer is doing and write up a list of them. Do some research on being green. Are there additional things your school or employer could be doing? Write a report to your school or employer, describing any suggestions. (Also look for ways that you can be green in your personal life.)

• Over the course of two weeks, see what ethical “dilemmas” you observe. These could be ones that you personally face, or they could be ones that others (friends, colleagues, other students talking in the hallway or before class starts, and so forth) face. List these dilemmas and think about what you might do if faced with each one.

• Interview two different managers about how they encourage their employees to be ethical. Write down their comments and discuss how these ideas might help you be a better manager.

• Steve’s and Mary’s suggested readings: Bethany McLean and Peter Elkind, The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron (Portfolio, 2003); Barbara Ley Toffler, Final Accounting: Ambition, Greed, and the Fall of Arthur Andersen (Broadway Books, 2003); Joseph L. Badaracco, Jr., Leading Quietly: An Unorthodox Guide to Doing the Right Thing (Harvard Business School Press, 2002); and Kenneth Blanchard and Norman Vincent Peale, The Power of Ethical Management (Morrow, 1988).

• If you have the opportunity, take a class on ethics (business or management) or on social responsibility—often called business and society—or both. Not only will this look good on your résumé, it could help you personally grapple with some of the tough issues managers face in being ethical and responsible.

• In your own words, write down three things you learned in this chapter about being a good manager.

• Self-knowledge can be a powerful learning tool. Go to mymanagementlab and complete these self-assessment exercises: What Do I Value? How Do My Ethics Rate? Do I Trust Others? and Do Others See Me as Trusting? Using the results of your assessments, identify personal strengths and weaknesses. What will you do to reinforce your strengths and improve your weaknesses?

ANSWERS TO CASE APPLICATION QUESTIONS 

Will We Ever Learn?

1. Describe the situation at Lehman Brothers from an ethics perspective. What’s your opinion of what happened here?

To attribute Lehman’s failure to “unprecedented adverse events in the financial markets” completely overlooks the irresponsible ethical behavior of employees and managers.
Students should mention the culture of corruption that existed at Lehman’s and the lack of controls that ultimately resulted in their downfall.  An interesting finding was the acceptance of a rule, Repo 105, that allowed the company to write off and hide bad decisions.  Even those unfamiliar with financial decisions will see the danger in the overuse of such a policy – something that was later denied by the CEO of Lehman’s.

2. What was the culture at Lehman Brothers like? How did this culture contribute to the company’s downfall?

The culture of Lehman’s was based on the ideals of risk taking and the pursuit of large financial rewards.  Culture, from chapter 2, is rooted in the values, principles and traditions of the organization. Organizational values and principles dictate what is acceptable and unacceptable behavior.  In the case of Lehman’s the disregard of accepted accounting principles and the push for lower costs and greater profits created a situation that would ultimately lead employees of the company to a potential unethical and/or illegal behavior.

3. What role did Lehman’s executives play in the company’s collapse? Were they being responsible and ethical? Discuss.

It is the CEO and top managers that establish the ethical context for the organization.  Values and goals flow down from the top of the organization – not from the bottom up.  According to the case, the “former chief executive Richard Fuld was at least grossly negligent in causing Lehman to file misleading periodic reports.”
Ethical failures by top management set the tone for the rest of the organization.  It is easy to see how Lehman employees looking at the questionable behavior of Fuld engaged in similar behavior themselves.

4. Could anything have been done differently at Lehman Brothers to prevent what happened? Explain.

Students should refer to the text and the following suggestion for encouraging ethical behavior: employee selection, establishing a code of ethics, top management leadership and commitment, realistic employee goals, aligning performance appraisals with high ethical standards, ethics training, independent social audits, and protective mechanisms to help employees who report ethical violations within the company.

5. After all the public uproar over Enron and then the passage of the Sarbanes-Oxley Act to protect shareholders, why do you think we still continue to see these types of situations? Is it unreasonable to expect that businesses can and should act ethically?

In many large corporations, there is still intense pressure on employees to produce extraordinary results without much concern for the costs it places on customers and society at large.  As long as board of directors, CEOs and top managers push employees to perform at these levels without proper controls and balances, then laws such as Sarbanes-Oxley will only serve as a band-aid to the much larger issue of corporate greed.  What is needed is not more laws, but a fundamental change in how companies adopt social responsibility.

Green Up on Aisle Two

1. What do you think of Wal-Mart’s green initiatives? Will it ever be able to achieve the reputation of being environmentally friendly? Discuss.

Most students will be surprised to find that Wal-Mart has taken the steps to become a greener company.  Wal-Mart still has a bad reputation for putting small, local companies out of business. In addition, Wal-Mart is a mass merchandiser and does not limit itself to environmentally friendly products like other stores with a reputation for being green. To see Wal-Mart as green may be a stretch for students. The answer to the second part of this question lies in its goals.  Wal-Mart strategy is based on driving down costs to sell products at a competitive price.  Green companies are not typically associated with being low costs.

2. Why do you think suppliers might be reluctant to be involved in this initiative? How might that reluctance be addressed? Although it said supplier participation was not mandatory, does Wal-Mart appear to be “forcing” suppliers to participate?

On its face, this looks like a green program for Wal-Mart, but in reality the cost of this program is placed on its suppliers.  While Wal-Mart has not ‘forced’ suppliers to cooperate, being that Wal-Mart is the world’s largest retailer they do exert a good deal of influence over supplier behavior.  Suppliers may end up being caught between the becoming more green and fit with the Wal-Mart initiative and pricing themselves into a position where they are unable to make a profit.

3. Why do you think it’s important for Wal-Mart to collaborate with other green-minded organizations?

Wal-Mart is a global company and as such receives a lot of pressure from governments and customers around the world to cut back on pollution/ waste and take steps to preserve the environment.  Also, as a retailer, products that Wal-Mart carries are not made by the company (with the exception of their store brands).  If Wal-Mart wants to be seen as a green company it must garner the support of brands and companies with which it partners.

4. What could other organizations learn from Wal-Mart’s green initiatives?

Wal-Mart’s success lies in its ability to control the supply chain.  The technology it uses to reduce shipping costs can be of incredible value to other companies in that reducing shipping also reduces pollution associated with transportation of products.  Wal-Mart has also made attempts to cut down on the amount of packaging material it uses in the distribution of its products – another skill that could be adopted by other companies.