CHAPTER 9

ETHICS, CORPORATE SOCIAL

RESPONSIBILITY, ENVIRONMENTAL
SUSTAINABILITY, AND STRATEGY
1. Understand how the standards of ethical behavior in
business are no different from the ethical standards
and norms of the larger society and culture in which
a company operates.
2. Recognize conditions that can give rise to unethical
business strategies and behavior.
3. Gain an understanding of the costs of business
ethics failures.
4. Learn the concepts of corporate social responsibility
and environmental sustainability and how firms
balance these duties with economic responsibilities
to shareholders.
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WHAT DO WE MEAN BY BUSINESS
ETHICS?
 Business Ethics
● Is the application of general ethical principles to the
actions and decisions of businesses and the conduct
of their personnel.
● Are not materially different from ethical principles in
general because business actions have to be judged
in the context of society’s standards of right and
wrong.

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CORE CONCEPTS

♦ Ethics concerns principles of right or wrong

conduct.
♦ Business ethics involves the application of
general ethical principles to the actions and
decisions of businesses and the conduct of
their personnel.

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 WHERE DO ETHICAL STANDARDS
COME FROM—ARE THEY UNIVERSAL
OR DEPENDENT ON LOCAL NORMS?

Sources for Ethical Standards

The School of The School of Integrated

Ethical Ethical Social Contracts
Universalism Relativism Theory

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 THE SCHOOL OF
ETHICAL UNIVERSALISM
 Ethical Universalism
● Holds that common understandings across multiple
cultures and countries about what constitutes right
and wrong give rise to universal ethical standards
that apply to all societies, all firms, and all
businesspeople.
 Effect on Business Ethics
● Whether a business-related action is right or wrong is
judged by universal standards.

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 THE SCHOOL OF
ETHICAL RELATIVISM
 Ethical Relativism
● Holds that differing beliefs, customs, and behavioral
norms across countries and cultures give rise to
multiple sets of standards of what is ethically right or
wrong.
 Effect on Business Ethics
● Whether business-related actions are right or wrong
depends on local ethical standards.

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CORE CONCEPT

♦ The school of ethical relativism holds that

differing religious beliefs, customs, and
behavioral norms across countries and cultures
give rise to multiple sets of standards
concerning what is ethically right or wrong.
These differing standards mean that whether
business-related actions are right or wrong
depends on the prevailing local ethical
standards.

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 EXAMPLES OF ETHICAL
RELATIVISM ISSUES

Variations in
Ethical Standards

Relativism The Use of

The Use of The Payment
Equates to Local Morality
Underage of Bribes and
Multiple Sets to Guide Ethical
Labor Kickbacks
of Standards Behavior

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 ILLUSTRATION CAPSULE 9.1
Apple’s Failures in Enforcing
Its Supplier Code of Conduct

♦ How effective has Apple’s Supplier Code of

Conduct been is reducing abuses of workers
at its supplier facilities?
♦ Is it fair for Apple to prescribe that its suppliers
comply with universal standards that are at
wide variance relative to local market labor
practices and conditions?

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STRATEGIC MANAGEMENT PRINCIPLE

♦ Codes of conduct based on ethical relativism

can be ethically dangerous for multinational
companies by creating a maze of conflicting
ethical standards.

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CORE CONCEPT
♦ According to integrated social contracts
theory, universal ethical principles based on
the collective views of multiple societies form a
“social contract” that all individuals and
organizations have a duty to observe in all
situations.
♦ Within the boundaries of this social contract,
local cultures or groups can specify what
additional actions may or may not be
ethically permissible.

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STRATEGIC MANAGEMENT PRINCIPLE

♦ According to integrated social contracts theory,

adherence to universal or “first-order” ethical
norms should always take precedence over
local or “second-order” norms.
♦ In instances involving universally applicable
ethical norms (like paying bribes), there can be
no compromise on what is ethically permissible
and what is not.

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 INTEGRATIVE SOCIAL
CONTRACTS THEORY

 Provides a middle-ground balance between

universalism and relativism.
 Posits that the collective views of multiple
societies form universal (first order) ethical
principles that all persons have a contractual
duty to observe in all situations.
 Within the contract, cultures or groups can
specify locally ethical (second-order) actions.

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 APPLICATION OF INTEGRATED
SOCIAL CONTRACTS THEORY
TO MULTINATIONAL BUSINESS

 Effects on Ethical Standards:

● Adherence to universal ethical norms takes
precedence over local norms.
● A local custom is not ethical if it violates universal
ethical norms.
● Application of codes of ethics should first follow
universal standards with allowance for local ethical
diversity and influence.

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 HOW AND WHY ETHICAL STANDARDS
IMPACT THE TASKS OF CRAFTING AND
EXECUTING STRATEGY

 The Ethics Code Litmus Test:

● Is what we are proposing to do fully compliant with
our code of ethics? Are there areas of ambiguity?
● Is this action in harmony with our core values? Are
any conflicts or potential problems evident?
● Is this action ethically objectionable? Would our
stakeholders, our competitors, the SEC under the
Sarbanes-Oxley Act, or the news and social media
view this action as ethically objectionable?

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CONSEQUENCES OF ETHICALLY
QUESTIONABLE STRATEGIES

When Strategies Fail

the Ethical Litmus Test

Sizable Devastating Sharp stock Criminal

civil fines and image and price drops as indictments
stockholder public relations investors lose and
lawsuits hits confidence convictions

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 WHAT ARE THE DRIVERS OF
UNETHICAL STRATEGIES AND
BUSINESS BEHAVIOR?

Faulty Oversight
and Self Dealing

Unethical
Pressure for Short- Strategies
term Performance and Business
Behaviors

A Weak or Corrupt
Ethical Environment

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 WHAT ARE THE DRIVERS OF
UNETHICAL STRATEGIES AND
BUSINESS BEHAVIOR?

 Drivers of Unethical Business Behavior:

● Faulty internal oversight allows self-dealing in the
pursuit of personal gain, wealth, and self-interest.
● Short-termism pressure to meet or beat short-term
performance targets.
● A culture that puts profitability and business
performance ahead of ethical behavior.

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CORE CONCEPT

♦ Self-dealing occurs when managers take

advantage of their position to further their own
private interests rather than those of the firm.
♦ Short-termism is the tendency for managers to
focus excessively on short-term performance
objectives at the expense of longer-term
strategic objectives. It has negative implications
for the likelihood of ethical lapses as well
as company performance
in the longer run.

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 ILLUSTRATION CAPSULE 9.2
Investment Fraud at Bernard L. Madoff Investment
Securities and Stanford Financial Group

♦ Which drivers of unethical behavior were active

in the Madoff investment fraud scheme?
♦ How did the cultures of the Madoff and Stanford
investment firms assist in perpetuating the
frauds?
♦ What ethical responsibilities were lacking in the
Madoff fraud’s investors that would have helped
prevent the frauds?

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 ILLUSTRATION CAPSULE 9.3
How Novo Nordisk Puts Its Ethical
Principles into Practice

♦ What steps has Novo Nordisk taken to ensure

that its ethical standards of employee conduct
are put into practice?
♦ Why has Novo Nordisk been so successful
instilling a culture of ethical conduct in its
organization when other firms have not?
♦ What has been the effect of Novo Nordisk’s
dedication to ethical business practices on its
success in the marketplace?

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WHY SHOULD COMPANY STRATEGIES
BE ETHICAL?

 The Moral Case for an Ethical Strategy:

● Because a strategy that is unethical is morally wrong
and reflects badly on the character of the firm’s
personnel.
 The Business Case for Ethical Strategies:
● Because an ethical strategy can be both good
business and serve the self-interest of shareholders.

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STRATEGIC MANAGEMENT PRINCIPLE

♦ Conducting business in an ethical fashion is

not only morally right—it is in a company’s
enlightened self-interest.
♦ Shareholders suffer major damage when a
company’s unethical behavior is discovered.
Making amends for unethical business conduct
is costly, and it takes years to rehabilitate a
tarnished company reputation.

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FIGURE 9.1 The Costs Companies Incur When Ethical Wrongdoing Is Discovered

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 STRATEGY, CORPORATE SOCIAL
RESPONSIBILITY, AND EVIRONMENTAL
SUSTAINABILITY

 Corporate Social Responsibility (CSR)

● Is a firm’s duty to operate in an honorable manner,
provide good working conditions for employees,
encourage workforce diversity, be a good steward of
the environment, and actively work to better the
quality of life in the local communities where it
operates and in society at large.

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CORE CONCEPT

♦ Corporate social responsibility (CSR) refers

to a company’s duty to operate in an honorable
manner, provide good working conditions for
employees, encourage workforce diversity, be
a good steward of the environment, and
actively work to better the quality of life in the
local communities where it operates and in
society at large.

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FIGURE 9.2
The Five Components
of a Corporate Social
Responsibility Strategy

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 ILLUSTRATION CAPSULE 9.4
Burt’s Bees: A Strategy Based on
Corporate Social Responsibility

♦ How has Burt’s Bees skillful use of corporate

social responsibility (CSR) as a strategic tool
contributed to its success in the marketplace?
♦ Given that many customers now purchase
personal care products online, how do they
determine that firms such as Burt’s Bees really
are practicing CSR?
♦ Why was there a customer backlash to The
Clorox Company’s acquisition of Burt’s Bees?

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 The Triple Bottom Line: Excelling on Three Measures of Company Performance
FIGURE 9.3

Profit People

Planet

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TABLE 9.1 A Selection of Companies Recognized for Their Triple-Bottom-Line
Performance in 2011

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 WHAT DO WE MEAN BY
SUSTAINABILITY AND SUSTAINABLE
BUSINESS PRACTICES?

 Sustainability
● Is the relationship of a firm to its environment and its
use of natural resources.
 Sustainable Business Practices
● Are those practices of a firm that meet the needs of
the present without compromising the ability to meet
the needs of the future.

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CORE CONCEPTS
♦ Sustainable business practices are those
that meet the needs of the present without
compromising the ability to meet the needs
of the future.
♦ An environmental sustainability strategy
consists of a firm’s deliberate actions to protect
the environment, provide for the longevity
of natural resources, maintain ecological
support systems for future generations,
and guard against the ultimate
endangerment of the planet.

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 SUSTAINABILITY AND SUSTAINABLE
BUSINESS PRACTICES

 Environmental Sustainability Strategy

● Consists of the firm’s deliberate actions to:
 Protect the environment.
 Provide for the longevity of natural resources.
 Maintain ecological support systems for future
generations.
 Guard against ultimate endangerment of the
planet.

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 CRAFTING CORPORATE
SOCIAL RESPONSIBILITY AND
SUSTAINABILITY STRATEGIES

Pursuing a Sustainable CSR Strategy

in the Firm’s Value Chain Activities

Moral Case: Business Case:

Stakeholder Competitive
Benefits Advantage

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STRATEGIC MANAGEMENT PRINCIPLE

♦ CSR strategies and environmental

sustainability strategies that both provide
valuable social benefits and fulfill customer
needs in a superior fashion can lead to
competitive advantage. Corporate social
agendas that address only social issues may
help boost a company’s reputation for
corporate citizenship but are unlikely to
improve its competitive strength in the
marketplace.

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 THE MORAL CASE FOR CSR AND
ENVIRONMENTALLY SUSTAINABLE
BUSINESS PRACTICES

The Implied Social Contract:

“To Do the Right Thing”

Operate Provide good Be a good Display good

ethically and work conditions environmental corporate
legally for employees steward citizenship

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STRATEGIC MANAGEMENT PRINCIPLE

♦ Every action a company takes can be

interpreted as a statement of what it stands for.

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 THE BUSINESS CASE FOR CSR AND
ENVIRONMENTALLY SUSTAINABLE
BUSINESS PRACTICES

 Increased reputation and buyer patronage

 Reduced risk of reputation-damaging incidents
 Lower turnover costs and enhanced employee
recruiting and workforce retention
 Increased revenue enhancement opportunities
due to support of CSR and sustainability
 CSR and sustainability best serve long-term
interests of shareholders

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 COMBATING THE EVASION OF
CSR AND SOCIALLY HARMFUL
BUSINESS PRACTICES

Increased public
awareness of misdeeds of
bad behavior by firms
Harmful and
Increased legislation and Unethical
regulation to correct and Business
punish firms Actions and
Behaviors

Refusal to do business with

irresponsible firms

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STRATEGIC MANAGEMENT PRINCIPLE

♦ The higher the public profile of a company or

its brand, the greater the scrutiny of its
activities and the higher the potential for it to
become a target for pressure group action.

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 STRATEGIC MANAGEMENT PRINCIPLE

♦ Socially responsible strategies that create value

for customers and lower costs can improve
company profits and shareholder value at the
same time that they address other stakeholder
interests.
♦ There’s little hard evidence indicating
shareholders are disadvantaged in any
meaningful way by a company’s actions to be
socially responsible.

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