Ethics, Corporate Social Responsibility, Environmental Sustainability, and Strategy

CHAPTER 9
ETHICS, CORPORATE SOCIAL

RESPONSIBILITY, ENVIRONMENTAL
SUSTAINABILITY, AND STRATEGY
(c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution
in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
THIS CHAPTER WILL HELP YOU UNDERSTAND:
LO 1 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.
LO 2 What drives unethical business strategies and behavior.
LO 3 The costs of business ethics failures.
LO 4 The concepts of corporate social responsibility and

environmental sustainability and how companies
balance these duties with economic responsibilities to
shareholders.
9–2
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.
9–3
CORE CONCEPTS
♦ Ethics concerns principles of right or wrong

conduct.
♦ Business ethics deals with the application of
general ethical principles to the actions and
decisions of businesses and the conduct of
their personnel.
9–4
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
9–5
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.
9–6
CORE CONCEPT
♦ The school of ethical universalism holds that

the most fundamental conceptions of right and
wrong are universal and apply to members of
all societies, all companies, and all
businesspeople.
9–7
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.
9–8
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.
9–9
STRATEGIC MANAGEMENT PRINCIPLE
♦ Under ethical relativism, there can be no one-

size-fits-all set of authentic ethical norms
against which to gauge the conduct of
company personnel.
9–10
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
9–11
ILLUSTRATION IKEA’s Global Supplier Standards:
CAPSULE 9.1 Maintaining Low Costs While Fighting
the Root Causes of Child Labor
♦ How effective has IKEA’s IWAY proactive

approach to setting global labor standards been in
reducing abuses of child workers at its supplier
facilities?
♦ Is it fair for IKEA to prescribe that its suppliers
comply with global standards that are at variance
with local market labor practices and conditions?
♦ What has IKEA done to help its suppliers
overcome the problems that foster the use of child
labor?
in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 9–12
♦ Codes of conduct based on ethical relativism

can be ethically dangerous for multinational
companies by creating a maze of conflicting
ethical standards.
9–13
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.
9–14
♦ 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.
9–15
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.
9–16
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.
9–17
♦ In instances involving universally applicable

ethical norms (like paying bribes), there can be
no compromise on what is ethically permissible
and what is not.
9–18
HOW AND WHY ETHICAL STANDARDS IMPACT
THE TASKS OF CRAFTING AND EXECUTING
STRATEGY
 The Ethics Code Litmus Test:

● Areas of ambiguity: Is what we are proposing to
do fully compliant with our code of ethics?
● Conflict or potential problem: Is this action in
harmony with our core values?
● Ethically objectionable action: Will our
stakeholders, our competitors, the SEC under the
Sarbanes-Oxley Act, or the news and social media
view this action as ethically objectionable?
(c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
9–19
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
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
9–20
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
9–21
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.
9–22
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.
9–23
ILLUSTRATION How Novo Nordisk Puts Its Ethical
CAPSULE 9.2 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?
WHY SHOULD COMPANY STRATEGIES BE
ETHICAL?
 The Moral Case for an Ethical Strategy:

● 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:
● An ethical strategy can be both good
business and serve the self-interest of
shareholders.
9–25
♦ 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.
9–26
FIGURE 9.1 The Costs Companies Incur When Ethical Wrongdoing Is Discovered
9–27
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.
9–28
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.
9–29
FIGURE 9.2
The Five Components
of a Corporate Social
Responsibility Strategy
9–30
ILLUSTRATION Burt’s Bees: A Strategy Based on
CAPSULE 9.3 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 Burt’s Bees acquisition?
CORE CONCEPT
♦ A company’s CSR strategy is defined by the

specific combination of socially beneficial
activities the company opts to support with its
contributions of time, money, and other
resources.
9–32
FIGURE 9.3 The Triple Bottom Line: Excelling on Three Measures of Company Performance
Profit People
Planet
9–33
ILLUSTRATION TOMS’s Well-Balanced
CAPSULE 9.4 Triple Bottom Line
♦ What unique marketing factors are driving the

sales growth of TOMS?
♦ How does TOMS use its environmental
sustainability approach to set it apart from its
competitors?
♦ How much of TOMS’s success is due to its focus
on catering to a market niche of loyal lifestyle
consumers?
♦ Does TOMS’ environmental sustainability strategy
limit its expansion into other footwear market
segments?
9–34
TABLE 9.1 A Selection of Companies Recognized for Their Triple-Bottom-Line
Performance in 2013
9–35
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.
9–36
CORE CONCEPT
♦ 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.
9–37
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.
9–38
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
9–39
♦ 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.
9–40
THE MORAL CASE FOR CSR AND
ENVIRONMENTALLY SUSTAINABLE
BUSINESS PRACTICES
The Implied Social Contract:

“It’s the right thing to do”
Operate Provide good Be a good Display good

ethically and work conditions environmental corporate
legally for employees steward citizenship
9–41
♦ Every action a company takes can be

interpreted as a statement of what it stands for.
9–42
THE BUSINESS CASE FOR CSR AND
ENVIRONMENTALLY SUSTAINABLE
BUSINESS PRACTICES
 Increased 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
9–43
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
9–44
♦ 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.
9–45
♦ 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.
9–46

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CHAPTER 9

ETHICS, CORPORATE SOCIAL

LO 1 How the standards of ethical behavior in business are

LO 2 What drives unethical business strategies and behavior.

LO 3 The costs of business ethics failures.

LO 4 The concepts of corporate social responsibility and

♦ Ethics concerns principles of right or wrong

Sources for Ethical Standards

The School of The School of Integrated

♦ The school of ethical universalism holds that

♦ The school of ethical relativism holds that

♦ Under ethical relativism, there can be no one-

Relativism The use of

♦ How effective has IKEA’s IWAY proactive

♦ Codes of conduct based on ethical relativism

♦ According to integrated social contracts

♦ According to integrated social contracts theory,

 Provides a middle-ground balance between

 Effects on Ethical Standards:

♦ In instances involving universally applicable

 The Ethics Code Litmus Test:

When Strategies Fail

Sizable Devastating Sharp stock Criminal

 Drivers of Unethical Business Behavior:

♦ Self-dealing occurs when managers take

♦ What steps has Novo Nordisk taken to

 The Moral Case for an Ethical Strategy:

♦ Conducting business in an ethical fashion is

 Corporate Social Responsibility (CSR)

♦ Corporate social responsibility (CSR)

♦ How has Burt’s Bees skillful use of

♦ A company’s CSR strategy is defined by the

♦ What unique marketing factors are driving the

♦ Sustainable business practices are those

 Environmental Sustainability Strategy

Pursuing a Sustainable CSR Strategy

Moral Case: Business Case:

♦ CSR strategies and environmental

The Implied Social Contract:

Operate Provide good Be a good Display good

♦ Every action a company takes can be

 Increased buyer patronage

Refusal to do business with

♦ The higher the public profile of a company or

♦ Socially responsible strategies that create

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