Corporate Social Responsibility

and Business Ethics

Strategic Management Model

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 Learning Objectives
1. Understand the importance of the stakeholder approach
2. Explain the continuum of social responsibility
3. Describe a social audit
4. Discuss the effect of Sarbanes-Oxley, 2002
5. Compare advantages of collaborative social initiatives
6. Explain the 5 principles of collaborate social initiatives
7. Compare the merits of different approaches to business ethics
8. Explain relevance of business ethics to strategic management
practice.

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 Discussion Questions
How do different stakeholders view corporate social responsibility? What
types of social commitment must managers consider regarding social
responsibility?

How has the Sarbanes-Oxley Act changed boards of directors’ thinking

relative to business ethics and social responsibility?

Explain the five principles of collaborative social initiatives.

Compare and contrast the different approaches to business ethics.

 Stakeholder Approach
According to the Stakeholder Approach:
• In defining or redefining the company
mission, strategic managers must recognize
the legitimate rights of the firm’s claimants.

• In addition to stockholders and employees,

these include outside stakeholders affected
by the firm’s actions.

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Firm’s Behavior and
Stakeholder’s
Expectations
Stakeholder Analysis
Stakeholder Analysis
Stakeholder Analysis
Perceived Stakeholders

• Customers
• Government
• Stockholders
• Employees
• Society

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 Concerns
• Diverse and Conflicting interests of Stakeholders
• Management need to cater all interests to some
degree
• Stakeholder orientation in decision making
• Need to prioritize the stakeholders and their
interests
• When a firm attempts to incorporate the
interests of these groups into its mission
statement, broad generalizations are insufficient.
Steps to Incorporate Stakeholders:
1. Identification of stakeholders
2. Understanding stakeholders’
specific claims vis-à-vis the firm
3. Reconciliation of these claims
and assignment of priorities
4. Coordination of the claims with
other elements of the company
mission

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 Identification of stakeholders
• Every business faces a slightly different set of
stakeholder groups, which vary in number,
size, influence, and importance.

• In defining the company, strategic managers

must identify all stakeholder groups and weigh
their relative rights and relative ability to
affect the firm’s success.
Understanding stakeholders’ specific claims
vis-à-vis the firm

• Strategic decision makers should understand

the specific demands of each group if the are
to initiate satisfactory actions.
 Reconciliation of these claims and
assignment of priorities
• Unfortunately, the claims of various stakeholder groups often conflict.
• For objectives and strategies to be internally consistent and precisely
focused, the statement must display a single-minded, though
multidimensional approach to the firm’s aims.
• There are hundreds, if not thousands, of claims on any firm—high wages,
pure air, job security, product quality, community service, taxes, OSHA
regulations, equal employment opportunity regulations, product variety,
wide markets, career opportunities, company growth, investment security,
high ROI, and many more.
• Not every claim can be pursued with equal emphasis.
• Priorities must be assigned in accordance with the relevant emphasis that
the firm will give them.
• Emphasis is reflected in the criteria that the firm uses in its strategic
decision making; in the firm’s allocation of its human, financial, and
physical resources; and in the firm’s long-term objectives and strategies.
 Coordination of the claims with other
elements of the company mission

• The demands of stakeholder groups constitute

only one principal set of inputs to the
company mission.
• The other principal sets are the managerial
operating philosophy and the determinants of
the product-market offering.
• The key question is, “How can the firm satisfy
its claimants and at the same time optimize its
economic success in the marketplace?”
 The stakeholder approach offers the clearest
perspective on these issues.
• Broadly stated, outsiders often demand that insiders’ claims be
subordinated to the greater good of the society (outsiders).
• Outsiders believe issues like pollution and conservation of
natural resources should be principal considerations in
strategic decision making.
• Insiders tend to believe that the competing claims of outsiders
should be balanced against one another in a way that protects
the company mission.
• Some insiders also argue that the claims of society, as
expressed in government regulation, provide tax money that
can be used to eliminate water pollution and the like if the
general public wants this to be done.
The Dynamics of Social
Responsibility
 Dynamics of Social Responsibility
 Inside vs. Outside Stakeholders
 Duty to serve society plus duty to serve stockholders
 Flexibility is key
 Firms differ along:
 Competitive Position
 Industry
 Country
 Environmental Pressures
 Ecological Pressures

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Inputs to the Development of Company Mission

• Insiders are individuals or groups that are stockholders or employees of the

firm.
• Outsiders are all the other individuals or groups that the firm’s actions
affect.
• The extremely large and often amorphous set of outsiders makes the
general claim that the firm be socially responsible. 3-26
 Types of Social Responsibility
 Economic – the duty of managers, as agents of the
company owners, to maximize stockholder wealth
 Legal – the firm’s obligations to comply with the laws
that regulate business activities
 Ethical – the company’s notion of right and proper
business behavior.
 Discretionary – voluntarily assumed by a business
organization.

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 Economic Responsibility
• Economic responsibilities are the duty of managers, as
agents of the company owners, to maximize
stockholder wealth.
• The essential responsibility of business is assumed to
be providing goods and services to society at a
reasonable cost.
• In discharging its economic responsibility, the
company emerges as socially responsible by providing
productive jobs for its workforce, and tax payments
for its local, state, and federal governments.
 Legal Responsibilities
• The consumer and environmental movements focused
increased public attention on the need for social
responsibility in business by lobbying for laws that govern
business in the areas of pollution control and consumer
safety.
• The intent of consumer legislation has been to correct the
“balance of power” between buyers and sellers in the
marketplace.
• Among the most important laws are the Federal Fair
Packaging and Labeling Act that regulates labeling
procedures, and the Consumer Product Safety Act that
protects consumers against unreasonable risks of injury.
 ……..
• The environmental movement has had a similar affect:
it achieved stricter enforcement of existing
environmental protections and it spurred the passage
of new, more comprehensive laws.
• The National Environmental Policy Act is devoted to
preserving the United State’s ecological balance and
making environmental protection a federal policy goal.
• Legal responsibilities are supplemental to the
requirement that businesses and their employees
comply fully with the general civil and criminal laws
that apply to all individuals and institutions in the
country.
 Ethical Responsibilities
• Ethical responsibilities are obligations that
transcend legal requirements.
• Firms are expected, but not required, to
behave ethically.
• Some actions that are legal might be
considered unethical.
• The topic of management ethics receives
attention later in the chapter.
 Discretionary responsibilities
• These responsibilities include public relations, good
citizenship, and full corporate responsibility.
• Discretionary responsibilities have a self-serving
dimension.
• A commitment to full corporate responsibility requires
strategic managers to attack social problems with the
same zeal in which they attack business problems.
• It is important to remember that the categories on the
social responsibility continuum overlap, creating many
gray areas where societal expectations on
organizational behavior are difficult to categorize.
 The stakeholder approach offers the clearest
perspective on these issues.
• Broadly stated, outsiders often demand that insiders’ claims be
subordinated to the greater good of the society (outsiders).
• Outsiders believe issues like pollution and conservation of
natural resources should be principal considerations in
strategic decision making.
• Insiders tend to believe that the competing claims of outsiders
should be balanced against one another in a way that protects
the company mission.
• Some insiders also argue that the claims of society, as
expressed in government regulation, provide tax money that
can be used to eliminate water pollution and the like if the
general public wants this to be done.
 Issues are numerous, complex, and contingent on
specific situations. Therefore, rigid rules of business
conduct cannot deal with them.
• Each firm, regardless of size, must decide how to meet its
perceived social responsibility.
• While large, well-capitalized companies may have easy access to
environmental consultants, this is not an affordable strategy for
smaller firms.
• The experience of many small businesses demonstrates that it is
feasible to accomplish significant pollution prevention and waste
reduction without big expenditures and without hiring
consultants.
• Once a problem area is identified, a company’s line employees
frequently can develop a solution.
• Making pollution prevention a social responsibility can be
beneficial to small and large companies.
 Different approaches adopted by different firms reflect
differences in competitive position, industry, country,
environmental and ecological pressures, and a host of
other factors.
 
• They will reflect both situational factors and
differing priorities in the acknowledgement of
claims.
•  
• Despite differences in their approaches, most
American firms now try to assure outsiders that
they attempt to conduct business in a socially
responsible manner.
CSR and Profitability
 CSR & Bottom Line (Profitability)
• The goal of every firm is to maintain viability
through long-run profitability. Until all costs
and benefits are accounted for, however,
profits may not be claimed.

• Corporate social responsibility (CSR), is the

idea that business has a duty to serve society
in general as well as the financial interests of
stockholders.

• The dynamic between CSR and success (profit)

is complex. They are not mutually exclusive,
and they are not prerequisites of each other.
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Factors Complicating a Cost-Benefit Analysis of CSR:

1. Some CSR activities incur no dollar costs at all. In fact,

the benefits from philanthropy can be huge.
2. Socially responsible behavior does not come at a
prohibitive cost.
3. Socially responsible practices may create savings, and,
as a result, increase profits.
4. Proponents argues that CSR costs are more than
offset in the long run by an improved company image
and increased community goodwill.

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Mission Statement of Johnson and Johnson
Mission Statement of Johnson and Johnson…..
 CSR and its Performance
• How do managers measure the financial effect of
corporate social performance?
• Critics of CSR believe companies that behave in a
socially responsible manner, and portfolios
comprising these companies’ securities, should
perform more poorly financially than those that do
not.
• The restrictive natures of portfolios based on social
criteria should increase portfolio risk and reduce
return, according to critics or CSR.
 Go through
• Exhibit 3.4: An Overview of Corporate
Scandals

• Important Ones: Enron and WorldCom

• Study about these through web sources too

 CSR Today
 Priority of American businesses
 Resurgence of Environmentalism
 Increasing Buying Power among Consumers
 Globalization of Business

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Sarbanes-Oxley Act of 2002
 Sarbanes-Oxley Act of 2002

 CEO and CFO must certify every report

containing company’s financial statements
 Restricted corporate control of executives,
acting, firms, auditing committees, and
attorneys
 Specifies duties of registered public acting
firms that conduct audits
 Composition of the audit committee and
specific responsibilities
 Rules for attorney conduct
 Disclosure periods are stipulated
 Stricter penalties for violations
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New Corporate Governance Structure
• Restructuring governance structure in
American corporations
• Heightened role of corporate internal
auditors
• Auditors now routinely deal directly with top
corporate officials
• CEO information provided directly by the
company’s chief compliance and chief
accounting officers

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The New Corporate Governance Structure

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CSR’s Effect on the Mission
Statement
 The mission statement not only identifies what product
or service a company produces, how it produces it, and
what market it serves, it also embodies what the
company believes.
•  It is essential that the mission statement recognize the
legitimate claims of its external stakeholders, which may
include creditors, customers, suppliers, government,
unions, competitors, local communities, and elements of
the general public.
• This stakeholder approach has become widely accepted by
U.S. businesses.
• Customers, government, stockholders, employees, and
society, in that order, were perceived by directors to be the
most important stakeholders according to a survey of 291 of
the largest southeastern U.S. companies.
 In developing mission statements, managers must
identify all stakeholder groups and weigh their relative
rights and abilities to affect the firm’s success.

 
• Some companies are proactive in their approach
to CSR, making it an integral part of their raison
d’être.

• Other firms are reactive, adopting socially

responsible behavior only when they must.
Social Audit
 Social Audit
• A social audit is an attempt to measure a company’s
actual social performance against its social objectives.
• A social audit may be performed by the company
itself; however, one conducted by an outside
consultant who will impose minimal biases may prove
more beneficial to the firm.
• As with a financial audit, an outside auditor brings
credibility to the evaluation.
• Credibility is essential if management is to take the
results seriously and if the general public is to believe
the company’s public relations pronouncements.
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 ………
• Careful, accurate monitoring and evaluation of
a company’s CSR actions are important not
only because the company wants to be sure it
is implementing CSR policy as planned, but
also because CSR actions by their nature are
open to intense public scrutiny.
 Once the social audit is complete, it may be
distributed internally or both internally and
externally, depending on the firm’s goals and
situation.
• Some firms include a section in their annual report
devoted to social responsibility activities.
• Other firms public a separate periodic report on
their social responsiveness.
• Companies publishing separate social audits include
GM, Bank of America, Atlantic Richfield, Control
Data, and Aetna Life and Casualty Company.
• Nearly all Fortune 500 corporations disclose social
performance information in their annual reports.
 ……….

• Large firms are not the only companies employing the social
audit.
• The social audit may be used for more than simply monitoring
and evaluating firm social performance.
• Managers use social audits to scan the external environment,
determine firm vulnerabilities, and institutionalize CSR within
the firm.
• Companies themselves are not the only ones who conduct
social audits; public interest groups and the media also watch
companies who claim to be socially responsible very closely to
see if they practice what they preach.
• These organizations include consumer groups and socially
responsible investing firms that construct their own guidelines
for evaluating companies.
Satisfying Corporate Social
Responsibility
 Executives face conflicting pressures to contribute to
social responsibility while honoring their duties to
maximize shareholder value.

•  These days they face many belligerent critics who

challenge the idea of a single-minded focus on profits.
•  They also face skeptics who contend that CSR initiatives
are chiefly a convenient marketing gloss.
•  The reality is that most executives are eager to improve
their CSR effectiveness.
•  The issues are not whether firms will engage in socially
responsible activities, but how.
•  For most firms, the challenge is how best to achieve the
maximum social benefit from a given amount of resources
available for social projects.
 The Core of the CSR Debate
• The proper role of CSR—the actions of a company to benefit society beyond
the requirements of the law and the direct interests of shareholders—has
generated a century’s worth of philosophically and economically intriguing
debates.
• The debates surfaced in more positive ways in the last 30 years as new
businesses set up shop with altruism very much in mind and on display.
• More executives have come to understand the value of their companies’
reputations with customers—and with investors and employees.
• In the past, research on the financial effect of CSR produced inconsistent
findings
• There is no shortage of options with which businesses can advance their CSR
goals.
• Managers need a model that they can use to guide them in selecting social
initiatives and through which they can exploit their companies’ core
competencies for the maximum positive impact.
 Mutual Advantages of Collaborative Social
Initiatives (CSI)
• The term social initiative describes major initiatives that take
a collaborative approach.

• Research on alliances and networks among companies in

competitive commercial environments tells us that each
partner benefits when the other brings resources, capabilities,
or other assets that it cannot easily attain on its own.

• These combinative capabilities allow the company to acquire

and synthesize resources and build new applications from
those resources, generating innovative responses to rapidly
evolving environments.
 ………..

• While neither companies nor non-profits are well-

equipped to handle escalating social or environmental
problems, each participant has the potential to
contribute valuable material resources, services, or
individuals’ voluntary time, talents, energies, and
organizational knowledge.
•  Those cumulative offerings are vastly superior to cash-
only donations, which are a minimalist solution to the
challenges of social responsibility.
• Social initiatives involve ongoing information and
operational exchanges among participants and are
especially attractive because of their potential benefit
for both the corporate and not-for-profit partners.
 There is strong evidence to show that CSR
activities increasingly confer benefits beyond
enhanced reputation.

• For some participants, they can be a tool to

attract, retain, and develop managerial talent.

• The PricewaterhouseCooper (PwC) Project

Ulysses is a leadership development program
that sends small teams of PwC partners to
developing countries to apply their expertise to
complex social and economic challenges.
Continuum of Corporate Social Responsibility Commitments

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Five Principles of Successful CSIs
 Five Principles of Successful CSIs

1. Identify a Long-Term Durable Mission

2. Contribute “What We Do”*
*This is the most important principle
3. Contribute Specialized Services to a Large-
Scale Undertaking
4. Weigh Government’s Influence
5. Assemble and Value the Total Package of
Benefits

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 1. Identify a Long-Term Durable Mission
• Companies make the greatest social contribution when
they identify an important, long-standing policy challenge
and they participate in its solution over the long term.
• Ron Alsop argues that companies that are interested in
contributing to corporate responsibility and thus
burnishing their reputations should “own the issue.”
• Companies that step up to tackle problems that are
clearly important to society’s welfare and that require
substantial resources are signaling to internal and
external constituencies that he initiative is deserving of
the company’s investment.
 2. Contribute “What We Do”
• Companies maximize the benefits of their corporate
contributions when they leverage core capabilities and
contribute products and services that are based on
expertise used in or generated by their normal operations.
• Such contributions create a mutually beneficial
relationship between the partners; the social-purpose
initiatives receive the maximum gains while the company
minimizes costs and diversions.
• It is not essential that these services be synonymous with
those of the company’s business, but they should build
upon some aspect of its strategic competencies.
 3. Contribute Specialized Services to a Large-
Scale Undertaking
• Companies have the greatest social impact when they make
specialized contributions to large-scale cooperative efforts.
• Those that contribute to initiatives in which other private,
public, or nonprofit organizations area also active have an
effect that goes beyond their limited contributions.
• Although it is tempting for a company to identify a specific
cause that will be associated only with its own
contributions, such a strategy is likely to be viewed as a “pet
project” and not as a contribution to a large problem where
a range of players have important interests.
 4. Weigh Government’s Influence
• Government support for corporate participation
in CSIs—or at least its willingness to remove
barriers—can have an important positive
influence.
• Tax incentives, liability protection, and other
forms of direct and indirect support for
businesses all help to foster business
participation and contribute to the success of
CSIs.
• Endorsements can also be very valuable.
 5. Assemble and Value the Total Package of
Benefits
• Companies gain the greatest benefits from their social
contributions when they put a price on the total benefit
package.
• The valuation should include both the social contributions
delivered and the reputation effects that solidify or
enhance the company’s position among its constituencies.
• Positive reputation is driven by genuine commitment
rather than episodic or sporadic interest.
• Consumers and other stakeholders see through nominal
commitments designed simply to garner short-term
positive goodwill.
The Limits of CSR Strategies
 Some companies have embedded social
responsibility and sustainability commitments
deeply in their core strategies.
 Larger companies must move beyond the easy
options of charitable donations but also steer
clear of overreaching commitments.
 CSR strategies can also run afoul of the
skeptics—the speed of information on the
Internet makes this an issue with serious
ramifications.

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 The Future of CSR
• CSR is firmly and irreversibly part of the
corporate fabric
• Corporations will face growing demands for
social responsibility contributions far beyond
simple cash or in-kind donations
• The public’s perception of ethics in corporate
America is near its all-time low
• Even when groups agree on what constitutes
human welfare, the means they choose to
achieve it may differ
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Management Ethics
 Management Ethics
The Nature of Ethics in Business:
• Belief that managers will behave in an ethical
manner is central to CSR
• Ethics – the moral principles that reflect
society’s beliefs about the actions of an
individual or a group that are right and wrong
• Ethical standards reflect the end product of a
process of defining and clarifying the nature
and content of human interaction
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 Approaches to Questions of Ethics

 Utilitarian Approach
 Moral Rights Approach
 Social Justice Approach
 Liberty Principle
 Difference Principle
 Distributive-Justice Principle
 Fairness Principle
 Natural-Duty Principle
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 ……..

• Managers report that the most critical quality of ethical

decision making is consistency.

• Managers who adopt the utilitarian approach judge the effects

of a particular action on the people directly involved, in terms
of what provides the greatest good for the greatest many.

– This approach focuses on actions rather than motives.

– Potentially positive results are weighed against potentially negative
ones.
– If the positive outweighs negative, the managers will likely proceed
with the action.
– That some people might be adversely affected is accepted as
inevitable.
 ……..

• Managers who subscribe to the moral rights

approach judge whether decisions and actions
are in keeping with the maintenance of
fundamental individual and group rights and
privileges.

– The moral rights approach (also called deontology)

includes the rights of human beings to life and
safety, a standard of truthfulness, privacy, freedom
of expression, freedom of speech, and private
property.
 ……..

• Managers who take the social justice approach judge

how consistent actions are with equity, fairness, and
impartiality in the distribution of rewards and costs
among individuals and groups.

– These ideas stem from two principles known as the liberty

principles and the difference principle.
– The liberty principle states that individuals have certain
basic liberties compatible with similar liberties by other
people.
– The difference principle states that social and economic
inequities must be addressed to achieve a more equitable
distribution of goods and services.
 ……..

• In addition to these defining principles, three implementing

principles are essential to the social justice approach.

– According to the distributive-justice principle, individuals should

not be treated differently on the basis of arbitrary characteristics,
such as race, sex, religion, or national origin. This is embodied in
the Civil Rights Act.
– The fairness principle means that employees must be expected to
engage in cooperative activities according to rules of the
company, assuming that the company rules are deemed fair.
– The natural-duty principle points up a number of general
obligations, including the duty to help others who are in need or
danger, the duty not to cause unnecessary suffering, and the
duty to comply with the just rules of an institution.
 Code of Business Ethics
• To help ensure consistence in the application of
ethical standards, an increasing number of
professional associations and businesses are
establishing codes of ethical conduct.
• The following all have ethics codes:
– Chemists
– Funeral directors
– Law Enforcement Agents
– Hockey Players
– Librarians
– Physicians
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 Major Trends in Codes of Ethics

1. Increased interest in codifying business ethics has led

to both the proliferation of formal statements by
companies and to their prominence among business
documents.
2. Such codes used to be found solely in employee
handbooks.
3. Companies are adding enforcement measures to their
codes.
4. Increased attention by companies in improving
employees’ training in understanding their obligations
under the company’s code of ethics.
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THE END