CHAPTER

2
Integrity, Ethics,
and Social
Entrepreneurship

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LEARNING OBJECTIVES

By studying this chapter, you should be able to…

2-1 Define integrity, and understand its importance to
small businesses.
2-2 Explain how integrity applies to various stakeholder
groups.
2-3 Identify some common challenges and benefits of
maintaining integrity in small businesses.
2-4 Suggest practical approaches for building a
business with integrity.
2-5 Define social entrepreneurship, and describe its
influence on small companies and startup
opportunities.
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 2-1 WHAT IS INTEGRITY?

• Integrity – A general sense of honesty and reliability

that is expressed in a strong commitment to doing the
right thing, regardless of the circumstances.
• “Doing anything for money” can quickly lead to
distortions in business behavior.
• Acting with integrity requires that an individual first
consider the welfare of others.
• Many small business owners strive to achieve the
highest standards of honesty, fairness, and respect in
their business relationships.

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 2-2 INTEGRITY AND THE INTERESTS
OF MAJOR STAKEHOLDERS (slide 1 of 3)
• Closely tied to integrity are ethical issues,
which go beyond what is legal or illegal to
include more general questions of right and
wrong.
• A recent Ethics Resource Center survey
indicated that employees witness various
forms of misconduct in their workplaces, with
the most frequently observed offenses
involving abusive behavior and lying to
employees.

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2.1 Most Frequently Observed Forms of Workplace Misconduct

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 2-2 INTEGRITY AND THE INTERESTS
OF MAJOR STAKEHOLDERS (slide 2 of 3)
• When making decisions, small business owners guided by
integrity must consider the interests of several different groups:
• Owners.
• Customers.
• Employees.
• The community.
• The government.
• Individuals in these groups are sometimes referred to as
stakeholders.
• Stakeholders – Individuals or groups that either can affect or are
affected by the performance of the company.
• Because the interests of various stakeholder groups sometimes
conflict, decisions can be very difficult to make.

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2.2 Four Types of Responsibilities for Small Businesses

Type of Societal General Focus

Responsibility Expectation
Economic Required Be profitable.
Legal Required Obey all laws, adhere to all
regulations.
Ethical Expected Avoid questionable practices.
Discretionary Desired / Expected Be a good corporate citizen, and
give back.

Source: Adapted with permission from Archie B. Carroll and Ann. K. Buchholtz,
Business and Society: Ethics, Sustainability, and Stakeholder Management, 9 e
(Mason, OH: Cengage Learning, 2015), p. 35.

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 2-2 INTEGRITY AND THE INTERESTS
OF MAJOR STAKEHOLDERS (slide 3 of 3)
• The concerns of important stakeholders are
fundamental to the management of a business.
• If neglected, any one group can use its influence to
negatively affect the performance of the company.
• Therefore, stakeholder interests should be carefully
considered and widely balanced.

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 2-2a The “Big Three” Stakeholders—
Owners, Customers, and Employees (slide 1 of 2)

PROMOTING THE OWNERS’ INTERESTS

• A company’s owners have a clear and reasonable right to benefit from the
financial performance of the business.
• In a business with more than one owner, high standards of integrity require
an honest attempt to promote the interests of all the owners, which include a
commitment to financial performance and protection of the firm’s reputation.

CARING ABOUT CUSTOMERS

• Those companies that take customers seriously and serve them well are
likely to have more of them.
• Companies with integrity recognize the importance of treating their
customers with care.
• When a company delivers an excellent product with first-rate service,
customer satisfaction and healthy sales are likely to follow.

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 2-2a The “Big Three” Stakeholders—
Owners, Customers, and Employees (slide 2 of 2)

VALUING EMPLOYEES
• Showing proper appreciation for employees as human beings and
as valuable members of the team is an essential ingredient of
managerial integrity.
• According to recent research, when employees feel that they are
valued and socially connected at work, they tend to be highly
engaged and much more productive.
• Small business owners must give much thought to the standards of
conduct that guide everyday behavior.
• Lapses in integrity are passed down from superiors to subordinates,
replicating like a life-threatening virus that spreads throughout the
organization.

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 2-2b Social Responsibility
and Small Business (slide 1 of 2)
• Most people consider an ethical small business to be
one that acts as a good citizen in its community.
• Social responsibilities – A company’s ethical
obligations to the community.
• Companies have increasingly shown commitment to
the communities where they do business.
• Their contribution starts with creating jobs and adding to local
tax revenues, but many entrepreneurs feel a duty to give back
even more to the community in return for the local support
they enjoy—and they usually benefit from increased goodwill
as a result.

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 2-2b Social Responsibility
and Small Business (slide 2 of 2)
• Entrepreneurs should think carefully about
their community commitments, because
building a business on a foundation of “doing
good” may add to a small company’s financial
burden.
• Research suggests that most small business
owners exercise great integrity, but some tend
to cut corners when it comes to social
responsibilities if profits will be affected.

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 2-2c Integrity and
Governmental Regulations
• Government regulations encompass workplace safety,
equal employment opportunities, fair pay, clean air, and
safe products, to name a few.
• Entrepreneurs must obey governmental laws and
follow applicable regulations if they want to maintain
their integrity and avoid jail time.
• One glaring example of unethical behavior by small
firm management is fraudulent reporting of income and
expenses for income tax purposes.
• This conduct includes skimming (that is, concealing some
income), as well as improperly claiming personal expenses to
be business-related.

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2-3 THE CHALLENGES AND BENEFITS
OF ACTING WITH INTEGRITY
• Small firms’ limited resources and desire to
succeed make them especially vulnerable to
allowing or engaging in unethical practices.

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 2-3a Small Companies and
the Legitimacy Lie (slide 1 of 3)
• Because startups do not have a history and a reputation
to lean on when trying to sell customers on their new
product or service or to impress other important
stakeholders, entrepreneurs often are uniquely tempted
to resort to telling what some researchers call legitimacy
lies.
• That is, they sometimes misrepresent the facts or create false
impressions to mislead others intentionally and earn their
confidence.
• Telling legitimacy lies threatens the reputation of the
business and the trust that goes along with it.
• If (when) the truth is revealed, future sales or support could very
well be compromised.
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 2-3a Small Companies and
the Legitimacy Lie (slide 2 of 3)
• Research has shown that customers are less likely to
decide to purchase if they have significant questions
about the product or service that the new venture is
offering, about those who represent and / or run the
business, and about the organization itself.
• These features are called P R O factors—Products,
Representatives, and the Organization—to emphasize that they
can promote firm performance when customers are satisfied
with them.
• Advertising, publicity programs, social media tools, and
other promotional strategies are used to address P R O
factors.

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 2-3a Small Companies and
the Legitimacy Lie (slide 3 of 3)
• A small firm’s legitimacy is staked on the reputation of its owner, but
it is important to highlight and honestly bolster the credibility of
anyone who represents the venture.
• It is best to make the credentials (educational background, expertise,
industry experience, etc.) of key employees known, as well as to
encourage those employees to participate in trade, business, and
community organizations where they can build important relationships
and associations.
• The business itself can establish legitimacy by:
• Setting up a high-quality website.
• Insisting on professional behavior from all employees.
• Forming strategic alliances with well-respected partner firms.

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 2-3b Integrity and the Internet
(slide 1 of 3)

• An issue of great concern to Internet users is personal

privacy.
• Businesses and consumers often disagree about how private
the identity of visitors to websites should be.
• Example: Businesses use cookies (digital “I D tags”) to collect
data on consumers’ buying habits and create a more
personalized shopping experience and offer convenience to the
buyer, but they may also sell the cookies to media-buying
companies and other interested groups.
• To minimize customer concerns, a company must be
honest and transparent with customers about its practices
and draft a privacy policy that conforms to the guidelines
provided by organizations like the Better Business Bureau
or through consultation with an attorney.
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 2-3b Integrity and the Internet
(slide 2 of 3)

• The extent to which an employer may monitor an employee’s

Internet activity is also hotly debated.
• Many workers believe it is inappropriate for employers to monitor their
e-mail, a practice they consider to be an invasion of privacy.
• Many employers, on the other hand, are concerned that employees
may be engaging in “cyberslacking” at the office—that is, wasting
company time dealing with personal e-mail, shopping online, and
surfing the Internet—and are convinced such activity hinders
workplace productivity.
• Companies that choose to monitor workers’ Internet use should
be sure to develop a carefully worded and legally sound policy
first, and then ensure that all employees are aware of it.
• Those choosing to take an even more cautious approach have
employees sign a monitoring consent form when they are first
hired.

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 2-3b Integrity and the Internet
(slide 3 of 3)

• Widespread use of the Internet has also focused

attention on the issue of protecting intellectual property.
• Intellectual property – Original intellectual creations,
including inventions, literary creations, and works of art, that
are protected by patents, copyrights, trademarks, design
rights, and trade secrets.
• The law allows originators of intellectual property to
require compensation for its use.
• However, the Internet has made it easy for millions of users to
copy intellectual property free of charge.

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 2-3c Integrity and
Doing Business Abroad
• Cultural differences may complicate ethical decision making for
small firms operating abroad.
• Ethical imperialism – The belief that the ethical standards of
one’s own country can be applied universally.
• The Foreign Corrupt Practices Act makes it illegal for U.S. businesses
to use bribery in their dealings anywhere in the world.
• Ethical relativism – The belief that ethical standards are subject
to local interpretation.
• This implies that anything goes if the local culture accepts it.
• One-time practices may set a pattern for future behaviors.
• Example: Offering a bribe to make a business deal often creates
expectations for more of the same in the future.

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 2-3d The Integrity Edge (slide 1 of 2)

• Research supports the notion that ethical business

practices are good for business.
• The advocacy group Business for Social Responsibility
contends that there are numerous long-term benefits of
adopting ethical and responsible business practices:
• Improved financial performance.
• Enhanced brand image and reputation.
• Increased sales and customer loyalty.
• Improved productivity and quality.
• Better recruitment and reduced employee turnover.
• Fewer regulatory inspections and less paperwork.
• Improved access to capital.

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 2-3d The Integrity Edge (slide 2 of 2)

• Perhaps the greatest benefit of integrity in

business is the trust it generates.
• When customers and employees trust a small
company to act with integrity, their support can help
keep the company going.

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 2-4 BUILDING A BUSINESS
WITH INTEGRITY
• The goal of a small business owner with
integrity should be to operate honorably in all
areas of practice, which sets the entrepreneur
on a path toward crafting a worthy legacy.
• Those at the top must provide the leadership,
culture, and training that support appropriate
ethical perspectives and proper behavior.

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 2-4a The Foundations of Integrity
(slide 1 of 2)

• The business practices that a firm’s leaders and

employees view as right or wrong reflect their
underlying values.
• Underlying values – Beliefs that provide a foundation for
ethical behavior in an individual or a firm.
• An individual’s beliefs affect what that person does on
the job and how she or he acts toward customers and
others.
• Business behavior, then, reflects a person’s commitment to
honesty, respect, truthfulness, and so forth—in other words, to
integrity in all of its dimensions.

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 2-4a The Foundations of Integrity
(slide 2 of 2)

• Values that serve as a foundation for integrity

in business are based on personal views of the
role of humankind in the universe and,
naturally, are part of basic philosophical and /
or religious convictions.
• Since these principles are reflected in the business
practices of firms of all sizes, a leader’s personal
commitment to certain basic values is an important
determinant of his or her firm’s commitment to
business integrity.

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 2-4b Leading with Integrity

• In a small organization, the influence of a

leader is more pronounced than it is in a large
corporation where leadership can be diffused.
• In a small company, a leader’s behavior has
much greater influence on employees than his
or her stated philosophy does.
• The leader’s conduct establishes the culture of the
company, underscoring what is allowed or
encouraged or what is prohibited.
• Thus, the dominant role of this one person (or the
leadership team) shapes the ethical performance of the
small company, for good or for ill.
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 2-4c An Ethical
Organizational Culture (slide 1 of 2)
• An organizational culture that supports integrity is key to
achieving appropriate behavior among a firm’s employees.
• To define ethical behavior in a company, the owner-manager of a
small firm should formulate a code of ethics similar to that of
most large corporations.
• Code of ethics – Formally established standards of employee
behavior communicated by a business owner.
• Authors Kenneth Blanchard and Norman Vincent Peale suggest
that an ethics policy be based on the following five fundamental
principles:
1. Purpose.
2. Pride.
3. Patience.
4. Persistence.
5. Perspective.
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 2-4c An Ethical
Organizational Culture (slide 2 of 2)
• Codes of ethics can shape and improve conduct in organizations in
a number of ways:
• By defining behavioral expectations.
• By communicating that those expectations apply to employees at all
levels in the business.
• By helping employees convey the company’s standards of conduct to
suppliers and customers.
• By serving as a guide for handling peer pressure.
• By providing a formal channel for communicating with superiors without
fear of reprisal.
• A well-written code expresses the principles to be followed by
employees of the firm and gives examples of these principles in
action.
• If a code of ethics is to be effective, employees must be aware of its
nature and convinced of its importance, and the entrepreneur’s
behavior must be consistent with his or her own stated principles.
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 2-4d Better Business Bureaus

• Many small companies join Better Business

Bureaus (B B Bs) to promote ethical conduct
throughout the business community.
• B B Bs encourage ethical practices in the following
ways:
• By providing consumers with free information to help them
make informed decisions when dealing with a company.
• By creating an incentive for businesses to adhere to proper
business practices and earnestly address customer
complaints.
• By resolving questions or disputes concerning purchases
through mediation or arbitration.

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 2-4e The Ethical Decision-
Making Process (slide 1 of 3)
STEP 1: DEFINE THE PROBLEM
• How you define the problem is important because this will guide
where you look for solutions.
• Looking for the root of the problem is the best place to start in
your search for a solution to a challenging ethical problem.

STEP 2: IDENTIFY ALTERNATIVE SOLUTIONS TO THE PROBLEM

• It is tempting to go with an “obvious” solution or one that has been
used in the past, but often this is not the best answer—even if it is
ethical.
• Be open-minded, and consider creative alternatives.
• Seeking advice from trusted friends and advisers who have faced
similar situations can spur your thinking and lead to options that
you might otherwise overlook.
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 2-4e The Ethical Decision-
Making Process (slide 2 of 3)
STEP 3: EVALUATE THE IDENTIFIED ALTERNATIVES
• Ask yourself the following four questions when you prepare to
make a decision about the things you think, say, or do:
1. Is it the truth?
2. Is it fair to all concerned?
3. Will it build goodwill and better friendships?
4. Will it be beneficial to all concerned?
• Perhaps the most widely recommended principle for ethical
behavior is simply to follow the Golden Rule: “Treat others as you
would want to be treated.”
• Writing down your thoughts about alternatives, listing the ethical
pros and cons of each alternative, or ranking all potential options
based on their overall merits and then narrowing the list to the two
or three best solutions to consider further will allow you to make a
better selection.
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 2-4e The Ethical Decision-
Making Process (slide 3 of 3)
STEP 4: MAKE THE DECISION
• Keeping your vision and core values in mind is essential to making
solid decisions that do not compromise your ethical standards.

STEP 5: IMPLEMENT THE DECISION

• Avoiding action on the decision may allow a small problem to
grow into a major crisis, and it may cause you to spend more time
thinking about the problem when other important matters deserve
your attention.

STEP 6: EVALUATE THE DECISION

• If the situation has not gotten better, or if new information has come
to light indicating that your decision was not the most ethical course
of action, you may need to reopen the matter to make things right.
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2-5 SOCIAL ENTREPRENEURSHIP:
A CONTINUING TREND
• Social entrepreneurship – Entrepreneurial
activity that provides innovative solutions for
social issues.
• A social entrepreneur is one who comes up
with innovative solutions to society’s most
pressing needs, problems, and opportunities
and then makes them happen.

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 2-5a Social Entrepreneurship and
the Triple Bottom Line
• Social entrepreneurs focus on an expanded set
of priorities—a triple bottom line, which takes
into account a venture’s impact on people,
profits, and the planet.

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 2-5b Small Business and the
Natural Environment (slide 1 of 3)
• Escalating concern for the environment has
spawned a shift toward sustainable small
businesses.
• Sustainable small businesses – A profitable
company that responds to customers’ needs while
showing reasonable concern for the environment.
• This trend recognizes that a company must be
profitable to stay in business, but it also promotes the
use of eco-friendly practices (careful use of
resources, energy conservation, recycling, etc.)
through all facets of a company’s operations.

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 2-5b Small Business and the
Natural Environment (slide 2 of 3)
SUSTAINABILITY MATTERS
• Environmentalism – The effort to protect and preserve the
environment.
• The commitment to the cause of environmentalism makes financial
sense for many businesses.
• Example: Though more expensive to construct, L E E D-certified
buildings (facilities that have been built to strict standards promoting
energy and water conservation, reduced C O 2 emissions, and improved
indoor air quality) can decrease energy costs from operations by as
much as
20 percent, and healthier workplace environments improve employee
productivity, reduce illness and absences, improve recruitment, and raise
retention—all of which can create a net savings for the company.
• However, some small businesses can be adversely impacted by
environmental protection laws.
• Examples: Fast lube and oil change centers, medical waste disposal
operations, and
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 2-5b Small Business and the
Natural Environment (slide 3 of 3)
• Firms whose products leave minimal environmental impact are
generally preferred by customers over competitors whose products
pollute.
• The Small Business Administration (S B A), the Environmental
Protection Agency (E P A), and other public and private resources
stand ready to help small businesses comply with environmental
regulations.

GREEN OPPORTUNITIES FOR SMALL BUSINESSES

• Small companies are sometimes launched precisely to take
advantage of opportunities created by environmental concerns.
• Creating environmentally friendly products and services requires
creativity and flexibility, areas in which small businesses tend to
excel.

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 Key Terms
code of ethics social entrepreneurship
environmentalism social responsibilities
ethical imperialism stakeholders
ethical relativism sustainable small businesses
integrity underlying values
intellectual property

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