Chapter 6 – Managing Social Responsibility

and Ethics

LO6.1 – What is Social Responsibility?

Definition: Social responsibility is a firm's obligation, beyond what is required by law and
economics, to pursue long-term goals that are good for society.

Two Opposing Views:

Classical View (Milton Friedman):

 Management's only responsibility is to maximize profits

 Managers are employees of stockholders, so they must serve stockholder interests
(financial return)
 Spending on social good undermines the market mechanism — stockholders,
employees, or consumers end up paying
 Managers who pursue social goals appoint themselves as "nonelected policymakers,"
which is not their role

Socioeconomic View:

 Management's responsibility goes beyond profits to include protecting and improving

society's welfare
 Corporations are chartered by governments and owe responsibility to the larger
society
 Long-run profits are maximized by accepting some social obligations (not polluting,
not discriminating, contributing to communities)
 "Maximizing profits is a company's second priority, not its first. The first is ensuring
its survival."

Three Related Concepts (important distinctions):

Social Obligation — meeting only economic and legal requirements; the minimum the law
requires

Social Responsiveness — adapting to changing societal conditions; guided by social norms;

pragmatic, focused on means, short/medium-term. Example: Starbucks banning plastic straws
in 2018 because public pressure demanded it.

Social Responsibility — goes further; adds an ethical imperative to do what is right, not just
what norms demand; focused on ends, long-term. Example: Had Starbucks banned straws 10
years earlier proactively, that would have been social responsibility.

Exhibit 6-2 comparison (SR vs Social Responsiveness):

  Major consideration: Ethical vs Pragmatic
 Focus: Ends vs Means
 Emphasis: Obligation vs Responses
 Decision framework: Long-term vs Medium/short-term

Arguments FOR Social Responsibility: public expectations, long-run profits, ethical

obligation, better public image, better environment, discourages more government regulation,
balances power with responsibility, improves stock price long-run, businesses have resources
to help, prevention is better than cure.

Arguments AGAINST: violates profit maximization, dilutes business purpose, costs money,
gives businesses too much power, business leaders lack skills, no accountability for social
actions.

Social Responsibility and Economic Performance:

 Studies of 53 studies covering 16,000+ companies: 71.7% showed a positive

relationship, only 3.1% negative
 Conclusion: Social responsibility does NOT hurt economic performance. It may even
help it.

LO6.2 – Green Management

Definition: Green management = managers considering the impact of their organization on
the natural environment.

Four Shades of Green (Exhibit 6-3) — from lowest to highest environmental sensitivity:

1. Legal Approach (Light Green) — do only what the law requires. Illustrates social
obligation. Low environmental sensitivity.
2. Market Approach — respond to environmental preferences of customers. Whatever
customers demand in eco-friendly products, the firm provides. Example: SC Johnson
reformulated Saran Wrap to remove PVC despite it performing worse. This is social
responsiveness.
3. Stakeholder Approach — meet environmental demands of multiple stakeholders
(employees, suppliers, community). Example: L'Oreal set strict environmental
standards for all its worldwide suppliers (carbon footprint, water, biodiversity, etc.)
4. Activist Approach (Dark Green) — proactively look for ways to protect the earth's
natural resources. Highest environmental sensitivity. Illustrates social responsibility.
Example: Climeworks (Switzerland) built a geothermal plant in Iceland that captures
CO2 directly from air and converts it to stone — the world's first negative carbon
emissions system.

Evaluating Green Actions — three ways:

1. GRI (Global Reporting Initiative) — voluntary reporting framework used by 7,500+

companies globally. Over 90% of the world's largest corporations use GRI standards.
 2. ISO 14000 — environmental management standard by International Organization for
Standardization. To be compliant, a firm must develop a total system to minimize
environmental impact and continually improve performance. Achieved by
organizations in 155+ countries.
3. Global 100 List — list of world's most sustainable corporations. Companies must
demonstrate superior ability to manage environmental and social factors.

LO6.3 – Factors That Lead to Ethical and Unethical

Behavior
Definition of Ethics: Moral principles that define right and wrong conduct.

The model (Exhibit 6-5): Ethical dilemma → Stage of Moral Development → Moderators
(individual characteristics, structural variables, issue intensity, organizational culture) →
Ethical/Unethical behavior

1. Stage of Moral Development (Kohlberg — 3 levels, 6 stages):

Preconventional (stages 1–2):

 Stage 1: Follow rules to avoid physical punishment

 Stage 2: Follow rules only when in your immediate interest
 Respond to right/wrong only based on personal consequences

Conventional (stages 3–4):

 Stage 3: Live up to what people close to you expect

 Stage 4: Maintain conventional order by fulfilling agreed obligations
 Most adults are at Stage 4 — they obey rules and laws of society

Principled (stages 5–6):

 Stage 5: Value rights of others; uphold absolute values regardless of majority opinion
 Stage 6: Follow self-chosen ethical principles even if they violate the law
 Define moral principles independently of external authority

Key conclusions: People move through stages in order (no skipping). Development can stop
at any stage. Higher stage = more ethical predisposition. Stage 3 manager → peer approval
decisions. Stage 4 → good corporate citizen. Stage 5 → challenges wrong organizational
practices.

2. Individual Characteristics:

Values — basic convictions about right and wrong, formed from childhood through parents,
teachers, peers.
Ego Strength — strength of a person's convictions. High ego strength = more likely to resist
unethical impulses and act consistently with moral judgment.

Locus of Control:

 Internal locus: believe they control their own fate → take personal responsibility, rely
on internal ethical standards, more consistent morally
 External locus: believe outcomes are due to luck/chance → less personal
responsibility, more likely to rely on external forces, less ethically consistent

3. Structural Variables:

 Formal rules, job descriptions, written codes of ethics reduce ambiguity and
encourage ethical behavior
 Behavior of superiors is the strongest single influence on individual ethical behavior
 Performance appraisals focused only on outcomes create pressure to do "whatever is
necessary" — both ends AND means should be evaluated
 Greater time/cost/competition pressure = more likely to compromise ethical standards

4. Organization's Culture:

 A culture high in adaptability, people orientation, and integrity promotes high ethical
standards
 Strong ethical culture = powerful positive influence on behavior
 Weak culture = employees rely on subculture/work group norms instead, which may
not be ethical

5. Issue Intensity — 6 characteristics (Exhibit 6-7):

1. Greatness of Harm — how many people are harmed?

2. Consensus of Wrong — how much agreement that the act is wrong?
3. Probability of Harm — how likely is the action to actually cause harm?
4. Immediacy of Consequences — how soon will harm be felt?
5. Proximity to Victim(s) — how close (socially/physically) are you to those harmed?
6. Concentration of Effect — how concentrated is the harm on those affected?

Higher issue intensity = managers more likely to behave ethically.

Ethics in an International Context:

 Ethical standards are NOT universal — cultural and social differences matter
 FCPA (Foreign Corrupt Practices Act) — US law making it illegal to pay foreign
government officials to obtain/retain business. Does not prohibit minor clerical-level
payoffs where it is accepted local practice.
 UN Global Compact — 10 principles covering human rights, labor standards,
environment, and anti-corruption. 9,700+ participants from 160+ countries.
 OECD Anti-Bribery Convention — first global instrument to combat corruption in
cross-border deals. Ratified by 43 countries.
LO6.4 – Management's Role in Encouraging Ethical
Behavior
Manager behavior is the single most important influence on whether employees act ethically
or not. A comprehensive ethics program can improve ethical climate, but there are no
guarantees.

Ways managers encourage ethical behavior:

1. Employee Selection

 Use integrity tests to screen for honesty, trustworthiness, attitudes toward theft,
misuse of resources, drugs, etc.
 Conduct background and reference checks
 "Best predictor of future behavior is past behavior"
 Use the interview to explore how candidates handled ethical dilemmas in the past

2. Codes of Ethics

 Formal statement of organization's values and ethical rules employees must follow
 90% of US corporations have a written code of ethics; 86% of Fortune Global 200
companies
 Most common core values in codes: integrity, teamwork, respect, innovation, client
focus
 Top 3 reasons companies have codes: legal compliance, shared culture,
protect/improve reputation
 Codes alone are not enough — effectiveness depends on management support and
how violators are treated
 41% of US employees surveyed had observed ethical/legal violations; 37% didn't
report it

3. Leadership at the Top

 Top managers set the cultural tone through words AND actions — actions matter far
more
 Rewarding/promoting managers who achieve results through questionable means
signals that such behavior is acceptable
 When wrongdoing is found, punishment should be publicized to reinforce
consequences

4. Job Goals and Performance Appraisal

 Unrealistic goals pressure ethical employees to cut corners

 Appraisals focused only on economic outcomes make "ends justify the means"
 Both ends (results) AND means (how results were achieved) should be evaluated

5. Ethics Training

 Most large organizations conduct seminars, workshops on ethical behavior

  Ethics training works best when combined with codes of ethics, top-management role
models, accountability policies, and regular audits
 Ethics training is ineffective when: it uses abstract dilemmas unrelated to real
situations, uses multiple-choice formats, is conducted sporadically, or conflicts with
reward systems that only value outcomes

6. Independent Social Audits

 Evaluate decisions and management practices against the organization's code of ethics
 Fear of being caught is a deterrent to unethical behavior
 Auditors should report directly to the board of directors (not internal management) to
maintain integrity

LO6.5 – Current Issues in Social Responsibility and Ethics

1. Protecting Whistle-Blowers

 Whistle-blowing = an individual within an organization disclosing information to

report and correct corruption
 53% of US employees who report wrongdoing internally face retaliation
 22 federal statutes in the US protect whistle-blowers (enforced by OSHA)
 Sarbanes-Oxley Act: manager who retaliates against a whistle-blower faces up to 10
years in jail

OSHA's 5 elements of an anti-retaliation program:

1. Management commitment — senior management visibly committed to addressing

concerns
2. Compliance concern response system — confidential reporting procedures with fair
and timely resolution
3. Anti-retaliation response system — independent channels to report retaliation,
bypassing the accused manager
4. Anti-retaliation training — all employees including management trained on rights and
procedures
5. Program oversight — monitoring and independent audits to ensure the program works

2. Social Entrepreneurship

 Definition: entrepreneurial activity with an embedded social purpose

 Aims to create solutions to social problems and improve standard of living for
beneficiaries
 Examples: microfinance in Bangladesh (loans to women to start businesses, reduced
rural poverty), TOMS Shoes (one-for-one model), PATH (low-cost healthcare
technology for developing countries)

3. Social Media and Social Responsibility

  Social media is an effective vehicle for promoting socially responsible actions and
enhancing reputation
 Transparency (through social media) builds trust, which enhances reputation
 Ideal for sharing mission statements, values, codes of ethics, diversity initiatives,
community involvement
 Allows two-way communication between organization and all stakeholders

4. Corporate Philanthropy

 Companies like Walmart, Google, ExxonMobil rank among the most charitable
Fortune 500 companies
 55% of online consumers (Nielsen study) would pay more for products from
socially/environmentally committed companies
 Philanthropy improves employee morale, attracts talent, builds public image, and can
increase long-run profits
 Corporate philanthropy is a win-win: meets customer demand while improving
reputation and long-run profits
Summary

LO6.1 – Social Responsibility

Two Views

 Classical (Friedman): maximize profits only

 Socioeconomic: responsibility to society beyond profits

Three Concepts

 Social Obligation: minimum legal/economic only

 Social Responsiveness: adapts to social norms, pragmatic, short-term
 Social Responsibility: ethical imperative, long-term

SR vs Economic Performance: does NOT hurt performance (71.7% positive in 53 studies)

LO6.2 – Green Management

Shades of Green (low to high):

 Legal (light green): law only, social obligation

 Market: customer preferences, social responsiveness
 Stakeholder: multiple stakeholders, social responsiveness
 Activist (dark green): proactively protect earth, social responsibility

Evaluating: GRI reports, ISO 14000, Global 100 list

LO6.3 – Ethical/Unethical Behavior

Stages of Moral Development

 Preconventional (1–2): personal consequences

 Conventional (3–4): rules/expectations of others; most adults at stage 4
 Principled (5–6): self-chosen ethical principles

Individual Characteristics

 Values: right/wrong convictions

 Ego strength: resists unethical impulses
  Locus of control: internal = responsible; external = blames luck

Structural Variables: rules, superior behavior, appraisal systems, pressure

Organizational Culture: strong ethical culture = strong ethical behavior

Issue Intensity (6 factors): greatness of harm, consensus of wrong, probability of harm,

immediacy, proximity to victim, concentration of effect

International: FCPA, UN Global Compact (10 principles), OECD Anti-Bribery Convention

LO6.4 – Encouraging Ethical Behavior

 Employee selection: integrity tests, background checks
 Code of ethics: formal values statement; 90% US firms have one
 Leadership at top: actions over words; reward/punishment signals
 Goals & appraisal: evaluate both ends AND means
 Ethics training: works best combined with codes, role models, audits
 Independent social audits: report to board directly

LO6.5 – Current Issues

 Whistle-blowing: reporting corruption; 5 OSHA anti-retaliation elements; Sarbanes-Oxley =
10yr jail for retaliation
 Social entrepreneurship: business with embedded social purpose
 Social media: promotes transparency, builds trust, shapes reputation
 Corporate philanthropy: win-win; improves image, morale, long-run profits