Because learning changes everything.
Chapter 4
Demanding Ethical and
Socially Responsible
Behavior
© 2022 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw Hill.
Chapter Contents
Ethics Is More Than Legality
Ethics Begins with Each of Us
Managing Businesses Ethically and Responsibly
Setting Corporate Ethical Standards
Corporate Social Responsibility
International Ethics and Social Responsibility
© McGraw Hill 3
Learning Objectives
LO 4-1 Explain why obeying the law is only the first step in
behaving ethically.
LO 4-2 Ask the three questions you need to answer when faced
with a potentially unethical action.
LO 4-3 Describe management’s role in setting ethical standards.
LO 4-4 Distinguish between compliance-based and integrity-based
ethics codes, and list the six steps in setting up a corporate
ethics code.
LO 4-5 Define corporate social responsibility and compare
corporations’ responsibilities to various stakeholders.
LO 4-6 Analyze the role of U.S. businesses in influencing ethical
behavior and social responsibility in global markets.
© McGraw Hill 4
Matt Damon and Gary White
Cofounders of [Link]
Lack of clean water in developing
countries affects well-being and
economic growth.
Actor Matt Damon and
entrepreneur/engineer Gary White
founded [Link] to help families
access microloans to fund their own
water operations.
They also formed WaterEquity to invest
in various enterprises, giving the profits
to underprivileged people.
[Link]’s goal is to provide 4.6 million
people with clean water and sanitation
over seven years.
© McGraw Hill Rick Kern/Getty Images 5
Name that Company
THIS CLOTHING COMPANY IS HELPING reverse the decline in the
environmental health of our planet by donating time, services, and at
least 1 percent of its sales to environmental groups all over the world.
© McGraw Hill 6
Ethics Is More than Legality 1
Life after Scandal
Scandals have shaken the real estate, mortgage, and
banking industries.
How do we restore trust in the free-market system?
• Punish those who have broken the law.
• Make accounting records more transparent.
• Consider what is ethical, not just what is legal.
© McGraw Hill 7
Ethics and Scandals
In 2016, the Consumer Financial Protection Bureau fined Wells Fargo
$185 million for creating more than 1.5 million fake accounts and 500,000
fraudulent credit cards in customers’ names without their knowledge. This
brought widespread attention to a number of other scandals associated
with the financial services firm, which has resulted in Wells Fargo paying
out billions of dollars in lawsuit settlements.
© McGraw Hill View_Point/Shutterstock 8
Figure 4.1 Examples of the Largest
Corporate Scandals 1
Company What Happened Result
Enron Corp Former CEO Kenneth Lay, C FO Andrew Fastow, and The executives who bankrupted the company
CEO Jeffrey Skilling were found guilty of committing made millions while employees and other small
accounting fraud by moving billions of dollars of debt o investors lost $74 billion. Lay died prior to his
Enron’s balance sheet which artificially inflated the sentencing. Fastow served a 4-year sentence,
company‘s stock and bond prices. The executives sold which ended in 2011. Skilling originally received a
millions of dollars’ worth of stock just before the fraud 24-year sentence, but in 2013 he struck a deal to
became public while the company’s pension reduce his sentence by 10 years in exchange for
regulations prohibited regular employees from selling giving $42 million to the victims of the Enron fraud.
their stock. Skilling was released in February 2019.
WorldCom WorldCom’s intentional accounting irregularities (not CEO Bernie Ebbers served 13 years of a 25-year
disclosing debt and falsely counting revenue that was sentence. He was released in December 2019 due
not received) made the company look almost $11 to deteriorating health and died February 2, 2020.
billion more profitable than it was. This led to the loss Enron and WorldCom’s collapses led to new
of 30,000 jobs and $180 billion in losses to investors regulations and legislation to promote the accuracy
of financial reporting for publicly held companies.
The 2002 Sarbanes-Oxley Act increased the
consequences for destroying, altering, or
fabricating financial records, and for trying to
defraud shareholders.
© McGraw Hill 9
Figure 4.1 Examples of the Largest
Corporate Scandals 2
Company What Happened Result
Tyco CEO Dennis Kozlowki and C FO Mark Swartz Kozlowski and Swartz were sentenced to
stole $150 million through unapproved loans 825 years. Tyco had to pay $2.9 billion to
and fraudulent stock sales and inflated investors. Kozlowski was released in 2012
company income $500 million. after serving almost 7 years and Swartz was
released in 2014 after serving 8 years.
Freddie The federally backed mortgage-lending giant President/COO David Glenn, chair/C EO
Mac intentionally misstated and understated $5 Leland Brensel, and former C FO Vaughn
billion in earnings. Clarke were fired.
Lehman The global financial services firm hid over The company was forced into the largest
Brothers $50 bankruptcy in U.S. history which helped
billion in loans as sales. spark the worldwide financial crisis. The S E
C didn't prosecute due to lack of evidence.
Bernie L. Bernie Madoff tricked investors out of $64.8 Madoff was sentenced to 150 years plus
Madoff billion in the largest ever Ponzi scheme. $170 billion in restitution.
Investment Madoff paid investors returns out of their own
Securities money or the money of other investors
instead of out of profits.
© McGraw Hill 10
Ethics Is More than Legality 2
Ethical Standards Are Fundamental
Ethics — Standards of moral behavior; that is, behavior
accepted by society as right versus wrong.
Few Americans have moral absolutes.
• Common standards of ethical behavior come from religion; the
Golden Rule.
© McGraw Hill 11
Ethics Begins with Each of Us 1
Unethical Behavior
In the office: Violate safety standards, goof off.
Personal: Most people do not volunteer.
At school: Plagiarize from the Internet.
• Studies found a strong relationship between academic dishonesty and
dishonesty at work.
© McGraw Hill 12
Ethics Begins with You
Some days at work you are tempted to spend most of the
time playing games on your computer, watching videos,
texting, sending e-mails to friends, or reading a book or
magazine on your devices.
What is the problem in this situation? What are your
alternatives? What are the consequences of each
alternative? Which alternative will you choose? Is your
choice ethical?
© McGraw Hill 13
Ethics Begins with Each of Us 2
Ethical Dilemmas
• Must choose between two unsatisfactory alternatives.
• Ask yourself these questions:
1. Is my proposed action legal?
2. Is it balanced?
3. How will it make me feel about myself?
© McGraw Hill 14
Creating an Online Garage
Sale for a Good Cause
Meghan Winegrad launched
Generopolis, an online platform
that allows people to sell stuff in
support of local nonprofits.
• No other service offered a way
to earmark sales for charities.
• It is especially appealing to
today’s young people, who
have different expectations for
donating to philanthropic
organizations.
© McGraw Hill 15
Bribery Bad Boys
Five FCPA Investigations
COMPANY CASE
Walmart Violating the books and records and failing to
operate a sufficient anti-corruption compliance
program.
Ericsson Large-scale bribery scheme in multiple countries.
FCPA violations in Hungary, Thailand, Saudi
Microsoft
Arabia, and Turkey.
Cognizant Bribery scheme in India.
Deutsche
Improper accounting controls and bookkeeping.
Bank
© McGraw Hill Source: SEC, [Link], accessed February 2020. 16
TESTPREP 1
• What is ethics?
• How do ethics differ from legality?
• When faced with ethical dilemmas, what questions can you
ask yourself that might help you make ethical decisions?
© McGraw Hill 17
Managing Businesses Ethically
and Responsibly
Ethics Start at the Top
• Managers can help instill corporate values in employees.
• Trust between workers and managers must be based on
fairness, honesty, openness, and moral integrity.
• Overly ambitious goals and incentives can create an
environment in which unethical actions can occur.
© McGraw Hill 18
Factors Influencing Managerial Ethics
Individual Organizational Environment
• Values. • Top-level • Competition.
• Work background. management • Economic
philosophy. conditions.
• Family status.
• Firm’s reward • Social/cultural
• Personality. system. institutions.
• Job dimensions.
© McGraw Hill 19
Setting Corporate Ethical
Standards 1
Written Codes of Ethics
• Compliance-based ethics codes — Emphasize
preventing unlawful behavior by increasing control and by
penalizing wrongdoers.
• Integrity-based ethics codes — Define the organization’s
guiding values, create an environment that supports
ethically sound behavior, and stress a shared
accountability among employees.
© McGraw Hill 20
Figure 4.2 Overview of the Hershey
Company’s Code of Ethics
Access the text alternative for slide images.
© McGraw Hill Hershey’s Kiss photo: © Richard Watkins/Alamy Stock Photo 21
Figure 4.3 Strategies for Ethics
Management
Features of compliance-based ethics codes Features of integrity-based ethics codes
Ideal Conform to outside standards (laws and Conform to outside standards (laws and
regulations). regulations) and chosen internal standards.
Objective Avoid criminal misconduct. Enable responsible employee conduct.
Leaders Lawyers. Managers with aid of lawyers and others.
Methods Education, reduced employee discretion, Education, leadership, accountability,
controls, penalties. decision processes, controls, and penalties.
© McGraw Hill 22
POLLING QUESTION 1
Would you rather work for a company with a compliance-
based or an integrity-based ethics code?
A. Compliance-based ethics code
B. Integrity-based ethics code
© McGraw Hill 23
Setting Corporate Ethical
Standards 2
Six Steps to Improve U.S. Business Ethics
1. Top management must adopt and unconditionally support an
explicit corporate code of conduct.
2. Employees must understand that senior management expects
all employees to act ethically.
3. Managers and others must be trained to consider the ethical
implications of all business decisions.
© McGraw Hill 24
Setting Corporate Ethical Standards 3
4. An ethics office must be set up with which employees
can communicate anonymously.
• Whistleblowers — Insiders who report illegal or unethical
behavior.
5. Involve outsiders such as suppliers, subcontractors,
distributors, and customers.
6. The ethics code must be enforced with timely action if any
rules are broken.
© McGraw Hill 25
Whistleblowers
Harry Markopolos is a forensic
accountant who spent nearly a
decade uncovering evidence that
Bernie Madoff operated his wealth
management company as a
gigantic Ponzi scheme. Although
Markopolos frequently notified the
Securities and Exchange
Commission about his findings, the
federal agency failed to act until
Madoff’s sons revealed the full
extent of his scam to the FBI in
2008. What motivates
whistleblowers like Harry
Markopolos?
© McGraw Hill Mark Wilson/Getty Images 26
How to Blow the Whistle
1. Decide carefully and quickly.
2. Make sure you have all allegations filed with the right
agencies.
3. File your allegations with as many agencies that are
appropriate.
4. Gather your information legally.
5. Stick with the facts — do not exaggerate.
© McGraw Hill 27
TESTPREP 2
• What are compliance-based and integrity-based ethics
codes?
• What are the six steps to follow in establishing an effective
ethics program in a business?
© McGraw Hill 28
POLLING QUESTION 2
Corporate refers to the position a firm takes on social
and political issues.
A. philanthropy
B. social initiatives
C. responsibility
D. policy
© McGraw Hill 29
Corporate Social Responsibility 1
Corporate Social Responsibility (C SR)
A business’s concern for the welfare of society.
• Based on a commitment to integrity, fairness, and
respect.
• Some feel this is not a manager’s role.
• Proponents argue that businesses owe their existence
to the societies they serve and cannot exist in societies
that fail.
Companies with good ethical reputations attract and
retain better employees, draw more customers, and
enjoy greater employee loyalty.
© McGraw Hill 30
Corporate Social Responsibility 2
Dimensions of a Company’s Social Performance
• Corporate philanthropy — Includes charitable donations.
• Corporate social initiatives — Include enhanced forms of
corporate philanthropy directly related to the company’s
competencies.
• Corporate responsibility — Includes everything from
hiring minority workers to making safe products.
• Corporate policy — The position a firm takes on social
and political issues.
© McGraw Hill 31
Helping Hands
Most Generous Celebrities
CELEBRITY ORGANIZATION
George and Amal Clooney Clooney Foundation for Justice; U N Messenger of Peace
Ellen DeGeneres St. Jude Hospital; Humane Society
John Legend Show Me Campaign
Rihanna Clara Lionel Foundation Global Scholarship Program
Michael J. Fox Michael J. Fox Foundation for Parkinson’s Research
Laverne Cox National Coalition of Anti-Violence Programs
Sir Elton John Elton John AIDS Foundation
Matt Damon H2O Africa
Oprah Winfrey Angel Network
© McGraw Hill 32
Generous Guys
World’s Biggest Givers in 2019
WHO? AMOUNT? WHAT FOR?
Warren Buffett $3.45b Gates Foundation, social justice initiatives
Bill and Melinda Gates $2.6b Gates Foundation
Climate change education, addiction
Michael Bloomberg $76m
initiatives
Walton Family $596m Education, health care
George Soros $585m Human rights, democracy
Mark Zuckerberg $410m Chan Zuckerberg Initiative
Hansjoerg Wyss $402m Conservation
James and Marilyn Simons $397m Math and science education
Pierre Omidyar $392m Education
Gordon and Betty Moore $298m Conservation
© McGraw Hill 33
Corporate Social Responsibility 3
Positive Impacts of Companies
• Negative news impacts customers’ view of companies.
• Many companies allow employees to volunteer and help
with social agencies.
© McGraw Hill 34
Volunteering in the Community
These Publix employees are
planting a garden at a
homeless shelter during
Publix Serves Day, an
annual event where the
grocery chain partners with
more than 135 nonprofit
organizations to help
communities across the
Southeastern United States.
Do companies have
responsibilities to the
communities in which they
operate beyond obeying
the laws?
© McGraw Hill Bruce R. Bennett/Zuma Press/Newscom 35
Figure 4.4 Examples of Corporate
Social Responsibility Efforts 1
Company Social Responsibility Efforts
Starbucks When the South American coffee crops were dying from coffee-leaf
rust, Starbucks’s R&D farm developed rust-resistant coffee plants.
The company improved the lives of coffee growers by giving away
the superior seeds to more than a million farmers and workers
across seven countries and three continents.
Harmless Harvest The San Francisco–based coconut water brand uses only coconuts
that are ethically harvested, processed, and packaged.
Zipline International Zipline uses drones to distribute medical supplies to clinics hindered
by impassable roads and limited storage facilities. The company is
100 percent focused on serving the neediest health care systems
and has turned away customers asking it to deliver other goods.
PepsiCo, Panera, These are just a few of the food companies that are providing
McDonald’s, Nestlé healthier food and drink options by doing such things as switching
to cage-free eggs; adopting stricter antibiotics policy; removing
preservatives; reducing fat, sugar, and sodium; and adding more
minerals and nutrients.
© McGraw Hill 36
Figure 4.4 Examples of Corporate
Social Responsibility Efforts 2
Company Social Responsibility Efforts
GlaxoSmithKline The pharmaceutical company delivers health care to those who are underserved.
GSK no longer files drug patents in the lowest-income regions of the world in
order to make drugs more accessible. It reinvests 20 percent of any profits it
makes in the least-developed countries into training health workers and building
medical infrastructure.
General Electric GE invested $17 billion in research and development of clean technology such as
the Digital Wind Farm which can boost a wind farm’s energy production by 20
percent.
Mastercard The credit company is making it easier for charities to get help to the people who
really need it quickly. Mastercard distributes cards similar to gift cards that are
loaded with points redeemable for groceries, medicine, shelter, building materials,
or business supplies. The cards can be made and distributed in a day or two,
compared with the weeks needed to create and send paper vouchers.
Coca-Cola The soft drink company has helped 1.2 million women in 60 countries become
entrepreneurs by partnering with governments and nonprofit organizations to
create market-specific entrepreneurship programs.
Intel The technology giant is helping build a workforce capable of keeping up with the
digital revolution. Intel’s Teach program helps K–12 teachers integrate technology
in classrooms and build critical S TEM (science, technology, engineering, and
math) skills.
© McGraw Hill 37
Corporate Social Responsibility 4
Responsibility to Customers
• President Kennedy’s four basic rights of consumers:
1. The right to safety.
2. The right to be informed.
3. The right to choose.
4. The right to be heard.
© McGraw Hill 38
Corporate Social Responsibility 5
• The primary use of social media is to communicate CSR
efforts.
• Social media allows companies to reach a broad, diverse
group and connect directly to them.
• Companies must live up to their expectations or face the
consequences.
© McGraw Hill 39
Social Customer Contact
Do’s and Don’ts of Using Twitter for Business
DO DON’T
Create discussions relevant to your industry. Start political rants.
Think about your message before posting.
Post impulsively.
Deleted tweets can still be found!
Offer new and engaging content. Let your account lie dormant.
Make personal
Create separate accounts for business and
announcements via your
personal use.
company’s accounts.
© McGraw Hill 40
Corporate Social Responsibility 6
Responsibility to Investors
• Insider trading — An unethical activity in which insiders use
private company information to further their own fortunes or
those of their family and friends.
• Unethical behavior does financial damage to a company and
investors are cheated.
• SEC adopted a new rule called Regulation F D (“fair disclosure”).
© McGraw Hill 41
Insider Trading
In 2014 a judge sentenced
former hedge fund trader
Mathew Martoma to nine
years in prison for overseeing
one of the largest insider
trading schemes in history.
While working as a portfolio
manager at SAC Capital,
Martoma made a series of
illegal trades that earned the
company $275 million. The
hedge fund's founder Steven
Cohen managed to avoid jail
time but was forced to pay a
record $1.8 billion fine.
© McGraw Hill Spencer Platt/Getty Images 42
Corporate Social Responsibility 7
Responsibility to Employees
• Create jobs and provide a chance for upward mobility.
• Treat employees with respect.
• Offer salaries and benefits that help employees reach their
personal goals.
• Loss of employee commitment, confidence, and trust in the
company and its management can be costly.
© McGraw Hill 43
Wages and Benefits
The wage and benefit packages offered by warehouse retailer Costco
are among the best in hourly retail. Even part-time workers are
covered by Costco’s health plan. Increased benefits reduce Costco
employee turnover to less than a third of the industry average. Why
do you think Costco is so successful at keeping its employees?
© McGraw Hill Paul Kane/Stringer/Getty Images 44
Corporate Social Responsibility 8
Responsibility to Society and the Environment
Many nonprofits receive funding from businesses, which
helps both benefit.
“Green movement” emerged as concern about climate
change increased.
• Businesses are trying to minimize their carbon footprint.
• Environmental efforts may increase costs but can create jobs
and benefit everyone.
• Renewable-energy and energy-efficiency industries account for 9
million U.S. jobs.
© McGraw Hill 45
Social Businesses
Since Patagonia’s founding in
1973, the outdoor apparel brand
has strived to make quality
goods in an ethical manner.
From closely vetting its suppliers
to promoting fair labor practices
in factories, Patagonia believes
that businesses should have a
positive impact on the world.
What do you think?
© McGraw Hill EnVogue_Photo/Alamy Stock Photo 46
Corporate Social Responsibility 9
Social Auditing
• A systematic evaluation of an organization’s progress
toward implementing socially responsible and
responsive programs.
• Five types of watchdogs:
1. Socially conscious investors.
2. Socially conscious research organizations.
3. Environmentalists.
4. Union officials.
5. Customers.
© McGraw Hill 47
Responsible Environmental Policies
The goal of the Rainforest Action
Network, an environmental activist
group, is to show companies that it
is possible to do well by doing
good. It conducts public campaigns
that refuse to adopt responsible
environmental policies. RAN has
helped convince dozens of
corporations including Home
Depot, Citigroup, Boise Cascade,
and Goldman Sachs to change
their practices.
© McGraw Hill 48
America’s Most Admired Companies
of 2020
1. Apple. 6. Starbucks.
2. Amazon. 7. Alphabet.
3. Microsoft. 8. JPMorgan Chase.
4. Walt Disney Company. 9. Costco Wholesale.
5. Berkshire Hathaway. [Link].
© McGraw Hill 49
TESTPREP 3
• What is corporate social responsibility, and how does it
relate to each of a business’s major stakeholders?
• What is a social audit, and what kinds of activities does it
monitor?
© McGraw Hill 50
International Ethics and Social
Responsibility
International Standards
Top leaders are being held to higher standards.
Many businesses demand socially responsible behavior from
their international suppliers.
Regulations:
• Foreign Corrupt Practices Act.
• Inter-American Convention Against Corruption.
• UN condemnation of corporate bribery.
.
• ISO 26000.
© McGraw Hill 51
Overcoming Ethical Errors
Nike has outsourced the
manufacture of its products to
plants in other countries and has
weathered much criticism for
operating in low-wage nations
where child labor is common.
The company has taken many
corrective measures, including
working with other companies
and advocacy groups on a set of
common labor standards and
factory guidelines. Can a
successful firm overcome past
ethical errors?
© McGraw Hill 52
Ethical Culture Clash
Here’s an example of how corporate
ethics can clash with cultural ethics.
• Joe is South American but moved
to the U.S. for college and worked
for a large telecommunications
company for five years before
being transferred back to his home
country.
• He was reimbursed $2,000 a
month for housing expenses, but
lived in a much cheaper and
dangerous neighborhood, sending
the extra money to his family.
• What is the ethical dilemma?
© McGraw Hill David R. Frazier Photolibrary, Inc./Alamy Stock Photo 53
TESTPREP 4
• How are U.S. businesses demanding socially responsible
behavior from their international suppliers?
• Why is it unlikely that there will be a single set of
international rules governing multinational companies
soon?
© McGraw Hill 54
End of Main Content
Because learning changes everything. ®
[Link]
© 2022 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw Hill.