Topic 2: Ethics, Social Responsibility and Sustainability

Overview

Business ethics can be defined as principles of conduct within organizations that guide decision making
and behavior. Good business ethics is a prerequisite for good strategic management; good ethics is just
good business! Social responsibility refers to actions an organization takes beyond what is legally
required to protect or enhance the well-being of living things. Sustainability refers to the extent that an
organization’s operations and actions protect, mend, and preserve rather than harm or destroy the
natural environment. Polluting the environment, for example, is unethical, irresponsible, and in many
cases illegal, as is treating pigs, cows, chickens, and turkeys inhumanely. Business ethics, social
responsibility, and environmental sustainability issues therefore are interrelated and impact all areas of
the strategic management process.

Learning Outcomes

• Explain why good ethics is good business in strategic management.

• Explain why whistle-blowing, bribery, and workplace romance are strategic issues.

• Discuss why social responsibility and policy are key issues in strategic planning.

• Discuss the nature of environmental sustainability and why it is a key issue in strategic planning.

• Explain why animal welfare is a strategic issue for firms.

Course Materials

Why “Good Ethics is Good Business” The Institute of Business Ethics (IBE) recently did a study titled
“Does Business Ethics Pay?” and concluded that companies displaying a “clear commitment to ethical
conduct” consistently outperform companies that do not display ethical conduct. Philippa Foster Black
of the IBE stated, “Not only is ethical behavior in business life the right thing to do in principle, it pays off
in financial returns.” Alan Simpson remarked, “If you have integrity, nothing else matters. If you don’t
have integrity, nothing else matters.” Good ethics is good business. Bad ethics can derail even the best
strategic plans. This chapter provides an overview of the importance of business ethics in strategic
management. Table 3-1 provides some results of the IBE study. Does It Pay to Be Ethical? A rising tide of
consciousness about the importance of business ethics is sweeping the United States and the rest of the
world. Strategists such as CEOs and business owners are the individuals primarily responsible for
ensuring that high ethical principles are espoused and practiced in an organization. All strategy
formulation, implementation, and evaluation decisions have ethical ramifications. As indicated in
Academic Research Capsule 3-1, it does pay to be ethical; high-performing companies generally exhibit
high business ethics. Investor’s Business Daily reported on 7-20-15.

(p. A4) that character-driven leaders deliver five times greater profitability results and 26 percent higher
workforce engagement than self-focused leaders. Those were the results of a seven-year study by Fred
Kiel, author of “Return on Character,” who followed 8,000 employees and 84 top executives of Fortune
500 companies. Daily, newspapers and business magazines report legal and moral breaches of ethical
conduct by both public and private organizations. Being unethical can be expensive. For example, Cisco.
In addition to plagiarism, literally hundreds of business actions are unethical, including:

1. Misleading advertising or labeling

2. Causing environmental harm

3. Poor product or service safety

4. Padding expense accounts

5. Insider trading

6. Dumping banned or flawed products in foreign markets

7. Not providing equal opportunities for women and minorities

8. Overpricing

9. Sexual harassment

10. Using company funds or resources for personal gain Increasingly, executives’ and managers’
personal and professional decisions are placing them in the crosshairs of angry shareholders, disgruntled
employees, and even their own boards of directors.

Whistle-Blowing, Bribery, and Workplace Romance

As social media and technology have become commonplace globally, three business ethics topics—
whistle-blowing, bribery, and workplace romance—have become important strategic issues facing
companies. Missteps in any of these three areas can severely harm an organization.

Whistle-Blowing

Whistle-blowing refers to employees reporting any unethical violations they discover or see in the firm.
Employees should practice whistle-blowing, and organizations should have policies that encourage
whistle-blowing. Three individuals recently received $170 million for helping investigators obtain a
record $16.65 billion penalty against Bank of America for inflating the value of mortgage properties and
selling defective loans to investors. The whistle-blower payouts are among the highest ever in financial
institution cases. Thousands of firms warn managers and employees that failing to report an ethical
violation by others could bring discharge. The Securities and Exchange Commission (SEC) recently
strengthened its whistleblowing policies, virtually mandating that anyone seeing unethical activity
report such behavior.

Avoid Bribery

Managers, employees, and firms must avoid bribery. Bribery is defined by Black’s Law Dictionary as the
offering, giving, receiving, or soliciting of any item of value to influence the actions of an official or other
person in discharge of a public or legal duty. A bribe is a gift bestowed to influence a recipient’s conduct.
The gift may be any money, goods, actions, property, preferment, privilege, emolument, object of value,
advantage, or merely a promise or undertaking to induce or influence the action, vote, or influence of a
person in an official or public capacity.

Workplace Romance

Workplace romance is an intimate relationship between two consenting employees, as opposed to

sexual harassment, which the Equal Employment Opportunity Commission (EEOC) defines broadly as
unwelcome sexual advances, requests for sexual favors, and other verbal or physical conduct of a sexual
nature. Sexual harassment (and discrimination) is illegal, unethical, and detrimental to any organization
and can result in expensive lawsuits, lower morale, and reduced productivity. Workplace romance
between two consenting employees simply happens, so the question is generally not whether to allow
the practice, or even how to prevent it, but rather how best to manage the phenomena. An organization
probably should not strictly forbid workplace romance because such a policy could be construed as an
invasion of privacy, overbearing, or unnecessary. Some romances actually improve work performance,
adding a dynamism and energy that translates into enhanced morale, communication, creativity, and
productivity. However, it is important to note that workplace romance can be detrimental to workplace
morale and productivity, for a number of reasons that include:

1. Favoritism complaints can arise.

2. Confidentiality of records can be breached.

3. Reduced quality and quantity of work can become a problem.

4. Personal arguments can lead to work arguments.

5. Whispering secrets can lead to tensions and hostilities among coworkers.

6. Sexual harassment (or discrimination) charges may ensue, either by the involved female or a
third party.

7. Conflicts of interest can arise, especially when well-being of the partner trumps well-being of
the company.

Organizations should establish guidelines or policies that address workplace romance, for at least six
reasons:

1. Guidelines can enable the firm to better defend against and avoid sexual harassment or
discrimination charges.

2. Guidelines can specify reasons (such as the seven listed previously) why workplace romance
may not be a good idea.

3. Guidelines can specify resultant penalties for romancing partners if problems arise.

4. Guidelines can promote a professional and fair work atmosphere.

5. Guidelines can help assure compliance with federal, state, and local laws and recent court cases.

6. Lack of any guidelines sends a lackadaisical message throughout the firm.

Design and Articulate a Social Policy

The term social policy embraces managerial philosophy and thinking at the highest level of the firm,
which is why the topic is covered in this text. Social policy concerns what responsibilities the firm has to
employees, consumers, environmentalists, minorities, communities, shareholders, and other groups.
After decades of debate, many firms still struggle to determine appropriate social policies. The impact of
society on business and vice versa is becoming more pronounced each year. Corporate social policy
should be designed and articulated during strategy formulation, set and administered during strategy
implementation, and reaffirmed or changed during strategy evaluation. Firms should strive to engage in
social activities that have economic benefits.

Social Policies on Retirement

Some countries around the world are facing severe workforce shortages associated with their aging
populations. The percentage of persons age 65 or older exceeds 20 percent in Japan, Italy, and Germany
—and will reach 20 percent in 2018 in France. In 2036, the percentage of persons age 65 or older will
reach 20 percent in the United States and China. Unlike the United

States, Japan is reluctant to rely on large-scale immigration to bolster its workforce. Instead, Japan
provides incentives for its elderly to work until ages 65 to 75. Western European countries are doing the
opposite, providing incentives for its elderly to retire at ages 55 to 60. The International Labor
Organization says 71 percent of Japanese men ages 60 to 64 work, compared to 57 percent of American
men and just 17 percent of French men in the same age group.

Environmental Sustainability

The ecological challenge facing all organizations requires managers to formulate strategies that preserve
and conserve natural resources and control pollution. Special natural environment issues include ozone
depletion, global warming, depletion of rain forests, destruction of animal habitats, protecting
endangered species, developing biodegradable products and packages, waste management, clean air,
clean water, erosion, destruction of natural resources, and pollution control. Firms increasingly are
developing green product lines that are biodegradable or are made from recycled products. Green
products sell well. Managing the health of the planet requires an understanding of how international
trade, competitiveness, and global resources are connected. Managing environmental affairs, for
example, can no longer be simply a technical function performed by specialists in a firm; more emphasis
must be placed on developing an environmental perspective among all employees and managers of the
firm. Businesses must not exploit and decimate the natural environment.
Assessment

1. Explain Business Ethics.

2. Explain Social Responsibility and Sustainability.