Part I

The Entrepreneurial Mindset

in the 21st Century

CHAPTER 4
Social
Entrepreneurship
and the Ethical
Challenges of
Entrepreneurship
© 2009 South-Western, a part of Cengage Learning. PowerPoint Presentation by Charlie Cook
All rights reserved. The University of West Alabama
 Chapter Objectives
1. To examine the concept of “social entrepreneurship”
2. To introduce the challenges of social enterprise
3. To discuss the importance of ethics for entrepreneurs
4. To define the term “ethics”
5. To study ethics in a conceptual framework for a
dynamic environment
6. To review the constant dilemma of law versus ethics
7. To present strategies for establishing ethical
responsibility
8. To emphasize the importance of entrepreneurial
ethical leadership
© 2009 South-Western, a part of Cengage Learning. All rights reserved. 4–2
 The Social Entrepreneurship Movement
• Social Entrepreneurship
 A new form of entrepreneurship applys to social
problem solving traditional, private-sector
entrepreneurship’s focus on innovation, risk-taking,
and large scale transformation.
• Social Entrepreneurship Process
 Recognition of a perceived social opportunity
 Translation of the social opportunity into an enterprise
concept
 Identification and acquisition of resources required to
execute the enterprise’s goals.

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 Social Entrepreneurs
• Social Entrepreneur
 A person or small group of individuals who founds
and/or leads an organization or initiative engaged in
social entrepreneurship.
 Also referred to as “public entrepreneurs,” “civic
entrepreneurs,” or “social innovators.

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 Social Entrepreneurs (cont’d)
• Characteristics of Social Entrepreneurs
as Change Agents
 Adoption of a mission to create and sustain social
value (beyond personal value)
 Recognition and relentless pursuit of opportunities for
social value
 Engagement in continuous innovation and learning
 Action beyond the limited resources at hand
 Heightened sense of accountability

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 The Social Enterprise Challenge
• Social Obligation
 Firms that simply react to social issues through
obedience to the laws.
• Social Responsibility
 Firm that respond more actively to social issues;
accepting responsibility for various programs.
• Social Responsiveness
 Firms that are highly proactive and are even willing to
be evaluated by the public for various activities.

© 2009 South-Western, a part of Cengage Learning. All rights reserved. 4–6

 Table
4.1 What Is the Nature of Social Enterprise?

Environment Pollution control

Restoration or protection of environment
Conservation of natural resources
Recycling efforts

Energy Conservation of energy in production and marketing operations

Efforts to increase the energy efficiency of products Other energy-saving programs (for example,
company-sponsored car pools)

Fair Business Practices Employment and advancement of women and minorities

Employment and advancement of disadvantaged individuals (disabled, Vietnam veterans, ex-
offenders, former drug addicts, mentally retarded, and hardcore unemployed)
Support for minority-owned businesses

Human Resources Promotion of employee health and safety

Employee training and development
Remedial education programs for disadvantaged employees
Alcohol and drug counseling programs
Career counseling
Child day-care facilities for working parents
Employee physical fitness and stress management programs

Community Involvement Donations of cash, products, services, or employee time

Sponsorship of public health projects
Support of education and the arts
Support of community recreation programs
Cooperation in community projects (recycling centers, disaster assistance, and urban renewal)

Products Enhancement of product safety

Sponsorship of product safety education programs
Reduction of polluting potential of products
Improvement in nutritional value of products
Improvement in packaging and labeling

Source: Richard M. Hodgetts and Donald F. Kuratko, Management, 3rd ed. (San Diego, CA: Harcourt Brace Jovanovich, 1991), 670
© 2009 South-Western, a part of Cengage Learning. All rights reserved. 4–7
 Table
4.2 Classifying Social Enterprise Behavior

DIMENSION STAGE ONE: STAGE TWO: STAGE THREE:

OF BEHAVIOR SOCIAL OBLIGATION SOCIAL RESPONSIBILITY SOCIAL RESPONSIVENESS

Response to Maintains low public profile, but Accepts responsibility for Willingly discusses activities
social pressures if attacked, uses PR methods solving current problems; will with outside groups; makes
to upgrade its public image; admit deficiencies in former information freely available to
denies any deficiencies; practices and attempt to the public; accepts formal and
blames public dissatisfaction persuade public that its informal inputs from outside
on ignorance or failure to current practices meet social groups in decision making; is
understand corporate norms; attitude toward critics willing to be publicly evaluated
functions; discloses conciliatory; freer information for its various activities
information only where legally disclosures than stage one
required

Philanthropy Contributes only when direct Contributes to Activities of stage two, plus
benefit to it clearly shown; noncontroversial and support and contributions to
otherwise, views contributions established causes; matches new, controversial groups
as responsibility of individual employee contributions whose needs it sees as
employees unfulfilled and increasingly
important

Source: Excerpted from S. Prakash Sethi, “A Conceptual Framework for Environmental Analysis of Social Issues
and Evaluation of Business Patterns,” Academy of Management Journal (January 1979): 68. Copyright 1979 by
the Academy of Management. Reproduced with permission of the Academy of Management
© 2009 South-Western, a part of Cengage Learning. All rights reserved. 4–8
 Environmental Awareness
• Ecovision
 A leadership style that encourages open and flexible
structures that encompass the employees, the
organization, and the environment, with attention to
evolving social demands.

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 Environmental Awareness
• Key Steps in an Environmental Strategy
1. Eliminate the concept of waste.
2. Restore accountability.
3. Make prices reflect costs.
4. Promote diversity.
5. Make conservation profitable.
6. Insist on accountability of nations.

© 2009 South-Western, a part of Cengage Learning. All rights reserved. 4–10

 The Ethical Side of Entrepreneurship
• Why are ethics important?

• What exactly represents right or wrong conduct?

• How do we develop our own codes of conduct?

• What impact does integrity and ethical conduct

have on creating a successful venture?

© 2009 South-Western, a part of Cengage Learning. All rights reserved. 4–11

 Defining Ethics
• Ethics
 A set of principles prescribing a behavioral code that
explains what is good and right or bad and wrong;
ethics may outline moral duty and obligations.
 Provide the basic rules or parameters for conducting
any activity in an “acceptable” manner.
• Reasons for Ethical Conflicts
 The many interests that confront business enterprises
both inside and outside the organization
 Changes in values, mores, and societal norms
 Reliance on fixed ethical principles rather than an
ethical process
© 2009 South-Western, a part of Cengage Learning. All rights reserved. 4–12
 Figure
4.1 Classifying Decisions Using a Conceptual Framework

Source: Verne E. Henderson, “The Ethical Side of Enterprise,” Sloan Management Review (spring 1982): 42.
© 2009 South-Western, a part of Cengage Learning. All rights reserved. 4–13
 Ethics and Laws
• Managerial Rationalizations
 Justifications in defense of unethical acts are
believing that an activity:
1. Is not “really” illegal or immoral.
2. Is in the individual’s or the corporation’s best
interest.
3. Will never be found out.
4. That helps the company will be condoned by the
company.

© 2009 South-Western, a part of Cengage Learning. All rights reserved. 4–14

 Table
4.3 Types of Morally Questionable Acts

Type Direct Effect Examples

Nonrole Against the firm Expense account cheating
Embezzlement
Stealing supplies

Role failure Against the firm Superficial performance appraisal

Not confronting expense account cheating
Palming off a poor performer with inflated praise

Role distortion For the firm Bribery

Price fixing
Manipulating suppliers

Role assertion For the firm Investing in South Africa

Using nuclear technology for energy generation
Not withdrawing product line in face of initial
allegations of inadequate safety

Source: James A. Waters and Frederick Bird, “Attending to Ethics in Management,” Journal of Business Ethics 5 (1989): 494.
© 2009 South-Western, a part of Cengage Learning. All rights reserved. 4–15
 The Matter of Morality
• Ethical conduct may reach beyond the limits of
the law.
 The requirements of law may overlap at times but do
not duplicate the moral standards of society.
 Legal requirements tend to be negative (forbidding
acts), whereas morality tends to be positive
(encouraging acts).
 Legal requirements usually lag behind the acceptable
moral standards of society.
 Inherent problems arise when people believe laws
represent morality.

© 2009 South-Western, a part of Cengage Learning. All rights reserved. 4–16

 Figure
4.2 Overlap between Moral Standards and Legal Requirements

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 Economic Trade-Offs
• Innovation, risk taking, and venture creation are
the backbone of the free enterprise system which
fosters individualism and competition.
 We cannot blame single individuals for the ethical
problems of free enterprise.
 Rather, we must understand the total, systematic
impact that free enterprise has on the common good.

© 2009 South-Western, a part of Cengage Learning. All rights reserved. 4–18

 Reasons for Unethical Behavior
• Greed
• Distinctions between activities at work and
activities at home
• A lack of a foundation in ethics
• Survival (bottom-line thinking)
• Reliance on other social institutions to convey
and reinforce ethics.

© 2009 South-Western, a part of Cengage Learning. All rights reserved. 4–19

 Avoiding Another Enron Disaster
1. Bring hidden liabilities back onto the balance
sheet.
2. Highlight the things that matter.
3. List the risks and assumptions built into the
numbers.
4. Standardize operating income
5. Provide aid in figuring free-cash flow

© 2009 South-Western, a part of Cengage Learning. All rights reserved. 4–20

 Establishing a Strategy for
Ethical Enterprise
• Ethical Practices and Codes of Conduct
 A code of conduct is a statement of ethical practices
or guidelines to which an enterprise adheres.
 Codes of conduct are becoming more prevalent in
industry.
 Recent codes are proving to be:
• More meaningful in terms of external legal and social
development
• More comprehensive in terms of their coverage, and easier to
implement in terms of the administrative procedures used to
enforce them.

© 2009 South-Western, a part of Cengage Learning. All rights reserved. 4–21

 Table
4.4 Approaches to Managerial Ethics

Organizational Immoral Amoral Moral

Characteristics Management Management Management
Ethical norms Managerial decisions, actions, and Management is neither moral nor Managerial activity conforms to a
behavior imply a positive and immoral, but decisions lie outside standard of ethical, or right,
active opposition to what is moral the sphere to which moral behavior. Managers conform to
(ethical). Decisions are discordant judgments apply. Managerial accepted professional standards
with accepted ethical principles. activity is outside or beyond the of conduct. Ethical leadership is
An active negation of what is moral order of a particular code. commonplace on the part of
moral is implied. A lack of ethical perception and management.
moral awareness may be implied.
Motives Selfish: Management cares only Well-intentioned but selfish: The Good: Management wants to
about its or the company’s gains. impact on others is not succeed but only within the
considered. confines of sound ethical precepts
(fairness, justice, due process).
Goals Profitability and organizational Profitability; other goals not Profitability within the confines of
success at any price. considered. legal obedience and ethical
standards.
Orientation Legal standards are barriers Law is the ethical guide, preferably Obedience is toward the letter and
toward law management must overcome to the letter of the law. spirit of the law. Law is a minimal
accomplish what it wants. The central question is what ethical behavior. Managers prefer
managers can do legally. to operate well above what the law
mandates.
Strategy Exploit opportunities for corporate Give managers free rein. Personal Live by sound ethical standards.
gain. Cut corners when it ethics may apply but only if Assume leadership position when
appears useful. managers choose. Respond to ethical dilemmas arise.
legal mandates if caught and Enlightened self-interest prevails.
required to do so.
Source: Archie B. Carroll, “In Search of the Moral Manager,” Business Horizons (March/April 1987): 12. Copyright
© 1987 by the Foundation for the School of Business at Indiana University. Reprinted by permission.
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 A Holistic Approach
• Principle 1: Hire the right people

• Principle 2: Set standards more than rules

• Principle 3: Don’t let yourself get isolated

• Principle 4: The most important principle is

to let your ethical example at all
times be absolutely impeccable

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 Shaping an Ethical Strategy
• The entrepreneur’s guiding values and commitments
must make sense and be clearly communicated.
• Entrepreneurs must be personally committed, credible,
and willing to take action on the values they espouse.
• The espoused values must be integrated into the normal
channels of the organization’s critical activities.
• The venture’s systems and structures must support and
reinforce its values.
• Employees throughout the company must have the
decision-making skills, knowledge, and competencies
needed to make ethically sound decisions every day.
Source: Adapted from Lynn Sharp Paine, “Managing for Organizational Integrity,” Harvard Business Review (March/April 1994): 106–117.
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 Ethical Responsibility

Ethical Ethical Process

Consciousness and Structure

Ethical
Responsibility

Institutionalization

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 Ethics and Business Decisions
• Complexity of Ethical Decisions:
1. Ethical decisions have extended consequences
2. Business decisions involving ethical questions have
multiple alternatives.
3. Ethical business often have mixed outcomes.
4. Most business decisions have uncertain ethical
consequences.
5. Most ethical business decisions have personal
implications.

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 Figure
4.3 Four Main Themes of Ethical Dilemmas for Entrepreneurs

Source: Shailendra Vyakarnam, Andy Bailey, Andrew Myers, and Donna Burnett, “Towards an
Understanding of Ethical Behavior in Small Firms,” Journal of Business Ethics 16(15) (1997): 1625-1636.
© 2009 South-Western, a part of Cengage Learning. All rights reserved. 4–27
 Questioning the Ethics of Business Decisions
1. Have you defined the problem accurately?
2. How would you define the problem if you stood on the other side of the fence?
3. How did this situation occur in the first place?
4. To whom and to what is your loyalty as a person and as a corporation member?
5. What is your intention in making this decision?
6. How does this intention compare with the probable results?
7. Whom could your decision or action injure?
8. Can you discuss the problem with the affected parties before making your decision?
9. Are you confident your position will be as valid over the long-term as it seems now?
10. Could you disclose without qualms your decision or action to your boss, your CEO,
the board of directors, your family, and society as a whole?
11. What is the symbolic potential of your action if understood? If misunderstood?

12. Under what conditions would you allow exceptions to your stand?

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 Ethical Considerations in Corporate
Entrepreneurship

• Corporate Entrepreneurs
 Are managers or employees who do not follow the
status quo of their co-workers.
 Are depicted as visionaries who dream of taking the
company in new directions.
 Often walk a fine line between clever resourcefulness
and outright rule breaking.

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 Figure
4.4 Ethical Considerations in Corporate Entrepreneurship

Source: Donald F. Kuratko and Michael G. Goldsby, “Corporate Entrepreneurs or Rogue Middle Managers?
A Framework for Ethical Corporate Entrepreneurship,” Journal of Business Ethics 55 (2004): 18
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 Effective Corporate Entrepreneurship
• Corporate Entrepreneurship requires:
 Establishing the needed flexibility, innovation, and
support of employee initiative and risk taking.
 Removing the barriers that the entrepreneurial middle
manager may face to more closely align personal and
organizational initiatives and reduce the need to
behave unethically.
 Including an ethical component to corporate training
that will provide guidelines for instituting compliance
and values components into state-of-the-art corporate
entrepreneurship programs.

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 Effective Corporate Entrepreneurship

Providing flexibility, Removing

innovation, and organizational
support barriers

Effective Corporate
Entrepreneurship

Including an ethical
component to
corporate training

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 Ethical Leadership by Entrepreneurs
• The Opportunity for Ethical Leadership by
Entrepreneurs
 An owner has the unique opportunity to display
honesty, integrity, and ethics in all key decisions.
 The owner’s actions serve as a model for other
employees to follow.
 An owner’s value system is a critical component of the
ethical considerations that surround a business
decision

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 Table
4.5 Issues Viewed by Entrepreneur/Owners

Demands Strong Greater Tolerance Regarding

Ethical Stance Ethical Position

Faulty investment advice Padded expense account

Favoritism in promotion Tax evasion

Acquiescing in dangerous design flaw Collusion in bidding

Misleading financial reporting Insider trading

Misleading advertising Discrimination against women

Defending healthfulness of cigarette smoking Copying computer software

Source: Justin G. Longenecker, Joseph A. McKinney, and Carlos W. Moore,

“Ethics in Small Business,” Journal of Small Business Management (January 1989): 30.
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 The Ethics of Caring
• Caring
 A feminine alternative to the more traditional and
masculine ethics that are based on rules and
regulations.

• Following laws may not lead to building as

strong of relationships as one could.
• Entrepreneurs must realize that their personal
integrity and ethical example will be the key to
their employees’ ethical performance.

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 Key Terms and Concepts
• amoral management • rationalizations
• code of conduct • role assertion
• ecovision • role distortion
• environmental awareness • role failure
• ethics • social entrepreneurship
• immoral management • social obligation
• moral management • social responsibility
• nonrole • social responsiveness

© 2009 South-Western, a part of Cengage Learning. All rights reserved. 4–36