MBA Notes: Ethics And Social Responsibility

Key Topics:
- Owners vs directors
- Stakeholder groupings
- Ethical and responsible strategies
- Whistle-blowing
- Green pays off

Actions for which a person or group of people can be held accountable and so commended or blamed, disciplined or rewarded, are said to lie within their sphere of responsibility. Anything that lies outside our control also lies beyond the scope of our responsibilities. Ethics, known in academic circles as moral philosophy, is concerned with classifying, defending, and proposing concepts of right and wrong behaviour in the way in which we discharge our responsibilities. While many responsibilities lie within the scope of the law, shareholders' protection, discrimination at work, misleading advertising and so forth (business law), both in those areas and in the grey area that surrounds them lies the province of ethics and social responsibility. Right and wrong in themselves are often not too difficult to separate out. The problem usually stems from competing 'rights' – giving shareholders a better return vs saving the planet, for example, and the inherent selfishness of humans. Many, if not all, of our actions are triggered by self-interest. In fact, much of the justification for capitalism's attraction lies in the 'invisible hand' theory advanced by

Adam Smith in his defining book, The Wealth of Nations (1776):
Every individual… generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.

Unfortunately, the invisible hand suggests only that businesses and consumers, in being selfish, may by accident do good, not that their actions are made ethical in the process. Many purely selfish actions, say by operating a cartel to rip off consumers, or adopting a polluting production process purely to boost the bottom line, fall firmly into the unethical bracket.

Even overtly ethical actions, for example when a business gives to charity or supports a 'not for profit' event, such as Coca-Cola's sponsorship of the Olympic Games over an 80-year period, can prove ethically questionable. In the first place Coca-Cola, McDonald's, Samsung and the other Olympics' sponsors hope for a share of the huge marketing benefits that accrue from such association. Secondly, supporting the Games may be the 'right' thing to do, but supporting the 2008 host country, China, a regime with a questionable human rights track record, may well be 'wrong'.
Business ethics defines the categories of duty for which we are morally responsible. Lists of moral duties and rights can be lengthy and overlapping.

The duty-based theory advanced by a British philosopher, W D Ross (1877–1971), provides a short list of duties that he believed reflects our actual moral convictions:
- Fidelity: the duty to keep promises.
- Reparation: the duty to compensate others when we harm them.
- Gratitude: the duty to thank those who help us.
- Justice: the duty to recognize merit.
- Beneficence: the duty to improve the conditions of others.
- Self-improvement: the duty to improve our virtue and intelligence.
- Non-maleficence: the duty to not injure others.

Ross recognized that there will be occasions when we must choose between two conflicting duties. For example, should your business be involved in any way with products that facilitate abortions? On one side of that moral argument lies beneficence in improving the conditions of women and, on the other, non-maleficence in not doing injury to the unborn child. You can find out more about the theoretical aspects of ethics on The Internet Encyclopedia of Philosophy (www.iep.utm.edu/e/ethics.htm).

Teaching ethics and social responsibility in business schools
This subject is perhaps the most controversial and disputed in terms of the teaching methodology and content used in business schools. A recent survey on Corporate Social Responsibility Education in Europe found that while most business schools had some content in this area, only a quarter had a specific topic, module or elective covering the ground. In 2008, courses in corporate social responsibility (CSR), ethics, sustainability or business and society are now a requirement for 58 per cent of MBAs, up from 45 per cent in 2003 and 34 per cent in 2001. Most had the subject embedded in various other subject areas, for example under titles such as a combination of 'Accounting, Corporate Governance, Law and Public Governance' or 'Stakeholder Management'. Others had ethics and social responsibility covered in the context of specific disciplines – ethical accounting systems or marketing and ethics. Georgia Tech College of Management's MBA set as a business ethics paper the task 'Analyze Sarbannes–Oxley from both conceptual and implementation perspectives', which is largely a single issue of directors' responsibilities to investors.
There is widespread use of practitioner speakers from business or non-governmental organizations (NGOs) as well as case studies from industry, and these methods dwarf the more academic methods (lectures, tutorials) used in other subject areas. Tuck School of Business at Dartmouth, for example, teaches a 'brief mini-course' based on discussions of ethical issues encountered by its faculty in cases involving their experience 'particularly on the functional areas of business as exercised in both the US and the global marketplace, where different local practices and cultural norms seem to muddy the ethical water'. The academics, however, are on the march! Nottingham University Business School has an International Centre for Corporate Social Responsibility and a Professor of CSR (Corporate Social Responsibility). INSEAD has a chaired professor of Business Ethics and Corporate Responsibility, though the focus there appears to be very much around ethical consumerism, deception in marketing and marketing ethics. But the University of Chicago Graduate School of Business leads the field in raising the bar on teaching in this field. It's the only business school anywhere to have a Nobel laureate – Robert Fogel, winner of the 1993 Nobel Prize in economics – teaching 'A Guide to Business Ethics'.

Owners vs directors: the start of the ethical tug of war
Directors are appointed by the owners of a business to control a business and look after their interests in their absence. When enterprises were small and local this was an expediency rarely invoked, as owners more often than not were the directors and where they were not it was usual to ensure at least some family oversight. Now, where nearly two-thirds of all business activity is conducted by giant global enterprises, this separation of ownership from control has become both necessary and commonplace. Also, such businesses have replaced 'owners' with 'shareholders'. The difference is subtle but it is the key to understanding the requirement for including business ethics and social responsibility on the business school curriculum.
Shareholders only rarely own more than a small fraction of any one business, they have no special reason to identify with the founders' vision or code of behaviour and they are preoccupied with relatively simple outcomes such as growth in earnings per share. If they become unhappy in that respect they just swap their holding in that business for a similar stake in another. In fact, even if such shareholders are satisfied with financial performance when a sector is out of 'favour', say, as retailers may be during a recession, they may well sell their holding in any event.

The main holders of large shareholdings in businesses now are fund managers and pension funds and arguably these have an even greater imperative to focus their attention on earnings. True, they exert pressure from time to time but that is usually when they see too much control moving into the hands of one director, say when there is an attempt to combine the roles of chairman and chief executive. Also, when directors are trying to pay themselves more than they may be worth or are trying to improve their lot in some other way at the expense of shareholders, a fund manager may step in. Fund managers are not always honest brokers with regard to looking after shareholder interest. For example, during a takeover there is a good chance that a fund manager will find themselves with holdings in both buyer and seller.

The board of directors has in effect replaced the 'owner' as the custodian of the moral tone and in setting standards of behaviour towards everyone the business has dealings with. They are in some ways encouraged by legal constraints placed on them to take a narrow view of those responsibilities. They are required 'to act in good faith in the interests of the company'; 'not to deceive shareholders and to appoint auditors to oversee the accounting records'; 'not to carry on the business of the company with intent to defraud creditors or for any fraudulent purpose'; and 'to have regard for the interests of employees in general'. (The responsibilities of directors.)
Directors and managers also have responsibilities to protect their customers when using their products or services or when visiting company premises and to follow rules inhibiting pollution in the operating processes. But it is only relatively recently that companies have been required to take a wider view of their responsibilities to other 'stakeholder' groups. Enlightened managers, or those that are particularly astute, depending on your level of cynicism, have often taken on broader responsibilities, sponsoring charities, funding social amenities such as play areas or providing low-cost housing. These initiatives are often spurred on by enlightened self-interest, say to help with recruiting and retaining employees; with getting favourable PR; or in the case of low-cost housing, providing amenities is a usual requirement in getting planning consent for a property development or a site for, say, a supermarket.

CASE STUDY
Amazon, Apple, Facebook, Google and Starbucks are finding out whether staying strictly within the law is sufficient to be ethical. Google, Amazon and Starbucks, three US companies with a widespread global presence got the answer to that question on 12 November 2012 when they appeared before a select committee in the House of Commons, the UK's parliament. The committee were told that Amazon had paid an effective UK tax rate of 2.5 per cent on 2011 earnings of £309 billion. Google paid 0.4 per cent on £2.5 billion. Starbucks paid nothing, though its UK earnings were £365 million. Starbucks has achieved this position by using a number of tax reduction strategies including paying royalties on intellectual property and using the 'buying expertise' of its 40 staff in Switzerland. Starbucks' Swiss business trades coffee and charges the UK arm a premium of 20 per cent for the privilege. That allows Starbucks to pay 12pc Swiss corporation tax, rather than the UK's 20 pc, despite the UK being the company's main operation in Europe with some 6,600 employees.
By using a registered base in Luxembourg, Amazon was able to generate £3.3 billion of sales in the UK while paying no corporation tax at all. The same location strategy allowed it to get away with paying just 3 per cent VAT on UK book sales, a fraction of the UK's rate of 20 per cent. Amazon employs 15,000 people in the UK and operates all its warehouses there, yet drives all its sales out of Luxemburg, a country with a population of 517,000.
All of these companies use legal tax avoidance strategies, channelling much of their business outside of the United States through subsidiaries in tax friendly countries including Ireland where the corporation tax is about half the UK level. Other ploys include paying royalty on intellectual property, commissions and fees with the aim of moving any profit to a low or no tax regime, including Caribbean tax havens.
Mrs Hodge, the Commons Committee's chair summed the situation up with this sentence: 'We are not accusing you of being illegal, we are accusing you of being immoral.' The problem for these companies may be more immediate as the UK press has been quick to suggest UK customers vote with their wallets. For example, going to Costa owned by Whitbread who paid £15 million in corporation tax, rather than companies such as Starbucks and Caffe Nero, would be more patriotic.

Understanding stakeholders
So we can see that directors and by extension the managers of an organization first saw that their primary, often their only, responsibility was to look after the shareholders' interests. Measures were, and still are, taken to attempt to ally their interests, for example linking bonuses to share price or profits. For the most part these attempts have failed, as the case of Enron showed, where shareholders were systematically deceived. Also, in the whole sub-prime debacle bankers were rewarded for systematically repackaging toxic loans and spreading them in near-undetectable layers around the globe, to the eventual detriment of their shareholders and the taxpaying public at large who had to pick up the bill. But even where it is possible to ally directors' interests with those of shareholders, that leaves a myriad of other interested parties effectively disenfranchised, except in so far as they are expressly protected by laws.
The idea that businesses had a responsibility other than to shareholders was brought to popular attention in Howard R Bowen's book Social Responsibilities of the Businessman (1953, New York: Harper and Brothers), but it was a decade later before the term 'stakeholder' was coined in an internal memorandum at the Stanford Research Institute in 1963. Over the next two decades the term stakeholder was debated and defined until Edward Freeman, a professor at the Darden School of Business (www.darden.virginia.edu), University of Virginia, in his book Strategic Management: A Stakeholder Approach (1984, United States: Pitman Bowen), set out simple guidelines that anyone in an organization could understand and follow. Freeman's stakeholders were defined as 'any group or individual who can affect or is affected by the achievement of the organization's objectives'.

Mapping out the stakeholders
Freeman (see above) divided stakeholders into six distinct categories, owners, employees, customers, suppliers, communities and governments, with which an organization has varying responsibilities or 'social contracts'. The first step in the process of developing an ethical strategy is to identify all the people, institutions and agencies that your organization is likely to impinge on in the normal course of its activities.
Figure 9.1 gives an example of a stakeholder map. It shows how stakeholders move outwards from the individual at the centre, to internal groups including their immediate work environment, colleagues, team and peers, and on to external groups, suppliers, customers, shareholders and eventually on to ever-distant publics and organizations.

FIGURE: Stakeholder mapping

Assessing obligations
Not all stakeholders will be affected by any one particular strategy or course of action, nor will those that are affected be affected to the same degree. So the next step in the process is to see which stakeholders will be affected and to what degree. This can be done using a Stakeholder Relevance Matrix, as in this figure. This shows which stakeholder groups will be affected by the decision to relocate a production unit to a new lower-cost country.

FIGURE: Stakeholder relevance matrix

The next step in the process is to analyse the specific interests/expectations and rights/responsibilities of each affected stakeholder group. Following through with the example of relocating a factory, we can see in this figure the different expectations and rights of the three stakeholder groups seen to be most relevant to this decision.

FIGURE: Stakeholder rights and expectations grid


Stakeholder strategies
Having identified the stakeholders and weighed up their rights and expectations, an organization has basically three possible ethical stances it can take:

- Immoral business: Make decisions that are clearly unethical to large groups of stakeholders. The Mafia and organized crime in general certainly fit into this category, as in many respects do the sex industry, large tracts of the gambling industry and arguably the tobacco and drinks industry too. These last three are accepted as being a customer's inalienable right to free choice, aided by being major employers and taxpayers.
- Amoral business: Make decisions without considering their ethical implications either through carelessness, indifference or the mistaken belief that business is there to make profit only. Such businesses see governments and their laws as the only ethical or moral constraint they need concern themselves with.
- Moral business: All decisions are made considering what is ethical, fair and just.

Implementing ethical and responsible strategies
Ethics and values play a central role in shaping a company's identity and reputation, building its brands, and earning the trust of customers, suppliers or other business partners. While honesty, fairness and responsibility are crucial for building a good reputation, an organization that is looking for pre-eminence in its field needs to go beyond just meeting stakeholders' needs. It has to emphasize the message that it is attractive as a business partner and as a good corporate citizen.

To achieve this status the following steps need to be pursued:
- Acknowledge and monitor all stakeholders with a valid claim on your attentions.
- Communicate regularly with stakeholders, listening to their interests and concerns.
- Actively cooperate with stakeholders to minimize risks.
- Always avoid actions that endanger lives.
- Use processes that are sensitive to stakeholders' needs.
- Recognize the danger that managers' convenience and the needs of most other stakeholder groups will almost always be in conflict.
- Resolve stakeholder conflicts speedily and fairly.

Resolving conflict
Unfortunately, however ethical and socially responsible an organization is, it will at some stage, perhaps even frequently, find itself pursuing a strategy that upsets other stakeholder groups. 
Resolving stakeholder conflicts calls for tact and communications and the recognition that while you can't please everyone, you can still be ethical. 

Whistle-blowers – an ethical longstop
Not surprisingly, the people most likely to know about unethical or socially irresponsible behaviour are those working in the organization itself. Governments around the world have adopted measures to encourage a flow of information on ethical problems and fraud from whistle-blowers – that is, anyone employed or recently employed by a public body, business organization or charity who reveals evidence of wrongdoing. Whistle-blowers have also been given a measure of legal protection.

In the United States the Lloyd–La Follette Act of 1912 started the ball rolling, giving federal employees the right to provide Congress with information, to be followed by a patchwork of laws covering such fields as water pollution, the environment, the Sarbanes–Oxley Act (2002) to deal with corporate fraud and the Whistleblower Protection Enhancement Act (2007). In the UK the Public Interest Disclosure Act (1998) and various laws enacted by the European Union and other governments provide a framework of legal protection for individuals who disclose information.

Many firms too have established ways to attract information on frauds being committed against them, including 24-hour hotlines and corporate ethics offices. For example, Vodafone's (www.vodafone.com/content/index/about/
about_us/suppliers/speak_up.html) 'Speak Up' programme – launched in 2006/07– provides suppliers and employees working in its supply chain with a means of reporting any ethical concerns. Fewer than 10 incidents were reported in 2006/07. That low figure may be less to do with the absence of ethical problems and more to do with the deeply ingrained biases against whistle-blowing and a distrust of assurances that retribution will not follow, especially in areas far removed from the watchful eyes of a corporate ethics office.

These organizations can provide further background on the subject:
- The National Whistleblowers Centre (www.whistleblowers.org): Focuses on exposing government and corporate misconduct, promoting ethical standards and protecting the jobs and careers of whistle-blowers.
- Spinwatch (www.spinwatch.org): Monitors the role of public relations and spin in contemporary society and has worked with whistle-blowers, anonymously, on some of the most contentious issues: Northern Ireland, the role of the media, genetic engineering, the oil industry, tobacco smuggling, food and farming, and the war in Iraq, for example.
- Whistleblower (www.whistleblower.co.uk): Run by journalists and set up to allow people to sell stories to the media confidentially. It has had a measure of success, breaking the story on how the Richard and Judy Show's 'You Say, We Pay' competition was ripping off viewers.
- The Chartered Institute of Personnel and Development (CIPD) has a factsheet on whistle-blowing at this weblink: www.cipd.co.uk/hr-resources/factsheets/whistleblowing.aspx.

Does being ethical pay off?
There is plenty of anecdotal evidence that ethical and socially responsible organizations are better places to work. At the very least, being ethical provides an organization with an insurance policy limiting its exposure to a range of legal liabilities for faulty products, misleading advertising, price fixing and discrimination at work, for example. But evidence on whether being ethical helps a business organization to become and stay more profitable is less clear.

Corpedia (http://welcome.corpedia.com), a compliance and ethics training company with clients in 60 countries, including RadioShack, EMC, Xerox and PepsiCo, produces an index of companies deemed ethical. Companies such as Intel, Starbucks, The Timberland Company and Whole Foods Market are in its index, which it claims has outperformed the S&P 500 by more than 370 per cent over 5 years. The rather more scientific and comprehensive FTSE4Good Index Series (www.ftse.com/Indices/FTSE4Good_Index_Series/Performance_Analysis.jsp) also shows the ethical companies to be ahead, though by a rather smaller margin.

But that still begs the question of what constitutes 'good'. The FTSE4Good Index sets out to measure the performance of companies that meet globally recognized corporate responsibility standards.

For inclusion a company must be:
- working towards environmental sustainability;
- developing positive relationships with stakeholders;
- upholding and supporting universal human rights;
- ensuring good supply chain labour standards;
- countering bribery.

It also excludes companies that have been identified as having business interests in these industries:
- tobacco producers;
- companies manufacturing either whole, strategic parts, or platforms for nuclear weapon systems;
- companies manufacturing whole weapons systems;
- owners or operators of nuclear power stations;
- companies involved in the extraction or processing of uranium.

This only serves to highlight the problem of deciding what is ethical and what is not.

For example, is mining uranium for nuclear power really more harmful than, say, switching to biofuels which, aside from probably releasing between two and nine times more carbon gases over the next 30 years than fossil fuels, will almost certainly cause food prices to stay high, particularly in the developing world? Or is the motor industry, whose products kill more people every year than the armaments industry, a more ethical and socially responsible sector?

However, a small but growing band of business schools believe that there is enough mileage in social responsibility and ethics to launch 'green' MBA programmes that emphasize a triple bottom line, also known as 'TBL' or '3BL' – profit, people, planet. Antioch University (www.antiochne.edu/om/mba), New England, Dominican University (www.greenmba.com), California and Duquesne University (http://mba.sustainability.duq.edu) in Pittsburgh are among those offering such programmes.