EthicaI Business Strategies,

Corporate Social Responsibility,

and EnvironmentaI Sustainabitity
Chapter Learning Obiectives

LO1.

Understand why the standards of ethicat behavior in business are no

different from the ethical standards and norms of the larger society
and cutture in which a company operates.

LOz.

Recognize conditions that give rise

and behavior.

LO3.

Gain an understanding of the costs of business ethics failures.

LO4.

Become familiar with how companies that operate in countries with

different cultures and ethical norms ensure a consistent commtment
to business ethics.

LO5.

Gain an understanding of the concepts of corporate social responsibitity, corporate citizenship, and corporate sustainability and how
comoanies balance these duties with economic res oo nsibilities to
shareholders.

to unethical business strategies

Part

One:

Section C: Crafting a Strategy

a company has a responsibility to make a profit and grow the business,

just
as clearly, a company and its personnel also have a duty to obey the
but
law and play by the rules of fair competition. But does a company have a duty
to go beyond legal requirements and operate according to the ethical norms of
the societies in which it operates? And does it have a duty or obligation to contribute to the bettement of society independent of the needs and preferences
of the customers it serves? Should a company display a social conscicncc and
devote a portion of its resources to bettering society? Should its strategic initiatives be screened for possiblc ncgative effects on future generations of the
world's population?
The focus of this chapter is tr> examine what Link, if an.v, there should be
between a company's efforts to craft and execute a wiruring strategy and its
duties to (1) conduct its activities in an ethical manner, (2) demonstrate socially
responsible behavior by being a committed corporate citizen, and (3) limit ts
strategic initiatives to those that meet the needs of consumers without depleting resources needed br fufure generations.

Clearly,

Business Ethics and the Tasks of Crafting

and Executing Strategy
Business ethics is the application of ethical principles and standards to business behavior.t Ethical principles in business are not matcrially different from
ethical principles in general because business actions
have to be judged in the context of society's stanclards
Business ethics involves the application of
of right and wrong. There is not a special set of rules
ethical standards and orincioles to business

that business people decide to apply to their own

conduct. If dishonesty is considered unethica'l and
lmmoral, then dishonest behavior in business-whcthcr it relates to customers, suppliers, employees, or sharcholders qualifies as equally unethical and
immoral. If being ethical entails adhering to generally accepted norms about
conduct that is right and wrong, then managers must consider such norms
when crafting and executing strategy.
lVhile most company managers are careful to ensure that a company's
strategy is rvithin the bounds of what is legal, evidence indicates they arc not
always so careful to ensure that their strategies are within thc bounds of what

activies. behavior. and decisions.

is considered ethical. In recent years, there has becn an ongoing series of revelations whcrc managcrs at such companies as Enron, Tyco lnternational, Health-

South, Adelphia, Royal Dutch/Shell, Parmalat (an Italy-based food products

company), Rite Aid, Mexican oil giant Pemex, AIC, Citigroup, several leading
brokerage houses, mutr-ral fund companies and investment banking firms, and
a host of mortgage lenders have deLiberatelv ignored society's ethical norms.
Alstom SA, a giant France-based engineering firm and makct of power plant
turbines and high-speed trains and subway cars, has been accused bv French
and Swiss prosecutors of using a Swiss slush fund to pay $500 million in bribes
to foreign officiais to win contracts abroad during 2001-2008; executives at
Corporate Strategy,
'James E. Post, Anne I Lawrence, and James Weber, B./siness ond
'ocety:
p. ro3.
Public Policy, Ethics, lorh ed. (Bun Ridge, lL: McGraw Hill lrwin, zooz),

Chapter

Ethicat Business Strategies, Corporate Social Responsibility, and Environmental Sustainabitity

Siemens AG of Germany, one of Alstom's competitors, have been charged by

German authorities with paying bibes of about $2 billion to win large coniracts in 12 foreign countries during 2000-2006.
Much of the crisis in residential real estate that emerged in the United States
in 2007-2008 stemmed from consciously r,rnethical strategies at cetair banks
and mortgage companies to boost the fees they earned on home mortgages by
deliberately lowering lending standards to grant home loans to people whose
incomes were insufficient to make their monthly mortgage payments. Once
these banks and mortgage companies earned the fees on the so-called subprime loans they made to unqualified borrowers, they secured the assistance
of investment banking firms to bundle these and other home mortgages into
collateralized debt obligations and mortgage-backed securities, found means
of having these high-risk securities assigned triple-A bond ratings, and auctioned them to unsuspecting investors, who later suffered huge losses when
the borrowers began to default on their loan payments. The consequences of
crafting strategies that carnot pass the test of moral scrutiny are manifested in
sharp drops in stock price that cost shareholders billions of dollars, devastating public relations hits, sizeable fines, and criminal indictments and convictions of company executives.

Drivers of Unethical Strategies and Business Behavior

Apart from "the business of business is business, not ethics" kind of thinking
apparent in recent high-profile business scandals, three other main drivers of
unethical business behavior also stand out:2

FaultI oversight by top management and the board of directors that

implicitly allows the overzealous pursuit of personal gairy wealth, and
other self-interests.

Heavy pressures on company managers to meet or beat performance

targets.

A company culture that puts profitability and good business performance

ahead of ethical behavror.

OVERZEALOUS PURSUIT OF PERSONAL GAIN, WEALTH, AND

SELF-INTERESTS People who are obsessed with wealth accumulafon,
greed, power, status, and other self-interests often push ethical principles
aside in their quest for personal gain. Driven by their ambitions, they exhibit
few qualms in skirting the rules or doing whatever is necessary to achieve
their goals. A general disregard for business ethics can prompt all kinds of
unethical strategic maneuvers and behaviors at companies. According to a
civil complaint filed by the Securities and Exchange Commission, the chief
executive officer (CEO) of Tyco International, a well-known $35.6 billion
manufacturing and services company, conspired with the company's CFO to
steal more than 9170 million, including a company-paid $2 million birthday
'For survey data on what managers say about why they sometimes behave unethically, see john

F.

Veiga, Timothy D. Golden, and Kathteen Dechant, "Why Managers Bend Company Rules," Acodemy
of MonIgement Executve 18, no. 2 (May 2oo4), pp. 84-89.

Part

One:

Section C: Crafting a Strategy

party for the CEO's wife held on Sardinia, an island off the coast of Italy; a
$7 million Park Avenue apartment for his wife; and secret low-interest and
interest-free loans to fund private businesses and investments and purchase
lavish artwork, yachts, estate iewelry, and vacation homes in New Hampshire,
Connecticut, Nantucket, and Park City, Utah. Tyco's CEO and CFO were further charged with conspiring to reap more than $430 million from sales of
stock, using questionable accounting to hide their actions, and engaging in
deceptive accounting practices to distort the company's financial condition
from 1995 to 2002. Both Tyco executivcs werc convictcd on multiple counts of
looting the company in 2005. Concepts & Connections 9.1 discusses hovr. the
overzealous pursuit of personal gain, wealth, and self-interests played a role
in the fraudulent inr-estment schemes at Bernard L. Madoff Investment Securities ancl alleged at Stanford Financial Group.

HEAVY PRESSURES ON CON{PANY MANAGERS TO MEET OR

BEAT EARNINCS TARCETS Performance expectations of Wall Strcct
analysts and investors may create enormous pressure on management to do
whatever it takes to sustain the company's reputation for delivering good
financial performance. Executives at high-performing companies know that
investors will see the slightest sign of a slowdown in earnings growth as a red
flag, which could begin a mass sell-off of the company's stock. In addition,
slowing growth or declining profits could lead to a downgrade of the company's credit rating if it has used lots of debt to finance its growth. The pressure
to watch the scoreboard and "never miss a quarter"-so as not to upset the
expectations of Wall Street analysts, stock market investors, and creditorsprompts near-sighted managers to cut discretionary costs that create greater
customer value, squeeze extra sales out of early deliveries, and engage in other
short-term maneuvers to make the numbers. As the pressure builds to "meet

ot bcat the numbers," company personnel start stretching the rules further
and further, until the limits of ethical conduct are overlooked.l
Several top executives at WorldCom n ere convicted of concocting a fraudulent $11 billion accounting scheme to hide costs and inflate revenues and profit
over several years; the scheme was said to have helped the company keep its
stock price propped up high enough to make additional acquisitions, support
its nearly $30 billion debt load, and allow executives to cash in on their lucra-

tive stock options. HealthSouth's chief financial managers were convicted of

overstating the company's earnings by $1.4 billion between 7996 and 2002
in an attempt to hide the company's slowing growth from investors. A 2007
internal investigation at DeLl Computer found that executives had engaged
in a scheme to manipulate the company's accounting data to meet investors'
quarterly earnings expectations. The fraudulent accounting practices inflated
the company's earnings by $150 million between 2002 and 2006. The executives n'ere terminated by Dell Computer in 2007.
The fundamental problem with a "make the numbers and move on" syndrome is that a company doesn't really create additional value for customers
or improve its competitiveness in the marketplace, which are the most reliable
For more details see Ronald R. Sims and Johannes Brinkmann, "Enron Ethcs (Or: Culture Matters
More than Codes)," lournol of Busness Ethics 45, no. 3 [uly zoo3), pp. 244-246.

Ethtcal Business Strateg es, Corporate Social Responsibilit and Environmental Sustainability

INVESTMENT FRAUD AT BERNARD L MADOFF INVESTMENT

SECURITIES AND STANFORD FINANCIAL GROUP
Bernard Madoff engineered the largest rnvestment scam
in hstory to accumulate a net worth of more than $8oo

million and build a reputation as one of WaLl Street's

most savvy investors-he was appointed to various
Securities and Exchange Commission panets, nvited to
testi[y before Congress on investment matters, made
chairman of Nasdaq, and befriended by some of the
worLd's rnost influential people. Madoff deceived Wall
Street and investors with a simple Ponzi scheme tht
promised investors returns that would beat the market
by 4oo to 5oo percent. The hedge funds, banks, and
wealthy individuals that sent Bernard L. lVladotf nvest

ment Serurities billions to invest on their behalf were

quite pleased when their statements arrived showng
annuaI returns as high as 45 percent. But, in fact, the
portfolio gains shown on these stalements were frctitious. Funds placed with Bernard Madoff were apparently
seldom, if ever, actually invesled n any typ of securitythe money went to cover losses in his legtimate stock

trading business, fund periodic withdrawals of investors'

funds, and support l\4adofPs lifestyte (including vacaton
homes n Montauk, New York, Patm Beach, Florida, Cap
d'Antibes, France; a $z million Manhattan condominium;
,,i.hf<.

rh.i I vrn :rcl

For decades, the Ponzi scheme was never in danger of collapse because most Madoff investors were so
impressed $/ith the reported returns that they seldom
made withdrawals from their accounts, and when they dd
withdraw funds lVladoff used the mones beng deposited
by new nvestors to cover the payments. Madoffs decep
tion came to an end in late 2oo8 when the dramatic
drop in world stock prlces caused so many of ladofls
investors to request withdralvals of their balances that
there was not nearty enough new money comng n to
cover the amounts being withdrawn. As with any Ponzi
scheme, the first to ask Madoff for their funds were paid,
but those asking later were Left empty-handed. All told,
more than 1,Joo account holders lost about $65 biliion
when Bernard Madotf admtted to the scam in December
zoo8. lMadoff was sentenced to 15o years in prison for

his crimes. As of June 2oo9, investigators had located

of only about $r billion to return to Madoff

assets

account holders.

Increased oversight at the Securities and Exchange

Commission after the December 2oo8 Madoff confession
led to the June zoog indctment of R. Allen Stanford and
five others who were accused of running an investment
scheme slmiLar to that perpetrated by Bernard Madoff.

Stanford was alleged to have defrauded more than

lo,ooo Stanford Financial Group account holders out
of $7 bLLion through the sate of spurious certificates of
deposit (CDs). The CDs marketed by Stanford Financial
croup were issued by the company's Antiguan subsidary, Stanford International Bank, and carried rates that
were as much as three to four times greatef than the
CD rates offered by other financal nstitutions. Stan.
ford claimed that the Stanford lnternational Bank was
able to provde such exceptiona[ yields because of ts
investment in a globatly diversified portfolo of stocks,
bonds, commodites, and alternative investments and
because of the tax advantages provided by the bank's
location in Antgua. All of the investments made by
StanFord InternationaI Bank were said to be safe and
liquid financial instruments monitored by more than 20
analysts and audited by Antiguan regulators. In fact, the
deposits were invested in much riskier private equty
placements and real estate investments and were subiect to severe fLuctuations in value. The statements provided to CD holders were alleged by prosecutors to be
based upon fabricated performance and phony flnancial
statements.
Federal prosecutors also atleged that deposits of at
least $r.6 billion were diverted into undsclosed personaL loans to Allen Stanford. At the time of Stanford's
indictment, he ranked 6o5th on Forbes magazine's list
of the world's weatthiest oersons with an estmated net
worth of $z.z biltion. Stanford was a notabte sports
enthusiast and philanthropist-he supported a cricket
[eague in Antigua and professional golf tournaments in
the tlnted States and contributed millions to the St. Jude
Children's Research Hospital and museums n Houston
and lVliami. Stanford also pLedged $roo million to support programs amed at slowing global warming. Allen
Stanford and Bernard IMadoff were atso maior contrbutors to politcal candidates, wth lvladoffs Largest contributions gong to New York Senator Charles Schumer
conu nueo

Part

One:

Section C: Crafting a Strategy

and New lersey Senator Frank Lautenberg. Stanford's

maior donations went to presidential candidates Barack
Obama and lohn McCain, Florida Senator Bill Nelson,
and Texas Reoresentative Pete Sessons. Stanford was

also a major potitical contributor in Antigua where he

held duat citizenship and was bestowed with knighthood. In May zoo9, Stanford Investment Bank disclosed
that it owed $Z.z bittion to about 28,ooo account holders. lts total assets at the time stood at $r billion.
including $46 million in cash.

Sources: James Bandler, Nicholas Varchaver, and Doris Burke,

"How Bernie Did lt" Fortune Online April 30, zoog (accessed
luly 7, 2oo9); Duncan Greenberg, "Billionaire Responds to
sEC Probe," Forbes Online, February 13, 2oog (accessed July
9, zoog); Katie Benner, 'Stanford Scandal Sets Antigua on
Edge," Foftune Onlne, Fe5tuary 25, 2oo9 (accessed July 9,
2oo9); Alyssa Abkowtz, "The Investment Scam-Artistb Playbook" Foftune Online, FebnJary 25, 2oo9 (accessed ,uly 9,
zoog); Kathryn Glass, "Stanford Bank Assets Insui.ient to
Repay Depositors," Fox gusness.com, May 15, 2oo9 (accessed
luty 9, 2oo9); and Bllt McQuillen, Justin Blum, and Laurel
Brubaker Glkins, 'Atlen Stanford Indicted bV U.5. in $7 Billion
Scam," Bloomberg.com, lune 19, zoog (accessed July 9, zoog).

drivers of higher profits and added shareholder value. Cutting ethical corners or stooping to downright illegal actions in the name of profits first carries
exceptionally high risk for shareholders-a steep stock price decline and a tarnished brand image that leaves a company worth much less than before.

COMPANY CULTURES THAT PUT THE BOTTOM LINE AHEAD OF

ETIIICAL BEHAVIOR When a company's culture spawrrs an ethically
corrupt or amoral work climate, people have a company approved license to
ignore "what's right" and engage in most any behavior they think they can
get away with.4 At such companies, ethically immoral or amoral people are
given free reign and otherwise honorable people may succumb to the many
opportunities around them to engage in unethical practices. A perfect example
of a compary culture gone awry on ethics is Enron.s Enron's arurual "ank
and yank" performance evaluation process where the 15 to 20 percent lowestranking employees were let go or encouraged to seek other employment made
it abundantly clear that bottom-line results were what mattered most. Survival
at Enron relied, to some extent on devising clever ways to boost revenues ad
earnings-even if it sometimes meant operating outside established policies
and without the knowledge of superiors.
The underpinnings of Enron's culture that encouraged unethical behavior were also linked to its reward system. Employees who produced the
best bottomline results received impressively large incentives and bonuses
(amounting to as much as $1 million for traders and even more for senior executives). On Car Day at Enron, an array of luxury sports cars arrived for presentation to the most successful employees. Understandably, employees wanted
to be seen as part of Enron's star team and partake in the benefits granted to
Enron's best and smartest employees. The high monetary rewards, the ambitious and hard-driving people that the company hired and promoted, and
the competitive, results-oriented culture combined to give Enron a reputation
Veiga, GoLden, and Dechant, "Why Managers Bend Company Rules," p. 85.
I The following account is based largely on the discussion and analysis n Sms and Brnkmann,

"Enron Ethics," pp.245-252. Perhaps the defintve book-length account of the corrupt Enron
culture is Kurt Eichenwald, Consprocy of Fools: A True Story (New York: Broadway Books, zoo5).

Chapter

Ethcal Business Strategies, Corporate Social Responsibility, and Environmental Sustainability

not only for trampling competitors at every oPPortunity but also for internal
ruthlessness. The company's super-aggressiveness and win-at-all-costs mindset nurtured a culture that gradually and then more rapidly fostered the erosion of ethical standards, eventually making a mockery of the company's
stated values of integrity and respect. When it became evident in the fall of
2001 that Enron was a house of cards propped up by deceitful accounting and
a myriad of unsavory practices, the company imploded in a matter of weeks.

The Business Case for Ethical Strategies

and Ethical Operating Practices
There are solid business reasons to adopt ethical strategies even if most company managers are not of strong moral character and personally committed
to high ethical standards. Pursuing unethical strategies not only damages a
company's reputation but it can also have costly consequences that are wideranging. Some of the costs are readily visible; others are hidden and difficult to track down-as shown in Figure 9.1. The costs of fines and penalties
and any declines in the stock price are easy enough to calculate. The administrative "cleanup" (or Level 2) costs are usually buried in the general costs
of doing business and can be difficult to ascribe to any one ethical misdeed.
Level 3 costs can be quite difficult to quantify but can sometimes be the most
devastating-the aftermath of the Enron debacle left Arthur Andersen's reputation in shreds and led to the once-revered accountine firm's almost immediate

FIGURE

9.1

Ih ccts of B|lslness Ethcs Faiturcs

tevet 3 Costs

Soufce Adapted fror

Terry Thomas, John R.

Schermerhorn, and John

.
.

Cstomer deftGons
Loss of eputgtlon
Lost employee morah

and hlgfter degrecs of

.
.
.
.

enployee cynlclsnr
Hlgher employee
brnovf
Hlgher recrulti0E cosB
and dffncufty of

tt'.cng tetenbd
enployees

effi

on
Adrerse
employee prodt(fvlty
Thc co3E of compMnt
wlth often halsher

tovcmment rrtulrong

W Dienhart, "Strategic
Leadership of Ethcal
Behaviot," Academy of
Mqnagement Executve
18, no. 2 (May 2oo4),

58.

Part

One:

Section C: Crafting a Strategy

demise. It remains to be seen rt'hethcr Merck, once one of the world's most
respected pharmaceutical firms, can survive the revelation that senior management deliberately concealed that its Vioxx painkiller, which the company
pulled off the market in September 2004, n,as tied to a high risk of heart attack
and strokes.6

Ensuring a Strong Commitment to Business Ethics

in Companies wth International Operations
Notions of rigl-rt and wrong, fair and unfair, moral and immoral, ethical and
unethical are present in a1l societies, organizations, and individuals. But there
are thrcc schools of thought about the extent to which the ethical standards
travel across cultures and lvhether muliinational companies can apply the
same set of ethical standards in all of the locations where thev oDerare.

THE SCHOOL Ol L I HTCAL U\IVERSALISI\I According to thc

school of ethical universalism, some concepts of what is right and what is
wrong are mttersal and transcend most all cultures, societies, and religions.T
For instance, being truthful strikes a chord of what's
fiSht in the peoples of all natrons. Ethical norms conAccording to the school of ethical universalism, the same standards of what,s ethical and sidered univcrsal by many ethcists include honesty,
whats unethical resonate with peoples of most trustworthiress, resPecting the rights of others, practicing the Golden Rule, and avoiding unnecessary harm
societies regardless of local traditions and
to wokers o to the users of the company's product or
cultural norms; hence, common ethical staft
dards can be used to judge employee conduct service.s To he extent Lhere is comrton ntoral agreement
in a variety of country markets and cultural
about right and iurong actions nnd behnuiors ncross mulcircumstances.
tipla aiturcs and cotmties, tlttre ,.ists n sel of uniuersal
ethical stnndards to zuhich all societies, companies, and indi-ctidunls can be held accountnble. The strength of ethical universalism is that it
draws upon the collective vier,r.s of multiple societies and cultures to put some
clear boundaries on what constitutes ethical business behavior no matter
what country market its personnel are operating in. This means that in those
lnstances where basc moral standards realiy do not vary significantly according to local cultural beliefs, traditions, or religious convictions, a multinational
company can devclop a code of ethics that it applies more or less evenly across
its n'orldn,icle operations.e
THF SCHOOL OF ETIIICAL IthLAIIVISI\{

Beyond widely accepted

ethicai norms, many ethical standards likely vary from one country to another
bccause of divergent religious beliefs, social customs, and prevailing political
6Anna Witde Mathews and Barbara Maftinez, "E-lv1als Suggest Merck Knew Vioxx's Dangers
at
Early Stage," lhe Wall Street Journal, November 1, 2oo4, pp. Ar and Aro.
7 For reserch on whal are the universal moral values (six
are identifled-trustworthness, respect,
responsibility, fairness, caring, and citizenship), see Mark S. Schwarlz, "Unversal MoraL Values for
Corporate Codes of Ethics," Journal of Business Ethics 59, no. r (June zoo5), pp. z7 44.
3
See, for instance, Mark. S. Schwartz, 'A Code of Ethcs for Corporate Codes of Ethics," lournal of
Busness Ethcs 4r, nos. 1-2 (November-Decem ber zooz), pp. zt-4).

'

For more discussion of

pp.29-30.

this point, see Schwartz, 'A Code of Ethics for Corporate Codes of Ethics,"

Chapter

Ethicat Business Strategies, Corporate Social Responsibility, and EnvironmentaI Sustainability

and economic doctrines (whethcr a countrv leans more

tou,ard a capitalistic market cconomy or one h

dominated bv socialistic or communistic princ

The school of ethical relativism holds that whe
are cross-country or cross-cultural differences i
is dccmed an ethical or unethical business sit
it is appropriate for local moral standards to take pre- to another.
cedence over what the ethical standards may be tn a
company's home market. The thesis is that whatever a culture thinks is right
or wrong really is right or wrong for that culture.r0
A company that adopts the princple of cthical relativism and holds company personnel to local ethical standards necessarily assumes that rvhat prevails as local moraliiy is an adequate guide to ethical behavior. This can be
ethically dangerous-it Leads to the conclusion that if a courrtry's culture
generally accepts bribery or environmental degradation or exposing workers
to dangerous conditions, then managers working in that country are free to
engage in such activities. Adopting such a position places a company ir-r a prsrilous position if it is rcquired to defend these activities to its stakeholders in
countries with higher ethical expectations. Moreover, from a global markets
perspective, ethical relatir.ism results in a maze of confliciing ethical standards
for multinational companies. Imagrne, for example, that a multinational company in the name of ethical relati'r'ism takcs the Position that it is okay for company personnel to pay bribes and kickbacks in countries where such payments
are customary but fobids company personnel from making such payments in
those countries where bribcs and kickbacks are considered unethical or illegal.
Having thus adoptcd conflicting ethical standards for operating in different
countries, company managers have little moral basis
for enforcing ethical standards companl.rvide-rather, Codes of conduct based upon ethical relativism
the clear message to employees would be that the com- can be ethicatty dangerous by creatng a maze
pany has no ethical standards or prurciples of its own, of conflcting ethical standards for multinational
preferring to let its practices be governed by thc coun- companies.
tries in which it operates. 'Table 9.1 prcsents results of
the 2008 Global Corruttion Report, which illustrates the impracticality of tailoring a multinational company's ethical standards to local expectations.

I\

I't.C,R,A,TlVE SOCIAL CON'l RACTS THEORY Integrativc social

contracts theory provides yet a middle position betwecn the opposing views
of universalism and relativism.rr According to integrative social contracts
theory, the ethical standards a company should try to uphold are governed
'"T. L. Beauchamp and N. E. Bowie, Ehcal Theory and Bus,ness (Upper Saddle River, Ni: Prentice
Hall, zoor), p. 8.
" Two of the definitive treatments of ntegrative social contracts theory as applied to ethics are
Thomas Donatdson and Thomas W. Dunfee, "Towards a Unfied Conception of Busness Ethi(sl
lntegrative Social Contracts Iheory," Acodemy of Monogement Review 19, no. 2 (April 1994),
pp. 252.-284; and Thomas Donaldson and Thomas W. Dunfee, Tes Thot Bind: A Social Controcts
Approach to Eusiness Ethlcs (Boston: Harvard Busrness School Press, 1999) especially Chapters 3,
4, and 6. See, also, Andrew Spicer, Thomas W Dunfee, and Wendy J. Bailey, "Does National context Matter in Ethicat Decision Making? An Empirical Test of Integrative SocaI Contracts Theory"
Academy of M1nagement Journal 47, no.4 (August zoo4), p. 6ro.

Table 9.1

2008 cPl

scoRr*

COUNTRY

2008 cPl
COUNTRY

scoRE*

Denmark
Ncw Zcaland

9.3

Ta irva n

5.7

93

Ma laysia

5.1

Sweden
Singapore
Finland

9 ..1

South Afric

9.2

Italy

4.9
4.8

9.0
9.0

Turkey
Cub
Romania
Ch ina

Switzerland
lce
N

la

nd

ether

8.9
8.9
8.7
8.7

la n ds

Australia
Ca

nada

l-uxembourg

8.3

Austria
Hong Kong

8.1

Mexico
ts razil
Saudi Arabia

Thailand
lndia

(lermany

B.t
7.9

lapan

7.3

Vietnam

7.3

Pakistan

nited States

France

6.9
6.9
6.5
6.0
5.9

Ch ile

Spain
ls rae

Unted Arab Emirates

Argentna

4.3
3.8
3.6
3.6
3.5
1q

3.4
2.9
2.7
2.5

ia

2.1

Venezuela

1.9
1.4

Ru ss

Haiti
Myanmar
Sorna lia

1.3

1.0

*]{ote: The CPI scores range betwee ro (highly clean) and (highly
o
corrupt); the data draw on information
from 13 different polls and surveys from 11 independent institutions The CP score represents the perceptions
of the degree of aorfuption as seen by busness people, academics, and risk analysts, CPI scores were reported
for 18o countries.
Source: Reprinted from zooS International Annual Report Copyright O 2oo8 Transparency Interna(onal:
the global condtion against coffuption. Llsed with permission, For further information, vis t http://www
.transparency.org.

both by (1) a limited number of universal ethical principles that are w.idely recognized as putting legitimate
ethical bour-rdaries on actions and behavio in all situations and (2) the circumstances of local cultures, traditions, and shared values that further prescribe what
constitutes ethically pcrmissible behavior and what
does not. This "social contract" by which managers in
all s.ituations have a duty to serve provides thal "firstorder" uniuersnl ethical nornrs nlunys tnke precedence ouer
"second-order" locnl ethicnl norms ifl circuntstnnces zuhere
ordet" local ethical norms in circumstances
local ethical noltns flre more pernissiae. Integrative social
where local ethical norms are more permissive.
contracts theory offers managers 1n multinational companics clcar guidance in resolving cross-countrv ethical
differences: Those parts of the company's code of cthics that involve universal
ethical norms mLrst be enforced worldwide, but within thcse boundaries there
is room for ethical diversity and opportunity for host country cultures to exert
srn influcnce in settins their own moral and ethical standards.
According to integrative social contracts
theory universal ethical prjnciples based on
collective views of multiole cultures combine to
form a 'social conhacf' that all employees in all
country markets have a duty to observe. Within
the boundaries of this social contract, there is
room for host country cultures to exert some
influence in setting their own moral and ethcal
standards. However, "fir storder" uniu ersa I ethtca
norms always take precedence over "second-

Chapter

Ethical Business Strategies, Corporate Social Responsibilty, and EnvironmentaL Sustanability

A good example of the application of integrative social contracts theory

involves the payment of bribes and kickbacks. Yes, bribes and kickbacks
seem to be common in some countries, but does this justify paying ihem? Just
because bribery flourishes in a country does not mean that it is an authentic
or legitimate ethical norm. Virtually all of the n'orld's major religions (Buddhism, Christianity, Confucianism, Hinduism, Islam, fudaism, Sikhism, and
Taoism) and all moral schools of thought condemn bribery and corruption.l2
Therefore, a multinational company might reasonably conclude that the right
ethical standard is one of refusing to condone bribery and kickbacks on the
part of company personnel no matter what the second-order local norm is and
no matter r,.hat the sales consequences are. An example of the application of
integrative social contracts theory that allows second-order local customs to
set ethical boundaries inr,olves employee recruiting and selection practices. A
company that has adopted a first-order universal norm of equal opportunity in
the workplace might allo\4' applicants to include photographs with resumes in
countries where such is the norm. Local country managers in the United States
are prohibited bv law from accepting employ'rnent applications including a
photograph, but local country managers in Europe would find it very unusual
for an application to not be accompanied b, a photograph of the applicant.
A policy that prohibited managers from accepting applications containing a
photo of the applicant would result in almost all applications being rejected.
But even with the guidance provided by integrative social contracts theory,
there are many instances where cross-country differences in ethical norms create "gray areas" where it is tough to draw a line in the sand between right and
wrong decisions, actions, and business practices.

Social Responsibtty and Corporate Citizenship

The idea that businesses have an obligatron to foster social betterment,, a muchclebated topic in the past 40 years, took root in the 19th centurv when pro-

in the aftermath of the industrial

revolution began to provide workers with housing
gressive companies

Gorporate social responsibility calls for

and other amenities. The notion that corporate execucomoanies to strive for balance between (1) the
tives should balance the interests of all stakeholdeseconomic responsbl,ty to reward sha reho lder s
shareholders, employees, customers, suppliers, the
with profits, (2) the legal responsibility to comply
communities in which they operated, and society at
with the laws of countres where it operates, (3)
large-began to blossom in the 1960s. The essence of
the eical responsib,rty to abide by society's
norms of what is moral and just, and f4) the
the theory of corporate social responsibility is that a
discretionary phlanthropc responsibi,ty to
company should strive for balance between (1) its ecocontribute to the noneconomic needs of sociew.
nomic responsibility fo rewad shareholders with profits, (2) its legal responsibilify to comply with the lavs
of countries u'here it operates, (3) the ethicnl responsibility to abide by society's
norms of what is moral and just, and (4) a philnnLfuopic responsibility to contribute to the noneconomic needs of societv.l'
" P M. Nichols, "Outlawing Transnational Bribery through the WorLd Trade Organization," Law ond
Polcy in lnternotionol Busness 28, no. z (t997), pp. 321-322.
'rArchie B. Carroll, 'A Three-Dimensional Conceptual Model of Corporate Performance," Academy
of Management Review 4, no. q 0929), pp. 497 5o5.

There is unanimous agreement among ch.ief managers of the world's most

notable companies that economic, Iegal, and ethical responsibilities are a duty
of management and are not subject to debate. In acldition, even though such
activities are discretionary, most chief managers agree that corporations have
a duty to engage in philanthropic activitics. Acting in a socially responsible
manner thus involves undertaking actions that earn trust and respect from
all stakeholders-operating in an honorable and ethical manner, striving to
make the company a great place to n-ork, demonstrating genuine respect for
the environment, and trying to make a difference in bettering society. Common corporate social responsibility programs invoh'e:

Actions to protect the en-cironment and, itt partiulnr, to minimize or elininate

nny nduerse impnct on the enuironment stemning from the conpany's ototr

bttsiness actiuities-Social responsibility as it applies to environmental

protection means doing more than r,r'hat is legally rcquircd. From a social

rcsponsibility pcrspcctivc, companics havc an obligation to be stewards

of the environment.
Actiotts to crete a ioork entronnent thnt enhnnces the rynlity of hfe for
emtloyees-Numcrous companics cxcrt cxtra cfforts to enhance the quality of life for their employees, both at work and at home. This can include
on-site day care, flexible work schedules for single parents, workplace
exercise facilities, special leaves to care for sick family members, work-athorne opportunities, gender pay equity, and the like.
Actions to buiLd a zoorkforce that is diuerse zoith respect to gender, rce, national
origin, ond perhnps other nspects thnt tlifferent people bring to tlrc workplnceMost large companies in the United States have established workfoce
diversity programs, and some go the extra mile to ensure that their workplaces are attractive to ethnic minorities and inclusive of all groups and
pcrspectives. The pursuit of workforce diversity can be good busincss. At
Coca-Cola, where strategic success depends on getting people all over the
world to become loyal consumers of the company's beverages, efforts to
build a public persona of inclusiveness for people of all races, reli;ions,
natronalities, interests, and talents har-e consideable strategic value.

Some companies use the terms corporate social responsibility and corporate citizenship interchangeabiy, but there is a body of thought that only comCorporate ctizenshp requres a corporate

pames pursuing discretionarv activities in the pursuit

of bettering society can be described as good corPorate

citizens. Adherents of corporate citizenship theories

commitment to go beyond meeting
expectations for ethical strategies and business suggest that corporations, as citizens of the communities in which they operate, have an obligation to conbehavior to demonstrating good citizenshp

socety's

society.

of

by

tribute to society where government has chosen not

to focus its efforts or has fallen short.1l For instance,
McDonald's sponsors the Ronald McDonald House
Charities program, which provides a home awav from home for the families
of critically ill childrcn recciving treatmcnt at nearby hospitals. British Telecom

addressing unmet noneconomic needs

Drk Matten and Andrew Crane, "Corporate Citzenship: Toward an Extended Theoretcal Conceptualization," Academy of Monagement Review 1o, no. 1 (2oo5), pp. 166-179.
'4

Chapter

EthicaI Business Strategies, Corporate Social Responsblity, and EnvronmentaL Sustanabilty

gives 1 percent of its profits directly to communities, largely for educationteacher training, in-school n'orkshops, and digital technology. Leading prescription drugmakcr ClaxoSmithKline and other pharmaceutical companics
practice corporate citizenship by either donaiing or heavily discounting medicines for distibution in the least-developed nations. Companies frequently
reirforce their philanthropic efforts by encouraging employees to support
charitable causes and participate in community affairs, often through programs that match employee contributions.

Corporate Sustainability and the Environment

There is a rapidly grou'ing set of multinational companies that are exranding
their understanding of societal responsibilties to include the impact of their

strategies and operations on future generations. Corporate sustainability

strategies arc aimcd at meeting the needs of current era customers, suppliers,
sharcholders, employees, and other stakeholders in a
manner that protects the resources needed by future
Corporate sustainability involves strategic
generations and is therefore sustainable for centuries.
efforts to meet the needs of today's customers,
Sustainability initiatives undertaken by companies are
supplers, shareholders, employees, and
directed at improving the company's triple bottom line
oer stakeholders in a manner that protects the
(TBL)-its performance on economic, environment,
environment and provides for the longevity of
and social metrics.ls Unilever, a diversified producer
resources needed for future generations.
personal
home
processed
foods,
care,
and
cleaning
of
products, is among the most committed corporations pursung sustainable
business practices. The company tracks 1l sustainablc agricultural indicators in its processed foods business and has launched a variety of pnrgrams
to impruve the environmental performance of its suppliers. Examples of such
programs include speciai iow-rate financing for tomato suppliers choosing to
switch to water-conserving irrigation systems and trairing programs in India
that have allowed contract cucumber gro!\ers to reduce pesticide r.rse by 90
percent, while improving yields by 78 percent.
Unilever has also reengineered many intemal processes to improve the company's overall performance on sustainability measurcs. For cxamplc, thc company's factories have reduced water usage by 50 perccnt and manufacturing u'aste
by 14 percent through thc implcmcntation of sustainability initiatives. Unilever has also redesi;ned packaging for many of its products to conserve natural resources and reduce the voiume of consumer waste. The company's Suave
shampoo bottles in the United States were reshaped to save almost 150 tons of
plastic resin per year, which is the equivalent of 15 million few.er emptv bottlcs
making it to landfills annually. Also, the r,r'idth of Unilever's Lipton soup cartons
was reduced to save 154 tons of cardboard per year. Because 40 percent of Unilever's sales are made to consumers in developing countries, the company also is
committed to addressing societal needs of consumers in those countries. Examples of the company's social performance include free laundries in poor neighborhoods in developing cou-ntries, start-up assistance for women-or+'ned micro
businesses rn India, and free drinking waier provided to villages in Chana.
'jGerald l. j., M. Zetsloot, and Marcel N.A. van Marrewijk, "From Quality to SustainabLity," /ournal
of Busness Ethics 55 (2004), pp. 79-82i and Elkngton, lohn B. Canniba[s with Forks: The Triple
Bottom Lne of 21st Century Busness, (Oxford: Capstone Pubtshing, 1992).

Part

One:

Section C: Crafting a Strategy

Sometimes cost savings and improved profitability are drivers of corporate

sustainability strategies. DuPont's sustainability initiatives regarding energy
usage have resulted in energy conservation savings of more than $2 billion
between 1990 and 2005. Procter & Gamble's Swiffer cleaning svstem, one of the
company/s best-selling new products, was developed as a sustainable product; not only does the Swiffer system have an earth-friendly design, but it also
outperforms less ecologically friendly alternatives. Although most consumers probably aren't aware that the Swiffer mop reduces demands on municipal water sources, saves electricity that would be needed to heat mop water,
and doesn't add to the amount of detergent making its way into waterways
and waste treatment facilities, they are attracted to purchasing Swiffer mops
because they prefer Swiffer's disposable cleaning sheets to filling and refilling
a mop bucket and wringing out a wet mop until the floor is clean.
Most well-knou'n companies discuss their sustainabilitv strategies and
results in press releases and special sustainability reports for consumers and
investors to revieu'. fust as investment firms have created mutual funds made
up of companies passing some threshold of social responsibiliry a number
of sustainability funds have been created in recent years for environmentally
and socially aware investors to purchase. The Dow Jones Sustainability World
lndex is made up of the top 10 percent of the 2,500 companies listed in the Dow
fones World Index in terms of economic performance, environmental performance, and social performance. Table 9.2 shows companies with exceptional
commitments to sustainability (judged according to their being designated
as worldwidc supersector leaders within the Dow fones Sustainability World
Index for 2008 /2009). However, achieving a prominent ranking in sustainability indexes is no guarantee that a company will outperform industry rivals
when it comes to social responsibility. For example, BP's $8 billion investment
into alternative energy sources and its strong lnvolvement in community and
environmental groups had allowed it to consistently rank near the top among
sustainability indexes, but between 2005 and 2007 the company was fined for
safety violations at an Ohio refinery, was investigated by the U.S. Department
of Justice for suspected manipulation of oil prices, had a major oil pipeline
leak in Alaska, and was hit with a refinerv explosion in Txas that claimed the
lives of 15 emolovees.16

Crafting Social Responsibitity and Sustainability Strategies

While striving to be socially responsible and to engage in environmentally sustainablc business practices, there's plenty of room for everv company to make
its own statcmcnt about what charitable contributions to make, what kinds of
community service projects to emphasize, what environmental actions to support, how to make the company a good place to work, where and how workforce diversity fits into the picture, and what else it will do to support worthy
causes and projects that benefit society. A company may choose to focus its
social responsibility strategy, on generic social issues, but social responsibility
stratcgics keyed to points of intersection between a company and society may
'6 BP's environmental record is discussed

ary 29,2oo7, p. 50.

in "Beyond the Green Corporation," Businessweek, )anu-

Chapter

Ethical Busness Strategies, Corporate Social Responsibility, and Environmental Sustainability

Table 9.2

MARKET STCTOR

COUNIRY

Automobilcs and parts

Cermanr

Banks

Austra lia

Xstr.rIa

Basic resources

UK

BASI

Chemicals
Construction and materials

Cermany
Switzerland
Braz

Netherlancls
Switzerlancl

Sw iss Re

Financia I services
Food and beverages
Health care
Ind ustria I goods and serviccs
Insu ra nce

Pcarson

Media

UK

ENI

Oil and

gas

ad id as

Ath letic

footwear apparel, and

Land Secu rities Croup

Real estate

Kingiisher
lntcl
BT Croup

Retail

BMW
Australia & Ncr'v Zcaland
Ba n king Crour

Holcim
Itausa-lnvestimentos ltau

Unilcvcr
Novarts

TNT N.V

rl

Netherlands
Switzerland
lv
Gcrmanv
Ita

equipment

Technology

Air France-KLM

Telecomm u n ictit.ns
Travel and leisu re

(i

Utilitics

rupo lbcrdrola

UK
UK
USA
UK
France
Spain

Sources: Dow jones Indexes, STOXX Limited, and SAM Group. Accessed at http://www.sustainability-indexes.
com/o7 htmle/indexes/dlsiwold supersectorleaders.html, on luly 8, 2oo9.

also contribute to a company's compctitivc advantage.LT Almost all activities

performed by a companv (such as hiring oractices, emissions, and waste disposal) have cithcr a positive or negative affect on society. ln addition, society
affects the competitive environment in which companies operate-society provides a companv with labor and transportation infrastructure, sets the rules
that govern competition, determines the demand for a company's product or
service, and shapes the availability of supporting industries.
Social responsibility strategies that focus on these points of intersection
between society and the company's ability to cxecute various value chair
activitics or better serve customer needs provide social benefits as well as
build competitive advantage. For example, while carbon emissions may be
a generic social issue for a financial institution such as Wells Fargo, Toyota's
social responsibility strategy aimed at reducing carbon emissions has Produced both competitive advantage and environmental benefits. Its Prius hybrid
eiectric/ gasoline powered automobile not only is among the lcast polluting
automobiles, but also is the best-selling hybrid vehicle in the United States and
'7 For an exceltent dscussion of crafting corporate social responsibitity strategies capable of
contributing to a company's competitive advantage, see Michael E. Porter and Mark R. Kramel
"Strategy & Society: The Link between Competitive Advantage and Corporate Social Responsiblity," Harvard Eusiness Review 84, no. 72 (December 2006), pp. 78-92.

Part

One:

Section C: Crafting a Strategy

Social responsibility strategies that have the

effect of both providing valuable socal benefts
and fulfilling customer needs in a superior
fashion can lead to competitve advantage.
Corporate social agendas that address generic
social issues may help boost a company's
reputation, but are unlikely to improve its
competitive strenglh in the marketplace.

has earned the company the loyalty of fuel-conscious

buvers and given Toyota a green image.
Green Mountain Coffee Roasters' commitment to
'rrotect the welfare of coffee gro\ ers and their families (in particular, making sure they receive a fair pnce)

also intersccts with the company's competitively

important value chain activities. In its dealings with
suppliers at small farmer cooperatives in Peru, Mexico, and Sumata, Green Mountain pays "fair trade"

prices for coffee beans (in 2008, the fair trade prices were a minimum of $1.39
per pound for conventional coffee versus market prices of $1.10 per pound).
Green Mountain also purchases about 25 percent of its coffee direct from farmcrs so as to cut out interrnediaries and see that farmers realize a higher price
for their efforts roffee is the r,t orld's second most heavily traded commodity
after oil, requiring the labor of somc 20 million pcoplc, most of whom live at
the poverty level.18 At Marriott, the company's social agenda includcs providing 180 hours of paid classnrom and on-the-job training to the chronically
unemployed. Ninety percent of the graduates from the lob training program
take jobs with Marriott and about trt o-thirds of those remain with Marriott for
more than a year. Patagonia encourages customers to return worn-out cotton,
fleece, and nylon clothing items so that the fibers can be recycled into fabrics
for new clothing items.
Whole Foods Market's social responsibility strategy is cvidcnt in almost
every segment of its company value chain and is a big part t)f its differentiation
strategy. The company's procurement policies encourage stoes to purchase
fresh fruits and vegetables from local farmers and screen processed food items
for more than 100 common ingredients that the company considers unhealthy
or cnvironmentally unsound. Spoilecl food items are sent to regional composting centers rather than landfills and all cleaning products used in its stores are
biodegradable. The company also has created the Animal Compassion Foundation to develop natual and humane ways of raising farm animals and has
converted all of its vehicles to run on biofuels.
However, not all companies choose to link their corporate social agendas to
their or+'n business or industry Chick-Fil-A, an Atlanta-based fast-food chain
r,vith over 1,200 outlets in 38 states, has a charitable foundation that supports 14
foster homes and a summer camp for some 1,800 campers fuorn 22 states and
several foreign countries.re Levi Strauss & Company has madc HIV/AIDS prevention and arvateness a major component of its social agenda for a number of
years. Some of the programs funded by the company and the Levi Strauss Foundatiorl having little to do with its business activities include its firancial support of Syringe Access Fund that makes sterile syringes available to ir-rtrau".ou,
'*World Business Council for Sustainable Development, "Corporate Social Responsibtity; Making
Good Business Sense," January zooo, p.7t accessed October 10, 2oo3 at www.wbscd.ch. For a
dscussion of how companies are connectng social initiatives to their core values, see David Hess,
Nikolai Rogovsky, and Thomas W Dunfee, "The Next Wave of Corporate Community Involvement:
Corporate Social Initiatives," Calfornia Monogement Review 44, no. z (Winter zooz), pp. rro-rz5;
Susan Ariel Aaronson, "Corporate ResponsrbiLty in the Global Village: The British Role Model and
the American Laggard," Business and Society Review 1o8, no. 3 (September zoo3), p. 323.
'r wwwch ick-fit-a.com, accessed November 4, 2oo5,

Chapter

Ethical Business Strategies, Corporate Social Responsibilty, and EnvironmentaL Sustainability

drug users irr ihe United States and the funding of cartoons directed at children
betr+'een the ages 8 and 10 that discuss hou,to best prevent the transmission of
the AIDS virus. The Preventoons cartoons were distributed to more than 20,000
teachers in Argentina and Uruguay to use in their classrooms.
It is common for cornpanies engaged in natural resource extraction, electric
power production, forestry and paper products, motor l'ehic1es, and chemicals
production to place more emphasis on addressing environmental concerns
than, say, software and electronics firms or apparel manufacfurers. Companies n'hose business success is heavily dependent on high employee morale
or attractin and retaining the best and brightest employees are somewhat
more prone to stress the n'ell-being of their employees and foster a positive,
high-energy workplace environment that eliciis the dedication and enthusiastic commitment of employees, thus putting real meaning behind the claim
"Our people are our greatest asset." Ernst & Young, one of the four largest
global accounting firms, stresses its "People First" workforce diversity strategy that is all about respecting differences, fostering individuality, and promoting inclusiveness so that its 105,000 cmployees in 140 countrics can feel
valued, engaged, and empowered in developing creative ways to serve the
firm's clients. Thus, while the strategies and actions of all socially responsible
companies have a sameness in the sense of making discretionary contributions to noneconomic societal needs, each company's version of being socially
responsible is unique.

The Business Case for Socially Responsibte

Behavior
Whatever the moral arguments for socially responsible business behavior, it
has long been recognized that it is in the enlightened seif-interest of companies to be ;ood citizens and devote some of their energies and resources to the
betterment of employees, the communities in which thev operate, and society
in general. In short, there are several reasons why the exercise of corporate
social responsibility and corporate citizenship is good business:

It generates internal benefits (particularly concerning enryIoyee recruitirtg,

workforce retention, and training cosfs)-Companies with good reputations
for contributing time and money to the bettement of society are better
able to attract and retain employees compared to companies with tarnished reputations. Some employees just feel better about working for a
company committed to improving society.20 This can contribute to lower
turnover and better worker productivity. Other direct and indirect economic benefits include lower costs for staff recruitment and training. For
example, Starbucks is said to enjoy much lower rates of employee turnover because of its full benefits package fo both ful1-time and part-time
employees, management efforts to make Starbucks a great place to work,
and the company's socially responsible practices.

'" N. Craig Smth, "Corporate Social Responsibility: Whether and How," Colifornio Monogement
Review 45, no. 4 (Summer zoo3), p. 63; see atso, Wold Economic Forum, "Findings of a Survey on
Global corporate Leadership," accessed at www.weforum.org/corporatecitizenship, October rr, zoo3.

Part

One

Section C: Crafting a Strategy

It

reduces the risk of reputation-damaging incidents and can lead to increased

buyer patronage-Firms may well be penalized by employees, consumers,

and shareholders for actions that are not considered socially responsible.
Consumer, environmental, and human rights activist groups are quick to
criticize businesses whose behavior they consider to be out of line, and
they are adept at getting their message into the media and onto the Internet. Pressure groups can generate widespread adverse publicity, promote
boycotts, and influence like-minded or sympathetic buyers to avoid an
offender's products. Research has shown that product boycott announcements are associated with a decline in a company's stock price.21 In contrast, to the extent that a company's socially responsible behavior wins
applause from consumers and fortifies its reputation, the company may
rvin additional patronage. Some observers and executives are convinced
that a strong, visible, social responsibility strategy gives a company an
edge in differentiating itself from rivals and in appealing to those consumers who prefer to do business with companies that are solid corporate
citizens. Whole Foods Market, Patagonia, Chick-Fil-A, Starbucks, and
Green Mountain Coffee Roasters have definitely expanded their customer
bases because of their visible and well-publicized activities as socially
conscious companies. Yet there is only limited evidence that consumers
go out of their way to patronize socially responsible companies if it means
paying a higher price or purchasing an inferior product.22

It

is in the best interest of shareholders-Well-conceived social responsibility

strategies help avoid or preempt legal and regulatory actions that could
prove costly and otherwise burdensome. Stock prices of companies taking
the straight and narrow path and rating high on social and environmental
performance criteria have performed 35 to 45 percent better than the average of the 2,500 companies on the Dow fones Global Index.'z3 Nearly 100
studies have examined the relationship between corporate citizenship and
corporate financial performance over the past 30 years; the majority point
to a positive relationship. Of the 80 studies that examined whether a company's social performance is a good predictor of its financial performance,
42 concluded yes, 4 concluded no. and the remainder reported mixed or

inconclusive findings.2a
'Waltace N. Davidson, Abuzar El-Jelly, and Dan L. Worrell, "lnfluencing Managers to Change
Unpopular Corporate Behavior through Boycotts and Divestitures: A Stock Market Test," Susiness
and Society 34, no. z (t99 , pp. t7t-t96.
" Smth, "Corporate Social Responsblity," p. 62.
'3 See James C. ColLins and Jerry l. Pofias, Bult to L?st: Successful Hobits of Vsionary Companies,
3rd ed. (London: HarperBusness, zooz); Sarah Roberts, Justn Keeble, and David Brown, "The
Business Case for Corporate Ctzenshp," a study for the Wortd Economic Forum, www.weforum.
org/corporalecitzenshp, October 14, 2oo3, p. 4; and Smith, "Corporate SociaL Responsibility,"

p.63.
'4Smith, "Corporate SocaL Responsibility," p. 65; Lee E. Preston and Dougtas P O'Bannon, "The
Corporate Social-Financial Performance Relationship," Busness ond Society 36, no. 4 (December ry97), pp. 419-4zgi Ronald M. Roman, Sefa Haybor, and Bradley R. Agle, "The Relationship
between Social and Financial Performance: Repainting a Portrait," Business and Socety,38,
no. r (March 1999), pp. to9-tz5; and Joshua D. Margols and lames P Walsh, People and Profits
(Mahwah, NJ: Lawrence ErLbaum, 2oo1).

Chapter

Ethical Business Strategies, Corporate Social Responsibility, and EnvironmentaI Sustainability

ln sum, companies that take social resPonsibility seriously can improve their
business reputations and operational efficiency while also reducing their risk
exposure and encouraging loyalty and innovation. Overall, companies that
take special pains to protect the environment @eyond what is required by
law), are active in community affairs, and are Senerous suPPorters of charitable causes and projects that benefit society are more likely to be seen as good
investments and as good companies to work for or do business with. Shareholders are likely to view the business case for social responsibility as a strong
one, even though they certainly have a right to be concemed about whether
the time and money their company spends to carry out its social responsibility
strategy outweighs the benefits and reduces the bottom line by an unjustified

amount.

Kev Points
Ethics involves concepts of right and wrong, fair and unfair, moral and immoral. Beliefs
about what is ethical serve as a moral compass in guiding the actions and behaviors of
individuals and organizations. Ethical principles in business ate not materially differ-

ent from ethical principles in general.

1.

The thee main drivers of unethical business behavior also stand out:

Overzealous or obsessive pursuit of personal gairl wealth, and other selfish

interests.

.
.

Heavy pressures on comPany managers to meet or beat earnings tal8ets.

A company culture that puts profitability and good business performance
ahead of ethical behavtor.

2.

Business ethics failues can result in Level 1 costs (fines, penalties, civil penalties arising from lawsuits, stock price declines), the administrative "cleanup" (or
Level 2) costs, and Level 3 costs (customer defections, loss of reputation, higher

turnover, harsher government regulations).

3.

There are three schools of thought about ethical standads for companies with
intemational operations:

According to the school of ethical uniuercalisrn, the same standards of what's

ethical and unethical resonate with peoples of most societies regardless of
local traditions and cultural norrns; hence, common ethical standards can be
used to judge the conduct of personnel at companies operating in a variety
of international markets and cultural circumstances.

According to t}:re school of ethical relatiaism, different societal cultues and custorns have divergent values and standards of right and wrong-thus what
is ethical or unethical must be judged in the light of Iocal customs and social
mores and can vary from one culture or nation to another.

EJ
<
<
e9

EI
e

According to integratiDe socnl contracts thmry, uriversal ethical principles

or norms based on the collective views of multiple cultures ard societies
combine to form a "social contract" that all individuals in all sifuations have
a duty to observe. Within the boundaries of this social contract, local culfures
can specify other impermissible actions; however, universal ethical noms
always take precedence over local ethical norms.

The concept of corporate social responsibility calls for companies to find balance between (1) their economic responsibilities to eward shareholders with
profits, (2) Iegal responsibilifies to comply with the laws of countries where they
operate, (3) ethical rcsponsibilities to abide by society's norms of what is moral
and just, and (4) philanthropic responsibillfies to contribute to the noneconomic
needs of society.
5.

Some companies use the terlrrs corporate socinl responsibilty and corponte citizensklp interchangeably, but typically, corporate citizenship places expectations on
companies to go beyond consistently demonstrating ethical strategies and business behavior by addressing unmet noneconomic needs of society.
Corporate sustainabilify involves strategic efforts to meet the needs of current customers, suppliers, shareholders, employees, and other stakeholders in a manner
that protects the environment, provides for the longevity of natural resources,
and maintains ecological support systems for future generations.

7.

The business case for corporate social responsibility is supported by the follow-

ing benefits.

lt

generates internal benet'its (particularly concerning employee recruiting, work-

force retention, and training costs)--{ompanies with good reputations for

contributing time and rnoney to the betterment of society are better able to

attract and retain ernployees compared to companies with tamished reputations. Other direct and indirect economic benefits include lower costs for
staff recruitment and training.

lt

reduces the risk of reputation-damaging incidents and can lead to increased

buyer patronage-Firms may well be penalized by employees, consumers,

and shareholders for actions that are not considered socially responsible.
Consumer, environmental, and human rights activist groups are quick to
criticize businesses whose behavior they consider to be out of line, and they
are adept at Betting their message into the media and onto the Internet. Pessure groups can generate widespread adverse publicity, promote boycotts,
and illuence like-minded or sympathetic buyers to avoid an offender's

products.

o lt is in the best interest of shareholders-Well-conceived

social responsibility
strategies help avoid or preempt legal and regulatoty actions that could
prove costly and otherwise burdensome. Taking the straight and narrow
path has allowed the stock prices of companies rating high on social and
environmental performance criteria to perform 35 to 45 percent better
than the average of the 2,500 companies comprising the Dow fones Global

Index.a
and Porras, Bult to Last: Successful Habts of Vsonory Companies; Roberts,
Keeble, and Brown, "The Business Case for Corporate Citizenship," p.4; and Smith, "Corporate
Social Responsibilty," p. 63.
'5 See Collns

LO4 1.

Assurne that yort are the sales nranager at a European company that makes
sleeplvear products for children. Company personncl discover that the chemicals
used tr.l flameproof the company's line of children's pajamas might cause cancer if absorbed through the skin. Following this discovery, the pajamas are thcn
barrned from salc in the European Union and the Unitec{ States, br.rt senior executives of your company learn that the children's pajamas in inventory and the
remaining flameproof material can be sold to sleepwear distributors in certarn
East European countries rvhere therc arc no restrictions against the material's
trse. \bur superiors instrr.lct you to makc thc necessary arrangements to sell the
inrentories of banned pajamas and flameproof matcrials to East European distributors. Wiruld you comply if vou felt that your job rvould be in jeopardy if you
dicln't?

LO5 2.

Ilevierv \f icrosoft's statements about its corporate citizenship programs at www.

microsof t.com / about/corporatecitizenship. Horv cloes the company's commitrnent io global citizcnship provide positive benefits for its stakeholders? How
does Microsoft plan |o imptovc social and economic empowerrnent in developing cor,rntries through ils Unhmitcd Potential program? Why is this important to
,\4icrosoft shareholders?

LO5 3.

Go k r,r,r'r,w,ncstle.com and read the companv's latest sustainabilitv report

lVhat arc Ncstl's key sustainable environmental policies? Horv is the comPany
addressing sustainable social development? How do these initiatives relate to thc
company's principlcs, values, and culture and its approach to competing ir, the
food industrv?

LOl

r.

Is your compani/'s strategy ethical? WI'ry or why not? Is there anythrng that your
company is doing that could be considerecl as "shady" by your competitiors?

2.

In what ways, if anli is your company cxercising social responsibility and good
c()rporate citizenship? Could (should) thc list of things your comPany is doing be
Ionger? lf so, indicate u,hat additional actions you think vour company ought to
consider taking

LO5

Is your compan.v conducting its business in an environmentally sustainable manner? What speclfic actions could your company take that n'ould make an even
grea ter contribution to cnvironmental sustainabilitv?

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