MBA503: Week 6

Ethics, Social Responsibility and Sustainable Development Dr Sardana Islam Khan

What is Ethics?
Ethics:
An individuals personal beliefs regarding what is right and wrong, good or bad

Ethical behaviour:
Behaviour that conforms to generally accepted social norms

Whether behaviour is ethical or not is in the eye of the beholder

John Wiley and Sons Australia

Moral Development and the Concept of Ethics

John Wiley and Sons Australia

Examples of unethical behaviour?

Australian examples:
HIH (Ray Williams)? OneTel (Jodee Rich and Brad Keeling)? James Hardie?

International examples:
Nestl selling baby formula in Africa without appropriate warning labels? Nike sweatshop labour? Shell Nigeria? SanLu Fonterra? BP?

Another external pressure

Another external pressure on organisations is to be socially responsible Grey area:
When your responsibilities required by law have been fulfilled but perhaps the organisations moral obligation to stakeholders or society at large has not been fulfilled?

Obligation and Responsibility

Obligation:
The requirements established by law, for example:
Taxation, through Federal tax legislation Product safety, through Federal Trade Practices Act (1974) Working conditions, through State legislation and common law Anti-pollution legislation, through State legislation Anti-discrimination legislation, through State legislation.

Responsibility:
Pursuit of long-term goals that are good for society Completely voluntary on the part of the organisation.

The Economic/Legal Responsibility

Key proponent: Milton Friedman Argues that:
Managers are obliged to operate businesses in the best interests of shareholders Those interests are financial returns on their investment Therefore, Friedman defines socially responsible as profit maximisation Any activities which deviate from the goal of profit maximisation will:
Weaken capitalism Weaken democracy
Milton Friedman

Danger to capitalism
Market mechanisms are unable to allocate the costs of social responsibility
Actions on the part of organisations, other than the pursuit of profits, undermines the fundamental premise of capitalism:
Reduce profits, then shareholders lose Reduce wages and salaries, then employees lose Increase prices, then consumers lose Distorts the market for investment capital, whole countries lose

Danger to Democracy
Actions of organisations, other than the pursuit of profits, undermines democracy:
Managers do not represent the community Their pursuit of anything except profit is an intervention in Government policy They do not have the expertise for policy-making They have not been elected to decide how society should be (i.e.: lack of accountability to society at large).

The Discretionary Responsibility Argument

Businesses are corporate citizens and have responsibilities to the society that creates and sustains them Managers should be concerned with financial viability over the long run, not short-term profit maximisation

Triple bottom line reporting

Many organisations in Australia are now implementing triple bottom line reporting:
Financial: includes financial performance, activities relating to shaping demand for products and services, employee compensation, community contributions and local procurement policies Environmental: includes impacts made through processes, products or services. These may include air, water, land, natural resources, flora, fauna and human health Social: includes involvement in shaping local, national and international public policy, equality, treatment of minorities, employee issues and public concern

Refer to Australian CPA website for further information Role of accounting practices in this process

CSR and firm performance

Do socially responsible firms outperform other firms? Studies show mixed results:
Refer to McWilliams (2001) Results differ depending on industry, markets product characteristics and approach to corporate social responsibility.

Implications
Business firms are specialised to achieve economic goals CSR adds economic costs that distort markets Efficient markets benefit society. However: Societal demands for CSR are growing CSR provides long-term economic benefits CSR can provide competitive advantages through product differentiation and improved reputation.

The Utilitarian approach

Utilitarians claim the purpose of morality is to make the world a better place Decisions are made solely on the basis of their outcomes or consequences:
to provide the greatest good for the greatest number to provide pleasure of happiness

Key theorists: Jeremy Bentham and John Stuart Mill

Bentham

Mill

Individualism approach
Ethical behaviour based on the belief that ones primary commitment is to the advancement of ones long term self interests By being self-interested, individuals become self regulating Premised on the promotion of honesty and integrity, but in reality, can promote a pecuniary ethic [a tendency to push the law to its outer limits]

Moral-rights approach
Decisions are concerned with respecting and protecting the basic rights of individuals.
Right to privacy Freedom of association Free speech.

Established minimal conditions of human decency

all men are created with certain unalienable rights that among these are life, liberty and the pursuit of happiness (US Declaration of Independence, 1776)

The most influential moral notion of the past two centuries

Justice approach
Rawls (1971) theory revolves around the adaptation of two fundamental principles which guarantee a just and morally acceptable society:
the right of each person to have the most extensive basic liberty compatible with the liberty of others social and economic positions are to be:
to everyone's advantage; and open to all.

John Rawls

Theory of justice view of ethics

Decision-makers seek to impose rules fairly and impartially:
In administration (procedural justice) Irrespective of an individuals characteristics (distributive justice) Individuals should be compensated for injury by party responsible (compensatory justice)

Protects the interests of stakeholders who are underrepresented or lack power Can encourage a sense of entitlement that may reduce innovation, productivity and risk-taking.

The unethical workplace

Common ethical (and illegal) problems in organisations:
Discrimination Sexual harassment Conflicts of interest Customer confidence Organisational resources

Do organisations often reward behaviours that violate ethical standards?

The pursuit of profit?

Recent ethics scandals in Bangladesh

Bribery in the cricket team Niko corp. bribe scandal in 2005
(See http://www.youtube.com/watch?v=DioKr9RdbWA)

Hallmark corruption in Bangladesh Rana Plaza tragedy

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Interesting research
Baucus and Near (1991):
Large firms are more likely to commit illegal acts than small firms Probability of wrongdoing is greatest when resources are plentiful (environmental munificence) Illegal behaviour is more prevalent in dynamic, uncertain environments Organisations in some industries are predisposed to undertaking illegal activities Type of illegal activity varies according to particular combinations of environmental and internal conditions.

Modern responses to ethical concerns

Ethics training for workers and managers:
Increase understanding of the impact of decisions Identifying highly ethical behaviour Training to incorporate this into daily practice

Whistleblower protection:
Expose the misdeeds of others in organisations Ensures anonymity

Codes of Ethics
Codes of ethics: Written guidelines, stating the values and ethical standards Employees make ethical decisions based on appropriate values e.g.treat people fairly Policy-based codes of ethics outline how to act in specific ethical situations (reducing the need for thinking or shared values): Conflicts of interest Proprietary information Political gifts Equal opportunities

Summary
The study of human ethical behaviour is a challenge for managers Ideas of morality have been applied to gauge the ethical behaviour of organisations What are the implications of ethical decisionmaking on the arguments posited by Friedman? Is being ethical anything more than good PR for an organisation?