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Business Ethics and Social Responsibility
Capitalism is often said the most selfish economic system but what usually is forgotten is that the very base of capitalism, the very foundation is based on ethics, morality and laws. Yes the system might seem to be fair but within that system, there is the paramount place for utility and protection of private property. This very fact makes ethics indispensable to the core ideology. It is unfair to take somebody else's property (an often repeated rule of capitalism), one can not force another person to work against one's will (another virtue of capitalism) , all point out to the special role ethics has played in the field of business and commerce. The whole modern day structure of commerce, business and trade is based on the unwritten and often vague principles of Ethics and moral behaviour.
The point can well be taken forward by looking at the concept of externalities in business today. The point will be explained further by analyzing case studies of individual companies, today we live in an integrated society where no one person is isolated from the actions of the other. If today steel companies are producing pollution, then they are bringing trouble on themselves since they are polluting the environment they themselves breathe in. The harmful effects of pollution are global. This precisely is the concept of negative externalities. Ethics command us not to pollute the environment, modern day welfare Economics, directs us to the exact same.
Now that we have established a firm base for ethics by use of modern day welfare economics, we continue to define what Business ethics are and what does the term corporate social responsibility mean.
Business ethics (also known as corporate ethics) is a form of applied ethics or professional ethics that examines ethical principles and moral or ethical problems that arise in a business environment. It applies to all aspects of business conduct and is relevant to the conduct of individuals and business organizations as a whole. Applied ethics is a field of ethics that deals with ethical questions in many fields such as medical, technical, legal and business ethics. Further the practice of using ethics to make tough business decisions is known as ethicism and is increasingly gaining in popularity showing the kind of attention ethics is getting today.
Professor Reshma Prasad says that firms can often gain super-normal profits by acting in an unethical fashion but sooner or later such behaviour does have its negative impact as well.
Business ethics can be both a normative and a descriptive discipline. As a corporate practice and a career specialization, the field is primarily normative. In academia descriptive approaches are also taken. The range and quantity of business ethical issues reflects the degree to which business is perceived to be at odds with non-economic social values. Historically, interest in business ethics accelerated dramatically during the 1980s and 1990s, both within major corporations and within academia. For example, today most major corporate websites lay emphasis on commitment to promoting non-economic social values under a variety of headings (e.g. ethics codes, social responsibility charters). In some cases, corporations have redefined their core values in the light of business ethical considerations.
Types of Managerial Ethics
Archie B. Carroll, an eminent researcher, identified three types of management ethics, depending on the extent to which the decisions were ethical or moral:
- moral management
- amoral management
- immoral management
Types of Managerial Ethics
1) Moral management
Moral management strives to follow ethical principles and doctrines. Moral managers work to succeed without violating any ethical standards. They seek to succeed remaining within the bounds of laws. Such managers undertake such activities which ensure that though they may engage in legal and ethical behavior, they also continue to make a profit. The law should be followed not only in letter but also in spirit. Moral managers always seek to determine whether their actions, behavior or decisions are fair to themselves as well as to all other stakeholders involved. In the long run, this approach is likely to be in the best interests of the organizations.
2) Amoral management
This approach is neither immoral nor moral. Amoral management simply ignores ethical considerations. It is broadly categorized into two types - intentional and unintentional. Intentional amoral managers do not take ethical issues into consideration while making decisions or while taking any action, because in their perception, general ethical standards should only be applicable to the non-business areas of life. Unintentional amoral managers, however, do not even consider the moral implications of their decisions or actions. Amoral managers pursue profitability as the only goal and pay very little attention to the impact on any of their social stakeholders. They do not like to interfere in their employees' activities, unless their behavior can lead to government interference. The guiding principle of amoral management is - "Within the law of the land, will this action, decision, or behavior help us make money?"
3) Immoral management
Immoral management not only ignores ethical concerns but it also actively opposes the ethical behavior. Organizations with immoral management are characterized by:
- Total concern for profits of the organization only.
- Strong inclination to minimize the expenditure.
- Laws are regarded as hurdles that should be removed or eliminated.
- Stress on profits and organization success at any cost.
The basic principle governing immoral management is: "Can we make money with this
Action, decision, or behavior? " Thus, ethical considerations are immaterial.
Coming now to corporate social responsibility. A formal definition by Ravindran-
CORPORATE social responsibility (CSR) is a concept that frequently overlaps with similar approaches such as corporate sustainability, corporate sustainable development, corporate responsibility, and corporate citizenship. While CSR does not have a universal definition, many see it as the private sector's way of integrating the economic, social, and environmental imperatives of their activities.
CSR can be seen both in a positive light as well as some are more sceptical about the efforts that modern day firms undertake in the name of CSR.
Different organisations have framed in the past different definitions, although there is considerable common ground between them. For instance, it is largely agreed largely that CSR is about how companies manage the business processes to produce an overall positive impact on society. So by balancing profits with an overall understanding and awareness of the short- and long-term consequences of an organisation's activities on the environment and community, a company can help to ensure that future generations not only enjoy its products but also the environment.
The paper will extensively analyze both the positive and negative effects of CSR initiatives.
CORPORATE SOCIAL RESPONSIBILITY
CSR. is a concept that states that organizations, especially corporations, have an obligation to consider the interests of customers, employees, shareholders, communities, and ecological considerations in all aspects of their operations. Corporate Social Responsibility (CSR) is a form of corporate self-regulation integrated into the business model and day-to-day operations of the company. CSR policy gives a self-regulating framework whereby a business monitors and ensures its adherence to law, ethical standards, environmental norms and morality. CSR is a concept that frequently overlaps with similar approaches such as corporate sustainability, corporate responsibility, corporate sustainable development and corporate citizenship.In addition to integration into corporate structures and processes, CSR also frequently involves creating innovative and proactive solutions to societal and environmental challenges, as well as collaborating with both external and internal stakeholders to improve CSR performance.
From a business perspective, CSR involves focusing on new opportunities as a way to respond to interrelated societal, social and environmental demands in the market.CSR isgenerallyseen as the business contribution to sustainable development which has been defined as "development that meets the needs of the present without compromising the ability of future generations to meet their own needs", and is generally understood focusing on how to achieve the integration of environmental, economic and social imperatives. CSR commitments and activities typically address aspects of a firm's behavior (including its policies and practices) with respect to such key elements as; environmental protection, health and safety, human rights, community development, corporate governance and consumer protection business ethics, supplier relations, labor protection, and stakeholder rights
Relevance of Corporate Social Responsibility
In the present corporate arena every company aims at long-term, sustained growth for its business. How does the growth trajectory of a business becomes "long-term" and "sustained" ? This happens when in future the supply of customers is assured. It is imperative that the company invests now to assure this future supply of customers. Thus, it is important that the company invests in the society because from the society forms the base from which its future customers will come. For long-term success, investment in the society is the most profitable investment a company can make.
Moreover, there is a marked change in the way consumers buy their products and services. They engage in a cultural and ethical audit of the producers. They are eager to know how the company treats its employees, whether the company is sensitive to societal needs, issues etc. A company having a good history of positive contribution to the society gains an edge over other companies, thus enhancing the 'buy-ability' of their product or service. In other words a producer having a good reputation in terms of adherence to ethics and morals has higher probability of scoring over other producers. In crowded markets, companies strive for the mindshare of the consumers by offering them a unique selling proposition that separates them from the competition in the minds of consumers, through social endeavours. Corporate Social Responsibility plays a vital role in building customer loyalty based on distinctive ethical values.
CSR initiatives also enhance the reputation of the company as an employer. A CSR programme can be an aid to recruitment and retention, particularly within a competitive market where companies vie for the best of minds and talents. Potential recruits often eager to know the firm's CSR policy and history as an employer during an interview. Having an active and comprehensive policy can give an advantage to the employer and positively differentiates the company in the eyes of the potential recruits.
CSR can also help improve the image of a company among its present employees.CSR initiatives targeted towards the current employees sends positive signals to them, contributing to the environment of mutual respect and understanding between the management and the employees.
Consumers and society in general expect more from the companies whose products they buy. This sense has increased in the light of recent corporate scandals, which reduced public trust of corporations, and reduced public confidence in the ability of regulatory bodies and organizations to control corporate excess.
Hence, the impact of business clearly extends beyond the company and the market to society as whole. Apart from profitability, it is important that the company considers the ethical, moral, environmental, legal and social context of its activities. Businesses need to take responsibility for the impact of their activities on the environment, local population, consumers, employees, communities, stakeholders and all other members of the public sphere. The implication for the corporate sector is to strike a balance between profitability and social consciousness and sensitivity. The inclusion of public interest into corporate decision-making and business model is very important in the present corporate landscape.
Positive Aspects of CSR
CSR is an important business strategy because, everyone wants to associate with a partner they can trust. Customers want to buy products from companies they trust; suppliers want to form alliances with corporations they can rely on; employees want to work for companies they respect; and governments, increasingly, want to work with companies seeking feasible solutions and innovations in areas of common concern. Satisfying each of these stakeholder groups allows companies to maximize their commitment to another important stakeholder group-their investors, who
benefit most when the needs of these other stakeholder groups are being met.
Having a positive social image has its costs as companies have to invest in various endeavours but it pays in the long run. The businesses most likely to succeed in the globalizing world will be those best able to combine the often conflicting interests of its multiple stakeholders, and incorporate a wider spectrum of opinions and values within the decision-making process and objectives of the organization.
We take two cases where years of CSR investments and adherence to societal norms helped corporations tide over crisis situations.
- Johnson & Johnson
- British Petroleum
Johnson & Johnson's Tylenol Case
Johnson & Johnson's transparent handling of the crisis facing its Tylenol brand in 1982 is widely heralded as the model case in the area of crisis management. The company could make it possible through years of adherence to ethics and societal norms which were reflected in its CSR policies.
The worldwide success of Johnson & Johnson is widely attributed to its business philosophy. Robert Wood Johnson II first articulated this business philosophy in 1943 called The Johnson & Johnson's Credo.
In 1982 and 1986 Johnson & Johnson's Tylenol acetaminophen was adulterated with cyanide and used as a murder weapon.
During the crisis Johnson & Johnson's managers and employees made countless decisions that were inspired by the philosophy embedded in the credo.
Tylenol was immediately cleared from store shelves and the company was proactive and open in addressing each crisis.
J&J went far and above what had previously been expected of corporations in such situations, instigating a $100 million re-call of 31 million bottles of the drug following a suspected poisoning/product tampering incident.
In acting in the way it did, J&J saved the Tylenol brand, enabling it to remain a strong revenue earner for the company to this day.
This example illustrates how investment in CSR initiatives can help a company gain the trust of the society.
BP, with a $200 million re-branding exercise, has effectively re-positioned itself as the most environmentally sound and socially responsible of the extraction companies.
The company stands in stark contrast today with Exxon Mobil that faces on-going NGO attacks, consumer boycotts, and activist-led litigation because of its decision to fight the environmental movement, and its failure to recognize the wider importance of CSR as a corporate strategy.
A counter view to the conventional one is that companies undertake CSR initiatives to distract the public from ethical questions that are posed by the fundamental operations of that company.
Company's sole motive is to make profits and hence they start CSR programmes for brand building and in turn help achieve their corporate objective. Also by funding certain specific projects they also build reputation with government officials who in turn are obliged to favor them.
Many firms claim to be committed towards sustainable development whereas their core business is a threat in itself. An example could be the hypocrisy of Ford. Although CSR issues aim at raising awareness of social and environmental issues no company changes its business model.
Ford has a stance on reduction of greenhouse gases whereas their profits come from trucks and SUV's. Many companies have failed due to pursuit of unethical practices. An example of the same is satyam and Enron. Such companies CSR statements are only phony promises and their vested interests are the main reason for entering this corporate social sphere.
To make companies behave in an ethical and socially responsible manner laws would have to be enforced. Corporate hypocrisy and sincerity needs to be addressed by making regulations and policies binding.
We have taken two successful companies and analyzed their CSR initiatives and practices followed:
- British American Tobacco
Dealing with the hypocrisy of the stance that organizations take
The unethical practices that are followed and how regulation can play an instrumental role in checking these undesirable activities
British American Tobacco
A major fiasco resulted as a revelation of the fact that the world's second largest tobacco company masks the damage it causes to health, development and the environment in the garb of "corporate social responsibility".
Framework Convention on Tobacco Control (FCTC) was tried to be blocked by the top BAT executives .They tried to win political influence in Africa by using their support for AIDS prevention as a tool.
They used tobacco industry research information to negate the findings of WHO regarding the harmful effects of secondhand smoke.
BAT's donation of HK$300,000 in 1992 to repair the Haizhou Bridge in Guangzhou province of China obliged the officialdom and helped establish.
In 2005 BAT profits were greater than £2.7 billion a year from a 15 per cent share of the world tobacco market. The total number of deaths due to tobacco related diseases was about 5 million. This implies BAT's 300 brands of cigarettes that were sold in 180 countries caused three-quarters of a million premature deaths.
ASH Director Deborah Arnott said:
"Tobacco firms like BAT hide behind glossy reports and boast of Corporate Social Responsibility. But this report shows the cynicism and deceit behind the public face. It should be read by decision-makers, campaigners and health professionals in every country where BAT seeks sales. Companies like BAT offer the ultimate devil's bargain. When they enter developing countries in search of new markets, they come with a smile a handshake and an open cheque book. But they leave behind nothing but a trail of addiction, misery and death."
The various CSR initiatives taken were:
- A clinic for the diagnosis of disease
- Accommodation for the homeless
- Arts and educational projects
Such programmes win allies in local markets and also open doors of politicians and regulators.
Impact on developing world:
The regulations in poorer countries are weak and by helping to a little extent the companies oblige politicians and in turn they win favors and can easily establish themselves. Hence stringent regulations are required to prevent this exploitation.
Wal-Mart is one of the largest private employers in the US. The sheer size and magnanimity of the company allows it to follow certain unethical processes as the laws against them are also not very stringent. Some of the controversies surrounding Wal-Mart are:
Many employees having children working here live below the poverty line.
Wal-Mart portrays itself as a company selling U.S. manufactured goods but in reality it utilizes products made in foreign countries and at questionable workshops. As a result of the cost advantage it gets it throws some of the competition out.
Unethical business practices that this company follows include:
Labor Union Opposition:
Wal-Mart claims to follow open door policy but its effectiveness in Wal-Mart is questionable. It is a non union organization and hence this structure helps the company have a no complaint system. Third party intervention is not desired.
Employees are provided lower wages than unionized corporations and as a result end up quitting by the end of the first year. The employees are prohibited to talk to union representatives.
This is unethical as according to the National Labor Relations Act, employers cannot discourage employees from forming a union for they have that right. Cases were filed against Wal-Mart
United Food and Commercial Workers Union filed a complaint with the National Labor Relations Board against Wal-Mart.
National Labor Relations Board alleged that Wal-Mart violated federal labor law as it "bribed" employees to report on co-workers who favored a union. (www.washingtonpost)
Unfair Treatment of Employees:
June 2001 Six Wal-Mart female employees filed a sex discrimination lawsuit.
Women were not being trained or given promotions. Also they were underpaid as compared to their male counterparts.
Discrimination on basis of gender was prevalent. Hence women were being treated in an undignified and disrespectful way. (www.arkansasnews.com) . Later in lieu of the given events Wal-Mart introduced workplace diversity initiatives to promote equality.
Wages were very low compared to prevalent rates .They wanted to continue offering low prices to customers hence did not want to increase operating costs. Due to this the wages were kept low.
Wal-Mart's health insurance was very expensive and some of the employees could not even afford to pay for it.
Case was filed against Wal-Mart as it did not pay employees more for overtime.
Wal-Mart used illegal immigrants as workers to reduce costs. In October 2003 hundreds of illegal immigrants employed were uncovered.
Companies have to spot ethical and unethical practices otherwise they would loose their reputation in the market.
Corporations today are best positioned when they reflect the values of the constantly shifting and sensitive market environment in which they operate. It is vital that they are capable of meeting the needs of an increasingly demanding and socially-aware consumer market, especially as brands move front and center of a firm's total value. Global firms with global lifestyle brands have the most to lose if the public perception of the brand fails to live up to the image portrayed. Integrating a complete 'social perspective' into all aspects of operations will maximize true value and benefit for an organization, while protecting the huge investments companies make in corporate brands.
Along with the social responsibility, comes the opportunity to convert these social initiatives into tangible results namely profits. An organization should look what amount of value the project can give back to the organization. A social cost benefit analysis can give the organization a fair idea about what kind of rewards the initiative can generate for the organization. Thus an organization can decide on the initiatives taking into consideration these various factors.