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Prior to answering the question; what are the strengths, limitations and challenges of ethical and socially responsible business practice? We should define what ethics, business ethics and social responsibility and how and if they coincide with one another. McDonald (2010) suggests that the definition of ethics, "Ethics can be defined as the critical, structured examination of how we should behave - in particular, how we should constrain the pursuit of self-interest when our action affects other". The most common and regular agents that involves their decisions are owners, customers, suppliers, employee's and the communities according to Robert Audi (2009).
Another term for ethics in business is called Business ethics or Corporate Ethics. McDonald (2010) says, "Business Ethics can be defined as critical structured, structured examination of how people and institutions should behave in the world of commerce. In particular it involves examining appropriate constraints on the pursuit of self-interest, or (for firms) profits, when the actions of individuals or firms affect others." In similar terms it is a written and unwritten code of principles and values that govern decisions and actions within and organisation.
As recent as ten to twenty years ago, many companies, executives and organisations viewed ethical and social responsibility in business practice as an administrative compliance with legal standards and adherence to internal rules and regulations as well as international always i.e. International Labour Organisations. These practices may be more important now than ever in the new organisational era, as there is wider coverage and more attention on how an organisation conducts its business which is on the rise across the globe especially with multinational organisations in developing countries as they are under extreme pressure and scrutiny to better their business ethic and corporate social responsibility (www.forbes.com).
There are numerous and potentially countless advantages and disadvantage for an organisation that practices business ethics. One of the main advantages is that a company gets to retain its customers and attracts new customers to their products, thereby boosting sales and profits particularly in the long term. This has a bad effect on short term profits as implementing the ethical practice cost finance, and having a department that oversees the ethics of the company also cost money to run it. In return this is a strategic plan that brings sustainability, provides integrity, trustworthiness a fun environment and retains the work force and attracts top talent (Trevino, Hartman and Brown, 2000).
With ethics being the forefront of a business if a company and its executives practice ethics it could avoid legal problems, therefore they would not have to pay for high legal cost, lawyer fee's, regulatory fee and settlement fees (Trevino, Hartman and Brown, 2000).For example In 2002, vegetarian groups, largely Hindu and Buddhist, successfully sued McDonald's for misrepresenting its French fries as vegetarian, when they contained beef broth.
If an organization had a good reputation it would help keep the current employees at the company and contribute to the commitment, job satisfaction and work rate. This decreases the labour turnover which decreases the finance spent on settlement fees and advertising cost for new employees. The challenge for the organisation is to implement such change and making sure your executives have ethical leadership and adhering to the codes conduct as suggest by Trevino, Hartman and Brown (2000)
Advertisement cost an organisation money, on the contrary it cost money to make money. Many organisations of today advertise a campaign to try gain trust from their customers. E.g. The Volvo's "life on board", EDF's Social Tariff and Tesco's "Computer for Schools" This communicates that organisation can be trusted and as Drummond (2009, P.12) says, "This illustrates that consumers are no longer basing purchasing decisions on price alone. We've labelled this trend as Trust Related Marketing" (TRM).
Corporate Social Responsibility is a commitment by business to behave ethically and contribute to economic development while improving the quality of life of the work force and their families as well as the local community and society at large. Corporate Social Responsibilities is different in the developed countries than in the developing countries, with corporate social responsibilities in developing countries being watched closely by the local community, government and Non-governmental organisations were that business is based .e.g. Royle (2005) suggest that McDonalds in reducing labour costs, employee exploitation to meet the McDonalds profitability targets.
If done ethically, corporate social responsibilities benefits the environment, the local Community and gains trust from the stakeholders, helps with risk management factor, Human Resources, retaining the best employees, less labour turnover and brand differentiation ,Broomhill (2007). Another factor that some not all stakeholders consider is the sustainability of the supply chain. Does the organisation get their suppliers from an ethical business and does this affect the company? Yes e.g. Cadbury and Nestle get their coca from Fair trade suppliers in Ghana. Fair trade means that the supplier adheres to business ethics in its practices (decent working conditions, fair terms of trade for the farmers and workers especially in the developing world (www.fairtrade.co.uk).
Furthermore if an organisation "preaches" that they are ethically sound but don't implement ethical and social responsible business practice, it could lead to a backlash from the stakeholders (local community and employees) and could lead to legal costs. Brown (2003) suggest that coco-cola's plant in India was closed down because the organisation was not social responsible and to the community and environment and fell afoul of the promises they made. Even though the plant met the standards set by the Kerada State Pollution Control Board, they firstly did no deliver on their promise that they would set up a water treatment plant to treat the water used and taken from the local reserves. As they didn't they gave the splurge back to the local community, poisoned their crops and decreased the work in the area therefore the employees and community retaliated.
This brings me to my conclusion that an organisation cannot be social responsible without a code or culture that is based on ethical principles such as integrity, respect and trustworthiness. We should not be confused by ethics, business ethics and being socially responsible and put them into different categories as social responsibility is a sub topic within a broader and wider topic of business ethics. However you cannot practice ethics and not be socially responsible on the other side you can practice business ethics but not be social responsible. In the new organisational era organisations are practicing business ethics and social responsibility as in doing so there is there is potentially a greater advantage in the long term even though it's a disadvantage in the short term especially for the shareholders and stakeholders.
Drummond,J. 2006. The value of being a "trusted" company. Corporate Responsibility Management, 2(4), pp. 12-13
Royle, T. (2005). Realism or idealism? Corporate social responsibility and the employee stakeholder in the global fast-food industry. Business Ethics: A European Review, 14(1 ), 42-55.
Trevino, L. K., Hartman, L. P., & Brown, M. (2000). Moral person and moral manager: how executives develop a reputation for ethical leadership. California Management Review, 42(4), 128-142.
Griseri, P. and Seppala N. (2010) Business Ethics and Corporate Social Responsibility. Chapter 1.
The Hindu . 2005, India: Health Minister : 'Coke Plant will not be allowed to function'
Mcdonald,C. Ph.D. (2010), A blog about Business Ethics. Available at http://businessethicsblog.com/2010/03/21/ethics-definition (Accessed: 17 November 2012)
Broomhill,R. (2007), Corporate Social Responsibility:Issues and Debates, 1-51. Access at: http://firgoa.usc.es/drupal/files/Ray_Broomhill.pdf (Accessed : 14 November 2012)
Fairtrade. Definition of Fairtrade. Available at: http://www.fairtrade.org.uk/ (Accessed on 17 November 2012)