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Chapter 3
Corporate Social Responsibility and Business Ethics
Chapter Summary
People in an organization set the legal, ethical, and moral tones in the workplace. Just as
Strategic decisions involve trade-offs. We pursue one goal while subordinating another.
Often, the concern is expressed that business activities tend to be illegal or unethical and
individuals’ failure to follow that pattern will leave them at a competitive disadvantage. The
Learning Objectives
1. Understand the importance of the stakeholder approach to social responsibility.
2. Explain the continuum of social responsibility and the effect of various options on
company profitability.
3. Describe a social audit and explain its importance.
4. Discuss the effect of the Sarbanes-Oxley Act on the ethical conduct of business.
5. Compare the advantages of collaborative social initiatives with alternative approaches to
CSR.
6. Explain the five principles of collaborative social initiatives.
7. Compare the merits of different approaches to business ethics.
8. Explain the relevance of business ethics to strategic management practice.
Lecture Outline
I. The Stakeholder Approach to Social Responsibility
A. In defining or redefining the company mission, strategic managers must recognize the
legitimate rights of the firm’s claimants. These include outside stakeholders affected by the
firm’s actions.
1. According to a survey of 2,361 directors in 291 of the largest southeastern U.S.
companies,
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a) Directors perceived the existence of distinct stakeholder groups
2. The study also found that perceived stakeholders were, in order of their importance:
a) Customers and government
3. When a firm attempts to incorporate the interests of these groups into its mission
statement, broad generalizations are insufficient. The firm should take these steps:
a) Identification of stakeholders
(1) The left-hand column of Exhibit 3.1, A Stakeholder View of Company
firm’s success.
b) Understanding stakeholders’ specific claims vis-à-vis the firm
(1) The concerns of the principal stakeholder groups tend to center on the
(2) Strategic decision makers should understand the specific demands of each
c) Reconciliation of these claims and assignment of priorities
(1) Unfortunately, the claims of various stakeholder groups often conflict.
(2) For objectives and strategies to be internally consistent and precisely
(3) There are hundreds, if not thousands, of claims on any firm—high wages,
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(6) Emphasis is reflected in the criteria that the firm uses in its strategic
d) Coordination of the claims with other elements of the company mission
(1) The demands of stakeholder groups constitute only one principal set of
inputs to the company mission.
B. The Dynamics of Social Responsibility
1. As indicated in Exhibit 3.2, Inputs to the Development of the Company
Mission, the various stakeholders of a firm can be divided into inside stakeholders
and outside stakeholders.
a) Insiders are individuals or groups that are stockholders or employees of the
firm.
b) Outsiders are all the other individuals or groups that the firm’s actions affect.
2. Corporate social responsibility is the idea that a business has a duty to serve
society in general as well as the financial interests of its stockholders.
3. The stakeholder approach offers the clearest perspective on such issues.
a) Broadly stated, outsiders often demand that insiders’ claims be subordinated
to the greater good of the society (outsiders).
b) Outsiders believe issues like pollution and conservation of natural resources
4. Issues are numerous, complex, and contingent on specific situations. Therefore,
rigid rules of business conduct cannot deal with them.
a) Each firm, regardless of size, must decide how to meet its perceived social
responsibility.
b) While large, well-capitalized companies may have easy access to
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d) Once a problem area is identified, a company’s line employees frequently
5. Different approaches adopted by different firms reflect differences in competitive
position, industry, country, environmental and ecological pressures, and a host of
other factors.
a) They will reflect both situational factors and differing priorities in the
socially responsible actions by companies.
II. Types of Social Responsibility
A. To better understand the nature and range of social responsibilities for which they must
1. Economic responsibilities are the most basic social responsibilities of business.
a) Economic responsibilities are the duty of managers, as agents of the company
owners, to maximize stockholder wealth.
2. Legal responsibilities reflect the firm’s obligations to comply with the laws that
regulate business activities.
a) The consumer and environmental movements focused increased public
safety.
b) The intent of consumer legislation has been to correct the “balance of power”
c) Among the most important laws are the Federal Fair Packaging and Labeling
Act that regulates labeling procedures, and the Consumer Product Safety Act
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e) The National Environmental Policy Act is devoted to preserving the United
3. Ethical responsibilities reflect the company’s notion of right and proper business
behavior.
a) Ethical responsibilities are obligations that transcend legal requirements.
4. Discretionary responsibilities are those that are voluntarily assumed by a
business organization.
a) These responsibilities include public relations, good citizenship, and full
corporate responsibility.
b) Discretionary responsibilities have a self-serving dimension.
B. Corporate Social Responsibility and Profitability
1. CSR and the Bottom Line
a) The goal of every firm is to maintain viability through long-run profitability.
b) Corporate social responsibility (CSR), is the idea that business has a duty
to serve society in general as well as the financial interests of stockholders.
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whole or part.
(2) Philanthropic activities of a corporation, which have been a traditional
(3) Socially responsible behavior does not come at a prohibitive cost.
2. Performance
a) How do managers measure the financial effect of corporate social
performance?
b) Critics of CSR believe companies that behave in a socially responsible
3. CSR Today
a) CSR has become a priority with American businesses.
b) The Resurgence of Environmentalism
(1) Since the Exxon Valdez disaster, the Coalition for Environmentally
(2) This group drafted the CERES Principles to “establish and
(3) The most prevalent forms of environmentalism are concerns for
c) Increasing Buying Power
(1) The rise of the consumer movement has meant that buyers—consumers
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(6) While social investing wields relatively low power as an individual
(7) Social investors comprise both individuals and institutions, including
(8) Large-scale social investing can be broken down into two broad areas of
(9) Screens for guideline portfolio investing may be negative or combine
d) The Globalization of Business
(1) Management issues have become more complex as companies
(2) One of the most contentious social responsibility issues confronting
(3) While Chinese workers are happy to earn manufacturer wages in China,
III. Sarbanes-Oxley Act of 2002
A. Following a string of wrongdoings by corporate execs in 2000-2002, and subsequent
failures of those firms, Washington lawmakers proposed more than 50 policies to assure
investors. The successful bill was called the Public Company Accounting Reform and
Investor Protection Act of 2002. It was changed to the Sarbanes-Oxley Act of 2002.
1. The law revised and strengthened auditing and accounting standards.
2. Law applies to public companies with securities registered under Section 12 of the
4. Exhibit 3.8, Strategy in Action, provides more details on the SOA.
5. Features of SOA:
a. The CEO and CFO must certify every report containing the company’s
financial statements. They must attest to the report’s accuracy and reliability.
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(1) Based on the officer’s knowledge, the report is a reliable source of the
(2) The certification also makes the officers responsible for establishing
(3) The officers must evaluate the effectiveness of the internal controls
(4) The officers must disclose any fraudulent material, deficiencies in the
(5) The officers must indicate any changes to the internal controls or factors
b. The corporate control of executives, accounting firms, auditing committees,
and attorneys is restricted.
(1) The Act bans personal loans for executives.
(2) Executive officers and directors are not permitted to purchase, sell,
(3) Executives are required to notify fund participants of any blackout
(4) The SEC will provide the company’s executives with a code of ethics
c. The Act limits some and issues new duties of the registered public
accounting firms that conduct the audits of the financial statements.
(1) Accounting firms are prohibited from performing bookkeeping or other
accounting services related to the financial statements, designing or
(2) All critical accounting policies and alternative treatments of financial
d. The Act defines the composition of the audit committee and specifies its
responsibilities.
(1) The members of the audit committee must be members of the
company’s board of directors.
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(4) The audit committee must create procedures for employee complaints or
(5) Upon discovery of unlawful acts by the company, the audit committee
e. The Act includes rules for attorney conduct.
(1) If a company’s attorneys find evidence of securities violations, they are
f. Disclosure periods for financial operations and reporting are stipulated.
(1) Relevant information relating to changes in the financial condition or
g. Stricter penalties have been issued for violations of the SOA.
(1) If a company must restate its financial statements due to
(2) Other securities fraud, such as destruction or falsification or records,
B. The New Corporate Governance Structure
1. A major consequence of the 2000-2002 accounting scandals was SOA. A major
3. In the past, internal auditors reviewed financial reports generated by other
corporate accountants.
a. Auditors considered professional accounting and financial practices, as well
b. Historically, the CFO reviewed the audits and determined the financial data
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whole or part.
4. Because Sarbanes-Oxley requires that CEOs and audit committees sign off on
financial results, auditors now routinely deal directly with top corporate officials,
as show in the new structure in Exhibit 3.9, Strategy in Action.
a. Approximately 75 percent of senior corporate auditors now report directly to
b. To eliminate the potential for accounting problems, companies are
5. The new structure also provides the CEO information provided directly by the
company’s chief compliance and chief accounting officers.
a. The CFO, who is responsible for ultimately approving all company