978-0134739724 Chapter 2

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CHAPTER 2

BUSINESS ETHICS, CORPORATE SOCIAL RESPONSIBILITY, AND

SUSTAINABILITY

CHAPTER OBJECTIVES

2.1 Discuss what ethics means and the sources of ethical guidance

2.2 Explore human resource management’s (HRM) role in creating an ethical culture

and a code of ethics

2.3 Define human resource ethics

2.4 Explain the concepts and practices related to corporate social responsibility and

corporate sustainability

2.5 Describe a social audit

KEY TERMS

LECTURE OUTLINE

DEFINING ETHICS AND THE SOURCES OF ETHICAL GUIDANCE

Ethics is the discipline dealing with what is good and bad, or right and wrong, or with

moral duty and obligation. The concepts of corporate social responsibility (CSR) and

corporate sustainability are related to ethics. CSR is the implied, enforced, or felt

obligation of managers, acting in their official capacity, to serve or protect the interests of

groups other than themselves. Corporate sustainability concerns with possible future

impact of an organization on society, including social welfare, the economy, and the

environment.

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BUSINESS ETHICS

Well-publicized corrupt conduct of companies such as WorldCom and Enron and their

senior managers provide many examples of unethical leadership. Even though most

Fortune 500 companies have a written code of ethics, business ethics scandals continue to

make headlines.

Compliance with the law sets the minimum standard for ethical behavior; however, ethics

is much more. There are many dimensions to ethics, and leaders must be able and willing

to instill ethics throughout the culture of an organization.

SOURCES OF ETHICAL GUIDANCE

The sources of ethical guidance should lead to our beliefs or a conviction about what is

right or wrong. Most would agree that people have a responsibility to avail themselves to

these sources of ethical guidance.

One might use a number of sources to determine what is right or wrong, good or bad,

moral or immoral. These sources include the Bible and other holy books in addition to the

still, small voice that many refer to as conscience. Another source of ethical guidance is

the behavior and advice of the people psychologists call significant others—our parents,

friends, role models, and members of our churches, clubs, and associations. For most

professionals, there are codes of ethics that prescribe certain behaviors.

LEGISLATING ETHICS

Much of the current legislation was passed because of business ethics breakdowns. There

have been four attempts to legislate business ethics since the late 1980s.

● PROCUREMENT INTEGRITY ACT of 1988—Prohibits the release of source

selection and contractor bid or proposal information. Passed after reports of

military contracts for $500 toilet seats.

● FEDERAL SENTENCING GUIDELINES FOR ORGANIZATIONS of

1992—Outlined an effective ethics training program and explained the seven

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● WHISTLEBLOWER PROTECTION—A whistleblower is someone who

participates in an activity that is protected. The whistleblowing side of the Dodd-

Frank is shaped after a successful IRS program. In passing the Act, Congress

believed that award programs are an effective method to encourage people with

information regarding violations of the law to come forward with the information

executive compensation matters.

CREATING AN ETHICAL CULTURE AND A CODE OF ETHICS

Saying that a company has an ethical culture and actually having one may be two

different things.

Ethical Culture

1. It is psychologically unsafe to speak up

2. There is excessive pressure to reach unrealistic performance targets

3. Conflicting goals provoke a sense of unfairness

4. Ethical behavior is not part of the routine conversation

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5. A positive example isn’t being set

CODE OF ETHICS

A code of conduct should tell employees what the rules of conduct are. A code of ethics

established the rules that the organization lives by. This is an important distinction.

Topics in a code of ethics might include business conduct, fair competition, and

LINKING PAY TO ETHICAL BEHAVIOR

The importance of linking pay to performance is an appropriate topic when discussing

ethics. It is well known in the compensation world that “what you reward is what you

get.” If the statement is correct, then a problem exists because most companies do not

link pay to ethical behavior.

acting in their official capacity, to serve or protect the interests of groups other than

themselves. CSR encompasses meeting economic, social, and environmental

responsibilities concurrently. Many organizations have demonstrated the bottom line

impact of CSR activities.

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While these days more employers are publicly endorsing a culture of ethics and social

responsibility, not all agree that CSR is important for companies. Milton Friedman was

an American economist, statistician, academic, and author who taught at the University

of Chicago for more than three decades and was a recipient of the Nobel Memorial Prize

in Economic Sciences. He argued that here is one and only one social responsibility of

business—to use its resources and engage in activities designed to increase its profits so

long as it stays within the rules of the game, which is to say, engages in open and free

competition without deception or fraud. Friedman disciples continue to condemn CSR as

a hodgepodge of, “value–destroying nonsense.”

CORPORATE SUSTAINABILITY

Corporate sustainability has evolved from the more traditional corporate social

responsibility. According to the World Commission on Environment and Sustainability,

the narrow definition of sustainability or sustainable development is, “meeting the needs

of the present without compromising the ability of future generations to meet their own

needs.” In recent years, sustainability has been changed to encompass the social,

2-1. What are ethics and business ethics?

2-2. What are some sources of ethical guidance?

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One might use numerous sources to determine what is right or wrong, good or

bad, and moral or immoral, such as holy books or one’s conscience. Another

source of ethical guidance is the behavior and advice of people, including our

parents, friends, and role models and members of our churches, clubs, and

associations. For most professionals, there are codes of ethics that prescribe

certain behavior.

What laws have been passed in an attempt to legislate ethics?

2-3. Why is it important to have a code of ethics?

2-4. Regarding business ethics, what does the statement, “what you reward is what

you get,” mean?

2-5. What are HR ethics?

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The application of ethical principles to human resource relationships and activities is

called human resource ethics.

2-6. What are the areas in which HR professionals can have a major impact on ethics?

2-7. What is corporate social responsibility?

2-8. What does corporate sustainability mean?

2-9. What are some of the practices companies can use to promote sustainability?

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Essentially it is about how a firm handles its business while understanding how these

decisions may affect others. One could think of corporate sustainability in a business

sense as providing long-term profitability. Thus, sustainability should be a fundamental

part of business strategy, product development, talent development, and capital

investment. Some organizations have emphasized the importance of corporate

sustainability by establishing the position of chief sustainability office.

DISCUSSION OF CHAPTER 2 INCIDENTS

HRM Incident 1: An Ethical Flaw

Amber Davis had recently graduated from college with a degree in general business.

Amber was quite bright, although her grades did not reflect this. She had thoroughly

enjoyed school, dating, playing tennis, and swimming, but found few stimulating

academic endeavors. When she graduated, she had not found a job. Her dad was

extremely upset when he discovered this, and he took it upon himself to see that Amber

became employed.

QUESTIONS

2-18. From an ethical standpoint, how would you evaluate the merits of Mr. Garbo’s

employing Amber? Discuss.

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Mr. Garbo should not have been pressured by Mr. Davis to hire his daughter, Amber. The

employment of a “friend’s” son or daughter may or may not be a good business practice.

If Amber had been competent, mature, ambitious, energetic, and wanted to learn the

business, then Mr. Garbo would have made a good decision. However, Amber did not

possess these characteristics, and so Mr. Garbo’s decision was based solely on his

business relationship with Mr. Davis. Obviously, employment decisions should be based

on business or professional judgment and not on personal relationships. Finally, it was

unethical of Mr. Davis to have pressured Mr. Garbo to hire Amber.

2-19. Now that she is employed, how would you suggest that the situation be resolved?

2-20. It may be that Mr. Garbo viewed the hiring of Amber as strictly a business

decision that would ensure receiving continued business from Amber’s father.

What might be some negative results of this questionable ethical decision?

HRM Incident 2: Illegal Hiring

The Foreign Corrupt Practices Act (FCPA) prohibits U.S. companies from bribing

foreign officials; yet, the number of violations each year is staggering. Some violations

center on the use of unethical HR practices. For example, the banking industry has been

investigated for its internship and full-time employment hiring practices. The Bank of

New York Mellon Corp. (BNY Mellon) gave internships to family members of foreign

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the FCPA can be ‘really abstract.’. . .” In the end, the bank agreed to pay a $5 million

penalty, give up $8.3 million, and pay $1.5 million in interest.

QUESTIONS

2-21. What would you have done in response to learning about these facts?

2-22. What factors in this situation might influence a company to make less-than-ethical

decisions.