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CHAPTER 4

MANAGING ETHICS AND SOCIAL RESPONSIBILITY

CHAPTER OUTLINE

New Manager Self-Test: What Is Your Level of Ethical Maturity?

I. What Is Managerial Ethics?

A. Ethical Management Today

B. The Business Case for Ethics and Social Responsibility

II. Ethical Dilemmas: What Would You Do?

III. Frameworks for Ethical Decision Making

IV. The Individual Manager and Ethical Choices

A. The Stages of Moral Development

B. Givers versus Takers

New Manager Self-Test: Are You a Giver or a Taker?

V. What Is Corporate Social Responsibility?

A. Organizational Stakeholders

B. The Green Movement

C. Sustainability and the Triple Bottom Line

VI. Evaluating Corporate Social Responsibility

VII. Managing Company Ethics and Social Responsibility

A. Code of Ethics

B. Ethical Structures

C. Whistle-Blowing

ANNOTATED LEARNING OUTCOMES

After studying this chapter, students should be able to:

1. Define ethics and explain how ethical behavior relates to behavior governed by law and free

choice.

Ethics is difficult to define in a precise way. In a general sense, ethics is the code of moral

2. Discuss why ethics is important for managers and identify recent events that call for a

renewed commitment to ethical management.

Managing Ethics and Social Responsibility •

The pervasiveness of ethical lapses during the first decade of this century has been astounding.

3. Explain the utilitarian, individualism, moral rights, justice, and practical approaches for

making ethical decisions.

The utilitarian approach holds that moral behaviors produce the greatest good for the greatest

number. In this approach, a decision maker is expected to consider the effect of each decision

4. Describe the factors that shape a manager’s ethical decision making, including levels of

moral development.

Individual managers bring specific personality and behavioral traits to the job. Personal needs,

family influence, and religious background all shape a manager’s value system. Specific

personality characteristics, such as ego strength, self-confidence, and a strong sense of

5. Identify important stakeholders for an organization and discuss how managers balance the

interests of various stakeholders.

6. Explain the philosophy of sustainability, including the triple bottom line, and why

organizations are embracing it.

Sustainability refers to economic development that generates wealth and meets the needs of the

current generation while saving the environment so future generations can meet their needs as

well. With a philosophy of sustainability, managers weave environmental and social concerns

Organizations are embracing the philosophy of sustainability because they are finding that they

can create wealth at the same time they are preserving natural resources. A good example of this

is when companies develop innovative ways to sell waste from production processes that they

once paid to have hauled away.

The triple bottom line refers to measuring an organization’s social performance, its

environmental performance, and its financial performance. This is sometimes called the three Ps:

People, Planet, and Profit. The People part of the triple bottom line looks at how socially

responsible the organization is in terms of fair labor practices, diversity, supplier relationships,

treatment of employees, contributions to the community, and so forth. The Planet aspect

measures the organization’s commitment to environmental sustainability. The third P looks at

the organization’s Profit, the financial bottom line. Based on the principle that what you

measure is what you strive for and achieve, using a triple bottom line approach to measuring

performance ensures that managers take social and environmental factors into account rather

than blindly pursuing profit, no matter the cost to society and the natural environment.

7. Define corporate social responsibility and how to evaluate it along economic, legal, ethical,

and discretionary criteria.

Social responsibility is management’s obligation to make choices and take actions that will

contribute to the welfare and interests of society as well as to the welfare and interests of the

organization. It means being a good corporate citizen. Social responsibility can be evaluated

8. Discuss how ethical organizations are created through ethical leadership and organizational

structures and systems.

Managing Ethics and Social Responsibility •

ethical footing. Management methods for helping organizations be more responsive include

leadership by example, codes of ethics, ethical structures, and supporting whistle-blowers.

LECTURE OUTLINE

NEW MANAGER SELF-TEST: WHAT IS YOUR LEVEL OF ETHICAL MATURITY?

It probably won’t happen right away, but soon enough students will find in their duties as a new

manager that they will be confronted with a situation that will test the strength of their moral

beliefs or their sense of justice. Will they be ready? To find out, students will think about times

when they were part of a student or work group. They will decide to what extent each of the

statements in this exercise characterizes their behavior when working with others in a group.

I. WHAT IS MANAGERIAL ETHICS? Exhibit 4.1

Ethics is the code of moral principles and values that govern the behaviors of a person or group

with respect to what is right or wrong. Ethics sets standards as to what is good or bad in conduct

and decision making. Ethics deals with internal values that are a part of corporate culture and

shape decisions concerning social responsibility with respect to the external environment.

Human behavior falls into three categories.

• Codified law. Values and standards are written into the legal system and are enforceable in

the courts. Lawmakers have ruled that people and corporations must behave in a certain way

such as obtaining licenses for cars or paying taxes.

• Free choice. Free choice pertains to behavior about which law has no say and for which an

individual or organization enjoys complete freedom.

• Ethics. Ethics lies between the domains of codified law and free choice. It has no specific

laws, but does have standards of conduct that are based on shared principles and values about

moral conduct that guide an individual or company. Because ethical standards are not

codified, disagreements and dilemmas about proper behavior often occur.

A. Ethical Management Today Exhibit 4.2

1. The pervasiveness of ethical lapses during the first decade of this century has been

astounding. Although public confidence in business managers in particular is at an

all-time low, politics, sports, and non-profit organizations have also been affected. In

the business world, the names of once-revered corporations have become

synonymous with greed, deceit, irresponsibility, and lack of moral conscience.

2. Managers carry a tremendous responsibility for setting the ethical climate in an

organization and can act as role models for others. The widespread ethical lapses of

the past decade have put managers under increasing scrutiny.

3. One hot-button ethical issue concerns excessive executive compensation.

B. The Business Case for Ethics and Social Responsibility

1. The relationship of ethics and social responsibility to an organization’s financial

performance concerns has generated hundreds of studies. Studies have provided

varying results, but they have generally found a positive relationship between ethical

and socially responsible behavior and a firm’s financial performance.

2. Companies are making an effort to measure the nonfinancial factors that create value.

Researchers find that people prefer to work for companies that demonstrate a high

level of ethics and social responsibility; thus, these organizations can attract and

retain high-quality employees.

II. ETHICAL DILEMMAS: WHAT WOULD YOU DO?

An ethical dilemma arises in a situation concerning right or wrong when values are in conflict

and right and wrong cannot be clearly defined. The individual who must make an ethical choice

in an organization is the moral agent.

Discussion Question #1: Is it reasonable to expect that managers can measure their social and

environmental performance on the same level as they measure their financial performance with

a triple bottom line? Discuss.

NOTES________________________________________________________________________

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III. FRAMEWORKS FOR ETHICAL DECISION MAKING

Managers faced with tough ethical choices often benefit from a normative strategy based on

norms and values to guide their decision making. Normative ethics is based on norms and

values. Five approaches are relevant for managers in making ethical decisions.

1. The utilitarian approach holds that moral behavior produces the greatest good for

the greatest number. The decision maker is expected to consider the effect of each

decision alternative on all parties and select the one that will optimize satisfaction for

the greatest number of people.

2. The individualism approach contends that acts are moral when they promote the

individual’s best long-term interests. Individualism is believed to lead to honesty and

integrity because that works best in the long run. Because individualism is easily

misinterpreted to support immediate self-gain, it is not popular in the highly

organized and group-oriented society of today.

3. The moral-rights approach asserts that human beings have fundamental rights that

cannot be taken away by an individual’s decision. An ethically correct decision is

one that best maintains the rights of those people affected by it. To make ethical

Managing Ethics and Social Responsibility •

decisions, managers need to avoid interfering with the fundamental rights of others,

such as the right to privacy, the right of free consent, or the right to freedom of

speech.

4. The justice approach holds that moral decisions must be based on standards of

equity, fairness, and impartiality. Three types of justice are of concern to managers.

a. Distributive justice requires that different treatment of people not be based on

arbitrary characteristics. Men and women should not receive different salaries if

they are performing the same job; however, people who differ in a substantive

way can be treated differently.

b. Procedural justice requires that rules be administered fairly. Rules should be

clearly stated and be consistently and impartially enforced.

c. Compensatory justice argues that the party responsible should compensate

individuals for the cost of their injuries. Individuals should not be held

responsible for matters over which they have no control.

5. The practical approach sidesteps debates about what is right, good, or just and bases

decisions on prevailing standards of the profession and the larger society, taking the

interests of all stakeholders into account. A decision would be considered ethical if it

is one that would be considered acceptable by the professional community, one the

manager would not hesitate to publish on the evening news, and one that a person

would typically feel comfortable explaining to family and friends.

NOTES________________________________________________________________________

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IV. THE INDIVIDUAL MANAGER AND ETHICAL CHOICES

Ethical or unethical business practices usually reflect the values, attitudes, beliefs, and behavior

patterns of the organizational culture. Ethics is as much an organizational issue as a personal

issue.

A. The Stages of Moral Development Exhibit 4.3

1. Preconventional level. At this level a manager is concerned with external rewards

and punishment and obeys authority to avoid detrimental personal consequences.

These managers are likely to be autocratic or coercive.

2. Conventional level. At this level managers learn to conform to expectations of good

behavior as defined by colleagues, friends, family, and society. These managers are

interested in interpersonal relationships and cooperation.

3. Postconventional level (also called principled level). At this level individuals develop

an internal set of standards and values and will disobey rules or laws that violate these

Managing Ethics and Social Responsibility •

principles. Internal values are more important than expectations of significant others.

These managers typically use a transformative or servant leadership style.

4. The great majority of managers operate at the conventional level. A few managers

have not advanced beyond the preconventional level. Only about 20 percent of

American adults reach the principled level of moral development.

B. Givers Versus Takers

1. When managers operate from a higher level of development, they may use a form of

servant leadership, focusing on the needs of followers and encouraging others to think

for themselves.

2. Research has shown that people will work harder and more effectively for people

who put others’ interests and needs above their own.

3. The shift toward admiring and rewarding givers over takers can bring significant

positive changes within organizations. The simple categories of giver and taker help

people understand how they might contribute to or detract from an organization’s

ethical culture.

Discussion Question #3: Imagine yourself in a situation of being encouraged by colleagues to

inflate your expense account. What factors do you think would influence your decision?

Explain.

NOTES________________________________________________________________________

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NEW MANAGER SELF-TEST: ARE YOU A GIVER OR A TAKER?

Managers differ in how they view other people and the tactics they use to get things done.

This exercise helps students view themselves and others. Their scores pertain to a concept that

was introduced by Robert Greenleaf in his book, Servant Leadership. Servant leadership means

that managers are “givers” and try to place service to others before self-interest, listen as a way

to care about others, and nourish others to help them become whole.

V. WHAT IS CORPORATE SOCIAL RESPONSIBILITY?

Social responsibility means distinguishing right from wrong. It means being a good corporate

citizen. Corporate social responsibility (CSR) is management’s obligation to make choices

and take actions that will contribute to the welfare and interests of society as well as the

organization. Social responsibility can be a difficult concept to grasp because people have

different beliefs as to which actions improve society’s welfare. Social responsibility covers a

wide range of issues that are ambiguous with regard to what is right or wrong.

Managing Ethics and Social Responsibility •

A. Organizational Stakeholders Exhibit 4.4

1. Enlightened organizations view the internal and external environment as having a

variety of stakeholders. A stakeholder is any group within or outside the

organization that has a stake in the organization’s performance. Each stakeholder has

a different criterion of responsiveness because it has a different interest in the

organization.

2. There is a growing interest in stakeholder mapping, a technique that provides a

systematic way to identify the expectations, needs, importance, and relative power of

various stakeholders.

3. The organization’s performance affects stakeholders. Socially responsible

organizations try to pay attention to all stakeholders who are affected by their actions.

4. Stakeholders can also have a tremendous effect on the organization’s performance

and success. Today, special interest groups continue to be one of the largest

stakeholder concerns that companies face. Environmental responsibility has become

a primary issue as both business and the public acknowledge the damage that has

been done to our natural environment.

Discussion Question #2: In September 2013, Tokyo Electric Power Company (Tepco) reported

highly contaminated water leaking from a storage tank at the Fukushima nuclear power plant

crippled in a March 2011 earthquake and tsunami. From what you know of the ongoing

Fukushima disaster, discuss the various stakeholder groups that Tepco should respond to in

order to handle this latest crisis.

NOTES________________________________________________________________________

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B. The Green Movement

1. Going green has become a new business imperative, driven by shifting social

attitudes, new governmental policies, climate changes, and the information

technology that quickly spreads news of a corporation’s negative impact on the

environment. Energy is an area of ongoing concern for the green movement.

C. Sustainability and the Triple Bottom Line

1. Many corporations are embracing an idea called sustainability or sustainable

development. Sustainability refers to economic development that generates wealth

and meets the needs of the current generation while saving the environment so future

generations can meet their needs as well. With a philosophy of sustainability,

managers weave environmental and social concerns into every strategic decision,

revise policies and procedures to support sustainability efforts, and measure their

progress toward sustainability goals.

2. The triple bottom line refers to measuring an organization’s social performance, its

environmental performance, and its financial performance. This is sometimes called

the three Ps: People, Planet, and Profit.

a. The first P, People, looks at socially responsible aspects including fair labor

practices, diversity, supplier relations, treatment of employees, and contributions

to community.

b. The second P, Planet, measures aspects such as the organization’s commitment to

environmental sustainability.

c. The third P, Profit, looks at the organization’s success in making sustainable

profits, the financial bottom line.

Based on the principles that what you measure is what you strive for and achieve,

using a triple bottom line approach to measuring performance ensures that managers

take social and environmental factors into account rather than blindly pursuing profit,

no matter the cost to society and the natural environment.

VI. EVALUATING CORPORATE SOCIAL RESPONSIBILITY Exhibit 4.5

A. Economic Responsibility

1. The first criterion of social responsibility is economic responsibility. The business

institution is the basic economic unit of society. Its responsibility is to produce the

goods and services that society wants and to maximize profits for its owners and

shareholders.

2. Economic responsibility carried to extreme is called the profit-maximizing view,

advocated by Nobel economist Milton Friedman. This view argues that the

corporation’s sole mission is to increase its profits so long as it stays within the

rules. This approach means that economic benefit is the only social responsibility

and can lead companies into trouble.

B. Legal Responsibility

1. Legal responsibility defines what society deems important with respect to

appropriate corporate behavior. Businesses are expected to fulfill their economic

goals within the law. Legal requirements are imposed by local governments, state

legislators, and federal regulatory agencies.

C. Ethical Responsibility

1. Ethical responsibility includes behaviors that are not necessarily codified into law

and may not serve the firm’s direct economic interests. To be ethical, decision

makers should act with equity, fairness, and impartiality, respect the rights of

individuals, and treat individuals differently only when relevant to the

Managing Ethics and Social Responsibility •

organization’s goals. Unethical behavior occurs when decisions enable an

individual or company to gain at the expense of society.

Discussion Question #7: Do you believe it is ethical for organizational managers to try to get

access to and scrutinize the Facebook pages of employees or job applicants? Discuss.

NOTES________________________________________________________________________

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D. Discretionary Responsibility

1. Discretionary responsibility is voluntary and guided by a company’s desire to

make social contributions not mandated by economics, law, or ethics.

Discretionary activities include philanthropic contributions that offer no direct

financial payback to the company and are not expected. Discretionary

responsibility is the highest criterion of social responsibility.

Discussion Question #9: The technique of stakeholder mapping lets managers classify which

stakeholders they will consider more important and will invest more time to satisfy. Is it

appropriate for management to define some stakeholders as more important than others?

Should all stakeholders be considered equal?

NOTES________________________________________________________________________

______________________________________________________________________________

VII. MANAGING COMPANY ETHICS AND SOCIAL RESPONSIBILITY Exhibit 4.6

A. Code of Ethics

1. A code of ethics is a formal statement of the company’s values concerning ethics

and social issues. It communicates to employees what the company stands for.

Codes of ethics tend to exist in two types.

a. Principle-based statements are designed to affect corporate culture. They define

fundamental values, company responsibilities, quality of products, and treatment

of employees.

b. Policy-based statements outline the procedures to be used in specific ethical

situations such as marketing, conflicts of interest, observance of laws,

proprietary information, political gifts, and equal opportunities.

Discussion Question #8: Which do you think would be more effective for shaping long-term

ethical behavior in an organization: a written code of ethics combined with ethics training or

strong ethical leadership? Which would have more impact on you? Why?

1. Ethical structures represent the various systems, positions, and programs a company

can undertake to implement ethical behavior.

a. An ethics committee is a group of executives appointed to oversee the

organization’s ethics by ruling on questionable issues and disciplining violators.

b. A chief ethics officer is a company executive who oversees all aspects of ethics

and legal compliance, including establishing and broadly communicating

standards, ethical training, dealing with exceptions or problems, and advising

senior managers in the ethical and compliance aspects of decisions.

C. Whistle-Blowing

a. Whistle-blowing is the disclosure by an employee of illegal, immoral, or

illegitimate practices by the organization. Some firms have instituted innovative

programs and confidential hotlines to encourage and support internal whistle-

blowing. Whistle-blowers are often considered as disgruntled employees, but

companies must view whistle-blowing as a benefit to the company and make

dedicated efforts to protect whistle-blowers for this practice to be an effective

ethical safeguard.

SUGGESTED ANSWERS TO END–OF-CHAPTER DISCUSSION

QUESTIONS

1. Is it reasonable to expect that managers can measure their social and environmental

performance on the same level as they measure their financial performance with a triple

bottom line? Discuss.

2. In September 2013, Tokyo Electric Power Company (Tepco) reported highly contaminated

water leaking from a storage tank at the Fukushima nuclear power plant crippled in a March

2011 earthquake and tsunami. From what you know of the ongoing Fukushima disaster,

discuss the various stakeholder groups that Tepco should respond to in order to handle this

latest crisis.

It would be very difficult to provide an exhaustive list of the stakeholders to whom Tepco needed

3. Imagine yourself in a situation of being encouraged by colleagues to inflate your expense

account. What factors do you think would influence your choice? Explain.

4. Is it ethical and socially responsible for large corporations to lobby against an SEC rule

requiring that they report the ratio of their CEOs’ pay compared to that of their average

employee, as described in the chapter? Discuss.

5. Managers at some banks and mortgage companies have argued that providing subprime

mortgages was based on their desire to give poor people a chance to participate in the

Managing Ethics and Social Responsibility •

American dream of home ownership. What is your opinion of this explanation in terms of

ethics and social responsibility?

6. A survey found that 69 percent of MBA students view maximizing shareholder value as the

primary responsibility of a company. Do you agree? What do you think this finding suggests

about the ethical and socially responsible stance of corporate managers over the next couple

of decades?

7. Do you believe it is ethical for organizational managers to try to get access and scrutinize

the Facebook pages of employees or job applicants? Discuss.

8. Which do you think would be more effective for shaping long-term ethical behavior in an

organization: a written code of ethics combined with ethics training or strong ethical

leadership? Which would have more impact on you? Why?

9. The technique of stakeholder mapping lets managers classify which stakeholders they will

consider more important and will invest more time to satisfy. Is it appropriate for

management to define some stakeholders as more important than others? Should all

stakeholders be considered equal?

10. The chapter described studies that show that people work harder and better for managers

who put the interests of others above their own. Why might this happen? Do you believe

being more of a “giver” than a “taker” will translate into greater career success for these

managers? Discuss.

APPLY YOUR SKILLS: SELF-LEARNING INSTRUMENT

Ethical Work Climates

Have students complete the self-examination of Ethical Work Climates. Note that ethical

climates can range from above 40 (very positive ethical climate) to below 20 (very poor ethical

climate). Discuss ethical changes students could make as a practicing manager. A teaching

suggestion is to discuss the four approaches to ethical dilemmas: utilitarian approach,

individualism approach, moral-rights approach, and justice approach.

APPLY YOUR SKILLS: GROUP LEARNING

Current Events of an Unethical Type

This exercise asks students to start by finding two newspaper or magazine articles from the past

several months relating to someone violating business ethics or potentially violating the law

Managing Ethics and Social Responsibility •

regarding business practices and summarize the articles. Students then meet in groups, share

their summaries, identify similar themes and sources of unethical behavior, and hoped-for

outcomes. Finally, students discuss what managers could do to prevent similar unethical

behavior in their own organizations or to fix these situations after they happen.

APPLY YOUR SKILLS: ETHICAL DILEMMA

Should We Go Beyond the Law?

1. Talk to the manufacturing vice president and emphasize the responsibility Chem-Tech has as

an industry leader to set an example. Present her with a recommendation that Chem-Tech

participate in voluntary pollution reduction as a marketing tool, positioning itself as the

environmentally friendly choice.

2. Mind your own business and just do your job. The company isn’t breaking any laws, and if

Chem–Tech’s economic situation doesn’t improve, a lot of people will be thrown out of work.

3. Call the local environmental advocacy group and get them to stage a protest of the company.

APPLY YOUR SKILLS: CASE FOR CRITICAL ANALYSIS

Too Much Intelligence?

1. How has Ken Bodine shaped the sales culture at Pace Technologies? Do you consider this

culture to be at a preconventional, conventional, or postconventional level of ethical

development? Why?

2. What would Ali Sloan do? What would you actually do if you were in her place? Explain.

3. How might Cody Rudisell’s decision differ if he based it on the utilitarian approach vs.

individualism approach vs. practical approach to ethical decision making? Which approach

does he appear to be using?

ON THE JOB VIDEO CASE ANSWERS

Theo Chocolate: Managing Ethics and Social Responsibility

1. What practices at Theo Chocolate reflect the concept of sustainability?

Sustainability refers to economic activity that generates wealth and meets the needs of the

2. What does Vice President Debra Music mean when she says that Theo is a “triple bottom

line” company? How is this different from any other company?

evaluates a company’s success in terms of “people, planet, and profits.” Widely attributed to

CSR guru John Elkington, the triple bottom line concept differs from the traditional “bottom

line” in that it attempts to judge a company’s success by three measures instead of the singular

measure of profitability.

3. What does the term fair trade mean to the leaders at Theo? What happens if fair trade goals

conflict with a company’s primary responsibility to be profitable?

Fair trade is a financial relationship between producers, sellers, and consumers based on the

principle of equity within the exchange of goods. Joe Whinney says that fair trade is important