Ethics and Values

Does it pay off to be really good?

Andy Weeger

Neu-Ulm University of Applied Sciences

September 3, 2024

Learning outcomes

After this session, you should have a solid understanding of

• what ethics, business ethics and corporate social responsibility is, including their key components;
• the origins of ethical dilemmas in business and the significance of approaching these;
• the impact of CSR on various stakeholders;
• the strategic advantages and potential challenges associated with implementing business ethics/CSR initiatives in a company;
• and when and why good ethics in strategic management pay back.

Prologue

A single individual can usually only commit small sins; a large firm can commit grandiose ones. Claes Gustafsson in Mintzberg (2014)

If you have integrity, nothing else matters. If you don’t have integrity, nothing else matters. Alan Simpson, Institute for Business Ethics (IBE)

Good ethics is good business. Bad ethics can derail even the best strategic plans.

Ethical strategy

Why strategy?

Following concerns make the idea of an ethical strategy relevant:

Ethics also apply to organizations as they may cause long-term damage, as they are difficult to turn, and as the question of doing right is not easy.

• The concept of ethics and morals applies to corporations just as it applies to individuals/humans.
• Wrong actions by companies can not only prove expensive, but also cause long-term damage.
• The nature of the planning and implementation process in companies makes it difficult to change course mid-way.
• The changing perceptions of what is considered ethical or unethical makes the process complex as well.

Business ethics

Reflection

What is ethics?

Ethics

Ethics is the branch of philosophy that involves systematizing, defending, and recommending concepts of right and wrong conduct. Wikipedia contributors (2023)

The term comes from the Greek word ‘ethos,’ which means character. Ethical theories reflect on what is morally good and how individuals ought to behave, offering guidance for making moral decisions.

Reflection

Is there a moral (or social) responsibility for firms?

If so, what is the extend and type of the responsibiliy?

Corporate moral responsibility

Firms do not function in a vacuum. They function in the context of a (wider) social environment, which imposes on them certain moral demands and responsibilities. Mintzberg (2014)

In a nutshell: business ethics is about doing the right thing in business.

• A company is a collection of human and social groupings.
• General expectations regarding acceptable conduct of others underpins such groupings.
  
• Values such as loyalty, credibility, diligence, cooperation, moral conduct, etc. are manifest in organisations, or at least, expected.

Ethic in business

Business ethics refers to the principles of right and wrong conduct within organizations that guide decision making and behavior.
David and David (2016)

The term business ethics emphasizes the importance of aligning business activities with ethical principles. It is a form of applied ethics that deals with ethical principles and moral or ethical issues that arise in a business environment. It encompasses all aspects of business conduct and is relevant to the behavior of individuals and entire organizations.

Business ethics, according to Drucker (1981), is about ensuring that business practices, decisions, and operations adhere to ethical standards and contribute positively to society while fulfilling the company’s objectives and obligations to its stakeholders. This is particular important when ethical dilemma occur. An ethical dilemma occurs when individuals or groups are faced with a challenging situation that requires them to make a choice between conflicting moral principles or values.

Values

The right conduct includes those lines of actions that are desirable in terms of the objectives and (moral) values of our society (Bowen and Johnson 1953).

Morality is an aspect of culture—different cultures have different moral systems. Moral values also change over time.

• Some moral values change slowly, over centuries
• Others change more quickly, needing just decades.
• Catastrophic events such as war, genocide, epidemic diseases, etc. may cause moral values to change abruptly.

Relevant social and cultural changes

Two social and cultural changes are to be expected that could lead to ethical conflicts (of strategic concern for corporations) in the future (Mintzberg 2014):

The effect of rapid technological development & cultural effects of environmental changes

• New technology could harm people’s personal integrity. It also makes it harder to think about the moral issues in business (e.g., the fast pace of action leaves little time for reflection).
• People are more aware of environmental issues, such as pollution and the effect of wrong practices on future generations. This has led to new moral and ethical concerns.

Reflection

What are ethical conflicts in business?

From a strategic point of view, what should companies do to counter these?

For ethical issues that come with generative Ai and how Microsoft intends to deal with them, please check Microsoft Generative AI Services Code of Conduct.

Implications

Identify core values, teach employees about ethics, make your moral views clear, and plan for the future.

Given that there are always grounds for ethical strategic concerns, it is desirable to develop ethics sensitivity in the company, and a routine to probe the general ethical climate of the firm (Mintzberg 2014).

Codes of conduct are a useful means of influencing the ethical climate in the company if they are not enforced through control systems and sanctions. They are an effective means of educating employees, especially when management visibly supports and emphasizes them.

A clear and consistent expression of moral convictions has a strong unifying cultural effect in the organization and gives it the intellectual power to manage ethical conflicts and avoid critical pitfalls.

Another aspect of ethical strategy is predicting and preparing for the future, for example by anticipating possible cultural and value-related changes.

Corporate social responsibility

Definitions

The firm’s consideration of, and response to, issues beyond the narrow economic, technical, and legal requirements of the firm. Davis (1973)

The economic, legal, ethical, and discretionary expectations that society has of organizations at a given point in time. Carroll (1979)

The policies and practices of corporations that reflect business responsibility for some of the wider societal good. Yet the precise manifestation and direction of the responsibility lie at the discretion of the corporation. Matten and Moon (2008)

Features

Definitions in academia and practice capture the following features (Moon 2014):

Responsibilities of organizations to society (i.e., accountability) and for society as well as good business practices.

• Business responsibility to society (i.e., being accountable).
• Business responsibility for society (i.e., in compensating for negative impacts and adding to societal welfare).
• Business’s responsible conduct (i.e., ethically, responsibly, and sustainably).

CSR pyramid

The CSR pyramid (Carroll 1991)

 

 

 

 

Figure 1: The CSR pyramid (Carroll 1991)

The CSR pyramid helps managers to recognize that different types of obligations are in constant tension with each other and are not mutually exclusive (Carroll 1991). The model includes economic, legal, ethical and philanthropic (discretionary) expectations that society has of organizations at a given point in time.

Type of Responsibility	Societal Expectation	Explanations
Economic responsibility	Required of business by society	Be profitable. Maximize sales, minimize costs
Legal responsibility	Required of business by society	Obey all laws, adhere to all regulations
Ethical responsibility	Expected of business by society	Do what is right, fair, and just. Assert ethical leadership
Philanthropic responsibility	Desired/expected of business by society	Be a good corporate citizen.

Table 1: The levels of the CSR pyramid (Carroll 1991)

Economic responsibilities

Firm has a responsibility to use the resources available to produce goods and services for society.

Economic responsibilities most dramatically impact owners, shareholders, and employees.

Examples

• Generating a high and consistent level of profitability
• Establishing and maintaining a strong competitive position
• Operating the firm at a high efficiency level

Legal Responsibilities

The laws and regulations that all firms are expected to follow as they perform their daily functions.

Legal responsibilities are certainly crucial with respect to owners and shareholders (i.e., employees and consumer stakeholders).

Examples

• Operating consistent with government and legal expectations
• Showing complete compliance with all regulations

Ethical Responsibilities

Change over time because they are based on expectations of society.

Ethical responsibilities affect all stakeholder groups (i.e., consumers, employees, and the environment).

Examples

• Meeting expectations of both social and ethical standards
• Ability to adapt to new or developing ethical and moral standards

Philanthropic Responsibilities (Discretionary Responsibilities)

Those responsibilities in which society does not have a clear message to present to businesses as to what their courses of action should be. Left in the hands of managers to make the right judgment.

Philanthropic responsibilities most affect the community.

Examples

• Giving to charitable organizations
• Providing drug treatment programs

Reflection

Does it pay to be socially responsible?

Take 20 minutes to discuss the insights you gained from reading Barnett and Salomon (2012).

Prepare to …

• give reasons why CSR might positively impact financial performance, and to
• provide real-life examples and identify activities or characteristics of socially responsible companies.

Economists generally say no, and philantropists say yes to this question.

Recent research by Barnett and Salomon (2012) suggest a U-shaped relationship between social and financial performance for many organizations. They propose that moderate social responsibility can positively impact financial performance, but there might be diminishing returns or potential negative effects beyond a certain point of social responsibility.

The authors emphasize that while a moderate level of social responsibility can be associated with improved financial performance, pursuing excessive social responsibility might not necessarily lead to better financial results. They suggest that companies need to find an optimal level of social responsibility that aligns with their strategic goals and business context.

Barnett and Salomon (2012) offer insights into the complex relationship between social and financial performance in organizations, highlighting that while being socially responsible can positively influence financial outcomes to a certain extent, an excessively high level of social responsibility might not always be conducive to improved financial performance. The findings call for a strategic balance in integrating social responsibility into business practices.

Principles

Some principles that characterize the ethics of corporate strategies:

• Honesty and transparency in decision-making
  • Considering all stakeholders, including employees, customers, and shareholders, when making strategic decisions
  • Establishing clear guidelines for ethical behavior
  • Holding individuals and organizations accountable for any unethical actions
• Fair treatment of employees, including decent working conditions and living wages
• Equal opportunities for career advancement and professional development
• Use of sustainable and ethical materials in products and operations
• Support for social and environmental initiatives and advocacy campaigns
• Collaboration and partnerships with local organizations and communities

Review and consolidation

The following questions are designed to review and consolidate what you have learned and are a good starting point for preparing for the exam.

• Provide examples of ethical dilemmas in business. How should organizations approach and resolve these ethical challenges?
• Analyze the potential conflicts between profit maximization and ethical decision-making. How can businesses balance these often-competing objectives?
• Explain the intersection between business ethics and CSR.
• Why is it essential for businesses to go beyond mere legal compliance and incorporate ethical practices into their operations?
• Why should business ethics be an important part of strategic management (including strategy formation and implementation)?
• How can business ethics be considered in both the external and internal audit?
• How does leadership impact employee conduct and overall organizational culture?
• Define Corporate Social Responsibility (CSR) and its significance in the modern business landscape.
• Explore the impact of the different levels of CSR on various stakeholders, including employees, customers, communities, and the environment. Give real-life examples.
• Describe the strategic advantages and potential challenges associated with implementing CSR initiatives in a company.
• Provide examples of successful CSR programs or initiatives from prominent companies. What made these initiatives successful?
• How does CSR influence brand perception, consumer behavior, and long-term business sustainability?

Homework

1. Listen to the Decoder Episode with Philips CEO Roy Jakobs and take notes on Philips’ organisational structure.
2. Read Lorenz and Buchwald (2023) and make notes on following questions:
   1. What is the difference between a Chief Digital Officer and a Chief Information Officer?
   2. What are their main responsibilities?
   3. How do CDOs and CIOs work together to develop digital projects and align them with the company’s overall strategy?
   4. What is structural ambidexterity and how does it relate to the CIO and CDO roles?

Q&A

Literature

Barnett, Michael L, and Robert M Salomon. 2012. “Does It Pay to Be Really Good? Addressing the Shape of the Relationship Between Social and Financial Performance.” Strategic Management Journal 33 (11): 1304–20.

Bowen, Howard R, and F Ernest Johnson. 1953. “Social Responsibilities of the Businessman.”

Carroll, Archie B. 1979. “A Three-Dimensional Conceptual Model of Corporate Performance.” Academy of Management Review 4 (4): 497–505.

———. 1991. “The Pyramid of Corporate Social Responsibility: Toward the Moral Management of Organizational Stakeholders.” Business Horizons 34 (4): 39–48.

David, F. R., and F. R. David. 2016. Strategic Management: A Competitive Advantage Approach, Concepts and Cases, Global Edition. Psychology Express. Pearson Education.

Davis, Keith. 1973. “The Case for and Against Business Assumption of Social Responsibilities.” Academy of Management Journal 16 (2): 312–22.

Drucker, Peter F. 1981. “What Is Business Ethics.” The Public Interest 63 (2): 18–36.

Lorenz, Felix, and Arne Buchwald. 2023. “A Perfect Match or an Arranged Marriage? How Chief Digital Officers and Chief Information Officers Perceive Their Relationship: A Dyadic Research Design.” European Journal of Information Systems 32 (3): 372–89.

Matten, Dirk, and Jeremy Moon. 2008. “‘Implicit’ and ‘Explicit’ CSR: A Conceptual Framework for a Comparative Understanding of Corporate Social Responsibility.” Academy of Management Review 33 (2): 404–24.

Mintzberg, Henry. 2014. The Strategy Process: Concepts, Contexts, Cases. Pearson education.

Moon, Jeremy. 2014. Corporate Social Responsibility: A Very Short Introduction. Vol. 414. Oxford University Press, USA.

Wikipedia contributors. 2023. “Ethics — Wikipedia, the Free Encyclopedia.” https://en.wikipedia.org/w/index.php?title=Ethics&oldid=1181606843.