Ethics and Values

Strategy and Performance Management

Andy Weeger

Neu-Ulm University of Applied Sciences

August 6, 2025

Learning Objectives

After this section, 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;
the concept of structural ambidexterity in relation to ethical strategy implementation;
and when and why good ethics in strategic management pay back.

Introduction

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

Ethics

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

Values and moral systems

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.

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).

Key considerations for strategic management:

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 may cause moral values to change abruptly

This temporal and cultural variation in moral systems creates complexity for multinational organizations operating across different cultural contexts and time periods.

Research by Hofstede, Hofstede, and Minkov (2010) demonstrates significant cultural variations in ethical values, while studies by Inglehart (2018) show how values evolve within societies over time. This creates strategic challenges for global organizations that must navigate different ethical expectations across markets.

The COVID-19 pandemic provides a recent example of how external shocks can rapidly shift societal expectations regarding corporate responsibility, particularly around employee safety, community support, and stakeholder care.

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 function in the context of a wider social environment, which imposes on them certain moral demands and responsibilities (Mintzberg 2014).

Business ethics is about doing the right thing in business.

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).

Foundation of corporate responsibility:

A company is a collection of human and social groupings
General expectations regarding acceptable conduct underpins such groupings
Values such as loyalty, credibility, diligence, cooperation, moral conduct are manifest in organisations

Research by Freeman (2010) demonstrates that organizations exist within networks of relationships that create mutual obligations and expectations, making ethical behavior a strategic necessity rather than an optional add-on.

In essence: business ethics is about doing the right thing in business, but “right” is defined by the intersection of moral principles and stakeholder expectations within specific social and cultural contexts.

Business ethics

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

Business ethics is a form of applied ethics that deals with ethical principles and moral issues that arise in business environments. It encompasses all aspects of business conduct and is relevant to the behavior of individuals and entire organizations.

Business ethics ensures that business practices, decisions, and operations adhere to ethical standards and contribute positively to society while fulfilling the company’s objectives and obligations to stakeholders (Drucker 1981). This is particularly important when ethical dilemmas occur. Ethical dilemma occurs when individuals or groups face challenging situations requiring choice between conflicting moral principles or values.

Research by Trevino and Nelson (2014) shows that ethical dilemmas in business often involve conflicts between different stakeholder interests, short-term vs. long-term considerations, or competing ethical frameworks.

Understanding the foundations of ethics and values, why do these concepts become strategically relevant for organizations?

Ethics x strategy

Strategic imperatives

Following concerns make the idea of an ethical strategy relevant:

The concept of ethics and morals applies to corporations just as it applies to individuals
The question of doing right is not easy in complex organizational contexts
Ethical business practices can create “shared value” and competetive advantage (Porter and Kramer 2011)
Wrong actions by companies can not only prove expensive (i.e., value destruction), but also cause long-term damage
Organizations are difficult to turn once strategic direction is set

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

Amplification effect

Strategic decisions affect multiple stakeholders across extended time horizons with amplified consequences.

This amplification effect makes organizational ethics both more complex and more critical than individual ethical decisions.

The transition from individual to organizational ethics involves several key amplification factors:

Scale amplification: Organizations can affect thousands of employees, millions of customers, and entire communities through single strategic decisions.
Time amplification: Strategic decisions create path dependencies that influence organizational behavior for years or decades.
Complexity amplification: Organizations operate across multiple jurisdictions, cultures, and stakeholder groups with different ethical expectations.
Visibility amplification: Organizational actions receive greater scrutiny from media, activists, and regulatory bodies than individual actions.
This amplification makes ethical strategic management both more challenging and more important for long-term organizational success.

Cultural and value changes

Two current social and cultural changes create ethical conflicts and dilemmas of strategic concern (Mintzberg 2014):

Rapid technological development, e.g.

AI and algorithmic decision-making in business processes
Data privacy and digital rights management

Environmental changes, e.g.

Climate change and sustainability reporting requirements
Supply chain transparency and human rights compliance

Rapid technological development

New technology could harm people’s personal integrity
Fast pace leaves little time for moral reflection
Creates unforeseen ethical challenges (AI, data privacy concerns)
Generative AI raises questions about intellectual property, bias, and misinformation

Research by Floridi (2019) highlights how digital technologies create new ethical challenges that require proactive organizational responses.

Environmental changes

Increased awareness of environmental issues and effects on future generations
New moral and ethical concerns about sustainability
Climate change as moral imperative for business action
Increased stakeholder expectations for environmental responsibility

Studies by Eccles, Ioannou, and Serafeim (2014) show that stakeholder expectations regarding environmental responsibility have fundamentally shifted, creating new strategic imperatives for organizations.

These changes create strategic imperatives for organizations to anticipate and prepare for ethical challenges ahead.

Ethical strategy

Core features

CSR captures three core features (Moon 2014):

Responsibilities of organizations to society (i.e., being accountable) and for society (i.e., compensation and value add) as well as good business practices.

CSR definitions capture three core features (Moon 2014):

Responsibility to society (being accountable): Organizations are accountable to societal stakeholders for their actions and impacts
Responsibility for society (compensating for negative impacts and adding to societal welfare): Organizations have obligations to contribute positively to society and mitigate negative effects
Good business practices (ethically, responsibly, and sustainably): Organizations should conduct business in ways that meet ethical, responsible, and sustainable standards

These features reflect the multi-dimensional nature of CSR as both a social obligation and a business strategy.

Research by Kramer and Porter (2011) emphasizes that the most effective CSR initiatives address social challenges that intersect with business opportunities, creating “shared value” for both society and the organization.

Carroll’s CSR pyramid

Figure 1: The CSR pyramid (Carroll 1991)

Carroll’s CSR pyramid (Carroll 1991) helps managers recognize that different types of obligations are in constant tension with each other and are not mutually exclusive. The model includes four levels:

1. Economic responsibility (required by society)

Core principle: Be profitable

Generate high and consistent profitability
Establish and maintain strong competitive position
Operate at high efficiency level
Maximize sales, minimize costs

Stakeholder impact: Primarily affects owners, shareholders, and employees

2. Legal responsibility (required by society)

Core principle: Obey all laws and regulations

Operate consistently with government and legal expectations
Show complete compliance with all regulations
Adhere to laws governing business operations

Stakeholder impact: Affects owners, shareholders, employees, and consumers

3. Ethical responsibility (expected by society)

Core principle: Do what is right, fair, and just

Meet expectations of social and ethical standards
Adapt to new or developing ethical and moral standards
Assert ethical leadership in industry and community

Stakeholder impact: Affects all stakeholder groups

Ethical responsibilities change over time based on societal expectations

4. Philanthropic responsibility (desired by society)

Core principle: Be a good corporate citizen

Give to charitable organizations
Provide community support programs
Engage in voluntary social initiatives

Stakeholder impact: Most affects the community

Note: Left to managerial judgment as society provides no clear guidance

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)

The pyramid structure suggests that economic and legal responsibilities form the foundation, with ethical and philanthropic responsibilities building upon them.

Recent research by Schwartz and Carroll (2003) has critiqued the hierarchical nature of the pyramid, arguing for a more integrated approach where all dimensions can be simultaneously important.

CSR-performance relationship

Studies suggest a U-shaped relationship between social and financial performance: moderate CSR can positively impact performance, but excessive CSR may have diminishing returns (Barnett and Salomon 2012).

Research by Barnett and Salomon (2012) suggests a U-shaped relationship between social and financial performance for many organizations:

Key insights: - Moderate social responsibility can positively impact financial performance - Excessive social responsibility might not necessarily lead to better financial results - Need to find optimal level aligned with strategic goals and business context - Strategic balance required between social responsibility and financial objectives

The authors emphasize that while moderate level of social responsibility can be associated with improved financial performance, pursuing excessive social responsibility might not always be conducive to improved financial outcomes. The findings call for strategic balance in integrating social responsibility into business practices.

This challenges both economists (who generally say CSR doesn’t pay) and philanthropists (who say it always does) by suggesting the relationship is more nuanced and context-dependent.

Meta-analysis by Margolis and Walsh (2003) examining 127 studies found a small but positive correlation between CSR and financial performance, while Orlitzky, Schmidt, and Rynes (2003) found stronger relationships when CSR is strategically aligned with business capabilities.

Strategic investment decisions

The U-shaped relationship suggests organizations must make strategic choices about CSR investment levels:

underinvestment risk (missing stakeholder value creation opportunities)
optimal investment zone — CSR aligned with capabilities and stakeholder priorities
overinvestment risk (resources diverted without proportional benefit)

Underinvestment risk

Organizations that invest too little in CSR may miss opportunities for:

Stakeholder value creation and loyalty building
Competitive differentiation through responsible practices
Risk mitigation and reputation protection
Access to socially conscious consumers and investors

Overinvestment risk

Excessive CSR investment may result in:

Resource diversion from core business activities
Diminishing returns on social investment
Stakeholder skepticism about authenticity
Competitive disadvantage if costs exceed benefits

Optimal investment zone

CSR initiatives should be:

Aligned with organizational core competencies and capabilities
Responsive to key stakeholder priorities and expectations
Integrated with business strategy rather than peripheral add-ons
Measurable in terms of both social and business impact

Organizations can identify their optimal investment level through stakeholder analysis, materiality assessments, and business case development for each CSR initiative.

Implementation

Strategic response framework

Given that there are grounds for ethical strategic concerns, it is desirable to develop ethics sensitivity in the company:

Identify core values
Teach employees about ethics
Make moral views clear
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).

Strategic response framework:

Identify core values: Establish clear organizational values and principles that guide decision-making
Teach employees about ethics: Educate employees about ethical behavior and decision-making processes
Make moral views clear: Communicate standards throughout organization with clear and consistent expression of moral convictions
Plan for the future: Anticipate and prepare for ethical challenges ahead, including possible cultural and value-related changes

Implementation mechanisms:

Codes of conduct: Useful means of influencing ethical climate when properly implemented and visibly supported by management
Cultural expression: Has strong unifying cultural effect and provides intellectual power to manage ethical conflicts
Future preparation: Predict and prepare for cultural and value-related changes

Implementation framework

Practical framework for implementing ethical strategy:

Ethical audit integration:
Include ethical factors in SWOT analysis and strategic reviews (Carroll 2004)
Stakeholder impact assessment:
Evaluate strategic options through comprehensive stakeholder lens (Harrison, Bosse, and Phillips 2010)
Ethical risk management:
Identify and mitigate ethical risks in strategy implementation (Kaplan and Norton 2012)
Performance metrics:
Develop KPIs balancing financial and ethical outcomes (Kaplan and Norton 2001)
Cultural alignment:
Ensure organizational culture supports ethical strategy execution (Schein 2010)

Ethics x strategic analysis

CSR affects customer willingness to pay, cost structures, employee satisfaction, and supplier relationships.

Ethics and CSR considerations should, thus, be integrated into both external and internal audits as sources of opportunities and threats, strengths and weaknesses.

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.

Ethics in practice

Case example: Patagonia’s $10 million tax cut donation to environmental causes:

Reinforced brand values and customer loyalty
Attracted environmentally conscious employees
Generated positive media coverage worth millions
Aligned with long-term business sustainability strategy

Patagonia’s $10 million tax cut donation to environmental causes illustrates how ethical decisions can create strategic value:

Customer value: the tax cut donation reinforced Patagonia’s environmental positioning, strengthening customer loyalty among environmentally conscious consumers willing to pay premium prices.
Employee value: the tax cut donation attracted and retained employees who share environmental values, improving engagement and reducing turnover costs.
Media value: the the tax cut donation generated extensive positive media coverage, providing marketing value far exceeding the $10 million donation.
Brand value: the the tax cut donation strengthened Patagonia’s authentic positioning as an environmental advocate, differentiating it from competitors perceived as “greenwashing.”

Overall, The decision aligned with Patagonia’s mission and long-term business sustainability strategy, as environmental degradation threatens outdoor recreation markets.

This example demonstrates how ethical decisions that appear costly in the short term can create significant strategic value when aligned with organizational purpose and stakeholder expectations.

Similar examples include Ben & Jerry’s social activism, Interface Inc.’s Mission Zero environmental initiative, and Unilever’s Sustainable Living Plan - all demonstrating strategic value creation through ethical positioning.

Key takeaways

Ethics foundations provide the basis for all business ethical decisions through understanding right and wrong conduct
Cultural and temporal variation in moral systems creates complexity for global organizations
Strategic amplification effects make organizational ethics critically important due to scale, time, complexity, and visibility
CSR pyramid shows four responsibility levels with different societal expectations and business implications
U-shaped CSR relationship requires strategic balance between underinvestment and overinvestment in social responsibility
Implementation framework demands integration across audit processes, risk management, and cultural alignment
Value creation mechanisms demonstrate how ethics enhance rather than constrain strategic performance across stakeholder relationships

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.

Define ethics and explain how moral systems vary across cultures and time periods.
Explain the concept of corporate moral responsibility and how it differs from individual ethical responsibility.
Provide examples of ethical dilemmas in business. How should organizations approach and resolve these ethical challenges?
Describe Carroll’s CSR pyramid and analyze the strategic implications of each level.
Analyze the U-shaped relationship between CSR investment and financial performance. What factors determine optimal CSR investment levels?
Compare and contrast different approaches to implementing ethical strategies in organizations.
Discuss how ethical considerations should be integrated into strategic analysis frameworks (external and internal audits).
Analyze how contemporary challenges (AI, data privacy, climate change) create new ethical strategic imperatives for organizations.
Evaluate the mechanisms through which ethical strategies create value for different stakeholder groups.

Q&A

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