BUSINESS ETHICS AND CORPORATE SOCIAL RESPONSIBILITY - SESSION 5:

CORPORATE SOCIAL IRRESPONSIBILITY

DR. MICHAEL VERBÜCHELN – DIRECTOR METHODOLOGY DEVELOPMENT | JANUARY 10, 2024

 Overview of sessions and schedule for the course

Group assignment Session 10:

February 02, 2024 Group presentations and Wrap up

Session 9:
Managing Sustainable Business Models
sustainability
January 23 & Session 7: Session 8:
February 02, 2024 From Output Measurement to Impact Management
Impact Valuation

Session 5: Session 6:
Beginning the Corporate Social Irresponsibility Business Ethics
sustainability
transformation
Session 3: Session 4:
January 09 & 10, 2024 Regulatory Landscape and Sustainability and CSR Strategy and
Sustainability Disclosure Target Setting

Fundamental concepts Session 1: Session 2:

January 08, 2024 Introduction to Sustainability Introduction to CSR

January 10, 2024 2

Guiding Questions

1. How can we define Corporate Social Irresponsibility (CSI)?

2. What are distinguishing characteristics of the many faces of CSI?
3. How do stakeholders attribute blame for CSI?
4. How to communicate to stakeholders after a CSI incident?

How would you define

Corporate Social
Irresponsibility?

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Definition of CSI

• A certain harm occurs through corporate activity and the behavior of the company infringed legal or social
norms of acceptable behavior.
• CSI as a violation of responsibilities:

Would you consider the

violation of philanthropic
responsibilities as CSI?

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 Trade-offs Between Economic and Social
Value Creation Leading to CSI

Increasing profit through Increasing profit through

Increasing profit through Increasing profit through
saving on maintenance saving on labor cost
financial fraud tax evasion
and employee safety cost and protection

Increasing profit through Increasing profit through Increasing profit through Increasing profit through
deceptive product saving on environmental unnecessary animal deceptive marketing
information protection testing claims

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 Further Antecedents of CSI

Strain: Actors resort to misconduct when they are unable to

achieve their goals through legitimate means (e.g., organizations → Be aware when setting goals!
facing poor results may engage in wrongdoing to acquire the
resources they need to operate)

Organizational culture: Organizational culture can endorse

wrongdoing (e.g., wrongdoing can be encouraged by rewarding → What type of culture are you building?
the achievement of ambitious ends without much consideration
for the means used to achieve them)

Rational choice: Self-interested actors choose actions that are → What behavior are you incentivizing?
beneficial for them but harmful for other parties

Networks: Organizational misconduct is a collective effort → Can you act as a steward for responsibility in
intentionally orchestrated by a number of interconnected actors your network?
(e.g., price fixing between companies)

Accidents: Organizational participants are boundedly rational,

→ Design tasks and environments that do not
and organizational task environments are complex. Bounded
exceed an individual’s abilities.
rationality in the context of complexity can lead to accidents

Source: Greve, H. R., Palmer, D., & Pozner, J. E. (2010). Organizations gone wild: The causes, processes, and consequences of organizational misconduct. The Academy of Management Annals, 4(1), 53-107.

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 The Many Faces of CSI

Source: Scheidler, Schons, and Wieseke (2015): Categorization of >500 real CSI incidents

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Negative Consequences of CSI

• Widespread external perceptions that a firm has acted in a socially irresponsible manner can have negative
consequences for a firm, since an organization’s success—indeed its survival— depends, in part, on
satisfying normative expectations from its environment (Pfeffer & Salancik, 1978; Scott, 2008).
• When organizational action seems controversial to observers and constituents, the firm risks losing
current and potential members, as well as outside endorsement and support, and it risks providing
“ammunition for adversaries” (Elsbach & Sutton, 1992: 712).
• An organization that is seen as a bad actor in society can have a hard time attracting customers,
investors, and employees (Fombrun, 1996).
• Loss of the „license to operate“

Source: Lange, D., & Washburn, N. T. (2012). Understanding attributions of corporate social irresponsibility. Academy of management review, 37(2), 300-326.

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Negative Consequences of CSI

Indeed, ample evidence from empirical research shows that counter-normative behavior can lead to such
consequences for the firm as…
• lawsuits,
• financial losses through settlements and sales declines,
• increases in the cost of capital,
• market share deterioration,
• network partner loss,
• or other costs associated with a negative reputation.

Which consequences are the most prominent ones depends on the type of CSI, for example:

Financial fraud reduced market value of a company’s stocks, increased cost of capital,
and in legal consequences.
Product safety issues large direct costs from supply chain or operational-related defects, loss of
typically sales, and decrease in consumers’ confidence towards the company.
result in
Employee mistreatment legal consequences, reputational harm, loss of shareholder value, and
employee dissatisfaction.
Environmental violations legal consequences and reputational harm.
Source: Lange and Washburn (2012); Hersel et al. (2019)

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Guiding Questions

1. How can we define Corporate Social Irresponsibility (CSI)?

2. What are distinguishing characteristics of the many faces of
CSI?
3. How do stakeholders attribute blame for CSI?
4. How to communicate to stakeholders after a CSI incident?

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Questions That Arise in Case of CSI

Norm Violation: Which legal and/or social

norms were harmed?

Causes and effects: What happened? Why Blame: Who knew what and who made the
did it happen? decisions? Who is to be blamed?
Individuals, teams, or the company? Did
Benefits and harms: Who was harmed? the deciders have a choice?
Who benefitted?
Motivation: Did the incident happen due to
Locus of control: Could it have been a deceptive intent/ a selfish motivation?
prevented? Was it in the control of the
company/ the management to take
preventive actions?

Stability: Was it a repeated incident? Is it

typical for this company/this industry?

Corporate response: How did the

company react? Which actions were
taken? Has there been a public
acknowledgement of guilt/ an apology?

Source: Lange, D., & Washburn, N. T. (2012). Understanding attributions of corporate social irresponsibility. Academy of management review, 37(2), 300-326.

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BP: Gulf of Mexico Oil Spill
Deepwater Horizon

• April 20th, 2010 in the Gulf of Mexico: following the

explosion and sinking of the Deepwater Horizon oil
rig, a sea-floor oil gusher flowed for 87 days.
• Eleven people went missing and were never found
and it is considered the largest accidental marine
oil spill in the history of the petroleum industry.
• The US Government estimated the total discharge at
4.9 million barrels.
• After several failed efforts to contain the flow, the well
was declared sealed on September 19th, 2010.
• Reports in early 2012 indicated the well site was still
leaking.

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BP: Gulf of Mexico Oil Spill
Deepwater Horizon

• In November 2012, BP and the United States Department of Justice settled

federal criminal charges with BP pleading guilty to 11 counts of
manslaughter, two misdemeanors, and a felony count of lying to
Congress.
• BP also agreed to four years of government monitoring of its safety
practices and ethics, and the Environmental Protection Agency announced
that BP would be temporarily banned from new contracts with the US
government.
• BP and the Department of Justice agreed to a record-setting $4.5 billion in
fines and other payments.
• As of February 2013, criminal and civil settlements and payments to a trust
fund had already cost the company $42.2 billion.
• In September 2014, a U.S. District Court judge ruled that BP was primarily
responsible for the oil spill because of its gross negligence and
reckless conduct.
• In July 2015, BP agreed to pay $18.7 billion in fines, the largest corporate
settlement in U.S. history.

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BP Executive „I want my life back“

Source: https://www.youtube.com/watch?v=MTdKa9eWNFw

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Shell Oil Spills in Nigeria

• Shell‘s activities in the Niger delta have caused continuous oil spills during the last 50
years (approx. 300 incidents per year).
• Approx. two million tons of raw oil spilled.
• Life expectancy of the inhabitants of the area has decreased by approx. 10 years due to
water, ground, and air pollution.
• Destruction of natural environment has caused violent conflicts.
• Estimated cost/time needed for cleanup: 1 billion $US, 25-30 years.

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Reflection

Why did the Deepwater Horizon

scandal receive much more attention
than the Shell scandal?

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Why did the Deepwater Horizon scandal receive
much more attention than the Shell scandal?

• High personal relevance

• Very unexpected
• Highly concentrated in time and
space
• Selfish Motivation (?)
• Affected party non-complicity

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The Ford Pinto „Deathtrap“

• Rear-end collision tests had been conducted in December 1970,

some months after the tests, the Pinto was already in production.
• 1972: reports of explosions in low-speed collisions involving Pintos
occurred. These crashes involved ruptured gas tanks that
bursts into flames.
• Ford had conducted a cost-benefit analysis weighing the cost of
technical improvements (11 $US per car) against the harm
incurred by accepting the deaths (180 deaths could have been
prevented).
• Although deadly accidents were equally frequent in case of similar
models at that time, the Pinto case attracted significantly more
attention and was judged as especially egregious.

• High personal relevance

• Very unexpected
• Intentional choice
• Selfish motivation
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 Distinguishing Factors of CSI Incidents
(Lange and Washburn 2012)
Three main factors that influence guilt attributions:

Effect undesirability Affected party Corporate culpability

non-complicity
• Personal threat: Is the event Does the affected party have a share How easily can the guilt be traced
personally threatening? in the guilt for the incident to occur? back to the company‘s behavior?
• Morality: Was the behavior of the • Causality: To what extent is the
company morally wrong? Does source of the negative effect
the event relate to suffering, internal rather than external to the
unfairness, or disrespect? firm?
• Norm violation: Did the event • Moral responsibility: To what
counter the norms of the society? extent could the company have
done otherwise and deserves
Source: Lange, D., & Washburn, N. T. (2012). Understanding attributions of corporate social irresponsibility. Academy of sanctions?
management review, 37(2), 300-326.

January 10, 2024 19

 Distinguishing Factors of CSI Incidents
(Lange and Washburn 2012)
Additional factors that influence guilt attributions:

Effect characteristics
• Unexpectedness: Was the incident likely to occur or was it surprising?
• Concentration in time and space: Was the incident very concentrated in time and space or was it
spread over a long time period and diverse places?

Frames positioning the firm as causal: Are media reports presenting the firm as the bad guy?
Has there been a public acknowledgement of guilt/an apology of the top management?

Firm characteristics
• Perceived disposition for irresponsible behavior: Does the firm/industry have a reputation for this
type of incident to occur?
• Size and prominence: How large and publicly visible is the company?

Identification: Does the observer identify with the company or the affected
parties?
Source: Lange, D., & Washburn, N. T. (2012). Understanding attributions of corporate social irresponsibility. Academy of management review, 37(2), 300-326.

January 10, 2024 20

Relevance of Guilt Attributions

Guilt attributions have an important influence on stakeholders’ behavior

• Stakeholders’ belief that a firm has engaged in conduct that is wrong and that has negative consequences
may increase boycott participation.
• The more responsibility for a crisis that is attributed to the organization (= guilt attributions), the more
damage can be expected, e.g., via consumer’s willingness to boycott.

However, companies can manage these negative consequences with their responses
• Stakeholders’ negative perceptions are minimized when an organization’s response strategy matches
stakeholders’ attributions of responsibility for the crisis.
• The response strategy can be critical for managing stakeholder evaluations of the company.

Source: Bundy, J., Pfarrer, M. D., Short, C. E., & Coombs, W. T. (2017). Crises and crisis management: Integration, interpretation, and research development. Journal of
Management, 43(6), 1661-1692.

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Guiding Questions

1. How can we define Corporate Social Irresponsibility (CSI)?

2. What are distinguishing characteristics of the many faces of CSI?
3. How do stakeholders attribute blame for CSI?
4. How to communicate to stakeholders after a CSI incident?

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Typology of Corrective Actions

Corrective Action Responses

Accommodative Defensive

Executive dismissal correct leadership problems; signal change scapegoating

Product recalls voluntary recalls (firm-initiated), pro-active involuntary recalls (government-

recalls mandated); passive recalls
Organizational Accounts acceptance/rebuilding strategies, e.g., denial strategies, e.g., attack the
apology, repentance, compensation, accuser, denial, blame, and suffering
sympathy, & rectification
Policy changes substantive change to the internal easily decoupled and reversible
strategies, structures, or rules; signal actual changes; “false signals” of change
change
Accommodative responses
• Pro-stakeholder responses; the response directly addresses and engages stakeholder concerns over the misconduct.
• Tangible solutions in response to the affected stakeholder group’s claims and needs.
Defensive responses
• Distancing the firm from the wrongdoing in the eyes of stakeholders and limiting the firm’s financial, reputational, and
strategic losses.
Source: Hersel, M. C., Helmuth, C. A., Zorn, M. L., Shropshire, C., & Ridge, J. W. (2019). The corrective actions organizations pursue following misconduct: A review and research
agenda. Academy of Management Annals, 13(2), 547-585.

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Considerations Relating to Executive Dismissal

• Signaling function: The decision to retain or fire leaders serves as an important signal to stakeholders
about the organization’s intentions for change, which can reduce stakeholder uncertainty about the firm’s
future.
• Possibility for a positive change: Executive dismissal may generate substantive changes that prevent
further misconduct.

Investors often react favorably to

dismissal and reestablish trust with
organizations after executive dismissal
occurs.

Source: Hersel, M. C., Helmuth, C. A., Zorn, M. L., Shropshire, C., & Ridge, J. W. (2019). The corrective actions organizations pursue following misconduct: A review and
research agenda. Academy of Management Annals, 13(2), 547-585.

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 Considerations Relating to Product Recalls

Signaling function:
• Product recalls signal an operational failure, which raises
shareholder concerns about systemic quality problems and,
potentially, subsequent financial losses.
• Choosing a monetary response strategy (such as refunds)
signals that the firm is required to leverage the greatest possible
incentive to remediate the faulty product.
• Product repairs or replacements are interpreted more positively
because these strategies signal to investors that the firm is
confident about its containment efforts and believes that the
likelihood of consumer harm is low.
Consumers and the media react positively
Learning opportunity: to responses that blend proper marketing
• Product recalls highlight structural, procedural, or design and media management with technical
failures, which stimulate firms to change their internal changes that directly address the origin of
procedures or consider alternative solutions. the safety issue.
Source: Hersel, M. C., Helmuth, C. A., Zorn, M. L., Shropshire, C., & Ridge, J. W. (2019). The corrective actions
organizations pursue following misconduct: A review and research agenda. Academy of Management Annals, 13(2), 547-
585.

January 10, 2024 25

 Considerations Relating to Policy Changes

• Signaling function: Policy changes are

signals to stakeholders that help rebuild trust
and reestablish legitimacy after a misconduct.
• Learning opportunity: An opportunity to
make substantive changes to internal
strategies, structures, or rules that incentivized
or allowed the misconduct.

Stakeholders often react positively to policy

changes that introduce socially responsible
or ethical business practices.

Source: Hersel, M. C., Helmuth, C. A., Zorn, M. L., Shropshire, C., & Ridge, J. W. (2019).
The corrective actions organizations pursue following misconduct: A review and research
agenda. Academy of Management Annals, 13(2), 547-585.

January 10, 2024 26

Considerations Relating to Organizational Accounts

Stakeholders, and particularly consumers, prefer accommodative response strategies:

• These include apology, repentance, sympathy, compensation, and rectification.
• Taking responsibility and/or assisting victims who suffered from the misconduct.
• Rebuilding reputation by dealing directly with the misconduct.

Consumers and the public at large react negatively to public denials where firms do not disclose incriminating
information:
• These include attacking the accuser, denial, blaming, and suffering rhetoric.
• Creating separation between transgressing organizations and the actual misconduct through denial.

Source: Hersel, M. C., Helmuth, C. A., Zorn, M. L., Shropshire, C., & Ridge, J. W. (2019). The corrective actions organizations pursue following misconduct: A review and
research agenda. Academy of Management Annals, 13(2), 547-585.

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Apologies

Koehn (2013): Corporate apology is a verbal exchange in which a corporate leader speaks in a way that aims
at a future reconciliation between the offending party and those whom the apologizer of the apologizer's firm
has harmed or offended. A good apology aims at building trust.

Elements of a good apology:

1. Content elements (logos): Naming and taking responsibility for the wrongdoing.
2. Speaker’s character (ethos): Apologizing promptly, conveying a settled, just, and prudent character, creating
a supportive, consistent context.
3. Audience emotions (pathos): Delivering the apology in person, exhibiting empathy.

Source: Koehn, D. (2013). Why saying “I’m sorry” isn’t good enough: The ethics of corporate apologies. Business Ethics Quarterly, 23(2), 239-268.

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„Runaway Toyotas“
Wrong-Sized Floormats?

• 2001: Accident in San Diego, 4 deaths.

• Headlines of „runaway Toyota“ around the world.
• Toyota‘s response: wrongly-sized floormats were blamed.
• Callback of 3.8 million vehicles.
• Increasing number of accounts of runaway Toyotas came up,
many customers said it cannot be explained by the size of the
floormat.
• A new electric steering system had been introduced between
2001 and 2004 in most of the models.
• Toyota was accused of covering-up the problem.

• High personal relevance

• Unexpected
• Deceptive intent (covering up)?

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Apology of Toyota‘s CEO

Source: https://www.youtube.com/watch?v=OIHgB6GHTwQ

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Case:
The Volkswagen Dieselgate Scandal

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Volkswagen „Dieselgate“ Emission Scandal

Facts:
• Testing in spring 2013: divergences between tests occurred.
• September 2015: Volkswagen caught cheating on EPA emission
tests.
• Volkswagen promoted being cleaner regarding their Diesel
engines than they truly were (cheating of customers and
government institutions).
• VW Diesel cars are accused to be 10-40 times dirtier than
allowed (according to EPA standards).
• 482,000 VW diesel cars on American roads affected.
• 11 million cars involved worldwide.
• VW stock price dropped by approx. 30%.

January 10, 2024 32

Volkswagen „Dieselgate“ Emission Scandal

US Press Quotes:
• „Cautionary tale of corporate misfeasance on the highest level“
• „I wouldn‘t be surprised if the company would go under as a result“
• „Horrifically inappropriate behavior“
• „The corporate executives have not acknowledged how bad it is“

Source: https://www.youtube.com/watch?v=TscRpOxAylM

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Public Apology of Prof. Dr. Martin Winterkorn

Source: https://www.youtube.com/watch?v=vTcF-9-K2y4
January 10, 2024 34
Winterkorn Steps Down From his Post as CEO

Source: https://www.youtube.com/watch?v=LxGeCDW6Yu8

January 10, 2024 35

Time for Discussion!

In your group, discuss Volkswagen’s response

to the Dieselgate scandal and be prepared to
share your thoughts with others.
• In your opinion, was the corporate response to
the scandal adequate?
• Would you do something differently?
• Which response was better, Volkswagen or
Toyota? Why?

January 10, 2024 36

THANK YOU
VERY MUCH!

[email protected]