Lecture No.

17 – Relationship between CSR and Business Ethics

Academic Script
Ethics are codes of values and principles that govern the action of a person, or a
group of people regarding what is right versus what is wrong (Levine, 2011; Sexty,
2011). Therefore, ethics set standards as to what is good or bad in organizational
conduct and decision making (Sexty, 2011). It deals with internal values that are a
part of corporate culture and shapes decisions concerning social responsibility with
respect to the external environment. The terms ethics and values are not
interchangeable (Mitchell, 2001). Whereas ethics is concerned with how a moral
person should behave; values are the inner judgments that determine how a person
actually behaves. Values concern ethics when they pertain to beliefs about what is
right and wrong.
In the business setting, being ethical means applying principles of honesty and
fairness to relationships with coworkers and customers (Daft, 2001). Business or
corporate ethics is a form of applied ethics or professional ethics that examines
ethical principles, and moral or ethical problems that arise in a business
environment (Stanwick & Stanwick, 2009). It is an umbrella term that covers all
ethics-related issues that come up in the context of doing business. Business ethics
is defined as the rules, standards, codes, or principles that provide guidance for
morally appropriate behavior in managerial decisions relating to the operations of
the corporation, and business relationship with the society (Sexty, 2011). It applies
to all aspects of business conduct and is relevant to the conduct of individuals and
the entire organization (Mitchell, 2001). Furthermore, business ethics is the
behavior that a business adheres to in its daily dealings with its stakeholders (e.g.,
employees, customers, suppliers, immediate community and society in general)
(Dombin, 2012).
The growth of business organization relies on its sound ethical code of conduct set
to guide both management and employees in its daily activities (Steve, Steensma,
Harrison & Cochran, 2005). The logic supporting ethics as a good practice, is that,
ethical contexts will create the proper climate which will aid to drive the
development of ethical human resource practices (Buckley et al., 2001). The result is
a shared value system that channels, shapes, and directs behavior at work. The
advantages of ethical behavior in business include the following (Mitchell, 2001):
 1. Build customer loyalty: A loyal customer base is one of the keys to long-range
business success. If consumers or customers believe they have been treated
unfairly, such as being overcharged, they will not be repeat customers. Also, a
company’s reputation for ethical behavior can help it create a more positive
image in the marketplace, which can bring in new customers through word-
of-mouth referrals. Conversely, a reputation for unethical dealings hurts the
company’s chances to obtain new customers. Dissatisfied customers can
quickly disseminate information about their negative experiences with the
company.
2. Retain good employees: Talented individuals at all levels of an organization
want to be compensated fairly for work and dedication. Companies who are
fair and open in their dealings with employees have a better chance of
retaining the most talented people.
3. Positive work environment: Employees have a responsibility to be ethical.
They must be honest about their capabilities and experience. Ethical
employees are perceived as team players rather than as individuals. They
develop positive relationships with coworkers. Their supervisors trust them
with confidential information.
4. Avoid legal problems: It can be tempting for a company’s management to cut
corners in pursuit of profit, such as not fully complying with environmental
regulations or labour laws, ignoring worker safety hazards or using sub-
standard materials in their products. The penalties if caught can be severe,
including legal fees and fines or sanctions by governmental agencies. The
resulting negative publicity can cause long-range damage to the company’s
reputation that can even be more costly than the legal fees or fines.
There are three levels of ethical standards i.e., the law, policies and procedures, and
moral standards of employees (Josephson, 1988): 1) the law, which defines for
society as a whole those actions that are permissible and those that are not. The law
merely establishes the minimum standard of behavior. At the same time, actions
that are legal may not be ethical. Therefore, simply obeying the law is insufficient as
a guide for ethical behavior; 2) Organizational policies and procedures, which serve
as specific guidelines for people or employees as they make daily decisions; 3) the
moral stance that employees take when they encounter a situation that is not
governed by law or organizational policies and procedures. A company’s culture can
serve to either support or undermine its employees’ concept of what constitutes
ethical behavior.

Establishing an ethical framework

The ethics of a business depends on the company’s culture or moral behavior (Long
& Sedley, 1987). The decision to do activities ethically is an example of moral
behavior. All corporations have to decide what to do and how to do it, in order to
align their behavior with their ethical values. An organization that places ethics at
the center of all that it does has an ethical framework (International Monetary Fund,
2008). To cope successfully with many potential ethical decisions, they face,
corporations, companies or entrepreneurs must develop a workable ethical
framework to guide themselves and the organization. Such a framework ensures
that ethical concerns are not dismissed as tangential, distracting, or inconsequential.
Developing an ethical framework can involve a four-step process (IDEA, 2008).
Step 1: Recognize the ethical dimensions involved in the dilemma or decision.
Before making informed ethical decisions, it is important to recognize that an ethical
situation exists. This enables the definition of the specific ethical issues involved. To
have a complete view of decisions concerning ethics and to avoid ethical quagmires,
it is important to consider the ethical forces at work in any situation, i.e., honesty,
fairness, respect for the community, concern for the environment, and trust.
Step 2: Identify the key stakeholders involved and determine how the decision will
affect them. The business can influence, and be influenced by a multitude of
stakeholders (e.g., employees, customers, community needs). The demands of these
stakeholders may conflict with one another, thus putting a business in the position
of having to choose which groups to satisfy or not. Before making a decision,
managers must sort out the conflicting interests of various stakeholders by
determining which ones have important stakes in the situation.
Step 3: Generate alternative choices and distinguish between ethical and unethical
responses. When generating alternative courses of action and evaluating the
consequences of each one. Asking and answering questions and ensuring a balance
between the choices can ensure that everyone involved is aware of the ethical
dimensions of the issue.
Step 4: Choose the best or plausible ethical response and implement it. At this point,
there likely will be several ethical choices from which managers can pick. Comparing
these choices with the ideal ethical outcome may help in making the final decision.
The final choice must be consistent with the company’s goals, culture, and value
system as well as those of the individual decision makers. Although an ethical
behavior may not be profitable all the time, an unethical behavior frequently
generates substantial losses, especially on a long term (Baron, 1996). Therefore, it is
important for organizations to understand that, regardless the nature of some
unethical consequences and the timing horizon to which they report, on a long
term, they represent considerable costs. Thus, whereas business ethics focuses on
the role and responsibilities of managers and employees as business agents,
corporate social responsibility, on the other hand, is more focused on the
corporation (or organization) and its obligations and behavior to other stakeholders
in the larger social system (Daft, 2001).

Corporate Social Responsibility (CSR)

Companies or corporations are facing increasing demands that, they look beyond
their own interests and prioritize those of the societies in which they operate
(Broomhill, 2007). The notion that, business enterprises have responsibilities to
society beyond that of making profits for shareholders has been around for
centuries (Carroll, & Shabana, 2010). This is because businesses host their
operations within society, and in return, society expects business to show
responsibility for aspects of their operations (Bichta, 2003). It is no longer
acceptable for a firm or corporation to experience economic prosperity in isolation
from the stakeholders within its immediate and as well the wider environment
(D’Amato et al., 2009). Accordingly, the quality of relationships that an organization
has with its employees and other key stakeholders (e.g., customers, investors,
suppliers, public and governmental officials, activists, and communities) is crucial to
its success.
Corporate Social Responsibility (CSR) can be understood as an integrative
management concept, which establishes responsible behavior within a company, its
objectives, values and competencies, and the interests of stakeholders (Meffert &
Münstermann, 2005). It refers to a business system that enables the production and
distribution of wealth for the betterment of stakeholders through the
implementation and integration of ethical systems and sustainable management
practices (Frederick, 2006). Furthermore, CSR refers to the responsibility of
enterprises for their impacts on society; and the consequences for the integration of
social, environmental, ethical, human rights, and as well consumer concerns into
business operations and core strategy, in close collaboration with stakeholders
(European Commission, 2011).
The concept of social responsibility is often expressed as the assumption of
voluntary responsibilities that go beyond the purely economic and legal
responsibilities of companies (Joseph, 1963:144; Henry & Henry, 1972:5). It also
refers to the voluntary activities or policies that organizations engage in for the
purpose of causing positive social change and environmental sustainability (Aguilera
et al., 2007). More specifically, CSR refers to the selection of institutional objectives
and evaluation of results, not only by the criteria of profitability and welfare
organization, but by the ethical standards or judgments of social desirability. In this
view, the exercise of social responsibility must be consistent with the corporate goal
of earning satisfactory level of benefits, but also implies a willingness to relinquish
some degree of benefit, in order to achieve non-economic objective (John,
2003:373).
Also, the concept of CSR has generated considerable debate in recent decades. On
the one hand, one view holds that, the sole purpose of business is profit. Friedman
(1970:32-33) stated that the resources devoted to CSR are better spent, from a
social perspective, if they increased firm efficiency. Carson (1993:3-32) explained
that, managers are put in the place of unelected officials, when they participate in
CSR, hence support has been significantly provided to the concept of corporate
social responsibility. Davis (1974:19) argued that, the public visibility of corporate
actions is necessary to become socially responsible managers and that companies,
as an essential component of society, has a responsibility towards the solution of
social problems.
Freeman (1984: 88-106) defended this point of view, and developed the theory of
the stakeholder. According to the author, companies have relationships with many
constituent groups and persons (stakeholders) that affect and are affected by the
actions of the company. Also, CSR is achieved when the firm goes beyond
compliance and engages in “actions that appear to further some social good,
beyond the interests of the firm and that which is required by law, to the firm’s
relevant stakeholders (McWilliams et al., 2006, p: 4).
CSR has both economic and legal components/responsibilities for the firm (Carroll,
1991). Economic: a) it is important to perform in a manner consistent with
maximizing earnings per share; b) it is important to be committed to being as
profitable as possible; c) it is important to maintain a strong competitive position; d)
It is important to maintain a high level of operating efficiency; and e) it is important
that a successful firm be defined as one that is consistently profitable. Legal: a) it is
important to perform in a manner consistent with expectations of government and
law; b) it is important to comply with various federal, state, and local regulations; c)
it is important to be a law-abiding corporate citizen; d) it is important that a
successful firm be defined as one that fulfills its legal obligations; and e) it is
important to provide goods and services that at least meet minimal legal
requirements.
Furthermore, adhering to CSR principles has benefits to the organization (Carroll &
Shabana, 2010; Cavico & Mujtaba, 2012): a) it helps to avoid excessive exploitation
of labour, bribery and corruption; b) companies would know what is expected of
them, thereby promoting a level playing field; c) many aspects of CSR behavior are
good for business (e.g., reputation, human resources, branding, and legislation)
which can help to improve profitability, growth and sustainability; d), in some areas,
such as downsizing, it could help to redress the balance between companies and
their employees; and e), potential “rogue” companies would find it more difficult to
compete through lower standards. Moreover, the wider community would benefit
as companies reach out to the key issue of underdevelopment around the world.
Additionally, six major CSR related activities which can generate a positive impact on
the firm are as follows (Kotler & Lee, 2005). First, corporations can provide funds, in-
kind contributions or other resources to build awareness and concern for social
cause. Second, corporations commit to donating a percentage of revenues to a
specific cause based on product sales. Third, corporations support the development
and/or implementation of a behavior change campaign to improve health, safety,
and the environment or community well-being. Fourth, corporations directly
contribute to charity in the form of cash donations and/or in-kind services. Fifth,
corporations support and encourage retail partners and/or franchise members to
volunteer their time to support local community. Finally, corporations adopt and
conduct discretionary business practices that support social causes to improve
community well-being and for protecting the environment.
According to Porter and Kramer (2006), under the scrutiny of government bodies,
activist shareholders, and the media, CSR has become “an inescapable priority for
business leaders in every country”. CSR is increasingly becoming a global practice,
with businesses based in different countries tending to pursue approaches that
reflect their particular mix of political, regulatory and financial systems, culture,
history and resources. The notion of CSR is increasingly important in today’s global
business climate, as companies compete and pursue economic growth through
internationalization.

Stakeholders and CSR

Corporate social responsibility as a business system can enable the production and
distribution of wealth for the betterment of its stakeholders through the
implementation and integration of ethical systems and sustainable management
practices (Frederick, 2006). Stakeholder theory posits that corporations gain
competitive advantage by addressing important stakeholder demands (Freeman,
1982). The stakeholders of any firm are “those groups who can affect or are affected
by the achievement of an organization’s purpose” (Freeman, 1984, p: 49).
Corporations can no longer be isolated economic actors operating in detachment
from society and working solely for shareholders.
There are five major stakeholder groups (internal and external of the firm) that are
recognized as priorities by most firms: owners (shareholders), employees,
customers, local communities, and the society-at large (Carroll, 1991). The concept
CSR embraces multiple stakeholders or partners (employees, customers, suppliers,
the environment, local authorities, governments and others) in addition to
shareholders and other investors (Mazurkiewicz, 2005). The quality of relationships
that a company has with its employees and other key stakeholder (i.e., customers,
investors, suppliers, public and governmental officials, activists, and communities) is
crucial to its success, as is its ability to respond to competitive conditions and
corporate social responsibility (CSR) (D’Amato et al., 2009). To implement CSR,
corporations need employees who are committed to, and knowledgeable about
corporate citizenship (Friedman & Tribunella, 2012).
CSR provides signals to job seekers about organizational values and norms (Greening
and Turban, 2000). Organizations that project a ‘good’ image provide positive signals
to job seekers (Rynes & Cable, 2003). Employees are primary stakeholders who
directly contribute to the success of the company. Thus, understanding employee
reactions to corporate social responsibility may help answer lingering questions
about the potential effects of corporate social responsibility on firms, and also
illuminate some of the processes responsible for them (Bauman & Skitka, 2012).
Social identity theory suggests that individuals tend to reinforce their selfesteem
and bolster their self-image by identifying with groups and organizations recognized
for their social engagement and responsibility (Gond et al., 2010). Depending on the
field of CSR (workplace, marketplace etc.) and the particular stakeholder group
(current vs. future employees), different theories and arguments can be used to
explain positive effects of CSR on employer attractiveness, employer choices and
employee motivation (Bustamante & Brenninger, 2013).
CSR can, therefore, be seen as a useful marketing tool for attracting the most
qualified employees, and also as an important component of corporate reputation
(Fombrun & Shanley, 1990). Accordingly, by enhancing corporate image and
reputation, CSR is an appropriate tool for marketing the organization to prospective
employees. Employees are primary stakeholders who directly contribute to the
success of the company, understanding employee reactions to corporate social
responsibility may help answer lingering questions about the potential effects of
corporate social responsibility on firms as well as illuminate some of the processes
responsible for them (Bauman & Skitka, 2012).
Indeed, an aspect of growing importance for both an employer and potential
employees is the ‘person-organization-fit’ (POF), the way in which a person fits
within his or her working environment (Gond et al., 2010). According to the
European Commission, (2008), workplace CSR – such as work-life balance, social
benefits and health management - has a direct effect on job satisfaction, staff
commitment and loyalty of current employees, and may lead higher motivation,
productivity and innovation. And that, as far as potential employees are able to
evaluate workplace characteristics beforehand, they also have a positive effect on
their cognitive and affective judgment of the company in question. Moreover, when
employees view their organization’s commitment to socially responsible behavior
more favorably, they also tend to have more positive attitudes in other areas that
correlate with better performance, such as customer service and leadership from
management (Porter & Kramer, 2006).
In a study with MBA students from two European and three North American
business schools, it was found that reputation-related attributes of caring about
employees, environmental sustainability, community/stakeholder relations, and
ethical products and services are important in job choice decisions (Montgomery &
Ramus, 2003). According to the authors, a significant percentage of the student
sample was willing to forgo financial benefits in order to work for an organization
with a better reputation for corporate social responsibility and ethics. Similarly, in a
study in the Greater China (i.e., Mainland China, Hong Kong, and Taiwan), it was
found that CSR related issues (i.e., salary and job prospects, work environment,
philanthropic and ethical policy) are considered important when selecting jobs
(Rowley et al., 2013).