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Chapter 2

Business Ethics and

Corporate
Social Responsibility
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Learning Objectives
1. Define ethics, corporate social responsibility, and corporate
sustainability.
2. Explore the concept of business ethics.
3. Describe sources of ethical guidance.
4. Discuss attempts at legislating ethics.
5. Explain the importance of creating an ethical culture and code
of ethics.
6. Define human resource ethics.

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Learning Objectives (Cont.)

7. Discuss the importance of linking pay to ethical behavior.

8. Describe ethics training.
9. Describe the concept of corporate social responsibility.
10. Explain corporate sustainability.
11. Describe a social audit.
12. Explain whether corporate social responsibility can succeed in the
global environment.

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LO 1
Ethics

Discipline of dealing with:

–What is good and bad
–What is right and wrong
–Moral duty and obligation

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LO 1
Corporate Social Responsibility (CSR)
• CSR: Implied, enforced, or felt obligation of
managers, acting in their official capacities, to
serve or protect interests of groups other than
themselves

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Corporate Sustainability LO 1

• Concerns with possible future impact of an

organization on society, including social welfare, the
economy, and the environment.

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LO 2
Business Ethics
• Nearly every industry has experienced a painful ethical crisis in recent
years
• Business ethics scandals continue make headlines Examples:
– Lying on résumés
– Obstruction of justice
– Destruction of records
– Stock price manipulation
– Cutting corners to meet Wall Street’s expectations
– Fraud, waste, and abuse

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LO 3
Sources of Ethical Guidance

• Lead to our beliefs or convictions

about what is right or wrong
• Examples:
– Bible and other holy books
– Conscience
– Significant others
– Code of ethics

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LO 4
Legislating Ethics

• Procurement Integrity Act

• Federal Sentencing Guidelines for Organizations
(FSGO)
• Corporate and Auditing Accountability,
Responsibility, and Transparence Act
• Dodd-Frank Wall Street Reform and Consumer
Protection Act
• Whistleblower Protection

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LO 4
Procurement Integrity Act of 1988

• Prohibits release of source selection and

contractor bid or proposal information
• Places restrictions on former employees
• Passed after reports of military contracts
for:
– $500 toilet seats
– $5,000 hammer
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Federal Sentencing Guidelines for Organizations

(FSGO) of 1992 LO 4

• Outlined effective ethics training program

• Promised softer punishments for wayward
corporations that had ethics programs in place
• Executives needed to be proactive
• Created:
– Ethics officer positions
– Ethics hotlines
– Codes of conduct

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Corporate and Auditing Accountability, LO 4

Responsibility, and Transparence Act of 2002
• Known as Sarbanes-Oxley Act
• Primary focus was to redress accounting
and financial reporting abuses
• Criminalized many corporate acts
• Established whistleblower protections
• Prohibited loans to executives and directors

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Bechtel v Competitive LO 4
Technologies Inc., 2003

• Supreme Court case involving wrongful termination

under Sarbanes-Oxley Act’s whistleblower protection
rule
• Court ruled that the company violated Act by firing two
employees, and ordered them reinstated

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Dodd-Frank Wall Street Reform

LO 4
and Consumer Protection Act

• Act brought on by worst financial crisis

since Great Depression
• Executive compensation played major
role in financial services sector as well
as in capital markets following the
collapse of investment service firms

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Whistleblower Protection LO 4

• Whistleblower: Someone who engages in a

“protected activity”
• Dobb-Frank Act requires SEC to give an
award to qualified whistleblowers (10-30%
of total)
• Act improves whistleblowers’ protection
from retaliation

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Creating an Ethical Culture LO 5

• Way for firm to create and sustain an ethical

culture is to audit ethics
• Climate at the top is fundamental to company's
ethical culture
• Firms with weak ethical cultures experience 10
times more misconduct than companies with
strong ethical cultures

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Code of Ethics LO 5

• Statement of values adopted by:

– Company
– Its employees
– Directors
• Sets official tone of top management regarding
expected behavior
• Establishes rules by which organization operates
• Becomes part of organization’s corporate culture

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Ethics Officer LO 5

• Larger firms appoint ethics officer

• Keeps code on front burner for employees
• Ethics committee often established

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Malcolm Baldrige National Quality LO 5

Award

• Increased emphasis on ethics in leadership

• Criteria: Senior leaders should serve as role
models for the rest of the organization

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Human Resource Ethics LO 6

• Application of ethical principles to HR relationships

and activities
• HR has a great deal to do with establishing an
organization’s conscience

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Linking Pay to Ethical Behavior LO 7

• Few companies have made ethics and

compliance a process for determining
how employees are compensated
• Only about 1 in 6 companies ties
incentives to ethical performance
• More work needs to be done

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Ethics Training LO 8

• FSGO outlined effective ethics training program to

educate employees in company’s standards and
procedures
• Ethics training should be for everyone

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Who Determines CSR? LO 9

Organization’s top executives usually

determine corporation’s approach to corporate
social responsibility

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Carroll’s Pyramid of Corporate Social

Responsibility LO 9

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Trends & Innovations: Not Everyone Is on

Board with Corporate Social Responsibility LO 9

• Some have challenged the concept by

saying that doing well is doing good
• Milton Friedman--Only social
responsibility of business is to increase
profits
• BP promoted themselves as being eco-
friendly

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Corporate Sustainability LO 10

• meeting the needs of the present without

compromising the ability of future
generations to meet their own needs

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LO 11
Social Audit

Systematic assessment of a company’s activities in

terms of their social impact

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Possible Types of Social Audits LO 11

• Simple inventory of activities

• Compilation of socially relevant expenditures
• Determination of social impact
• Ideal social audit: Involve determining true
benefits to society of any socially oriented
business activity

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A Global Perspective: Can Corporate LO 12

Social Responsibility Succeed in the
Global Environment?
• Some global firms are questioning the wisdom
of being socially responsible
• Adherence to CSR issues has declined
• First 15 years of CSR efforts has not produced
the desired results
• Significant changes will have to be made
• Reputation management?

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