Module:

Entrepreneurship
Dr Tamer Karam
Essentials of Entrepreneurship and Small
Business Management
Eighth Edition
Section 1: The Challenge of Entrepreneurship

Chapter 2
Ethics and Social
Responsibility:
Doing the Right
Thing

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Learning Objectives (1 of 2)
1. Define business ethics
and describe the three
levels of ethical
standards.
2. Determine who is
responsible for ethical
behavior and why
ethical lapses occur.
3. Explain how to
establish and maintain
high ethical standards.
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Learning Objectives (2 of 2)
4. Explain the difference between social entrepreneurs
and traditional entrepreneurs.
5. Define social responsibility.
6. Understand the nature of business’s responsibility to
the environment.
7. Describe business’s responsibility to employees.
8. Discuss business’s responsibility to customers.
9. Describe business’s responsibility to investors.
10. Describe business’s responsibility to the community.

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Ethical Behavior
• Ethical behavior: doing what is “right” as
opposed to what is “wrong.”
– Reflects entrepreneur’s personal
values and beliefs
• It is important to consider the perspectives of
different stakeholders: the various groups and
individuals who affect and are affected by a business.

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Figure 2.1 Key Stakeholders

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Ethics and Social Responsibility
• Ethics: a branch of philosophy that studies and
creates theories about the basic nature of right
and wrong, duty, obligation, and virtue.
• Social responsibility: how an organization
responds to the needs of the many elements in
society.

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Business Ethics
• Business ethics: the fundamental moral values
and behavioral standards that form the
foundation for the people of an organization as
they make decisions and interact with
stakeholders.

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Figure 2.2 Three Levels of Ethical
Standards

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Moral Management (1 of 2)
Table 2.1 Approaches to Business Ethics
Organizational
Characteristics Immoral Management Amoral Management Moral Management
Ethical norms Management decisions, Management is neither Management activity
actions, and behavior moral nor immoral; conforms to a standard
imply a positive and decisions are not based of ethical, or right,
active opposition to what on moral judgments. behavior.
is moral (ethical). Management activity is Management activity
Decisions are discordant not related to any moral conforms to accepted
with accepted ethical code. professional standards
principles. A lack of ethical of conduct.
An active negation of perception and moral Ethical leadership is
what is moral is implicit. awareness may be commonplace.
implicit.
Motives Selfish. Management Well-intentioned but Good. Management wants
cares only about its or selfish in the sense that to succeed but only within
its company’s gains. impact on others is not the confines of sound ethical
considered. precepts such as fairness,
justice, and due process.

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Moral Management (2 of 2)
[Table 2.1 continued]
Organizational
Characteristics Immoral Management Amoral Management Moral Management
Goals Profitability and Profitability. Other goals Profitability within the
organizational are not considered. confines of legal obedience
success at any price. and ethical standards.
Orientation Legal standards are Law is the ethical guide, Obedience toward letter
toward law barriers that preferably the letter of and spirit of the law. Law is
management must the law. The central a minimal ethical behavior.
overcome to accomplish question is, what we Prefer to operate well
what it wants. can do legally? above what law mandates.
Strategy Exploit opportunities for Give managers free Live by sound ethical
corporate gain. Cut rein. Personal ethics standards. Assume
corners when it appears may apply but only if leadership position
useful. managers choose. when ethical
Respond to legal dilemmas arise.
mandates if caught and Enlightened self-interest.
required to do so.

Source: Archie B. Carroll, “In Search of the Moral Manager,” reprinted from Business Horizons, March/April, Copyright
1987 by the Foundation for the School of Business at Indiana University. Used withpermission.
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Benefits of Moral Management
1. Companies avoid the damaging fallout from
unethical behavior on their reputation.
2. Dealing with stakeholders is much easier if a
company has a solid ethical foundation on
which to build.
3. It is easier to attract and retain quality workers.
4. It has a positive impact on a company’s bottom
line.
5. It has an impact on a company’s ability to
provide value for its customers.
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Why Be Ethical? (1 of 2)
Top Five Reasons to Run a Business
Ethically
1. Protect brand and company reputation
2. It is the right thing to do
3. Maintain customers’ trust and loyalty
4. Maintain investors’ confidence
5. Earn public acceptance and recognition

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Why Be Ethical? (2 of 2)
Top Five Factors That Drive Business
Ethics
1. Corporate scandals
2. Marketplace competition
3. Demands by investors
4. Pressure from customers
5. Globalization

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Establishing an Ethical Framework (1 of 2)
Step 1: Identify the personal moral and ethical
principles that shape all business decisions.
Step 2: Recognize the ethical dimensions involved in
the dilemma or decision.
Step 3: Identify the key stakeholders involved and
determine how the decision will affect them.
• Triple bottom line (3BL): measuring business
performance using profitability, commitment to ethics
and social responsibility, and its impact on the
environment (“profit, people, and planet”).
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Establishing an Ethical Framework (2 of 2)
Step 4: Generate alternative choices and distinguish
between ethical and unethical responses.
Step 5: Choose the “best” ethical response and
implement it.

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Why Ethical Lapses Occur
Figure 2.3 Causes Of Ethical Lapses

Source: KPMG Integrity Survey 2013, p. 12.

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Features of Ethical Cultures (1 of 2)
1. Leaders support and model ethical behavior.
2. Consistent communications come from all company
leaders.
3. Ethics is integrated into the organization’s goals,
business processes, and strategies.
4. Ethics is part of the performance management
system.
5. Ethics is part of the company’s selection criteria and
selection process.

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Features of Ethical Cultures (2 of 2)
6. The needs of the various stakeholder are balanced
when making decisions.
7. A strong set of core values supports the vision and
mission of the company.
8. The company maintains a long-term perspective on
all decisions.

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Establishing and Maintaining Ethical
Standards
• Ethical tests for judging behavior:

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Principles to Guide Ethical Behavior
• Honesty
• Integrity
• Promise-keeping
• Fidelity
• Fairness
• Caring for others
• Respect for others
• Responsible citizenship
• Pursuit of excellence
• Accountability
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Maintaining Ethical Standards (1 of 3)
• Set the tone.
• Create a company credo:
– A statement that defines the values underlying the
entire company and its ethical responsibilities to its
stakeholders.
• Establish high standards of behavior.
• Involve employees in establishing ethical standards.
• Create a culture that emphasizes two-way
communication.

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Maintaining Ethical Standards (2 of 3)
• Eliminate “undiscussables.”
• Develop a code of ethics:
– A written statement of the standards of behavior
and ethical principles a company expects from its
employees.
• Enforce the code of ethics through policies.
• Recruit and promote ethical employees.
– Ethical commitment.
– Ethical consciousness.
– Ethical competency.
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Maintaining Ethical Standards (3 of 3)
• Conduct ethics training.
• Reward ethical conduct.
• Separate related job duties.
• Perform periodic ethical audits.

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Social Entrepreneurship
• Social entrepreneurs:
– Seek solutions for social problems that are
met by neither the market nor the
government.
– Focus on creating social benefit rather
than commercial success.
– Tackle social problems by taking full
advantage of natural market forces.

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Social Responsibility
• Companies must go beyond “doing well” –
simply earning a profit – to “doing good” –
living up to their social responsibility.
• Surveys show:
– 55% of small businesses’ mission statements
include references to achieving social
goals.
– 90% of small business owners give to charity
and 70% donate both money and time to local
causes.

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Why Be Socially Responsible?
• Research shows:
– 75% of consumers say social
responsibility is important in their
purchasing decisions.
– There is a positive correlation between
ethical, socially responsible behavior and
profitability.
• But it can be difficult to define just what
socially responsible behavior is!

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Being Socially Responsible
• Encourage recycling.
• Support local fundraisers.
• Join in community service.
• Reduce energy usage.
• Create a grant program.
• Support local causes.
• Partner with local school.

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Business’s Responsibility to the
Environment
• Socially responsible business owners focus on the
three Rs:
1. Reduce the amount of energy and materials
used in your company.
2. Reuse whatever you can.
3. Recycle the materials you must dispose of.

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Business’s Responsibility to
Employees
• Recognize the value of employees:
– Listen to them and respect their opinions.
– Ask for their input and involve them in the
decision- making process.
– Provide regular feedback – positive and negative.
– Tell them the truth – always.
– Let them know exactly what’s expected of them.
– Reward them for performing their jobs well.
– Trust them – create an environment of respect and
teamwork.
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Cultural Diversity in the Workplace
Figure 2.4 Diversity Index by County

Source: Kyle Reese-Cassal, 2014/2019 Diversity Index 2014/2019, Ersi,

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Managing a Culturally Diverse
Workforce
• Business owners need to:
– Assess diversity needs.
– Learn to recognize and correct their own
biases and stereotypes.
– Avoid making invalid assumptions.
– Push for diversity in their management teams.
– Concentrate on communication.
– Make diversity a core value in the organization.
– Continue to adjust the company to their
workers.
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Drug Testing
• An effective, proactive drug program should include:
– A written substance abuse policy.
– Training for supervisors to detect substance-
abusing workers.
– An employee education program.
– A drug-testing program, when necessary.
– An employee assistance program (EAP):
§ A company-provided benefit designed to help
reduce workplace problems such as alcoholism,
drug addiction, a gambling habit, and other
conflicts and to deal with them when they arise.
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Sexual Harassment
• Sexual harassment: any unwelcome sexual
advance, request for sexual favors, and other verbal
or physical sexual conduct made explicitly or implicitly
as a condition of employment.
• Small businesses are especially vulnerable
because they lack the policies, procedures, and
training to prevent it.

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What Is Sexual Harassment?
• Behaviors that can result in sexual harassment
charges:
– Quid pro quo harassment
– Hostile environment
– Harassment by nonemployees

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Preventing Sexual Harassment
• Education:
– Training programs can raise awareness of what
constitutes harassment.
• Policy:
– Implement a meaningful and enforceable policy
against harassment.
• Procedure:
– Provide a channel for employees to express their
complaints.

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Privacy
• Business owners should:
– Establish a clear policy for monitoring
employees’ communications.
– Create guidelines for the proper use of the
company’s communication technology and
communicate them to everyone.
– Monitor in moderation.

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Business’s Responsibility to
Customers
• Businesses should build long-term relationships
with their customers.
• Abide by the Consumer Bill of Rights.
– Right to safety.
– Right to know.
– Right to be heard.
– Right to education.
– Right to choice.

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Business’s Responsibility to
Investors
• Businesses have a responsibility to:
– Provide investors with an attractive return on
their investment.
– Meet ethical and social goals.
– Report their financial performance in an
accurate and timely fashion to their
investors.

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Business’s Responsibility to the
Community
• Businesses have a responsibility to:
– Provide jobs and create wealth.
– Contribute to the community in other ways.
§ Act as volunteers for community groups.
§ Participate in projects to help the elderly or poor.
§ Adopt a highway to promote a clean community.
§ Volunteer in school programs.

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Conclusion
• Businesses must do more than earn profit; they
must act ethically and in a socially responsible
way.
– But, there is no universal definition of
ethical behavior.
• Business owners need to commit to following
the highest ethical standards if they expect
their employees to do so.

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