BUSINESS and F I N D L A Strategic EApproach to Y Social Responsibility & Ethics , SOCIETY Fifth Edition S A O. C.RFerrell University of New Mexico A Debbie Thorne Texas State University 1 Linda1Ferrell University of3New Mexico 6 T S Chapter one Social Responsibility Framework Chapter Objectives ●● ●● ●● ●● ●● 2 To define the concept of social responsibility To trace the development of social responsibility To examine the global nature of social responsibility To discuss the benefits of social responsibility To introduce the framework for understanding social responsibility F I N D L E Chapter Outline Y , Social Responsibility Defined Development of Social Responsibility S Global Nature of Social Responsibility A Benefits of Social Responsibility R Framework for Studying Social A Responsibility 1 1 3 6 T S Opening Vignette NiSource—A Top Firm in Social Responsibility For NiSource, social responsibility involves actively living its four core values: fairness, honesty, integrity, and trust. NiSource is a Fortune 500 company that owns a portfolio of energy businesses. Headquartered in Merrillville, Indiana, NiSource is involved in natural gas and electric transmission, storage, generation, and distribution in seven states. The company’s mission reflects its emphasis on social responsibility. It seeks to deliver “safe, reliable, clean and affordable energy” that benefits all stakeholders. As a profitable company complying with all applicable laws, NiSource achieves the economic and legal levels of social responsibility. It also exhibits strong ethical and philanthropic initiatives, leading it to be named one of the “World’s Most Ethical Companies” for the third consecutive year. Its code of ethics encourages employees to take responsibility for the company’s success and ethical conduct. NiSource demonstrates a strong commitment to employees, customers, the environment, and communities. For instance, NiSource has taken a strong stance on improving employee safety and has become an industry leader in this area. NiSource incentivizes employees by offering them rewards for safe behavior. As a result, vehicle accidents have decreased 47 percent and other safety-related incidents by 62 ­percent. NiSource also recognizes the dangers that consumers might face, especially in situations such as potentially hitting an underground utility line when digging in their yards. NiSource invests $2.3 million on public and safety awareness programs for consumers. As part of its awareness campaign, it created the mascot Digger Dog to appeal to children and educate them about c­alling the number 811 to receive information about the location of utility lines before digging. Environmental sustainability is a strong component of NiSource’s corporate culture. In 2014 the company completed a project estimated to reduce harmful sulfur dioxide emissions significantly. The company maintains a Board of Directors’ Environmental Health and Safety Committee that evaluates and approves NiSource’s environmental policy, including policies concerning climate change. NiSource also helps its customers save energy by developing energy efficiency programs such as its Customer CHOICE® program. This program allows customers to reduce energy costs by purchasing natural gas from non-utilities suppliers. Finally, NiSource recognizes its responsibilities toward communities. It has established the NiSource Charitable Foundation to provide funds to nonprofits who it believes contribute toward its mission to help create “strong and sustainable communities.” NiSource has invested $6.8 million toward nonprofit F I N D L E Y , S A R A 1 1 3 6 T S ­organizations. NiSource invests resources in social responsibility and has been recognized for its many benefits. Because of its sustainability initiatives, NiSource was named to the Dow Jones Sustainability Index in 2012. It was also named among the top 25 Socially Responsible Dividend Stocks by the Dividend Channel. These awards are beneficial in attracting investors interested in investing in socially responsible companies. This has significantly impacted NiSource’s bottom line—its stock outperformed the Dow Jones and Standard and Poor’s indices with a total shareholder return of 8.5 percent. NiSource clearly proves that social responsibility helps stakeholders and the bottom line.1 3 4 Business and Society B usinesses today must cope with challenging decisions related to their interface with society. Consumers, as well as others, are increasingly emphasizing the importance of companies’ reputations, which are often based on ethics and social responsibility. The meaning of the term “social responsibility” goes beyond being philanthropic or environmentally sustainable. Seventy-six percent of Americans think the meaning now extends to how employees are treated and the values a company holds.2 In an era of intense global competition and increasing media scrutiny, consumer activism, and government regulation, all types of organizations need to become adept at fulfilling these expectations. Like NiSource, many companies are trying, with varying F results, to meet the many economic, legal, ethical, and philanthropic responsibilities they now face. Satisfying the I expectations of social responsibility is a never-ending process of continuous improvement that requires leadership from top management, buy-in N from employees, and good relationships across the community, industry, D market, and government. Companies must properly plan, allocate, and use resources to satisfy the demands placed on them by investors, employees, L customers, business partners, the government, the community, and others. E or stake in the company are referred to as Those who have an interest stakeholders. Y In this chapter, we examine the concept of social responsibility and , how it relates to today’s complex business environment. First, we define social responsibility. Next, we consider the development of social responsibility, its benefits to organizations, and the changing nature of expectations S in our increasingly global economy. Finally, we introduce the framework A for studying social responsibility used by this text, which includes such elements as strategic management for stakeholder relations; legal, regulaR tory, and political issues; business ethics; corporate governance; consumer A philanthropy and community relations; techrelations; employee relations; nology issues; sustainability issues; and global relations. 1 1 Social Responsibility Defined Business ethics, corporate3volunteerism, philanthropic activities, going green, sustainability, corporate governance, reputation management— 6 these are terms you may have heard used, or even used yourself, to describe the various rightsTand responsibilities of business organizations. You may have thought about S what these terms actually mean for business practice. You may also have wondered how businesses engage in these behaviors or contribute to these outcomes. In this chapter, we clarify some of the confusion that exists in the terminology that people use when they talk about expectations for business. To this end, we begin by defining social responsibility. In most societies, businesses are granted a license to operate and the right to exist through a combination of social and legal institutions. Businesses are expected to provide quality goods and services, abide by Chapter 1 Social Responsibility Framework laws and regulations, treat employees fairly, follow through on contracts, protect the natural environment, meet warranty obligations, and adhere to many other standards of good business conduct. Companies that continuously meet and exceed these standards are rewarded with customer satisfaction, employee dedication, investor loyalty, strong relationships in the community, and the time and energy to continue focusing on businessrelated concerns. Firms that fail to meet these responsibilities can face penalties, both formal and informal, and may have their attention diverted away from core business practice. For example, in 2014 General Motors (GM) instituted a recall of 2.6 million vehicles due to faulty ignition switches. Attorneys filed class action lawsuits against F GM, and GM’s case was hurt further because it knew about the faulty ignition switch problem I on GM’s reputation. years before the recall.3 This is likely to put a damper The first female CEO of GM, Mary Barra, hadNto address these issues to restore customer confidence. However, GM can restore consumer confiD dence if they acknowledge mistakes, correct the problem, and make proper restitution. The goal is to prevent these negativeLoutcomes in the future. In contrast, a large multinational corporation may be faced with protestors who use physical means to destroyEor deface property. For example, in 2014 Vietnamese protestors attacked Y Chinese companies to protest the location of a Chinese oil rig in disputed waters. In addition to , 129 people and killed 2. much physical destruction, the protestors injured Many foreign-owned factories in Vietnam shut down as a result.4 After the violence died down, companies still had to allocate resources to remodel S their stores and answer criticism. A Finally, a company engaged in alleged deceptive practices may face formal investigation by a government agency. For example, officials at the R Justice Department inquired about pricing discussions those in the publishA price fixing was taking ing industry might have had to determine whether place. This occurred two years after a civil antitrust lawsuit was settled with three book publishers who allegedly conspired with Apple to raise electronic book prices. The Justice Department1is concerned that pricing discussions among publishers could lead to future 1 price-fixing in order to keep up with Amazon.com’s domination of the e-book and print book industries.5 Investigations such as this could lead3to legal charges and penalties, perhaps severe enough to significantly alter 6 the company’s products and practices or close the business. For example, The Scooter Store, a comT United States, filed for pany that sold motorized wheelchairs all over the Chapter 11 bankruptcy after a federal investigation S determined the company had deceptively overcharged Medicare and Medicaid between $47 million and $88 million over the course of two years. The company was found to have engaged in deceptive tactics, such as continually contacting doctors to prescribe the motorized wheelchairs whether or not a patient was in need of one; claiming the wheelchairs were free in advertisements when taxpayers were paying for them; and contributing to political campaigns to avoid any changes to Medicare and Medicaid. In addition, the city of New Braunfels, Texas, the home of the company’s ­headquarters, 5 6 Business and Society sued the company for the more than $2 million that was given to them from an economic development fund to build their headquarters. To make matters worse, consumers remarked they made purchases from the company because they claimed their goal was to “Always Do the Right Thing.”6 Businesses today are expected to look beyond self-interest and recognize that they belong to a larger group, or society, that expects responsible participation. Therefore, if any group, society, or institution is to function, there must be a delicate interplay between rights (i.e., what people expect to get) and responsibilities (i.e., what people are expected to contribute) for the common good. Research F indicates that the most ethical and socially responsible companies are the most profitable.7 Therefore, responsible conduct and policies yield Isignificant benefits to society as well as shareholders. While the mediaNprovides much coverage of misconduct and illegal activities in business, most businesses try to act in an ethical and D socially responsible manner. The term social responsibility came into widespread use in the business L world during the 1970s. It has evolved into an emphasis on the following E protection, sustainability, and corporate areas: social issues, consumer governance. Social issues are Y linked with the idea of the “common good.” The common good is associated with the development of social conditions , that allow for societal welfare and fulfillment to be achieved. In other words, social issues involve the ethical responsibilities a firm owes to society. Equal rights, gender roles, marketing to vulnerable populations, data S protection, and internet tracking are examples of social issues common in business. Social issues can A become so significant that they warrant legislation to protect consumers. For the Federal Trade Commission’s Bureau of R Consumer Protection, leading consumer protection issues include misleadA and advertising to children. ing advertising, product safety, Sustainability has also become a growing area of concern in society. In the United States, sustainability is used to refer more to the environ1 mental impact on stakeholders. Green marketing practices, consumption of resources, and greenhouse gas emissions are important sustainability 1 considerations that socially responsible businesses will have to address. 3 be described in more detail in Chapter 3. Corporate governance will It refers to formal systems 6 of accountability, oversight, and control. Corporate governance is becoming an increasingly important topic in light of business scandals T over the last 10–15 years. Issues in corporate governance include concerns S over executive compensation, internal control mechanisms, and risk management.8 Figure 1.1 discusses the social responsibility issues that we will be covering in this text. These four areas of social responsibility tend to conflict with the traditional or neoclassical view of a business’s responsibility to society. The traditional view of social responsibility, articulated in the famous economist Milton Friedman’s 1962 Capitalism and Freedom, asserts that business has one purpose, satisfying its investors or shareholders, and that any other considerations are outside its scope.9 Although this view still exists Chapter 1 Social Responsibility Framework 7 FIGURE 1.1 Major Emphases of Social Responsibility Issues Recognition Issue Awareness Social issues Consumer protection Sustainability Corporate governance Philanthropy Legal responsibilities Employee well-being Outcomes Decisions F I Stakeholder Evaluations N Source: © O.C. Ferrell, 2014. D L today, it has lost credibility as more and moreEcompanies have assumed a social responsibility orientation.10 Companies Y see social responsibility as a part of their overall corporate strategy and a benefit that directly , increases the bottom line. We define social responsibility as the adoption by a business of a strategic focus for fulfilling the economic, legal, ethical, and philanthropic responsibilities expected of it by its stakeholders. This S and activities, including definition encompasses a wide range of objectives both historical views of business and perceptions Athat have emerged in the last decade. Let’s take a closer look at the parts of this definition. R A Social Responsibility Applies to All Types of Businesses It is important to recognize that all types of businesses—small and large, sole proprietorships and partnerships, as well1 as large corporations— implement social responsibility initiatives to further their relationships 1 with their customers, their employees, and their community at large. For 3 example, Altered Seasons, a candle retailer in Buffalo, New York, operates on a one-for-one model, where the company gives a meal to the hungry for 6 every candle that it sells. The company’s candles are made from environT in the United States.11 mentally friendly materials and are manufactured Thus, the ideas advanced in this book are equally S relevant and applicable across a wide variety of businesses and nonprofits. Nonprofit organizations are expected to be socially responsible. Relationships with stakeholders—including employees, those that are served, and the community—affect their reputation. For example, the Southern California chapter of the Better Business Bureau was expelled from the organization after evidence emerged in 2010 that it had been operating a pay-for-play scheme. The Better Business Bureau is a nonprofit self-regulatory organization that objectively rates businesses on how they social responsibility The adoption by a business of a strategic focus for fulfilling the economic, legal, ethical, and philanthropic responsibilities expected of it by its stakeholders. 8 Business and Society treat consumers and handle consumer complaints. Investigations revealed that employees at the Southern California bureau were awarding businesses high rankings only if they paid to become members. The bureau is the largest ever expelled for misconduct.12 This example demonstrates that nonprofit organizations must also develop strategic plans for social responsibility. In addition, government agencies are expected to uphold the common good and act in an ethical and responsible manner. Although the social responsibility efforts of large corporations usually receive the most attention, the activities of small businesses may have a greater impact on local communities.13 Owners of small businesses often serve as community leaders, F provide goods and services for customers in smaller markets that larger corporations are not interested in serving, creI to local community causes. Medium-sized ate jobs, and donate resources businesses and their employees N have similar roles and functions on both a local and a regional level. Although larger firms produce a substantial D output of the United States, small businesses portion of the gross national employ about half of the L private sector workforce and produce roughly half of the private sector output. In addition to these economic outcomes, small business presents anEentrepreneurial opportunity to many people, some of whom have been shut Y out of the traditional labor force. Women, minorities, and veterans are increasingly interested in self-employment , and other forms of small business activity.14 It is vital that all businesses consider the relationships and expectations that our definition of social responsibility suggests. S Social ResponsibilityANeeds a Strategic Focus R Social responsibility is an important business concept and involves sigA nificant planning and implementation. Our definition of social respon- sibility requires a formal commitment, or a way of communicating the company’s social responsibility philosophy. For example, Herman Miller, 1 provider of office, residential, and health­ a multinational care furniture TABLE 1.1 Herman Miller, Inc.’s, 1 and services, established a set of values that create a culture of community both within and outside of Corporate Culture Values of Community 3 (shown in Table 1.1). This statement declares the company •• Curiosity and Exploration Herman Miller’s philosophy and the way it will fulfill 6 •• Performance its responsibilities to its customers, its shareholders, its •• Engagement Tthe community, and the natural environment. employees, •• Design Because this S statement takes into account all of Herman •• Relationships Miller’s constituents and applies directly to all of the com•• Inclusiveness pany’s operations, products, markets, and business rela•• A Better World tionships, it demonstrates the company’s strategic focus •• Transparency on social responsibility. Other companies that embrace •• Foundations social responsibility have incorporated similar elements Source: “Things That Matter to Us,” Herman into their strategic communications, including mission Miller, Inc., http://www.hermanmiller.com/about­ and vision statements, annual reports, and websites. For us/things­that­matter­to­us.html (accessed May 28, 2014). Courtesy of Herman Miller, Inc. example, Hershey Entertainment & Resorts focuses upon Chapter 1 Social Responsibility Framework four ­pillars of CSR: (1) the environment and the goal to reduce the ecological footprint; (2) the community and being a positive, productive, and informed partner; (3) the workplace, in fostering one that is safe, inclusive, desirable, and respectful; and (4) a marketplace and guest focus that considers the ethical treatment of all s­ takeholders.15 In addition to a company’s verbal and written commitment to social responsibility, our definition requires action and results. To implement its social responsibility philosophy, Herman Miller has developed and implemented several corporate-wide strategic initiatives, including research on improving work furniture and environments, innovation in the area of ergonomically correct products, progressive employee develF opment opportunities, volunteerism, and an environmental stewardship I many accolades, such program.16 These efforts have earned the company as being named the “Most Admired” furnitureN manufacturer in America by Fortune magazine, and a place on many prestigious lists, including Fortune magazine’s “100 Best Companies toDWork for in America,” Forbes magazine’s “Platinum List” of America’s L 400 best-managed large companies, Business Ethics magazine’s “100 Best Corporate Citizens,” E for Supplier Diversity,” Diversity Inc. magazine’s “Top 10 Corporations and The Progressive Investor’s “Sustainable Business Top 20.”17 As this Y example demonstrates, effective social responsibility requires both words , and action. If any such initiative is to have strategic importance, it must be fully valued and championed by top management. Leaders must believe in and S support the integration of stakeholder interests and economic, legal, ethiA corporate decision. For cal, and philanthropic responsibilities into every example, company objectives for brand awareness and loyalty can be R developed and measured from both a marketing and a social responsibility A a relationship between standpoint because researchers have documented consumers’ perceptions of a firm’s social responsibility and their intentions to purchase that company’s brands.18 Likewise, engineers can integrate 1 consumers’ desires for reduced negative environmental impact in product designs, and marketers can ensure that a brand’s advertising campaign 1 incorporates this product benefit. Finally, consumers’ desires for an environmentally sustainable product may stimulate 3 a stronger company interest in assuming environmental leadership in all6aspects of its operations. Home Depot, for example, responded to demands by consumers and enviT products by launching a ronmentalists for environmentally friendly wood new initiative that gives preference to wood products certified as having S been harvested responsibly over those taken from endangered forests.19 With this action, the company—which has long touted its environmental principles—has chosen to take a leadership role in the campaign for environmental responsibility in the home improvement industry. Although social responsibility depends on collaboration and coordination across many parts of the business and among its constituencies, it also produces effects throughout these same groups. We discuss some of these benefits in a later section of this chapter. 9 10 Business and Society Because of the need for coordination, a large company that is committed to social responsibility often creates specific positions or departments to spearhead the various components of its program. For example, Starbucks has a Global Responsibility Department that focuses on responsible and ethical behaviors regarding the environment, employee relations, customer interactions, suppliers, and communities. The company’s Environmental Starbucks Coffee Company Affairs team works to develop environmentally responsible policies and minimize the company’s “footprint.” CEO Howard Schultz considers the creation of a good work environment a top priority. Some of the results of this philosophy include offering one of the best healthcare programs F in the coffee shop industry and the institution of wellness programs. Starbucks also practices conservation with its I Equity Practices (CAFE), which is a set of Starbucks Coffee and Farmer socially responsible coffee-buying guidelines. Finally, the company is philN anthropic and engages the community on how well the company is doing from their perspective. InDthe table of contents page of the company’s annual report, CSR (corporate L social responsibility) is listed as a key feature.20 A smaller firm may give an executive, perhaps in human resources or the business owner, the E ability to make decisions regarding community involvement, ethical standards, Y philanthropy, and other areas. Regardless of the formal or informal nature of the structure, this department or execu, responsibility initiatives are aligned with tive should ensure that social the company’s corporate culture, integrated with companywide goals and plans, fully communicated within and outside the company, and measured S to determine their effectiveness and strategic impact. In sum, social responsibility must be given the same A planning time, priority, and management attention that is given to any other company initiative, such as continuous R improvement, cost management, investor relations, research and development, human resources, orA marketing research. Social Responsibility1Fulfills Society’s Expectations Another element of our definition of social responsibility involves society’s 1 expectations of business conduct. Many people believe that businesses 3 four types of responsibility: financial, legal, should accept and abide by ethical, and philanthropic6(see Table 1.2). To varying degrees, the four types are required, expected, and/or desired by society.21 T At Stage 1, businesses have a responsibility to be financially viable so S on investment for their owners, create jobs that they can provide a return for the community, and contribute goods and services to the economy. The economy is influenced by the ways organizations relate to their shareholders, their customers, their employees, their suppliers, their competitors, their community, and even the natural environment. For example, in nations with corrupt businesses and industries, the negative effects often pervade the entire society. Transparency International, a German organization dedicated to curbing national and international corruption, conducts an annual survey on the effects of business and government Chapter 1 Social Responsibility Framework TABLE 1.2 Social Responsibility Requirements Stages Examples Stage 1: Financial Viability Starbucks offers investors a healthy return on investment, including paying dividends. Stage 2: Compliance with Legal and Regulatory Requirements Starbucks specifies in its code of conduct that payments made to foreign government officials must be lawful according to the laws of the United States and the foreign country. Stage 3: Ethics, Principles, and Values Starbucks offers healthcare benefits to part-time employees and supports coffee growers so they get a fair price. Stage 4: Philanthropic Activities Starbucks created the Starbucks Foundation to award grants to eligible nonprofits and to give back to their communities. F I corruption on a country’s economic growth andNprospects. The organization reports that corruption reduces economic growth, inhibits foreign investment, and often channels investment andD funds into “pet projects” that may create little benefit other than high returns to the corrupt deciL sion makers. Many of the countries with the highest levels of perceived E corruption also report the highest levels of poverty in the world. These Y countries include Somalia, Chad, Iraq, Haiti, Afghanistan, and Myanmar. Transparency International also notes that some relatively poor countries, , including Bulgaria, Colombia, and Estonia, have made positive strides in curbing corruption. However, Canada and Iceland have started to experience higher levels of perceived corruption, yet S maintain relatively strong economies. The organization encourages governments, consumers, and A corruption.22 Although nonprofit groups to take action in the fight against business and society may be theoretically distinct, R there are a host of practical implications for the four levels of social responsibility, business, and A its effects on society. At Stage 2, companies are required to maintain compliance with legal and regulatory requirements specifying the nature of responsible business 1 the behavior of busiconduct. Society enforces its expectations regarding nesses through the legal system. If a business chooses to behave in a way 1 that customers, special-interest groups, or other businesses perceive as 3 representatives to draft irresponsible, these groups may ask their elected legislation to regulate the firm’s behavior, or they 6 may sue the firm in a court of law in an effort to force it to “play by the rules.” For example, T in 2014 Google was charged with anticompetitive behavior regarding S its secret Mobile Application Distribution Agreements (MADAs) that all mobile device manufacturers have had to sign. The MADAs require manufacturers to preload and prominently place Google applications and search engines onto the devices. The antitrust lawsuit claimed that manufacturers should have the freedom to choose which search engines will be placed on their devices and that MADAs are stifling competition because other search engines are prevented from approaching the manufacturers to argue for their inclusion on the devices. Further claims stated that this kind of activity decreases the likelihood of the improvement of search engine functionality 11 12 Business and Society in general. Lastly, they claimed that if other search engines, such as Bing and Yahoo!, were able to compete against Google in the mobile realm, the prices of the devices for end consumers would dramatically decrease.23 Beyond financial viability and legal compliance, companies must decide what they consider to be just, fair, and right—the realm of ethics, principles, and values. Business ethics refers to the principles and standards that guide behavior in the world of business. Principles are specific and universal boundaries for behavior that should never be violated. Principles such as fairness and honesty are determined and expected by the public, government regulators, special-interest groups, consumers, industry, and individual organizations. The F most basic of these principles have been codified into laws and regulations to require that companies conduct themselves in ways that conformI to society’s expectations. Ethical issues exist in most managerial decisions.NA firm needs to create an ethical culture with values and norms that meet the expectations of stakeholders. Values are enduring beliefs and idealsDthat are socially enforced. Freedom of speech, for example, is a strong value L in the Western world. At the Marriott, values include putting people first, pursuing excellence, embracing change, E acting with integrity, and serving our world.24 Many firms and industries Y have chosen to go beyond these basic laws in an effort to act responsibly. The Direct Selling Association (DSA), for example, has established ,a code of ethics that applies to all individual and company members of the association. Because direct selling involves personal contact with consumers, there are many ethical issues that can S arise. For this reason, the DSA code directs the association’s members to go beyond legal standardsA of conduct in areas such as product representation, appropriate ways of contacting consumers, and warranties and R guarantees. In addition, the DSA actively works with government agencies A that ethical standards are pervasive in the and consumer groups to ensure direct selling industry. The World Federation of Direct Selling Associations (WFDSA) also maintains two codes of conduct, one for dealing with consumers and the other for 1interactions within the industry, that provide guidance for direct sellers1around the world in countries as diverse as Argentina, Canada, Finland, Taiwan, and Poland.25 3 At Stage 4 are philanthropic activities, which promote human welfare and goodwill. By making philanthropic donations of money, time, 6 and other resources, companies can contribute to their communities and T of life. For example, the UPS Foundation society and improve the quality has been active in the global S community since 1951. The foundation offers programs in philanthropy and humanitarian relief. Donations total approximately $100 million worldwide. In addition to the monetary contributions, 1.4 million annual volunteer hours have also been given. The foundation focuses its efforts on education, disaster preparedness and resiliency, urgent response to unexpected disasters, post-disaster recovery, in-kind disaster relief, skill-based volunteering, partnerships with ­humanitarian organizations, and thought leadership.26 Chapter 1 Social Responsibility Framework FIGURE 1.2 Social Responsibility Continuum Minimal Considerations that focus solely on shareholders Strategic Financial, legal, ethical, and philanthropic considerations targeted at selected stakeholders F When these dimensions of social responsibility were first introduced, I many people assumed that there was a natural progression from financial viability to philanthropic activities, meaning that a firm had to be finanN cially viable before it could properly consider the other three elements. Today, social responsibility is viewed in a moreDholistic fashion, with all four dimensions seen as related and integrated, L and this is the view we will use in this book.27 In fact, companies demonstrate varying degrees of E 1.2 depicts the social social responsibility at different points in time. Figure responsibility continuum. Companies’ fulfillment Y of their responsibilities can range from a minimal to a strategic focus that results in a stakeholder , orientation. Firms that focus only on shareholders and the bottom line operate from a legal or compliance perspective. Firms that take minimal responsibility view such activities as a “cost of doing business.” Some critS the minimal approach ics believe that pharmaceutical manufacturers take with respect to the advertising and sale of certain A drugs. A court case involving pharmaceutical company GlaxoSmithKline revealed a string of R pharmaceutical companies engaging in aggressive and deceptive marketing to encourage doctors to prescribe psychotropicAdrugs to children. It was found that over the course of 20 years, many companies—including Pfizer, Johnson & Johnson, and Eli Lilly—targeted academic leaders, wrote articles, suppressed data, and seduced doctors with 1 gifts to sell these drugs for pediatric use. Further, the children who were prescribed these drugs were 1 mainly foster children from low-income backgrounds. To date, approxi3 mately $13 billion has been paid by the pharmaceutical industry to settle lawsuits related to this issue.28 6 Strategic responsibility is realized when a company has integrated a T into its strategic direcrange of expectations, desires, and constituencies tion and planning processes. In this case, an organization considers social S responsibility an essential component of its vision, mission, values, and practices. BT, formerly known as British Telecom, is communicating its commitment to strategic responsibility with the theme of “Responsible Business,” where BT is focused on tackling climate change, helping create a more inclusive society, and enabling sustainable economic growth. BT has been reporting on its social responsibility activities for nearly 20 years, which makes the company a leader in accountability disclosure. Finally, 13 14 Business and Society firms may be forced to be more socially responsible by government, nongovernmental organizations, consumer groups, and other stakeholders. In this case, any expenditures are considered a “tax” that occurs outside the firm’s strategic direction and resource allocation process.29 Executives with this philosophy often maintain that customers will be lost, employees will become dissatisfied, and other detrimental effects will occur because of forced social responsibility.30 In this book, we will give many examples of firms that are at different places along this continuum to show how the pursuit of social responsibility is never ending. For example, Pacific Gas & Electric (PG&E) was nominated to the 100 Best F Corporate Citizens list between 2008 and 2013. It had also been named as one of the United States’ three most sustainI been considered a leader in the industry for able large utilities. PG&E has sustainability and has demonstrated a commitment to clean energy and N community engagement. However, in 2014 it was dropped from the 100 DPG&E was suffering the repercussions from a Best Corporate Citizens list. 2010 gas line explosion. After L paying a large settlement to those affected by the disaster, the California Public Utilities Commission levied a $14.35 E for allegedly sending them incorrect safety million fine against PG&E information about a gas pipeline and then failing to correct the informaY tion for a long period of time. As with most large firms, PG&E must con, of social responsibility issues and determine tinuously monitor a number the most appropriate corporate response and action.31 S Social ResponsibilityARequires a Stakeholder Orientation The final element of ourRdefinition involves those to whom an organization is responsible, including customers, employees, investors and A stakeholders Constituents who have an interest or stake in a company’s products, industry, markets, and outcomes. shareholders, suppliers, governments, communities, and many others. These constituents have a stake in, or claim on, some aspect of a company’s products, industry,1markets, and outcomes and are thus known as ­stakeholders. We explore the roles and expectations of stakeholders 1 in Chapter 2. Companies that consider the diverse perspectives of these constituents in their daily3 operations and strategic planning are said to have a stakeholder orientation, meaning that they are focused on 6 stakeholders’ concerns. Adopting this orientation is part of the social responsibility philosophy,Twhich implies that business is fundamentally connected to other parts S of society and must take responsibility for its effects in those areas. R. E. Freeman, a developer of stakeholder theory, maintains that business and society are “interpenetrating systems,” in that each affects and is affected by the other.32 For the common good to be achieved, crossinstitutional and -organizational interactions must move society toward shared partnerships. For example, Kingfisher, the operator of more than 1,130 home improvement retail stores in nine countries, embarked on a new corporate responsibility initiative called “Kingfisher Net Positive.” Chapter 1 Social Responsibility Framework The four components to this plan included timber, energy, innovation, and communities. In just over two years, the company has nearly reached its goal of sourcing 100 percent of timber from responsible sources, with 89 percent responsibly sourced. Kingfisher has expanded energy-efficient product lines in its stores to help customers reduce energy consumption. In terms of innovation, the company is focusing on designing products with closed loop systems and determining ways of producing materials from in-store recycling. Finally, the company impacts its communities through education, volunteering, and partnering with other organizations, with 25 percent of Kingfisher stores engaged in these activities.33 F I Development of Social Responsibility N In 1959, Harvard economist Edward Mason asserted that business cor34 His declaraD porations are “the most important economic institutions.” tion implied that companies probably affect the L community and society as much, or perhaps more, in social terms as in monetary, or financial, E a living wage are necterms. Employment and the benefits associated with essary to develop a sustainable economy. The opportunity for individuals Y and businesses to attain economic success is necessary to create a society , our economic system, that can address social issues. Today some question but without economic resources little progress can be made in developing society. Although some firms have more of a socialSimpact than others, companies do influence many aspects of our lives, from A the workplace to the natural environment. This influence has led many people to conclude that R companies’ actions should be designed to benefit employees, customers, A as shareholders. Social business partners, and the community as well responsibility has become a benchmark for companies today.35 However, these expectations have changed over time. For example, the first corporations in the United States were granted charters1 by various state governments because they were needed to serve an important function in society, 1 such as transportation, insurance, water, or banking services. In addition 3 specified the internal to serving as a “license to operate,” these charters structure of these firms, allowing their actions 6to be more closely monitored.36 During this period, corporate charters were often granted for a T limited period of time because many people, including legislators, feared the power that corporations could potentially wield. It was not until the S mid 1800s and early 1900s that profit and responsibility to stockholders became major corporate goals.37 After World War II, as many large U.S. firms came to dominate the global economy, their actions inspired imitation in other nations. The definitive external characteristic of these firms was their economic dominance. Internally, they were marked by the virtually unlimited autonomy afforded to their top managers. This total discretion meant that these firms’ top managers had the luxury of not having to answer for some 15 16 Business and Society of their actions.38 In the current business mind­set, such total autonomy would be viewed as a hindrance to social responsibility because there is no effective system of checks and balances. In Chapter 3, we elaborate on corporate governance, the process of control and accountability in organizations that is necessary for social responsibility. In the 1950s, the 130 or so largest companies in the United States provided more than half of the country’s manufacturing output. The top 500 firms accounted for almost two-thirds of the country’s nonagricultural economic activity.39 U.S. productivity and technological advancements dramatically outpaced those of global competitors, such as Japan and Western Europe. For example, F the level of production in the United States was twice as high as that in Europe and quadruple that in Japan. The level I carried out by U.S. corporations was also of research and development well ahead of overseas firms. N For these reasons, the United States was perceived as setting a global standard for other nations to emulate. During the 1950s and D 1960s, these companies provided benefits that are often overlooked. Their L contributions to charities, the arts, culture, and other community activities were beneficial to the industry or to sociE companies’ own profitability. For example, ety rather than simply to the the lack of competition meant Y that companies had the profits to invest in higher quality products for consumer and industrial use. Although the , required companies to take actions to protect government passed laws that the natural environment, make products safer, and promote equity and diversity in the workplace, many companies voluntarily adopted responS sible practices rather than constantly fighting government regulations and A provided many of the services that are now taxes. These corporations once provided by the government in the United States. For example, during this R period, the U.S. government spent less than the government of any other A things as pensions and health benefits, as industrialized nation on such these were provided by companies rather than by the government.40 In the 1960s and 1970s, however, the business landscape changed. 1 the 1970s and 1980s changed the role of corEconomic turmoil during porations. Venerable firms1that had dominated the economy in the 1950s and 1960s became less important as a result of bankruptcies, takeovers, 3 mergers, or other threats, including high energy prices and an influx of foreign competitors. The stability experienced by the U.S. firms of mid­century 6 dissolved. During the 1960s and 1970s, the Fortune 500 had a relatively T low turnover of about 4 percent. By 1990, however, one-third of the companies in the Fortune 500 S of 1980 had disappeared, primarily as a result of takeovers and bankruptcies. The threats and instability led companies to protect themselves from business cycles by becoming more focused on their core competencies and reducing their product diversity. To combat takeovers, many companies adopted flatter organizational hierarchies. Flatter organizations meant workforce reduction but also entailed increasing empowerment of lower-level employees. Thus, the 1980s and 1990s brought a new focus on profitability and economies of scale. Efficiency and productivity became the primary Chapter 1 Social Responsibility Framework ­ bjectives of business. This fostered a wave of downsizing and restruco turing that left some people and communities without financial security. Before 1970, large corporations employed about one of every five Americans, but by the 1990s, they employed only one in ten. The familial relationship between employee and employer disappeared, and along with it went employee loyalty and company promises of lifetime employment. Companies slashed their payrolls to reduce costs, and employees changed jobs more often. Workforce reductions and “job hopping” were almost unheard of in the 1960s but had become commonplace two decades later. These trends made temporary employment and contract work the fastest 41 growing forms of employment throughout the 1990s. F Along with these changes, top managers were largely stripped of their former freedom. Competition heated up,Iand both consumers and stockholders grew more demanding. The increased N competition led business managers to worry more and more about the bottom line and about protecting the company. Escalating use of the D internet provided unprecedented access to information about corporate decisions and conduct, and L fostered communication among once unconnected groups, furthering conE sumer awareness and shareholder activism. Consumer demands put more pressure on companies and their employees. The education and activism Y of stockholders had top management fearing for their jobs. Throughout the last two decades of the twentieth century, ,legislators and regulators initiated more and more regulatory requirements every year. These factors resulted in difficult trade-offs for management. S Corporate responsibilities were renewed in the 1990s. Partly as a result A 1980s, many industries of business scandals and Wall Street excesses in the and companies decided to pursue and expect more responsible and respectR able business practices. Many of these practices focused on creating value A and decreased the narfor stakeholders through more effective processes row and sole emphasis on corporate profitability. At the same time, consumers and employees became less interested in making money for its own sake and turned toward intrinsic rewards and 1a more holistic approach in the development to life and work.42 This resulted in increased interest 1 of human and intellectual capital; the installation of corporate ethics programs; the development of programs to promote3employee volunteerism in the community; strategic philanthropy efforts and 6 trust in the workplace; and the initiation of a more open dialog between companies and their T stakeholders. Despite major advances in the 1990s, the sheer S number of corporate scandals at the beginning of the twenty-first century prompted a new era of social responsibility. The downfall of Enron, WorldCom, and other corporate stalwarts caused regulators, former employees, investors, nongovernmental organizations, and ordinary citizens to question the role and integrity of big business and the underlying economic system. Federal legislators passed the Sarbanes–Oxley Act to overhaul securities laws and governance structures. The new Public Company Accounting Oversight Board was implemented to regulate the accounting and auditing profession after 17 18 Business and Society Enron and WorldCom failed due to accounting scandals. Newspapers, business magazines, and news websites devoted entire ­sections—often labeled Corporate Scandal, Year of the Apology, or Year of the Scandal— to the trials and tribulations of executives, their companies and auditors, and stock analysts. In 2007 and 2008, a housing boom in the United States collapsed, setting off a financial crisis. Homeowners could not afford to pay their mortgages. Because of the housing boom, in many cases the mortgages were higher than the houses were worth. People all across the United States began to walk away from their mortgages, leaving banks and other lenders with hundreds of thousands of houses that had decreased in value. F Meanwhile, companies such as AIG were using complex financial instruments known as derivativesI to transfer the risks of securities such as mortgages, almost as a type of N insurance policy. The housing collapse created a number of demands on financial firms who had sold these derivatives to D on the defaulted debt securities, but financial pay their insurance contracts firms did not have enoughLof a safety net to cover so many defaults. The housing collapse created a chain reaction that led to the worst recession EThe government was forced to step in to bail since the Great Depression. out financial firms in order Y to keep the economy going and prevent the economy from collapsing further. Many established organizations such as , Bear Stearns, Lehman Brothers, and Countrywide went bankrupt or were acquired by other firms at a fraction of what they were originally worth. Table 1.3 describes some of the corporations and banks that collapsed in S the financial crisis. TABLE 1.3 A R Corporations and Banks Involved in the Financial Crisis A Organization Outcome General Motors Declared bankruptcy and required a government bailout of $49.5 billion to reorganize. The government sold their last shares in GM in 2013 and is estimated to have lost more than $10 billion on its investment. AIG Bank of America Washington Mutual 1 1 Received 3 a government bailout of $182 million and was ­criticized for using bailout money to pay executives large ­bonuses. 6 AIG repaid the last of its loans in 2013. Received $42 billion in bailout money as part of the Troubled T Asset Relief Program. It paid back its loans in 2009. S subsidiaries were sold by the Federal Deposit Its banking Insurance Corporation to J.P. Morgan for $1.9 billion. Chrysler Declared bankruptcy and required a government bailout of $12.5 billion. By 2011 Chrysler had repaid most of the debt, and Fiat agreed to purchase the rest of the U.S. Treasury’s shares in Chrysler for $500 million. Countrywide Financial Acquired by Bank of America for $4.1 billion. Bank of America inherited many of the lawsuits against Countrywide claiming it had engaged in fraudulent and discriminatory lending practices. Chapter 1 Social Responsibility Framework In 2010, Congress passed the Dodd–Frank Wall Street Reform and Consumer Protection Act, the most sweeping legislation since Sarbanes– Oxley. Dodd–Frank is intended to protect the economy from similar financial crises in the future by creating more transparency in the financial industry. This complex law required legislators to develop hundreds of laws to increase transparency and create financial stability. The Dodd– Frank Act will be discussed in more detail in Chapter 4. The financial crisis and the collapse of many well-known institutions has led to a renewed interest in business ethics and social responsibility. In the last five years, the economy has stabilized and the stock market has recovered. Even though many banks failed F during the financial crisis, today banks and the other financial institutions are much larger. The largest five banks are twice as large as they were a Idecade ago.43 Rather than getting rid of too-big-to-fail financial institutions, Nthey seem to be growing much larger despite recent legislation. D L Global Nature of Social Responsibility E Although many forces have shaped the debate on Y social responsibility, the increasing globalization of business has made it an international concern. , and scope of business A common theme is criticism of the increasing power and income differences among executives and employees. Questions of corruption, environmental protection, fair wages, safe working conditions, S posed. Many critics and and the income gap between rich and poor were protesters believe that global business involves exploitation of the working A poor, destruction of the planet, and a rise in inequality.44 After the finanR cial crisis, global trust in business dropped significantly. More recent polls A indicate that trust is rebounding in certain countries, but companies are still vulnerable to the ramifications of distrust. Approximately 54 percent of global consumers indicate they trust business. This is even lower in the 1 overall.45 In an enviUnited States, where only 49 percent trust business ronment where consumers distrust business, greater 1 regulation and lower brand loyalty are the likely results. We discuss more of the relationship 3 later in this chapter. between social responsibility and business outcomes The globalization of business has critics who 6 believe the movement is detrimental because it destroys the unique cultural elements of individual countries, concentrates power within developedTnations and their corporations, abuses natural resources, and takes advantage of people in develS oping countries. Multinational corporations are perhaps most subject to criticism because of their size and scope. Thirty-seven of the world’s top 100 economies are not national economies at all; they are corporations like Walmart and Royal Dutch Shell. Table 1.4 shows the top 40 world economies. For example, Toyota Motor’s revenues are roughly the size of the combined revenues of Hungary, Ireland, and New Zealand. Because of the economic and political power they potentially wield, the actions of large, multinational companies are under scrutiny by many stakeholders. 19 20 Business and Society TABLE 1.4 Top 40 Economies in the World Nation/ Corporation 1. United States GDP or Revenue ($ billions) 15,685 Nation/ Corporation GDP or Revenue ($ billions) 21. Iran 549 2. China 8,227 22. Sweden 526 3. Japan 5,964 23. Norway 501 4. Germany 3,401 24. Poland 488 5. France 2,609 25. Belgium 485 6. United Kingdom 2,441 26. Argentina 475 7. Brazil 2,396 F 2,022 I 2,014 N 1,825 D 1,819 L 1,542 E 1,352 Y 1,177 1,156 , 27. Taiwan 474 28. Walmart Stores 469 29. Royal Dutch Shell 467 30. Exxon Mobil 421 31. Sinopec-China Petroleum 412 32. Austria 399 33. South Africa 384 34. Venezuela 382 8. Russia 9. Italy 10. India 11. Canada 12. Australia 13. Spain 14. Mexico 35. BP 371 16. Indonesia 878 36. Colombia 366 17. Turkey 794 37. Thailand 366 18. Netherlands 773 15. South Korea S 38. United Arab Emirates A 19. Saudi Arabia 727 39. Denmark 20. Switzerland 632 40. PetroChina R Note: Multinational corporations areA bolded to distinguish them from country names. 359 314 309 Sources: Forbes, May 2013; International Monetary Fund, April 2013; CIA World Factbook, July 2013. Information taken from “The Corporations Bigger than Nations,” Make Wealth History, February 3, 2014, http://makewealthhistory.org/2014/02/03/the-corporations-bigger-than-nations/ (accessed June 12, 2014). 1 1 3 Most allegations by antiglobalization protestors are not extreme, but the issues are still of consequence. For example, the pharmaceutical industry 6 has long been criticized for excessively high pricing, interference with clinical evaluations, some Tdisregard for developing nations, and aggressive promotional practices.SCritics have called on governments, as well as public health organizations, to influence the industry in changing some of its practices.46 Advocates of the global economy counter these allegations by pointing to increases in overall economic growth, new jobs, new and more effective products, and other positive effects of global business. Although these differences of opinion provide fuel for debate and discussion, the global economy probably “holds much greater potential than its critics think, and much more disruption than its advocates admit. By definition, Chapter 1 Social Responsibility Framework a global economy is as big as it can get. This means that the scale of both the opportunity and the consequences are at an apex.”47 In responding to this powerful situation, companies around the world are increasingly implementing programs and practices that strive to achieve a balance between economic responsibilities and other social responsibilities. The Nestlé Company, a global foods manufacturer and marketer, published the Nestlé Corporate Business Principles in 1998 and has continually revised them (2002, 2004, and 2010). These principles serve as a management tool for decision making at Nestlé and have been translated into over 50 languages. The updated principles are consistent with the United Nations’ Global Compact, an accord that coversFenvironmental standards, human rights, and labor conditions.48 We explore the global context of social responsibility more fully in Chapter 12. I In most developed countries, social responsibility involves stakeN holder accountability and the financial, legal, ethical, and philanthropic D dimensions discussed earlier in the chapter. However, a key question for implementing social responsibility on a global L scale is: “Who decides on these responsibilities?” Many executives and managers face the challenge E of doing business in diverse countries while attempting to maintain their employers’ corporate culture and satisfy their Y expectations. Some companies have adopted an approach in which broad corporate standards can be adapted at a local level. For example, a ,corporate goal of demonstrating environmental leadership could be met in a number of different ways depending on local conditions and needs. The Coca-Cola Company S releases sustainability and social responsibility reports for each region in A the company highlights which it conducts business. In Eurasia and Africa, initiatives and progress achieved regarding women’s empowerment, water R conservation, and improvement of communities. In Greece, the company contributed toward reforestation and to active A lifestyles for youth in the Netherlands. While some of the sustainability and social responsibility initiatives are similar among countries, Coca-Cola’s focus on each indi1 contributions to their vidual region allows them to make the most relevant stakeholders.49 1 Global social responsibility also involves the confluence of govern3 ment, business, trade associations, and other groups. For example, countries that belong to the Asia-Pacific Economic6Cooperation (APEC) are responsible for half the world’s annual production and trade volume. As T it has also developed APEC works to reduce trade barriers and tariffs, meaningful projects in the areas of sustainable development, clean technolS ogies, workplace safety, management of human resources, and the health of the marine environment. This powerful trade group has demonstrated that financial, social, and ethical concerns can be tackled simultaneously.50 Like APEC, other trade groups are also exploring ways to enhance economic productivity within the context of legal, ethical, and philanthropic responsibilities. Another trend involves business leaders becoming “cosmopolitan citizens” by simultaneously harnessing their leadership skills, worldwide 21 22 Business and Society business connections, access to funds, and beliefs about human and social rights. Bill Gates, the founder of Microsoft, is no longer active day-to-day in the company, as he and his wife spearhead the Bill and Melinda Gates Foundation to tackle AIDS, poverty, malaria, and the need for educational resources. Golfer Jack Nicklaus and his business partner Jack Milstein designed a line of golf balls whose proceeds are designated to children’s health care.51 Dave Goldberg, CEO of SurveyMonkey, created a survey platform called Audience, which donates money to a charity of the surveyors’ choice after completing the survey. Over $1 million has been infused into charities, including Teach for America, the Boys and Girls Club, and donates 1 percent of its profits to envithe Humane Society.52 Patagonia F ronmental organizations. These business leaders are acting as agents to I of globalization are met with true concern ensure the economic promises for social and environmental N considerations. In many cases, such efforts supplant those historically associated with government responsibility and D programs.53 In sum, progressive global L businesses and executives recognize the “shared bottom line” that results from the partnership among business, communities, government,Ecustomers, and the natural environment. In a Nielsen survey of more than Y 28,000 citizens in 56 countries, 76 percent of the respondents indicated that they consult others online regarding the , social responsibility of companies before they make a purchase. The top three issues that are most important to consumers include environmental sustainability, advancements in STEM (science, technology, engineering, S mathematics) education, and relieving hunger and poverty.54 Thus, our A concept of social responsibility is applicable to businesses around the world, although adaptations of implementation and other details on the R local level are definitely required. In companies around the world, there is A also the recognition of a relationship between strategic social responsibility and benefits to society and organizational performance. 1 1 Benefits of Social Responsibility 3 The importance of social responsibility initiatives in enhancing stakeholder relationships, improving performance, and creating other benefits has been 6 debated from many different perspectives.55 Many business managers view T such programs as costly activities that provide rewards only to society at the expense of the bottomSline. Another view holds that some costs of social responsibility can be recovered through improved performance. If social responsibility is strategic and aligned with a firm’s mission and values, then improved performance can be achieved. It is hard to measure the reputation of a firm, but it is important to build trust and achieve success. Moreover, ample research evidence demonstrates that companies that implement strategic social responsibility programs are more profitable. Some of the specific benefits include increased efficiency in daily operations, greater employee commitment, higher product quality, improved Chapter 1 Social Responsibility Framework FIGURE 1.3 The Role of Social Responsibility in Performance Stakeholder Trust Customer Loyalty Social Responsibility Organizational Performance Employee Commitment F I Shareholder Support N D L decision making, increased customer loyalty, as E well as improved financial performance. In short, companies that establish a reputation for trust, Y that fosters success, fairness, and integrity develop a valuable resource which then translates to greater financial performance (see Figure 1.3). , This section provides evidence that resources invested in social responsibility programs reap positive outcomes for both organizations and their stakeholders. S Trust A R together A Trust is the glue that holds organizations and allows them to focus on efficiency, productivity, and profits. According to Stephen R. Covey, author of The 7 Habits of Highly Effective People, “Trust lies at the very core of effective human interactions. Compelling trust is the high1 est form of human motivation. It brings out the very best in people, but it takes time and patience, and it doesn’t preclude1the necessity to train and develop people so their competency can rise to 3 that level of trust.” When trust is low, organizations decay and relationships deteriorate, resulting 6 in infighting, playing politics within the organization, and general inefT ficiency. Employee commitment to the organization declines, product quality suffers, employee turnover skyrockets, and customers turn to more S trustworthy competitors.56 Any stakeholder that loses trust can create a missing link necessary for success. In a trusting work environment, however, employees can reasonably expect to be treated with respect and consideration by both their peers and their superiors. They are also more willing to rely and act on the decisions and actions of their coworkers. Thus, trusting relationships between managers and their subordinates and between peers contribute to greater decision-making efficiencies. Research by the Ethics Resource 23 24 Business and Society Table 1.5 Indicators of Support, Trust, and Transparency Supervisor gives positive feedback for ethical behavior Satisfied with information from senior leadership about what is going on in company Supervisor supports following company’s ethics standards Believe that senior leadership is transparent about critical issues that impact our company Trust coworkers will keep their promises and commitments Source: Ethics Resource Center, National Business Ethics Survey of the U.S. Workforce (Arlington, Virginia: Ethics Resource Center, 2014), p. 33. F is pivotal for supporting an ethical climate. Center ­indicates that this trust Employees of an organization I with a strong ethical culture are much more likely to report misconduct but are much less likely to observe misconduct N a weak ethical culture.57 Table 1.5 shows five than employees in firms with indicators of trust, support,Dand transparency that have a strong impact on whether employees will report ethical issues. As the table demonstrates, a L key factor that inspires trust and transparency in organizations involves E support from senior leadership. Trust is also essential Y for a company to maintain positive long-term relationships with customers. A study by Cone Communications reported , have boycotted or refused to purchase from that 42 percent of consumers companies that have demonstrated irresponsible behavior in the last 12 months.58 For example, after the Deepwater Horizon oil spill in 2010, S citizens aggressively boycotted BP due to certain groups and individual the vast environmental damage A in the Gulf of Mexico. Communities and regulators that lose trust in a company can damage the firm’s reputation R stakeholders. and relationships with other A Customer Loyalty 1 The prevailing business philosophy about customer relationships is that a company should strive to 1market products that satisfy customers’ needs through a coordinated effort that also allows the company to achieve 3 accepted that customer satisfaction is one its own objectives. It is well of the most important factors 6 for business success. Although companies must continue to develop and adapt products to keep pace with consumers’ changing desires, it is T also crucial to develop long-term relationships with customers. Relationships S built on mutual respect and cooperation facilitate the repeat purchases that are essential for success. By focusing on customer satisfaction, a business can continually strengthen its customers’ trust in the company, and as their confidence grows, this in turn increases the firm’s understanding of their requirements. In a Cone survey of consumer attitudes, 89 percent of consumers indicated they would be likely to switch to brands associated with a good cause if price and quality were equal. These results show that consumers take for granted that they can buy high-quality products at low prices; Chapter 1 Social Responsibility Framework therefore, companies need to stand out as doing something—something that demonstrates their commitment to society.59 A study by Harris Interactive Inc. and the Reputation Institute reported that one-quarter of the respondents had boycotted a firm’s products or lobbied others to do so when they did not agree with the firm’s policies or activities.60 Another way of looking at these results is that irresponsible behavior could trigger disloyalty and refusals to buy, whereas good social responsibility initiatives could draw customers to a company’s products. For example, many firms use cause-related marketing programs to donate part of a product’s sales revenue to a charity that is meaningful to the product’s target market. Among the best known cause-related marketing programs is Avon’s F “pink ribbon.” I N Employee Commitment D Employee commitment stems from employees who are empowered with L of the Virgin Group, training and autonomy. Sir Richard Branson, founder has one of the most committed groups of employees E in business for these reasons, as well as many others. He has created a culture wherein he Y their ideas down, and personally asks employees for their input, writes incorporates them when relevant. He is a very, visible and approachable authority and inspires a “passion of commitment” for customer service. Virgin Airlines is ranked as the highest in quality for domestic airlines. In the end, empowered employees keep customersShappy and coming back for more.61 For instance, service quality is positively related to employee A loyalty. This, in turn, leads to higher customer satisfaction and customer social responsibility initialoyalty.62 Evidence also suggests that corporate R 63 tives are a good way to retain and attract employees. A When companies fail to provide value for their employees, loyalty and commitment suffer. A survey by Gallup found low levels of employee loyalty and commitment worldwide. The study, 1 which surveyed thousands of employees in 142 countries, found that only 13 percent of workers 1 spend many of their indicated feeling engaged in their jobs.64 Employees waking hours at work; thus, an organization’s3commitment to goodwill and respect of its employees usually results in increased employee loyalty 6 and support of the company’s objectives. Shareholder Support T S Investors look at a corporation’s bottom line for profits or the potential for increased stock prices. To be successful, relationships with stockholders and other investors must rest on dependability, trust, and commitment. But investors also look for potential cracks or flaws in a company’s performance. Companies perceived by their employees as having a high degree of honesty and integrity had an average three-year total return to shareholders of 101 percent, whereas companies perceived as having 25 26 Business and Society a low degree of honesty and integrity had a three-year total return to shareholders of just 69 percent.65 After hackers broke into Target’s databases and stole customers’ credit card numbers and other information, stock fell 46 percent.66 Target has been criticized for its lack of sufficient internal controls. Many shareholders are also concerned about the reputation of companies in which they invest. Investors have even been known to avoid buying the stock of firms they view as irresponsible. For example, Warren Buffet sold 25 percent of his holdings in General Motors after a series of recalls was initiated following a federal investigation. The investigation concluded that the company was at fault F in several injuries and deaths resulting from negligence of a faulty ignition switch.67 Many socially responsible mutual I firms are available to help concerned invesfunds and asset management tors purchase stock in responsible companies. These investors recognize N that corporate responsibility is the foundation for efficiency, productivity, D and profits. In contrast, investors know that fines or negative publicity can decrease a company’sLstock price, customer loyalty, and long-term viability. Consequently, many chief executives spend a great deal of time E about their firms’ reputations and financial communicating with investors performance and trying toY attract them to their stock. The issue of drawing and retaining investors is a critical one for CEOs, , as roughly 50 percent of investors sell their stock in companies within one year, and the average household replaces 80 percent of its common stock portfolio each year.68 This focus on short-term gains subjects corporate S managers to tremendous pressure to boost short-term earnings, often at A the expense of long-term strategic plans. The resulting pressure for shortterm gains deprives corporations of stable capital and forces decision makR ers into a “quarterly” mentality. A Conversely, those shareholders willing to hold onto their investments are more willing to sacrifice short-term gains for long-term income. Attracting these long-term investors shields companies from the vagaries 1 them flexibility and stability in long-term of the stock market and gives strategic planning. In the aftermath of the Enron scandal, however, trust 1 and confidence in financial audits and published financial statements were 3 in grassroots investment clubs declined, severely shaken. Membership retail stock investments declined, and investors called for increased trans6 parency in company operations and reports.69 Gaining investors’ trust and T confidence is vital for sustaining a firm’s financial stability. S The Bottom Line: Profits Social responsibility is positively associated with return on investment, return on assets, and sales growth.70 A company cannot continuously be socially responsible and nurture and develop an ethical organizational culture unless it has achieved financial performance in terms of profits. Businesses with greater resources—regardless of their staff size—have Chapter 1 Social Responsibility Framework the ability to promote their social responsibility along with serving their ­customers, valuing their employees, and establishing trust with the public. As mentioned before, the stock returns of the world’s most ethical companies are often higher than that of companies listed on the S&P 500. Many studies have identified a positive relationship between social responsibility and financial performance.71 For example, a survey of the 500 largest public corporations in the United States found that those that commit to responsible behavior and emphasize compliance with codes of conduct show better financial performance.72 A managerial focus on stakeholder interests can affect F financial performance, although the relationships between stakeholders and financial performance vary and are very complex.73 A metaI analysis of 25 years of research identified 33 studies (63 percent) demonstrating a positive N relationship between corporate social performance and corporate D financial performance, 5 studies (about 10 percent) indicating a negative relationship, and 14 studies (27 percent)Lyielding an inconclusive result or no relationship.74 Research on the effects of legal infractions suggests that the negative effect of misconductE does not appear until the third year following a conviction, with multiple Y convictions being more harmful than a single one.75 , and results in social In summary, a company with strong efforts responsibility is generally not penalized by market forces, including the intention of consumers to purchase the firm’s products. Social responsiS bility efforts and performance serve as a reputational lever that managers A may use to influence stakeholders. A high-performing company may also receive endorsements from governmental officials or other influential R groups, and these are more believable than company messages. A comA often becomes quite pany with a strong social responsibility orientation proactive in managing and changing conditions that yield economic benefits, including avoiding litigation and increased regulation. Finally, 1 corporate social performance and corporate financial performance are positively correlated. These findings subjugate the belief that social 1 responsibility is just a “cost factor” for business and has no real benefits 3 to the firm.76 6 T National Economy S has any bearing on a An often asked question is whether business conduct nation’s overall economic performance. Many economists have wondered why some market-based economies are productive and provide a high standard of living for their citizens, whereas other market-based economies lack the kinds of social institutions that foster productivity and economic growth. Perhaps a society’s economic problems can be explained by a lack of social responsibility. Trust stems from principles of morality and serves as an important “lubricant of the social system.”77 Many descriptions of 27 28 Business and Society market economies fail to take into account the role of such institutions as family, education, and social systems in explaining standards of living and economic success. Perhaps some countries do a better job of developing economically and socially because of the social structure of their economic relationships. Social institutions, particularly those that promote trust, are important for the economic well­being of a society.78 Society has become economically successful over time “because of the underlying institutional framework persistently reinforcing incentives for organizations to engage in productive activity.”79 In some developing countries, opportunities for political and economic F development have been stifled by activities that promote monopolies, graft, and corruption and by restrictions on opportunities to advanceI individual, as well as collective, well­ being. L. E. Harrison offers fourNfundamental factors that promote economic well­being: “(1) The degree of identification with others in a society— D sense of community; (2) the rigor of the the radius of trust, or the ethical ­system; (3) the wayLauthority is exercised within the society; and (4) ­attitudes about work, innovation, saving, and profit.”80 E based on strong trust foster a productivityCountries with institutions enhancing environment because they have ethical systems in place that Y reduce transaction costs and make competitive processes more efficient , systems with a great degree of trust, such as and effective. In market-based Germany, Sweden, Switzerland, Canada, and the United Kingdom, highly successful enterprises can develop through a spirit of cooperation and the S ease in conducting business.81 A Superior financial performance at the firm level within a society is measured as profits, earnings per share, return on investment, and capital R appreciation. Businesses must achieve a certain level of financial perforA in the various institutions in society that mance to survive and reinvest provide support. But, at the institutional or societal level, a key factor distinguishing societies with high standards of living from those with lower standards of living is1whether the institutions within the society are generally trustworthy. The1challenge is to articulate the process by which institutions that support social responsibility can contribute to firm-level 3 82 superior financial performance. A comparison of countries that have high levels of corruption and 6 underdeveloped social institutions with countries that have low levels of T in the economic well­being of the country’s corruption reveals differences citizens. Transparency International, an organization discussed earlier, S publishes an annual report on global corruption that emphasizes the effects of corruption on the business and social sectors. Table 1.6 lists the countries with the most and least corrupt public sectors, as perceived by Transparency International. Eighteen countries are perceived to be more ethical than the United States.83 As stated several times in this chapter, conducting business in an ethical and responsible manner generates trust and leads to relationships that promote higher productivity and a positive cycle of effects.84 Chapter 1 Social Responsibility Framework Table 1.6 Perceptions of Countries as Least/Most Corrupt Least Corrupt Country Most Corrupt Country 1. Denmark 1. Somalia 1. New Zealand 1. North Korea 3. Finland 1. Afghanistan 3. Sweden 4. Sudan 5. Norway 5. South Sudan 5. Singapore 6. Libya 7. Switzerland 7. Iraq 8. The Netherlands 8. Uzbekistan F I 9. Australia 8. Turkmenistan 9. Canada 8. Syria N Source: Transparency International, “Corruptions Perception Index 2013,” http://cpi.transparency.org/ D cpi2013/results/ (accessed June 12, 2014). L E Framework for Studying Social Y Responsibility , The framework we have developed for this text is designed to help you understand how businesses fulfill social expectations. It begins with the S levels of social responsocial responsibility philosophy, includes the four sibilities, involves many types of stakeholders,Aand ultimately results in both short­and long-term performance benefits. As we discussed earlier, R social responsibility must have the support of top management—both in A words and in deeds—before it can become an organizational reality. Like many organizations, Cummins Engine Company has faced a number of challenges over the past several decades. Cummins is currently the world leader in the design and manufacture of diesel 1 engines and was the largest employer in Columbus, Indiana, for many years. Cummins’s drive to 1 build positive relationships with employees, customers, and community 3 led Business Ethics to rank the firm on the magazine’s list of the “100 Best Corporate Citizens.” The company received the6highest possible rating for its corporate governance practices from Governance Metrics International T In addition, Ethisphere (GMI), even during the global recession of 2009. named the company as one of the “World’s Most S Ethical Companies” for seven years in a row.85 Once the social responsibility philosophy is accepted, the four aspects of corporate social responsibility are defined and implemented through programs that incorporate stakeholder input and feedback. Cummins, like other companies, is aware of the potential costs associated with addressing social responsibility issues and stakeholder requirements. When social responsibility programs are put into action, they have both immediate and delayed outcomes. 29 30 Business and Society FIGURE 1.4 An Overview of This Book Corporate Governance (Chapter 3) Legal, Regulatory, and Political Issues (Chapter 4) Global Social Responsibility (Chapter 12) Strategic Management of Stakeholder Relationships (Chapter 2) F I N D Technology L Issues E (Chapter 10) Y Community Relations , Sustainability Issues (Chapter 11) and Strategic Philanthropy (Chapter 9) S A R A Decision Maker Business Ethics and Ethical Decision Making (Chapter 5) Strategic Approaches to Improving Ethical Behavior (Chapter 6) Employee Relations (Chapter 7) Consumer Relations (Chapter 8) Figure 1.4 depicts how the chapters of this book fit into our framework. This framework begins 1 with a look at the importance of working with stakeholders to achieve social responsibility objectives. The frame1 work also includes an examination of the influence on business decisions 3 and actions of the legal, regulatory, and political environment; business ethics; and corporate governance. The remaining chapters of the book 6 explore the responsibilities associated with specific stakeholders and issues T that confront business decision makers today, including the process of implementing a social responsibility audit. S Strategic Management of Stakeholder Relationships Social responsibility is grounded in effective and mutually beneficial relationships with customers, employees, investors, competitors, government, the community, and others who have a stake in the company. Increasingly, companies are recognizing that these constituents both affect and are affected by their actions. For this reason, many companies attempt to Chapter 1 Social Responsibility Framework address the concerns of stakeholder groups, recognizing that failure to do so can have serious long-term consequences. For example, the Better Business Bureau of the Alaska, Oregon, and Western Washington region revoked the membership of 12 businesses in a period of three months for not meeting the organization’s standards.86 Chapter 2 examines the types of stakeholders and their attributes, how stakeholders become influential, and the processes for integrating and managing stakeholders’ influence on a firm. It also examines the impact of corporate reputation and crisis situations on stakeholder relationships. Corporate Governance F Because both daily and strategic decisions affectI a variety of stakeholders, companies must maintain a governance structure Nto ensure proper control of their actions and assign responsibility for those actions. In Chapter 3, we define corporate governance and discuss its D role in achieving strategic social responsibility. Key governance issues addressed include the rights of L shareholders, the accountability of top management for corporate actions, E executive compensation, and strategic-level processes for ensuring that Y financial, legal, ethical, and philanthropic responsibilities are satisfied. , Legal, Regulatory, and Political Issues In Chapter 4, we explore the complex relationship S between business and government. Every business must be aware of and abide by the laws and regA This chapter also examulations that dictate acceptable business conduct. ines how business can influence government by R participating in the public policy process. A strategic approach for legal compliance is also provided. A Business Ethics and Strategic Approaches to Improving 1 Ethical Behavior Because individual values are a component of1 organizational conduct, these findings raise concerns about the ethics of 3 future business leaders. Chapters 5 and 6 are devoted to exploring the role of ethics in business 6 decision making. These chapters explore business responsibilities that go T examine the factors that beyond the conduct that is legally prescribed. We influence ethical decision making and consider how companies can apply S this understanding to increase their ethical conduct. We also examine ethical leadership and how it contributes to an ethical corporate culture. Employee Relations In today’s business environment, most organizations want to build longterm relationships with a variety of stakeholders, but particularly with employees—the focus of Chapter 7. Employees today want fair treatment, 31 32 Business and Society excellent compensation and benefits, and assistance in balancing work and family obligations. This is increasingly important as employee privacy issues have become a major concern in recent years. Raytheon developed a computer program called SilentRunner that can detect patterns of data activity that may reflect employee fraud, insider trading, espionage, or other unauthorized activity.87 Critics, however, question whether the use of such software contributes to an environment of trust and commitment. Research has shown that committed and satisfied employees are more productive, serve customers better, and are less likely to leave their employers. These benefits are important to successful business performance, but organizations must be proactive in their humanFresources programs if they are to receive them. I N Chapter 8 explores companies’ relationships with consumers. This conD primary stakeholder group, and there are a stituency is part of a firm’s number of financial, legal,Lethical, and philanthropic responsibilities that companies must address. Chapter 8 therefore considers the obligations E that companies have toward their customers, including health and safety Y consumer rights, and related responsibilities. issues, honesty in marketing, , Community and Philanthropy Chapter 9 examines community relations and strategic philanthropy, S the synergistic use of organizational core competencies and resources A interests and to achieve both organizato address key stakeholders’ tional and social benefits.R Whereas traditional benevolent philanthropy involves donating a percentage of sales to social causes, a strategic A and organizational resources and expertise approach aligns employees Consumer Relations with the needs and concerns of stakeholders, especially the community. Strategic philanthropy involves both financial and nonfinancial contri1 butions (employee time, goods and services, technology and equipment, 1 and reaps benefits for the community and and facilities) to stakeholders company. 3 6 T In Chapter 10, we examine the issues that arise as a result of enhanced technology in the business S environment, including the effects of new techTechnology Issues nology on privacy, intellectual property, and health. The strategic direction for technology depends on government as well as on business’s ability to plan the implementation of new technology and to assess the influence of that technology on society. Thanks to the internet and other technological advances, we can ­communicate faster than ever before, find information about just about anything, and live longer, healthier lives. However, not all of the changes Chapter 1 Social Responsibility Framework that occur as a result of new technologies are positive. For example, because shopping via the internet does not require a signature to verify transactions, online credit card fraud is significantly greater than fraud through mail-order catalogs and traditional storefront retailers. A major identity theft ring in New York affected thousands of people. Members of the theft ring illegally obtained the credit records of consumers and then sold them to criminals for about $60 per record. The criminals used the credit records to obtain loans, drain bank accounts, and perform other fraudulent activities.88 F I In Chapter 11, we dedicate an entire chapter to issues of sustainability, N development, social including the interdependent nature of economic development, and environmental impact. Sustainability has become D a watchword in business and community circles, and this chapter L develop goals, impleexplores the ways in which companies define and ment programs, and contribute to sustainability E concerns. The Dow Jones Sustainability Index (DJSI) makes an annual assessment of companies’ economic, environmental, and socialYperformance, based on more than 50 general and industry specific criteria. The DJSI includes , Sustainability Issues 2,500 ­companies from 20 countries and is used by investors who prefer to make financial investments in companies engaged in socially responsible and sustainable practices.89 S Global Social Responsibility A R A competitive, remain Finally, in order for many businesses to they must continually evolve to reach global markets and anticipate emerging world trends. Chapter 12 delves into the complex and intriguing nature of social 1 key concepts discussed responsibility in a global economy. Building on throughout the book, we examine the forces that 1 make overseas business plans and activities of paramount concern to host countries, local and 3 national governments, nongovernmental organizations, and other members of society. The chapter covers a wide range6of challenges and opportunities, such as outsourcing, environmental protection, living wages, T labor standards, and trade restrictions. Sa way of understanding We hope this framework provides you with the range of concepts, ideas, and practices that are involved in an effective social responsibility initiative. So that you can learn more about the practices of specific companies, a number of cases are provided at the end of the book. In addition, every chapter includes an opening vignette and other examples that shed more light on how social responsibility works in today’s businesses. Every chapter also includes a real-life scenario entitled “What Would You Do?,” a contemporary 33 34 Business and Society Earth in the Balance: Business Sustainability Automakers Develop Lighter Cars to Meet Fuel-Efficient Standards Today, many consumers are using sustainability criteria in their purchase decisions. This has had a major impact on the automotive industry. Automobile makers such as Ford are investigating new ways to increase the sustainability of their vehicles. Vehicles have started evolving into lighter versions of themselves as lighter materials increase fuel efficiency. Although automobile makers have a market incentive to increase the fuel-efficiency of vehicles, they also have a legal incentive. In the United States it has been mandated that vehicles must reach 35.5 miles per gallon (mpg) by 2016. The government plans to extend this to 54.5 mpg by 2025. In Europe, cars must reduce emissions 40 percent 2007 levels by 2021. This is requiring automakers to be innovative in investigating ways to make their vehicles lighter. Materials for these lighter cars include aluminum, carbon fiber, and highstrength steel, which can decrease a vehicle’s weight by 200 pounds. Automakers are optimistic that developing these lighter vehicles will cut fuel emissions in half. Unfortunately, these criteria create a challenge for carmakers developing electric vehicles (EVs). Although EVs reduce greenhouse gas emissions, the batteries needed for the EV are often expensive and heavy. EV maker Tesla Motor is dealing with these issues by using less costly, lighter batteries. Its Giga Factory is estimated to produce 30 gigawatt hours worth of batteries approximately each year—what is needed to power ­ 400,000 vehicles. BMW is spending nearly $3 billion to completely reinvent the car. It is producing a new brand of light hybrid luxury vehicle with a carbonneutral supply chain. Its i3 EV utilizes light carbon-fiber thread and aluminum to make it incredibly lightweight for a car, at 2,680 pounds. This enables it to get 81 mpg. Automakers are also increasing their use of sustainable materials in their vehicles’ interiors. The i3, for instance, has an interior made from eucalyptus. Another EV firm called Fisker is using reclaimed wood for the interior of its sedans. These often lighter materials contribute to a more fuel-efficient vehicle. The Ford Fusion’s use of kenaf leaves instead of oil-based resins in its doors reduces door bolsters by 25 percent. All of these changes will entail challenges, not only for automakers but also for consumers. While consumers might desire more socially responsible and sustainable products, many do not like to sacrifice convenience or cost. It is estimated that repair costs for vehicles made of aluminum will increase due to the lightness of the materials. In countries such as Germany, consumers enjoy driving quickly on the roads, requiring vehicles that use a lot of gas. More fuel-efficient vehicles may be more limited in speed. Both businesses and consumers will have to make trade-offs in the quest for a more sustainable industry. However, these trade-offs have the potential to significantly reduce the negative impact of vehicle emissions on the environment. F I N D L E Y , S A R A 1 1 3 6 T mpg Is Going to Be Hard to Reach,” Green Auto Blog, Sources: Gary Witzenburg, “Future Fuel Economy Mandates, Part I: 54.5 January 26, 2012, http://green.autoblog.com/2012/01/26/future-fuel-economy-mandates-part-i-54-5-mpg-is-going-to-be-ha/ (accessed SUp in a Car?” USA Today, June 28, 2013, 3B; Bill Esler, “Real June 5, 2014); Chris Woodyard, “If a Tree Falls in the Forest, Does It End Wood Preferred in Eco Car Interiors,” Wood Working Network, July 8, 2013, http://www.woodworkingnetwork.com/wood/componentsourcing/Reclaimed-Wood-Dresses-Car-Interiors-214604411.html#sthash.cuo9IOEi.dpbs (accessed July 26, 2013); Ford, “Ford Uses Kenaf Plant Inside Doors in the All-New Escape, Saving Weight and Energy,” http://media.ford.com/article_display.cfm?article_id=35895 (accessed July 26, 2013); Chris Woodyard, “Lighter Cars Add Weight to Repair,” USA Today, September 16, 2013, 1B; Brad Plumer, “Why Cars Will Keep Getting Lighter,” Washington Post, January 12, 2012, http://www.washingtonpost.com/blogs/wonkblog/post/ why-cars-will-keep-getting-lighter/2012/01/12/gIQARefVtP_blog.html (accessed October 15, 2013); Mark Rogowsky, “Musk: ‘We Hope The Big Car Companies Do Copy Tesla,’” Forbes, February 5, 2014, http://www.forbes.com/sites/markrogowsky/2014/02/05/musk-wehope-the-big-car-companies-do-copy-tesla/ (accessed June 5, 2014); Jennifer Collins, “For Germans, Need for Speed Clashes with Eco-Friendly Ideals,” USA Today, May 26, 2014, http://www.usatoday.com/story/news/world/2014/05/24/german-autobahn-speed-limitsemissions/9387539/ (accessed June 5, 2014); Dan Neil, “BMW Plots Sustainable Supercar with the i8 Project,” The Wall Street Journal, May 2, 2014, http://online.wsj.com/news/articles/SB10001424052702304677904579535612915387656 (accessed June 5, 2014). Chapter 1 Social Responsibility Framework debate issue, and another exercise to help you apply concepts and examine your own decision-making process. As you will soon see, the concept of social responsibility is both exciting and controversial; it is in a constant state of development—just like all important business concepts and practices. A recent survey of thought leaders in the area of social responsibility found that a majority believes social responsibility has made steady progress into conventional business thinking. Much like the social responsibility continuum introduced in this chapter, the thought leaders described several stages of commitment to corporate social responsibility. These stages range from light, where companies are concerned aboutFresponding to complaints, to deep, where companies are founded on a business model of improving I social or environmental circumstances. Many companies fall somewhere in between, with a focus on complying with new standards and surviving in a N climate of increasing social responsibility expectations.90 We encourage you to draw on current news events and your own D experiences to understand social responsibility and the chal...
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