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Chapter 4-6

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McMaster University
Rita Cossa

CHAPTER FOUR – ETHICS AND SOCIAL RESPONSIBILITY Ethics is More Than Legality  Restore trust in free-market system: o Punish those who broke the law (arresting business leaders who have participated in unethical behavior) o New laws to make accounting records more transparent (easy to read and understand) o More laws that hold business people/others more accountable  Ethics and legality very different  Legality: laws written to protect ourselves from fraud, theft, violence  Ethics: how should people treat others  Unethical acts may still be legal Ethical Standards are Fundamental  Ethics: standards of moral behavior; behavior that is accepted by society as right vs. wrong  Many people decide situationally if something is right or wrong  People think that right/wrong is what works best for individual at that time Ethics Begins with Each of Us  Ethical decisions should be in daily lives not just business environment  Fraser Institute’s annual Generosity Index (2008): Manitoba and Ontario rank highest in percentage of tax filers who donate and percentage of income donated  Studies found strong relationship between academic dishonesty in students and dishonesty later in working world  Ethical dilemma: must choose between unethical decision and other consequence  Questions to ask when facing ethical dilemma: 1. Is it legal? 2. Is it balanced? o Make decisions that benefit all parties involved (win-win) 3. How will it make me feel about myself? o How would feel if family friends found out o Would it matter if was announced on news o Did someone tell to hide actions Managing Businesses Ethically and Responsibly  Organizational ethics begin at the top  People learn standards/values from observing others not listening to others  Ethical leaders will have ethical employees  Business should be managed ethically to: o Maintain good reputation o Keep existing customers o Attract new customers o Avoid lawsuits o Reduce employee turnover o Avoid government intervention (passage of new laws/regulations to control business activities)  Individuals usually need cooperation of others to behave unethically in corporation Setting Corporate Ethical Standards  Compliance-based ethics codes: emphasize preventing unlawful behavior by increasing control and penalizing wrongdoers  Integrity-based ethics codes: o Define organization’s guiding values o Creates environment that supports ethically sound behavior o Stresses shared accountability among employees  Process to help improve business ethics: 1. Top management: adopt and unconditionally support explicit corporate code of conduct 2. Employees: understand that expectations for ethical behavior begin at top and senior management expects all employees to act accordingly 3. Ethics office set up: anonymous so whistleblowers (people who report illegal/unethical behavior) feel protected 4. Suppliers, customers, distributors must be told about ethics program 5. Ethics code must be enforced (does not matter if not enforced)  Important factor in success of ethics code is a good ethics officer  EPAC: Ethics Practitioners’ Association of Canada The Sarbanes-Oxley Act of 2002 (SOX)  US federal legislation  Established stronger standards to prevent misconduct and improve corporate governance practices  Goal: ensure accuracy/reliability of published financial info  Makes sure whistleblowers are not punished Whistleblowing Legislation in Canada  Bill C-11: The Public Servants Protection Disclosure Act  National whistleblower legislation (protects them)  No protection for whistleblowers in private-sector Corporate Social Responsibility  Corporate social responsibility (CSR): business’s concern for welfare of society as a whole  Based on company’s concern for welfare of stakeholders not just owners  Critics of CSR: managers pursuing CSR are using money to improve society instead of to make more money (stealing from investors)  Defenders of CSR: o Businesses owe existence to society they serve o Cannot succeed if society fails o Makes more money for investors in long run  Corporate philanthropy: include charitable donations to no-profit groups  Corporate social initiatives: enhanced forms of corporate philanthropy more directly related to company’s competencies (ex. make product/service free)  Corporate responsibility: hiring minority workers, providing safe products/work environment minimizing pollution, using energy wisely  Corporate policy: position firm takes on social/political issues Corporate Responsibility in the Twenty-First Century  Different views of corporate responsibility to stakeholders: 1. Strategic Approach: o Management’s primary orientation is toward economic interests of shareholders o Optimize profits o Stakeholders’ interests are secondary 2. Pluralist Approach: o Management should maximize profit but not at expense of employees, suppliers, members of community o Corporations can maintain economic viability when fulfill moral responsibilities to society Responsibility to Customers  Businesses responsible for offering customers goods/services of real value  Will fail customers if not completely honest with them  Ex. Suzuki sales plummet when don’t admit to car rolling over, Daimler-Benz does not lose customers when admit problem and fix it  Studies on consumers show they prefer socially conscious companies  Do not want to do business with companies do not trust Responsibility to Investors  Ethical behavior is good for shareholder wealth  Unethical behavior causes financial damage  May seem to work in short term but guarantees eventual failure o Ex. Nortel Networks Corp damaged investor trust, share value plummeted and went bankrupt  Investors like to invest in companies who benefit community/environment  Insider trading: unethical activity in which insiders use private company info to further their own fortunes or those of family/friends Responsibility to Employees  Businesses have responsibility to create jobs if want to grow  Employees need to see that hard work pays off (chance to be promoted)  If company respects employees, employees will respect company  “Contented cow” companies made more money and created more jobs than “common cow” companies  Employees will strike back if treated unfairly  Will not work as hard as they can/steal Responsibility to Society  Business responsible for creating new wealth for society  Wealth disbursed to employees, suppliers, shareholders, stakeholders  More funds available to benefit society when stock prices increase  For stock prices to increase, companies must be successful  Companies must develop long-term profitable relationships with customers  Business partially responsible for promoting social justice  Businesses depend on employees to be active in politics, law, churches, temples, arts, charities  Many businesses and employees give back by cleaning up environment, building community toilets, caring for elderly, supporting poor children Responsibility to the Environment  Businesses criticized for destroying environment  Governments intervene to protect environment  Environmental efforts increase company’s costs  Also might allow company to: charge higher prices, increase market share  Environmental practices are of interest to stakeholders and investors  Companies that care about environment do better than those who do not  Companies must find right public good to appeal to target market  Environmental quality is a public good Social Auditing  Social audit: systematic evaluation of an organization’s progress toward implementing programs that are socially responsible and responsive  Major problem: how to measure firm’s activities and effects on society  Ex. social audits contain workplace issues, environment, product safety, etc.  Triple-bottom line (“TBL, “3BL”, “People, Planet, Profit”): framework for measuring and reporting corporate performance against economic, social and environmental parameters  Watchdogs for how companies enforce ethical/social responsibility policies: 1. Socially conscious investors: o Insist company extends high standards to all suppliers o Social responsibility investing (SRI) is on the rise 2. Environmentalists: apply pressure by naming names of companies that don’t abide by environmentalists’ standards 3. Union officials: hunt down violations and force companies to comply to avoid negative publicity 4. Customers: take business elsewhere if company demonstrates unethical/socially irresponsible practices  Isn’t enough for company to be right, have to convince customers and society it is right Sustainable Development  Sustainable development: implementing a process that integrates environmental, economic, social considerations into decision making  World Commission on Environment and Development: development should be sustainable for benefit of current and future generations  Ex. supplies not needed by one company redistributed to other organizations who do need them International Ethics and Social Responsibility  Government leaders being held to higher standards  Businesses demanding socially responsible behavior from international suppliers  Ex. Sears will not import products made by Chinese prison labour  Many companies joining together in anti-sweatshop groups  Created common factory-inspection system  Joint Initiative on Corporate Accountability & Workers’ Rights: replace current approaches with something easier and cheaper to use  Problem: what is unethical in one country may be ethical in another CHAPTER FIVE – COMPETING IN GLOBAL MARKETS The Dynamic Global Market  Many companies use global expansion as link to future growth  Need to continuously review global operations to make sure still operating at a profit  Exporting: selling goods/services to another country  Canada is big exporting nation  Face big competition from exporters in Germany, China, Japan  Importing: buying goods/services from another country Why Trade with Other Nations  Reasons for trade: o No country can produce all products people want/need o Even if country was self-sufficient other countries would still want to trade with it o Some countries have lots of natural resources but no technology and others have lots of technology but few natural resources  Free trade: movement of goods/services among nations without political/economic obstruction The Theories of Comparative and Absolute Advantage  Global trade: exchange of goods/services across national borders  Countries also exchange: art, sports, cultural events, medical advances, space exploration, labour  Comparative advantage theory: country should sell products it produces most effectively/efficiently to other countries and buy products it cannot produce as effectively/efficiently from other countries  Absolute advantage: advantage that exists when country has ability to produce good/service using fewer resources than another country  Trade allows specialization so resources can be used more productively Getting Involved in Global Trade  Small businesses becoming more involved in global markets  Foreign Affairs and International Trade Canada and Export Development Canada (EDC) help Importing Goods and Services  Service imports: 16.3% of total imports  Machinery and equipment, industrial goods/materials, automotive products represent 65% of total imports Exporting Goods and Services  Can sell almost any good/service used in Canada to other countries  Competition not as intense for producers in global markets as it is at home  Trade with other countries enhances quality of life for Canadians  Contributes to economic well-being  Exports account for one in five Canadian jobs  Exports seven ties more goods than services  Two largest export categories: industrial goods/materials, machinery and equipment  Adapting goods/services to specific global markets can be difficult Measuring Global Trade  Measuring effectiveness of global trade: o Balance of trade: nation’s ratio of exports to imports (want exports to exceed imports) o Trade deficit (unfavourable balance of trade): countries imports exceed exports o Balance of payments: difference between money coming into country (from exports) and money leaving country (for imports)  Always want more money coming into country than going out Trading in Global Markets: The Canadian Experience  Very dependent on the US  69% of imports from the US  73% of exports to the US Canada’s Priority Markets  Technological advances cause more economies to emerge  They have high growth rates, increases in standard of living, rising global prominence  Federal government identified 13 priority markets around world where Canadian opportunities have greatest potential for growth  Steps taken to make Canadian presence in global marketplace stronger: o Tax cuts o Increased support for research/development o Critical investments in infrastructure at Canada-US borders o Asia-Pacific Gateway  Worlds largest economies: US, China, India Strategies for Reaching Global Markets (From least to most: amount of commitment, control, risk, and profit potential) Exporting  Simplest way of going international is to export goods/services  Export-trading companies: o Step in when Canadian firms do not want to establish foreign trade relationships o Negotiate and establish desired relationships o Matches buyers and sellers from different countries o Deals with documentation requirements, foreign customs offices, etc. o Also help with getting paid Licensing  Licensing: firm (licensor) allows foreign company (licensee) to produce its product in exchange for a fee (royalty)  Licensor helps set up production process and helps with distribution, promotion, consulting  Beneficial because: o Organization can gain revenue from product that originally would not o Licensees must buy start-up supplies, component materials, consulting services o Licensors spend little/no money to produce and market products  Problems: o Firm must grant license for certain number of years o If very successful in other market: most of profits belong to licensee o Licensing firm selling expertise, technology, product secrets o Licensee may break agreement and start to produce similar product Franchising  Variation of licensing  Franchising: arrangement where someone with good idea for business sells right to use business name and sell product/services to others  Canadian franchises: Canadian Tire, Molly Maid, Boston Pizza  Franchisors must adapt good/service in countries they serve Contract Manufacturing  Contract manufacturing (outsourcing): foreign company’s production of private-label goods to which domestic company attaches brand name/trademark  Allows company to experiment in new market without heavy start-up costs  Can use outsourcing to temporarily meet unexpected increase in orders  Labour costs usually very low International Joint Ventures and Strategic Alliances  Joint venture: partnership in which two or more companies (usually from different countries) join to undertake major product or form new company  Good for countries it is hard to gain business entry to (ex. China)  Benefits of international joint ventures: 1. Shared technology and risk 2. Shared marketing a
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