Chapter 2 Business Ethics and Social Responsibility
Concern for Ethical and Societal Issues
An organization that wants to do well over the long term should consider its business ethics. Business
ethics refers to the standards of conduct and moral values that lead to our actions and decisions in the
business environment. Business also must consider a wide range of social issues, including how a
decision will affect the environment, employees, and customers. These issues are at the heart of
corporate social responsibility (CSR). CSR’s primary objective is to enhance society’s well-being
through philosophies, policies, procedures, and actions. In other words, businesses must find a balance
between doing what is right and doing what is profitable.
The Contemporary Ethical Environment
This movement toward corporate social responsibility should benefit everyone- consumers, the
environment, and the companies themselves. Most business owners and managers have built and
maintained successful companies without breaking the rules. [Johnson & Johnson]
The company has grouped its social responsibility priorities into four broad categories:
1. Environment 2. People 3. Responsibility 4. The community
Sarbanes-Oxley and Bill 198
In the States, the Sarbanes-Oxley Act of 2002 established new rules and regulations for securities
trading and accounting practices. Companies are now required to publish their code of ethics, if they
have one, and inform the public of any change made to it. The law may actually motivate even more
firms to develop written codes and guidelines for ethical business behaviour.
Sarbanes-Oxley Act of 2002: U.S federal legislation designed to deter and punish corporate and
accounting fraud and corruption. It is also designed to protect the interests of workers and
shareholders by requiring enhanced financial disclosures, criminal penalties for CEOs and CFOs who
defraud investors, and safeguards for whistle-blowers. The act also established a new regulatory today
for public accounting firms.
Similar legislation has been enacted in Canada known as Bill 198 of 2003, which has come to be
referred to as “C-SOX” or the Canadian version of Sarbanes-Oxley.
Many companies now adopt a three-pronged approach to ethics and social responsibility:
1. Engaging in traditional corporate philanthropy, such as giving to worthy causes
2. Anticipating and managing risks
3. Identifying opportunities to create value by doing the right thing Individuals Make a Difference
Ethical behaviour can be difficult to track or define in all situations. The evidence suggests that some
individuals act unethically or illegally on the job. Their behaviour includes putting their own interests
ahead of the organization, lying to employees, misreporting hours worked, internet abuse, and safety
violations. Technology may have expanded the range and impact of unethical behavior. For example,
one who has computer access to data may be able to steal or manipulate the data or shut down the
system, even from a remote location.
Development of Individual Ethics
An individual’s moral and ethical development is the result of many factors. Experiences shape our
responses to different situations. Our family, educational, cultural, and religious backgrounds also
play a role, as does the environment within the firm. We also have different styles of deciding ethical
dilemmas, no matter what our stage of moral development
On-the-job Ethical Dilemmas
Businesses sometimes refuse to purchase goods or services from a particular country because of civil
rights abuses by that country’s government. Solving ethical dilemmas is not easy. Often, each possible
decision can lead to both good and bad outcomes, which must be considered. Four of the most
common ethical challenges that businesspeople face are: conflict of interest, honesty and integrity,
loyalty versus truth, and whistle-blowing.
Conflict of interest
A conflict of interest occurs when a businessperson is faced with a situation where an action that
benefits one person or group has the potential to harm another. Conflicts of interest may pose ethical
challenges when they involve the businessperson’s own interests and the interests of a person or party
to whom the businessperson has a duty. A real estate agent would face an ethical conflict by
representing both the buyer and seller in a transaction.
A conflict of interest may also occur when one person holds two or more similar jobs in two different
workplaces. Conflicts of interest can be handled ethically by (1) avoiding them (2) disclosing them.
Most businesses and government agencies have written policies that either prevent employees from
accepting gifts or specify a maximum gift value.
Honesty and Integrity
An employee with integrity goes beyond truthfulness. Having integrity means behaving according to
one’s deeply felt ethical principles in business situations. It includes doing what you say you will do
and accepting responsibility for your mistakes. Integrity can help to build long-term relationships with
customers, employers, suppliers, and the public. Employees, in turn, want their manager and the
company as a whole to treat them honestly and with integrity.
Violations of honesty and integrity are common. Some people misrepresent their academic standing
and previous work experience on their resume or job application. Some employees steal from their
employer by taking home supplies or products without permission or by carrying out personal
business when they are being paid to work. Internet misuse during the workday is increasing. Loyalty versus Truth
Businesspeople expect their employees to be loyal and to act in the best interests of the company.
Individual employees may need to decide between loyalty to the company and truthfulness in business
relationships. People resolve such dilemmas in various ways. Some place the highest value on loyalty,
even at the expense of the truth. Others avoid volunteering negative information but answer truthfully
when asked a direct question.
When an employee encounters unethical or illegal actions at work, the employee must decide what
action to take. The person may conclude that the only solution is to “blow the whistle”. Whistle-
blowing is usually an employee’s disclosure to company officials, government authorities, or the
media of illegal, immoral, or unethical practices. In 2004, Bill C-25, The Public Servants Disclosure
Protection Act, was introduced. This bill was intended to protect people who expose problems in the
government’s bureaucracy. The government said this act will help ensure “transparency,
accountability, financial responsibility, and ethical conduct.”
How Organizations Shape Ethical Conduct
Most ethical lapses in business reflect the values in the firm’s corporate cultures. A corporate culture
that supports business ethics develops on four levels:
1. Ethical awareness
2. Ethical reasoning
3. Ethical action
4. Ethical leadership
If any of these four factors is missing, the ethical climate in an organization will weaken.
The foundation of an ethical climate is ethical awareness. Ethical dilemmas occur frequently in the
workplace. Employees need help in identifying ethical problems when they occur. They also need
guidance about how the firm expects them to respond.
One way for a firm to provide this support is to develop a code of conduct. This formal statement
defines how the organization expects its employees to resolve ethical questions.
At the most basic level, a code of conduct may simply be the ground rules for acceptable behaviour,
such as the laws and regulations that employees must obey.
Other companies use their code of conduct to identity key corporate values and provide frameworks
that guide employees as they resolve moral and ethical dilemmas.
Other firms incorporate similar codes in their policy manuals or mission statements; some issue a code
of conduct or statement of values in the form of small card that employees and managers can carry
with them. Ethical Education
A code of conduct can provide an overall framework, but it does not have a solution for very ethical
situation. Businesses must provide the tools employees need to evaluate the options and arrive at
Many firms have started their own ethics training programs. Other firms have hired organizations such
as the Skald Group, based in Hamilton, Ontario, which provides outsourced ethics programs to
businesses. Other organizations, such as SAI Global, host employee-reporting services that offer an
anonymous hotline and an ethics case management system.
Codes of conduct and ethics training help employees to recognize and reason through ethical problems.
In addition, firms must provide structures and approaches that allow decisions to be turned into ethical
actions. Businesses often set goals for the whole business and for individual departments and
employees. In today’s internet economy, a high value is often placed on speed. But valuing speed can
lead to climate where ethical behaviour is challenged.
Some companies encourage ethical action. These companies provide support for employees faced with
dilemmas. One common tool is an employee hotline, which is a telephone number that employees can
call anonymously for advice or to report unethical behaviour they have seen. Some firms have ethics
compliance officers, who guide employees through difficult ethical issues.
Executives must not just talk about ethical behaviour; they also need to show it in their actions,
employees need to be personally committed to the company’s core values, and they must be willing to
base their actions on those values. Ethical mavericks follow a moral code with there simple
1. Use clear, explicit language rather than euphemisms for corrupt behaviour
2. Encourage behaviour that generates and fosters ethical values
3. Practise moral absolutism, insisting on doing right, even if it proves financially costly
However, ethical leadership should also go one step further. Each employee at every level should be
charged with the responsibility to be an ethical leader. Everyone should be aware of problems and be
willing to defend the organization’s standards.
The damage from ethical misconduct can powerfully affect a firm’s stakeholders- customers, investors,
employees, and the public- businesses are pressured to act in acceptable ways. But when businesses
fail, the law must step in to enforce good business practices.
Acting Responsibly to Satisfy Society
A second major issue affecting business is the question of social responsibility. In a general sense,
social responsibility is management’s acceptance of its obligation, when evaluating firm performance,
to consider profit to be equal value as qualitative indicators, such as employee satisfaction, consumer satisfaction, and societal well-being. Businesses may exercise social responsibility for many reasons”
because such behavior is required by law, because, it enhances the company’s image, or because
management believes it is the ethical course of action.
A business is often judged by its interactions with the community. To demonstrate their social
responsibility, many corporations highlight their charitable contributions and community service in
their annual reports and on their websites.
Some firms measure social performance by conducting social audits, formal procedures that identify
and evaluate all company activities that relate to social issues, such as conservation, employment
practices, and philanthropy. The social audit tells management how well the company is performing in
these areas. After seeing this information, management may decide to revise its current programs or
develop new ones.
Outside groups may do their own evaluations of businesses. Various environmental, religious, and
public-interest groups have created standards of corporate performance. Reports on many of these
evaluations are available to the general public.
Business’s social responsibilities can be divided by their relationships to the general public, customers,
employees, investors, and other members of the financial community. Many of these relationships
extend beyond national borders.
Responsibility to the General Public
The responsibilities of business to the general public include dealing with public health issues,
protecting the environment, and developing the quality of the workforce. Businesses should give back
to the communities in which they earn profits. Such efforts are called corporate philanthropy.
Public Health Issues
As business addresses its ethical and social responsibilities to the general public, one of its most
complex issues is public health. Rates of heart disease, diabetes, and obesity have been increasing.
These three conditions are now major public health issues.
Substance abuse is another serious public health problem worldwide. Many of the drugs used by
athletes are similar to chemicals that are naturally present in the body. As a result knowing whether a