Chapter 4 Corporate Social Responsibility Chapter Summary This chapter examines the topic of Corporate Social Responsibility (CSR) where we change the internal perspective of the organization to an external one and look at how an organization should interact with its stakeholders in an ethical manner. This chapter begins with a definition of CSR and discusses the different ethical perspectives. In addition, this chapter covers and explains the five major trends behind the CSR phenomenon. Further, the triple bottom line approach to corporate performance measurement is evaluated and the relative merits of Carbon Offset Credits. Learning Outcomes After studying this chapter, the student should be able to: 1. Describe and explain corporate social responsibility (CSR). 2. Distinguish between instrumental and social contract approaches to CSR. 3. Explain the business argument for “doing well by doing good.” 4. Summarize the five driving forces behind CSR. 5. Explain the triple bottom-line approach to corporate performance measurement. 6. Discuss the relative merits of carbon-offset credits. Extended Chapter Outline Frontline Focus “A Stocking Error” Questions 1. MegaDrug advertises that it is a socially responsible organization that puts its stakeholders first. Is Mr. Jones being ethically responsible to his customers here? Read the definition of ethical corporate social responsibility (CSR) on page 70 for more details. According to the definition on page 70, ethical CSR organizations pursue a clearly defined sense of social conscience in managing their financial responsibilities to shareholders, their legal responsibilities to their local community and society as a whole, and their ethical responsibilities to “do the right thing” for all their stakeholders. Mr. Jones is not following the ethical responsibilities to all stakeholders because the name brand suppliers are stakeholders as well, and not stocking the shelves with their product is unethical. 2. Mr. Jones would rather have one or two customers complain about an unavailable item than lose profitable sales of MegaDrug’s own brand. Is denying customers a choice of products a valid solution? If someone really did make a mistake and didn’t fill the order requisition correctly, then having an unavailable item may be justifiable. However, not having an item simply because the profit margin is not as high as the store’s own labeled products is not a valid reason for denying customers a choice of products. 3. What should Claire do now? Claire needs to approach Mr. Jones and explain that she understands that there is a higher profitability on their own labeled products, but from an ethical standpoint the store has an obligation to both their suppliers and customers to stock all items, including brand name products. Learning Outcome 1: Describe and Explain Corporate Social Responsibility (CSR). • Corporate Social Responsibility (CSR) can be defined as the actions of an organization that are targeted toward achieving a social benefit over and above maximizing profits for its shareholders and meeting all its legal obligations. It is also known as corporate citizenship and corporate conscience. o This definition assumes that the corporation is operating in a competitive environment and that the managers of the corporation are committed to an aggressive growth strategy while complying with all federal, state, and local legal obligations, including: ➢ Payment of all taxes related to the operation of the business ➢ Payment of all employer contributions for its workforce ➢ Compliance with all legal industry standards in operating a safe working environment for its employees ➢ Delivering safe products to its customers • While CSR may be growing in prominence, much of that prominence has come at the expense of organizations that found themselves facing boycotts and focused media attention on issues that previously were not considered as part of a traditional strategic plan. • Porter and Kramer pointed out that many companies awoke to [CSR] only after being surprised by public responses to issues they had not previously thought were a part of their business responsibilities. o Nike faced an extensive consumer boycott after The New York Times and other media outlets reported abusive labor practices at some of its Indonesian suppliers in the early 1990s. o Shell Oil’s decision to sink the Brent Spar, an obsolete oil rig, in the North Sea resulted in Greenpeace protests in 1995. Learning Outcome 2: Distinguish Between Instrumental and Social Contract Approaches to CSR. • The instrumental approach is the perspective that the only obligation of a corporation is to maximize profits for its shareholders in providing goods and services that meet the needs of its customers. o The most famous advocate of this “classical” model is the Nobel Prize-winning economist Milton Friedman. o From an ethical perspective, Friedman argues that it would be unethical for a corporation to do anything other than deliver the profits for which its investors have entrusted it with their funds in the purchase of shares in the corporation. o In addition, Friedman argues that, as an employee of the corporation, the manager has an ethical obligation to fulfill his role in delivering on the expectations of his employers. o This position does not prevent the organization from demonstrating some form of social conscience—donating to local charities or sponsoring a local Little League team, for example—but it restricts such charitable acts to the discretion of the owners, rather than recognizing any formal obligation on the part of the corporation and its management team. • The social contract approach is the perspective that a corporation has an obligation to society over and above the expectations of its shareholders. o Originally, the primary focus of the social contract was an economic one, assuming that continued economic growth would bring an equal advancement in the quality of life. o However, the continued corporate growth was not matched by an improved quality of life. o Growth at the expense of rising costs, wages growing at a lower rate than inflation, and the increasing presence of substantial layoffs to control costs were seen as evidence that the old social contract was no longer working. o The modern social contract approach argues that since the corporation depends on society for its existence and continued growth, there is an obligation for the corporation to meet the demands of that society rather than just the demands of a targeted group of customers. o As such, corporations should be recognized as social institutions as well as economic enterprises. Learning Outcome 3: Explain the Business Argument for “Doing Well by Doing Good.” • Corporations do not operate in an isolated environment. • As far back as 1969, Henry Ford II recognized the fact that the terms of contract between industry and society were changing. • Corporations’ actions impact their: o Customers o Employees o Suppliers o Communities • Depending on the actions taken by the corporation, some of these groups will be positively affected and others will be negatively affected. o If a corporation is operating unprofitably in a very competitive market, it is unlikely that it could raise prices to increase profits. ➢ The logical choice would be to lower costs—most commonly by laying off its employees. ➢ The communities in which those employees reside have now lost the spending power of those employees, who, presumably, no longer have as much money to spend in the local market until they find alternative employment. o If the corporation chooses to shut down an entire factory, which negatively impacts the services it can provide to its residents—schools, roads, police force, etc. ➢ In addition, those local suppliers who made deliveries to that factory also have lost business and may have to make their own tough choices as a result. o Presumably, the layoffs will help the corporation remain competitive and continue to offer low prices to its competitors, and the more cost-effective operation will hopefully improve the profitability of the corporation. • Organizations that do demonstrate a “conscience” that goes beyond generating profit inevitably attract a lot of attention. • Jim Roberts, professor of marketing at the Hankamer School of Business, thought of corporate social responsibility as “doing well by doing good.” o Doing what’s in the best long-term interest of the customer is ultimately doing what’s best for the company. Learning Outcome 4: Summarize the Five Driving Forces Behind CSR. • Joseph F. Keefe of NewCircle Communications asserts that there are five major trends behind the CSR phenomenon: o Transparency o Knowledge o Sustainability o Globalization o The Failure of the public sector • Even with these major trends driving CSR, many organizations have found it difficult to make the transition from CSR as a theoretical concept to CSR as an operational policy. • Many CSR initiatives do not generate immediate financial gains to the organization. • Corporations that choose to experiment with CSR initiatives run the risk of creating adverse results and ending up worse off than when they started: o Employees feel that they are working for an insincere, uncaring organization. o The public sees little more than a token action concerned with publicity rather than community. o The organization does not perceive much benefit from CSR and so sees no need to develop the concept. Learning Outcome 5: Explain the Triple Bottom-Line Approach to Corporate Performance Measurement. • Organizations pursue operational efficiency through detailed monitoring of their bottom line—that is, how much money is left after bills are paid from the revenue generated from sale of product or service. • As a testament of how seriously companies are now taking CSR, many have adapted their annual reports to reflect a triple bottom-line approach, for which they provide social and environmental updates alongside their primary bottom-line financial performance. • The phrase, triple bottom-line approach, has been attributed to John Elkington, cofounder of business consultancy SustainAbility, in his 1998 book Cannibals with Forks: The Triple Bottom Line of 21st Century Business. o As further evidence that this notion has hit the business mainstream, there is a trendy acronym, 3BL, for corporations to use to prove, supposedly, that they are on the “cutting edge” of this new trend. • Organizations have jumped on the CSR bandwagon by adopting three distinct types of CSR—ethical, altruistic, and strategic—for their own purposes. • Ethical CSR represents the purest or most legitimate type of CSR in which organizations pursue a clearly defined sense of social conscience in managing their financial responsibilities to shareholders, their legal responsibilities to their local community and society as a whole, and their ethical responsibilities to do the right thing for all their stakeholders. o Organizations in this category have typically incorporated their beliefs into their core operating philosophies. • Altruistic CSR takes a philanthropic approach to CSR in which organizations underwrite specific initiatives to give back to the company’s local community or to designated national or international programs. o Critics have argued that, from an ethical perspective, this type of CSR is immoral since it represents a violation of shareholder rights if they are not given the opportunity to vote on the initiatives launched in the name of corporate social responsibility. o The relative legitimacy of altruistic CSR is based on the argument that the philanthropic initiatives are authorized without concern for the corporation’s overall profitability. • Strategic CSR is a philanthropic approach to CSR in which organizations target programs that will generate the most positive publicity or goodwill for the organization but which runs the greatest risk of being perceived as self-serving behavior on the part of the organization. o By supporting these programs, companies can claim to be doing the right thing and, on the assumption that good publicity brings more sales, they also can meet their fiduciary obligations to their shareholders. o Compared to the alleged immorality of altruistic CSR, critics can argue that strategic CSR is ethically commendable because these initiatives benefit stakeholders while meeting fiduciary obligations to the company’s shareholders. Learning Outcome 6: Discuss the Relative Merits of Carbon-Offset Credits. • At www.carbonfootprint.com/calculator.aspx, a person can calculate the carbon dioxide emissions from his or her home, his or her car, and any air travel he or she does, and then calculate his or her total emissions on an annual basis. o The result is the person’s “footprint.” o People can then purchase credits to offset emissions and to render themselves “carbon neutral.” • If a person has sufficient funds, he or she can purchase more credits than he or she needs to achieve neutrality and then join the enviable ranks of carbon-positive people who actually take more carbon dioxide out of the cycle than they produce. o This, of course, is a technicality since the person is doing nothing more than buying credits from other projects around the world, such as tree planting in indigenous forests or outfitting African farmers with energy-efficient stoves, and using those positive emissions to counterbalance his or her negative ones. • Companies such as Dell Computer, British Airways, Expedia Travel, and BP have experimented with programs where customers can pay a fee to offset the emissions spent in manufacturing their products or using their services. • The issue of offsetting is serious enough to have been ratified by the Kyoto Protocol—an agreement between 160 countries that became effective in 2005 (and which the United States has yet to sign). o The protocol requires developed nations to reduce their greenhouse gas emissions not only by modifying their domestic industries, but also by funding projects in developing nations in return for carbon credits. o It didn’t take long for an entire infrastructure to develop in order to facilitate the trading of these credits so that organizations with high emissions (and consequently a larger demand for offset credits) could purchase credits in greater volumes than most individual projects would provide. • Companies such as JPMorgan Chase and Deutsche Bank, which have multibillion dollar investments in the credit trading arena, are demanding that commonly accepted codes of conduct be established in order to clean up the market and offer greater incentives for customers to trade their credits. • In November 2006, Deutsche Bank teamed up with more than a dozen investment banks and five carbon- trading organizations in Europe to create the European Carbon Investors and Services Association (ECIS) to promote the standardization of carbon trading on a global scale. • In 2003, the Chicago Climate Exchange (CCX) was launched with 13 charter members and today remains the only trading system for all six greenhouse gases (carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride) in North America. • In 2005, CCX launched the European Climate Exchange (ECX) and the Chicago Climate Futures Exchange (CCFE), which offers options and futures contracts on emissions credits. o Membership of CCX has now reached almost 300 members. Life Skills Being Socially Responsible This Life Skills box discusses how important one’s beliefs about corporate social responsibility are in one’s daily life. It proposes questions pertaining to the damages done by companies who simply provide products at the lowest possible price. It also discusses the importance of finding a job with a company that one is proud to work for rather than taking the first opportunity that comes along only to find oneself at odds with many of the company’s policies and philosophies. Progress ✓ Questions 1. Define corporate social responsibility. Corporate social responsibility is defined as the actions of an organization that are targeted toward achieving a social benefit over and above maximizing profits for its shareholders and meeting all its legal obligations. 2. Name two other terms that may be used for socially aware corporate behavior. Two other terms that may be used for socially aware corporate behavior are corporate citizenship and corporate conscience. 3. Give four examples of a corporation’s legal obligations. Managers of corporations are committed to an aggressive growth strategy while complying with all federal, state, and local legal obligations. These obligations include payment of all taxes related to the profitable operation of the business, payment of all employer contributions for its workforce, and compliance with all legal industry standards in operating safe working environment for its employees and delivering safe products to its customers. 4. Do investors always invest money in companies to make a profit? Investors invest money in companies to provide capital to grow and pursue corporate strategies. It is in the best interest of the investors for the company to be socially responsible and understand that they will not always profit, especially in the short-term, but that they will reap profits over the long-term. 5. What is the instrumental model of corporate management? The instrumental approach to corporate management is the perspective that the only obligation of a corporation is to maximize profits for its shareholders in providing goods and services that meet the needs of its customers. 6. What is the social contract model of corporate management? The social contract approach to corporate management is the perspective that a corporation has an obligation to society over and above the expectations of its shareholders. 7. Research Friedman’s article—what are the assumptions of his argument? Student responses will vary based on their perception of the article. However, their answers may contain the following points: • The view has been gaining widespread acceptance that corporate officials have a social responsibility that goes beyond serving the interests of their stockholders. • This view shows a fundamental misconception of the character and nature of a free economy. • There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud. • Few trends could so thoroughly undermine the very foundations of the free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible. • In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business and has direct responsibility to his employers. 8. Do you agree or disagree with the social contract model? Why? Students’ answers will vary. The social contract approach is the perspective that a corporation has an obligation to society over and above the expectations of its shareholders. 9. List the five major trends driving CSR. The five major trends driving CSR are: • Transparency • Knowledge • Sustainability • Globalization • The Failure of the public sector 10. Which one do you think is the most important? Why? Students’ answers will vary. Some of them may choose one among the five trends— transparency, knowledge, sustainability, globalization, and the failure of the public sector. They must present an argument as to why they think one is more important than the others. Others may say that all five trends are important. 11. Explain why organizations are struggling to adopt CSR initiatives. Organizations are struggling to adopt CSR initiatives not because the ethical action itself causes a problem, but because it is difficult to promote these actions as proof of a new corporate conscience without seeming manipulative or as simply trying to generate press coverage for policies. Such policies could easily be dismissed as feel-good initiatives that are just chasing customer favor. Also, many CSR initiatives do not generate immediate financial gains to the organization. 12. Why would customers be cynical of CSR initiatives? Students’ answers may vary, but they may include the following points to support their views: • Cynical customers may decide to wait and see if this is real or just a temporary project to win new customers in a tough economic climate. • They see the corporation’s activity as little more than a token action concerned with publicity rather than community. • Customers may easily dismiss the corporation’s CSR activities as feel-good initiatives that are simply chasing customer favor. 13. Explain the term triple bottom line. Organizations pursue operational efficiency through detailed monitoring of their bottom line— that is, how much money is left over after all the bills have been paid from the revenue generated from the sale of their product or service. As a testament to how seriously companies are now taking CSR, many have adapted their annual reports to reflect a triple bottom-line approach, for which they provide social and environmental updates alongside their primary bottom-line financial performance. 14. Explain the term ethical CSR. Ethical CSR represents the purest or most legitimate type of CSR, in which organizations pursue a clearly defined sense of social conscience in managing their financial responsibilities to shareholders, their legal responsibilities to their local community and society as a whole, and their ethical responsibilities to do the right thing for all their stakeholders. 15. Explain the term altruistic CSR. Altruistic CSR is a philanthropic approach to CSR in which organizations underwrite specific initiatives to give back to the company’s local community or to designated national or international programs. 16. Explain the term strategic CSR. Strategic CSR is a philanthropic approach to CSR in which organizations target programs that will generate the most positive publicity or goodwill for the organization but which runs the greatest risk of being perceived as self-serving behavior on the part of the organization. Ethical Dilemma Case 4.1 – Global Resources 1. If Global is paying a fair market price for drilling rights, are there any ethical violations here? Why or why not? Student responses may vary. Global Resources might be paying a fair market price for drilling rights; however, they are not being honest to the landowners about the implications of the drilling process, such as, fracking. Fracking refers to the procedure of injecting pressurized fluids to break up (or “fracture” the shale rock to release the natural gas. This process can be dangerously toxic and the long term effects of such activity can be disastrous for the land and the landowners. Despite the benefits being promised by Global Resources to the landowners, the entire process brings a lot of negatives too. Global Resources will be violating environmental ethics by justifying their acts by offering improved way of life to the landowners. 2. Are the Global engineers as committed to “full disclosure” as they claim to be? Students’ responses will vary. Some of them may say that Global engineers were not as committed to “full disclosure” as they claimed to be because they didn’t talk about the dangers of fracking. Global engineers were not following the ethical philosophy of “doing the right thing.” Global engineers were not taking action based on what is best for the people and community. They were only motivated by self-interest and were not putting the people’s interest first. 3. Is Global Resources Corporation being socially responsible, or are its local initiatives just “window dressing”? Student responses may vary. Global Resources Corporation might be over promising on the benefits that they would provide the landowners in return of their lands. They might provide many infrastructural benefits but in the long run the negatives may outweigh the positives provided by them. The toxic wastes produced due to fracking being the most dangerous result of all. 4. What would you do if you were in Bennett’s shoes? Why? Student responses may vary. Jon Bennett should contact an environmental organization and ask for its help in analyzing the pros and cons of the situation. He should let the other landowners know about the implication of drilling their lands by fracking, which uses pressurized fluids and produces toxic wastes. They can bring up the matter to Global Resources and see if they can set up a waste disposal and recycling plants as well to keep the water bodies free from toxins. These actions will make sure that the decision of leasing out their lands to Global Resources for such a long term is a wise one and beneficial to everyone, including the landowners and people in the neighborhood. Case 4.2 – Banning the Real Thing 1. Which ethical standards are being violated here? Students’ responses may vary. Coca-Cola is violating the preferential standards prescribed by the Vendor Code of Conduct. Of the preferential standards, Coca-Cola has been allegedly polluting the environment in India by disposing biosolid waste. It has been drawing down the water table by using deep bore wells. The Coca-Cola products sold in India have been found to contain pesticides that are in excess of local and international standards. It has also violated primary standards in Colombia by not being able to take care of proper health and safety arrangements for the workers at the bottling plants. 2. Is the university being unreasonable in the high standards demanded in its Vendor Code of Conduct? Students’ responses may vary. Some of the students may feel that the University set standards that were necessary for corporations to maintain. The University even gave Coca-Cola a probationary period and the situation worsened. These standards are not too high; they are what is expected of organizations and must be enforced. 3. Do you think the university would have developed the Vendor Code of Conduct without the aggressive campaign put forward by SOLE? Students’ responses may vary. Some of them may say that the aggressive campaign put forward by SOLE certainly put the Code of Conduct initiative into motion. The university probably would not have had as thorough or as high standards as pushed for by SOLE. 4. How should Coca-Cola respond in order to keep the University of Michigan contracts? Students’ responses may vary. Some of them may say that Coca-Cola needs to address the human rights violations and reporting the progress of their business practices to the University of Michigan. Once Coca-Cola demonstrates they meet the standards set by the university and SOLE, they should pursue another contract with the University of Michigan. Frontline Focus “A Stocking Error—Claire Makes a Decision” Questions 1. Did Claire do the right thing here? Claire made a good decision in this situation. Mistakes happen; therefore, customers would be more understanding if they were offered rain checks as opposed to receiving a simple apology from Claire. Also, Claire expressed her opinion of the situation regarding a balance between the store’s own-labeled products and the name brand items. 2. What would the consequences have been for MegaDrug if Claire had not done this? Student answers will vary. Many consumers are brand conscious, especially when dealing with medicines. If Claire had not issued rain checks, MegaDrug may have lost numerous customers and, consequently, potential revenue. 3. What do you think Mr. Jones will do when he finds out? Student answers will vary. Mr. Jones needs to understand that a lot of customers are brand loyal and need to have both brand name and generic choices available. Employees can always promote the store’s own label products, but the availability of name brands is also important in order to satisfy customers and keep them coming back. Therefore, Mr. Jones should recognize that Claire did the right thing by catering to the customers and keeping them satisfied until the ordering mistake could be cleared up. Key Terms Altruistic CSR: Philanthropic approach to CSR in which organizations underwrite specific initiatives to give back to the company’s local community or to designated national or international programs. Corporate Social Responsibility: The actions of an organization that are targeted toward achieving a social benefit over and above maximizing profits for its shareholders and meeting all its legal obligations. Also known as corporate citizenship and corporate conscience. Ethical CSR: Purest or most legitimate type of CSR in which organizations pursue a clearly defined sense of social conscience in managing their financial responsibilities to shareholders, their legal responsibilities to their local community and society as a whole, and their ethical responsibilities to do the right thing for all their stakeholders. Instrumental Approach: The perspective that the only obligation of a corporation is to maximize profits for its shareholders in providing goods and services that meet the needs of its customers. Social Contract Approach: The perspective that a corporation has an obligation to society over and above the expectations of its shareholders. Strategic CSR: Philanthropic approach to CSR in which organizations target programs that will generate the most positive publicity or goodwill for the organization but which runs the greatest risk of being perceived as self-serving behavior on the part of the organization. Review Questions NOTE: Some questions allow for a number of different answers. Below are some suggestions. 1. Would organizations really be paying attention to CSR if customers and federal and state agencies weren’t forcing them to? Why or why not? Students’ responses may vary. It is hopeful that organizations would adhere to corporate social responsibility and provide the good service and products that consumers deserve. Many CSR initiatives do not generate immediate financial gains to the organization. Cynical customers may decide to wait and see if this is real or just a temporary project to win new customers in a tough economic climate. This delayed response tests the commitment of those organizations that are inclined to dispense with experimental initiatives when the going gets tough. To make sure that the corporations hold on to the initiatives and turn them into practice federal and state agencies stipulate some norms on them, so that they continue their CSR activities. 2. Would the CSR policies of an organization influence your decision to use their products or services? Why or why not? Students’ responses may vary. Many people are aware of and respond to an organization’s decision to act in a socially responsible manner by patronizing it. Consumers who are conscious of a corporation’s charitable donations or environment friendly practices likely have a positive impression of the company and purchase items from it. On the other hand, some consumers simply care about the lowest possible price. 3. Which is more ethical: altruistic CSR or strategic CSR? Provide examples to explain your answer. Students’ responses may vary. Students should recall that altruistic CSR takes a philanthropic approach and centers itself in the charitable giving of a corporation. The organization chooses the charity and could be considered less ethical if the organization violates shareholders’ rights by denying shareholders the chance to vote on the choice of charity. Strategic CSR also takes a philanthropic approach to CSR by targeting programs that will generate the most positive publicity or goodwill for the organization but it also runs the greatest risk of being perceived as self-serving behavior on the part of the organization. 4. How would you measure your carbon footprint? At www.carbonfootprint.com/calculator.aspx, students could calculate the carbon dioxide emissions from their home, their car, and any air travel they do, and then calculate their total emissions on an annual basis. The result would be their carbon footprint. 5. If a carbon-offset project is already profitable, is it ethical to provide credits over and above those profits? Why or why not? Students’ responses may vary. Individuals can purchase credits to offset the emissions to render themselves “carbon neutral.” Consider the use of the credits over and above profits. The Kyoto Protocol is an agreement between 160 countries that became effective in 2005 and it requires developed nations to reduce their greenhouse gas emissions. A company that has an abundance of credits can facilitate the trading of those credits so that those organizations with high emissions and a larger demand for offset credits can purchase the credits in larger volumes than most individual projects would provide. However, there are some cases, where credits are sold at inflated market prices, credits are sold from projects that never existed, and the same credits are sold from one project over and over to different buyers who are unable to verify the effectiveness of a project based on their remote geographical area. These practices are however, unethical and should not be accepted, since they are aimed at increasing profits for the organization and not for protecting the environment. 6. Consider the company you currently work for (or one you have worked for in the past). What initiatives could they start to be more socially responsible? How would you propose such changes? Students’ responses may vary. Numerous initiatives could be started by various companies. Students would need to look at the current initiatives of the company and find opportunities such as charitable donations, environment protection/sustainability, scholarships, etc. Changes would need to be analyzed and evaluated to see if they are feasible and realistic. A strategic team can be formed to conduct the necessary research, and implement the changes. Review Exercises 1. The PGEP/Payatas project is being promoted as a win-win project for all parties involved. Is that an accurate assessment? Why or why not? Students’ responses may vary. Quezon City is doing what it can to enhance the lives of individuals and groups in the community. When Pangea Green Energy Philippines, Inc. drilled the 33 gas wells, their intentions were to harvest the methane gas. As a result, they were able to build a U.S. $4 million 200-kilowatt power plant to be fueled by the harvested methane. It enhances the state of the dump and it creates power for the community. However, methane gas is 21 times more polluting than the carbon dioxide. PGEP trades the carbon credits in return for U.S. $300,000 donation to the Quezon City community and they will use those funds to develop the community and build schools and hospitals to enhance the lifestyle of the locals. Students will express their opinions and weigh the good versus the bad effects in this scenario. 2. The Payatas project is estimated to generate 100,000 carbon credits per year. At an average market value of U.S. $30 per credit (prices vary according to the source of the credit), PGEP will receive an estimated U.S. $3 million from the project. On those terms, is the U.S. $300,000 donation to the Payatas community a fair one? Students’ responses may vary. Students will discuss whether or not the U.S. $3 million is a fair amount of money for PGEP to receive versus the U.S. $300,000 it is donating to the local community in order to enhance their lifestyle. 3. How could Quezon City officials ensure that there is a more equitable distribution of wealth? Students’ responses may vary. Some of them may say that Quezon City officials could request additional funds and set up a community center to offer additional services. They could also set up a trust fund for the locals or arrange for an equitable distribution of funds. Internet Exercises 1. Review the CSR policies of a Fortune 100 company of your choice. Would you classify its policies as ethical, altruistic, strategic, or a combination of all three? Provide examples to support your answer. Students’ responses will vary. The students should review the CSR policies of a Fortune 100 company and classify their policies as ethical, altruistic, or strategic and provide examples to support their classification. On June 13, 2013, the first five companies in the Fortune 100 were Google, Inc.; SAS; CHG Healthcare Services; The Boston Consulting Group, Inc.; and Wegmans Food Markets, Inc. 2. Review the annual report of a Fortune 100 company of your choice. What evidence can you find of triple bottom-line reporting in the report? Provide examples to support your answer. Students’ responses will vary. The students should review the annual report of a Fortune 100 company and discuss the evidence that the company uses a triple bottom-line reporting in their report and provide examples to support their research. On June 13, 2013, the first five companies in the Fortune 100 were Google, Inc.; SAS; CHG Healthcare Services; The Boston Consulting Group, Inc.; and Wegmans Food Markets, Inc. Team Exercises 1. Instrumental or social contract? Divide into two teams. One team must prepare a presentation advocating for the instrumental approach model of corporate management. The other team must prepare a presentation arguing for the social contract model of corporate management. The instrumental approach is the perspective that the only obligation of a corporation is to maximize profits for its shareholders in providing goods and services that meet the needs of its customers. This approach focuses on generating profits for the owners who have already invested money in the company through customer satisfaction. The social contract approach is the perspective that a corporation has an obligation to society over and above the expectations of its shareholders. Advocates of this model may point out that this approach is going above and beyond simply making profits for the owners of the corporation and satisfying customers. 2. Ethical, altruistic, or strategic? Divide into three groups. Each group must select one of the following types of CSR: ethical CSR, altruistic CSR, or strategic CSR. Prepare a presentation arguing for the respective merits of each approach and offer examples of initiatives that your company could engage in to adopt this strategy. Ethical CSR represents the purest or most legitimate type of CSR in which organizations pursue a clearly defined sense of social conscience in managing their financial responsibilities to shareholders, their legal responsibilities to their local community and society as a whole, and their ethical responsibilities to do the right thing for all their stakeholders. Organizations in this category have typically incorporated their beliefs into their core operating philosophies. Altruistic CSR takes a philanthropic approach by underwriting specific initiatives to give back to the company’s local community or to designated national or international programs. Critics have argued that, from an ethical perspective, this type of CSR is immoral since it represents a violation of shareholder rights if they are not given the opportunity to vote on the initiatives launched in the name of corporate social responsibility. The relative legitimacy of altruistic CSR is based on the argument that the philanthropic initiatives are authorized without concern for the corporation’s overall profitability. Strategic CSR runs the greatest risk of being perceived as self-serving behavior on the part of the organization. This type of philanthropic activity targets programs that will generate the most positive publicity or goodwill for the organization. Companies supporting these programs can achieve the best of both worlds—they can claim to be doing the right thing and, on the assumption that good publicity brings more sales, they also can meet their fiduciary obligations to their shareholders. 3. Closing down a factory. Divide into two groups and prepare arguments for and against the following behavior: Your company is managing to maintain a good profit margin on the computer parts you manufacture in a very tough economy. Recently, an opportunity has come along to move your production capacity overseas. The move will reduce manufacturing costs significantly as a result of tax incentives and lower labor costs, resulting in an anticipated 15 percent increase in profits for the company. However, the costs associated with shutting down your U.S.-based operations would mean that you wouldn’t see those increased profits for a minimum of three years. Your U.S. factory is the largest employer in the surrounding town, and shutting it down will result in the loss of over 800 jobs. The loss of those jobs is expected to devastate the economy of the local community. Students’ responses may vary. The benefits for moving the production capacity overseas would strictly be based on reducing manufacturing costs because of tax incentives and lower labor costs. These tax breaks and lower labor costs may also reduce the price of the computer parts to consumers. On the other hand, there are numerous arguments for keeping the production capacity in the United States: • First, the firm is already maintaining a good profit margin in a tough economy. • Second, if the production capacity were to be moved, the community in which the current operations are held would drastically be affected by putting over 800 employees out of work. This firm has an obligation to its stakeholders, including all its employees, and it would be unethical to disrupt and destroy the relationship the firm has developed with all its employees and the community. 4. A limited campaign. Divide into two groups and prepare arguments for and against the following behavior: You work in the marketing department of a large dairy products company. The company has launched a “revolutionary” yogurt product with ingredients that promote healthy digestion. As a promotion to launch the new product, the company is offering to donate 10 cents to the American Heart Association (AHA) for every foil top from the yogurt pots that is returned to the manufacturer. To support this campaign, the company has invested millions of dollars in a broad “media spend” on television, radio, web, and print outlets, as well as the product packaging itself. In very small print on the packaging and advertising is a clarification sentence that specifies that the maximum donation for the campaign will be $10,000. Your marketing analyst colleagues have forecast that first-year sales of this new product will reach 10 million units, with an anticipated participation of 2 million units in the pot-top return campaign (a potential donation of $200,000 without the $10,000 limit). Focus groups that were tested about the new product indicated clearly that participants in the pot-top return campaign attach positive feelings about their purchase to the added bonus of the donation to the AHA. Students’ responses will vary. Arguments for the pot-top return promotion include that the firm is still donating $10,000 to the AHA, and even though it is printed in small print, the firm still specifies that the maximum donation for the campaign is $10,000. Placing a ceiling or maximum of $10,000 provides an outlet for the firm to potentially donate less to the AHA while still gaining positive publicity. Arguments against this campaign includes the ethical perspective that many consumers will participate without reading or being aware that only a maximum of $10,000 will be donated to AHA when sales in the first year are projected to be much higher. The firm is capitalizing on consumers being aware of the promotion, but not seeing the small print. Thinking Critically 4.1 – Sustainable Capitalism 1. Why is “people, planet, profits” a more media-friendly message than a triple bottom-line approach to CSR? Students’ responses may vary. Organizations pursue operational efficiency through detailed monitoring of their bottom line—that is, how much money is left over after all the bills have been paid from the revenue generated from the sale of their product or service. As a testament to how seriously companies are now taking CSR, many have adapted their annual reports to reflect a triple bottom-line approach, for which they provide social and environmental updates alongside their primary bottom-line financial performance. The message “people, planet, and profit” is more media friendly because it gives a more personal touch to the triple bottom line approach— by attributing people to the social perspective, planet to the environmental perspective, and profits to the financial perspective—thus making it easier for people to relate to it. 2. On what grounds could the CSR initiatives of a corporation be dismissed as “window- dressing”? Students’ responses may vary. Some corporations provide glossy annual reports and photogenic websites illustrating the wonderful work of corporate-funded nonprofit organizations around the world to reassure their stakeholders who want to see evidence of more conscious capitalism than the pursuit of profit at any cost. However, this project based approach, it is argued, facilitates the development of “window-dressing” strategies where the high visibility of PR-friendly projects may be used to divert attention from the lack of fundamental change in the way most corporations conduct business. In case the projects taken up by the company does not contribute to the resource scarcity awareness, climate change, or any other social or environmental perspective, it can be dismissed as “window-dressing”. 3. What is meant by the term sustainable capitalism? Students’ responses may vary. Sustainable capitalism fosters the idea that sustainability factors— economic, environmental, social, and governance criteria—will drive a company’s returns over the long term. By integrating sustainability issues with traditional analysis, the company should seek to provide superior investment returns. 4. Based on the information in this case and a review of GenerationIM’s manifesto document, is there any correlation of its proposal to the commonly accepted tenets of CSR? Students’ responses may vary. Corporate social responsibility (CSR)—also referred to as corporate citizenship or corporate conscience—may be defined as the actions of an organization that are targeted toward achieving a social benefit over and above maximizing profits for its shareholders and meeting all its legal obligations. This definition assumes that the corporation is operating in a competitive environment and that the managers of the corporation are committed to an aggressive growth strategy while complying with all federal, state, and local legal obligations. These obligations include payment of all taxes related to the profitable operation of the business, payment of all employer contributions for its workforce, and compliance with all legal industry standards in operating a safe working environment for its employees and delivering safe products to its customers. The proposals made in the GenerationIM’s manifesto documents are somewhat similar to the commonly accepted principles of CSR and work to achieve the same. They are: • Identify and incorporate risks from stranded assets • Integrated reporting of environmental, social, and governance (ESG) performance alongside mandated financial returns • End the default practice of issuing quarterly earnings guidance • Align compensation structures with long-term sustainable performance • Encourage long-term investing with loyalty-driven securities 5. What challenges do you foresee in the broader acceptance of sustainable capitalism around the world? Students’ responses may vary. Critics of sustainable capitalism argue that its action items represent nothing more than an attempt to burden an efficient capitalist model with political correctness. GenerationIM’s decision to go beyond the more familiar “green” or “ethical” investment fund model, and commit to these specific issues in its investment selection criteria, means that a longer waiting period is required for the promised larger returns of sustainable capitalism. 6. How would you go about introducing sustainable capitalism in your company? Students’ responses may vary. In order to introduce sustainable capitalism in a company the five specific action items can be followed. They are: • Identify and incorporate risks from stranded assets • Integrated reporting of environmental, social, and governance (ESG) performance alongside mandated financial returns • End the default practice of issuing quarterly earnings guidance • Align compensation structures with long-term sustainable performance • Encourage long-term investing with loyalty-driven securities 4.2 – Corporate Social Irresponsibility 1. Why would companies choose to inflate the image of their corporate citizenship? Students’ responses may vary. Companies are inflating the image of their corporate citizenship to provide positive press releases and a positive image among their investors and potential investors. Companies are spending more time promoting and advertising their corporate citizenship because they feel that having a positive corporate image will generate more sales. 2. Is it ethical to direct company donations to “nonprofit groups closely aligned with the interests of the corporation’s employees, communities, and business objectives”? Why or why not? Students’ responses may vary. Company donations to nonprofit groups closely aligned with the interests of the corporation’s employees, communities, and business objectives may create a situation of conflict of interest. However, this can also—if managed correctly—be a powerful business tool. 3. Is it ethical to direct company donations to support “pet projects of senior managers or board members”? Why or why not? Students’ responses may vary. Company donations to support pet projects of senior managers or board members create a situation of conflict of interest. This is because these stakeholders have ulterior motives other than the good of the cause. 4. Why would budgeting a fixed percentage of pretax profits for corporate philanthropy be seen as a more convincing commitment to CSR than just funding a variety of projects? Students’ responses may vary. Budgeting a fixed percentage of pretax profits for corporate philanthropy is a more convincing commitment to CSR because this shows the firm is dedicated to providing a fixed amount for CSR initiatives rather than selecting projects that do not require as much funding or those that provide a conflict of interest. 5. The authors of this article claim that “an effectively managed contribution program can deliver strong returns to a corporation.” What might those returns be? Students’ responses may vary. An effectively managed contribution program can deliver strong returns to a corporation. Rather than a self-imposed tax, a corporation can donate directly to nonprofit groups closely aligned with the interests of the corporation’s employees, communities, and business objectives. Other returns may be increased investors which will allow the company more capital to expand, grow, or implement new strategies. 6. Does the fact that Target and General Mills donate five times more than the minimum 1 percent make them five times more socially responsible? Why or why not? Students’ responses may vary. Some of them may say that the fact that Target and General Mills donate five times more than the minimum 1 percent does not make them five times more socially responsible. What it does say about these corporations is that they are willing to exceed the minimum standards and expectations of corporate social responsibility. This willingness to exceed standards and expectations also carries over into other aspects of business. 4.3 – The Pesticide DDT 1. Did the Montrose Chemical Corporation violate any ethical standards in manufacturing and selling DDT to the public? Students’ responses may vary. Ethical standards not only pertain to the well-being of human beings, but also to the environment. If Montrose Chemical Corporation was aware of the effects of DDT on the environment and wildlife, then it needed to discontinue its manufacturing, rather than waiting until the news was made public in a book. Also, even when the effects were made public and the United States banned the use of the product, Montrose continued to manufacture and sell DDT to other countries abroad. 2. What should it have done differently? Students’ responses may vary. Many of them may say that Montrose Chemical Corporation should have taken into consideration the effects of the product not only on human beings, but also on the environment. Once information on the effects of DDT became public, Montrose needed to discontinue its manufacturing in all international regions, not simply those where it was banned. This would have shown that the firm cared for the well-being of the people in those regions, as well as the environment. 3. Was it ethical to manufacture and sell DDT to other countries after the Environmental Protection Agency (EPA) banned its use in the United States due to its harmful effects? Students’ responses may vary. Many of them may say that once the EPA banned the use of DDT in the United States because of its harmful effects, Montrose should have discontinued manufacturing this product completely. This would have shown its dedication, commitment, and feelings toward the people and environment in which it operates. 4. Did the EPA make the right decision when it banned DDT? Students’ responses may vary. Many of them may say that the EPA made the right decision by banning DDT because it was looking out for the people and the environment which were being negatively affected due to the harmful effects of the product. 5. Should Muller’s Nobel Prize be taken away now that DDT has been found to be harmful? Students’ responses may vary. Many of them may say that at the time of DDT’s discovery, the harmful effects of the product were not known. Muller was not aware of the harmful effects of the product and therefore, at the time the Nobel Prize was awarded, it was thought by all to be a discovery that would help mankind. The award should not be taken away, but future awards should be based on the criteria that research examines the possible harmful effects. 6. Is the ability to save lives worth the risk to the environment? Students’ responses may vary. Some of them may say that the ability to save lives is important, but it does not justify destroying the environment in which people and wildlife live. Also, while DDT may combat malaria, it has been found to cause cancer. Therefore, the use and manufacturing of DDT should be banned and new methods of saving lives should be researched and developed. Copyright © 2013 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 4 Corporate Social Responsibility 4-2 Corporate Social Responsibility • Actions of an organization that are targeted towards the achievement of a social benefit over and above maximizing profits for its shareholders and meeting all its legal obligations 4-3 Management without Conscience • Instrumental approach: Perspective that the only obligation of a corporation is to maximize profits for its shareholders in providing goods and services that meet the needs of their customers • Social contract approach: Perspective that a corporation has an obligation to society over and above the expectations of its shareholders 4-4 Management by Inclusion • Actions of corporations impact: • Customers • Employees • Suppliers • Communities • Impacts • Positive • Negative 4-5 Management by Inclusion • Going beyond generating profit attracts a lot of attention • Alcohol manufacturers have a long-term perspective and spread awareness about drinking responsibly 4-6 The Driving Forces Behind CSR Transparency Knowledge Sustainability Globalization The Failure of the Public Sector 4-7 The Driving Forces Behind CSR • Corporations that choose CSR run the risk of creating adverse results • Employees feel that they are working for an insincere organization • Public sees little more than a token action concerned with publicity rather than community • Organization does not perceive much benefit from CSR and so sees no need to develop the concept 4-8 Types of CSR • Organizations pursue a defined sense of social conscience in managing financial responsibilities to shareholders, legal responsibilities to local community and society as a whole, and ethical responsibilities to do the right thing for all their stakeholders Ethical CSR • Organizations take a philanthropic approach by underwriting specific initiatives to give back to the company’s local community or to designated national or international programs • Philanthropic initiatives are authorized without concern for the corporation’s overall profitability Altruistic CSR • Philanthropic activities targeted towards programs that will generate the most positive publicity for the organization, but runs the risk of being perceived as self-serving behavior on the part of the organization Strategic CSR 4-9 Carbon Footprint • Total carbon dioxide emissions on an annual basis • Carbon neutral - Way to off set damage being done to the environment through greenhouse gas emissions by purchasing credits from carbon-positive projects • Kyoto Protocol - Requires developed nations to reduce their greenhouse gas emissions by funding projects in developing countries in return for carbon credits Solution Manual for Business Ethics Now Andrew Ghillyer 9780073524696, 9781260262513
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