CHAPTER 9

Ethics,
Corporate Social
Responsibility,
Environmental
Sustainability, and
Strategy

©McGraw-Hill Education. All rights reserved. Authorized onlyCopyright

for instructor use in the classroom.
© McGraw-Hill  NoPermission required for reproduction or display.
Education. ©alice-photo/Shutterstock.com
reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
 Learning Objectives
This chapter will help you understand:
1. How ethical standards in business are no different from
the ethical norms of the larger society in which a
company operates.
2. What drives unethical business strategies and behavior.
3. The costs of business ethics failures.
4. The concepts of corporate social responsibility and
environmental sustainability and how companies
balance these duties with economic responsibilities to
shareholders.

© McGraw-Hill Education.
 What Do We Mean By Business Ethics?

Business ethics:
• Is the application of general ethical principles to the
actions and decisions of businesses and the conduct of
their personnel.
• Are not materially different from ethical principles in
general because business actions must be judged in
the context of society’s standards of right and wrong.

© McGraw-Hill Education.
 Where Do Ethical Standards Come From—Are
They Universal or Dependent on Local Norms?

Sources for Ethical Standards

The school of ethical universalism

The school of ethical relativism

Integrate social contracts theory

© McGraw-Hill Education.
 The School of Ethical Universalism
Ethical universalism:
• Holds that common understandings across multiple
cultures and countries about what constitutes right and
wrong give rise to universal ethical standards that apply
to all societies, all firms, and all businesspeople.
Effect on business ethics:
• Whether a business-related action is right or wrong is
judged by universal standards.

© McGraw-Hill Education.
 The School of Ethical Relativism
Ethical relativism:
• Holds that differing beliefs, customs, and behavioral
norms across countries and cultures give rise to multiple
sets of standards of what is ethically right or wrong.
Effect on business ethics:
• Whether business-related actions are right or wrong
depends on local ethical standards.

© McGraw-Hill Education.
 Examples of Ethical Relativism Issues

Variations in Ethical Standards

The use of underage labor

The payment of bribes and kickbacks

Relativism can result in multiple sets of standards

The use of local morality to guide ethical behavior

© McGraw-Hill Education.
 View from the Back Seat:
Uber Rides Into Ethical Trouble
Which of Uber’s several ethical lapses likely
caused the greatest damage to Uber’s brand and
repetition with ridesharing customers?

What must Uber do to regain its momentum in the

ridesharing market?

© McGraw-Hill Education.
 Ethics and Integrative Social Contracts Theory

• Provides a middle-ground balance between

universalism and relativism
• Posits that the collective views of multiple
societies form universal (first order) ethical
principles that all persons have a contractual
duty to observe in all situations
• Within contract, cultures or groups can specify
locally ethical (second-order) actions

© McGraw-Hill Education.
 Application of Integrated Social Contracts
Theory to Multinational Business
Effects on ethical standards
• Adherence to universal ethical norms takes precedence
over local norms.
• A local custom is not ethical if it violates universal ethical
norms.
• Application of codes of ethics should first follow
universal standards with allowance for local ethical
diversity and influence.

© McGraw-Hill Education.
 How and Why Ethical Standards Impact the
Tasks of Crafting and Executing Strategy

The ethics code litmus test

• Areas of ambiguity: Is what we are proposing to do fully
compliant with our code of ethics?
• Conflict or potential problem: Is this action in harmony
with our core values?
• Ethically objectionable action: Will our stakeholders, our
competitors, the SEC under the Sarbanes-Oxley Act, or
the news and social media view this action as ethically
objectionable?

© McGraw-Hill Education.
 Consequences of Ethically
Questionable Strategies
• Sizable civil fines
and stockholder
lawsuits
• Devastating image
When Strategies Fail
and public relations
the Ethical Litmus Test
hits
• Sharp stock price
drops as investors
lose confidence
• Criminal indictments
and convictions
© McGraw-Hill Education.
 Drivers of Unethical Business Strategies
and Business Behavior

Unethical Strategies and Business Behaviors

Faulty oversight and self-dealing

Pressure for short-term performance

A weak or corrupt ethical environment

© McGraw-Hill Education.
What Are the Drivers of Unethical Strategies
and Business Behavior?
Drivers of unethical business behavior
• Faulty internal oversight allows self-dealing in the pursuit
of personal gain, wealth, and self-interest.
• Short-termism pressures managers to meet or beat
short-term performance targets.
• A culture that puts profitability and business
performance ahead of ethical behavior drives unethical
behavior and strategies.

© McGraw-Hill Education.
 Why Should Company
Strategies Be Ethical?
The moral case for an ethical strategy
• A strategy that is unethical is morally wrong and reflects
badly on the character of the firm’s personnel.
The business case for ethical strategies
• An ethical strategy can be both good business and
serve the self-interest of shareholders.

© McGraw-Hill Education.
 How PepsiCo Put Its Ethical Principles
into Practice
What steps has PepsiCo taken to ensure that its
ethical standards of employee conduct are put into
practice?
Why has PepsiCo been so successful in instilling a
culture of ethical conduct in its organization when
other firms have not?
What has been the effect of PepsiCo’s dedication
to ethical business practices on its success in the
marketplace?

© McGraw-Hill Education.
 The Visible Costs Companies Incur When
Ethical Wrongdoing Is Discovered
Visible costs
• Government fines and penalties
• Civil penalties arising from class-action lawsuits and
other litigation aimed at punishing the company for its
offense and the harm done to others
• The costs to shareholders in the form of a lower stock
price (and possibly lower dividends)

© McGraw-Hill Education.
 The Internal Costs Companies Incur When
Ethical Wrongdoing Is Discovered
Internal administrative costs
• Legal and investigative costs incurred by the company
• The costs of providing remedial education and ethics
training to company personnel
• The costs of taking corrective actions
• Administrative costs associated with ensuring future
compliance

© McGraw-Hill Education.
 The Intangible Costs Companies Incur
When Ethical Wrongdoing Is Discovered
Intangible or less visible costs
• Customer defections
• Loss of reputation
• Lower employee morale and higher degrees of
employee cynicism
• Higher employee turnover
• Higher recruiting costs and difficulty in attracting talented
employees
• Adverse effects on employee productivity
• The costs of complying with harsher government
regulations

© McGraw-Hill Education.
 Strategy, Corporate Social Responsibility,
and Environmental Sustainability
Corporate social responsibility (CSR)
• Is a firm’s duty to operate in an honorable manner,
provide good working conditions for employees,
encourage workforce diversity, be a good steward of
the environment, and actively work to better the quality
of life in the local communities where it operates and in
society at large.

© McGraw-Hill Education.
 FIGURE 9.2 The Five Components of a
Corporate Social Responsibility Strategy

Access the text alternative for these images. Copyright ©McGraw-Hill Education. Permission required for reproduction or display.
© McGraw-Hill Education.
 Warby Parker: Combining Corporate Social
Responsibility with Affordable Fashion
How has Warby Parker’s skillful use of CSR as a
strategic tool contributed to its success in the
marketplace?
How strongly is customer loyalty affected by Warby
Parker’s CSR practices?
Is the firm’s dedication to outcomes outside of
profit likely to be acceptable to outside investors?

© McGraw-Hill Education.
 FIGURE 9.3 The Triple
Bottom Line: Excelling on Three Measures
of Company Performance

Access the text alternative for these images.

Source: Developed with help from Amy E. Florentino.

© McGraw-Hill Education. Copyright ©McGraw-Hill Education. Permission required for reproduction or display.
 TABLE 9.1 A Selection of Companies Recognized for their
Triple-Bottom-Line Performance in 2013 (1 of 3)
Name Market Sector Country

Peugeot SA Automobiles & Components France

Westpack Banking Group Banks Australia

CNH Industrial NV Capital Goods Great Britain

SGS SA Commercial & Professional Switzerland

Services
LG Electronics Inc. Consumer Durables & Apparel South Korea

Intercontinental Hotels Group Consumer Services Great Britain

UBS Group AB Diversified Financials Switzerland

Thai Oil PCL Energy Thailand

METRO AG Food & Staples Retailing Germany

© McGraw-Hill Education.
 TABLE 9.1 A Selection of Companies Recognized for their
Triple-Bottom-Line Performance in 2013 (2 of 3)
Name Market Sector Country

Coca-Cola HBC AG Food, Beverage, & Tobacco Switzerland

Abbott Laboratories Health Care Equipment & United States

Services
Henkel AG & Co. KGaA Household & Personal Products Germany

Allianz SE Insurance Germany

Grupo Argos SA Materials Colombia

Pearson PLC Media Great Britain

Roche Holding AG Pharmaceuticals, Switzerland

Biotechnology, & Life Sciences
Mirvac Group Real Estate Australia

Industria de Diseno Textil SA Retailing Spain

© McGraw-Hill Education.
 TABLE 9.1 A Selection of Companies Recognized for their
Triple-Bottom-Line Performance in 2013 (3 of 3)
Name Market Sector Country

Advanced Semiconductor Semiconductors & Taiwan

Engineering Inc. Semiconductor Equipment
Amadeus IT Group SA Software & Services Spain

Konica Minolta Inc. Technology Hardware & Japan

Equipment
Koninklijke KPN NV Telecommunication Services Netherlands

Royal Mail PLC Transportation Great Britain

Red Electric Corp SA Utilities Spain

Copyright ©McGraw-Hill Education. Permission required for reproduction or display.

© McGraw-Hill Education.
 What Do We Mean by Sustainability and
Sustainable Business Practices?
Sustainability
• Is the relationship of a firm to its environment and its use
of natural resources.
Sustainable business practices
• Are those practices of a firm that meet the needs of the
present without compromising the ability to meet the
needs of the future.

© McGraw-Hill Education.
 Unilever’s Focus on Sustainability
How has the Unilever Sustainable Living Plan
(USLP) for implementing its comprehensive triple-
bottom-line approach toward sustainable farm
management affected the company’s long-term
profitability?
What place in business thinking should
sustainability occupy in strategic planning that
seeks to maximize profits?
What internal forces could mitigate against
pursuing sustainability goals if benchmark indices
are controlled by external parties?
© McGraw-Hill Education.
 Sustainability and Sustainable
Business Practices
Environmental sustainability strategy
• Consists of the firm’s deliberate actions to:
• Protect the environment

• Provide for the longevity of natural resources

• Maintain ecological support systems for future

generations
• Guard against ultimate endangerment of the planet

© McGraw-Hill Education.
 Crafting Corporate Social Responsibility
and Sustainability Strategies

Pursuing a Sustainable CSR Strategy in the

Firm’s Value Chain Activities
Moral case: Business case:
stakeholder benefits competitive advantage

© McGraw-Hill Education.
 The Moral Case for CSR and Environmentally
Sustainable Business Practices
• Operate ethically and
legally.
• Provide good work
conditions for
The Implied Social
employees.
Contract: “It’s the right
• Be a good
thing to do”
environmental
steward.
• Display good
corporate citizenship.

© McGraw-Hill Education.
 The Business Case for CSR and
Environmentally Sustainable
Business Practices
• Increased buyer patronage
• Reduced risk of reputation-damaging incidents
• Lower employee turnover costs and enhanced
recruiting and workforce retention
• Increased revenue enhancement opportunities
due to the use of CSR and sustainability
• CSR and sustainability best serving long-term
interests of shareholders

© McGraw-Hill Education.
Combating the Evasion of CSR and Socially
Harmful Business Practices
• Increased public
awareness of
misdeeds and bad
Harmful and Unethical behavior by firms
Business Actions and • Increased legislation
Behaviors and regulation to
correct and punish
firms
• Refusal to do
business with
irresponsible firms
© McGraw-Hill Education.