Ethics, Social Responsibility,

and Diversity

Lecture VI
 Ethics
• Ethics: a set of beliefs about right and
wrong. The study of rights and who is or
should not be – benefited or harmed by
an action.
– Ethics guide people in dealings with
stakeholders and others, to determine
appropriate actions.
– Managers often must choose between the
conflicting interest of stakeholders.
 Stakeholders

• Stakeholders: people or groups that have

an interest in the organization.
– Stakeholders include employees, customers,
shareholders, suppliers, and others.
– Stakeholders often want different outcomes
and managers must work to satisfy as many
as possible.
 To whom are organizations
socially responsible?
• Shareholders
– Managers must satisfy the owners
– Social responsibility is maximizing shareholder
wealth
• Stakeholders
– Persons or groups with legitimate interest in a
company’s action.
– Social responsibility is satisfying the interests of
multiple stakeholders.
 Shareholder Model: Friedman
• Managers cannot act effectively as moral agents for
shareholders.
• Time, money, and attention diverted to social causes
undermine market efficiency.
• The stockholder theory states that stockholders
advance capital to corporate managers who act as
agents in advancing their interests.
• This theory was forwarded by Milton Friedman, who
was quoted saying,
"There is one and only one social responsibility of business:
to use its resources to 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."
 Friedman’s Assumption #1

• Freidman thinks firms ought to

maximize their profits (they have social
obligation to do so) Because “profit
really represents the net contribution
that the firm makes to the social good
and the profits should therefore be
made as large as possible.”
 Friedman’s Assumption #2

• Freidman also assumes natural

constraints of the market will help keep
companies in check.
– I.e., if a company is known to be dishonest
or terrible to their employees, then
consumers will not buy from that
company!
Problem #1 with Friedman’s Position

• It assumes that forces of competition are

sufficiently vigorous—but they aren’t.
• The country’s regulations are essential to
force companies to act in an ethical
manner.
• Such regulations direct the market
towards ethical behavior.
 Problem #2 with Friedman

• Distribution of income that results from

unrestrained profit maximization is very
unequal.
 Problem #3 with Friedman

• Maximizing profits is socially inefficient

when costs are not paid
• Examples:
– pollution
– traffic congestion
– No taxes– poorly educated workforce
 Problem #4 with Friedman
• Maximizing profits is socially inefficient
when the seller has great knowledge
advantage over the buyer.
Stakeholder Model of corporate
social responsibility
• Firm’s stakeholders
– Governments
– Political groups
– Investors
– Customers
– Communities
– Employees
– Trade Associations
– Suppliers
 Problems with Traditional
Stockholder Model
• Resistant to change: dangerous to rely
simply on stockholder satisfaction
• Not consistent with the law: law does
not simply uphold stockholder’s rights
• Usually ignores ethics: the Separation
Fallacy: business decision vs ethical
decision.
Three reasons that the separation of
business and ethics is a fallacy

1. Open Questions
2. Integration Thesis
3. Responsibility Principle
1. These Questions Make sense
• If this decision is made, for whom is value
created and destroyed?
• Who is harmed and/or benefited by this
decision?
• Whose rights are enabled and whose
values are realized by this decision (and
whose are not)
• What kind of person will I become if I
make this decision?
 2. Integration Thesis
• Most business decisions, or sentences
about business have some ethical
content, or implicit ethical view.
• Most ethical decisions, or sentences
about ethics have some business content
or implicit view about business.
 3. Responsibility Principle
• Most people, most of the time, want to,
actually do, and should accept
responsibility for the effects of their actions
on others.
 Ethical Models

Social Ethics:
Legal rules, customs

Organization’s
Code of Ethics

Professional Ethics: Individual Ethics:

Values in workplace Family influence
 Managing for Stakeholders
• “Managing for stakeholders is about creating as much
value as possible for stakeholders, without resorting to
tradeoffs.”
• “The basic idea is that businesses, and the executives
who manage them, actually do and should create
value for customers, suppliers, employees, communities,
and financiers (or shareholders).
• And, that we need to pay careful attention to how
these relationships are managed and how value gets
created for these stakeholders.”
 Ethical Origins
• Societal Ethics: standards that members of
society use when dealing with each other.
– Based on values and standards found in society’s
legal rules, norm, and mores.
– Codified in the form of law and society customs.
– Norms dictate how people should behave.

• Societal ethics vary based on a given society.

– Strong beliefs in one country may differ elsewhere.
– Example: bribes are an accepted business practice
in some countries!
 Ethical Origins
• Professional ethics: values and standards used by
groups of managers in the workplace.
– Applied when decisions are not clear-cut ethically.
– Example: in Uganda engineers, medics and lawyers
have professional associations that enforce these.

• Individual ethics: values of an individual resulting

from their family and upbringing.
– If behavior is not illegal, people will often disagree on if
it is ethical.
– Ethics of top managers set the tone for firms.
 Ethical Decisions
• A key ethical issue is how to disperse harm and
benefits among stakeholders.
– If a firm is very profitable for two years, who should receive
the profits? Employees, managers and stockholders all want
a share.

– Should we keep the cash for future slowdowns?

What is the ethical decision?

• What about the reverse, when firms must layoff

workers.
• Final point: stockholders are the legal owners of the
firm!
 Ethical Decisions
• Some other issues managers must consider.
– Should you hold payment to suppliers as long as
possible to benefit your firm?
• This will harm your supplier who is a stakeholder.

– Should you pay severance pay to laid off

workers?
• This may decrease the stockholder's return.

– Should you buy goods from firms that hire

children?
• If you don’t the children might not earn enough money
to eat.
 Why Behave Ethically?
• Managers should behave ethically to avoid
harming others.
– Managers are responsible for protecting and
nurturing resources in their charge.

• Unethical managers run the risk for loss of

reputation.
– This is a valuable asset to any manager!
– Reputation is critical to long term management
success.
– All stakeholders are judged by reputation.
 Ethics and the nature of
management jobs
• Ethical behavior follows accepted principles of
right and wrong.
• Internal managerial unethical behavior:
– Company resources for personal use
– Mishandling information
– Encouraging others’ unethical behavior.

• Unintentional managerial unethical behavior:

– Poorly constructed policies
– Unrealistic employee goal
Types of workplace deviances

• Production deviance
– Leaving early
– Taking excessively long breaks
– Purposely working slower
– Intentionally wasting resources

• Property deviance
– Sabotaging, stealing
– Damaging equipment
Types of workplace deviances

• Political deviance
– Using favoritism
– Spreading rumors
– Falsely blaming others for mistakes

• Personal aggression
– Sexual harassment
– Verbal abuse
– Threatening co-workers
Corporate social responsibility
• What an organization does to influence
the society in which it exists, such as
through:
– Volunteer assistance program
– Charity and donations
Business Responsibilities vs Personal
Social Responsibilities
• Social responsibilities of the executive:
Family, conscience, feelings of charity,
church, clubs, city, country
• Fiduciary responsibility: To make money
for stockholders
 Social Responsibility
• Social Responsibility: the manager’s duty to
nurture, protect and enhance the welfare of
stakeholders.
There are many ways managers respond to this
duty:
• Obstructionist response: managers choose not
to be socially responsible.
– Managers behave illegally and unethically.
– They hide and cover-up problems.
 Social Responsibility
• Defensive response: managers stay within the law but make
no attempt to exercise additional social responsibility.

– Put shareholder interest above all other stakeholders.

– Managers say society should make laws if change is needed.

• Accommodative response: managers realize the need for

social responsibility.

– Try to balance the interests of all stakeholders.

• Proactive response: managers actively embrace social

responsibility.

– Go out of their way to learn about and help stakeholders.

 Levels of Responsibility

Obstruction Defensive Accommodative Proactive

response response response response

Low High
Social responsibility
 Why be Responsible?
• Managers accrue benefits by being responsible.
– Workers and society benefit.

– Quality of life in society will improve.

– It is the right thing to do.

• Whistleblowers: a person reporting illegal or unethical

acts.
• Whistleblowers now protected by law in most cases.

• Social audit: managers specifically take ethics and

business into account when making decisions.
 The Social Audit
Profitability
Negative Low Medium High

Negative
Social Returns

Low

Medium
Favored
High Strategies
 Charity principle

• Andrew Carnegie (1835 – 1919) and the Gospel of

wealth.
• The industrialist, businessman, and philanthropist
Andrew Carnegie (1835 - 1919) established a gospel of
wealth that can be neither ignored nor forgotten, and
set a pace in distribution that succeeding millionaires
have followed as a precedent.
• Doctrine of social responsibility requires more fortunate
individuals to assist less fortunate members of the
society including the unemployed, the handicapped,
the sick and the elderly.
 Principles of ethical decision
making
• Principle of long-term interest
• Principle of personal virtue
• Principle of religious injunction
• Principle of government requirements
• Principle of utilitarian benefits
• Principle of distributive justice.
Principle of long-term self-interest

• People should never take any

action that’s not yours or your
organization’s long-term self
interest or value.
 Principle of personal virtue
• People should never do anything that is
not honest, open, and truthful, and
which would not be glad to see
reported in the newspapers or on TV.
Principle of religious Injunctions
• People should never do anything that
is not kind and that does not build a
sense of community;
– a sense of everyone working together for
a commonly accepted goal.
 Principle of government
requirements
• People should never take any action
that violates the law, for the law
represents the minimum moral
standard.
 Principle of individual rights

• People should never take any action

that infringes on others’ agreed-on
rights.
Principles of Utilitarian benefits
• People should never take any action
that does not result in greater good for
society.
• Instead do whatever creates the
greatest good for the greatest
number.
Principle of distributive justice
• People should never take any action
that harms the least among us:
– the poor, the uneducated, the
unemployed.
 Promoting Ethics
• There is evidence showing that ethical managers
benefit over the long run.
• Ethical Control System: a formal system to encourage
ethical management.
• Firms appoint an ethics ombudsman to monitor practices.

• Ombudsman communicates standards to all employees.

• Ethical culture: firms increasingly seek to make good

ethics part of the norm and organizational culture.
Social Responsibility and Economic
Performance
• Social responsibility can sometimes cost a
company significantly if it chooses to be
socially responsible.
• Sometimes it does pay to be socially
responsible.
• While socially responsible behavior may be “the
right thing to do”, it does not guarantee
profitability.
 Managing Diverse Workforces
• The workforce has become much more diverse
during the recent years.
– Diversity refers to differences among people such as
age, gender, race, religion.
– Diversity is an ethical and social responsibility issue.

• Managers need to give all workers equal

opportunities.
– Not following this is against the law and unethical.
– When all have equal opportunity, the organization
benefits.
 Types of Diversity

Capabilities
Disabilities Age

Socioeconomic Gender
background

Sexual
orientation Race

Religion
Ethnicity
 Manage Diversity
• Distributive Justice: dictates members be
treated fairly concerning pay raises, promotions,
office space and similar issues.
– These rewards should be assigned based on merit
and performance.

• Procedural Justice: Managers should use fair

practices to determine how to distribute
outcomes to members.
– This involves how managers appraise worker
performance or decide who to layoff.
 Diversity Makes Business Sense
• Diverse employees provide new, different points of
view.
– Customers are also diverse.

• Still, some employees may be treated unfairly.

– Biases: systematic tendencies to use information in ways that
result in inaccurate perceptions.

– People often view those like themselves positively and have

biases about others.

– Social status is a type of bias conferred to people of differing

social position.

– Stereotypes: inaccurate beliefs about a given group.

 How to Manage Diversity
• Increase diversity awareness: managers need
to become aware of their own bias.
• Understand cultural differences and their
impact on working styles.
• Practice effective communication with diverse
groups.
• Be sure top management is committed to
diversity.
 Sexual Harassment
• Damages both the person being harassed and the
organization.
– Both men and women can be victims.

• Quid pro quo harassment: victim is requested to

perform sexual favors to keep a job or win promotion.
• Hostile work environment harassment: Some
members are faced with a hostile, intimidating work
environment.
– Lewd jokes, pornographic displays and remarks.
 Avoiding Harassment

• Develop and communicate an anti-sexual harassment

policy.
– Point out that these actions are unacceptable.

• Set up a fair complaint system to investigate

allegations.
– If there are problems, correct them at once.

• Provide harassment training to employees and

managers.
 Group Discussion Exercise
1. What are the consequences of unethical behavior?
2. If you were writing a code of ethics for your company,
what would you include?
3. In times of economic downturn, is ethical behavior a
luxury?
4. How would you handle an ethical violation committed by
one of your employees?
5. Nobel laureate economist Milton Friedman said that
companies should focus on maximizing profits, not social
responsibilities or purposes. Do you agree with this view?
Why or why not?
6. What aspects of P-O-L-C would be most likely to change
based on what you have learned in this section?

Source: Principles of Management, University of Minnesota Libraries Publishing edition,

2015 Ebook ISBN: 978-1-946135-18-6