CHAPTER 2

ETHICAL TERMINOLOGY
Chapter objectives
• Clarify agency, social contracts and integrated social contracts theory.
• Outline the essential tenets of stakeholder management.
• Delineate the four levels of social responsibility.
• Critique the relationship and activities that differentiate
environmentalism from sustainability.
• Describe the key dimensions of corporate governance.
• Identify the reporting expectations in relation to the triple bottom
line (TBL or 3BL).
Introduction
In describing ethical organisations, a number of phrases come to mind:
• Ethical
• Socially responsible
• Environmentally conscious
• A good corporate citizen
• A sustainable organisation
• Demonstrating tri-sector leadership
• Responsible capitalism
• Mission-driven
• A hybrid organisation
• An authentic organisation
• A company with a conscience
• A social enterprise
Introduction
Despite good intentions, we often see terminology starting to coalesce,
particularly terms such as:
• business ethics
• corporate social responsibility (CSR)
• stakeholder management
• governance
• sustainability
• accountability
• triple bottom line (TBL or 3BL)
• corporate citizenship
• philanthropy.
The media frequently intermingles these terms, which does not help to
distinguish the concepts.
Introduction
It is useful to take a broader perspective and consider that the ultimate
intent of all of these concepts is to create a better organisation.

However, the difficulty is that more than 100 concepts have been
proposed on how ethical issues in business should be defined.

This explosion of concepts and definitions has inadvertently increased

the vagueness and ambiguity of ethics.
Theoretical foundation of corporate responsibility
• Agency theory
• Social contract theory
• Integrated social contract theory
• Stakeholder theory
Theoretical foundation of corporate responsibility
Agency theory (sometimes referred to as principal agency theory)
describes the relationship between principals (usually the owners or
shareholders) and their agents (usually the managers and administrators
of the company).

Principals need to delegate to agents but, in doing so, there is a loss of

control. Agency theory suggests there is the potential for administrators
and managers (agents) to not always act in the best interests of owners
or shareholders (principals).
Theoretical foundation of corporate
responsibility
Social contract theory proposes that an implied contract exists between
a business and the state regarding rights, responsibilities and
expectations of behaviour that surround the agreement.

An implied social contract allows a corporation to be formed and, in

return, its managers are ethically obliged to pursue corporate profit, but
only if doing so increases societal welfare.
Theoretical foundation of corporate responsibility

Integrated social contract theory recognises that ethical rules develop

formally through explicit contracts, and informally through implicit
agreements.

These obligations are based on both a theoretical macro social contract

among economic participants and also micro social contracts among
members of specific communities.

The more that businesspeople know about the expectations of these

communities, the better they can deliver on the social contracts. This
brings us to an investigation of stakeholders.
Theoretical foundation of corporate responsibility

Stakeholder theory emphasises that a company is part of the social system, in

which it recognises a variety of internal and external groups of importance to
the company, not just its shareholders.

Stakeholder theory, therefore, involves maximising returns not only for

shareholders (principals) but for a wider constituency of interested parties of
which the business needs to be cognisant.

Stakeholders can be: employees, customers, suppliers, investors, owners,

banks, interest groups, the community, media, government, society or even
competitors. They can be classified as primary or secondary stakeholders.

Example: Strategies for managing stakeholder relationships, 2009, YouTube,

corporateethics, 1 October, <http://www.youtube.com/watch?v=MlK6582g700
>.
Theoretical foundation of corporate responsibility
Selected stakeholder ethical issues:
 Competitors – deceptive gaining of competitor information, predatory tactics, and
price collusion.
 Government – disregarding rules and regulations, tax avoidance and bribery and
corruption.
 Customers – unsafe products and services, deceptive marketing and labelling,
invasion of privacy and the inappropriate use of customer information.
 Employees – discriminatory practices in relation to recruitment, promotions,
training, compensation. Labour abuses and unsafe work environment.
 Investors – conflict of interest, provision of accurate information, violation of duty
of care in relation to money invested, and market manipulation.
 Future generations – waste management, carbon reduction, avoiding pollution and
environmental damage, and ensuring future sustainability.
Corporate social responsibility
Corporate social responsibility (CSR) is described as the ‘generally
accepted relationships, obligations and duties between major
institutions and people’.

CSR, therefore, goes further than merely identifying the

organisation’s stakeholders and their critical concerns (which is
largely done through stakeholder analysis), to actively recognise
that organisations have obligations, duties and social contracts to
fulfil in relation to these stakeholders.

Example: What is corporate social responsibility (CSR)?, 2012,

YouTube, HSGUniStGallen, 30 September, <
http://www.youtube.com/watch?v=E0NkGtNU_9w>.
Corporate social responsibility
The pyramid of corporate social responsibility (Carroll 1991)

Philanthropic – obligation to
improve people's quality of life and
community through resource
contributions

Ethical – obligation to be fair, just

and avoid harm

Legal – obeying society's codified

rules

Economic – profitability; the

foundational responsibility
Corporate social responsibility
Four levels of social responsibility

Social Impact

Social
Responsiveness

Social
Responsibility

Social Obligation
Corporate social responsibility
Four levels of social responsibility:
• Social obligation – Corporate behaviour that aims to conform only to
legal requirements and competitive pressure.
Social responsibility – Corporate behaviour that is congruent with
prevailing norms, values and expectations of society and that
responds to the need of a wide range of stakeholders.
• Social responsiveness – Corporate behaviour that takes preventive
action and anticipates future requirements beyond current
expectations.
• Social impact (also known as corporate social performance [CSP]) –
Corporate behaviour that looks for specific outcomes and redresses
adverse social phenomena.
 Corporate social responsibility
Corporate social responsibility standards:
1. Principle-based CSR standards, which provide business with broadly
defined principles that can be used as guidance, such as the UN Global
Compact, launched in 2000. Its 10 principles cover human rights, labour
standards, the environment and anti-corruption.
2. Reporting-based CSR standards, which provide an indication of
performance expectations to be used for reporting, such as the Global
Reporting Initiative (GRI) Guidelines, which utilise ‘economic’,
‘environmental’ and ‘social’ as content category guidelines.
 Corporate social responsibility
Corporate social responsibility standards:
3. Certification-based CSR standards, which provide compliance target
audits that evaluate company performance against their targets, such as
Social Accountability (SA) and Audit (SAA) which has developed SA8000,
AccountAbility (AA1000) and ISO 26000 standard and sector-specific
certification initiatives.

Companies can also use a third-party certification through schemes

such as Australian Certified Organic, Fair Trade, Energy Star, Green Seal,
Leadership in Energy and Environmental Design, and Forest
Stewardship Council.
Corporate social responsibility
Dimensions of CSR:
1. Environmental
2. Social capital
3. Human capital
4. Business models and innovation
5. Leadership and corporate governance
Environmentalism

Environmentalism provided the origins of what has become

sustainable development, and its primary concerns are for pollution
prevention and waste minimisation.

More recently, attention is being given to ways of mitigating climate

change, notably by reducing carbon production and committing to
renewable energy.
Sustainability
Sustainability is very much a value-based symbol, like democracy and
capitalism, and has been a central theme in the past 20 years, just as
economic growth was during the 20 years before that.

The literature tends to prefer the term sustainable development,

rather than sustainability, to indicate the ongoing nature of the task.
However, for ease, we will use the term sustainability.
Sustainability

Dunphy, Griffiths & Benn’s ‘phases of sustainability’

Non- Strategic Sustaining

Rejection responsive- Compliance Efficiency
sustainability corporation
ness

(Sourced from: Dunphy, Griffiths & Benn 2003)

Phases in sustainability
1. Rejection – the organisation holds a strong belief that organisations exist
to maximise profit and that the environment is a free good to be exploited.
2. Non-responsiveness – there is ignorance or a lack of awareness rather
than active opposition to a corporate ethic that is broader than financial
gain.
3. Compliance – the focus is on reducing the organisation’s risk of sanctions
for failing to meet minimum standards.
4. Efficiency – a growing awareness by managers in the organisation that
there are real advantages to be gained by proactively instituting sustainable
practices.
5. Strategic sustainability – sustainability now becomes an important part
of the organisation’s business strategy.
6. The sustaining corporation – there is a strong internalised ideology of
working for a sustainable world.
Sustainability
Sustainability in developing nations
Rapidly developing economies tend to lag behind on sustainability, as their
priority is to raise their citizens out of poverty.

Other concerns in developing economies are weak regulatory bodies,

resentment of the pressure from industrialised nations and a hesitation to
restrict newly liberalised markets (Haanaes et al. 2013).

There is, however, a unique opportunity for companies in developing nations

to assist with sustainability efforts.
Sustainability
Sustainable sourcing originally related to ensuring workers had safe
and legal employment and were being well-treated and paid fair
wages. It also implies that the supplier is respecting the environment
during the production and manufacture of the products.

The concept first referred to sourcing of materials taking into

account labour issues, social and environmental responsibilities, and
minimising of resource depletion.

Now, however, it has broadened to include firms taking a more

proactive approach, not only to sourcing sustainably, but also to
enhancing the viability and performance of their suppliers.
Sustainability
Sustainability divestment means that, essentially, an organisation
looks not only at how it can improve its environmental impact through
its own enabling policies and processes, but also at where it currently
invests and whether those investments enhance or hinder
sustainability.

Organisations with investments that contradict their sustainability

objectives are under increasing pressure to divest themselves of such
investments.
Ethics in the media: Sustainability
In 2014, some 400 co-operative stores in the UK introduced
compostable carrier bags, which:

• carry the ‘seedling’ logo, meaning they are certified to EN13432

standard
• are made from a combination of natural materials
• are strong enough to carry home bulky shopping items
• are approved for use as bin liners (‘Co-op first to offer compostable
carrier bags in UK’ 2014).
Corporate governance
Corporate governance in business covers the procedures for how
private sector organisations are directed, managed and controlled,
including the relationships, responsibilities and legitimate expectations
among the different stakeholders, the board of directors,
management, shareholders and other interested groups.

This definition alludes to the social and environmental demands on

the business in addition to financial performance expectations.
Ethics on reflection: Corporate Governance
For the introduction of corporate governance codes and best practice of
codifying ethics – see Corporate Governance Principles and
Recommendations with 2010 amendments at <http://
www.asx.com.au/documents/asx-compliance/cg_principles_recommen
dations_with_2010_amendments.pdf
> (ASX Corporate Governance Council 2007).
Corporate governance
Common dimensions of corporate governance

• Ethical standards
• Board composition and performance
• Board committees
• Reporting and disclosures
• Remuneration
• Risk management
• Auditing
• Shareholder and stakeholder relations
Corporate governance
Social network theory examines the connections between companies
through board membership and ownership, with the suggestion that,
through multiple board memberships a network develops, with board
membership being based on who you know rather than your individual
attributes.
Corporate governance
Board composition
Co-determination involves opening up company boards to full
representation, with the genuine belief that boards perform better
when there is diversity of thought and experience at the table, and
that employees should also be an active part of this process.

Women on boards – while governance involves multiple facets, of

considerable focus in the area of governance has been the presence,
or rather the absence, of women on boards.

It has been found that women

• in senior leadership positions in the US are more socially responsive
• are more philanthropic.
Triple bottom line (TBL or 3BL)
The triple bottom line has organisations working on and reporting on
performance in the areas of:
1. social (people)
2. environmental (planet)
3. profit.

Example: Dr Karl-Henrik Robèrt – sustainability, the triple bottom line, move beyond
the line 2011, YouTube, move beyond the line, 30 June, <
http://www.youtube.com/watch?v=VvFRB7HuLgo>.
Triple bottom line (TBL or 3BL)

People

Profit Planet

(Adapted from: Powell 2011)

Ethics at the movies
* Erin Brockovich

A small law firm takes on big business after uncovering the illegal
dumping of toxic waste and its ramifications on a small town.

Erin Brockovich, 2000, motion picture movie, DeVito, D, Sher, S,

Shamberg, M, Lyon, G & Hardy, J, <
https://www.youtube.com/watch?v=kC5L4IJoERM>.

* Author’s pick