Business Ethics, the Changing Environment, and Stakeholder Management

Chapter 1: Business Ethics, the Changing Environment, and Stakeholder Management

chapter 1

business ethics, the changing environment, and Stakeholder Management

topics covered

1.1Business Ethics and the Changing Environment

1.2What is Business Ethics? Why Does It Matter?

1.3Levels of Business Ethics

1.4Five Myths about Business Ethics

1.5Why Use Ethical Reasoning in Business?

1.6Can Business Ethics be Taught and Trained?

1.7Plan of the Book

lecture outline

1.1Business Ethics and the Changing Environment

Businesses and governments operate in changing technological, legal, economic, social, and political environments with competing stakeholders and power claims. Stakeholders are individuals, companies, groups, and nations that cause and respond to external issues, opportunities, and threats. Disruptive technologies, increased working hours, increased personal and professional stress create pressure on stakeholders. Examples include: Enron, Adelphia, and others; excessive CEO pay and poor corporate performance; new regulation (eg., Sarbanes-Oxley Act of 2002); and increased outsourcing.

A.Seeing the “Big Picture”

1.Thomas Friedman has written a vivid account of the accelerating trend

toward globalization in The Lexus and the Olive Tree.

B.Environmental Forces and Stakeholders

1.Organizations are embedded in and interact with multiple changing local,

national, and international environments.

2.The economic environment continues to evolve into a more global context of

trade, markets, and resource flows.

3.Technologically, the advent of electronic communication and the Internet is

changing economies, industries, companies, jobs, and the way business is

conducted.

4.Politically, the fall of communist regimes and the rise of global terrorism are

also changing trading and business partners.

5.Governmental and regulatory laws and procedures also are changing.

6.Legal questions and issues affect all of the environmental dimensions and every

stakeholder.

7.Demographically, the workforce has become more diverse.

C.Stakeholder Management Approach

The stakeholder management approach is a way of understanding the ethical effects of environmental forces and groups on specific issues that affect real-time stakeholders and their welfare.

Begins by enabling win-win strategies based on:

identifying and prioritizing issues, threats, or opportunities.

mapping who the stakeholders are.

identifying their stakes, interests, and power sources.

showing who the members of coalitions are or may become.

showing what each stakeholder’s ethics are (and should be).

developing collaborative strategies and dialogue from a “higher ground” perspective to move plans and interactions to the desired closure for all parties.

1.2What is Business Ethics? Why Does It Matter?

Ethical “solutions” to business and organizational problems may have more than one alternative and sometimes no right solution may seem available. Learning to think, reason, and act ethically can enable us to be aware of and recognize a potential ethical problem. Laura Nash defined business ethics as “the study of how personal moral norms apply to the activities and goals of commercial enterprise.” Nash stated that business ethics deal with three basic areas of managerial decision making that include: choices about what the laws should be and whether to follow them; choices about economic and social issues outside the domain of law; and choices about the priority of self-interest over the company’s interests.

A.Unethical Business Practices of Employees

The fifth National Business Ethics Survey found that:

Bad News
Ethical misconduct is very high and is back at pre-Enron levels
Only 9% of companies have strong ethical cultures

Good News
The number of formal ethical compliance programs is on the rise
Companies that adopt an enterprise-wide ethical culture dramatically reduce misconduct.

B.Specific Types of Misconduct Reported

In the past 12 months, more than 56% of employees personally observed conduct that violated company standards and policies
23% of employees observed putting one’s own interests above the organizations
21% of employees observed intimidating behavior
20% of employees observed lying to employees

Ethical issues in business suggest that any useful definition of business ethics must address a range of problems in the workplace, including relationships among professionals at all levels and among corporate executives and external groups.

Other ethical issues include effects of information technology, sexual harassment, invasion of privacy on the Internet, limits on a company’s competitiveness, employee rights and issues, diversity, and the future of capitalism.

C.Ethics and Compliance Programs

Only one in four companies have a well-implemented ethics and compliance program.

1. The Retaliation Trust/Fear/Reality Disconnect. 80% believe that management does not tolerate retaliation; however, 36% of those who didn’t report feared retaliation and only 12% of those who did report experienced retaliation.

C.Why Does Ethics Matter in Business?

“Doing the right thing” matters to employers, employees, stakeholders, and the public.

Acting legally and ethically means saving billions of dollars each year in lawsuits, settlements, and theft.

It has been estimated that workplace theft costs businesses $600 billion annually.

Costs to businesses also include deterioration of relationships, damage to reputation, declining employee productivity, creativity, and loyalty, ineffective information flow throughout the organization, absenteeism, and difficulty recruiting and retaining valued professionals.

Managing ethically also means managing with integrity.

D.Working for the Best Companies

Employees are attracted to ethically and socially responsible companies.

Employees repeatedly cited profit sharing, bonuses, monetary awards, policies and benefits that balance work and personal life, and those that encourage social responsibility as characteristic of good employers.

Ethics matters in organizations because all stakeholders stand to gain when organizations, groups, and individuals seek to do the right thing as well as do things the right way.

1.3Levels of Business Ethics

Ethical and moral issues in business can be examined from at least five levels, including individual, organizational, association, societal, and international.

A.Asking Key Questions

It is helpful for an individual, group, or company to be aware of the ethical levels of a situation and the possible interaction between these levels when confronting a marketing, management, or simple policy question that has moral implications. This can be accomplished by asking six key questions.

What are my core values and beliefs?

What are the core values and beliefs of my organization?

Whose values, beliefs, and interests may be at risk in this decision? Why?

Who will be harmed or helped by my decision or by the decision of my organization?

How will my own and my organization’s core values and beliefs be affected or changed by this decision?

How will I and my organization be affected by the decision?

1.4Five Myths about Business Ethics

A myth is “a belief given uncritical acceptance by the members of a group, especially in support of existing or traditional practices and institutions.” The five most popular myths include:

A.Ethics is a personal, individual affair, not a public or debatable matter.

This myth holds that individual ethics is based on personal or religious beliefs, and that one decides what is right and wrong in the privacy of one’s own conscience.

B.Business and ethics do not mix.

This myth holds that business practices are basically amoral because businesses operate in a free market. This myth also asserts that management is based on scientific, rather than religious or ethical, principles.

C.Ethics in business is relative.

This is one of the more popular myths and it holds that no right or wrong way of believing or acting exists. Right and wrong are in the eyes of the beholder.

D.Good business means good ethics.

The reasoning here is that executives and firms that maintain a good corporate image, practice fair and equitable dealings with customers and employees, and earn profits by legitimate, legal means are de facto ethical.

E.Information and computing are amoral.

This myth holds that information and computing are neither moral nor immoral, but are amoral, i.e. they are in a “gray zone,” a questionable area regarding ethics.

1.5Why Use Ethical Reasoning in Business?

A. Ethical reasoning is required in business for at least three major reasons:

Many times, laws are insufficient and do not cover all aspects or “gray areas” of a problem.

Free-market and regulated-market mechanisms do not effectively inform owners and managers about how to respond to complex issues that have far-reaching ethical consequences.

Complex moral problems require “an intuitive or learned understanding and concern for fairness, justice, due process to people, groups and communities.”

1.6Can Business Ethics be Taught and Trained?

A.The ongoing debate on the ability of ethics to be taught and trained has no final

answer and studies continue to address the issue.

B.According to the author:

Ethics courses should not advocate a single set of rules from a single perspective or offer one best solution to a specific ethical problem.

Ethics courses or training sessions should not promise superior or absolute ways of thinking and behaving in situations.

Ethics courses and training can do the following:

Provide people with rationales, ideas, and vocabulary to help them participate effectively in the process of ethical decision-making.

Help people “make sense” of their environments by abstracting and selecting ethical priorities.

Provide intellectual weapons to do battle with advocates of economic fundamentalism and those who violate ethical standards.

Enable employees to act as alarm systems for company practices that will not pass society’s ethical tests.

Enhance conscientiousness and sensitivity to moral issues and commitment to finding moral solutions.

Enhance moral reflectiveness and strengthen moral courage.

Increase people’s ability to become morally autonomous, ethical dissenters and the conscience of a group.

Improve the moral climate of the firm by providing ethical concepts and tools for creating ethical codes and social audits.

Ethical training can add value to the moral environment of a firm and to relationships in the workplace in the following ways:

Finding a match between an employee’s and employer’s values.

Managing the push-back point, where an employee’s values are tested by peers, employees, and supervisors.

Handling an unethical directive from a boss.

Coping with a performance system that encourages cutting ethical corners.

Lawrence Kohlberg’s study of the stages of moral development, as well as studies on the relevance of Kohlberg’s study for managers and professionals, offers a useful framework for evaluating ethics training.

C.Stages of Moral Development

Lawrence Kohlberg’s three levels with six stages of moral development offer a guide for observing a person’s level of moral maturity, especially as he or she engages in different organizational transactions.

Level 1: Preconventional Level (Self-Orientation)

Stage 1: Punishment avoidance: avoiding punishment by not breaking rules. The person has little awareness of others’ needs.

Stage 2: Reward seeking: acting to receive rewards for oneself. The person has awareness of others’ needs but not of right and wrong as abstract concepts.

Level 2: Conventional Level (Others Orientation)

Stage 3: Good person: acting “right” to be a “good person” and to be accepted by family and friends, not to fulfill any moral ideal.

Stage 4: Law and order: acting “right” to comply with law and order and norms in societal institutions.

Level 3: Postconventional, Autonomous, or Principles Level (Universal, Humankind Orientation)

Stage 5: Social contract: acting “right” to reach consensus by due process and agreement. The person is aware of relativity of values and tolerates differing views.

Stage 6: Universal ethical principles: acting “right” according to universal, abstract principles of justice and rights. The person reasons and uses conscience and moral rules to guide actions.

D.Kohlberg’s Study and Business Ethics

One study of 219 corporate managers working in different companies found that:

Managers typically reason at moral stages 3 or 4.

Managers in large-to-medium-sized firms reasoned at lower moral stages than managers who were self-employed or who worked at small firms.

Managers reasoned at a higher level when responding to a moral dilemma in which the main character was not a corporate employee.

Another important study argued that moral decision making is “issue dependent” and, more specifically, that “the moral intensity of the issue itself has a significant effect on moral decision making and behavior at all stages of the process.”

1.7Plan of the Book

A. This book focuses on applying stakeholder and issues-management approaches

along with students’ own critical reasoning to situations that involve groups and

individuals who often have competing demands and interpretations of a problem,

crisis, or opportunity.

Chapter 2 provides a systematic approach for structuring and evaluating stakeholder issues, strategies, and options at the outset.

Chapter 3 provides ethical principles, “quick tests,” and scenarios for evaluating motivations for certain decisions and actions.

Chapter 4 examines an organization’s corporate governance and compliance.

Chapter 5 looks at how organizations manage external and business issues stakeholders.

Chapter 6 looks at internal stakeholders, strategy, culture, and self-regulation in corporations and discusses rights and obligations of employees and employers as stakeholders.

Chapter 7 analyzes current trends affecting employees in corporations.

Chapter 8 examines globalization and views nations as stakeholders and looks at how multinational corporations operate in host countries and different systems of capitalism.