27 Ethics, Social Responsibility And Strategic Management

1.       Learning Outcome

2.       Introduction

3.       Role of Ethics in Organisations

4.       Types of Unethical Behaviour

5.       Reasons of Unethical Behaviour

6.       A Framework to Ensure Ethical Behaviour in Organisations

7.       Social Responsibility and Strategic Management

8.       Social Policy

9.       Summary

1.   Learning Outcome:

After completing this module the students will be able to understand:

• Concept of ethics and ethical dilemmas
• Role of ethics in in strategic decision making and success of an organisation
• Underlying reasons for people behaving unethically in organisations
• Types of unethical behaviors perpetrated by employees in organisations
• Role of social responsibility, and thus social policy in strategic decision making and success of an organisation

Introduction

“If business is not based on ethical grounds, it is of no benefit to society, and will, like all the other unethical combinations, pass into oblivion.”- C. Max Killan

The study of Strategic Management is incomplete without delving into the realm of Ethics. Ethics as a subject is a major branch of Philosophy and shapes the attitude and behaviour of individuals and society. The term ethics may be defined as accepted principles of right or wrong that govern the conduct of a person, the behavior of members of a profession, or the actions of an organization.

In particular, Business ethics are the accepted principles of right or wrong governing the conduct of business organisations and people at workplace. Ethical decisions are those that are in accordance with accepted principles of right and wrong, whereas an unethical decision is one that violates accepted principles. However, the world is complex and the situations often confronted by the managers ask for a decision, where the choices seem equally ethical or unethical; and sometimes it becomes very difficult to weigh the different choices on ethical grounds because no guiding principles seem to exist. Such inevitable situations, also known as ethical dilemmas and response thereof, shape the goodwill and thus the future of any organisation in long run.

Many of these accepted principles about right and wrong have been universally recognised and have been coded into laws. That ways, violating such principles not only counts as unethical on the part of an organisation, but also is termed as illegal under the legislature of the nation the organisation is operating into.

2.  Role of Ethics in Organisations

One of the basic differences between ordinary and extraordinary companies is that the latter ones follow ethical policies beyond what is legally required.

You must have heard of good car companies recalling their defective cars suo moto or the pharmaceutical companies recalling their medicines because of some sub-standard chemical being used therein.

One such case is that of Johnson & Johnson, wherein it recalled its defective medicine from the market and went further to ad against using it. The company incurred a heavy loss, but it helped in its brand building eventually because of its superior responsiveness.

One such case is that of Nike wherein the operations seemed unethical,though Nike had not contravened any statute in US. It outsourced the production of shoes to third world countries, and the working conditions in some of these countries were substandard to say the least, in comparison to that in developed world. Nike had to bear the brunt in form of retaliation from many international agencies and subsequent fall in its reputation for a considerable time period.

Due to the presence of umpteen controllable and uncontrollable variables facing an organisation; there are zillions of ethical dilemmas for an organisation in daily life. Most of these ethical dilemmas faced by the manager are due to the potential conflicts between the individual goals of the manager, the organisation, and the goals and fundamental rights of the stakeholders i.e. stock holders, customers, suppliers, employees, government and society at large.

Stakeholders have basic rights that should be respected, and it is unethical to violate those rights. Stockholders have the right to accurate and timely information (in terms of accounting statements following requisite standards) about their investments. Customers have the right to be fully informed about the products and services they consume, Employees have the right to safe and conducive working conditions, fair rewards for the work they perform, and to be treated with dignity by the organisation. Suppliers have the right to expect contracts to be respected and competitors have the right to expect that the organisation will abide by the rules of competition and will not violate the provisions of Competition Act and rules related thereto. Communities and the general public, including government, have the right to expect that a organisation will not harm the environment, will develop self-renewable systems so that the natural resources are not overly exhausted, and will help develop the society by providing opportunities of sustainable development.

In case we apply common sense to the realm of business, it won’t take rocket science to conclude that an organisation must take the stakeholders’ view into consideration while deciding for the organisation. Considerations for the stakeholders will eventually lead to their support in the survival and long term development of the organisation in this world of cut-throat competition.

Tata Motors, when shifted their plant from Singoor, West Bengal to Sanand, Gujarat, they trained the people of nearby village technically, conducted yoga classes and ultimatelyOne such case is that of Johnson & Johnson, wherein it recalled its defective medicine from the market and went further to ad against using it. The company incurred a heavy loss, but it helped in its brand building eventually because of its superior responsiveness.that businesses need to give something back to the society that made their success possible.

3.  Types of Unethical Behaviours

Oftentimes unethical behaviour occurs due to agency problem; more specifically when the manager puts her interests or that of the organisation above the goals or the fundamental rights of one or more stakeholders. Let’s look at some of unethical behaviours arising out of such circumstances.

Tata Motors, when shifted their plant from Singoor, West Bengal to Sanand, Gujarat, they trained the people of nearby village technically, conducted yoga classes and ultimately transformed them into productive human resources. It helped Tata Motors to boost their reputation and helped the general public at large by generating employment Figure 6 opportunities. Others go beyond this (Source: http://www.autocarpro.in/news- instrumental approach to ethics to argue that in many cases, acting 2966)national/south-india-makers-road-gujarat- ethically is simply the right thing to do. They argue that businesses need to give something back to the society that made their success possible.

Self-dealing: It occurs when the managers find a way to feather their own nests with corporate moneys through misusing the resources of the organisation for their personal use beyond what is legal.

Information manipulation: It occurs when a manager use their control and authority to hide or distort the information to gain financially. The classic case of Satyam Computers is a paragon in this regard, wherein Ramalinga Raju manipulated the financials of the company to get more funds for the company and to boost the morale of the stakeholders of the company. Eventually the surreptitious dealings were divulged to the world when it became impossible for him to carry it on any further. Many a times, information being manipulated is non-financial too. One example could be when a pharmaceutical company supresses its internal research wherein it observes long term (not life threatening) side effects of one of its best selling drugs

Anti-competitive behaviour: It covers a range of actions that exploits the current and potential competitors. One of such actions is to show monopolistic behaviour by selling goods at such a low price that all other smaller competitors are ruined with the passage of time. The similar behaviour at macro level wherein the nations are involved is known as anti-dumping.

Other such action is Opportunistic exploitation. A large company exploits the suppliers or intermediate customers in the value chain by forcing an unequitable contract having odds in favour of the company. The power to breech a contract or redefining the terms of the contract midway comes from the bargaining power lying with the company due to its large size and dynamics of the industry.

Yet other action in this category is to form a collision by 2-3 largest organisations in a particular industry, when these companies decide the price of a product by illegally controlling the supply of the product or otherwise. It leaves no choice with the customers but to buy the product at artificially higher prices.

Substandard working conditions: Substandard working conditions arise when the organisation pays less than the legally set standards or under invests in the working conditions. Aforementioned Nike case falls in the same category. In India, State Governments propose Minimum Wages

time-to-time, and all the firms in the organised sector are legally bound to pay more than this level of wages. Labour laws like Factories Act, 1948, Contract Labour Act, 1970, Workmen’sCompensation Act, 1923 etc. help provide conducive working milieu for the employees. Environmental degradation occurs when the products, services or direct or indirect actions of an organisation harms environment anyway. Air pollution, water pollution and soil pollution, due to inappropriatedumping of harmful chemicals; sound pollution and heat waves due to furnace and heavy machines; and deforestation resulting in soil erosion environmental imbalance, are some types of environmental degradation. Recently observed debacles like global warming and nuclear leakages have made the governments to focus on environmental friendly policies. All the big manufacturing units were ordered to base outside Delhi, due to the increasing levels of pollutions in the Capital of India.Organisations are expected to treat the water and fumes before releasing them to the atmosphere. Certifications like ISO 14001 are getting popular day-by-day to acknowledge and encourage environment friendly and sustainable practices. Corruption as an unethical action seems self-explanatory. Corruption be perpetrated in zillions of ways. Managers manipulates financial statements, misappropriate funds etc. Subroto Roy aka Sahara Shree, has been put behind the bars for misappropriating the money of the investors into undisclosed activities. Rama Linga Raju’s case already discussed above can also be put into the category of corruption.

4.  Reasons of Unethical Behaviours

So far, we have discussed what is termed as ethical and unethical behaviour and specific situations pertaining to both the categories. More fundamental question confronting is why people behave unethically in the organisations. Let’s look at some of the foremost 4. reasons:

Whether people in organisations will follow business ethics depends largely on where they stand in terms of personal ethics. Personal ethics intern depends on their cultural values and upbringing. People, many a times, don’t consider ethics as a criterian and decide purely economic terms and choose the most profitable option.

Sometimes it becomes very difficult to contemplate what out of the available options will be ethical. These ethical dilemmas occur due to the complex world having umpteen number of controllable and uncontrollable variables. People compromise on their ethical standards on trivial matters and justify themselves that they are doing it to attain some higher goal.

Above mentioned reasons make it clear that people take unethical decisions and frequently they do it in ignorance. Furthermore, ethical dilemmas make it difficult for people to ensure that their decisions will be counted as ethical even if they follow righteousness with all their understanding.

5.  A Framework to Ensure Ethical Behaviour in Organisations

How can a manager ensure that her decisions count ethical? Following are some ways of prescriptive nature to ascertain it.

Employee acquisition: It’s already been established that personal ethics of a person impacts her decisions in business settings. Therefore, organisations strive to on-board people with higher ethical standards. But how could an organisation discern such people during hiring process?

One of the possible ways is to administer psychological tests to judge the personal value system of the applicants. Scales like Person-Organisation Fit and Person-Job-Fit fetch good results.

Reference check of the potential employees, through their previous organisations and people of repute is also appropriate.

Employee Referral Programs are very effectual in seeking appropriate employees, because the current employees happen to know the organisation they work at and the person they refer as well.

It is utmost important to on-board ethical people to maintain ethical standards. On the other hand, employees perpetrating unethical deeds must be punished suitably,

to promote conducive culture.

Promotions: Value System must be given due importance in promotion decisions and only those people must become the top brass of the organisation, who qualify

on the adherence of essential ethical values.

Code of Conduct: Every organisation must have a code of conduct to guide the employees on how to decide to be ethical. Standing Orders provided for the workmen based upon Industrial Employment (Standing Order) Act, 1946 provides an example in this regard.

The founders of Johnson & Johnson, one of the Fortune 100 companies created a Credo Statement that has stood the test of time and guided the employees of the companies through thick and thin most effectively. The Credo has been provided below and the reader is expected to read it like scriptures.

Decision making processes: Besides the culture that favours and encourages ethical behaviours, an organisation must have practical and executable guiding principles to direct an employee to be sure that her decisions made by them are always ethical.

To ensure that, they must be able to systematically analyze the implications of the decisions made by them. Some experts have designed some questions, and the answer of these questions in “yes” ensures that the decisions made are ethical.

1.   Does my decision fall within the accepted values or standards that typically apply in the organizational environment (as articulated in a code of ethics or some other corporate statement?

2.  Am I willing to see the decision communicated to all stakeholders affected by

it—for example, by having it reported in newspapers or on television?

3. Would the people with whom I have a significant personal relationship, such as family members, friends, or even managers in other businesses, approve of the

decision?

Ethics Officers: Having Ethics Officers is one of the important ways to ensure that the organisation adheres to the ethical standards through sound Code of Conduct. Ethics Officers are qualified and competent to discern ethical actions from the unethical  ones.  In  many  companies,  Ethics  Officers  also  acts  as  internal Ombudsperson who deals with the complaints and suggests changes in the processes and systems so that the organisation behaves ethically to employees adhere to the Code of Conduct.

Strong Corporate Governance: Strong Corporate Governance practices make sure that the employees adhere to ethical norms. Practices like having outside independent directors are most important to ensure that the managers don’t make decisions to cut their own axe or to have ulterior motives. Had the companies like Satyam Computers, Enron and WorldCom had the independent directors, the companies would not have fallen for unwanted fatal practices and their managers would not have used the resources of the company as their own money.

Moreover, following benchmark for reporting financial results help a long way.

Assertive Training: Assertive Training popularly known as A-T in Corporate World is very important to instill the employees with the courage to say “No” in the pressure situations. It is a common fact that employees, when pressurised by the authorities, strike a compromise on their ethical standards. Group think and Group shift are common occurrences in the organisations.

To install proper systems, to encourage people to divulge the malpractices of the company, is an effective way. Therefore, Whistle Blowing procedures must be instituted in every organisation.

Last but not the least, it must be understood that behaving ethically is not only a virtue, but also a mantra for immaculate reputation and long-term success of any organisation.

7.        Social Responsibility and Strategic Management

We all must have heard the phrase that “With great power, comes the great responsibility”.

Corporate Social Responsibility means the voluntary activities undertaken by a company

According to Investopedia.com, “Corporate Social Responsibility, often abbreviated as “CSR”, is a corporation’s initiatives to take responsibility for the company’s effects on Environmental and Social wellbeing. The term generally applies to efforts that go beyond what may be required by regulators and environmental protection groups”.

Some strategists put themselves in Ralph Nader’s camp, who asserted that corporations have unlimited obligations. He takes big corporations like ExxonMobil for example to demonstrate that its worth is more than that of most countries. Therefore such firms have the responsibility to help the society get free from many ills. On the other hand, other strategies follow Milton Friedman, the renowned economist, who proclaims that the business of business is just business and the firms need not to do for the society, that is beyond legally required of them. According to him, it is irresponsible of the firms to donate money because the firm could use that money more efficiently.

To take a neutral view, we’d all agree that the first responsibility of an organisation must be to do its business in an effective way to sustain itself through its core activities. . If the organisation becomes broke thanks to the overburden of social responsibility, it cannot be justified, as it itself will become a liability to the society. A company that plans to retrench a large number of employees because of slow in demand due to recession in the economy, it can’t always avoid the retrenchment so as to protect the livelihood of employees, when this action can liquidate the company altogether and all the employees could lost their life. Decisions are made with long-term orientation in these regards.

The best way to perform its obligations towards the society is that the strategists of the organisation must look for the nature of social activities that would support their core business. An IT company that has an ITES arm can help the society by employing disabled people for IT and BPO services. A company into real estate or construction may help construct toilets in villages and schools. Wipro does its social responsibility through investing in education sector. Birla Group constructs temples as its social responsibility. Tata Sons. Trust works in diverse areas.

Figure 16

(Source:http://enoahisolution.com/corporate-social-responsibility/)

8.      Social Policy

Social Policy means the contemplation of policy on Social Responsibility that gels well with the Managerial philosophy at the highest level of the organisation. This is a very responsible job to frame such a policy. A well thought off policy ensures that the resources invested by the company will create optimum value for the society and that the company will stick to its endeavor in long run,.

Look at the list of Most Admired Companies for Social Responsibility by Fortune Magazine:

1.      Marriott International

2.      Starbucks

3.      Whole Foods Market

4.      Royal Dutch Shell

5.      CH2M Hill

6.      Nike

7.      Nestle`

8.      Walt Disney

9.      Statoil

10.  Wyndham Worldwide

It is a matter of research to know direction of causality in CSR activities of a company and its brand value. Responsible organisations undertake large social projects and help transform the society.

We’ve already discussed the case of Tata Motors, wherein Tata Motors educated and trained the people of nearby villages for its Tata Nano factory at Sanand, Gujarat. It helped the company improve its reputation and was able to get trained employees through local market.

Political parties often educate general public on the power of votes and the voting process without soliciting them to vote for their political party. This helps to increase their credibility.

It is very important to understand that Corporate Social Responsibility should not be taken as a burden and it can be a source of Competitive Advantage for an organisation.

8.      Summary

Unethical actions may help an organisation to make a killing in short run by fly-by-night operations, but ethical actions ensure the success of the organisation in long run. There are zillions of examples of such companies that always adhered to ethical values and are able to inculcate trust in stakeholders leading to great brand value. Employees sometimes behave unethically in organisations, thanks to their vested ulterior motives, but organisations can develop appropriate systems to curb such behaviours and to reward ethical behaviours. Corporate Social Responsibility has gained a legal status and companies are required to spend a share of their net profits into CSR activities. Social Responsibility as a concept and application, is criticized for the reason that CSR puts a burden on an organisation and can hamper the growth of the organisation severely. However, if the areas of CSR activities are chosen keeping into consideration the line of business of the organisation; it might prove to be a strategic tool to improve the reputation of the organisation and might help the organisation to flourish in global arena.