Managerial Ethics and Social Responsibility

Business ethics has come to the fore recently following a series of corporate collapses caused by dishonest behaviour by senior executives. One such case was the well-publicised failure of US energy giant Enron which resulted from dishonest accounting aimed at boosting the stock price. Public concern over global warming and environmental pollution has forced organisations to confront the issue of sustainable and responsible development.

Ethics is concerned with right and wrong, with good and evil [No, this is moral reasoning]. An ethical act is one which is regarded as right or good; unethical behaviour is wrong and/or bad. [No, ethics is justifiable behaviour derived from moral principles; one can engage in an act which is morally wrong but ethically justifiable]. To a large extent individuals' ethical principles are determined by what is considered right and wrong in the society in which they live. Views on what is right and wrong are derived from cultural traditions, religion, shared community values and what might be called 'the rules of the game'. [Argh! They are not 'rules' for a 'game'. The are a motivational force for the treatment of others - cf., The Seven Habits of Highly Effective People].

Samson and Daft (2005: 162) suggest that there are three levels of moral development. These levels, the leadership styles and employee behaviours evident in individuals operating at this level. Postconventional, Conventional and Preconventional. [No, this is Lawrence Kohlberg theory of moral development from the early 1970s and backed by substantial empirical studies. The stages themselves are derived from Jean Piaget's genetic episteoloy development psychology starting from the 1930s!]. There are some people (such as the economist, Milton Friedman) who claim that the market system can resolve all problems and those who make this claim would follow the preconventional stage of moral development. [No, Friedman actually doesn't make that claim and indeed he explicitly rejects it; describing his morality has 'preconventional' is simply pejorative.].

The main reason for behaving ethically in business should be personal. Any decent manager is going to behave honestly and fairly. Organisations depend on a level of trust between the members of the organisation—especially between managers and staff. Unethical behaviour breaks down that trust. Providing misleading information is nearly always counterproductive. A key aspect of organisational cohesion is a set of shared values. These values determine the objectives of the organisation and its culture and the factors staff regard as important. When behaviour goes against these professed values, it disrupts the integrity of the organisation and destroys the trust between its members.

Wenstop and Myrmel (2006: 679) suggest that three kinds of values exist in organisations:

  • core values—such as integrity, honesty, respect
  • protected values—such as health, environment, safety, rights
  • created values—such as return on investment, quality, image, citizenship.

"Francis Fukuyama (1995), the eminent historian," [Actually he is a political economist and it's probably culturally appropriate to use his fullname Yoshihiro Francis Fukuyama cf., and] has provided evidence that the basis for sound economic development is the degree of trust within the society. Countries where there is a high level of trust (e.g. Germany or Japan) can set up large and efficient organisations, whereas countries with low levels of trust (e.g. the Philippines) have difficulty in doing so.

Many organisations have cultures that operate against ethics. Any company which has a strongly competitive culture is in danger of this. A system which provides large rewards for good results and does not enquire too deeply how those results were obtained, is asking for unethical behaviour. Several financial organisations have suffered as a result of their overly competitive cultures.

A culture of blame is another obstacle to ethical behaviour. In such workplace cultures, many employees are tempted to conceal mistakes and poor performance if there is public criticism and retribution for someone who admits an error. Honesty has to be rewarded and rewards should be offered in the short term. When mistakes are made, the best course is to discuss them openly with staff, try to identify why the mistake was made and set up systems, training and processes to ensure that it does not happen again.

There has been a move in recent years for organisations to develop a 'code of ethics' to guide conduct within the organisation. A code of ethics is, in Hitt et al.'s words (page161) 'typically a formal statement of one to three pages that primarily outlines the types of behaviour that are and are not acceptable'. However, codes of ethics have both positive and negative aspects. A code of ethics which are not compatible with the organisational culture are likely to be ineffective documents.

In summary, a code of ethics will only be effective if:

  • it is developed in consultation with the organisation's employees
  • training programs are designed to ensure that all staff members understand the code and how the code is to guide their behaviour
  • it is compatible with the organisational culture
  • it is re-communicated and reinforced at regular intervals
  • there are formal, stated penalties for transgressions
  • senior managers model the behaviours described in the code

Many organisations do not develop formal codes of ethics, but rely on establishing a culture that is concerned about ethical issues and creating an atmosphere of 'doing the right thing'. Many ethical problems may not be covered by a formal code and leaving the decision to the judgment of competent managers who have ethical attitudes can have better outcomes. Some organisations develop value statements (also referred to as core values or governing values) that articulate how the organisation 'chooses to work as a human enterprise' and encourage 'unanimity of purpose among staff' (Viljoen & Dann, 2003: 105). It is sometimes better to have a set of values to guide ethical decisions, rather than a set of rules. Maslow's (1970) hierarchy of needs (Physiological, Safety, Belonging, Esteem, Self-Actualisation) is a useful guide to values. In this hierarchy, each level of need is valued until it is fulfilled, when it is largely taken for granted; then the next higher level becomes important.

Human resources is an area where ethics plays a major part, both in the fair treatment of staff and in recruitment. There is legislation in most developed countries that aims to regulate the relationship between employers and employees. The legislation seeks to balance an individual's right to work, receive fair wages and have reasonable and safe working conditions with commercial principles, such as profit, the need for employer control and investment risk (Barron 2006: 631).

Many suppliers are in a poor negotiating position with their customers. The customers are often large corporations, while the suppliers are small and vulnerable. Unethical behaviour of this kind is also common in the sourcing of food and other products from poor countries. In developed countries, there are usually laws relating to pollution, but developing countries often have no laws, or they can be easily circumvented. In such cases, it is the ethical concerns (and fear of negative publicity) of the multinational corporations which act as the controls. The protection of customers from unethical practices grows steadily. In many countries there are Trade Practices laws and regulatory bodies to whom customers can appeal to get redress from dishonest suppliers.

Much of the discussion on organisational ethics is about refraining from wrongdoing - being honest, fair and open. However, in recent years, the debate has broadened and now organisations are deemed to be responsible for their overall effect on society and are expected to take positive action to ensure that this effect is beneficial. The classical (economic) view holds that for an organisation to pursue values other than profit maximisation poses a threat to survival and unjustly subverts the intentions of its owners. However, this view has lost credibility with governments and society following the widespread damage to health, the environment and business confidence caused by corporations intent only on pursuing profit.

In contrast, the socioeconomic view argues that organisations have a responsibility to the society that creates and sustains them. This responsibility goes beyond the profit imperative to include protecting and improving society's welfare. In other words, a business should have values which ensure that it not only complies with the law and with the morality of society, but also contributes to its welfare more actively.

This framework is triple bottom line (TBL) reporting and it captures, describes and measures the organisation's impact on the world. Triple bottom line reporting was developed by John Elkington in 1994 who argued that businesses needed to measure their success in wider terms than just profit and financial performance. Elkington proposed that corporations report their results in the following three dimensions; environment, social, and economic. The use of triple bottom line reporting is growing steadily in leading corporations throughout the world as they recognize that TBL reporting can enhance their reputations.

There is little evidence to suggest that socially responsible behaviour diminishes the long-term economic performance of an organisation. In fact, failing to be socially responsible can have negative effects, such as increased scrutiny of managerial decision making or extreme consequences such as having to withdraw from specific markets, long-term negative affects on brand and having to pay compensation costs.

Another measure used to ascertain an organisation's social performance is known as content analysis. This method calculates how frequently social responsibility topics are mentioned in annual reports and other company publications. This measurement method and the previously mentioned survey measurement have weaknesses. Assessments of reputations are subjective; writing about social responsibility is not the same as acting on it.