Chapter Four

The Corporation and External Stakeholders

Managing Moral Responsibility in the Marketplace
Business Ethics: A Stakeholder and Issues Management Approach, 4e, Joseph W. Weiss Copyright 2006 by South-Western, a division of Thomson Business & Economics. All rights reserved.

Top 10 Best Corporate Citizens Who Serve Stakeholders Well (2004)

1. Fannie Mae 2. Proctor & Gamble 3. Intel Corporation 4. St. Paul Companies 5. Green Mountain Coffee Roasters Inc. 6. Deere & Company 7. Avon Products, Inc. 8. Hewlett Packard 9. Agilent Technologies 10.Ecolab Inc.

Figure 4.1: External Stakeholders, Moral Stakes, and Corporate Responsibilities

Source: Based on the Caux Round Tables Principles for Business. The principles are printed in Business Ethics magazine, 52 S. 10th St. #110, Minneapolis, MN 55403.

Competitive Advantages for Socially Responsible Firms

1. Reputation 2. Successful social investment portfolios 3. Ability to attract quality employees

The Social Contract

A set of rules and assumptions about behavior patterns among the various elements of society Often involves a quid pro quo (something for something) exchange Often based on implicit as well as explicit agreements between a corporation and its stakeholders

Covenantal Ethic

Related to the social contract Central to a stakeholder management approach Focuses on the importance of relationships between businesses, customers, and stakeholders

Pragmatic Principles

Make a profit ---------- Act justly Cause no avoidable or unjustifiable harm Prevent harm when possible Ought implies can Moral minimum standard

Moral Basis for Social Responsibility

Trustee

for societys resources Two-way open system, open disclosure Social costs and benefits Consumer pays for consumption and effects on society Social involvement in core competency areas

Best Practices for Corporate Governance

Separating the role of chairman of the board when the CEO is also a board member 2. Setting tenure rules for board members 3. Regularly evaluating itself and the CEOs performance 4. Prohibiting directors from serving as consultants to the companies which they serve 5. Compensating directors with both cash and stock 6. Prohibiting retired CEOs from continuing board membership 7. Assigning independent directors to the majority of members who meet periodically without the CEO
1.

The Role of Laws and the Regulatory System in Corporate Governance

Regulate competition Protect consumers Promote equity and safety Protect the natural environment Ethics and compliance programs to deter and provide for enforcement against misconduct

Summary of the Sarbanes-Oxley Act

Establishes an independent public company accounting board to oversee audits of public companies Requires one member of the audit committee to be an expert in finance Requires full disclosure to stockholders of complex financial transactions Requires CEOs and CFOs to certify in writing the validity of their companies financial statements Prohibits accounting firms from offering other services, like consulting, while also performing audits

Summary of the Sarbanes-Oxley Act (cont)

Requires ethics codes, registered with the Securities and Exchange Commission (SEC), for financial officers Provides a 10-year penalty for wire and mail fraud Requires mutual fund professionals to disclose their vote on shareholder proxies, enabling investors to know how their stocks influence decisions Provides whistle-blower protection for individuals who report wrongful activities to authorities Requires attorneys of companies to disclose wrongdoing to senior officers and to the board of directors, if necessary

Cons and Pros of Sarbanes-Oxley

Cons

Pros

It is too costly

Government costs also increase to regulate the law

It impacts negatively on a firms global competitiveness CFOs are overburdened and pressured by having to enforce and assume accountability by the law An exodus will occur of public companies returning to private ownership

The costs of implementing is minimal compared to the costs of not having it The changes required to implement this law are difficult The data does not support the argument that this law presents a competitive disadvantage to global firms Financial officers who complain about the requirements of SarbanesOxley may in fact be suffering from the lack of internal controls they had before If a company uses the SarbanesOxley Act as a reason to not go public, the firm should not go public or use investors funds

1991 Original Seven Criteria of the Revised Guidelines

1. Established standards and procedures capable of reducing the chances of criminal conduct 2. Appointment of compliance officer(s) to oversee plans 3. Took due care not to delegate substantial discretionary authority to individuals who are likely to engage in criminal conduct 4. Established steps to effectively communicate the organizations standards and procedures to all employees 5. Took steps to ensure compliance through monitoring and auditing 6. Employed consistent disciplinary mechanisms 7. When an offense was detected, took steps to prevent future offenses, including modifying the compliance plan, if appropriate

Responsibility toward Consumers

Duty to inform fully and truthfully Duty not to misrepresent or withhold information Duty not to force or take undue advantage of through fear or stress Duty to take due care to prevent foreseeable injuries

Consumer Rights

Right to safety Right to free and rational choice Right to know, access information Right to be heard (complain) Right be to compensated for harm

Free Market Theory

Minimal moral restraints Full competitiveness with entry and exit Relevant information available to everyone Accurate reflection of all production costs in prices (assumes an equal balance of power, knowledge, and sophistication of choice in buying and selling of products and services)

Problems with the Free Market Theory

Resource-rich firms create unequal information Advertising is used questionably Invisible hand does not exist for all situations (imperfect markets)

Five Goals of Government Policy Makers toward Consumers

1. Providing consumers with reliable information about purchases 2. Providing legislation to protect consumers against hazardous products 3. Providing laws to encourage competitive pricing 4. Providing laws to promote consumer choice 5. Protecting consumers privacy

U.S. Consumer Protection Agencies

1. The Federal Trade Commission (FTC) deals with online privacy, deceptive trade practices, and competitive pricing

2. The Food and Drug Administration (FDA) regulates and enforces the safety of drugs, foods, and food additives, and sets standards for toxic chemical research
3. The National Highway Traffic Safety Administration (NHTSA) deals with motor vehicle safety standards 4. The National Transportation Safety Board (NTSB) handles airline safety 5. The Consumer Product Safety Commission sets and enforces safety standards for consumer products 6. The Department of Justice (DOJ) enforces consumer civil rights and fair competition

External Corporate Responsibility Areas

Advertising Product safety and liability Environmental concerns

Advertising

Inform vs. persuade (two purposes) FTC guidelines: (claims must be substantiated)

Deception:

Mislead customers Affect consumers behavior or decisions Substantial injury Injury not outweighed by other benefits Injury is reasonably avoidable

Unfair:

Pros and Cons of Advertising

Pros

Cons

Informs consumers about products Enables companies to be competitive Increases consumption and spending, which in turn creates economic growth Helps a nations balance of trade and debt payments Customers pay for the images as well as the products Consumers are not ignorant; they have freedom of choice

Thin line between puffery and deception Targeting unsophisticated buyers (children and youth) Intentional deception and half-truths

Advertising Issues

Pop-up and pop-under ads on the Internet Telemarketing School sporting events, hallways, etc. (obesity) Movie theaters Dangerous products (e.g., tobacco, firearms) Life-required products (e.g., drugs) Child-focused advertising

Ethics and Advertising

Is the consumer being treated as a means to an end or as an end? What and whose end? Whose rights are being protected or violated intentionally and inadvertently? At what and whose cost? Are consumers being justly and fairly treated? Are the public welfare and good taken into consideration for the effects as well as the intention of advertisements? Has anyone been harmed, and can this harm be proven?

Justice Powells Four-Step Test (Free Speech Argument)

Is the ad accurate, and does it promote a lawful product? 2. Is the governments interest in banning or restricting the commercial speech important, nontrivial, and substantial? 3. Does the proposed restriction of commercial speech assist the government in obtaining a public policy goal? 4. Is the proposed restriction of commercial speech limited only to achieving the governments purpose?
1.

Product Safety and Liability

Marginal value of product = Marginal cost of life or function

National Commission on Product Safetys steps to assess product safety:

How much safety is technically attainable, and how can it be specifically obtained for this product or service? What is the acceptable risk level for society, the consumer, and the government regarding this product? Does the product meet societal and consumer standards?

External Review and Control

1972 CPS Act, CPS Commission EPA, NHTSA, FDA, OSHA

Why are external review processes (i.e., governmental regulatory oversight) needed?

Childrens products (car seats, toys, cribs, highchairs, etc.) Automobiles (Firestone, Ford Explorers) Drugs (Fen-Phen, etc.)

Liability and Negligence

Negligence all parties can be held liable if reasonable care is not observed in producing or selling a product Strict Liability the manufacturer is liable for a persons injury or death if a product with a known or knowable defect gets to market
1. Injury happened 2. Injury resulted from a product defect 3. Defective product delivered by manufacturer

Absolute liability the manufacturer is liable for not warning of product danger even though the danger was scientifically unknown at the time of production and sale of the product

Environmental Issues

Toxic air pollution Water pollution Hazardous waste and land pollution

Laws:

The Federal Water Pollution Control Act of 1972 The Safe Drinking Water Act of 1974 and 1996 The Toxic Substances Control Act of 1976 The Resource Conservation and Recovery Act of 1976 Chemical Safety Information, Site Security, and Fuels Regulatory Relief Act of 1999

Causes of Environmental Pollution

1. 2. 3.

4.
5. 6.

Consumer affluence Materialistic cultural values Urbanization Population explosion New and uncontrolled technologies Industrial activities

The Ethics of Ecology

Responsibilities go beyond production of goods and services at a profit Include helping to solve important social problems, especially those they create Broader constituency than stockholders Impact more than just marketplace Serve a wider range of human values than just economic values

Figure 4.7: 5 Stages of Environmental Corporate Commitment

Source: Adapted from Christopher B. Hunt and Ellen R. Auster, Proactive Environmental Management: Avoiding the Toxic Trap, Sloan Management Review, Winter 1990, p. 9. Permission granted by the publisher. Copyright 1990 by the Sloan Management Review Association. All rights reserved.