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Case Study: Corporate Social Responsibility of Starbucks

Starbucks is the world’s largest and most popular coffee company. Since the beginning, this premier cafe aimed to deliver the world’s finest fresh-roasted coffee. Today the company dominates the industry and has created a brand that is tantamount with loyalty, integrity and proven longevity. Starbucks is not just a name, but a culture .

It is obvious that Starbucks and their CEO Howard Shultz are aware of the importance of corporate social responsibility . Every company has problems they can work on and improve in and so does Starbucks. As of recent, Starbucks has done a great job showing their employees how important they are to the company. Along with committing to every employee, they have gone to great lengths to improve the environment for everyone. Ethical and unethical behavior is always a hot topic for the media, and Starbucks has to be careful with the decisions they make and how they affect their public persona.

The corporate social responsibility of the Starbucks Corporation address the following issues: Starbucks commitment to the environment, Starbucks commitment to the employees, Starbucks commitment to consumers, discussions of ethical and unethical business behavior, and Starbucks commitment and response to shareholders.

Commitment to the Environment

The first way Starbucks has shown corporate social responsibility is through their commitment to the environment. In order to improve the environment, with a little push from the NGO, Starbucks first main goal was to provide more Fair Trade Coffee. What this means is that Starbucks will aim to only buy 100 percent responsibly grown and traded coffee. Not only does responsibly grown coffee help the environment, it benefits the farmers as well. Responsibly grown coffee means preserving energy and water at the farms. In turn, this costs more for the company overall, but the environmental improvements are worth it. Starbucks and the environment benefits from this decision because it helps continue to portray a clean image.

Another way to improve the environment directly through their stores is by “going green”. Their first attempt to produce a green store was in Manhattan. Starbucks made that decision to renovate a 15 year old store. This renovation included replacing old equipment with more energy efficient ones. To educate the community, they placed plaques throughout the store explaining their new green elements and how they work. This new Manhattan store now conserves energy, water, materials, and uses recycled/recyclable products. Twelve stores total plan to be renovated and Starbucks has promised to make each new store LEED, meaning a Leader in Energy and Environmental Design. LEED improves performance regarding energy savings, water efficiency, and emission reduction. Many people don’t look into environmentally friendly appliances because the upfront cost is always more. According to Starbucks, going green over time outweighs the upfront cost by a long shot. Hopefully, these new design elements will help the environment and get Starbucks ahead of their market.

Commitment to Consumers

The second way Starbucks has shown corporate social responsibility is through their commitment to consumers. The best way to get the customers what they want is to understand their demographic groups. By doing research on Starbucks consumer demographics, they realized that people with disabilities are very important. The company is trying to turn stores into a more adequate environment for customers with disabilities. A few changes include: lowering counter height to improve easy of ordering for people in wheelchairs, adding at least one handicap accessible entrance, adding disability etiquette to employee handbooks, training employees to educate them on disabilities, and by joining the National Business Disability Council. By joining the National Business Disability Council, Starbucks gains access to resumes of people with disabilities.

Another way Starbucks has shown commitment to the consumers is by cutting costs and retaining loyal customers. For frequent, loyal customers, Starbucks decided to provide a loyalty card. Once a customer has obtained this card, they are given incentives and promotions for continuing to frequent their stores. Promotions include discounted drinks and free flavor shots to repeat visitors. Also, with the economy being at an all time low, Starbucks realized that cheaper prices were a necessity. By simplifying their business practices, they were able to provide lower prices for their customers. For example, they use only one recipe for banana bread, rather than eleven!

It doesn’t end there either! Starbucks recognized that health is part of social responsibility. To promote healthier living, they introduced “skinny” versions of most drinks, while keeping the delicious flavor. For example, the skinny vanilla latte has 90 calories compared to the original with 190 calories. Since Starbucks doesn’t just sell beverages now, they introduced low calorie snacks. Along with the snacks and beverages, nutrition facts were available for each item.

Also one big way to cut costs was outsourcing payroll and Human Resources administration . By creating a global platform for their administration system, Starbucks is able to provide more employees with benefits. Plus, they are able to spend more money on pleasing customers, rather than on a benefits system.

Commitment and Response to Shareholders

One way Starbucks has demonstrated their commitment and response to shareholder needs is by giving them large portions. By large portions, Starbucks is implying that they plan pay dividends equal to 35% or higher of net income to. For the shareholders, paying high dividends means certainty about the company’s financial well-being. Along with that, they plan to purchase 15 million more shares of stock, and hopefully this will attract investors who focus on stocks with good results.

Starbucks made their commitment to shareholders obvious by speaking directly to the media about it. In 2004, Starbucks won a great tax break, but unfortunately the media saw them as “money grubbing”. Their CEO, Howard Shultz, made the decision to get into politics and speak to Washington about expanding health care and the importance of this to the company. Not only does he want his shareholders to see his commitment, but he wants all of America to be able to reap this benefits.

In order to compete with McDonalds and keeping payout to their shareholders high, Starbucks needed a serious turnaround . They did decide to halt growth in North America but not in Japan. Shultz found that drinking coffee is becoming extremely popular for the Japanese. To show shareholders there is a silver lining, he announced they plan to open “thousands of stores” in Japan and Vietnamese markets.

Commitment to Employees

The first and biggest way Starbucks shows their commitment to employees is by just taking care of their workers. For example, they know how important health care, stock options, and compensation are to people in this economy. The Starbucks policy states that as long as you work 20 hours a week you get benefits and stock options. These benefits include health insurance and contributions to employee’s 401k plan. Starbucks doesn’t exclude part time workers, because they feel they are just as valuable as full time workers. Since Starbucks doesn’t have typical business hours like an office job, the part time workers help working the odd shifts.

Another way Starbucks shows their commitment to employees is by treating them like individuals, not just number 500 out of 26,000 employees. Howard Shultz, CEO, always tries to keep humanity and compassion in mind. When he first started at Starbucks, he remembered how much he liked it that people cared about him, so he decided to continue this consideration for employees. Shultz feels that a first impression is very important. On an employee’s first day, he lets each new employee know how happy he is to have them as part of their business, whether it is in person or through a video. His theory is that making a good first impression on a new hire is similar to teaching a child good values. Through their growth, he feels each employee will keep in mind that the company does care about them. Shultz wants people to know what he and the company stand for, and what they are trying to accomplish.

Ethical/Unethical Business Behavior

The last way Starbucks demonstrates corporate social responsibility is through ethical behavior and the occasional unethical behavior. The first ethically positive thing Starbucks involves them self in is the NGO and Fair Trade coffee. Even though purchasing mostly Fair Trade coffee seriously affected their profits, Starbucks knew it was the right thing to do. They also knew that if they did it the right way, everyone would benefit, from farmers, to the environment, to their public image.

In the fall of 2010, Starbucks chose to team up with Jumpstart, a program that gives children a head start on their education. By donating to literacy organizations and volunteering with Jumpstart, Starbucks has made an impact on the children in America, in a very positive way.

Of course there are negatives that come along with the positives. Starbucks isn’t the “perfect” company like it may seem. In 2008, Starbucks made the decision to close 616 stores because they were not performing very well. In order for Starbucks to close this many stores in one year, they had to battle many landlords due to the chain breaking lease agreements. Starbucks tried pushing for rent cuts but some stores did have to break their agreements. On top of breaching lease agreements, Starbucks was not able to grow as much as planned, resulting their future landlords were hurting as well. To fix these problems, tenants typically will offer a buyout or find a replacement tenant, but landlords are in no way forced to go with any of these options. These efforts became extremely time consuming and costly, causing Starbucks to give up on many lease agreements.

As for Starbucks ethical behavior is a different story when forced into the media light. In 2008, a big media uproar arose due to them wanting to re-release their old logo for their 35th anniversary. The old coffee cup logo was basically a topless mermaid, which in Starbucks’ opinion is just a mythological creature, not a sex symbol. Media critics fought that someone needed to protect the creature’s modesty. Starbucks found this outrageous. In order to end the drama and please the critics, they chose to make the image more modest by lengthening her hair to cover her body and soften her facial expression. Rather than ignoring the media concerns, Starbucks met in the middle to celebrate their 35th anniversary.

Related posts:

• Case Study: Corporate Social Responsibility at The Body Shop
• Case Study: British Petroleum and Corporate Social Responsibility
• Case Study: Starbucks Social Media Marketing Strategy
• Corporate Social Responsibility (CSR) – Definition, Perspectives and Approaches
• The Importance of Corporate Social Responsibility in Business
• Carroll’s Pyramid of Corporate Social Responsibility
• Corporate Social Responsibility as a Source of Competitive Advantage
• Stakeholders Perspective on Corporate Social Responsibility (CSR)
• Stakeholder Expectations and Corporate Social Responsibility (CSR)
• Aligning Business Ethics and Corporate Social Responsibility

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Videos Concepts Unwrapped View All 36 short illustrated videos explain behavioral ethics concepts and basic ethics principles. Concepts Unwrapped: Sports Edition View All 10 short videos introduce athletes to behavioral ethics concepts. Ethics Defined (Glossary) View All 58 animated videos - 1 to 2 minutes each - define key ethics terms and concepts. Ethics in Focus View All One-of-a-kind videos highlight the ethical aspects of current and historical subjects. Giving Voice To Values View All Eight short videos present the 7 principles of values-driven leadership from Gentile's Giving Voice to Values. In It To Win View All A documentary and six short videos reveal the behavioral ethics biases in super-lobbyist Jack Abramoff's story. Scandals Illustrated View All 30 videos - one minute each - introduce newsworthy scandals with ethical insights and case studies. Video Series

Curated Resources UT Star Icon

Sustainability & CSR

Sustainability describes the ability to maintain various systems and processes — environmental, social, and economic — over time. Corporate Social Responsibility, or CSR, is as varied as the companies that practice it.

Sustainability originated in natural resource economics, but has since gained broader currency in terms of sustainable development and social equality. Corporate Social Responsibility, or CSR, usually refers to a company’s commitment to practice environmental and social sustainability and to be good stewards of the environment and the social landscapes in which they operate.

Approaches to sustainability and CSR vary according to industry and how an individual organization defines and embraces these ideas. Some companies and economists reject the idea of CSR because it implies an obligation to society and future generations beyond those contained in the binding legal requirements of business. However, most companies now embrace some notion of CSR. Some companies invest in CSR as reputation management or to sustain the profitability of a company, and some invest in CSR out of a sense of moral obligation to society.

These resources focus on sustainability and CSR primarily in terms of moral obligation. They offer insight into ethics concepts relevant to economic sustainability, environmental sustainability, and social equity. Among other things, the resources describe how companies may determine what factors to favor in ethical decisions, the impact of intangible factors in ethical dilemmas, and best practices for developing ethical culture in organizations.

Start Here: Videos

Cognitive Dissonance

Cognitive dissonance is the psychological discomfort that we feel when our minds entertain two contradictory concepts at the same time.

Ethical Fading

Ethical fading occurs when we are so focused on other aspects of a decision that its ethical dimensions fade from view.

Tangible & Abstract

Tangible and abstract describes how we react more to vivid, immediate inputs than to ones removed in time and space, meaning we can pay insufficient attention to the adverse consequences our actions have on others.

Start Here: Cases

• Arctic Offshore Drilling

Competing groups frame the debate over oil drilling off Alaska’s coast in varying ways depending on their environmental and economic interests.

• Climate Change & the Paris Deal

While climate change poses many abstract problems, the actions (or inactions) of today’s populations will have tangible effects on future generations.

The Costco Model

How can companies promote positive treatment of employees and benefit from leading with the best practices? Costco offers a model.

Teaching Notes

Begin by viewing the “Start Here” videos. They introduce concepts that are basic to sustainability and CSR. Read through these videos’ teaching notes for details and related ethics concepts. Watch the “Related Videos” and/or read the related Case Study. “Additional Resources” offer further reading, a bibliography, and (sometimes) assignment suggestions.

The “Additional Videos” describe the way incentives affect economics, how the slippery slope leads to moral degradation, why “framing” matters to sustainability and CSR, and the hallmarks of fair and equal representation. Other videos introduce behavioral ethics biases that impact ethical decision-making, such as the tendency to switch values based on our role, and the importance of loss aversion in making moral choices.

Show a video in class, assign a video to watch outside of class, or embed a video in an online learning module such as Canvas. Then, prompt conversation in class to encourage peer-to-peer learning. Ask students to answer the video’s “Discussion Questions,” and to reflect on the ideas and issues raised by the students in the video. How do their experiences align? How do they differ? The videos also make good writing prompts. Ask students to watch a video and apply the ethics concept to course content.

Case studies are an effective way to introduce ethics topics, too, and for students to learn how to spot ethical issues. Read the recommended case studies to start class discussion on issues related to economic and environmental sustainability and social equity. The selected cases cover these topics across a wide range of disciplines and examine sustainability and CSR in terms of fair business practices, environmental policies, advertising, consumer goods, equal representation, and freedom of speech.

Ask students to answer the case study “Discussion Questions.” Then, ask students to reason through the ethical dimensions presented, and to sketch the ethical decision-making process outlined by the case. Then, challenge students to develop strategies to avoid these ethical pitfalls. Suggest students watch the case study’s “Related Videos” and “Related Terms” to further their understanding.

Ethics Unwrapped  blogs  are also useful prompts to engage students. Learning about ethics in the context of real-world (often current) events can enliven classroom discussion and make ethics relevant and concrete for students. Share a blog in class or post one to the class’s online learning module. To spur discussion, ask students to identify the ethical issues at hand and to name the ethics concepts related to the blog (or current event in the news). Dig more deeply into the topic using the Additional Resources listed at the end of the blog post.

Remember to review video, case study, and blogs’ relevant glossary  terms. In this way, you will become familiar with all the ethics concepts contained in these material. Share this vocabulary with your students, and use it to expand and enrich ethics and leadership conversations in your classroom. To dive deeper in the glossary, watch “Related” glossary videos.

Many of the concepts covered in Ethics Unwrapped operate in tandem with each other. As you watch more videos, you will become more fluent in ethics and see the interrelatedness of ethics concepts more readily. You also will be able to spot ethical issues more easily – at least, that is the hope! As your students watch more videos, it will be easier for them to recognize and understand ethical issues, and to express their ideas and thoughts about what is and isn’t ethical and why. Hopefully, they will also come to realize the interconnectedness of ethics and leadership, and the essential role ethics plays in developing solid leadership skills that support sustainability and corporate social responsibility.

Additional Videos

• Causing Harm
• Conflict of Interest
• Corporate Social Responsibility
• Diffusion of Responsibility
• Fundamental Moral Unit
• GVV Pillar 6: Voice
• Incrementalism
• Incentive Gaming
• Loss Aversion
• Moral Agent
• Moral Agent & Subject of Moral Worth
• Moral Equilibrium
• Moral Illusions Explained
• Moral Imagination
• Moral Muteness
• Moral Myopia
• Representation
• Role Morality
• Self-serving Bias
• Systematic Moral Analysis

Additional Cases

Related to economic sustainability.

• Apple Suppliers & Labor Practices
• Myanmar Amber
• Selling Enron
• The Collapse of Barings Bank

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• Buying Green: Consumer Behavior

Related to Social Equity

• Banning Burkas: Freedom or Discrimination?
• Freedom of Speech on Campus
• Pao & Gender Bias
• Patient Autonomy & Informed Consent
• Responding to Child Migration
• Welfare Reform

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The Business Case for Corporate Social Responsibility

Matteo Tonello is Director of Corporate Governance for The Conference Board, Inc. This post is based on a Conference Board Director Note by Archie B. Carroll and Kareem M. Shabana , and relates to a paper by these authors, titled “The Business Case for Corporate Social Responsibility: A Review of Concepts, Research and Practice,” published in the International Journal of Management Reviews .

In the last decade, in particular, empirical research has brought evidence of the measurable payoff of corporate social responsibility (CSR) initiatives to companies as well as their stakeholders. Companies have a variety of reasons for being attentive to CSR. This report documents some of the potential bottomline benefits: reducing cost and risk, gaining competitive advantage, developing and maintaining legitimacy and reputational capital, and achieving win-win outcomes through synergistic value creation.

The term “corporate social responsibility” is still widely used even though related concepts, such as sustainability, corporate citizenship, business ethics, stakeholder management, corporate responsibility, and corporate social performance, are vying to replace it. In different ways, these expressions refer to the ensemble of policies, practices, investments, and concrete results deployed and achieved by a business corporation in the pursuit of its stakeholders’ interests.

This report discusses the business case for CSR—that is, what justifies the allocation of resources by the business community to advance a certain socially responsible cause. The business case is concerned with the following question: what tangible benefits do business organizations reap from engaging in CSR initiatives? This report reviews the most notable research on the topic and provides practical examples of CSR initiatives that are also good for the business and its bottom line.

The Search for a Business Case: A Shift in Perspective

Business management scholars have been searching for a business case for CSR since the origins of the concept in the 1960s. [1]

An impetus for the research questions for this report was philosophical. It had to do with the long-standing divide between those who, like the late economist Milton Friedman, believed that the corporation should pursue only its shareholders’ economic interests and those who conceive the business organization as a nexus of relations involving a variety of stakeholders (employees, suppliers, customers, and the community where the company operates) without which durable shareholder value creation is impossible. If it could be demonstrated that businesses actually benefited financially from a CSR program designed to cultivate such a range of stakeholder relations, the thinking of the latter school went, then Friedman’s arguments would somewhat be neutralized.

Another impetus to research on the business case of CSR was more pragmatic. Even though CSR came about because of concerns about businesses’ detrimental impacts on society, the theme of making money by improving society has also always been in the minds of early thinkers and practitioners: with the passage of time and the increase in resources being dedicated to CSR pursuits, it was only natural that questions would begin to be raised about whether CSR was making economic sense.

Obviously, corporate boards, CEOs, CFOs, and upper echelon business executives care. They are the guardians of companies’ financial well-being and, ultimately, must bear responsibility for the impact of CSR on the bottom line. At multiple levels, executives need to justify that CSR is consistent with the firm’s strategies and that it is financially sustainable. [a]

However, other groups care as well. Shareholders are acutely concerned with financial performance and sensitive to possible threats to management’s priorities. Social activists care because it is in their long-term best interests if companies can sustain the types of social initiatives that they are advocating. Governmental bodies care because they desire to see whether companies can deliver social and environmental benefits more cost effectively than they can through regulatory approaches. [b] Consumers care as well, as they want to pass on a better world to their children, and many want their purchasing to reflect their values.

[a] K. O’Sullivan, “Virtue rewarded: companies are suddenly discovering the profit potential of social responsibility.” CFO , October 2006, pp. 47–52.

[b] Simon Zadek. Doing Good and Doing Well: Making the Business Case for Corporate Citizenship . New York: The Conference Board Research Report, 2000, 1282-00-RR.

The socially responsible investment movement Establishing a positive relationship between corporate social performance (CSP) and corporate financial performance (CFP) has been a long-standing pursuit of researchers. This endeavor has been described as a “30-year quest for an empirical relationship between a corporation’s social initiatives and its financial performance.” [2] One comprehensive review and assessment of studies exploring the CSP-CFP relationship concludes that there is a positive relationship between CSP and CFP. [3]

In response to this empirical evidence, in the last decade the investment community, in particular, has witnessed the growth of a cadre of socially responsible investment funds (SRI), whose dedicated investment strategy is focused on businesses with a solid track record of CSR-oriented initiatives. Today, the debate on the business case for CSR is clearly influenced by these new market trends: to raise capital, these players promote the belief of a strong correlation between social and financial performance. [4]

As the SRI movement becomes more influential, CSR theories are shifting away from an orientation on ethics (or altruistic rationale) and embracing a performance-driven orientation. In addition, analysis of the value generated by CSR has moved from the macro to the organizational level, where the effects of CSR on firm financial performance are directly experienced. [5]

The CSR of the 1960s and 1970s was motivated by social considerations, not economic ones. “While there was substantial peer pressure among corporations to become more philanthropic, no one claimed that such firms were likely to be more profitable than their less generous competitors.” In contrast, the essence of the new world of CSR is “doing good to do well.” [6]

CSR is evolving into a core business function, central to the firm’s overall strategy and vital to its success. [7] Specifically, CSR addresses the question: “can companies perform better financially by addressing both their core business operations as well as their responsibilities to the broader society?” [8]

One Business Case Just Won’t Do

There is no single CSR business case—no single rationalization for how CSR improves the bottom line. Over the years, researchers have developed many arguments. In general, these arguments can be grouped based on approach, topics addressed, and underlying assumptions about how value is created and defined. According to this categorization, CSR is a viable business choice as it is a tool to:

• implement cost and risk reductions;
• gain competitive advantage;
• develop corporate reputation and legitimacy; and
• seek win-win outcomes through synergistic value creation. [9]

Other widely accepted approaches substantiating the business case include focusing on the empirical research linking CSR with corporate social performance (CSP) and identifying values brought to different stakeholder groups that directly or indirectly benefit the company’s bottom lines.

Broad versus narrow views Some researchers have examined the integration of CSR considerations in the day-to-day business agenda of organizations. The “mainstreaming” of CSR follows from one of three rationales:

• the social values-led model, in which organizations adopt CSR initiatives regarding specific issues for non-economic reasons;
• the business-case model, in which CSR initiatives are primarily assessed in an economic manner and pursued only when there is a clear link to firm financial performance [10] ; and
• the syncretic stewardship model, which combines the social values-led and the business-case models.

The business case model and the syncretic models may be seen as two perspectives of the business case for CSR: one narrow and one broad. The business case model represents the narrow view: CSR is only recognized when there is a clear link to firm financial performance. The syncretic model is broad because it recognizes both direct and indirect relationships between CSR and firm financial performance. The advantage of the broad view is that it enables the firm to identify and exploit opportunities beyond the financial, opportunities that the narrow view would not be able to recognize or justify.

Another advantage of the broad view of the business case, which is illustrated by the syncretic model, is its recognition of the interdependence between business and society. [11]

The failure to recognize such interdependence in favor of pitting business against society leads to reducing the productivity of CSR initiatives. “The prevailing approaches to CSR are so fragmented and so disconnected from business and strategy as to obscure many of the greatest opportunities for companies to benefit society.” [12] The adoption of CSR practices, their integration with firm strategy, and their mainstreaming in the day-to-day business agenda should not be done in a generic manner. Rather, they should be pursued “in the way most appropriate to each firm’s strategy.” [13]

In support of the business case for CSR, the next sections of the report discuss examples of the effect of CSR on firm performance. The discussion is organized according to the framework referenced earlier, which identifies four categories of benefits that firms may attain from engaging in CSR activities. [14]

Reducing Costs and Risks

Cost and risk reduction justifications contend that engaging in certain CSR activities will reduce the firm’s inefficient capital expenditures and exposure to risks. “[T]he primary view is that the demands of stakeholders present potential threats to the viability of the organization, and that corporate economic interests are served by mitigating the threats through a threshold level of social or environmental performance.” [15]

Equal employment opportunity policies and practices CSR activities in the form of equal employment opportunity (EEO) policies and practices enhance long-term shareholder value by reducing costs and risks. The argument is that explicit EEO statements are necessary to illustrate an inclusive policy that reduces employee turnover through improving morale. [16] This argument is consistent with those who observe that “[l]ack of diversity may cause higher turnover and absenteeism from disgruntled employees.” [17]

Energy-saving and other environmentally sound production practices Cost and risk reduction may also be achieved through CSR activities directed at the natural environment. Empirical research shows that being environmentally proactive results in cost and risk reduction. Specifically, data shows hat “being proactive on environmental issues can lower the costs of complying with present and future environmental regulations … [and] … enhance firm efficiencies and drive down operating costs.” [18]

Community relations management Finally, CSR activities directed at managing community relations may also result in cost and risk reductions. [19] For example, building positive community relationships may contribute to the firm’s attaining tax advantages offered by city and county governments to further local investments. In addition, positive community relationships decrease the number of regulations imposed on the firm because the firm is perceived as a sanctioned member of society.

Cost and risk reduction arguments for CSR have been gaining wide acceptance among managers and executives. In a survey of business executives by PricewaterhouseCoopers, 73 percent of the respondents indicated that “cost savings” was one of the top three reasons companies are becoming more socially responsible. [20]

Gaining Competitive Advantage

As used in this section of the report, the term “competitive advantage” is best understood in the context of a differentiation strategy; in other words, the focus is on how firms may use CSR practices to set themselves apart from their competitors. The previous section, which focused on cost and risk reduction, illustrated how CSR practices may be thought of in terms of building a competitive advantage through a cost management strategy. “Competitive advantages” was cited as one of the top two justifications for CSR in a survey of business executives reported in a Fortune survey. [21] In this context, stakeholder demands are seen as opportunities rather than constraints. Firms strategically manage their resources to meet these demands and exploit the opportunities associated with them for the benefit of the firm. [22] This approach to CSR requires firms to integrate their social responsibility initiatives with their broader business strategies.

Reducing costs and risks • Equal employment opportunity policies and practices • Energy-saving and other environmentally sound production practices • Community relations management

Gaining competitive advantage • EEO policies • Customer relations program • Corporate philanthropy

Developing reputation and legitimacy • Corporate philanthropy • Corporate disclosure and transparency practices

Seeking win-win outcomes through synergistic value creation • Charitable giving to education • Stakeholder engagement

EEO policies Companies that build their competitive advantage through unique CSR strategies may have a superior advantage, as the uniqueness of their CSR strategies may serve as a basis for setting the firm apart from its competitors. [23] For example, an explicit statement of EEO policies would have additional benefits to the cost and risk reduction discussed earlier in this report. Such policies would provide the firm with a competitive advantage because “[c]ompanies without inclusive policies may be at a competitive disadvantage in recruiting and retaining employees from the widest talent pool.” [24]

Customer and investor relations programs CSR initiatives can contribute to strengthening a firm’s competitive advantage, its brand loyalty, and its consumer patronage. CSR initiatives also have a positive impact on attracting investment. Many institutional investors “avoid companies or industries that violate their organizational mission, values, or principles… [They also] seek companies with good records on employee relations, environmental stewardship, community involvement, and corporate governance.” [25]

Corporate philanthropy Companies may align their philanthropic activities with their capabilities and core competencies. “In so doing, they avoid distractions from the core business, enhance the efficiency of their charitable activities and assure unique value creation for the beneficiaries.” [26] For example, McKinsey & Co. offers free consulting services to nonprofit organizations in social, cultural, and educational fields. Beneficiaries include public art galleries, colleges, and charitable institutions. [27] Home Depot Inc. provided rebuilding knowhow to the communities victimized by Hurricane Katrina. Strategic philanthropy helps companies gain a competitive advantage and in turn boosts its bottom line. [28]

CSR initiatives enhance a firm’s competitive advantage to the extent that they influence the decisions of the firm’s stakeholders in its favor. Stakeholders may prefer a firm over its competitors specifically due to the firm’s engagement in such CSR initiatives.

Developing Reputation and Legitimacy

Companies may also justify their CSR initiatives on the basis of creating, defending, and sustaining their legitimacy and strong reputations. A business is perceived as legitimate when its activities are congruent with the goals and values of the society in which the business operates. In other words, a business is perceived as legitimate when it fulfills its social responsibilities. [29]

As firms demonstrate their ability to fit in with the communities and cultures in which they operate, they are able to build mutually beneficial relationships with stakeholders. Firms “focus on value creation by leveraging gains in reputation and legitimacy made through aligning stakeholder interests.” [30] Strong reputation and legitimacy sanction the firm to operate in society. CSR activities enhance the ability of a firm to be seen as legitimate in the eyes of consumers, investors, and employees. Time and again, consumers, employees, and investors have shown a distinct preference for companies that take their social responsibilities seriously. A Center for Corporate Citizenship study found that 66 percent of executives thought their social responsibility strategies resulted in improving corporate reputation and saw this as a business benefit. [31]

Corporate philanthropy Corporate philanthropy may be a tool of legitimization. Firms that have negative social performance in the areas of environmental issues and product safety use charitable contributions as a means for building their legitimacy. [32]

Corporate disclosure and transparency practices Corporations have also enhanced their legitimacy and reputation through the disclosure of information regarding their performance on different social and environmental issues, sometimes referred to as sustainability reporting. Corporate social reporting refers to stand-alone reports that provide information regarding a company’s economic, environmental, and social performance. The practice of corporate social reporting has been encouraged by the launch of the Global Reporting Initiative (GRI) in 1997-1998 and the introduction of the United Nations Global Compact in 1999. Through social reporting, firms can document that their operations are consistent with social norms and expectations, and, therefore, are perceived as legitimate.

Seeking Win-Win Outcomes through Synergistic Value Creation

Synergistic value creation arguments focus on exploiting opportunities that reconcile differing stakeholder demands. Firms do this by “connecting stakeholder interests, and creating pluralistic definitions of value for multiple stakeholders simultaneously.” [33] In other words, with a cause big enough, they can unite many potential interest groups.

Charitable giving to education When companies get the “where” and the “how” right, philanthropic activities and competitive advantage become mutually reinforcing and create a virtuous circle. Corporate philanthropy may be used to influence the competitive context of an organization, which allows the organization to improve its competitiveness and at the same time fulfill the needs of some of its stakeholders. For example, in the long run, charitable giving to education improves the quality of human resources available to the firm. Similarly, charitable contributions to community causes eventually result in the creation and preservation of a higher quality of life, which may sustain “sophisticated and demanding local customers.” [34]

The notion of creating win-win outcomes through CSR activities has been raised before. Management expert Peter Drucker argues that “the proper ‘social responsibility’ of business is to … turn a social problem into economic opportunity and economic benefit, into productive capacity, into human competence, into well-paid jobs, and into wealth.” [35] It has been argued that, “it will not be too long before we can begin to assert that the business of business is the creation of sustainable value— economic, social and ecological.” [36]

An example: the win-win perspective adopted by the life sciences firm Novo Group allowed it to pursue its business “[which] is deeply involved in genetic modification and yet maintains highly interactive and constructive relationships with stakeholders and publishes a highly rated environmental and social report each year.” [37]

Stakeholder engagement The win-win perspective on CSR practices aims to satisfy stakeholders’ demands while allowing the firm to pursue financial success. By engaging its stakeholders and satisfying their demands, the firm finds opportunities for profit with the consent and support of its stakeholder environment.

The business case for corporate social responsibility can be made. While it is valuable for a company to engage in CSR for altruistic and ethical justifications, the highly competitive business world in which we live requires that, in allocating resources to socially responsible initiatives, firms continue to consider their own business needs.

In the last decade, in particular, empirical research has brought evidence of the measurable payoff of CSR initiatives on firms as well as their stakeholders. Firms have a variety of reasons for being CSR-attentive. But beyond the many bottom-line benefits outlined here, businesses that adopt CSR practices also benefit our society at large.

[1] See Edward Freeman, Strategic Management: a Stakeholder Approach , 1984, which traces the roots of CSR to the 1960s and 1970s, when many multinationals were formed. (go back)

[2] J. D. Margolis and Walsh, J.P. “Misery loves companies: social initiatives by business.” Administrative Science Quarterly , 48, 2003, pp. 268–305. (go back)

[3] J. F. Mahon and Griffin, J .J. “Painting a portrait: a reply.” Business and Society , 38, 1999, 126–133. (go back)

[4] See, for an overview, Stephen Gates, Jon Lukomnik, and David Pitt- Watson, The New Capitalists: How Citizen Investors Are Reshaping The Business Agenda , Harvard Business School Press, 2006. (go back)

[5] M.P. Lee, “A review of the theories of corporate social responsibility: its evolutionary path and the road ahead”. International Journal of Management Reviews , 10, 2008, 53–73. (go back)

[6] D.J. Vogel, “Is there a market for virtue? The business case for corporate social responsibility.” California Management Review , 47, 2005, pp. 19–45. (go back)

[7] Ibid. (go back)

[8] Elizabeth Kurucz; Colbert, Barry; and Wheeler, David “The Business Case for Corporate Social Responsibility.” Chapter 4 in Crane, A.; McWilliams, A.; Matten, D.; Moon, J. and Siegel, D. The Oxford Handbook of Corporate Social Responsibility. Oxford: Oxford University Press, 2008, 83-112 (go back)

[9] Kurucz, Colbert, and Wheeler , 85-92. (go back)

[10] Berger,I.E., Cunningham, P. and Drumwright, M.E. “Mainstreaming corporate and social responsibility: developing markets for virtue,” California Management Review , 49, 2007, 132-157. (go back)

[11] Ibid. (go back)

[12] M.E. Porter and Kramer, M.R. “Strategy & society: the link between competitive advantage and corporate social responsibility.” Harvard Business Review , 84, 2006,pp. 78–92. (go back)

[13] Ibid. (go back)

[14] Kurucz, Colbert, and Wheeler, 85-92. (go back)

[15] Ibid., 88. (go back)

[16] T. Smith, “Institutional and social investors find common ground. Journal of Investing , 14, 2005, 57–65. (go back)

[17] S. L. Berman, Wicks, A.C., Kotha, S. and Jones, T.M. “Does stakeholder orientation matter? The relationship between stakeholder management models and firm financial performance.” Academy of Management Journal , 42, 1999, 490. (go back)

[18] Ibid. (go back)

[19] Ibid. (go back)

[20] Top 10 Reasons, PricewaterhouseCoopers 2002 Sustainability Survey Report, reported in “Corporate America’s Social Conscience,” Fortune , May 26, 2003, 58. (go back)

[21] Top 10 Reasons . (go back)

[22] Kurucz, Colbert, and Wheeler (go back)

[23] N. Smith, 2003, 67. (go back)

[24] T. Smith, 2005, 60. (go back)

[25] Ibid., 64. (go back)

[26] Heike Bruch and Walter, Frank (2005). “The Keys to Rethinking Corporate Philanthropy.” MIT Sloan Management Review , 47(1): 48-56 (go back)

[27] Ibid., 50. (go back)

[28] Bruce Seifert, Morris, Sara A.; and Bartkus, Barbara R. (2003). “Comparing Big Givers and Small Givers: Financial Correlates of Corporate Philanthropy.” Journal of Business Ethics , 45(3): 195-211. (go back)

[29] Archie B. Carroll and Ann K. Buchholtz, Business and Society: Ethics, Sustainability and Stakeholder Management , 8th Edition, Mason, OH: South-Western Cengage Learning, 2012, 305. (go back)

[30] Kurucz, Colbert, and Wheeler, 90. (go back)

[31] “Managing Corporate Citizenship as a Business Strategy,” Boston: Center for Corporate Citizenship, 2010. (go back)

[32] Jennifer C. Chen, Dennis M.; & Roberts, Robin. “Corporate Charitable Contributions: A Corporate Social Performance or Legitimacy Strategy?” Journal of Business Ethics , 2008, 131-144. (go back)

[33] Kurucz, Colbert, and Wheeler , 91. (go back)

[34] Porter and Kramer, 60-65. (go back)

[35] Peter F. Drucker, “The New Meaning of Corporate Social Responsibility.” California Management Review , 1984, 26: 53-63 (go back)

[36] C. Wheeler, B. Colbert, and R. E. Freeman. “Focusing on Value: Reconciling Corporate Social Responsibility, Sustainability and a Stakeholder Approach in a Network World.” Journal of General Management , (28)3, 2003, 1-28. (go back)

[37] Ibid. (go back)

Nice blog. CSR has become something very important to all the corporate houses today. However, with the rising growth of CSR activities. It is very important to have an effective software that helps to keep a track of the entire exercise.

Interesting article! Perhaps nice to give Mr. Stephen ‘Gates’ his real name back? After all “The New Capitalists: How Citizen Investors Are Reshaping The Business Agenda” was written by Stephen DAVIS. I think he would like the recognition ;)

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Chapter 4 Ethics and Social Responsibility

Learning objectives.

• Define business ethics and explain what it means to act ethically in business.
• Explain why we study business ethics.
• Identify ethical issues that you might face in business, such as insider trading, conflicts of interest, and bribery, and explain rationalizations for unethical behavior.
• Identify steps you can take to maintain your honesty and integrity in a business environment.
• Define corporate social responsibility and explain how organizations are responsible to their stakeholders, including owners, employees, customers, and the community.
• Discuss how you can identify an ethical organization, and how organizations can prevent behavior like sexual harassment.
• Learn how to avoid an ethical lapse, and why you should not rationalize when making decisions.

Introduction

“mommy, why do you have to go to jail”.

The one question Betty Vinson would have preferred to avoid is “Mommy, why do you have to go to jail?” [1] Vinson graduated with an accounting degree from Mississippi State and married her college sweetheart. After a series of jobs at small banks, she landed a mid-level accounting job at WorldCom, at the time still a small long-distance provider. Sparked by the telecom boom, however, WorldCom soon became a darling of Wall Street, and its stock price soared. Now working for a wildly successful company, Vinson rounded out her life by reading legal thrillers and watching her daughter play soccer.

Her moment of truth came in mid-2000, when company executives learned that profits had plummeted. They asked Vinson to make some accounting adjustments to boost income by $828 million. Vinson knew that the scheme was unethical (at the very least) but she gave in and made the adjustments. Almost immediately, she felt guilty and told her boss that she was quitting. When news of her decision came to the attention of CEO Bernard Ebbers and CFO Scott Sullivan, they hastened to assure Vinson that she’d never be asked to cook any more books. Sullivan explained it this way: “We have planes in the air. Let’s get the planes landed. Once they’ve landed, if you still want to leave, then leave. But not while the planes are in the air.” [2] Besides, she’d done nothing illegal, and if anyone asked, he’d take full responsibility. So Vinson decided to stay. After all, Sullivan was one of the top CFOs in the country; at age 37, he was already making $19 million a year. [3] Who was she to question his judgment? [4]

Six months later, Ebbers and Sullivan needed another adjustment—this time for $771 million. This scheme was even more unethical than the first: it entailed forging dates to hide the adjustment. Pretty soon, Vinson was making adjustments on a quarterly basis—first for $560 million, then for $743 million, and yet again for $941 million. Eventually, Vinson had juggled almost $4 billion, and before long, the stress started to get to her: she had trouble sleeping, lost weight, and withdrew from people at work. She decided to hang on when she got a promotion and a $30,000 raise.

By spring 2002, however, it was obvious that adjusting the books was business as usual at WorldCom. Vinson finally decided that it was time to move on, but, unfortunately, an internal auditor had already put two and two together and blown the whistle. The Securities and Exchange Commission charged WorldCom with fraud amounting to $11 billion—the largest in US history. Seeing herself as a valuable witness, Vinson was eager to tell what she knew. The government, however, regarded her as more than a mere witness. When she was named a co-conspirator, she agreed to cooperate fully and pleaded guilty to criminal conspiracy and securities fraud. But she won’t be the only one doing time: Scott Sullivan will be in jail for five years, and Bernie Ebbers will be locked up for 25 years. Both maintain that they are innocent. [5]

So where did Betty Vinson, mild-mannered midlevel executive and mother, go wrong? How did she manage to get involved in a scheme that not only bilked investors out of billions but also cost 17,000 people their jobs? [6] Ultimately, of course, we can only guess. Maybe she couldn’t say no to her bosses; perhaps she believed that they’d take full responsibility for her accounting “adjustments.” Possibly she was afraid of losing her job or didn’t fully understand the ramifications of what she was doing. What we do know is that she disgraced herself and went to jail. [7]

The WorldCom situation is not an isolated incident. Perhaps you have heard of Bernie Madoff, founder of Bernard L. Madoff Investment Securities and former chairman of the NASDAQ stock exchange. [8] Madoff is alleged to have run a giant Ponzi scheme [9] that cheated investors of up to $65 billion. His wrongdoings won him a spot at the top of Time Magazine’s Top 10 Crooked CEOs. According to the SEC charges, Madoff convinced investors to give him large sums of money. In return, he gave them an impressive 8–12 percent return a year. But Madoff never really invested their money. Instead, he kept it for himself. He got funds to pay the first investors their return (or their money back if they asked for it) by bringing in new investors. Everything was going smoothly until the fall of 2008, when the stock market plummeted and many of his investors asked for their money. As he no longer had it, the game was over and he had to admit that the whole thing was just one big lie. Thousands of investors, including many of his wealthy friends, not-so-rich retirees who trusted him with their life savings, and charitable foundations, were financially ruined. Those harmed by Madoff either directly or indirectly were likely pleased when he was sentenced to jail for 150 years.

Headlines from more corporate scandals since 2015:

• In 2015, Volkswagen admitted cheating the United States emissions tests for diesel engines.
• In 2016, then Wells-Fargo CEO John Stumpf was fired for a scandal that included the creation of 1.5 million fake deposit accounts and more than 500,000 fake credit cards, all in customers’ names and without their permission. This was just the beginning of more scandals to be uncovered at one of the Top 5 largest banks in the United States. [10]
• In 2019, Facebook agrees to pay $5 billion to settle with the US Federal Trade Commission over privacy and data concerns. [11]

What can government, business and/or society do to reduce these types of ethical scandals?

Business Ethics

The idea of business ethics.

It’s in the best interest of a company to operate ethically. Trustworthy companies are better at attracting and keeping customers, talented employees, and capital. Those tainted by questionable ethics suffer from dwindling customer bases, employee turnover, and investor mistrust.

Let’s begin this section by addressing this question: What can individuals, organizations, and government agencies do to foster an environment of ethical behavior in business? First, of course, we need to define the term.

What Is Ethics?

You probably already know what it means to be ethical : to know right from wrong and to know when you’re practicing one instead of the other. We can say that business ethics is the application of ethical behavior in a business context. Acting ethically in business means more than simply obeying applicable laws and regulations: It also means being honest, doing no harm to others, competing fairly, and declining to put your own interests above those of your company, its owners, and its workers. If you’re in business you obviously need a strong sense of what’s right and wrong. You need the personal conviction to do what’s right, even if it means doing something that’s difficult or personally disadvantageous.

Why Study Ethics?

Ideally, prison terms, heavy fines, and civil suits would discourage corporate misconduct, but, unfortunately, many experts suspect that this assumption is a bit optimistic. Whatever the condition of the ethical environment in the near future, one thing seems clear: the next generation entering business—which includes most of you—will find a world much different than the one that waited for the previous generation. For example, cyberethics and how user behavior and programmed computers might impact people and society. Recent history tells us in no uncertain terms that today’s business students, many of whom are tomorrow’s business leaders, need a much sharper understanding of the difference between what is and isn’t ethically acceptable. As a business student, one of your key tasks is learning how to recognize and deal with the ethical challenges that will confront you. Asked what he looked for in a new hire, Warren Buffett, CEO of Berkshire Hathaway and one of the world’s most successful investor, replied: “I look for three things. The first is personal integrity, the second is intelligence, and the third is a high energy level.” He paused and then added, “But if you don’t have the first, the second two don’t matter.” [12]

Identifying Ethical Issues and Dilemmas

Ethical issues are the difficult social questions that involve some level of controversy over what is the right thing to do. Environmental protection is an example of a commonly discussed ethical issue, because there can be trade offs between environmental and economic factors.

Ethical dilemmas are situations in which it is difficult for an individual to make decisions either because the right course of action is unclear or carries some potential negative consequences for the person or people involved.

Make no mistake about it: when you enter the business world, you’ll find yourself in situations in which you’ll have to choose the appropriate behavior. How, for example, would you answer questions like the following?

• Is it OK to accept a pair of sports tickets from a supplier?
• Can I buy office supplies from my brother-in-law?
• Is it appropriate to donate company funds to a local charity?
• If I find out that a friend is about to be fired, can I warn her?

Obviously, the types of situations are numerous and varied. Fortunately, we can break them down into a few basic categories: issues of honesty and integrity, conflicts of interest and loyalty, bribes versus gifts, and whistle-blowing. Let’s look a little more closely at each of these categories.

Issues of Honesty and Integrity

Master investor Warren Buffet once told a group of business students the following: “I cannot tell you that honesty is the best policy. I can’t tell you that if you behave with perfect honesty and integrity somebody somewhere won’t behave the other way and make more money. But honesty is a good policy. You’ll do fine, you’ll sleep well at night and you’ll feel good about the example you are setting for your coworkers and the other people who care about you.” [13]

If you work for a company that settles for its employees’ merely obeying the law and following a few internal regulations, you might think about moving on. If you’re being asked to deceive customers about the quality or value of your product, you’re in an ethically unhealthy environment.

Think About This Story:

“A chef put two frogs in a pot of warm soup water. The first frog smelled the onions, recognized the danger, and immediately jumped out. The second frog hesitated: The water felt good, and he decided to stay and relax for a minute. After all, he could always jump out when things got too hot (so to speak). As the water got hotter, however, the frog adapted to it, hardly noticing the change. Before long, of course, he was the main ingredient in frog-leg soup.” [14]

So, what’s the moral of the story? Don’t sit around in an ethically toxic environment and lose your integrity a little at a time; get out before the water gets too hot and your options have evaporated. Fortunately, a few rules of thumb can guide you.

We’ve summed them up in Figure 4.2.

Conflicts of Interest

Conflicts of interest occur when individuals must choose between taking actions that promote their personal interests over the interests of others or taking actions that don’t. A conflict can exist, for example, when an employee’s own interests interfere with, or have the potential to interfere with, the best interests of the company’s stakeholders (management, customers, and owners). Let’s say that you work for a company with a contract to cater events at your college and that your uncle owns a local bakery. Obviously, this situation could create a conflict of interest (or at least give the appearance of one—which is a problem in itself). When you’re called on to furnish desserts for a luncheon, you might be tempted to send some business your uncle’s way even if it’s not in the best interest of your employer. What should you do? You should disclose the connection to your boss, who can then arrange things so that your personal interests don’t conflict with the company’s.

The same principle holds that an employee shouldn’t use private information about an employer for personal financial benefit. Say that you learn from a coworker at your pharmaceutical company that one of its most profitable drugs will be pulled off the market because of dangerous side effects. The recall will severely hurt the company’s financial performance and cause its stock price to plummet. Before the news becomes public, you sell all the stock you own in the company. What you’ve done is called insider trading —acting on information that is not available to the general public, either by trading on it or providing it to others who trade on it. Insider trading is illegal, and you could go to jail for it.

Conflicts of Loyalty

You may one day find yourself in a bind between being loyal either to your employer or to a friend or family member. Perhaps you just learned that a coworker, a friend of yours, is about to be downsized out of his job. You also happen to know that he and his wife are getting ready to make a deposit on a house near the company headquarters. From a work standpoint, you know that you shouldn’t divulge the information. From a friendship standpoint, though, you feel it’s your duty to tell your friend. Wouldn’t he tell you if the situation were reversed? So what do you do? As tempting as it is to be loyal to your friend, you shouldn’t tell. As an employee, your primary responsibility is to your employer. You might be able to soften your dilemma by convincing a manager with the appropriate authority to tell your friend the bad news before he puts down his deposit.

Bribes vs. Gifts

It’s not uncommon in business to give and receive small gifts of appreciation, but when is a gift unacceptable? When is it really a bribe ?

There’s often a fine line between a gift and a bribe. The following information may help in drawing it, because it raises key issues in determining how a gesture should be interpreted: the cost of the item, the timing of the gift, the type of gift, and the connection between the giver and the receiver. If you’re on the receiving end, it’s a good idea to refuse any item that’s overly generous or given for the purpose of influencing a decision. Because accepting even small gifts may violate company rules, always check on company policy.

Google’s “Code of Conduct,” for instance, has an entire section on avoiding conflicts of interest. They outline where these conflicts might occur, such as accepting gifts, personal investments, and outside employment, and provide guidelines: “In each of these situations, the rule is the same—if you are considering entering into a business situation that creates a conflict of interest, don’t. If you are in a business situation that may create a conflict of interest, or the appearance of a conflict of interest, review the situation with your manager and Ethics & Compliance.” [15]

Whistle-Blowing

As we’ve seen, the misdeeds of Betty Vinson and her accomplices at WorldCom didn’t go undetected. They caught the eye of Cynthia Cooper, the company’s director of internal auditing. Cooper, of course, could have looked the other way, but instead she summoned up the courage to be a whistle-blower —an individual who exposes illegal or unethical behavior in an organization. Like Vinson, Cooper had majored in accounting at Mississippi State and was a hard-working, dedicated employee. Unlike Vinson, however, she refused to be bullied by her boss, CFO Scott Sullivan. In fact, she had tried to tell not only Sullivan but also auditors from the Arthur Andersen accounting firm that there was a problem with WorldCom’s books. The auditors dismissed her warnings, and when Sullivan angrily told her to drop the matter, she started cleaning out her office. But she didn’t relent. She and her team worked late each night, conducting an extensive, secret investigation. Two months later, Cooper had evidence to take to Sullivan, who told her once again to back off. Again, however, she stood up to him, and though she regretted the consequences for her WorldCom coworkers, she reported the scheme to the company’s board of directors. Within days, Sullivan was fired and the largest accounting fraud in history became public. [16]

As a result of Cooper’s actions, executives came clean about the company’s financial situation. The conspiracy of fraud was brought to an end, and though public disclosure of WorldCom’s problems resulted in massive stock-price declines and employee layoffs, investor and employee losses would have been greater without Cooper’s intervention. Even though Cooper did the right thing, and landed on the cover of Time magazine for it, the experience wasn’t exactly gratifying.

A lot of people applauded her action, but many coworkers shunned her; some even blamed her for the company’s troubles. [17]

Whistle-blowing is sometimes career suicide. A survey of 200 whistle-blowers conducted by the National Whistleblower Center found that half were fired for blowing the whistle. [18] Even those who keep their jobs can experience repercussions. As long as they stay, some will treat them (as one whistle-blower put it) “like skunks at a picnic”; if they leave, they may be blackballed in the industry. [19] On a positive note, new Federal laws have been passed which are intended to protect whistle-blowers.

For her own part, Cynthia Cooper doesn’t regret what she did. As she told a group of students at Mississippi State: “Strive to be persons of honor and integrity. Do not allow yourself to be pressured. Do what you know is right even if there may be a price to be paid.” [20] If your company tells employees to do whatever it takes, push the envelope, look the other way, and “be sure that we make our numbers,” you have three choices: go along with the policy, try to change things, or leave. If your personal integrity is part of the equation, you’re probably down to the last two choices. [21]

Corporate Social Responsibility

Corporate social responsibility refers to the approach that an organization takes in balancing its responsibilities toward different stakeholders when making legal, economic, ethical, and social decisions. Remember that we previously defined stakeholders as those with a legitimate interest in the success or failure of the business and the policies it adopts. The term social responsibility refers to the approach that an organization takes in balancing its responsibilities toward their various stakeholders.

What motivates companies to be “socially responsible”? We hope it’s because they want to do the right thing, and for many companies, “doing the right thing” is a key motivator. The fact is, it’s often hard to figure out what the “right thing” is: what’s “right” for one group of stakeholders isn’t necessarily just as “right” for another. One thing, however, is certain: companies today are held to higher standards than ever before. Consumers and other groups consider not only the quality and price of a company’s products but also its character. If too many groups see a company as a poor corporate citizen, it will have a harder time attracting qualified employees, finding investors, and selling its products. Good corporate citizens, by contrast, are more successful in all these areas.

Figure 4.3 presents a model of corporate responsibility based on a company’s relationships with its stakeholders. In this model, the focus is on managers —not owners—as the principals involved in these relationships. Owners or shareholders are the stakeholders who invest risk capital in the firm in expectation of a financial return. Other stakeholders include employees , suppliers , and the communities in which the firm does business. Proponents of this model hold that customers, who provide the firm with revenue, have a special claim on managers’ attention. The arrows indicate the two-way nature of corporation-stakeholder relationships: All stakeholders have some claim on the firm’s resources and returns, and management’s job is to make decisions that balance these claims. [22]

Let’s look at some of the ways in which companies can be “socially responsible” in considering the claims of various stakeholders.

Owners or shareholders invest money in companies. In return, the people who run a company have a responsibility to increase the value of owners’ investments through profitable operations. Managers also have a responsibility to provide owners (as well as other stakeholders having financial interests, such as creditors and suppliers) with accurate, reliable information about the performance of the business. Clearly, this is one of the areas in which WorldCom managers fell down on the job. Upper-level management purposely deceived shareholders by presenting them with fraudulent financial statements

Managers have what is known as a fiduciary responsibility to owners: they’re responsible for safeguarding the company’s assets and handling its funds in a trustworthy manner. Yet managers experience what is called the agency problem; a situation in which their best interests do not align with those of the owners who employ them. To enforce managers’ fiduciary responsibilities for a firm’s financial statements and accounting records, the Sarbanes-Oxley Act of 2002 requires CEOs and CFOs to attest to their accuracy. The law also imposes penalties on corporate officers, auditors, board members, and any others who commit fraud. You’ll learn more about this law in your accounting and business law courses.

Companies are responsible for providing employees with safe, healthy places to work—as well as environments that are free from sexual harassment and all types of discrimination. They should also offer appropriate wages and benefits. In the following sections, we’ll take a closer look at these areas of corporate responsibility.

Wages and Benefits

At the very least, employers must obey laws governing minimum wage and overtime pay. A minimum wage is set by the federal government, though states can set their own rates as long as they are higher. The current federal rate, for example, is $7.25, while the rate in many states is far higher. By law, employers must also provide certain benefits —social security (retirement funds), unemployment insurance (protects against loss of income in case of job loss), and workers’ compensation (covers lost wages and medical costs in case of on-the-job injury). Most large companies pay most of their workers more than minimum wage and offer broader benefits, including medical, dental, and vision care, as well as savings programs, in order to compete for talent. Companies may also pay a living wage, which is a sufficient wage that covers the basic cost of living for a specific location. [23]

Safety and Health

Though it seems obvious that companies should guard workers’ safety and health , some simply don’t. For over four decades, for example, executives at Johns Manville suppressed evidence that one of its products, asbestos, was responsible for the deadly lung disease developed by many of its workers. [24] The company concealed chest X-rays from stricken workers, and executives decided that it was simply cheaper to pay workers’ compensation claims than to create a safer work environment. A New Jersey court was quite blunt in its judgment: Johns Manville, it held, had made a deliberate, cold-blooded decision to do nothing to protect at-risk workers, in blatant disregard of their rights. [25]

About four in 100,000 US workers die in workplace “incidents” each year. The Department of Labor categorizes deaths caused by conditions like those at Johns Manville as “exposure to harmful substances or environments.” How prevalent is this condition as a cause of workplace deaths? See Figure 4.4, “Workplace Deaths by Event or Exposure (2018),” which breaks down workplace fatalities by cause. Some jobs are more dangerous than others. For a comparative overview based on workplace deaths by occupation, see Figure 4.5.

Fortunately for most people, things are far better than they were at Johns Manville. Procter & Gamble (P&G), for example, considers the safety and health of its employees paramount and promotes the attitude that “Nothing we do is worth getting hurt for.” With nearly 100,000 employees worldwide, P&G uses a measure of worker safety called “total incident rate per employee,” which records injuries resulting in loss of consciousness, time lost from work, medical transfer to another job, motion restriction, or medical treatment beyond first aid. The company attributes the low rate of such incidents—less than one incident per hundred employees—to a variety of programs to promote workplace safety. [26]

The purpose of any business is to satisfy customers , who reward businesses by buying their products. Sellers are also responsible—both ethically and legally—for treating customers fairly. The rights of consumers were first articulated by President John F. Kennedy in 1962 when he submitted to Congress a presidential message devoted to consumer issues. [27] Kennedy identified four consumer rights:

• The right to safe products . A company should sell no product that it suspects of being unsafe for buyers. Thus, producers have an obligation to safety-test products before releasing them for public consumption. The automobile industry, for example, conducts extensive safety testing before introducing new models (though recalls remain common).
• The right to be informed about a product . Sellers should furnish consumers with the product information that they need to make an in- formed purchase decision. That’s why pillows have labels identifying the materials used to make them, for instance.
• The right to choose what to buy . Consumers have a right to decide which products to purchase, and sellers should let them know what their options are. Pharmacists, for example, should tell patients when a prescription can be filled with a cheaper brand-name or generic drug. Telephone companies should explain alternative calling plans.
• The right to be heard . Companies must tell customers how to contact them with complaints or concerns. They should also listen and respond.

Companies share the responsibility for the legal and ethical treatment of consumers with several government agencies: the Federal Trade Commission (FTC), which enforces consumer-protection laws; the Food and Drug Administration (FDA), which oversees the labeling of food products; and the Consumer Product Safety Commission , which enforces laws protecting consumers from the risk of product-related injury.

Communities

For obvious reasons, most communities see getting a new business as an asset and view losing one—especially a large employer—as a detriment. After all, the economic impact of business activities on local communities is substantial: They provide jobs, pay taxes, and support local education, health, and recreation programs. Both big and small businesses donate funds to community projects, encourage employees to volunteer their time, and donate equipment and products for a variety of activities. Larger companies can make greater financial contributions. Let’s start by taking a quick look at the philanthropic activities of a few US corporations.

Philanthropy

Many large corporations support various charities, an activity called philanthropy . Some donate a percentage of sales or profits to worthwhile causes. Retailer Target, for example, donates 5 percent of its profits—about $2 million per week—to schools, neighborhoods, and local projects across the country; its store-based grants underwrite programs in early childhood education, the arts, and family-violence prevention. [28] The late actor Paul Newman donated 100 percent of the profits from “Newman’s Own” foods (salad dressing, pasta sauce, popcorn, and other products sold in eight countries). His company continues his legacy of donating all profits and distributing them to thousands of organizations, including the Hole in the Wall Gang camps for seriously ill children. [29]

For example, the LEGO Group consistently ranks as a top organization globally because of their commitment to Corporate Social Responsibility.  According to their website in 2020, the LEGO Group has their commitment to sustainability broken into three categories:  Children, Environment and People. Here are some examples of their specific CSR initiatives:

Ethical Organizations

How can you recognize an ethical organization.

One goal of anyone engaged in business should be to foster ethical behavior in the organizational environment. How do we know when an organization is behaving ethically? Most lists of ethical organizational activities include the following criteria:

• Treat employees, customers, investors, and the public fairly.
• Hold every member personally accountable for his or her action.
• Communicate core values and principles to all members.
• Demand and reward integrity from all members in all situations. [30]

Employees at companies that consistently make CR magazine’s list of the “100 Best Corporate Citizens” regard the items on the previous list as business as usual in the workplace. Companies at the top of the 2019 list include Owens Corning, Intel, General Mills, HP, and Microsoft. [31]

By contrast, employees with the following attitudes tend to suspect that their employers aren’t as ethical as they should be:

• They consistently feel uneasy about the work they do.
• They object to the way they’re treated.
• They’re uncomfortable about the way coworkers are treated.
• They question the appropriateness of management directives and policies. [32]

Sexual Harassment

Sexual harassment occurs when an employee makes “unwelcome sexual advances, requests for sexual favors, and other verbal or physical conduct of a sexual nature” to another employee. It’s also considered sexual harassment when “submission to or rejection of this conduct explicitly or implicitly affects an individual’s employment, unreasonably interferes with an individual’s work performance or creates an intimidating, hostile or offensive work environment.” [33]

To prevent sexual harassment—or at least minimize its likelihood—a company should adopt a formal anti-harassment policy describing prohibited conduct, asserting its objections to the behavior, and detailing penalties for violating the policy. [34] Employers also have an obligation to investigate harassment complaints. Failure to enforce anti-harassment policies can be very costly. In 1998, for example, Mitsubishi paid $34 million to more than 350 female employees of its Normal, Illinois, plant to settle a sexual harassment case supported by the Equal Employment Opportunity Commission . The EEOC reprimanded the company for permitting an atmosphere of verbal and physical abuse against women, charging that female workers had been subjected to various forms of harassment, ranging from exposure to obscene graffiti and vulgar jokes to fondling and groping. [35] Since the “#MeToo” movement gained traction in late 2017, there has been widespread discussion regarding the best ways to prevent sexual harassment. [36]

Workforce Diversity

In addition to complying with equal employment opportunity laws, many companies make special efforts to recruit employees who are underrepresented in the workforce according to sex, race, or some other characteristic. In helping to build more diverse workforces, such initiatives contribute to competitive advantage for two reasons:

• People from diverse backgrounds bring new talents and fresh perspectives to an organization, typically enhancing creativity in the development of new products.
• By more accurately reflecting the demographics of the marketplace, a diverse workforce improves a company’s ability to serve an ethnically diverse population.

The Individual Approach to Ethics

Betty Vinson didn’t start out at WorldCom with the intention of going to jail. She undoubtedly knew what the right behavior was, but the bottom line is that she didn’t do it. How can you make sure that you do the right thing in the business world? How should you respond to the kinds of challenges that you’ll be facing? Because your actions in the business world will be strongly influenced by your moral character, let’s begin by assessing your current moral condition. Which of the following best applies to you (select one)?

• I’m always ethical.
• I’m mostly ethical.
• I’m somewhat ethical.
• I’m seldom ethical.
• I’m never ethical.

Now that you’ve placed yourself in one of these categories, here are some general observations. Few people put themselves below the second category. Most of us are ethical most of the time, and most people assign themselves to category number two—“I’m mostly ethical.” Why don’t more people claim that they’re always ethical?

Apparently, most people realize that being ethical all the time takes a great deal of moral energy. If you placed yourself in category number two, ask yourself this question: How can I change my behavior so that I can move up a notch? The answer to this question may be simple. Just ask yourself an easier question: How would I like to be treated in a given situation? [37]

Unfortunately, practicing this philosophy might be easier in your personal life than in the business world. Ethical challenges arise in business because companies, especially large ones, have multiple stakeholders who sometimes make competing demands. Making decisions that affect multiple stakeholders isn’t easy even for seasoned managers; and for new entrants to the business world, the task can be extremely daunting. You can, however, get a head start in learning how to make ethical decisions by looking at two types of challenges that you’ll encounter in the business world: ethical dilemmas and ethical decisions.

Addressing Ethical Dilemmas

An ethical dilemma is a morally problematic situation: you must choose between two or more acceptable but often opposing alternatives that are important to different groups. Experts often frame this type of situation as a “right-versus-right” decision. It’s the sort of decision that Johnson & Johnson (known as J&J) CEO James Burke had to make in 1982. [38] On September 30, twelve-year-old Mary Kellerman of Chicago died after her parents gave her Extra-Strength Tylenol. That same morning, 27-year-old Adam Janus, also of Chicago, died after taking Tylenol for minor chest pain. That night, when family members came to console his parents, Adam’s brother and his wife took Tylenol from the same bottle and died within 48 hours. Over the next two weeks, four more people in Chicago died after taking Tylenol. The actual connection between Tylenol and the series of deaths wasn’t made until an off-duty fireman realized from news reports that every victim had taken Tylenol. As consumers panicked, J&J pulled Tylenol off Chicago-area retail shelves. Researchers discovered Tylenol capsules containing large amounts of deadly cyanide. Because the poisoned bottles came from batches originating at different J&J plants, investigators determined that the tampering had occurred after the product had been shipped. [39]

So J&J wasn’t at fault. But CEO Burke was still faced with an extremely serious dilemma: Was it possible to respond to the tampering cases without destroying the reputation of a highly profitable brand?

Burke had two options:

• He could recall only the lots of Extra-Strength Tylenol that were found to be tainted with cyanide. In 1991, Perrier executives recalled only tainted product when they discovered that cases of their bottled water had been poisoned with benzine. This option favored J&J financially but possibly put more people at risk.
• Burke could order a nationwide recall—of all bottles of Extra-Strength Tylenol. This option would reverse the priority of the stakeholders, putting the safety of the public above stakeholders’ financial interests.

Burke opted to recall all 31 million bottles of Extra-Strength Tylenol on the market. The cost to J&J was $100 million, but public reaction was quite positive. Less than six weeks after the crisis began, Tylenol capsules were reintroduced in new tamper-resistant bottles, and by responding quickly and appropriately, J&J was eventually able to restore the Tylenol brand to its previous market position. When Burke was applauded for moral courage, he replied that he’d simply adhered to the long-standing J&J credo that put the interests of customers above those of other stakeholders. His only regret was that the perpetrator was never caught. [40]

If you’re wondering what your thought process should be if you’re confronted with an ethical dilemma, you might wish to remember the mental steps listed here—which happen to be the steps that James Burke took in addressing the Tylenol crisis:

• Define the problem : How to respond to the tampering case without destroying the reputation of the Tylenol brand.
• Identify feasible options : (1) Recall only the lots of Tylenol that were found to be tainted or (2) order a nationwide recall of all bottles of Extra-Strength Tylenol.
• Assess the effect of each option on stakeholders : Option 1 (recalling only the tainted lots of Tylenol) is cheaper but puts more people at risk. Option 2 (recalling all bottles of Extra-Strength Tylenol) puts the safety of the public above stakeholders’ financial interests.
• Establish criteria for determining the most appropriate action : Adhere to the J&J credo, which puts the interests of customers above those of other stakeholders.
• Select the best option based on the established criteria : In 1982, Option 2 was selected, and a nationwide recall of all bottles of Extra-Strength Tylenol was conducted.

Making Ethical Decisions

In contrast to the “right-versus-right” problem posed by an ethical dilemma, an ethical decision entails a “right-versus-wrong” decision—one in which there is clearly a right (ethical) choice and a wrong (unethical or illegal) choice. When you make a decision that’s unmistakably unethical or illegal, you’ve committed an ethical lapse. If you’re presented with this type of choice, asking yourself the questions in Figure 4.6 “How to Avoid an Ethical Lapse” will increase your odds of making an ethical decision.

To test the validity of this approach, let’s take a point-by-point look at Betty Vinson’s decisions:

• Her actions were clearly illegal.
• They were unfair to the workers who lost their jobs and to the investors who suffered financial losses (and also to her family, who shared her public embarrassment).
• She definitely felt badly about what she’d done.
• She was embarrassed to tell other people what she had done.
• Reports of her actions appeared in her local newspaper (and just about every other newspaper in the country).

So Vinson could have answered “yes” to all five of our test questions. To simplify matters, remember the following rule of thumb: If you answer yes to any one of these five questions, odds are that you’re about to do something you shouldn’t.

Revisiting Johnson & Johnson

As discussed earlier, Johnson & Johnson received tremendous praise for the actions taken by its CEO, James Burke, in response to the 1982 Tylenol catastrophe. However, things change. To learn how a company can destroy its good reputation , let’s fast forward to 2008 and revisit J&J and its credo, which states, “We believe our first responsibility is to the doctors, nurses and patients, to mothers and fathers and all others who use our products and services. In meeting their needs everything we do must be of high quality.” [41]  How could a company whose employees believed so strongly in its credo find itself under criminal and congressional investigation for a series of recalls due to defective products? [42] In a three-year period, the company recalled 24 products, including Children’s, Infants’ and Adults’ Tylenol, Motrin, and Benadryl; [43]  1-Day Acuvue TruEye contact lenses sold outside the US; [44]  and hip replacements. [45]

Unlike the Tylenol recall, no one had died from the defective products, but customers were certainly upset to find they had purchased over-the-counter medicines for themselves and their children that were potentially contaminated with dark particles or tiny specks of metal; [46] contact lenses that contained a type of acid that caused stinging or pain when inserted in the eye; [47]  and defective hip implants that required patients to undergo a second hip replacement. [48]

Who bears the responsibility for these image-damaging blunders? Two individuals who were at least partially responsible were William Weldon, CEO, and Colleen Goggins, Worldwide Chairman of J&J’s Consumer Group. Weldon has been criticized for being largely invisible and publicly absent during the recalls. [49] Additionally, he admitted that he did not understand the consumer division where many of the quality control problems originated. [50]  Goggins was in charge of the factories that produced many of the recalled products. She was heavily criticized by fellow employees for her excessive cost-cutting measures and her propensity to replace experienced scientists with new hires. [51]  In addition, she was implicated in scheme to avoid publicly disclosing another J&J recall of a defective product.

After learning that J&J had released packets of Motrin that did not dissolve correctly, the company hired contractors to go into convenience stores and secretly buy up every pack of Motrin on the shelves. The instructions given to the contractors were the following: “You should simply ‘act’ like a regular customer while making these purchases. THERE MUST BE NO MENTION OF THIS BEING A RECALL OF THE PRODUCT!” [52]  In May 2010, when Goggins appeared before a congressional committee investigating the “phantom recall,” she testified that she was not aware of the behavior of the contractors [53]  and that she had “no knowledge of instructions to contractors involved in the phantom recall to not tell store employees what they were doing.” In her September 2010 testimony to the House Committee on Oversight and Government Reform, she acknowledged that the company in fact wrote those very instructions. In 2020, Johnson & Johnson is discontinuing their baby powder, one of their flagship products, because of the cancer-related issues found from the talc, an ingredient in the powder. This time, they are being proactive. [54]

Refusing to Rationalize

Despite all the good arguments in favor of doing the right thing, why do many reasonable people act unethically (at least at times)? Why do good people make bad choices? According to one study, there are four common rationalizations (excuses) for justifying misconduct: [55]

• My behavior isn’t really illegal or immoral . Rationalizers try to convince themselves that an action is OK if it isn’t downright illegal or blatantly immoral. They tend to operate in a gray area where there’s no clear evidence that the action is wrong.
• My action is in everyone’s best interests . Some rationalizers tell themselves: “I know I lied to make the deal, but it’ll bring in a lot of business and pay a lot of bills.” They convince themselves that they’re expected to act in a certain way. [56]
• No one will find out what I’ve done . Here, the self-questioning comes down to “If I didn’t get caught, did I really do it?” The answer is yes. There’s a simple way to avoid succumbing to this rationalization: Always act as if you’re being watched.
• The company will condone my action and protect me . This justification rests on a fallacy. Betty Vinson may honestly have believed that her actions were for the good of the company and that her boss would, therefore, accept full responsibility (as he promised). When she goes to jail, however, she’ll go on her own.

Here’s another rule of thumb: If you find yourself having to rationalize a decision, it’s probably a bad one.

What to Do When the Light Turns Yellow

Like our five questions, some ethical problems are fairly straightforward. Others, unfortunately, are more complicated, but it will help to think of our five-question test as a set of signals that will warn you that you’re facing a particularly tough decision—that you should think carefully about it and perhaps consult someone else. The situation is like approaching a traffic light. Red and green lights are easy; you know what they mean and exactly what to do. Yellow lights are trickier. Before you decide which pedal to hit, try posing our five questions. If you get a single yes, you’ll almost surely be better off hitting the brake. [57]

Chapter Video

Foxconn is a major supplier to Apple. All of its factories are in China and Taiwan, although it recently announced building a new one in the United States. Working conditions are much different than in a typical US factory. As you watch the video, think about what responsibilities Apple has in this situation. They don’t own Foxconn or its factories, yet their reputation can be nevertheless impacted.

To view this video, visit:  https://www.youtube.com/watch?v=Jk-xqPKOxl4&amp=&t=39s

(Copyrighted material)

Key Takeaways

• Business ethics is the application of ethical behavior in a business context. Ethical (trustworthy) companies are better able to attract and keep customers, talented employees, and capital.
• Acting ethically in business means more than just obeying laws and regulations. It also means being honest, doing no harm to others, competing fairly, and declining to put your own interests above those of your employer and coworkers.
• In the business world, you’ll encounter conflicts of interest: situations in which you’ll have to choose between taking action that promotes your personal interest and action that favors the interest of others.
• Corporate social responsibility refers to the approach that an organization takes in balancing its responsibilities toward different stakeholders (owners, employees, customers, and the communities in which they conduct business) when making legal, economic, ethical, and social decisions.
• Managers have several responsibilities: to increase the value of owners’ investments through profitable operations, to provide owners and other stakeholders with accurate, reliable financial information, and to safeguard the company’s assets and handle its funds in a trustworthy manner.
• Companies have a responsibility to pay appropriate wages and benefits, treat all workers fairly, and provide equal opportunities for all employees. In addition, the must guard workers’ safety and health and to provide them with a work environment that’s free from sexual harassment.
• Consumers have certain legal rights: to use safe products, to be informed about products, to choose what to buy, and to be heard. Sellers must comply with these requirements.
• Businesspeople face two types of ethical challenges: ethical dilemmas and ethical decisions.
• An ethical dilemma is a morally problematic situation in which you must choose competing and often conflicting options which do not satisfy all stakeholders.
• An ethical decision is one in which there’s a right (ethical) choice and a wrong (unethical or downright illegal) choice.

Image Credits: Chapter 4

Figure 4.1: US Department of Justice (2009). “Bernie Madoff’s Mugshot.” Wikipedia. Public Domain. Retrieved from: https://en.wikipedia.org/wiki/Bernard_Madoff#/media/File:BernardMadoff.jpg

Figure 4.3: Alex Muravev. “House.” Noun Project Inc. Retrieved from: https://thenounproject.com/search/?q=house&i=983462 ; Graphiqu. “City Building.” Noun Project Inc. Retrieved from: https://thenounproject.com/search/?q=city building&i=2579723 ; Kitzsingmaniiz. “People.” Noun Project Inc. Retrieved from: https://thenounproject.com/search/?q=boss&i=1778786 ; Timothy Miller. “Businesswoman.” Noun Project Inc. Retrieved from: https://thenounproject.com/search/?q=boss&i=1941869

Figure 4.4: US Bureau of Labor Statistics. “Workplace deaths by event (2018).” Retrieved from: https://www.bls.gov/news.release/pdf/cfoi.pdf

Figure 4.5: US Bureau of Labor Statistics. “Workplace deaths by occupation (2018).” Retrieved from: https://www.bls.gov/news.release/pdf/cfoi.pdf

Figure 4.7: Sir James (2009). “Traffic light modern version Ireland Dublin.” Wikimedia Commons. CC BY-SA 3.0 . Retrieved from: https://commons.wikimedia.org/wiki/File:Traffic_light_modern_version_Ireland_Dublin_2_yellow_2009-09-27.jpg

Video Credits: Chapter 4

ABC News (2012, February 21). “Foxconn: An Exclusive Inside Look.” YouTube. Retrieved from: https://www.youtube.com/watch?v=Jk-xqPKOxl4&amp=&t=39s

• This case is based on Susan Pullman (2003). “How Following Orders Can Harm Your Career.” Wall Street Journal. Retrieved from: http://ww2.cfo.com/human-capital-careers/2003/10/how-following-orders-can-harm-your-career/ ↵
• Ibid. ↵
• Amanda Ripley (2002). “The Night Detective.” Time. Retrieved from: http://content.time.com/time/magazine/article/0,9171,1003990,00.html ↵
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• Scott Reeves (2005). “Lies, Damned Lies and Scott Sullivan.” Forbes. Retrieved from: http://www.forbes.com/2005/02/17/cx_sr_0217ebbers.html; David A. Andelman (2005). “Scott Sullivan Gets Slap on the Wrist—WorldCom Rate Race.” Forbes. Retrieved from: http://www.mindfully.org/Industry/2005/Sullivan-WorldCom-Rat12aug05.htm ↵
• Susan Pullman (2003). “How Following Orders Can Harm Your Career.” Wall Street Journal. Retrieved from: http://ww2.cfo.com/human-capital-careers/2003/10/how-following-orders-can-harm-your-career/ ↵
• David Hancock (2002). “World-Class Scandal at WorldCom.” CBS News. Retrieved from: http://www.cbsnews.com/news/world-class-scandal-at-worldcom ↵
• Time (2009). “Top 10 Crooked CEO’s.” Retrieved from: http://content.time.com/time/specials/packages/article/0,28804,1903155_1903156_1903160,00.html ↵
• Fred Langan (2008). “The -billion BMIS Debacle: How a Ponzi Scheme Works.” CBC News. Retrieved from: http://www.cbc.ca/news/business/the-50-billion-bmis-debacle-how-a-ponzi-scheme-works-1.709409 ↵
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• Adrian Gostick and Dana Telford (2003). The Integrity Advantage . Salt Lake City: Gibbs Smith. pp. 3–4. ↵
• Ibid. p. 103. ↵
• Ibid. Adapted from p. 16. ↵
• Travis H. Brown (2015). "Living Wage vs. Minimum Wage: What's the Difference?" How Money Walks. Retrieved from: https://www.howmoneywalks.com/living-wage-vs-minimum-wage-whats-the-difference/ ↵
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• Gostick and Telford (2003). The Integrity Advantage . Salt Lake City: Gibbs Smith. p. 13. ↵
•  National Whistleblower Center (2002). “Labor Day Report: The National Status of Whistleblower Protection on Labor Day 2002.” Retrieved from: https://web.archive.org/web/20060130104004/http://www.whistleblowers.org/labordayreport.htm ↵
•  Paula Dwyer, Dan Carney et al. (2002). “Year of the Whistleblower.” BusinessWeek. Retrieved from: http://www.bloomberg.com/news/articles/2002-12-15/year-of-the-whistleblower ↵
•  Scott Waller (2003). “Whistleblower Tells Students to Have Personal Integrity.” The (Jackson, MS) Clarion-Ledger. Retrieved from: http://www.yourlawyer.com/articles/title/whistleblower-tells-students-to-have-personal-integrity ↵
• Gostick and Telford (2003). The Integrity Advantage . Salt Lake City: Gibbs Smith. pp. 98-99. ↵
• David P. Baron (2003). Business and Its Environment , 4th ed. Upper Saddle River. NJ: Prentice Hall. pp. 650– 52. ↵
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• Ibid. p. 53. ↵
•  Procter & Gamble (2003). Sustainability Report 2003 . Retrieved from: http://us.pg.com/sustainability/at_a_glance/sustainability_reports ↵
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• LEGO. "About Us: Sustainability." Retrieved from: https://www.lego.com/en-us/aboutus/sustainability/ ↵
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•  McNeil Consumer Healthcare (2011). “Product Recall Information.” Retrieved from: http://web.archive.org/web/20110808021741/http://www.mcneilproductrecall.com ↵
• Bill Berkrot (2010). “J&J Confirms Widely Expanded Contact Lens Recall.” Reuters. Retrieved from: http://www.reuters.com/article/us-jandj-recall-idUSTRE6B05G620101201 ↵
•  Natasha Singer (2010). “Johnson & Johnson Recalls Hip Implants.” New York Times. Retrieved from: http://www.nytimes.com/2010/08/27/business/27hip.html ↵
• Mina Kimes (2010). “Why J&J’s Headache Won’t Go Away.” Fortune. Retrieved from: http://archive.fortune.com/2010/08/18/news/companies/jnj_drug_recalls.fortune/index.htm ↵
• Jonathan D. Rockoff and Jon Kamp (2010). “J&J Contact Lenses Recalled.” Wall Street Journal. Retrieved from: http://online.wsj.com/article/SB10001424052748703846604575447430303567108.html ↵
•  Matthew Perrone (2011). “J&J CEO Gets 3% Raise, but Bonus Is Cut.” USA Today. Retrieved from: http://usatoday30.usatoday.com/money/industries/health/2011-02-25-jnj_N.htm ↵
• Johnson and Johnson (2010). “Testimony of Ms. Colleen A. Goggins, Worldwide Chairman, Consumer Group, Johnson & Johnson, before the Committee on Oversight and Government Reform, U.S. House of Representatives.” Retrieved from: http://www.blogjnj.com/wp-content/uploads/2010/05/Testimony-of-Colleen-A-Goggins2.pdf ↵
• Jen Christensen (2020). "Johnson & Johnson will stop selling talc-based baby powder." CNN Health. Retrieved from: https://www.cnn.com/2020/05/20/health/johnson-and-johnson-stops-selling-talc-based-baby-powder-trnd/index.html ↵
•  Saul W. Gellerman (2003). “Why ‘Good’ Managers Make Bad Ethical Choices” in Harvard Business Review on Corporate Ethics . Boston: Harvard Business School Press. p. 59. ↵
• Adrian Gostick and Dana Telford (2003). The Integrity Advantage . Salt Lake City: Gibbs Smith. p. 12. ↵
• Online Ethics Center for Engineering and Science (2004). “Advice from the Texas Instruments Ethics Office: Article Number 280: What do you do when the light turns yellow?” Onlineethics.org. Retrieved from: https://web.archive.org/web/20060517161459/http://onlineethics.org/corp/help.html ↵

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What Are Business Ethics & Why Are They Important?

• 27 Jul 2023

From artificial intelligence to facial recognition technology, organizations face an increasing number of ethical dilemmas. While innovation can aid business growth, it can also create opportunities for potential abuse.

“The long-term impacts of a new technology—both positive and negative—may not become apparent until years after it’s introduced,” says Harvard Business School Professor Nien-hê Hsieh in the online course Leadership, Ethics, and Corporate Accountability . “For example, the impact of social media on children and teenagers didn’t become evident until we watched it play out over time.”

If you’re a current or prospective leader concerned about navigating difficult situations, here's an overview of business ethics, why they're important, and how to ensure ethical behavior in your organization.

Access your free e-book today.

What Are Business Ethics?

Business ethics are principles that guide decision-making . As a leader, you’ll face many challenges in the workplace because of different interpretations of what's ethical. Situations often require navigating the “gray area,” where it’s unclear what’s right and wrong.

When making decisions, your experiences, opinions, and perspectives can influence what you believe to be ethical, making it vital to:

• Be transparent.
• Invite feedback.
• Consider impacts on employees, stakeholders, and society.
• Reflect on past experiences to learn what you could have done better.

“The way to think about ethics, in my view, is: What are the externalities that your business creates, both positive and negative?” says Harvard Business School Professor Vikram Gandhi in Leadership, Ethics, and Corporate Accountability . “And, therefore, how do you actually increase the positive element of externalities? And how do you decrease the negative?”

Related: Why Managers Should Involve Their Team in the Decision-Making Process

Ethical Responsibilities to Society

Promoting ethical conduct can benefit both your company and society long term.

“I'm a strong believer that a long-term focus is what creates long-term value,” Gandhi says in Leadership, Ethics, and Corporate Accountability . “So you should get shareholders in your company that have that same perspective.”

Prioritizing the triple bottom line is an effective way for your business to fulfill its environmental responsibilities and create long-term value. It focuses on three factors:

• Profit: The financial return your company generates for shareholders
• People: How your company affects customers, employees, and stakeholders
• Planet: Your company’s impact on the planet and environment

Check out the video below to learn more about the triple bottom line, and subscribe to our YouTube channel for more explainer content!

Ethical and corporate social responsibility (CSR) considerations can go a long way toward creating value, especially since an increasing number of customers, employees, and investors expect organizations to prioritize CSR. According to the Conscious Consumer Spending Index , 67 percent of customers prefer buying from socially responsible companies.

To prevent costly employee turnover and satisfy customers, strive to fulfill your ethical responsibilities to society.

Ethical Responsibilities to Customers

As a leader, you must ensure you don’t mislead your customers. Doing so can backfire, negatively impacting your organization’s credibility and profits.

Actions to avoid include:

• Greenwashing : Taking advantage of customers’ CSR preferences by claiming your business practices are sustainable when they aren't.
• False advertising : Making unverified or untrue claims in advertisements or promotional material.
• Making false promises : Lying to make a sale.

These unethical practices can result in multi-million dollar lawsuits, as well as highly dissatisfied customers.

Ethical Responsibilities to Employees

You also have ethical responsibilities to your employees—from the beginning to the end of their employment.

One area of business ethics that receives a lot of attention is employee termination. According to Leadership, Ethics, and Corporate Accountability , letting an employee go requires an individualized approach that ensures fairness.

Not only can wrongful termination cost your company upwards of $100,000 in legal expenses , it can also negatively impact other employees’ morale and how they perceive your leadership.

Ethical business practices have additional benefits, such as attracting and retaining talented employees willing to take a pay cut to work for a socially responsible company. Approximately 40 percent of millennials say they would switch jobs to work for a company that emphasizes sustainability.

Ultimately, it's critical to do your best to treat employees fairly.

“Fairness is not only an ethical response to power asymmetries in the work environment,” Hsieh says in the course. “Fairness—and having a successful organizational culture–can benefit the organization economically and legally.”

Why Are Business Ethics Important?

Failure to understand and apply business ethics can result in moral disengagement .

“Moral disengagement refers to ways in which we convince ourselves that what we’re doing is not wrong,” Hsieh says in Leadership, Ethics, and Corporate Accountability . “It can upset the balance of judgment—causing us to prioritize our personal commitments over shared beliefs, rules, and principles—or it can skew our logic to make unethical behaviors appear less harmful or not wrong.”

Moral disengagement can also lead to questionable decisions, such as insider trading .

“In the U.S., insider trading is defined in common, federal, and state laws regulating the opportunity for insiders to benefit from material, non-public information, or MNPI,” Hsieh explains.

This type of unethical behavior can carry severe legal consequences and negatively impact your company's bottom line.

“If you create a certain amount of harm to a society, your customers, or employees over a period of time, that’s going to have a negative impact on your economic value,” Gandhi says in the course.

This is reflected in over half of the top 10 largest bankruptcies between 1980 and 2013 that resulted from unethical behavior. As a business leader, strive to make ethical decisions and fulfill your responsibilities to stakeholders.

How to Implement Business Ethics

To become a more ethical leader, it's crucial to have a balanced, long-term focus.

“It's very important to balance the fact that, even if you're focused on the long term, you have to perform in the short term as well and have a very clear, articulated strategy around that,” Gandhi says in Leadership, Ethics, and Corporate Accountability .

Making ethical decisions requires reflective leadership.

“Reflecting on complex, gray-area decisions is a key part of what it means to be human, as well as an effective leader,” Hsieh says. “You have agency. You must choose how to act. And with that agency comes responsibility.”

Related: Why Are Ethics Important in Engineering?

Hsieh advises asking the following questions:

• Are you using the “greater good” to justify unethical behavior?
• Are you downplaying your actions to feel better?

“Asking these and similar questions at regular intervals can help you notice when you or others may be approaching the line between making a tough but ethical call and justifying problematic actions,” Hsieh says.

Become a More Ethical Leader

Learning from past successes and mistakes can enable you to improve your ethical decision-making.

“As a leader, when trying to determine what to do, it can be helpful to start by simply asking in any given situation, ‘What can we do?’ and ‘What would be wrong to do?’” Hsieh says.

Many times, the answers come from experience.

Gain insights from others’ ethical decisions, too. One way to do so is by taking an online course, such as Leadership, Ethics, and Corporate Accountability , which includes case studies that immerse you in real-world business situations, as well as a reflective leadership model to inform your decision-making.

Ready to become a better leader? Enroll in Leadership, Ethics, and Corporate Accountability —one of our online leadership and management courses —and download our free e-book on how to be a more effective leader.

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4 Ethics and Social Responsibility

Learning objectives, by the end of the chapter, you should be able to:.

• Define business ethics and explain what it means to act ethically in business.
• Explain why we study business ethics.
• Identify ethical issues that you might face in business, such as insider trading, conflicts of interest, and bribery, and explain rationalizations for unethical behaviour.
• Identify steps you can take to maintain your honesty and integrity in a business environment.
• Define corporate social responsibility and explain how organizations are responsible to their stakeholders, including owners, employees, customers, and the community.
• Discuss how you can identify an ethical organization, and how organizations can prevent behaviour like sexual harassment.
• Recognize how to avoid an ethical lapse, and why you should not rationalize when making decisions.

Show What You Know

Canada’s leader: passing or failing the “smell test”.

Ethics is not always black and white; the ethical decision is not always obvious to all. Even leaders can fail to act ethically all the time. Recent decisions impacted two leaders.

CBC News’s reporter, E. Thompson, filed the following story on December 21, 2017. It provides a detailed account of the ethical issues surrounding Prime Minister Trudeau’s trip to Aga Khan’s private island.

Democracy Watch  files complaint, saying Bahamas vacation violated lobbying law.

The Aga Khan could face an investigation into allegations he violated Canada’s Lobbying Act by giving Prime Minister Justin Trudeau and his family free vacations on his private island in the Bahamas at the same time as he was discussing funding for projects.

Democracy Watch sent a letter to the Commissioner of Lobbying late Wednesday, urging her to investigate whether Prince Shah Karim Al Hussaini Aga Khan IV “violated the Lobbyists Code by giving Prime Minister Trudeau and Liberal MP Seamus O’Regan the gifts of trips to his island home”.

In the letter, Democracy Watch co-founder Duff Conacher says the Aga Khan’s actions have put Trudeau and O’Regan in a conflict of interest. It is also against the law to give a public office holder a gift that could create a sense of obligation.

“Your position must be that anyone working for or associated with a company that is registered to lobby a public office holder who gives to or does anything for that office holder… that is more than an average voter does… puts that office holder in an apparent conflict of interest,” he wrote.

The Aga Khan is the spiritual leader of millions of Ismaili Muslims and is listed as a member of the board of directors of the Aga Khan Foundation Canada. The foundation, which has received millions of dollars in federal government development aid over the years, is registered to lobby several federal government departments including the Prime Minister’s Office, although the Aga Khan is not listed among those registered to lobby on its behalf.

A search of the lobbyist registry shows the foundation has filed 132 reports since 2011 outlining its meetings with government decision makers. However, none of those reports list any meetings with Trudeau.

Representatives of the Aga Khan Foundation of Canada contacted by CBC News have yet to comment.

The call for a lobbying investigation comes in the wake of a scathing report by Ethics Commissioner Mary Dawson on Wednesday.

Dawson found that Trudeau violated four sections of the Conflict of Interest Act when he accepted a vacation on the island in the Bahamas and a ride in the Aga Khan’s personal helicopter.

While Trudeau and his family got a tropical vacation, Canadian taxpayers got a bill for more than $215,000 in transportation and staffing costs — far more than the government initially disclosed to Parliament.

Dawson also revealed that Trudeau’s trip during last year’s Christmas holidays was one of three that Trudeau or members of his family had made to the island. Dawson disclosed that Sophie Grégoire-Trudeau stayed on the island in March 2016 with a friend and their children.

Neither the Aga Khan, nor any member of his family, was on the island during their stay.

Dawson said the Aga Khan was on the island during the Trudeaus’ Christmas-time visit last year as was a “senior American official of a previous administration,” who she did not name.

In her report, Dawson describes the relationship between Trudeau and the Aga Khan, the times they met and the questions they discussed.

Among them was a bilateral meeting on May 17, 2016 that was arranged by “representatives” of the Aga Khan. After a 15-minute chat between the two men about “personal matters, the Ismaili community in general and geopolitics,” they were joined by three of the Aga Khan’s representatives, Heritage Minister Mélanie Joly, staff members from the Prime Minister’s Office and senior officials of the Privy Council Office.

Dawson’s report says the government had found a funding mechanism to allow it to contribute to the Global Centre for Pluralism’s endowment fund and Trudeau reaffirmed the government’s $15 million commitment during the meeting.

The Aga Khan’s pitch for government funding for a $200 million riverfront renewal plan in Ottawa was also discussed.

Dawson ruled that Trudeau should have recused himself from two discussions in May 2016 involving the $15 million grant.

“Two months prior to the May 2016 occasions, Mr. Trudeau’s family accepted a gift from the Aga Khan that might reasonably be seen to have been given to influence Mr. Trudeau in the exercise of an official power, duty or function as Prime Minister,” she wrote.

“For this reason, the discussions with the Privy Council Office and later with the Aga Khan about the outstanding $15 million grant to the endowment fund provided an opportunity to improperly further the private interests of the Global Centre for Pluralism.”

While the Aga Khan is not paid to lobby government (one of the criteria under the law) Conacher said he believes the Aga Khan violated the lobbying rules. Otherwise, it would create a giant loophole, he said.

“Every single corporation, business, union, non-profit organization would start using board members to give gifts to politicians if this loophole were opened up by the lobbying commissioner.”

Conacher is also calling for outgoing lobbying commissioner Karen Shepherd and incoming lobbying commissioner Nancy Bélanger to recuse themselves from ruling on the investigation because of the way Shepherd’s contract was renewed and the way Bélanger was chosen in “a secretive, PMO-controlled process.”

Manon Dion, spokeswoman for the lobbying commissioner’s office, said she cannot reveal whether they are already looking into the issue.

Thompson, E. (Dec. 21, 2017). Aga Khan could face lobbying probe for Trudeau trip . Retrieved from http://www.cbc.ca/news/politics/trudeau-aga-khan-bahamas-lobbying-1.4459561

Point to Ponder

Could the Prime Minister and family have taken an ethical version of this vacation? If yes, how? If not, why not?

The Prime Minister’s Response : http://www.cbc.ca/news/politics/trudeau-ethics-aga-khan-1.4458220

The Ethics Commissioner’s Report: https://www.documentcloud.org/documents/4334047-The-Trudeau-Report.html

Moving Ethics To the Business World

Perhaps you have heard of Bernie Madoff, founder of Bernard L. Madoff Investment Securities and former chairman of the NASDAQ stock exchange. [1]  Madoff is alleged to have run a giant Ponzi scheme [2]  that cheated investors of up to $65 billion. His wrongdoings won him a spot at the top of Time Magazine’s Top 10 Crooked CEOs. According to the SEC charges, Madoff convinced investors to give him large sums of money. In return, he gave them an impressive 8 percent to 12 percent return a year. But Madoff never really invested their money. Instead, he kept it for himself. He got funds to pay the first investors their return (or their money back if they asked for it) by bringing in new investors. Everything was going smoothly until the fall of 2008, when the stock market plummeted and many of his investors asked for their money. As he no longer had it, the game was over and he had to admit that the whole thing was just one big lie. Thousands of investors, including many of his wealthy friends, not-so-rich retirees who trusted him with their life savings, and charitable foundations, were financially ruined. Those harmed by Madoff either directly or indirectly were likely pleased when he was sentenced to jail for one-hundred and fifty years.

What is Business Ethics?

The idea of business ethics.

It’s in the best interest of a company to operate ethically. Trustworthy companies are better at attracting and keeping customers, talented employees, and capital. Those tainted by questionable ethics suffer from dwindling customer bases, employee turnover, and investor mistrust.

Let’s begin this section by addressing this question: What can individuals, organizations, and government agencies do to foster an environment of ethical behaviour in business? First, of course, we need to define the term.

What Is Ethics?

You probably already know what it means to be ethical : to know right from wrong and to know when you’re practising one instead of the other. B usiness ethics  is the application of ethical behaviour in a business context. Acting ethically in business means more than simply obeying applicable laws and regulations. It also means being honest, doing no harm to others, competing fairly, and declining to put your own interests above those of your company, its owners, and its workers. If you’re in business you obviously need a strong sense of what’s right and wrong. You need the personal conviction to do what’s right, even if it means doing something that’s difficult or personally disadvantageous.

Why Study Ethics?

Ideally, prison terms, heavy fines, and civil suits would discourage corporate misconduct, but, unfortunately, many experts suspect that this assumption is a bit optimistic. Whatever the condition of the ethical environment in the near future, one thing seems clear: the next generation entering business—which includes most of you—will find a world much different than the one that waited for the previous generation. Recent history tells us in no uncertain terms that today’s business students, many of whom are tomorrow’s business leaders, need a much sharper understanding of the difference between what is and isn’t ethically acceptable. As a business student, one of your key tasks is learning how to recognize and deal with the ethical challenges that will confront you. Asked what he looked for in a new hire, Warren Buffet, the world’s most successful investor, replied: “I look for three things. The first is personal integrity, the second is intelligence, and the third is a high energy level.” He paused and then added: “But if you don’t have the first, the second two don’t matter”. [3]

Identifying Ethical Issues and Dilemmas

Ethical issues  are the difficult social questions that involve some level of controversy over what is the right thing to do. Environmental protection is an example of a commonly discussed ethical issue, because there can be trade-offs between environmental and economic factors.

Tips to maintain honesty and integrity

• Follow your own code of personal conduct; act according to your own convictions rather than doing what’s convenient (or profitable) at the time.
• While at work, focus on your job, not on non-work related activities, such as emails and personal phone calls.
• Don’t appropriate office supplies or products or other company resources for your own use.
• Be honest with customer, management, coworkers, competitors, and the public.
• Remember that it’s the small seemingly trivial, day-to-day activities and gestures that build your character.

Make no mistake about it: when you enter the business world, you’ll find yourself in situations in which you’ll have to choose the appropriate behaviour. How, for example, would you answer questions like the following?

• Is it OK to accept a pair of sports tickets from a supplier?
• Can I buy office supplies from my brother-in-law?
• Is it appropriate to donate company funds to a local charity?
• If I find out that a friend is about to be fired, can I warn her?

Obviously, the types of situations are numerous and varied. Fortunately, we can break them down into a few basic categories: issues of honesty and integrity, conflicts of interest and loyalty, bribes versus gifts, and whistle-blowing. Let’s look a little more closely at each of these categories.

Issues of Honesty and Integrity

Master investor Warren Buffet once told a group of business students the following: “I cannot tell you that honesty is the best policy. I can’t tell you that if you behave with perfect honesty and  integrity  somebody somewhere won’t behave the other way and make more money. But honesty is a good policy. You’ll do fine, you’ll sleep well at night and you’ll feel good about the example you are setting for your coworkers and the other people who care about you”. [4]

If you work for a company that settles for its employees’ merely obeying the law and following a few internal regulations, you might think about moving on. If you’re being asked to deceive customers about the quality or value of your product, you’re in an ethically unhealthy environment.

Think about this story:

“A chef put two frogs in a pot of warm soup water. The first frog smelled the onions, recognized the danger, and immediately jumped out. The second frog hesitated: The water felt good, and he decided to stay and relax for a minute. After all, he could always jump out when things got too hot (so to speak). As the water got hotter, however, the frog adapted to it, hardly noticing the change. Before long, of course, he was the main ingredient in frog-leg soup.” [5]

So, what’s the moral of the story? Don’t sit around in an ethically toxic environment and lose your integrity a little at a time; get out before the water gets too hot and your options have evaporated. 

Conflicts of Interest

Conflicts of interest  occur when individuals must choose between taking actions that promote their personal interests over the interests of others or taking actions that don’t. A conflict can exist, for example, when an employee’s own interests interfere with, or have the potential to interfere with, the best interests of the company’s stakeholders (management, customers, and owners). Let’s say that you work for a company with a contract to cater events at your college and that your uncle owns a local bakery. Obviously, this situation could create a conflict of interest (or at least give the appearance of one—which is a problem in itself). When you’re called on to furnish desserts for a luncheon, you might be tempted to send some business your uncle’s way even if it’s not in the best interest of your employer. What should you do? You should disclose the connection to your boss, who can then arrange things so that your personal interests don’t conflict with the company’s.

The same principle holds that an employee shouldn’t use private information about an employer for personal financial benefit. Say that you learn from a coworker at your pharmaceutical company that one of its most profitable drugs will be pulled off the market because of dangerous side effects. The recall will severely hurt the company’s financial performance and cause its stock price to plummet. Before the news becomes public, you sell all the stock you own in the company. What you’ve done is called insider trading  – acting on information that is not available to the general public, either by trading on it or providing it to others who trade on it. Insider trading is illegal, and you could go to jail for it.

Conflicts of Loyalty

You may one day find yourself in a bind between being loyal  either to your employer or to a friend or family member. Perhaps you just learned that a coworker, a friend of yours, is about to be downsized out of his job. You also happen to know that he and his wife are getting ready to make a deposit on a house near the company headquarters. From a work standpoint, you know that you shouldn’t divulge the information. From a friendship standpoint, though, you feel it’s your duty to tell your friend. Wouldn’t he tell you if the situation were reversed? So what do you do? As tempting as it is to be loyal to your friend, you shouldn’t tell. As an employee, your primary responsibility is to your employer. You might be able to soften your dilemma by convincing a manager with the appropriate authority to tell your friend the bad news before he puts down his deposit.

Bribes Versus Gifts

It’s not uncommon in business to give and receive small gifts of appreciation, but when is a gift unacceptable? When is it really a bribe ?

There’s often a fine line between a gift and a bribe. The following information may help in drawing it, because it raises key issues in determining how a gesture should be interpreted: the cost of the item, the timing of the gift, the type of gift, and the connection between the giver and the receiver. If you’re on the receiving end, it’s a good idea to refuse any item that’s overly generous or given for the purpose of influencing a decision. Because accepting even small gifts may violate company rules, always check on company policy.

Read through Bell Canada’s Code of Business Conduct detailing its recommendations for gifts. If you cannot access the image below, find it on page 10 of the document .

Whistleblowing

Whistleblowing was defined in 1972 by Ralph Nader as “an act of a man or a woman who, believing in the public interest overrides the interest of the organization he serves, publicly blows the whistle if the organization is involved in corrupt, illegal, fraudulent or harmful activity”.

While there are increasing incentives from governments and regulators for whistleblowers to go public about corporate misconduct, protections for whistleblowers are still very limited. Few Canadian laws pertain directly to whistleblowing and therefore whistleblowers are mostly unprotected by statute.

There is, however, a patchwork of protection provisions for whistleblowers under the Canadian Criminal Code , Public Servants Disclosure Protection Act ( PSDPA ), the Public Service of Ontario Act, 2006 as well as the Securities Act .

Section 425.1 of the Criminal Code , for example, states that employers may not threaten or take disciplinary action against, demote or terminate an employee in order to deter her/him from reporting information regarding an offence s/he believes has or is being committed by her/his employer to the relevant law enforcement authorities.

An employer cannot threaten an employee with negative repercussions to deter them from contacting law enforcement with information about the employer’s offence. Punishment for employers who make such threats or reprisals can include up to five years imprisonment and/or fines.

In early 2018, a Canadian whistleblower received worldwide recognition for disclosing the amount and kinds of data harvested by Cambridge Analytica through personal Facebook accounts. However, there are other, prominent Canadian whistleblowers .

Corporate Social Responsibility

Corporate social responsibility (CSR) refers to the approach that an organization takes in balancing its responsibilities toward different stakeholders when making legal, economical, ethical, and social decisions. Remember that we previously define stakeholders as those with a legitimate interest in the success or failure of the business and the policies it adopts. The term social responsibility refers to the approach that an organization takes in balancing its responsibilities toward their various stakeholders.

What motivates companies to be “socially responsible”? We hope it’s because they want to do the right thing, and for many companies , “doing the right thing” is a key motivator. The fact is, it’s often hard to figure out what the “right thing” is: what’s “right” for one group of stakeholders isn’t necessarily “right” for another. One thing, however, is certain: companies today are held to higher standards than ever before. Consumers and other groups consider not only the quality and price of a company’s products but also its character. If too many groups see a company as a poor corporate citizen, it will have a harder time attracting qualified employees, finding investors, and selling its products. Good corporate citizens, by contrast, are more successful in all these areas.

Included in this chapter is an optional open access article updating Carroll’s Pyramid by Carroll himself and diving deeper into CSR.

Excerpted from: Carroll, A. B. (2016). Carroll’s pyramid of CSR: Taking another look. International Journal of Corporate Social Responsibility, 1 (3). https://doi.org/10.1186/s40991-016-0004-6

Another Lens

Carroll’s Pyramid is a well-respected resource for situating corporate social responsibility. Another view of corporate social responsibility is from the perspective of a company’s relationships with its stakeholders. In this model, the focus is on managers —not owners—as the principals involved in these relationships. Owners  are the stakeholders who invest risk capital in the firm in expectation of a financial return. Other stakeholders include employees , suppliers , and the communities  in which the firm does business. Proponents of this model hold that customers, who provide the firm with revenue, have a special claim on managers’ attention. The arrows indicate the two-way nature of corporation-stakeholder relationships. All stakeholders have some claim on the firm’s resources and returns, and management’s job is to make decisions that balance these claims. [13]

Let’s look at some of the ways in which companies can be “socially responsible” in considering the claims of various stakeholders.

Owners  invest money in companies. In return, the people who run a company have a responsibility to increase the value of owners’ investments through profitable operations.  Managers also have a responsibility to provide owners (as well as other stakeholders having financial interests, such as creditors and suppliers) with accurate, reliable information about the performance of the business. Clearly, this is one of the areas in which WorldCom managers fell down on the job. Upper-level management purposely deceived shareholders by presenting them with fraudulent financial statements

Managers  have what is known as a fiduciary responsibility to owners: they’re responsible for safeguarding the company’s assets and handling its funds in a trustworthy manner. Yet managers experience what is called the agency problem; a situation in which their best interests do not align with those of the owners who employ them. To enforce managers’ fiduciary responsibilities for a firm’s financial statements and accounting records, Ontario’s Keeping the Promise for a Strong Economy Act (Budget Measures) 2002, also known as Bill 198, (Canadian equivalent to Sarbanes-Oxley Act of 2002 in the United States) requires CEOs and CFOs to attest to their accuracy. The law also imposes penalties on corporate officers, auditors, board members, and any others who commit fraud. You’ll learn more about this law in your accounting and business law courses.

Companies are responsible for providing employees  with safe, healthy places to work—as well as environments that are free from sexual harassment and all types of discrimination. They should also offer appropriate wages and benefits. In the following sections, we’ll take a closer look at these areas of corporate responsibility.

Wages and Benefits

At the very least, employers must obey laws governing minimum wage and overtime pay. A  minimum wage  is set by the provincial government. As of January 1, 2018, the Ontario rate is $14.00 with another increase to $15.00 set for January 1, 2019.  By law, employers must also provide certain benefits —Canadian Pension Plan (CPP -retirement funds), unemployment insurance (protects against loss of income in case of job loss), and depending on the industry, workers’ compensation (covers lost wages and medical costs in case of on-the-job injury). Most large companies pay most of their workers more than minimum wage and offer broader benefits, including medical, dental, and vision care, as well as savings programs, in order to compete for talent.

Safety and Health

Though it seems obvious that companies should guard workers’ safety and health , some simply don’t. For over four decades, for example, executives at Johns Manville suppressed evidence that one of its products, asbestos, was responsible for the deadly lung disease developed by many of its workers. [14]  The company concealed chest X- rays from stricken workers, and executives decided that it was simply cheaper to pay workers’ compensation claims than to create a safer work environment. A New Jersey court was quite blunt in its judgment: Johns Manville, it held, had made a deliberate, cold-blooded decision to do nothing to protect at-risk workers, in blatant disregard of their rights. [15]

In The Globe and Mail’ s 2017 article, “Statistics Canada looks to close data gap on workplace death, injuries” examines the different, Canadian landscape on safety and health.

Currently, responsibility for workers’ compensation and occupational health and safety issues falls largely to provinces or territories – and each jurisdiction has different approaches in capturing data. As a result, there’s an “uneven landscape” of health and safety research capacity, said Barbara Neis, co-founder and senior research associate at the SafetyNet Centre for Occupational Health and Safety Research at Memorial University.

The last time Statistics Canada produced a national analysis was in 1996.

Responsibility for fatality and injury counts, which are based on accepted workers’ compensation claims, shifted over to the Association of Workers’ Compensation Boards at that time. Detailed data must be purchased, and researchers say these counts don’t represent the whole workforce, partly because not all sectors or types of workers are included in the workers’ compensation system.

Available workers’ compensation numbers show about 350 Canadians die each year from an on-the-job injury at work. If longer-term work-related illnesses (such as mesothelioma from asbestos exposures, or lung cancers from silica dust) are factored in, this number climbs to about 1,000 deaths a year.

The purpose of any business is to satisfy customers , who reward businesses by buying their products. Sellers are also responsible—both ethically and legally—for treating customers fairly. This means customers have:

• The right to safe products . A company should sell no product that it suspects of being unsafe for buyers. Thus, producers have an obligation to safety-test products before releasing them for public consumption. The automobile industry, for example, conducts extensive safety testing before introducing new models (though recalls remain common).
• The right to be informed about a product . Sellers should furnish consumers with the product information that they need to make an informed purchase decision. That’s why pillows have labels identifying the materials used to make them, for instance.
• The right to choose what to buy . Consumers have a right to decide which products to purchase, and sellers should let them know what their options are. Pharmacists, for example, should tell patients when a prescription can be filled with a cheaper brand-name or generic drug. Telephone companies should explain alternative calling plans.
• The right to be heard . Companies must tell customers how to contact them with complaints or concerns. They should also listen and respond.

Companies share the responsibility for the legal and ethical treatment of consumers with several government agencies.

From the federal Office of Consumer Affairs ( https://www.ic.gc.ca ):

In Canada, consumer complaints are regulated by different levels of government, as well as non-government organizations. Finding the right place to direct your complaint is not always easy, but understanding your rights as a consumer is an important part of the complaint filing process.

Provincial and territorial consumer protection legislation

Many consumer complaints fall under provincial and territorial jurisdiction, including issues related to:

• buying goods and services;
• the purchase, maintenance or repair of motor vehicles;
• credit reporting agencies and the practices of collection agencies.

Federal consumer protection legislation

The Government of Canada has an important role in consumer awareness and protection.

Federal agencies and departments are responsible for enforcing legislation related to various issues, including:

• consumer product safety;
• food safety;
• consumer product packaging and labelling;
• anti-competitive practices, such as price fixing and misleading advertising;
• privacy complaints.

Additional resources to remember

Follow or bookmark this link for some of the more relevant areas where federal agencies and departments regulate consumer issues: https://www.ic.gc.ca/eic/site/oca-bc.nsf/eng/ca02965.html

In Ontario, customers have the added protection of the Consumer Protection Act . 

Communities

For obvious reasons, most communities  see getting a new business as an asset and view losing one—especially a large employer—as a detriment. After all, the economic impact of business activities on local communities is substantial: they provide jobs, pay taxes, and support local education, health, and recreation programs. Both big and small businesses donate funds to community projects, encourage employees to volunteer their time, and donate equipment and products for a variety of activities. Larger companies can make greater financial contributions. Let’s start by taking a quick look at the philanthropic activities of a few U.S. corporations.

Philanthropy

Many large corporations support various charities, an activity called philanthropy . Some donate a percentage of sales or profits to worthwhile causes.  Retailer Target, for example, donates 5 percent of its profits—about $2 million per week—to schools, neighborhoods, and local projects across the country; its store-based grants underwrite programs in early childhood education, the arts, and family-violence prevention. [17]  The late actor Paul Newman donated 100 percent of the profits from “Newman’s Own” foods (salad dressing, pasta sauce, popcorn, and other products sold in eight countries). His company continues his legacy of donating all profits and distributing them to thousands of organizations, including the Hole in the Wall Gang camps for seriously ill children. [18]

Across the border, Canadian companies also show their philanthropic side. Tim Horton’s Children’s Foundation sends 19,000 kids to camp each summer, who would otherwise not have the resources to attend. [19]   Its Timbits Minor Sports Program supports the participation of 300 000 kids in their pursuit of hockey, soccer, lacrosse, softball, baseball, and ringette [20] . In 2017, Loblaw Companies and its President’s Choice Children’s Charity pledged $150 million over the next decade to address childhood hunger in Canada. [21]  These are just two examples of Canadian companies giving back at the local and national levels.  

Ethical Organizations

  how can you recognize an ethical organization.

One goal of anyone engaged in business should be to foster ethical behaviour  in the organizational environment. How do we know when an organization is behaving ethically? Most lists of ethical organizational activities include the following criteria:

• Treating employees, customers, investors, and the public fairly
• Holding every member personally accountable for his or her action
• Communicating core values and principles to all members
• Demanding and rewarding integrity from all members in all situations [22]

Employees at companies that consistently make Business Ethics magazine’s list of the “100 Best Corporate Citizens” regard the items on the previous list as business as usual in the workplace. Companies at the top of the 2016 list include Microsoft, Hasbro, Ecolab, Bristol-Myers-Squibb, and Lockheed Martin. [23]

By contrast, employees with the following attitudes tend to suspect that their employers aren’t as ethical as they should be:

• They consistently feel uneasy about the work they do.
• They object to the way they’re treated.
• They’re uncomfortable about the way coworkers are treated.
• They question the appropriateness of management directives and policies. [24]

Sexual Harassment

Sexual harassment  occurs when an employee makes “unwelcome sexual advances, requests for sexual favours, and other verbal or physical conduct of a sexual nature” to another employee. It’s also considered sexual harassment when “submission to or rejection of this conduct explicitly or implicitly affects an individual’s employment, unreasonably interferes with an individual’s work performance or creates an intimidating, hostile or offensive work environment.” [25]

Sexual harassment rocketed to the top of news reports and social media when on October 5, 2017, The New York Times broke the story of Harvey Weinstein’s decades of harassment in Hollywood. In March of 2018, CBC News collated the allegations of sexual harassment against prominent Canadians . The list, including only those allegations reported by CBC, highlight the prevalence of this issue.

To prevent sexual harassment—or at least minimize its likelihood—a company should adopt a formal anti-harassment policy  describing prohibited conduct, asserting its objections to the behaviour, and detailing penalties for violating the policy. Employers also have an obligation to investigate harassment complaints. Failure to enforce anti-harassment policies can be very costly. At the end of 2017, 353 women had submitted and finalized sexual harassment, discrimination or intimidation claims against the RCMP with as many as another 650 expected to file. To settle these claims, the government of Canada has set aside $100 million.

Workforce Diversity | Inclusive Workplaces

In addition to complying with equal employment opportunity laws, many companies make special efforts to recruit employees who are underrepresented in the workforce according to sex, race, or some other characteristic. In helping to build more inclusive workforces, such initiatives contribute to competitive advantage for two reasons:

• People from diverse backgrounds bring new talents and fresh perspectives to an organization, typically enhancing creativity in the development of new products.
• By more accurately reflecting the demographics of the marketplace, a diverse workforce improves a company’s ability to serve an ethnically diverse population.

Each year The Globe and Mail, reports on Canada’s Top 100 Employers . Peruse the list of industry winners and follow through to highlights detailing why the company topped the list.

Please note the selection process:

To determine this year’s winners of the Canada’s Best Diversity Employers competition, Mediacorp editors reviewed diversity and inclusiveness initiatives at employers that applied for the Canada’s Top 100 Employers project. From this applicant pool, a smaller short-list of employers with noteworthy and unique diversity initiatives was developed. The short-listed candidates’ programs were compared to those of other employers in the same field. The finalists chosen represent the diversity leaders in their industry and region of Canada.

The Individual Approach to Ethics

How can you make sure that you do the right thing in the business world? How should you respond to the kinds of challenges that you’ll be facing? Because your actions in the business world will be strongly influenced by your moral character, let’s begin by assessing your current moral condition. Which of the following best applies to you (select one)?

• I’m always ethical.
• I’m mostly ethical.
• I’m somewhat ethical.
• I’m seldom ethical.
• I’m never ethical.

Now that you’ve placed yourself in one of these categories, here are some general observations. Few people put themselves below the second category. Most of us are ethical most of the time, and most people assign themselves to category number two— “I’m mostly ethical.” Why don’t more people claim that they’re always ethical?

Apparently, most people realize that being ethical all the time takes a great deal of moral energy. If you placed yourself in category number two, ask yourself this question: How can I change my behaviour so that I can move up a notch? The answer to this question may be simple. Just ask yourself an easier question: How would I like to be treated in a given situation? [28]  

Unfortunately, practising this philosophy might be easier in your personal life than in the business world. Ethical challenges arise in business because companies, especially large ones, have multiple stakeholders who sometimes make competing demands. Making decisions that affect multiple stakeholders isn’t easy even for seasoned managers; and for new entrants to the business world, the task can be extremely daunting. You can, however, get a head start in learning how to make ethical decisions by looking at two types of challenges that you’ll encounter in the business world: ethical dilemmas and ethical decisions.

Case Study: How a Bottle Cap Restored a Reputation (Temporarily)

Addressing ethical dilemmas.

An ethical dilemma  is a morally problematic situation: you must choose between two or more acceptable but often opposing alternatives that are important to different groups.  Experts often frame this type of situation as a “right-versus-right” decision. It’s the sort of decision that Johnson & Johnson (known as J&J) CEO James Burke had to make in 1982. [29]  On September 30, twelve-year-old Mary Kellerman of Chicago died after her parents gave her Extra-Strength Tylenol. That same morning, twenty-seven-year-old Adam Janus, also of Chicago, died after taking Tylenol for minor chest pain. That night, when family members came to console his parents, Adam’s brother and his wife took Tylenol from the same bottle and died within forty-eight hours. Over the next two weeks, four more people in Chicago died after taking Tylenol. The actual connection between Tylenol and the series of deaths wasn’t made until an off-duty fireman realized from news reports that every victim had taken Tylenol. As consumers panicked, J&J pulled Tylenol off Chicago-area retail shelves. Researchers discovered Tylenol capsules containing large amounts of deadly cyanide. Because the poisoned bottles came from batches originating at different J&J plants, investigators determined that the tampering had occurred after the product had been shipped. [30]

So J&J wasn’t at fault. But CEO Burke was still faced with an extremely serious dilemma: Was it possible to respond to the tampering cases without destroying the reputation of a highly profitable brand?

Burke had two options:

• He could recall only the lots of Extra-Strength Tylenol that were found to be tainted with cyanide. In 1991, Perrier executives recalled only tainted product when they discovered that cases of their bottled water had been poisoned with benzine. This option favoured J&J financially but possibly put more people at risk.
• Burke could order a nationwide recall—of all bottles of Extra-Strength Tylenol. This option would reverse the priority of the stakeholders, putting the safety of the public above stakeholders’ financial interests.

Burke opted to recall all 31 million bottles of Extra-Strength Tylenol on the market. The cost to J&J was $100 million, but public reaction was quite positive. Less than six weeks after the crisis began, Tylenol capsules were reintroduced in new tamper-resistant bottles, and by responding quickly and appropriately, J&J was eventually able to restore the Tylenol brand to its previous market position. When Burke was applauded for moral courage, he replied that he’d simply adhered to the long-standing J&J credo that put the interests of customers above those of other stakeholders. His only regret was that the perpetrator was never caught. [31]

If you’re wondering what your thought process should be if you’re confronted with an ethical dilemma, you might wish to remember the mental steps listed here—which happen to be the steps that James Burke took in addressing the Tylenol crisis:

• Define the problem : How to respond to the tampering case without destroying the reputation of the Tylenol brand.
• Identify feasible options : (1) Recall only the lots of Tylenol that were found to be tainted or (2) order a nationwide recall of all bottles of Extra-Strength Tylenol.
• Assess the effect of each option on stakeholders : Option 1 (recalling only the tainted lots of Tylenol) is cheaper but puts more people at risk. Option 2 (recalling all bottles of Extra-Strength Tylenol) puts the safety of the public above stakeholders’ financial interests.
• Establish criteria for determining the most appropriate action : Adhere to the J&J credo, which puts the interests of customers above those of other stakeholders.
• Select the best option based on the established criteria : In 1982, Option 2 was selected, and a nationwide recall of all bottles of Extra-Strength Tylenol was conducted.

Making Ethical Decisions

In contrast to the “right-versus-right” problem posed by an ethical dilemma, an ethical decision  entails a “right-versus-wrong” decision—one in which there is clearly a right (ethical) choice and a wrong (unethical or illegal) choice. When you make a decision that’s unmistakably unethical or illegal, you’ve committed an ethical lapse. If you’re presented with this type of choice, asking yourself the following questions and increase your odds of making an ethical decision.

• Is the action illegal?
• Is it unfair to some stakeholders?
• If I do it, will I feel badly about it?
• Will I be ashamed to tell my family friends, coworkers, or boss?
• Will I be embarrassed if my action is written up in the newspaper?

To test the validity of this approach, consider a point-by-point look at Trudeau’s decisions.

Here use the five-question process for ethical decision-making in Chapter 3 to determine if Trudeau made an ethical choice in his decision to vacation on the Aga Khan’s private island. You response is anonymous and will be added to responses from other institutions using this textbook chapter.

I f you answer yes to any one of these five questions when considering an ethical dilemma, odds are that you’re about to do something you shouldn’t.

Revisiting Johnson & Johnson

As discussed earlier, Johnson & Johnson received tremendous praise for the actions taken by its CEO, James Burke, in response to the 1982 Tylenol catastrophe. However, things change. To learn how a company can destroy its good reputation , let’s fast forward to 2008 and revisit J&J and its credo, which states, “We believe our first responsibility is to the doctors, nurses and patients, to mothers and fathers and all others who use our products and services. In meeting their needs everything we do must be of high quality.” [32]  How could a company whose employees believed so strongly in its credo find itself under criminal and congressional investigation for a series of recalls due to defective products? [33]  In a three-year period, the company recalled twenty-four products, including Children’s, Infants’ and Adults’ Tylenol, Motrin, and Benadryl; [34]  1-Day Acuvue TruEye contact lenses sold outside the U.S.; [35]  and hip replacements. [36]

Unlike the Tylenol recall, no one had died from the defective products, but customers were certainly upset to find they had purchased over-the-counter medicines for themselves and their children that were potentially contaminated with dark particles or tiny specks of metal; [37]  contact lenses that contained a type of acid that caused stinging or pain when inserted in the eye; [38]  and defective hip implants that required patients to undergo a second hip replacement. [39]

Who bears the responsibility for these image-damaging blunders? Two individuals who were at least partially responsible were William Weldon, CEO, and Colleen Goggins, Worldwide Chairman of J&J’s Consumer Group. Weldon has been criticized for being largely invisible and publicly absent during the recalls. [40]  Additionally, he admitted that he did not understand the consumer division where many of the quality control problems originated. [41]  Goggins was in charge of the factories that produced many of the recalled products. She was heavily criticized by fellow employees for her excessive cost-cutting measures and her propensity to replace experienced scientists with new hires. [42]  In addition, she was implicated in scheme to avoid publicly disclosing another J&J recall of a defective product.

After learning that J&J had released packets of Motrin that did not dissolve correctly, the company hired contractors to go into convenience stores and secretly buy up every pack of Motrin on the shelves. The instructions given to the contractors were the following: “You should simply ‘act’ like a regular customer while making these purchases. THERE MUST BE NO MENTION OF THIS BEING A RECALL OF THE PRODUCT!” [43]  In May 2010, when Goggins appeared before a congressional committee investigating the “phantom recall,” she testified that she was not aware of the behaviour of the contractors [44]  and that she had “no knowledge of instructions to contractors involved in the phantom recall to not tell store employees what they were doing.” In her September 2010 testimony to the House Committee on Oversight and Government Reform, she acknowledged that the company in fact wrote those very instructions.

Refusing to Rationalize

Despite all the good arguments in favour of doing the right thing, why do many reasonable people act unethically (at least at times)? Why do good people make bad choices? According to one study, there are four common rationalizations  (excuses) for justifying misconduct: [45]

• My behaviour  isn’t really illegal or immoral . Rationalizers try to convince themselves that an action is OK if it isn’t downright illegal or blatantly immoral. They tend to operate in a gray area where there’s no clear evidence that the action is wrong.
• My action is in everyone’s best interests . Some rationalizers tell themselves: “I know I lied to make the deal, but it’ll bring in a lot of business and pay a lot of bills.” They convince themselves that they’re expected to act in a certain way. [46]
• No one will find out what I’ve done . Here, the self-questioning comes down to “If I didn’t get caught, did I really do it?” The answer is yes. There’s a simple way to avoid succumbing to this rationalization: always act as if you’re being watched.
• The company will condone my action and protect me . This justification rests on a fallacy.

If you find yourself having to rationalize a decision, it’s probably a bad one.

What to Do When the Light Turns Yellow

Like our five questions, some ethical problems are fairly straightforward. Others, unfortunately, are more complicated, but it will help to think of our five-question test as a set of signals that will warn you that you’re facing a particularly tough decision— that you should think carefully about it and perhaps consult someone else. The situation is like approaching a traffic light. Red and green lights are easy; you know what they mean and exactly what to do. Yellow lights are trickier. Before you decide which pedal to hit, try posing our five questions. If you get a single yes, you’ll almost surely be better off hitting the brake. [47]

Key Takeaways

Important terms and concepts.

• Business ethics is the application of ethical behaviour in a business context. Ethical (trustworthy) companies are better able to attract and keep customers, talented employees, and capital.
• Acting ethically in business means more than just obeying laws and regulations. It also means being honest, doing no harm to others, competing fairly, and declining to put your own interests above those of your employer and coworkers.
• In the business world, you’ll encounter conflicts of interest: situations in which you’ll have to choose between taking action that promotes your personal interest and action that favors the interest of others.
• Corporate social responsibility refers to the approach that an organization takes in balancing its responsibilities toward di ff erent stakeholders (owners, employees, customers, and the communities in which they conduct business) when making legal, economic, ethical, and social decisions.
• Managers have several responsibilities: to increase the value of owners’ investments through profitable operations, to provide owners and other stakeholders with accurate, reliable financial information, to safeguard the company’s assets, and to handle its funds in a trustworthy manner.
• Co mpanies have a responsibility to pay appropriate wages and benefits, treat all workers fairly, and provide equal opportunities for all employees. In addition, they must guard workers’ safety and health and to provide them with a work environment that’s free from sexual harassment.
• Consumers have certain legal rights: to use safe products, to be informed about products, to choose what to buy, and to be heard. Sellers must comply with these requirements.
• Business people face two types of ethical challenges: ethical dilemmas and ethical decisions.
• An ethical dilemma is a morally problematic situation in which you must choose competing and often conflicting options which do not satisfy all stakeholders.
• An ethical decision is one in which there’s a right (ethical) choice and a wrong (unethical or downright illegal) choice.

This chapter is adapted from Ethics and Social Responsibility in Fundamentals of Business: Canadian Edition by Business Faculty from Ontario Colleges and eCampusOntario Program Managers.

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Democracy Watch  files complaint, saying Bahamas vacation violated lobbying law.

The Aga Khan could face an investigation into allegations he violated Canada's Lobbying Act by giving Prime Minister Justin Trudeau and his family free vacations on his private island in the Bahamas at the same time as he was discussing funding for projects.

Democracy Watch sent a letter to the Commissioner of Lobbying late Wednesday, urging her to investigate whether Prince Shah Karim Al Hussaini Aga Khan IV "violated the Lobbyists Code by giving Prime Minister Trudeau and Liberal MP Seamus O'Regan the gifts of trips to his island home".

In the letter, Democracy Watch co-founder Duff Conacher says the Aga Khan's actions have put Trudeau and O'Regan in a conflict of interest. It is also against the law to give a public office holder a gift that could create a sense of obligation.

"Your position must be that anyone working for or associated with a company that is registered to lobby a public office holder who gives to or does anything for that office holder… that is more than an average voter does… puts that office holder in an apparent conflict of interest," he wrote.

The Aga Khan is the spiritual leader of millions of Ismaili Muslims and is listed as a member of the board of directors of the Aga Khan Foundation Canada. The foundation, which has received millions of dollars in federal government development aid over the years, is registered to lobby several federal government departments including the Prime Minister's Office, although the Aga Khan is not listed among those registered to lobby on its behalf.

Dawson found that Trudeau violated four sections of the Conflict of Interest Act when he accepted a vacation on the island in the Bahamas and a ride in the Aga Khan's personal helicopter.

Dawson also revealed that Trudeau's trip during last year's Christmas holidays was one of three that Trudeau or members of his family had made to the island. Dawson disclosed that Sophie Grégoire-Trudeau stayed on the island in March 2016 with a friend and their children.

Dawson said the Aga Khan was on the island during the Trudeaus' Christmas-time visit last year as was a "senior American official of a previous administration," who she did not name.

Among them was a bilateral meeting on May 17, 2016 that was arranged by "representatives" of the Aga Khan. After a 15-minute chat between the two men about "personal matters, the Ismaili community in general and geopolitics," they were joined by three of the Aga Khan's representatives, Heritage Minister Mélanie Joly, staff members from the Prime Minister's Office and senior officials of the Privy Council Office.

Dawson's report says the government had found a funding mechanism to allow it to contribute to the Global Centre for Pluralism's endowment fund and Trudeau reaffirmed the government's $15 million commitment during the meeting.

The Aga Khan's pitch for government funding for a $200 million riverfront renewal plan in Ottawa was also discussed.

"Two months prior to the May 2016 occasions, Mr. Trudeau's family accepted a gift from the Aga Khan that might reasonably be seen to have been given to influence Mr. Trudeau in the exercise of an official power, duty or function as Prime Minister," she wrote.

"For this reason, the discussions with the Privy Council Office and later with the Aga Khan about the outstanding $15 million grant to the endowment fund provided an opportunity to improperly further the private interests of the Global Centre for Pluralism."

"Every single corporation, business, union, non-profit organization would start using board members to give gifts to politicians if this loophole were opened up by the lobbying commissioner."

Conacher is also calling for outgoing lobbying commissioner Karen Shepherd and incoming lobbying commissioner Nancy Bélanger to recuse themselves from ruling on the investigation because of the way Shepherd's contract was renewed and the way Bélanger was chosen in "a secretive, PMO-controlled process."

Manon Dion, spokeswoman for the lobbying commissioner's office, said she cannot reveal whether they are already looking into the issue.

Perhaps you have heard of Bernie Madoff, founder of Bernard L. Madoff Investment Securities and former chairman of the NASDAQ stock exchange. [1]  Madoff is alleged to have run a giant Ponzi scheme [2]  that cheated investors of up to $65 billion. His wrongdoings won him a spot at the top of Time Magazine’s Top 10 Crooked CEOs. According to the SEC charges, Madoff convinced investors to give him large sums of money. In return, he gave them an impressive 8 percent to 12 percent return a year. But Madoff never really invested their money. Instead, he kept it for himself. He got funds to pay the first investors their return (or their money back if they asked for it) by bringing in new investors. Everything was going smoothly until the fall of 2008, when the stock market plummeted and many of his investors asked for their money. As he no longer had it, the game was over and he had to admit that the whole thing was just one big lie. Thousands of investors, including many of his wealthy friends, not-so-rich retirees who trusted him with their life savings, and charitable foundations, were financially ruined. Those harmed by Madoff either directly or indirectly were likely pleased when he was sentenced to jail for one-hundred and fifty years.

You probably already know what it means to be ethical : to know right from wrong and to know when you’re practising one instead of the other. B usiness ethics  is the application of ethical behaviour in a business context. Acting ethically in business means more than simply obeying applicable laws and regulations. It also means being honest, doing no harm to others, competing fairly, and declining to put your own interests above those of your company, its owners, and its workers. If you’re in business you obviously need a strong sense of what’s right and wrong. You need the personal conviction to do what’s right, even if it means doing something that’s difficult or personally disadvantageous.

Ideally, prison terms, heavy fines, and civil suits would discourage corporate misconduct, but, unfortunately, many experts suspect that this assumption is a bit optimistic. Whatever the condition of the ethical environment in the near future, one thing seems clear: the next generation entering business—which includes most of you—will find a world much different than the one that waited for the previous generation. Recent history tells us in no uncertain terms that today’s business students, many of whom are tomorrow’s business leaders, need a much sharper understanding of the difference between what is and isn’t ethically acceptable. As a business student, one of your key tasks is learning how to recognize and deal with the ethical challenges that will confront you. Asked what he looked for in a new hire, Warren Buffet, the world’s most successful investor, replied: “I look for three things. The first is personal integrity, the second is intelligence, and the third is a high energy level.” He paused and then added: “But if you don’t have the first, the second two don’t matter". [3]

Ethical issues  are the difficult social questions that involve some level of controversy over what is the right thing to do. Environmental protection is an example of a commonly discussed ethical issue, because there can be trade-offs between environmental and economic factors.

• Follow your own code of personal conduct; act according to your own convictions rather than doing what's convenient (or profitable) at the time.
• Don't appropriate office supplies or products or other company resources for your own use.
• Remember that it's the small seemingly trivial, day-to-day activities and gestures that build your character.

So, what’s the moral of the story? Don’t sit around in an ethically toxic environment and lose your integrity a little at a time; get out before the water gets too hot and your options have evaporated. 

Conflicts of interest  occur when individuals must choose between taking actions that promote their personal interests over the interests of others or taking actions that don’t. A conflict can exist, for example, when an employee’s own interests interfere with, or have the potential to interfere with, the best interests of the company’s stakeholders (management, customers, and owners). Let’s say that you work for a company with a contract to cater events at your college and that your uncle owns a local bakery. Obviously, this situation could create a conflict of interest (or at least give the appearance of one—which is a problem in itself). When you’re called on to furnish desserts for a luncheon, you might be tempted to send some business your uncle’s way even if it’s not in the best interest of your employer. What should you do? You should disclose the connection to your boss, who can then arrange things so that your personal interests don’t conflict with the company’s.

The same principle holds that an employee shouldn’t use private information about an employer for personal financial benefit. Say that you learn from a coworker at your pharmaceutical company that one of its most profitable drugs will be pulled off the market because of dangerous side effects. The recall will severely hurt the company’s financial performance and cause its stock price to plummet. Before the news becomes public, you sell all the stock you own in the company. What you’ve done is called insider trading  – acting on information that is not available to the general public, either by trading on it or providing it to others who trade on it. Insider trading is illegal, and you could go to jail for it.

You may one day find yourself in a bind between being loyal  either to your employer or to a friend or family member. Perhaps you just learned that a coworker, a friend of yours, is about to be downsized out of his job. You also happen to know that he and his wife are getting ready to make a deposit on a house near the company headquarters. From a work standpoint, you know that you shouldn’t divulge the information. From a friendship standpoint, though, you feel it’s your duty to tell your friend. Wouldn’t he tell you if the situation were reversed? So what do you do? As tempting as it is to be loyal to your friend, you shouldn’t tell. As an employee, your primary responsibility is to your employer. You might be able to soften your dilemma by convincing a manager with the appropriate authority to tell your friend the bad news before he puts down his deposit.

Carroll's Pyramid is a well-respected resource for situating corporate social responsibility. Another view of corporate social responsibility is from the perspective of a company’s relationships with its stakeholders. In this model, the focus is on managers —not owners—as the principals involved in these relationships. Owners  are the stakeholders who invest risk capital in the firm in expectation of a financial return. Other stakeholders include employees , suppliers , and the communities  in which the firm does business. Proponents of this model hold that customers, who provide the firm with revenue, have a special claim on managers’ attention. The arrows indicate the two-way nature of corporation-stakeholder relationships. All stakeholders have some claim on the firm’s resources and returns, and management’s job is to make decisions that balance these claims. [13]

Owners  invest money in companies. In return, the people who run a company have a responsibility to increase the value of owners’ investments through profitable operations.  Managers also have a responsibility to provide owners (as well as other stakeholders having financial interests, such as creditors and suppliers) with accurate, reliable information about the performance of the business. Clearly, this is one of the areas in which WorldCom managers fell down on the job. Upper-level management purposely deceived shareholders by presenting them with fraudulent financial statements

Managers  have what is known as a fiduciary responsibility to owners: they’re responsible for safeguarding the company’s assets and handling its funds in a trustworthy manner. Yet managers experience what is called the agency problem; a situation in which their best interests do not align with those of the owners who employ them. To enforce managers’ fiduciary responsibilities for a firm’s financial statements and accounting records, Ontario’s Keeping the Promise for a Strong Economy Act (Budget Measures) 2002, also known as Bill 198, (Canadian equivalent to Sarbanes-Oxley Act of 2002 in the United States) requires CEOs and CFOs to attest to their accuracy. The law also imposes penalties on corporate officers, auditors, board members, and any others who commit fraud. You’ll learn more about this law in your accounting and business law courses.

Companies are responsible for providing employees  with safe, healthy places to work—as well as environments that are free from sexual harassment and all types of discrimination. They should also offer appropriate wages and benefits. In the following sections, we’ll take a closer look at these areas of corporate responsibility.

At the very least, employers must obey laws governing minimum wage and overtime pay. A  minimum wage  is set by the provincial government. As of January 1, 2018, the Ontario rate is $14.00 with another increase to $15.00 set for January 1, 2019.  By law, employers must also provide certain benefits —Canadian Pension Plan (CPP -retirement funds), unemployment insurance (protects against loss of income in case of job loss), and depending on the industry, workers’ compensation (covers lost wages and medical costs in case of on-the-job injury). Most large companies pay most of their workers more than minimum wage and offer broader benefits, including medical, dental, and vision care, as well as savings programs, in order to compete for talent.

Though it seems obvious that companies should guard workers’ safety and health , some simply don’t. For over four decades, for example, executives at Johns Manville suppressed evidence that one of its products, asbestos, was responsible for the deadly lung disease developed by many of its workers. [14]  The company concealed chest X- rays from stricken workers, and executives decided that it was simply cheaper to pay workers’ compensation claims than to create a safer work environment. A New Jersey court was quite blunt in its judgment: Johns Manville, it held, had made a deliberate, cold-blooded decision to do nothing to protect at-risk workers, in blatant disregard of their rights. [15]

Currently, responsibility for workers' compensation and occupational health and safety issues falls largely to provinces or territories – and each jurisdiction has different approaches in capturing data. As a result, there's an "uneven landscape" of health and safety research capacity, said Barbara Neis, co-founder and senior research associate at the SafetyNet Centre for Occupational Health and Safety Research at Memorial University.

Responsibility for fatality and injury counts, which are based on accepted workers' compensation claims, shifted over to the Association of Workers' Compensation Boards at that time. Detailed data must be purchased, and researchers say these counts don't represent the whole workforce, partly because not all sectors or types of workers are included in the workers' compensation system.

Available workers' compensation numbers show about 350 Canadians die each year from an on-the-job injury at work. If longer-term work-related illnesses (such as mesothelioma from asbestos exposures, or lung cancers from silica dust) are factored in, this number climbs to about 1,000 deaths a year.

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For obvious reasons, most communities  see getting a new business as an asset and view losing one—especially a large employer—as a detriment. After all, the economic impact of business activities on local communities is substantial: they provide jobs, pay taxes, and support local education, health, and recreation programs. Both big and small businesses donate funds to community projects, encourage employees to volunteer their time, and donate equipment and products for a variety of activities. Larger companies can make greater financial contributions. Let’s start by taking a quick look at the philanthropic activities of a few U.S. corporations.

Many large corporations support various charities, an activity called philanthropy . Some donate a percentage of sales or profits to worthwhile causes.  Retailer Target, for example, donates 5 percent of its profits—about $2 million per week—to schools, neighborhoods, and local projects across the country; its store-based grants underwrite programs in early childhood education, the arts, and family-violence prevention. [17]  The late actor Paul Newman donated 100 percent of the profits from “Newman’s Own” foods (salad dressing, pasta sauce, popcorn, and other products sold in eight countries). His company continues his legacy of donating all profits and distributing them to thousands of organizations, including the Hole in the Wall Gang camps for seriously ill children. [18]

Across the border, Canadian companies also show their philanthropic side. Tim Horton’s Children’s Foundation sends 19,000 kids to camp each summer, who would otherwise not have the resources to attend. [19]   Its Timbits Minor Sports Program supports the participation of 300 000 kids in their pursuit of hockey, soccer, lacrosse, softball, baseball, and ringette [20] . In 2017, Loblaw Companies and its President’s Choice Children’s Charity pledged $150 million over the next decade to address childhood hunger in Canada. [21]  These are just two examples of Canadian companies giving back at the local and national levels.  

  How Can You Recognize an Ethical Organization?

One goal of anyone engaged in business should be to foster ethical behaviour  in the organizational environment. How do we know when an organization is behaving ethically? Most lists of ethical organizational activities include the following criteria:

Sexual harassment  occurs when an employee makes “unwelcome sexual advances, requests for sexual favours, and other verbal or physical conduct of a sexual nature” to another employee. It’s also considered sexual harassment when “submission to or rejection of this conduct explicitly or implicitly affects an individual’s employment, unreasonably interferes with an individual’s work performance or creates an intimidating, hostile or offensive work environment.” [25]

To prevent sexual harassment—or at least minimize its likelihood—a company should adopt a formal anti-harassment policy  describing prohibited conduct, asserting its objections to the behaviour, and detailing penalties for violating the policy. Employers also have an obligation to investigate harassment complaints. Failure to enforce anti-harassment policies can be very costly. At the end of 2017, 353 women had submitted and finalized sexual harassment, discrimination or intimidation claims against the RCMP with as many as another 650 expected to file. To settle these claims, the government of Canada has set aside $100 million.

Apparently, most people realize that being ethical all the time takes a great deal of moral energy. If you placed yourself in category number two, ask yourself this question: How can I change my behaviour so that I can move up a notch? The answer to this question may be simple. Just ask yourself an easier question: How would I like to be treated in a given situation? [28]  

An ethical dilemma  is a morally problematic situation: you must choose between two or more acceptable but often opposing alternatives that are important to different groups.  Experts often frame this type of situation as a “right-versus-right” decision. It’s the sort of decision that Johnson & Johnson (known as J&J) CEO James Burke had to make in 1982. [29]  On September 30, twelve-year-old Mary Kellerman of Chicago died after her parents gave her Extra-Strength Tylenol. That same morning, twenty-seven-year-old Adam Janus, also of Chicago, died after taking Tylenol for minor chest pain. That night, when family members came to console his parents, Adam’s brother and his wife took Tylenol from the same bottle and died within forty-eight hours. Over the next two weeks, four more people in Chicago died after taking Tylenol. The actual connection between Tylenol and the series of deaths wasn’t made until an off-duty fireman realized from news reports that every victim had taken Tylenol. As consumers panicked, J&J pulled Tylenol off Chicago-area retail shelves. Researchers discovered Tylenol capsules containing large amounts of deadly cyanide. Because the poisoned bottles came from batches originating at different J&J plants, investigators determined that the tampering had occurred after the product had been shipped. [30]

In contrast to the “right-versus-right” problem posed by an ethical dilemma, an ethical decision  entails a “right-versus-wrong” decision—one in which there is clearly a right (ethical) choice and a wrong (unethical or illegal) choice. When you make a decision that’s unmistakably unethical or illegal, you’ve committed an ethical lapse. If you’re presented with this type of choice, asking yourself the following questions and increase your odds of making an ethical decision.

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As discussed earlier, Johnson & Johnson received tremendous praise for the actions taken by its CEO, James Burke, in response to the 1982 Tylenol catastrophe. However, things change. To learn how a company can destroy its good reputation , let’s fast forward to 2008 and revisit J&J and its credo, which states, “We believe our first responsibility is to the doctors, nurses and patients, to mothers and fathers and all others who use our products and services. In meeting their needs everything we do must be of high quality.” [32]  How could a company whose employees believed so strongly in its credo find itself under criminal and congressional investigation for a series of recalls due to defective products? [33]  In a three-year period, the company recalled twenty-four products, including Children’s, Infants’ and Adults’ Tylenol, Motrin, and Benadryl; [34]  1-Day Acuvue TruEye contact lenses sold outside the U.S.; [35]  and hip replacements. [36]

Unlike the Tylenol recall, no one had died from the defective products, but customers were certainly upset to find they had purchased over-the-counter medicines for themselves and their children that were potentially contaminated with dark particles or tiny specks of metal; [37]  contact lenses that contained a type of acid that caused stinging or pain when inserted in the eye; [38]  and defective hip implants that required patients to undergo a second hip replacement. [39]

Who bears the responsibility for these image-damaging blunders? Two individuals who were at least partially responsible were William Weldon, CEO, and Colleen Goggins, Worldwide Chairman of J&J’s Consumer Group. Weldon has been criticized for being largely invisible and publicly absent during the recalls. [40]  Additionally, he admitted that he did not understand the consumer division where many of the quality control problems originated. [41]  Goggins was in charge of the factories that produced many of the recalled products. She was heavily criticized by fellow employees for her excessive cost-cutting measures and her propensity to replace experienced scientists with new hires. [42]  In addition, she was implicated in scheme to avoid publicly disclosing another J&J recall of a defective product.

After learning that J&J had released packets of Motrin that did not dissolve correctly, the company hired contractors to go into convenience stores and secretly buy up every pack of Motrin on the shelves. The instructions given to the contractors were the following: “You should simply ‘act’ like a regular customer while making these purchases. THERE MUST BE NO MENTION OF THIS BEING A RECALL OF THE PRODUCT!” [43]  In May 2010, when Goggins appeared before a congressional committee investigating the “phantom recall,” she testified that she was not aware of the behaviour of the contractors [44]  and that she had “no knowledge of instructions to contractors involved in the phantom recall to not tell store employees what they were doing.” In her September 2010 testimony to the House Committee on Oversight and Government Reform, she acknowledged that the company in fact wrote those very instructions.

Despite all the good arguments in favour of doing the right thing, why do many reasonable people act unethically (at least at times)? Why do good people make bad choices? According to one study, there are four common rationalizations  (excuses) for justifying misconduct: [45]

• My behaviour  isn’t really illegal or immoral . Rationalizers try to convince themselves that an action is OK if it isn’t downright illegal or blatantly immoral. They tend to operate in a gray area where there’s no clear evidence that the action is wrong.

Fundamentals of Business: Canadian Edition Copyright © 2018 (Canadian Edition) by Pamplin College of Business and Virgina Tech Libraries is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License , except where otherwise noted.

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The effects of business ethics and corporate social responsibility on intellectual capital voluntary disclosure

Journal of Intellectual Capital

ISSN : 1469-1930

Article publication date: 9 March 2021

Issue publication date: 17 December 2021

This study aims to examine the potential effect that business ethics (BE) in general and corporate social responsibility (CSR) more specifically can exert on the voluntary disclosure (VD) of intellectual capital (IC) for the ethically most engaged firms in the world.

Design/methodology/approach

The research design is based on an inductive approach. As part of the global quantitative investigation, the authors have analyzed the impact of BE and CSR on the transparent communication of the IC. The data under analysis have been investigated using multiple linear regression.

Based on a sample of 83 enterprises emerging as the most ethical companies in the world, the results have revealed that the adoption of ethical and socially responsible approach is positively associated with the extent of VD about IC. This finding may help attenuating the asymmetry of information and the conflict of interest potentially arising with corporate partners. Hence, IC-VD may stand as an evidence of ethical and socially responsible behaviors.

Practical implications

Global and national regulators and policymakers can be involved by these results when setting social reporting standards because they suggest that institutional and/or cultural factors affect top management's social reporting behavior in the publication of the IC information.

Social implications

Direct and indirect stakeholders, if supported by ethical and socially responsible behaviors of the company, could assess more in detail the quality of the disclosed information concerning the IC.

Originality/value

Most of the studies that have been conducted in this field have examined the effect of BE and CSR on the firm's overall transparency, neglecting their potential effect on IC disclosure. This study is designed to fill in this gap through testing the impact of ethical and socially responsible approaches specifically on IC-VD.

• Business ethics
• Corporate social responsibility
• Voluntary disclosure
• Intellectual capital
• Transparency

Rossi, M. , Festa, G. , Chouaibi, S. , Fait, M. and Papa, A. (2021), "The effects of business ethics and corporate social responsibility on intellectual capital voluntary disclosure", Journal of Intellectual Capital , Vol. 22 No. 7, pp. 1-23. https://doi.org/10.1108/JIC-08-2020-0287

Emerald Publishing Limited

Copyright © 2021, Matteo Rossi, Giuseppe Festa, Salim Chouaibi, Monica Fait and Armando Papa

Published by Emerald Publishing Limited. This article is published under the Creative Commons Attribution (CC BY 4.0) licence. Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. The full terms of this licence may be seen at http://creativecommons.org/licences/by/4.0/legalcode

1. Introduction

Over the last few decades, firms have been generating value not only from securities and financials but also from other intangible elements, such as skills of employees (human capital), novelty in technology (structural capital), relationships with customers (direct relational capital) and reputation on the market (indirect relational capital or social capital), all forms of potential intellectual capital (IC), whose contribution, however, is probably riskier than industrial assets ( Su, 2014 ; Cruz-González et al. , 2014 ). In fact, the impact of IC on the business results is uncertain, and in addition, it is often more difficult to identify and measure its characteristics ( Murray et al. , 2016 ).

The uncertainty about its representation and measurement still poses issues related to accounting, evaluation and governance ( Hussi, 2004 ; Guthrie et al. , 2006 ; Hamed and Omri, 2014 ). To limit these problems, managers may choose voluntary disclosure (VD) to reduce the asymmetry of the information ( Branco and Rodrigues, 2008 ).

IC is a driving factor and creator of lasting value ( Lin et al. , 2015 ; Vaz et al. , 2019 ), and disclosure by applying ethical and social principles improves the trust of information and reduces the conflict of interest ( Alves et al. , 2012 ; Chung et al. , 2015 ; Al Maskati and Hamdan, 2017 ). These behaviors may exert a positive effect on the global quality of the IC-VD ( Melloni, 2015 ), and in this study, more specifically, VD of nonfinancial information about IC are assumed to be positively influenced by ethical and socially responsible behaviors of the company's decision-makers ( Corvino et al. , 2019 ).

In this respect, interest in the development of business ethics (BE) and corporate social responsibility (CSR) in accounting, evaluation and management has gained increasing attention in the academic literature ( Nahapiet and Ghoshal, 1998 ), and the last 20 years (or even more) of empirical research on these issues have generated vast literature ( Gray et al. , 1995 ; Chen and Gavious, 2015 ; Singh and Gaur, 2020 ). Accordingly, the quality of the information published by companies about their IC has received an ever more peculiar interest in managerial research ( Ousama and Fatima, 2012 ; Muttakin et al. , 2015 ; Devalle et al. , 2016 ; Bellucci et al. , 2020 ), with specific concerns about the effect of BE and CSR on the quality of the disclosed information on voluntary or mandatory basis, also considering several financial scandals that have added doubts about relevance and reliability of some company data ( Lehnert et al. , 2016 ).

Subsequently, a critical question is the following: is it adequate, opportune and reliable to take into consideration only the accounting information that mandatorily concern IC, especially considering that this entity is so difficult to identify and measure? This issue seems deserving huge attention particularly in the current context, constantly and continuously marked by the rise of BE and CSR, with consequent effect also on the relevance of the quality of the disclosed information.

For example, the legitimacy theory provides some contributions regarding environmental reputation, and the related effect of VD on reputational capital ( Alvino et al. , 2020 ). In this respect, the reputation of the company is a social construct stemming from the process of legitimization ( Bond et al. , 2016 ).

However, empirical studies investigating the effect of BE and CSR on VD have proved mixed results, mostly because of the different meaning about ethics and responsibility in each institutional and cultural context ( Ting et al. , 2020 ). The current study aims to combat this diversity and its consequences in terms of value creation, analyzing more specifically the potential effect of BE and CSR on the VD of IC ( Giacosa et al. , 2017 ).

The perimeter of the research regards the companies that are ranked by the Ethisphere Institute – most probably the global leader in the world for defining and advancing the standards of ethical and social practices that fuel corporate character, market trust and business success – as the most ethical companies in the world. More precisely, the contribution of the study is in checking whether the companies' behavior about IC disclosure is influenced by BE and CSR, aspect that has been often neglected in other studies.

In this respect, a research concerning companies displaying high level of ethical and socially responsible commitment has been conducted, with two main ambitions. First, results should enable to explicitly identify the characteristics that are more likely to influence the diffusion of information about IC in the annual reports through adoption of BE and CSR; second, it should help exploring the contribution of the several company characteristics as assessed in terms of ethics-based scoring.

The empirical evidence emerging from the research has demonstrated that the adoption of approaches that are based on BE and CSR noticeably help in enhancing the disclosure extent of the IC information as figuring in annual reports. Thus, this study should serve to provide further recommendations to the companies intending to adopt codes of ethics, or to put forward CSR practices, encouraging these behaviors also from the point of view of the IC disclosure (and consequent accounting, evaluation and management).

The structure of this paper is organized as follows; Section 2 presents the basic theoretical background and the hypotheses that have been developed: in this section, the relationship between the potential effect of BE and CSR on the VD of IC has been analyzed. Section 3 displays the methodology that has been adopted, while the empirical results are exposed and discussed in Section 4 ; finally, the discussions of the findings, the concluding remarks and their implications are provided in Section 5 .

2. Theoretical background and hypotheses development

As aforementioned, the following investigation is about the effect of BE and CSR on IC-VD, also for clarifying the distinct influences that may arise from concepts that sometimes are considered in ambiguous connection ( Fassin et al. , 2011 ). Therefore, the first step of the research is about a general analysis of the studies focusing on the association between ethical as well as socially responsible behaviors and IC-VD as core aspect of a more global knowledge management approach that cutting-edge enterprises should adopt to succeed ( Serenko and Bontis, 2013 ).

2.1 Theoretical background

To present main reasons and usefulness of the VD of information about IC, the theory of planned behavior has been adopted as fundamental approach. In fact, although extensive research has focused on the variables that externally and internally may influence the managers' decision about disclosing information on IC, few studies have examined in this respect the psychological factors and have used a theoretical decision-making framework ( Coluccia et al. , 2017 ; McPhail, 2009 ).

The theory of planned behavior, largely used to explain the process of individual decision-making behavior ( Ajzen, 1991 ), can emerge as a theoretical framework for investigating the psychosocial factors stimulating the managers' decision to disclose IC information in a mandatory and/or voluntary way. In addition, this model has demonstrated its superiority over other theoretical approaches in many contexts of VD, including IC ( Zhang et al. , 2019 ).

This theory assumes that when individuals, considering altogether internal attitudes and external considerations, perceive a manageable activity as capable of providing business benefits, such as those that may arise from IC-VD, they receive intention, support and encouragement in adopting that specific behavior, also making assumptions about their ability to perform the task ( Passaro et al. , 2018 ; Mura et al. , 2012 ).

For example, Armitage and Conner (2001) examined 185 empirical studies that were conducted prior to 1997, finding that about 39 and 27% of the variance of intention and behavior, respectively, was caused by the theory of planned behavior. In fact, this theory is a rational decision-making model, which is mainly used to predict the potential behavioral intentions of the managers (in this specific case, adopting VD of IC).

Three key independent variables are at the basis of this framework: (1) the attitudes toward a particular behavior; (2) the perceptions of others' approval or disapproval of a particular behavior (subjective norms) and (3) the perceived behavioral control about easiness or difficulty in performing a particular behavior ( Ajzen, 1991 ). This configuration is adopted as methodological basis for the theoretical model in which assessing the following hypotheses.

2.2 Hypotheses development (H1) : BE and VD of IC

Transparent and reliable communication is essential to reflect the true image of a company ( Bhimani, 2008 ): with this regard, financial transparency is a necessary condition for a firm that is involved in the BE process. In the specific context of disclosure, several authors have recognized that BE rooted in organizational culture has a tremendous influence on the development of IC-VD ( Branco and Rodrigues, 2008 ).

For example, Jo et al. (2008) have analyzed the development of ethical standards in the business to improve the quality of the disclosed information, finding that entrepreneurs and managers that consider the promotion of ethical behaviors are urged to ensure permanent disclosure of the company's IC. Later, Navid et al. (2015) have found that unethical behaviors are at the basis of corporate financial scandals, workplace frauds and harassment or misleading financial reporting: such issues have raised awareness about the positive benefits of ethical behavior, also in improving VD (and then, also about IC), to limit the problems of the agency theory.

Mouritsen (2004) has found a significant gap between the market value and the book value resulting from the failure of the companies' hidden value in their annual reports: consequently, BE oriented to IC-VD would limit the problem of the business undervaluation (more specifically, VD of information about IC is positively influenced by the ethical behavior of the company's decision-makers).

On the other hand, the complexity and uncertainty of strategic decision-making require different combinations of data, information and knowledge. In this respect, some research has been conducted to examine the factors influencing disclosure of IC: Ferreira et al. (2012) have found that ownership concentration and firm size have a positive influence on the disclosure of IC, and ethical behaviors also positively influence this disclosure.

Several studies suggest that there are many benefits to acting ethically, such as improving the financial and nonfinancial performances as well as creating a sustainable competitive advantage ( Goel and Ramanathan, 2014 ; Khondkar et al. , 2016 ). In addition, in highly risky and uncertain contexts, policymakers are forced to select powerful tools over VD.

BE behaviors have positive impact on the extent of the IC-VD.

2.3 Hypotheses development (H2) : CSR and VD of IC

The economic value of the company is expressed not only by its means of production but also by the global impact that fundamentally derives from its IC ( Campanella et al. , 2014 ), activating human, structural and relational resources to generate shared value ( Porter and Kramer, 2011 ) at business, social and environmental level ( Elkington, 1998 ). As result, a new path on IC reporting sustains that all companies are increasingly required to be socially responsible and to better manage their environmental impact ( Aslam et al. , 2018 ).

In this vein, organizations have developed accounting and management systems and improved their disclosure practices according to social and environmental principles ( Khondkar et al. , 2016 ). In part, this has been due also to the fact that companies may have incentives for adopting globally responsible approaches and operating socially responsible initiatives ( Gangi et al. , 2019 ); however, a study by Türkel et al. (2016) on the European Union has provided evidence that CSR is a mean that companies may voluntarily decide to adopt to contribute to better society and cleaner environment.

From one side, Sun et al. (2010) have found that companies that need to pursue a strategy of VD of IC are brought to value CSR, and this should be positively interpreted by the various stakeholders. On the other side, regarding the potential asymmetry of information and conflict of interest that may exist, CSR should constitute a behavioral method that would have positive effect on the corporate behaviors, as it promotes transparency, also with regard to the potential VD of IC ( Beretta et al. , 2019 ).

Coherently to the dynamic resource capability perspective of (Bamel and Bamel, 2018) , Luthan et al. (2016) found that in an uncertain world, the adoption of a CSR approach could help reducing uncertainty, especially if the company discloses information about its IC. Similarly, some researchers argue that CSR is a very broad domain, and VD of IC should be considered as a social responsibility action ( Chan et al. , 2014 ).

Polo and Vázquez (2008) have described the relationship between CSR and the VD of information, to ensure the sustainability of the business in general and its operational goals more specifically. In other words, CSR is an asset for the company and the various stakeholders ( Fukukawa et al. , 2007 ) because of its direct contribution to IC (indirect relational capital, for example), with consequent influence on the relevance of the information provided by the company about its IC and knowledge properties more in general ( Rechberg and Syed, 2013 ).

Moreover, as aforementioned, Khondkar et al. (2016) have studied the effect of CSR on the quality of the information disclosed in companies' annual reports. They have found a positive relationship between the level of disclosure and the intensity of CSR, concluding that greater disclosure is a form of socially responsible behavior, thus directly and/or indirectly impacting IC ( Vrontis et al. , 2020 ).

CSR behaviors have positive impact on the extent of the IC-VD.

3. Research design

3.1 sample construction and data collection.

Being the main purpose of this study to explore the effect of BE and CSR on IC-VD, a sample of firms already involved in the process has been selected. In other words, the selectable companies have been detected among those with evident commitment and involvement in ethical and social behaviors.

Several statistical institutes are responsible for making an appropriate classification in this specific field: however, since 2007, the Ethisphere Institute ( Ethisphere.com ) has been analyzing the global market to identify, sector by sector, the most committed companies in the field of ethical behaviors, drawing up a list of the most ethical companies in the world and gaining at international level high reputation in the field ( BusinessWire.com ).

Then, the following investigation has been grounded on the Ethisphere Institute database, which considers more than 100 criteria; the most important are social responsibility, good governance, environmental impact, implementation of code of good behavior, commitment of the direction to questions of ethics and CSR, setting up of internal monitoring indicators, citizen investment and so on (it also considers negative criteria, such as the existence of disputes or infringements to sector regulations). This database provides a global overview, and the list of elected representatives reveals a real geographical diversity with several companies located outside the United States, such as the United Kingdom, Australia, Sweden, Germany, India, Guatemala, Poland, Switzerland, Saudi Arabia, Portugal and Belgium.

The data under investigation have been obtained from the Global-100 KPI 2015 database published by the independent Ethics Expert Group of the Ethisphere Institute (secondary, which have been then summarized into composite indexes, and not empirical data have been used to avoid any potential bias deriving from individual interviews concerning BE and CSR, most of all in the context of the planned behavior theory). Considered as one of the most authoritative indexes in the world due to its methodology and reliability, the Corporate Knights Global 100 designates each year the top 100 companies (out of several thousands) that are the most responsible in terms of ethical behavior.

The year 2015 has been chosen so that the data under analysis could be taken as definitively reliable, considering the time that sometimes is necessary to validate all the accounting information, most of all from a social and environmental point of view. Thus, the 2015 database, to the best of the authors' ability, is the latest publicly available for which it has been possible to collect all the necessary information for implementing the current investigation, but evidently the methodology can be replicated for any other year, when all necessary data would be available (for example, searching for the adequate data starting from WorldsMostEthicalCompanies.com ).

The initial population consisted of 4,353 companies (candidates); in a second step, 4,253 companies that did not meet the classification criteria for the first 100 companies were excluded. From the 100 best ranked companies, for the specific scope of the current research firms that are part of the financial sector, considering the very peculiar rules that govern this industry, have been excluded (i.e. 17 companies); thus, the final sample has included 83 firms, with Table 1 summarizing the sampling selection criteria.

Tables 2 and 3 describe the distributional profiles by country and by sector, respectively: the sample includes 18 developed countries belonging to 35 industries, according to the 48 industry group affiliations as figuring in Fama and French (1997) , with most firms that are based in the USA, the UK and France (these three countries make up 54.28% of the total sample).

The companies from the USA are at the top of the list, with 25% of the sample (20 firms out of 83, 24.09%): French and British companies are entitled of the second position in this ranking, respectively, represented with 10 companies on an equal basis. Then, Canada ranks fourth, since it is represented with eight firms, corresponding to 10% of the total sample (hence, these four countries account for almost 60% of the total sample).

In Table 3 , the most represented sectors are Oil, Gas & Consumable Fuels (eight firms), Pharmaceuticals (seven firms) and Chemicals (four firms), respectively. Concerning other sectors, the number of companies is more limited (three or less).

3.2 The regression model

DISC_SCO: composite index about IC-VD, calculated as combination of several elements (cf. Table 4 ).

ETH_SCO: composite index about BE, calculated as combination of several elements reflecting ethical principles.

CSR_INDEX: composite index about CSR, calculated as combination of 40 indicators reflecting principles of individual and collective social responsibility.

INVT: the degree of innovation intensity is the ratio between research and development (R&D) costs and the turnover (concerning 2015).

TAX_PAID: the effective tax rate is the ratio between tax expenses and earnings before interest and taxes.

ETH_COUNTRY: the scores about this variable range from 1 to 7, with 1 indicating a very low level of country ethics and 7 indicating a very high level of country ethics.

WOM_BOARD: this variable measures the proportion of women that are present in the boards of directors.

LEG_SYST: the legal system works as a binary variable, which numbers 1 if the company belongs to the Anglo-Saxon legal system (globally recognized as stricter), and 0 otherwise.

LEVE: the level of indebtedness is the ratio between long- and medium-term debts and total assets.

POL_SECTOR: the pollutant sector works as a binary variable, which numbers 1 if the company belongs to the polluting sectors (more regulated), and 0 otherwise.

3.3 Variables definition

To operationalize the hypotheses under test, all the variables that have been included in the empirical model are defined and commented as follows.

3.3.1 Dependent variable (“DISC_SCO”)

To measure this dimension, Li et al. (2008) have adopted a content analysis method, investigating the annual reports of selected companies to derive the qualitative, quantitative, financial as well as nonfinancial data relating to IC. In Table 4 the several components for human, structural and relational capital are reported.

In the current research, according to the measure used by Li et al. (2008) , cited also in Maaloul and Zeghal (2015) , the variable “DISC_SCO” has been adopted as a proxy of IC-VD, concerning published items about IC. Based on the examination of the annual reports, this dimension appraises the disclosed information on IC.

3.3.2 Independent variables

As aforementioned, several categories of explanatory variables have been selected to test their combined effects on the VD of IC. In the empirical model under analysis, to test H1 and H2 , two explanatory variables are naturally the most relevant, namely, BE and CSR.

3.3.2.1 BE (“ETH_SCO”)

The ethical measurement has been differently implemented in different contexts because this concept is highly complex and relates to several nonmeasurable dimensions. In addition, several studies have recently operationalized this measure by various means, originating from several international organizations.

In this research, the Ethisphere Quotient developed by the Ethisphere Institute has been adopted to measure the BE of the firms, as result of an investigation that consists of a series of multiple-choice questions that count the company's ethical performance. It is a composite index based on the combination of several items, reflecting each company's level of ethical principles.

3.3.2.2 CSR (“CSR_INDEX”)

In the current study, this measure has been derived from Dias et al. (2017) , who have constructed a list of indicators for measuring the CSR associated practices. The construct involves 40 CSR indicators categorized into three CSR dimensions (5 economic, 15 environmental and 20 social), as shown in Table 5 , thus providing a global view on the CSR of each firm.

The choice of the 40 indicators has been influenced by the most widely adopted standards on CSR disclosure (CSRD), i.e. the Global Reporting Initiative (GRI) Guidelines ( Bebbington et al. , 2008 ). Dias et al. (2017) have primarily focused on the GRI core indicators representing the well-established CSR indicators, and the selected items have been adapted to avoid penalizing companies that do not apply the GRI model.

CSR_INDEX = Level of CSR disclosure

e j  = Attributed analysis (1 if the disclosure item is found, and 0 otherwise)

e  = Maximum number of items a company can disclose (40).

3.3.3 The control variables: characteristics about the firm and the environment of the firm

BE and CSR are not the only factors that may influence the VD of IC. A control has been operated about other determinants of VD that have been documented in prior studies and that might explain the effects of financial and economic peculiarities of the firms on the scale and design of voluntary, and sometimes even mandatory, disclosure of IC ( Ribeiro Lucas and Costa Lourenço, 2014 ).

More specifically, control variables related to the characteristics of the firm are the following: the degree of innovation intensity (INVT), the effective tax rate (TAX_PAID), the percentage women on board of directors (WOM_BOARD), the leverage level (LEVE) and the pollutant sector (POL_SECTOR). Control variables related to the characteristics of the environment of the firm are the following: the level of country ethics (ETH_COUNTRY) and the legal system (LEG_SYST) because the sample includes several countries.

Generally, positive signs should be expected for INVT, WOM_BOARD, ETH_COUNTRY and LEG_SYST, whereas negative signs should be expected for LEVE, and POL_SECTOR, while no directional prediction is assumed for TAX_PAID. Finally, for an overall overview about the model variables composition, cf. Table 6 .

4. Empirical results and discussion

The current research, although engineered for testing specific hypotheses, has an explanatory purpose, aiming at identifying the potential determinants for the VD of the IC through ethical-and-social responsibility approach. As a result, a linear relationship could be established between the variable to be explained (IC-VD) and the potential explanatory variables (BE and CSR).

4.1 Descriptive analysis

Sections A and B, as figuring in Table 7 , provide the descriptive statistics characteristics concerning the continuous and dichotomous variables under investigation. Section A depicts mean, standard deviation, minimum and maximum relevant to the continuous variables, whereas Section B provides the frequency of the dichotomous variables; globally speaking, the sample seems to be evenly distributed.

Starting with the analysis of Section A in Table 7 , the descriptive analysis provides evidence that the mean level of IC-VD (DISC_SCO) is 0.59; this score is high with respect to the Maaloul and Zeghal (2015) reached index (0.46), relevant to a sample of US companies in 2013. Moreover, the current sample encloses firms that should also tend to improve their informational capacity related to IC.

The BE score (ETH_SCO) has a mean value of 0.608. Most companies in the sample tend to be more involved in BE activities.

The CSR scores range from a minimum of 0.15 to a maximum of 0.95, with a mean of 0.698. A higher CSR score denotes that the company displays a better CSR performance ( Hassan and Guo, 2017 ).

As regards the control variables, the following considerations may arise. The intensity of innovation (INVT) displays an average of 0.068, with a minimum of 0 and a maximum of 0.745; whereas the mean level of debt (LEVE) scores 33.3 (that seems an appreciable level of indebtedness), and the effective tax rate (TAX_PAID) exhibits an average of 0.166.

Regarding women's percentage on directors' boards (WOM_BOARD), it has been discovered that, on average, 0.223 of board members are female, with a minimum and a maximum value of 0.10 and 0.429, respectively. Consequently, there is predominance of men in the boards of directors.

As concerns the measure of the level of the country ethics (ETH_COUNTRY), Finland (6.4), Denmark (6.2) and Japan (6) rank as the most ethical, while Spain (3.8), Canada (3.51) and South Korea (0) exhibit the lowest ethical values. This finding is very relevant, affecting the potential influence of the countries' ethical approach on the adoption of IC-VD policies on behalf of enterprises.

From the analysis of Section B in Table 7 , highlighting the binary variables related frequencies, as regards the legal system (LEG_SYST) most of the companies in the sample turn out to pertain to the Anglo-Saxon rules (55%). Additionally, concerning the pollutant sector variable (POL_SECTOR), 51% of the companies in the sample appears to belong to nonpolluting sectors.

4.2 Correlations analysis

The Pearson coefficients were computed to examine the associations between the independent variables. According to Gujarati (2004) , if the pair-wise comparison between two independent variables is over 0.8, serious multicollinearity exists.

The maximum pair-wise value in the current investigation is 0.2649 (cf. Table 8 ); thus, multicollinearity should not be a concern for the regression analysis. Nonetheless, the null hypothesis of autocorrelation can be accepted because the explanatory variables are weakly correlated with each other, indicating that autocorrelation is not a problem. Table 8 presents all the correlation coefficients between the various explanatory variables that have been adopted in the empirical model.

The intercorrelations for all the explanatory variables have been examined by applying the variance inflation factors (VIF) analysis, which revealed no sign of multicollinearity. In fact, the VIF values corresponding to all the independent variables ranged from 1.05 to 1.47, very far below the acceptable upper bound of 10 ( Hair et al. , 2006 ).

The VIF values have been reported for each regression to demonstrate the model stability. Finally, both tests suggest that the regression estimations are not degraded by the presence of multicollinearity.

4.3 Regression analysis

The empirical results reveal that 32.5% of the variation for the level of IC-VD is explained by BE, CSR and control-related variables (cf. Table 9 ). As per Fisher's ( F ) statistics, equal to 2.8, the model's reliability is confirmed at a significant threshold lower than 0.01, and consequently, we tend to reject the null hypothesis, and assume that regression has significant potential to exist.

As expected, the empirical findings, even though with not definitive statistical values, in accordance with the exploratory nature of the research, show some evidence about supporting the research hypotheses ( H1 and H2 ), as further analyzed in detail. Thus, it can be concluded that the model is statistically significant and somehow fruitful for exploring the phenomenon under investigation.

4.3.1 Empirical evidence on BE impacting IC-VD ( H1 )

This hypothesis has been assumed to verify whether the ethical behavior of the companies under analysis positively influences the level of VD of IC: examination of the statistical tests (beta coefficient, t -test and p -value) shows that this variable has a positive and significant effect on the VD of IC. Indeed, the study of causal relationships shows that the coefficient associated with the link between BE and IC-VD is positive (0.485) and statistically significant (the value of the associated t is 1.99 with p  = 0.045), corroborating the hypothesis predictions ( H1 ).

It could be noted the existence of some similarity between these findings and those published by Wirth et al. (2016) . In addition, the results show that divergence of interests and information asymmetry are issues that hinder the success of the enterprise ( Rubinstein et al. , 2001 ); similarly, the rigidity of the corporate governance system could also prevent managers from disclosing information about IC.

The problems of moral hazard and adverse selection are obvious; nevertheless, the results found in this study show that the abovementioned risks are not constraints that prevent the company from disclosing information on IC. These results turn out to be in-line with those reported by Goel and Ramanathan (2014) .

As a further result, the company's commitment in the BE process is a trigger for improving VD of IC, corroborating the results found by Areal and Carvalho (2012) on a sample of the most ethical companies in the world, as these companies can have advantages over others because of three distinct effects, namely, culture, diversity and reputation. This attitude positively influences the level of IC-VD, suggesting for example that these companies may benefit from special protection in the event of a crisis.

4.3.2 Empirical evidence on CSR impacting IC-VD ( H2 )

This hypothesis has assumed that CSR has a positive influence on the level of VD of IC. The statistical tests analysis shows that this variable positively and statistically influences the VD of information.

The estimated coefficient of CSR_INDEX is positive and statistically significant (0.116, p  < 0.01), meaning that CSR influences the VD of the IC. This corroborates the hypothesis predictions ( H2 ).

These results turn out to be in-line with those reported by Branco and Rodrigues (2008) and Dias et al. (2017) . In this respect, CSR is positively interpreted by the various stakeholders via its effect on the decisions made by the company's organs and on the cognitive and mental patterns of the managers as well as on the legitimacy of the decisions ( Fontana et al. , 2019 ).

Likewise, these results align perfectly with the conclusions about the legitimacy of the company's managers ( Bond et al. , 2016 ). Thus, in some cases, and more specifically those based on the postulates of the agency theory, the manager who engages in specific activities related to CSR seems to reduce asymmetric information adopting these actions.

Indeed, the current findings support the view suggesting that VD of information about IC is sustained by CSR, in a mutual influence. Nevertheless, the commitment of the company in the activities of social responsibility, also when impacting IC-VD, is an asset that improves the confidence of investors in the business in the long run ( Saeidi et al. , 2015 ).

These results show the potential existence of a link between CSR and socially responsible disclosure and therefore, the transparency of information. Indeed, as shown by Su (2014) , engagement in social responsibility is a form of commitment to sustainable development and integration into VD that is needed for the most innovative companies.

In addition, as indicated by Garcia-Sanchez et al. (2016) , the company's commitment to social responsibility activities may affect the level of VD and promote financial transparency. Therefore, engagement in social responsibility activities could be dominated by a strategy of transparency and reliability, which may have significant impact on IC-VD.

4.3.3 Complementary considerations

Regarding the control variables, not all the related coefficients show the expected signs. The degree of innovation intensity (INVT) is positively and significantly associated ( p  < 0.1) with VD of IC: this finding suggests that the most innovative firms worldwide have adopted more VD practices about IC; in fact, innovative firms are often under greater pressure from the part of investors and financial analysts to disclose IC relating information.

In addition, the influence of pollutant sector (POL_SECTOR) turns out to be negatively and significantly correlated ( p  < 0.1) with the IC-VD, as expected. Similar confirmation can be found also as concerns the ethical level of the country (ETH_COUNTRY), positively associated with IC-VD.

However, the legal system relevant to each country (LEG_SYST) seems to be involved in controlling the corporate transparency, but this variable appears to be negatively correlated and statistically significant ( p  < 0.05) with IC-VD. Most probably, and differently from what expected, stricter legal system may stimulate in reinforcing potential conflicts of interest and information asymmetry.

Similarly, the percentage of women on boards of directors and the level of indebtedness present directions that are contrary to what expected. Globally speaking, these potential contradictions about the control variables estimations suggest caution and confirm the initial assumption about the exploratory nature of the research.

5. Theoretical and practical implications

The overall results of the research show some applicative potential. From a scientific point of view, essentially, the study helps highlighting the persistence of several connections associating corporate ethics and the extent of IC-VD, within a context characterized with a new tendency of the companies to be responsible in this respect. From a managerial point of view, furthermore, the current study can be useful to promote the implementation of BE and CSR-related strategies, enabling to protect majority or minority shareholders through an enhanced high-quality disclosure of IC.

Ethically, nevertheless, companies should allot greater engagement about the necessity and importance of transparent and reliable communication helping reflecting the firm's true image ( Mathuva et al. , 2017 ). In this respect, financial transparency constitutes a necessary condition for the effective promotion of a firm involved in ethical and socially responsible behaviors, and with this regard, several studies have acknowledged that global ethics, as engraved within the organizational culture, has a remarkable impact on the development of VD, and specifically on the various components of IC ( Luthan et al. , 2016 ).

For example, Rezaee et al. (2020) have stressed the promotion of ethical standards within the company to improve the quality of disclosed information. Indeed, it has been recently discovered that the companies envisaging to promote ethical behaviors are called upon to adopt a rather intensive disclosure policy regarding their IC characteristics: in other words, the quality of disclosed information about IC contributes to outline the social legitimacy ( Slack and Munz, 2016 ).

The quality of information disclosed about the company's IC as based on corporate ethics should necessarily help improving the confidence of the user of the information, while enhancing the firm's social legitimacy. In this context, Su (2014) has found that companies involved in stakeholders' ethical issues can gain a competitive advantage and higher performance attracting excellent employees, as concerns human capital, and enhancing the brand image, as concerns relational/social capital ( Pedrini, 2007 ).

The VD program is an organized process that abides by specific rules conforming to the company's social approach and the executive's behavior. In this respect, the agency theory helps only partially reflecting the reality of the company, as it outlooks other aspects of the business value, especially within the new context of the knowledge-based economy ( Long Kweh et al. , 2014 ).

More particularly, managers are representative agents that rationally respond to the firm's economic stakeholders and the control mechanisms/contractual motivations ( Bamber et al. , 2010 ). Yet, the enterprises' decision-makers are not interchangeable, and companies' actions are a reflection of the values, skills and cognitive competences of the human capital ( Rodriguez Perez and de Pablos, 2003 ); thus, as an organizational option, VD is rather potentially dependent on other considerations than on just the firm's environmental characteristics.

Moreover, the process of communication is complex, as it involves judgments and arbitrations that account for the various constraints relating to the environment of the company, and managers act on the basis of their personal interpretations of the strategic situations they encounter. These interpretations are therefore based also on the individual and organizational values that the manager enjoys ( López-González, 2019 ).

To this end, the theory of planned behavior has been considered as means whereby the disclosure decision about IC could be influenced by several attitudes about BE and CSR. Indeed, it helps understanding a certain behavior in individual's psychological processes, as subjected to various influences, particularly to ethical and social factors.

Like any other behavior, information disclosure about IC also rests on perceived opportunities as well as probable outcomes, as entirely based on managers' values and proper knowledge. Moreover, the generated and disseminated information highly depends on the capacity of the company's information systems not only in terms of quantity but also in terms of growth and ability to account for the needs issued by parties that are external to the company, along with other organisms' requests, ever more with respect to IC.

At even more practical level, the reached findings appear to provide effects for global regulators and policymakers intending to install social reporting standards. They may provide ground that institutional and/or cultural factors affect top management's social reporting behavior or ethical/social values more in general, influencing the quality of published information about IC.

6. Research limitations and future avenues

The study shows several constraints, and two seem quite relevant. First, the research sample corresponds to firms without homogeneous characteristics, especially with regard to their pertinence to two different legal systems (the selected sample encloses several countries with two distinct legal system assumptions), probably affecting the companies' behaviors in terms of VD (mandatorily for sure); for this reason, it seems very desirable to control more thoroughly the legal system's effect, for example, subdividing further research samples into subsamples on the basis of the legal system pertinence. Furthermore, it could be useful to implement a comparison of the investigated model between companies pertaining to civil law or common law, since the legal system directly influences the accounting system, and then, the quality of the financial information.

Second, this finding appears to demonstrate that VD depends highly on corporate culture rather than the respective countries' accounting culture: this should also highlight that IC-VD stands as a form of socially responsible behavior, or an outcome of ethical behavior regarding the entirety of partners, more than mere legal constraint. Thus, further research on cross-cultural management influence could be useful, along with longitudinal analyses that could support major reliability of the global research.

7. Conclusion

This study has explored the impact of BE and CSR on the process of IC-VD, concerning a sample including 83 of the most ethical companies in 2015 in the world. Among the research motivations, it is to highlight that very few empirical studies appear to demonstrate the persistence of a relationship between ethical and social approaches and IC-VD: attempting to fill such a noticeable gap, the current study has been conducted to investigate, empirically, the relationship binding both variables.

Findings support arguments that companies with ethical behaviors and socially responsible practices appear to be highly committed to VD about their IC. It could follow, therefore, that IC-VD can also be considered as a form of ethical and socially responsible behavior.

The results achieved in this research afford empirical evidence as to the extent of external disclosure practices in the global context, also considering ever more frequent interfirm networks, providing useful means for investors seeking profitable investment opportunities and for financial report users, acting as operative orientations of knowledge management and IC strategy ( Del Giudice and Maggioni, 2014 ). In this respect, an ethical behavior (structural capital), influenced by personal values (human capital), affects IC-VD and then, practically, also the relational/social capital of the organization.

Sample selection process