Business Policy and Strategy Questions

10 Business Ethics, Social Responsibility, and Environmental Sustainability

CHAPTER OBJECTIVES

After studying this chapter, you should be able to do the following:

• 1. Discuss the ethics of workplace romance.

• 2. Explain why concern for wildlife is a strategic issue for firms.

• 3. Explain why good ethics is good business in strategic management.

• 4. Explain how firms can best ensure that their code of business ethics guides decision making instead of being ignored.

• 5. Explain why whistle-blowing is important to encourage in a firm.

• 6. Discuss the nature and role of corporate sustainability reports.

• 7. Discuss specific ways that firms can be good stewards of the natural environment.

• 8. Explain ISO 14000 and 14001.

• 9. Discuss recent trends in bribery law.

ASSURANCE OF LEARNING EXERCISES

The following exercises are found at the end of this chapter.

• EXERCISE 10A How Does Your Municipality Compare to Others on Being Pollution-Safe?

• EXERCISE 10B Evaluate PepsiCo’s Global Code of Conduct

• EXERCISE 10C Compare and Evaluate Sustainability Reports

• EXERCISE 10D The Ethics of Spying on Competitors

• EXERCISE 10E Who Prepares a Sustainability Report?

Although the three sections of this chapter (business ethics, social responsibility, and sustainability) are distinct, the topics are quite related. Many people, for example, consider it unethical for a firm to be socially irresponsible. Social responsibility refers to actions an organization takes beyond what is legally required to protect or enhance the well-being of living things. Sustainability refers to the extent that an organization’s operations and actions protect, mend, and preserve rather than harm or destroy the natural environment. Polluting the environment, for example, is unethical, irresponsible, and in many cases illegal. Business ethics, social responsibility, and sustainability issues therefore are interrelated and impact all areas of the comprehensive strategic-management model, as illustrated in Figure 10-1 with white shading.

A sample company that adheres to the highest ethical standards and that uses excellent strategic planning and has an outstanding commitment to corporate sustainability is Apple.

Business Ethics

The Institute of Business Ethics (IBE) recently did a study titled “Does Business Ethics Pay?” and concluded that companies displaying a “clear commitment to ethical conduct” consistently outperform companies that do not display ethical conduct. Philippa Foster Black of the IBE stated: “Not only is ethical behavior in business life the right thing to do in principle, it pays off in financial returns.” Alan Simpson said: “If you have integrity, nothing else matters. If you don’t have integrity, nothing else matters.” Table 10-1 provides some results of the IBE study.

Apple Inc.: EXCELLENT STRATEGIC MANAGEMENT SHOWCASED

Apple’s stock has dropped lately, but the company was still the most profitable company in the world last quarter, posting $13.6 billion in net income. In Q4 of 2012, Apple’s iPhone 5 was the world’s best selling smartphone, followed in second place by the iPhone 4S.

Apple recently re-registered all its products with the U.S. government-backed voluntary registry of green electronics. Called Epeat, the registry was created in collaboration among government agencies, activist groups, and manufacturers. Epeat-certified computers and devices are designed with higher energy efficiency and for ease of use in recycling. San Francisco had released a letter informing all of the city’s 50 agencies that Apple’s laptops and desktops would “no longer qualify” for purchase unless Apple registered its products with Epeat. The federal government requires that its laptops and desktops be Epeat-certified.

Apple has its own recycling program that reportedly recycles about 70 percent of its iPhones. The iPhone5 has raised consumer awareness of sustainability issues when it comes to electronic devices because the person’s old device may be worth some good money and throwing a phone away is not the best option. “There’s a market for all models of iPhones,” said Andy Bates, Vice-President of the Colorado-based Wireless Alliance, a cell phone recycling company that has about 14,000 collection points nationwide and brings in up to 80,000 cell phones a month. “Your iPhone should be reused 99 percent of the time so that it doesn’t have a major impact on e-waste. It should be recycled at some point.” Verizon has an excellent wireless trade-in program in which customers can get their iPhone appraised and then valued via an electronic gift card. Verizon’s program has diverted more than 75 tons of e-waste from landfills.

Apple is engaged in a fierce competitive battle with Samsung and Amazon as the three technology giants go head to head in more digital areas. Amazon is now testing its own smartphone and is expected to soon launch a vastly new and improved Kindle Fire tablet aimed at taking over Apple’s iPad business. And Amazon recently purchased Yap and UpNext, two software companies that focus on mobile maps and voice recognition, both areas in which Apple wants to offer unique features for iPhone users. While Amazon tries to out-execute Apple, Apple at the same time is moving aggressively into Amazon areas. For example, Apple has developed new technology to build interactive e-books, called iBooks Author. Amazon’s Kindle App was recently the fifth-most downloaded free iPad app of all time, and Amazon sells thousands of iPods and iPhones on its website. For now, Apple still has 60 percent of the tablet business globally and Amazon has 60 percent of the digital-book business globally, but those numbers too are changing daily. Both Apple and Amazon have excellent strategic plans and are basically crushing thousands of other retailers from Best Buy and RadioShack to small mom-and-pops.

Source: Based on Ian Sherr, “Apple Goes Back to Green Registry,” Wall Street Journal (July 16, 2012): B3. Also, Jessica Vascellaro and Greg Bensinger, “Apple-Amazon War Heats Up,” Wall Street Journal (July 26, 2012): B3. Also, Lorraine Luk and Jessica Lessin, “Apple Tests Designs for New Television,” Wall Street Journal (December 13, 2012): B1.

FIGURE 10-1 A Comprehensive Strategic-Management Model

Source: Fred R. David, “How Companies Define Their Mission,” Long Range Planning 22, no. 3 (June 1988): 40.

Good ethics is good business. Bad ethics can derail even the best strategic plans. This chapter provides an overview of the importance of business ethics in strategic management. Business ethics can be defined as principles of conduct within organizations that guide decision making and behavior. Good business ethics is a prerequisite for good strategic management; good ethics is just good business!

TABLE 10-1 Seven Principles of Admirable Business Ethics

Source: Based on http://sbinformation.about.com/od/bestpractices/a/businessethics.htm.

A rising tide of consciousness about the importance of business ethics is sweeping the USA and the rest of the world. Strategists such as CEOs and business owners are the individuals primarily responsible for ensuring that high ethical principles are espoused and practiced in an organization. All strategy formulation, implementation, and evaluation decisions have ethical ramifications.

Newspapers and business magazines daily report legal and moral breaches of ethical conduct by both public and private organizations. Being unethical can be expensive. For example, some of the largest payouts for class-action legal fraud suits ever were against Enron ($7.16 billion), WorldCom ($6.16 billion), Cendant ($3.53 billion), Tyco ($2.98 billion), AOL Time Warner ($2.5 billion), Nortel Networks ($2.47 billion), and Royal Ahold ($1.09 billion).

Other business actions considered to be unethical include misleading advertising or labeling, causing environmental harm, poor product or service safety, padding expense accounts, insider trading, dumping banned or flawed products in foreign markets, not providing equal opportunities for women and minorities, overpricing, moving jobs overseas, and sexual harassment.

The Food and Drug Administration (FDA) recently warned both Avon Products and L’Oreal about misleading marketing of certain of its antiwrinkle products. The FDA’s position is that Avon and L’Oreal’s claims that discuss things like the stimulation of skin cells or reactivating the skin’s repair process are not true.

Yahoo!’s CEO Scott Thompson recently was forced to resign as a result of his “resume padding or inflating.” J.P. Morgan Chase CEO Jamie Dimon is currently under fire after the investment bank’s $2.3 billion trading blunder that has already cost a key deputy her job. Increasingly, executives’ and managers’ personal and professional decisions are placing them in the cross hairs of angry shareholders, disgruntled employees, and even their own boards of directors—making even the imperious CEO far more vulnerable to personal, public, and corporate missteps than ever before. “Certainly, anybody who is doing something that can be construed as unethical, immoral or greedy is being taken to task,” says Paul Dorf of Compensation Resources, a consultant to boards of directors.1

Social media and business-centric websites such as glassdoor.com and vault.com as well as disclosure mandates required under Sarbanes-Oxley are just several of many outlets that today quickly spread fact and rumor about the inside dealings of Corporate America, revealing ethical breaches and internal business practices that may never have surfaced before the Internet and a 24/7 media culture. “God forbid anyone who isn’t squeaky-clean these days or misrepresents their credentials at the top of the company,” says Wendy Patrick, who teaches business ethics at San Diego State University. “Anything embarrassing and you begin to question everything. If they aren’t making good decisions in their personal lives, it can bleed over to the way they run their companies.”

“The pressure and scrutiny on performance has shortened the tenure of the average CEO from about 10 years to about 5½ years since the 1990s,” says John Challenger of consultants Challenger Gray and Christmas. Challenger notes that 42 CEOs were forced out of their jobs in 2011 and that pace is up 5 percent in 2012.2

Code of Business Ethics

A new wave of ethics issues related to product safety, employee health, sexual harassment, AIDS in the workplace, smoking, acid rain, affirmative action, waste disposal, foreign business practices, cover-ups, takeover tactics, conflicts of interest, employee privacy, inappropriate gifts, and security of company records has accentuated the need for strategists to develop a clear code of business ethics. Internet fraud, hacking into company computers, spreading viruses, and identity theft are other unethical activities that plague every sector of online commerce.

Merely having a code of ethics, however, is not sufficient to ensure ethical business behavior. A code of ethics can be viewed as a public relations gimmick, a set of platitudes, or window dressing. To ensure that the code is read, understood, believed, and remembered, periodic ethics workshops are needed to sensitize people to workplace circumstances in which ethics issues may arise.3 If employees see examples of punishment for violating the code as well as rewards for upholding the code, this reinforces the importance of a firm’s code of ethics. The website www.ethicsweb.ca/codes provides guidelines on how to write an effective code of ethics.

An Ethics Culture

Reverend Billy Graham once said: “When wealth is lost, nothing is lost; when health is lost, something is lost; when character is lost, all is lost.” An ethics “culture” needs to permeate organizations! To help create an ethics culture, Citicorp developed a business ethics board game that is played by thousands of employees worldwide. Called “The Word Ethic,” this game asks players business ethics questions, such as how do you deal with a customer who offers you football tickets in exchange for a new, backdated IRA? Diana Robertson at the Wharton School of Business believes the game is effective because it is interactive. Many organizations have developed a code-of-conduct manual outlining ethical expectations and giving examples of situations that commonly arise in their businesses.

One reason strategists’ salaries are high is that they must take the moral risks of the firm. Strategists are responsible for developing, communicating, and enforcing the code of business ethics for their organizations. Although primary responsibility for ensuring ethical behavior rests with a firm’s strategists, an integral part of the responsibility of all managers is to provide ethics leadership by constant example and demonstration. Managers hold positions that enable them to influence and educate many people. This makes managers responsible for developing and implementing ethical decision making. Gellerman and Drucker, respectively, offer some good advice for managers:

• All managers risk giving too much because of what their companies demand from them. But the same superiors, who keep pressing you to do more, or to do it better, or faster, or less expensively, will turn on you should you cross that fuzzy line between right and wrong. They will blame you for exceeding instructions or for ignoring their warnings. The smartest managers already know that the best answer to the question “How far is too far?” is don’t try to find out.4

• A man (or woman) might know too little, perform poorly, lack judgment and ability, and yet not do too much damage as a manager. But if that person lacks character and integrity—no matter how knowledgeable, how brilliant, how successful—he destroys. He destroys people, the most valuable resource of the enterprise. He destroys spirit. And he destroys performance. This is particularly true of the people at the head of an enterprise because the spirit of an organization is created from the top. If an organization is great in spirit, it is because the spirit of its top people is great. If it decays, it does so because the top rots. As the proverb has it, “Trees die from the top.” No one should ever become a strategist unless he or she is willing to have his or her character serve as the model for subordinates.5

No society anywhere in the world can compete long or successfully with people stealing from one another or not trusting one another, with every bit of information requiring notarized confirmation, with every disagreement ending up in litigation, or with government having to regulate businesses to keep them honest. Being unethical is a recipe for headaches, inefficiency, and waste. History has proven that the greater the trust and confidence of people in the ethics of an institution or society, the greater its economic strength. Business relationships are built mostly on mutual trust and reputation. Short-term decisions based on greed and questionable ethics will preclude the necessary self-respect to gain the trust of others. More and more firms believe that ethics training and an ethics culture create strategic advantage. Max Killan said: “If business is not based on ethical grounds, it is of no benefit to society, and will, like all other unethical combinations, pass into oblivion.”

Whistle-Blowing

Harris Corporation and other firms warn managers and employees that failing to report an ethical violation by others could bring discharge. The Securities and Exchange Commission (SEC) recently strengthened its whistle-blowing policies, virtually mandating that anyone seeing unethical activity report such behavior. Whistle-blowing refers to policies that require employees to report any unethical violations they discover or see in the firm.

Whistle-blowers in the corporate world receive up to 25 percent of the proceeds of legal proceedings against firms for wrongdoing. Whistle-blower payouts are becoming more and more common. In late 2012, Brad Birkenfeld, the former Zurich-based UBS AG banker who told the Internal Revenue Service (IRS) how the bank helped thousands of Americans evade taxes, received an IRS award of $104 million, perhaps the largest payout ever for an individual U.S. whistle-blower. The largest bank in Switzerland, UBS’s Birkenfeld told IRS agents how UBS bankers came to the USA to woo rich Americans, managed $20 billion of their assets, and helped them cheat the IRS. He pleaded guilty to conspiracy in 2008, a year after reporting the bank’s conduct to the Justice Department, U.S. Senate, IRS, and Securities and Exchange Commission. Birkenfeld went briefly to prison for his involvement in the bank scheme, but UBS avoided prosecution in the USA by agreeing to pay $780 million, disclosing data on more than 250 Swiss accounts, and admitting it helped foster tax evasion. It later agreed to hand over data on another 4,450 accounts. Since Birkenfeld came forward, at least 33,000 Americans have voluntarily disclosed offshore accounts to the IRS, generating more than $5 billion.

In October 2012, the IRS in a separate case paid another whistle-blower $38 million which was between 15 and 30 percent of the taxes recovered from another large corporation. The name of this company and the whistle-blower remain completely confidential, proving that the IRS can reward corporate whistle-blowers without ever revealing their identity. Pfizer paid out $2.3 billion in a whistle-blower settlement case and Eli Lilly paid out $1.4 billion. Most firms have internal whistle-blowing incentives and policies and try to keep such matters internal, but recent laws and court cases are shifting disclosure and settlements outside the firm.6

An accountant recently tipped off the IRS that his employer was skimping on taxes and received $4.5 million in the first IRS whistle-blower award. The accountant’s tip netted the IRS $20 million in taxes and interest from the errant financial-services firm. The award represented a 22 percent cut of the taxes recovered. The IRS program, designed to encourage tips in large-scale cases, mandates awards of 15 to 30 percent of the amount recouped. “It’s a win-win for both the government and taxpayers. These are dollars that are being returned to the Treasury that otherwise wouldn’t be,” said lawyer Eric Young.

Ethics training programs should include messages from the CEO or owner of the business emphasizing ethical business practices, the development and discussion of codes of ethics, and procedures for discussing and reporting unethical behavior. Firms can align ethical and strategic decision making by incorporating ethical considerations into long-term planning, by integrating ethical decision making into the performance appraisal process, by encouraging whistle-blowing or the reporting of unethical practices, and by monitoring departmental and corporate performance regarding ethical issues.

Bribes

Bribery is defined by Black’s Law Dictionary as the offering, giving, receiving, or soliciting of any item of value to influence the actions of an official or other person in discharge of a public or legal duty. A bribe is a gift bestowed to influence a recipient’s conduct. The gift may be any money, good, right in action, property, preferment, privilege, emolument, object of value, advantage, or merely a promise or undertaking to induce or influence the action, vote, or influence of a person in an official or public capacity. Bribery is a crime in most countries of the world, including the United States.7

The U.S. Foreign Corrupt Practices Act (FCPA) that governs bribery is being enforced more strictly. This act and a new provision in the Dodd-Frank financial-regulation law allows company employees or others who bring cases of financial fraud, such as bribery, to the government’s attention to receive up to 30 percent of any sum recovered. Bribery suits against a company also expose the firm to shareholder lawsuits.

In 2012, Pfizer paid $60.2 million to settle a federal investigation into bribery overseas whereby the firm was accused of bribing doctors, hospitals administrators, and regulators in several countries in Europe and Asia to prescribe their medicines. Pfizer allegedly gave doctors in China cellphones and tea sets, while plying Croatian doctors with cash and international trips, and then sought to hide the bribery by recording the payments in accounting records as legitimate expenses.

Avon Products is currently being investigated for bribery charges related to their winning the first direct-sales license awarded by China to a foreign company. Even former Avon CEO Andrea Jung is being interrogated through her attorney Theodore Wells Jr. Avon is also being examined for spending millions of dollars in Brazil and France to consultants hired to assist the company with tax bills in those countries.

A recent (11-15-12) Wall Street Journal article titled “Bribery Law Dos and Don’ts” provides a synopsis of the recent 130-page document released by the U.S. Justice Department and the SEC to respond to complaints from companies that ambiguity in the FCPA has forced them to abandon business in high-risk countries and spend millions of dollars investigating themselves.8 Numerous examples of bribery are given, such as “1) providing a $12,000 birthday trip for a government official from Mexico that incudes visits to wineries and museums” or 2) $10,000 spent on a government official for drinks, dinners, and entertainment.”

In mid-2013, the SEC began investigating electronics giant Panasonic for bribery within its subsidiary, Avionics, based in Lake Forest, California. From 2009 to mid-2013, the U.S. Justice Department filed 110 bribery cases and the SEC filed 80 bribery cases.

The United Kingdom’s new Bribery Law forbids any company doing any business in the United Kingdom from bribing foreign or domestic officials to gain competitive advantage. The British law is more stringent even than the similar U.S. FCPA. The British Bribery Law carries a maximum 10-year prison sentence for those convicted of bribery. The law stipulates that “failure to prevent bribery” is an offense and stipulates that facilitation payments, or payments to gain access, are not a valid defense to prevent bribery.

Great Britain’s Bribery Act applies even to bribes between private businesspersons, and if the individual who makes the payment does not realize the transaction was a bribe, he or she is still liable. The new bribery law is being enforced by Britain’s Serious Fraud Office (SFO) and boosts the maximum penalty for bribery to 10 years in prison from 7, and sets no limits on fines. More and more nations are taking a tougher stance against corruption, and companies worldwide are installing elaborate programs to avoid running afoul of the FCPA or the SFO.

Paying bribes is considered both illegal and unethical in the USA, but in some foreign countries, paying bribes and kickbacks is acceptable. Tipping is even considered bribery in some countries. Important antibribery and extortion initiatives are advocated by many organizations, including the World Bank, the International Monetary Fund, the European Union (EU), the Council of Europe, the Organization of American States, the Pacific Basin Economic Council, the Global Coalition for Africa, and the United Nations.

The U.S. Justice Department recently increased its prosecutions of alleged acts of foreign bribery. Businesses have to be much more careful these days. For years, taking business associates to lavish dinners and giving them expensive holiday gifts and even outright cash may have been expected in many countries, such as South Korea and China, but there is now stepped-up enforcement of bribery laws.

The SEC and Justice Department are investigating several pharmaceutical companies, including Merck, AstraZeneca PLC, Bristol-Myers Squibb, and GlaxoSmithKline PLC, for allegedly paying bribes in certain foreign countries to boost sales and speed approvals. Four types of violations are being reviewed: bribing government-employed doctors to purchase drugs; paying company sales agents commissions that are passed along to government doctors; paying hospital committees to approve drug purchases; and paying regulators to win drug approvals. Johnson & Johnson recently paid $70 million to settle allegations that it paid bribes to doctors in Greece, Poland, and Romania to use their surgical implants and to prescribe its drugs. Pfizer paid $60 million to resolve similar probes to win business overseas.

The SEC and the Justice Department are also investigating Hewlett-Packard for allegedly paying Russian government officials bribes to secure a $44.5 million information technology network. Similarly, the engineering giant Siemens AG is being investigated on bribery charges related to a $27 million traffic-control system installed in Moscow, Russia.

The U.S. FCPA prohibits U.S. companies from paying or offering to pay foreign government officials or employees of state companies to gain a business advantage. Under the U.S. Dodd-Frank Act, passed in 2010, employees are encouraged to report possible acts of bribery and whistle-blowers are rewarded between 10 percent and 30 percent of any financial sanctions against companies.

Workplace Romance

Director of the U.S. Central Intelligence Agency (CIA), Gen. David Petraeus abruptly resigned in November 2012, citing workplace romance as the reason. Petraeus wrote in the letter to his staff that he was going to the White House to ask President Obama “for personal reasons” to resign. “After being married for more than 37 years, I showed extremely poor judgment by engaging in an extramarital affair,” Petraeus wrote in his letter. “Such behavior is unacceptable, both as a husband and as a leader of an organization such as ours.” Petraeus’s wife is Holly Petraeus whom he met when he was a cadet at the U.S. Military Academy at West Point.

Just hours after Petraeus resigned, the CEO of Lockheed Martin Corp., Chris Kubasik, was fired for having a “close personal relationship” with a subordinate. The company said the CEO’s “improper conduct” violated the company’s code of ethics. Kubasik, who is married, had his relationship revealed by a whistle-blower, at which point Lockheed hired external investigators to examine the allegation. Lockheed manufactures numerous military products, so the firm is perhaps more prudent than most in monitoring relationships because spying is a concern within defense firms.

Workplace romance is an intimate relationship between two truly consenting employees, as opposed to sexual harassment, which the Equal Employment Opportunity Commission (EEOC) defines broadly as unwelcome sexual advances, requests for sexual favors, and other verbal or physical conduct of a sexual nature. Sexual harassment (and discrimination) is illegal, unethical, and detrimental to any organization and can result in expensive lawsuits, lower morale, and reduced productivity.

Workplace romance between two consenting employees simply happens, so the question is generally not whether to allow the practice, and or even how to prevent it, but rather how best to manage the phenomena. An organization probably should not strictly forbid workplace romance because such a policy could be construed as an invasion of privacy, overbearing, or unnecessary. Some romances actually improve work performance, adding a dynamism and energy that translates into enhanced morale, communication, creativity, and productivity.9

However, it is important to note that workplace romance can be detrimental to workplace morale and productivity, for a number of reasons that include:

• 1. Favoritism complaints can arise.

• 2. Confidentiality of records can be breached.

• 3. Reduced quality and quantity of work can become a problem.

• 4. Personal arguments can lead to work arguments.

• 5. Whispering secrets can lead to tensions and hostilities among coworkers.

• 6. Sexual harassment (or discrimination) charges may ensue, either by the involved female or a third party.

• 7. Conflicts of interest can arise, especially when well being of the partner trumps well-being of the company.

In some states, such as California, managers can be held personally liable for damages that arise from workplace romance. Organizations should establish guidelines or policies that address workplace romance, for at least six reasons:

• 1. Guidelines can enable the firm to better defend itself against and avoid sexual harassment or discrimination charges.

• 2. Guidelines can specify reasons (such as the seven listed previously) why workplace romance may not be a good idea.

• 3. Guidelines can specify resultant penalties for romancing partners if problems arise.

• 4. Guidelines can promote a professional and fair work atmosphere.

• 5. Guidelines can help assure compliance with federal, state, and local laws and recent court cases.

• 6. Lack of any guidelines sends a lackadaisical message throughout the firm.

Workplace romance guidelines should apply to all employees at all levels of the firm and should specify certain situations in which affairs are especially discouraged, such as supervisor and subordinate. Company guidelines or policies in general should discourage workplace romance because “the downside risks generally exceed the upside benefits” for the firm. Best Buy CEO Brian Dunn recently resigned when directors learned of his inappropriate relationship with a young subordinate, a violation of that company’s code of ethics. Based in Fremont, California, IGate Corp., fired its CEO, Phaneesh Murthy, in May 2013 for allegedly failing to report a work-place romance relationship that turned into a sexual harassment issue with a subordinate.

Flirting is a step down from workplace romance, but a new full-page Wall Street Journal article titled “The New Rules of Flirting” reveal the do’s and don’ts of flirting.10 Flirting is defined by researchers as “romantic behavior that is ambiguous and goal oriented,” or said differently, “ambiguous behavior with potential sexual or romantic overtones that is goal-oriented.” A few flirting rules given in the article are:

• 1. Do not flirt with someone you know is looking for a relationship if you are not interested in a new relationship.

• 2. Do flirt within a relationship that you want to strengthen.

• 3. Do not flirt to make your partner jealous because this is manipulative behavior.

• 4. Flirting between power differences, such as boss and employee or professor and student, usually leads to trouble, as many defendants in sexual-harassment complaints know.

• 5. Do not make physical contact with the person you are flirting with, unless it is within a desired relationship.

Among colleges and universities, the federal Office of Civil Rights (OCR) has stepped up its investigation of sexual harassment cases brought forward by female students against professors. Yale University has been in the news in this regard as well as numerous other institutions currently being investigated. At no charge to the student, the OCR will investigate a female student’s claim if evidence is compelling.

A Wall Street Journal article recapped U.S. standards regarding boss and subordinate love affairs at work.11 Only 5 percent of all firms sampled had no restrictions on such relationships; 80 percent of firms have policies that prohibit relationships between a supervisor and a subordinate. Only 4 percent of firms strictly prohibited such relationships, but 39 percent of firms had policies that required individuals to inform their supervisors whenever a romantic relationship begins with a coworker. Only 24 percent of firms required the two persons to be in different departments.

In Europe, romantic relationships at work are largely viewed as private matters and most firms have no policies on the practice. However, European firms are increasingly adopting explicit, U.S.-style sexual harassment laws. The U.S. military strictly bans officers from dating or having sexual relationships with enlistees. At the World Bank, sexual relations between a supervisor and an employee are considered “a de facto conflict of interest which must be resolved to avoid favoritism.” World Bank president Paul Wolfowitz recently was forced to resign as a result of a relationship he had with a bank staff person.

A recent Bloomberg Businessweek article reports that in the sluggish job market, employees are filing sexual harassment complaints as a way to further their own job security. Many of these filings are increasingly third-party individuals not even directly involved in the relationship but alleging their own job was impacted. Largely the result of the rise of third-party discrimination claims, the EEOC recovers about $500 million on behalf of office romance victims.12

Social Responsibility

Fortune annually lists the most admired and least admired companies globally on social responsibility. Fortune’s 2012 top three most admired socially responsible companies are GDF Suez, Marquard & Bahls, and RWE. The top three least admired companies are China Railway Group, China Railway Construction, and China State Construction Engineering.13 Chinese firms dominate the least admired list.

Walmart was socially responsible in the wake of the earthquake and tsunami that devastated Japan in 2011. Following the catastrophe, Walmart quickly mobilized a local relief effort to deliver supplies such as water and flashlights to survivors. Walmart has a history of helping immensely in times of crisis—the retailer was also able to get supplies to people who needed them following Hurricane Katrina.

Some strategists agree with Ralph Nader, who proclaims that organizations have tremendous social obligations. Nader points out, for example, that ExxonMobil has more assets than most countries, and because of this, such firms have an obligation to help society cure its many ills. Other people, however, agree with the economist Milton Friedman, who asserts that organizations have no obligation to do any more for society than is legally required. Friedman may contend that it is irresponsible for a firm to give monies to charity.

Do you agree more with Nader or Friedman? Surely we can all agree that the first social responsibility of any business must be to make enough profit to cover the costs of the future because if this is not achieved, no other social responsibility can be met. Indeed, no social need can be met by the firm if the firm fails.

Strategists should examine social problems in terms of potential costs and benefits to the firm and focus on social issues that could benefit the firm most. For example, should a firm avoid laying off employees so as to protect the employees’ livelihood, when that decision may force the firm to liquidate?

Social Policy

The term social policy embraces managerial philosophy and thinking at the highest level of the firm, which is why the topic is covered in this textbook. Social policy concerns what responsibilities the firm has to employees, consumers, environmentalists, minorities, communities, shareholders, and other groups. After decades of debate, many firms still struggle to determine appropriate social policies.

The impact of society on business and vice versa is becoming more pronounced each year. Corporate social policy should be designed and articulated during strategy formulation, set and administered during strategy implementation, and reaffirmed or changed during strategy evaluation.14

Firms should strive to engage in social activities that have economic benefits. Merck & Co. once developed the drug ivermectin for treating river blindness, a disease caused by a fly-borne parasitic worm endemic in poor tropical areas of Africa, the Middle East, and Latin America. In an unprecedented gesture that reflected its corporate commitment to social responsibility, Merck then made ivermectin available at no cost to medical personnel throughout the world. Merck’s action highlights the dilemma of orphan drugs, which offer pharmaceutical companies no economic incentive for profitable development and distribution. Merck did however garner substantial goodwill among its stakeholders for its actions.

Social Policies on Retirement

Some countries around the world are facing severe workforce shortages associated with their aging populations. The percentage of persons age 65 or older exceeds 20 percent in Japan, Italy, and Germany—and will reach 20 percent in 2018 in France. In 2036, the percentage of persons age 65 or older will reach 20 percent in the USA and China. Unlike the USA, Japan is reluctant to rely on large-scale immigration to bolster its workforce. Instead, Japan provides incentives for its elderly to work until ages 65 to 75. Western European countries are doing the opposite, providing incentives for its elderly to retire at ages 55 to 60. The International Labor Organization says 71 percent of Japanese men ages 60 to 64 work, compared to 57 percent of American men and just 17 percent of French men in the same age group.

Sachiko Ichioka, a typical 67-year-old man in Japan, says, “I want to work as long as I’m healthy. The extra money means I can go on trips, and I’m not a burden on my children.” Better diet and health care have raised Japan’s life expectancy now to 82, the highest in the world. Japanese women are having on average only 1.28 children compared to 2.04 in the USA. Keeping the elderly at work, coupled with reversing the old-fashioned trend of keeping women at home, are Japan’s two key remedies for sustaining its workforce in factories and businesses. This prescription for dealing with problems associated with an aging society should be considered by many countries around the world. The Japanese government is phasing in a shift from age 60 to age 65 as the date when a person may begin receiving a pension, and premiums paid by Japanese employees are rising while payouts are falling. Unlike the USA, Japan has no law against discrimination based on age.

Worker productivity increases in Japan are not able to offset declines in number of workers, thus resulting in a decline in overall economic production. Like many countries, Japan does not view immigration as a good way to solve this problem. Japan’s shrinking workforce has become such a concern that the government just recently allowed an unspecified number of Indonesian and Filipino nurses and caregivers to work in Japan for two years. The number of working-age Japanese—those between ages 15 and 64—is projected to shrink to 70 million by 2030. Using foreign workers is known as gaikokujin roudousha in Japanese. Many Filipinos have recently been hired now to work in agriculture and factories throughout Japan.

Sources: Based on http://money.cnn.com/magazines/fortune/most-admired/2012/best_worst/best4.html and http://money.cnn.com/magazines/fortune/most-admired/2012/best_worst/worst4.html.

Fortune’s best and worst companies globally in regard to being socially responsible in 2012 are listed in Table 10-2. Note that the 10 worst companies are all based in China.

In October of every year, three world renowned corporate sustainability rankings are published: (1) the Dow Jones Sustainability Index (DJSI), (2) the Carbon Disclosure Project, and (3) Newsweek’s “Green” rankings. Regarding the DJSI, some notable companies that were added to the DJSI 2012 Index for being especially sustainable were Microsoft, Target, Hewlett-Packard, and the Canadian National Railway Company. Some notable companies that were kicked out of the 2012 DJSI sustainability rankings were GlaxoSmithKline PLC, Duke Energy, IBM, United Technologies, and Dell.

Launched in 1999, DJSI annually reveals the best corporations in the world in various industries in terms of sustainability. A few of the number-1 (best) companies in the world on sustainability in the DJSI 2012 in their respective industries were: BMW, Unilever NV, Roche Holding AG, Siemens AG, Alcatel-Lucent SA, and Air France-KLM.

The strategies of both companies and countries are increasingly scrutinized and evaluated from a natural environment perspective. Companies such as Walmart now monitor not only the price its vendors offer for products, but also how those products are made in terms of environmental practices, as well as safety and infrastructure soundness particularly of Southeast Asia factories. A growing number of business schools offer separate courses and even a concentration in environmental management.

Businesses must not exploit and decimate the natural environment. Mark Starik at George Washington University says, “Halting and reversing worldwide ecological destruction and deterioration is a strategic issue that needs immediate and substantive attention by all businesses and managers. According to the International Standards Organization (ISO), the word environment is defined as “surroundings in which an organization operates, including air, water, land, natural resources, flora, fauna, humans, and their interrelation.” This chapter illustrates how many firms are gaining competitive advantage by being good stewards of the natural environment.

Employees, consumers, governments, and society are especially resentful of firms that harm rather than protect the natural environment. Conversely people today are especially appreciative of firms that conduct operations in a way that mends, conserves, and preserves the natural environment. Consumer interest in businesses preserving nature’s ecological balance and fostering a clean, healthy environment is high.

No business wants a reputation as being a polluter. A bad sustainability record will hurt the firm in the market, jeopardize its standing in the community, and invite scrutiny by regulators, investors, and environmentalists. Governments increasingly require businesses to behave responsibly and require, for example, that businesses publicly report the pollutants and wastes their facilities produce.

In terms of megawatts of wind power generated by various states in the United States, Iowa’s 2,791 recently overtook California’s 2,517, but Texas’s 7,118 megawatts dwarfs all other states. Minnesota also is making substantial progress in wind power generation. New Jersey recently outfitted 200,000 utility poles with solar panels, which made it the nation’s second-largest producer of solar energy behind California. New Jersey is also adding solar panels to corporate rooftops. The state’s $514 million solar program doubled its solar capacity to 160 megawatts in 2013. The state’s goal is to obtain 3 percent of its electricity from the sun and 12 percent from offshore wind by 2020.

A sustainability report reveals a firm’s operations impact the natural environment. This document discloses to shareholders information about the firm’s labor practices, product sourcing, energy efficiency, environmental impact, and business ethics practices.

It is good business for a company to provide a sustainability report annually to the public. With 60,000 suppliers and more than $350 billion in annual sales, Walmart works with its suppliers to make sure they provide such reports. Many firms use the Walmart sustainability report as a benchmark, guideline, and model to follow in preparing their own report.

The Global Reporting Initiative recently issued a set of detailed reporting guidelines specifying what information should go into sustainability reports. The proxy advisory firm Institutional Shareholder Services reports that an increasing number of shareholder groups are pushing firms to provide sustainability information annually. Two companies that released sustainability reports for the first time in 2012 were Hyatt Hotels & Resorts and Las Vegas Sands Corporation. Rival firm Hilton Worldwide does not have a stand-alone sustainability report, but Marriott and Wyndham Worldwide do release annual sustainability reports and of late revealed excellent reductions in energy, water, waste, and carbon dioxide emissions.

Walmart encourages and expects its 1.35 million U.S. employees to adopt what it calls Personal Sustainability Projects, which include such measures as organizing weight-loss or smoking-cessation support groups, biking to work, or starting recycling programs. Employee wellness can be a part of sustainability.

Walmart is installing solar panels on its stores in California and Hawaii, providing as much as 30 percent of the power in some stores. It may go national with solar power if this test works well. Also moving to solar energy is department-store chain Kohl’s Corp., which is converting 64 of its 80 California stores to use solar power. There are big subsidies for solar installations in some states.

Home Depot, the world’s second largest retailer behind Walmart, recently more than doubled its offering of environmentally friendly products such as all-natural insect repellent. Home Depot has made it much easier for consumers to find its organic products by using special labels similar to Timberland’s (the outdoor company) Green Index tags.

Managers and employees of firms must be careful not to become scapegoats blamed for company environmental wrongdoings. Harming the natural environment can be unethical, illegal, and costly. When organizations today face criminal charges for polluting the environment, they increasingly turn on their managers and employees to win leniency. Employee firings and demotions are becoming common in pollution-related legal suits. Managers were fired at Darling International, Inc., and Niagara Mohawk Power Corporation for being indirectly responsible for their firms polluting water. Managers and employees today must be careful not to ignore, conceal, or disregard a pollution problem, or they may find themselves personally liable.

A few years ago, firms could get away with placing “green” terminology on their products and labels using such terms as organic, green, safe, earth-friendly, nontoxic, or natural because there were no legal or generally accepted definitions. Today, however, these terms carry much more specific connotations and expectations. Uniform standards defining environmentally responsible company actions are rapidly being incorporated into the legal landscape. It has become more and more difficult for firms to make “green” claims when their actions are not substantive, comprehensive, or even true. Lack of standards once made consumers cynical about corporate environmental claims, but those claims today are increasingly being challenged in courts. Joel Makower says, “One of the main reasons to truly become a green firm is for your employees. They’re the first group that needs assurance than any claims you make hold water.”15

Around the world, political and corporate leaders now realize that the “business green” topic will not go away and in fact is gaining ground rapidly. Strategically, companies more than ever must demonstrate to their customers and stakeholders that their green efforts are substantive and set the firm apart from competitors. A firm’s performance facts and figures must back up their rhetoric and be consistent with sustainability standards.

The ecological challenge facing all organizations requires managers to formulate strategies that preserve and conserve natural resources and control pollution. Special natural environment issues include ozone depletion, global warming, depletion of rain forests, destruction of animal habitats, protecting endangered species, developing biodegradable products and packages, waste management, clean air, clean water, erosion, destruction of natural resources, and pollution control. Firms increasingly are developing green product lines that are biodegradable or are made from recycled products. Green products sell well.

Managing as if “health of the planet” matters requires an understanding of how international trade, competitiveness, and global resources are connected. Managing environmental affairs can no longer be simply a technical function performed by specialists in a firm; more emphasis must be placed on developing an environmental perspective among all employees and managers of the firm. Many companies are moving environmental affairs from the staff side of the organization to the line side, thus making the corporate environmental group report directly to the chief operating officer. Firms that manage environmental affairs will enhance relations with consumers, regulators, vendors, and other industry players, substantially improving their prospects of success.

Environmental strategies could include developing or acquiring green businesses, divesting or altering environment-damaging businesses, striving to become a low-cost producer through waste minimization and energy conservation, and pursuing a differentiation strategy through green-product features. In addition, firms could include an environmental representative on their board of directors, conduct regular envrionmental audits, implement bonuses for favorable environmental results, become involved in environmental issues and programs, incorporate environmental values in mission statements, establish environmentally oriented objectives, acquire environmental skills, and provide environmental training programs for company employees and managers.

Preserving the environment should be a permanent part of doing business for the following reasons:

• 1. Consumer demand for environmentally safe products and packages is high.

• 2. Public opinion demanding that firms conduct business in ways that preserve the natural environment is strong.

• 3. Environmental advocacy groups now have more than 20 million Americans as members.

• 4. Federal and state environmental regulations are changing rapidly and becoming more complex.

• 5. More lenders are examining the environmental liabilities of businesses seeking loans.

• 6. Many consumers, suppliers, distributors, and investors shun doing business with environmentally weak firms.

• 7. Liability suits and fines against firms having environmental problems are on the rise.

More firms are becoming environmentally proactive—doing more than the bare minimum to develop and implement strategies that preserve the environment. The old undesirable alternative of being environmentally reactive—changing practices only when forced to do so by law or consumer pressure—more often today leads to high cleanup costs, liability suits, reduced market share, reduced customer loyalty, and higher medical costs. In contrast, a proactive policy views environmental pressures as opportunities and includes such actions as developing green products and packages, conserving energy, reducing waste, recycling, and creating a corporate culture that is environmentally sensitive.

Based in Geneva, Switzerland, the International Organization for Standardization (ISO) is a network of the national standards institutes of 147 countries, with one member per country. ISO is the world’s largest developer of sustainability standards. Widely accepted all over the world, ISO standards are voluntary because ISO has no legal authority to enforce their implementation. ISO itself does not regulate or legislate.

Governmental agencies in various countries, such as the Environmental Protection Agency (EPA) in the USA, have adopted ISO standards as part of their regulatory framework, and the standards are the basis of much legislation. Adoptions are sovereign decisions by the regulatory authorities, governments, or companies concerned.

ISO 14000 refers to a series of voluntary standards in the environmental field. The ISO 14000 family of standards concerns the extent to which a firm minimizes harmful effects on the environment caused by its activities and continually monitors and improves its own environmental performance. Included in the ISO 14000 series are the ISO 14001 standards in fields such as environmental auditing, environmental performance evaluation, environmental labeling, and life-cycle assessment.

ISO 14001 is a set of standards adopted by thousands of firms worldwide to certify to their constituencies that they are conducting business in an environmentally friendly manner. ISO 14001 standards offer a universal technical standard for environmental compliance that more and more firms are requiring not only of themselves but also of their suppliers and distributors.

The ISO 14001 standard requires that a community or organization put in place and implement a series of practices and procedures that, when taken together, result in an environmental management system (EMS). ISO 14001 is not a technical standard and as such does not in any way replace technical requirements embodied in statutes or regulations. It also does not set prescribed standards of performance for organizations. Not being certified with ISO 14001 can be a strategic disadvantage for towns, counties, and companies because people today expect organizations to minimize or, even better, to eliminate environmental harm they cause.16 The major requirements of an EMS under ISO 14001 include the following:

• • Show commitments to prevention of pollution, continual improvement in overall environmental performance, and compliance with all applicable statutory and regulatory requirements.

• • Identify all aspects of the organization’s activities, products, and services that could have a significant impact on the environment, including those that are not regulated.

• • Set performance objectives and targets for the management system that link back to three policies: (1) prevention of pollution, (2) continual improvement, and (3) compliance.

• • Meet environmental objectives that include training employees, establishing work instructions and practices, and establishing the actual metrics by which the objectives and targets will be measured.

• • Conduct an audit operation of the EMS.

• • Take corrective actions when deviations from the EMS occur.

In mid-2012, South Korea announced plans to resume whaling despite a 1986 moratorium on commercial whaling. Many countries are upset at these plans, including Australia where the Prime Minister Julia Gillard said: “We are completely opposed to whaling; there’s no excuse for scientific whaling.” Only a few countries, such as Norway, Japan, and Russia, favor and engage in commercial whaling.

Fairmont Hotels & Resorts in 2012 instituted a policy removing shark fin soup from its menu, following the lead of Shangri-La Hotels & Resorts. Even the Chinese government has recently stopped serving shark fin soup at most official banquets. Studies reveal that many shark species have been reduced 90 percent in recent decades, largely by overfishing for shark fins. The demand for shark fin soup in Asia is arguably the major cause of the alarming decline of blue sharks off the British coast and much of the Atlantic. Scientists from the United Kingdom and Portugal recently tracked sharks and confirm that sharks are being deliberately targeted by fishermen with long-line fishing that can stretch as long as 100 km. The fins are cut off and the bodies discarded onsite. Blue sharks are the most frequently caught shark species, with drastic population declines. Many shark species are now classified as “near-threatened” on the International Union for Conservation of Nature (IUCN) Red List.17

The European Parliament in late 2012 voted with an overwhelming 566–47 margin to force all boats in EU waters and EU-registered boats around the world to land sharks with their fins attached and prove the animal had not been thrown back. Uta Bellion of the Pew Environment Group said: “the parliament’s vote is a major milestone in ending the wasteful practice of shark finning.” EU fisheries chief Maria Damanaki said the law would “ease control and help us eradicate shark finning,” which she called cruel to the animals and a vast waste of resources. Sharks are vulnerable to over-exploitation because they mature late and give birth to small numbers of young at a time. Shark fins are in high demand in Asia for soup and alleged cures. Damanaki said some 75 million sharks a year are killed for the use of their fins only, with the EU being the biggest exporter. As a result, the hammerhead shark is as good as extinct in the Mediterranean Sea. Damanaki has compared shark finning to killing elephants only for their tusks.

Arctic sea ice shrank to a record low of 1.32 million square miles (3.41 million square km) in late 2012 according to the National Oceanic and Atmospheric Agency. However, polar bears’ designation as a threatened species is being challenged in a U.S. appeals court. A decision is expected in 2013. Alaska and oil companies have argued that Endangered Species Act protections for polar bears diminish opportunities for Alaska energy development. The state has said in its appeals court filing that bears have survived previous warming periods and most populations have grown or remained stable despite shrinkage of ice. The case is Safari Club International et al v. Ken Salazar et al and Center for Biological Diversity et al, No. 11-5219.

According to the Convention on the International Trade in Endangered Species (CITES), more than 25,000 elephants are killed each year for their ivory—even though international trade in ivory has been outlawed since 1989.

A recent Wall Street Journal article titled “America Gone Wild” talks about how wildlife populations in the USA have experienced an “astonishing resurgence.”18 A drawback of the resurgence is that the total cost of wildlife damage to U.S. crops, landscaping, and infrastructure now exceeds $28 billion a year, including $1.5 billion from deer-vehicle crashes alone.

The Solar Energy Industries Association reported in late 2012 that the USA is on pace to install as much solar power in 2012 as it did in the prior eleven put together, at least 2,500 megawatts, the equivalent of more than two nuclear-power plants. GTM Research says the U.S. solar-power industry grew 71 percent in 2012 and will grow 20 to 40 percent annually through 2016. To cut greenhouse-gas emissions and fight climate change, states such as California have created subsidies for solar power developers and requirements for utilities to buy solar power. China supplies nearly half of the solar panels used globally but two leading U.S. suppliers of solar panels are Solarcity, which has more than 2,000 employees, and Sunrun Inc. Thousands of companies are looking into install solar panels as part of their sustainability efforts.

Table 10-3 reveals the impact that bad environmental policies have on two of nature’s many ecosystems.

No company or individual wants to do business with someone who is unethical or is insensitive to natural environment concerns. It is no longer just cool to be environmentally proactive, it is expected, and in many respects is the law. Firms are being compared to rival firms every day on sustainability and ethics behavior, actually every minute on Facebook, Twitter, Myspace, LinkedIn, and YouTube. Issues presented in this chapter therefore comprise a competitive advantage or disadvantage for all organizations. Thus, you should include in your case analysis recommendations for your firm to exceed stakeholder expectations on ethics, sustainability, and social responsibility. Make comparisons to rival firms to show how your firm can gain or sustain competitive advantage on these issues. Reveal suggestions for the firm to be a good corporate citizen and promote that for competitive advantage. Be mindful that the first responsibility of any business is to stay in business, so use cost/benefit analysis as needed to present your recommendations effectively.

In a final analysis, ethical standards come out of history and heritage. Our predecessors have left us with an ethical foundation to build on. Even the legendary football coach Vince Lombardi knew that some things were worth more than winning, and he required his players to have three kinds of loyalty: to God, to their families, and to the Green Bay Packers, “in that order.” Employees, customers, and shareholders have become less and less tolerant of business ethics violations in firms, and more and more appreciative of model ethical firms. Information-sharing across the Internet increasingly reveals such model firms versus irresponsible firms.

Consumers across the country and around the world appreciate firms that do more than is legally required to be socially responsible. But staying in business while adhering to all laws and regulations must be a primary objective of any business. One of the best ways to be socially responsible is for the firm to proactively conserve and preserve the natural environment. For example, to develop a corporate sustainability report annually is not legally required, but such a report, based on concrete actions, goes a long way toward assuring stakeholders that the firm is worthy of their support. Business ethics, social responsibility, and environmental sustainability are interrelated and key strategic issues facing all organizations.