ME2 Management and Business for Engineers

LECTURE 7: CORPORATE SOCIAL RESPONSIBILITY

LECTURE OBJECTIVES
• To examine the impact of business ethics and legal requirements on
corporate social responsibility.

1. Introduction
By way of introduction here is a useful definition of business ethics:-
‘Business ethics is the study of business situations, activities, and decisions
where issues of right and wrong are discussed’ (Crane and Matten, 2004, 8).
Mention of business ethics is often greeted with cheap jokes or remarks such as
‘business ethics — I didn’t think there were any!’ This view is nurtured by some of
the ‘off the cuff’ macho statements made by business people to the effect that ‘it’s
a jungle out there — a dog eat dog situation where only the strong can prevail’.
Further, the more or less daily dose of news relating to corporate malpractice
somewhere in the world serves to strengthen the prejudice against the very idea
that business can be ethical and that business has certain responsibilities beyond
those required by law. Finally, the development of globalization has complicated
the situation with differing norms or mores prevailing in various parts of the
world — e.g. what might be seen as a bribe in one jurisdiction would be seen as a
gift in another. We will return to this issue in section 4 of the lecture.

2. The development of business ethics

Every individual has certain values or standards which guide their conduct.
Equally, they have certain expectations regarding the conduct of others. The
origin of these values or rules can often be found in the early cultural training of
the individual concerned. All the major faith traditions provide guidance on how
we should live our lives i.e. a set of moral principles or ethics. Only in the so-called
‘advanced’ societies have such matters been detached from religious teaching
and become matters of individual conscience. Like individuals, business (and all
other organisations for that matter) has certain values or rules of conduct without
which it is impossible to operate. Not least there has to be an element of trust for
any business activity to occur. Bad business practices erode trust and damage the
reputation of the business concerned and stimulate calls for state intervention —
see for example the banking industry since 2008. Also like individuals, businesses
exist in specific legal and cultural contexts that increasingly demand they accept
their ‘social responsibilities’ — see for example the recent history of BP in the USA.

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From the 1980s on there was growing interest in business ethics among
academics and business people in the UK. There were specific historical reasons
for this, not least a major shift in economic and public policy. For many decades
of the twentieth century there was a view (albeit contested) that the state was the
appropriate body to moralise business, often through various forms of
intervention, including the process of socialisation or nationalisation. Running in
tandem with this view was a high degree of hostility to business nurtured by a
uniquely influential trade union movement. By the 1980s the phenomenon of so-
called ‘governmental overload’, together with the partial defeat of the trade union
movement at the hands of government and employers, stimulated an interest in
business ethics. In recent times, partly as a result of the circumstances
surrounding the ‘credit crunch’, the state has partly regained significance as trust
in business has declined.
As in many other spheres of management thinking the business ethics movement
originated in the USA where a ‘muckraking’ tradition existed within the prevailing
capitalist system. The business ethics movement is now widely established
around the globe, interest having been prompted by several factors, including
the following:-
• Outrage over major disasters such as Union Carbide’s pesticide plant at
Bhopal in India in 1984 — where the escape of a huge cloud of methyl
isocyanate is reckoned to have killed between 16 and 30 thousand people
and harmed a further half million, making it the world’s worst industrial
disaster.
• Consumers often prefer to buy from apparently ethical companies — so
called ‘ethical consumers’. In this context a number of companies make
‘ethical issues’ an aspect of marketing strategy (e.g. Body Shop).
• Damage to brands in the eyes of consumers if seen to be acting
unethically. Companies such as Nike, Gap and Apple have attracted much
adverse attention relating to the wages and working conditions of workers
employed by suppliers in developing countries.
• Avoidance of Government intervention. A prime example would be the
tobacco industry, which has mounted a long rear-guard action against a
total UK ban.
• Desire to conduct business ethically. Surveys suggest that, given the
choice, employees prefer to work for companies they perceive to be
ethical.
We can identify three main approaches that can be taken by organisations to the
subject of business ethics as follows:-

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1. ‘Business is business’ — which takes the view that the aims of business are
purely commercial and therefore the maximisation of profits and/or market
share must prevail over ethical considerations.
2. ‘Act consistently with the law’ — whereas ‘business is business’ holds that
anything goes (including selling faulty goods, giving bribes or carrying out
industrial espionage), ‘act consistently with the law’ argues that
organisations need to fulfil their legal obligations in any particular
jurisdiction but nothing more.
3. ‘Good ethics mean good business’ — argues that virtue and prosperity
fortuitously coincide (there are many examples which suggest that poor
ethics are bad for business, often involving the organisation in bad
publicity or costly litigation).

3. Corporate social responsibility

‘The social responsibility of business is to increase its profits’ (Friedman, 1970).
This ‘one-liner’ was the economist Milton Friedman’s response to the emerging
business ethics movement of the 1960s. Friedman’s protest against the growing
assertion in the USA that business corporations had social responsibilities was
based on three main assertions as follows:-
1. Only human beings have moral responsibility for their actions —
corporations are not human beings and cannot therefore assume true
moral responsibility.
2. The managers’ responsibility is to act solely in the shareholders’ interests —
as long as the corporation abides by the legal framework established by
society then the only responsibility of managers is to maximise profit for
shareholders. If managers decide to pursue various social causes this
constitutes a betrayal of trust and a form of ‘theft’.
3. Social issues and problems are the proper province of the state rather than
corporate managers — matters relating to society’s best interests should
be left to government and the politicians who are democratically elected
to deal with such matters.
Friedman’s arguments were influential and even persuasive in a period when
there was a feeling that business was already bearing too many burdens and
should, as far as possible, be left alone to get on with what it could do best.
However, for reasons of self-interest alone, the notion that corporations should
pretend that they were operating in a vacuum where social issues could be
ignored with impunity couldn’t really ‘cut it’. Instead a rather vague but none-the-
less attractive ideology became fashionable — namely stakeholder theory.

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Stakeholder theory has its origins in the world of corporate strategy and
specifically the work of H. Igor Ansoff. As he put it in his book Corporate Strategy
in 1965,
‘The firm has both (a) ‘’economic’’ objectives aimed at optimizing the
efficiency of its total resource conversion process and (b) ‘’social’’ or non-
economic objectives… In most firms the economic objectives exert the
primary influence on the firm’s behaviour and form the main body of
explicit goals used by management for guidance and control of the firm,
(while) the social objectives exert a modifying and constraining influence
on management behaviour’.
Ansoff was influenced in his thinking by Peter Drucker who had argued, in his
1954 book The Practice of Management, that although a business must ultimately
be judged on its economic performance, there could nevertheless be certain
‘spin-offs’ of value to the wider community.
One of the problems of stakeholder theory was/is identifying the stakeholders
and placing them in order of priority. Who should be the primary claimants and
who should be secondary? Should, for example, economic objectives override
consumer safety? Or might a corporate gift to education override both? Should
an uneconomical plant be closed if closure would contribute to the decline of a
community or region? An attempt was made to deal with these issues by Carroll
who described four categories of corporate responsibility as follows:-
1. Economic — these are primary since this is the reason why the business
was set up.
2. Legal — are the rules and regulations established by government to
regulate and legitimize business.
3. Ethical — are expectations of how business should be conducted beyond
the narrow requirements of the law.
4. Discretionary — are philanthropic activities carried out by corporations
which are desired rather than expected.
A consensus currently exists which suggests that corporations do have social
responsibilities and that Friedman’s approach is flawed.

4. The limits of self- regulation and the intrusion of the law

It is accurate to suggest that all organisations prefer self-regulation to legal
intrusion. However, over time, greater legal intervention in our affairs seems
inevitable. In the case of business, a constant battle is waged to minimise legal
impositions and to maintain as much freedom of operation as possible. Recent
UK Governments have pursued a so-called ‘light touch’ approach in the hope of
encouraging business activity. However, from time to time the failure of self-

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regulation has prompted greater legal intervention. Two such areas are health
and safety at work and the issue of bribery. Using Carroll’s categories, such areas
are no longer matters relating merely to ethics or discretion but requirements
under the law with penalties for non-compliance.
The Health and Safety at Work Act of 1974 provides the basis of UK law in the
sphere of safety. The Act lays out the general duties, which employers have
towards employees and members of the public and also the duties employees
have to themselves and to each other. The legislation followed the deliberations
of the Robens Commission, which reported in 1972, and was calculated to put a
legal framework in place but also to raise the level of safety in British industry
through improved awareness. The duties under the Act are qualified by the
principle of ‘so far as reasonably practicable’. Basically, the law requires employers
to look at the risks involved in any particular situation and take appropriate
measures to deal with them. The 1974 Act has been strengthened by the
Management of Health and Safety at Work Act of 1999 (the Management
Regulations), which make more explicit what employers are required to do to
manage health and safety. The regulations apply to every work activity and
require employers to carry out a risk assessment. Employers with five or more
employees need to record the significant findings of the risk assessment. The
framework of safety law was strengthened further in 2007 with the passing of the
Corporate Manslaughter Act. Under the Act companies and organisations can be
found guilty of corporate manslaughter as a result of serious management
failures resulting in a ‘gross breach of a duty of care’. In 2008 a further piece of
legislation, the Health and Safety Offences Act, increased the penalties for
neglecting health and safety issues.
The Bribery Act of 2010 covers the criminal law relating to bribery, being bribed,
the bribery of foreign public officials, and the failure of a commercial organization
to prevent bribery on its behalf. The penalties under the Act are a maximum of 10
years imprisonment, together with unlimited fines and the potential for
confiscation of property and disqualification of company directors. The Act has
near-universal jurisdiction, allowing the prosecution of an individual or company
with links to the UK, regardless of where the crime occurred. This is very tough
and the Act has been criticised for criminalising behaviour that is acceptable in
the wider global market — thereby putting UK business at a disadvantage.

Sample examination questions

1. ‘Good ethics mean good business.’ Discuss this statement using
contemporary examples.
2. What are the main elements of the Health and Safety at Work Act 1974?

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References and background literature

Carroll, A ‘A Three-Dimensional Conceptual Model of Corporate Performance’
Academy of Management Journal, 1979
Chryssides, D and Kaler, J Essentials of Business Ethics, McGraw Hill, 1996
Crane, A and Matten, D Business Ethics Oxford, 2004

Notes

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