Business Ethics & Social Responsibilities

“Business Ethics & Social Responsibilities”

Part 1 – Introduction to Social Responsibilities and Business Ethics

Focus point:
 What is the meaning of “Business Ethics” & “Social Responsibilities”?
 What kind of responsibilities do businesses have, towards their stakeholder?
 Why are these important?

Definitions:
a) Social responsibilities … are duties that a business owes to those affected by its
activities.

b) Business ethics … is the influence of values and beliefs upon the conduct and
operation of businesses, i.e. about morality and doing ‘what is right’ and not ‘what is
wrong’.

… “Why is it important that businesses should conduct ethical behavior?”…

Businesses are often said to be run for the benefit of their owners, i.e. their
“shareholders”. However, other “stakeholders” are also an important part of business
decision making because it is argued that businesses have “Social Responsibilities”
towards them. As such, businesses should act in a responsible and ethical manner and
consider the possible effects of any decisions they make.

Supplier
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“So…what kind of social responsibilities do businesses have, towards these

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stakeholders?”

As we should know, businesses do not operate in isolation, they are actually a

“part of society” who has an impact upon the lives of those communities in which
they operate. And therefore…

*** A firm which is ethical with regard to the society as a whole and the community
within which it is based might be described as “Socially Responsible”***

Here are some examples where firms can show their ethical behaviors, these can be…

 …To their “Customers”:

Businesses have responsibilities to their customers, e.g. to sell them a well made
product which is reasonably priced.

 …To their “Suppliers”:

An ethical firm should act fairly to their suppliers, e.g. paying reasonable prices for
products. They should also respect contracts which they have signed with suppliers.

 … To their “Employees”:
An ethical firm should offer equal opportunities to all employees, thus encourage a
fair competitions among employees.

 … To our “Future Generation”:

Businesses can affect our future generation in various ways, e.g. messages in
advertisement. An ethical firm should be aware when building their brand images, e.g.
branding that emphasize on sex, violence, rebellion, etc…

 …To “Communities”:
Businesses have social responsibilities to the communities in which they operate, e.g.
in Africa, some small countries are highly dependent on single mining companies or
oil companies since they provide a large proportion of jobs. And firms should treat
them ethically, not taking advantages with it, i.e. Nike  Low paid workers.

 …To “Environment”:
*** Will be discussed in part 2***

Part 2 – The Costs & Benefits of Business Activity

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Focus point:
 Introduction to Negative/ Positive Externalities.
 Negative Externalities in terms of “Environmental Costs” and their impacts.

Definitions:
a) Private costs… are the cost of an activity to an individual or a business.
e.g. wages, materials, etc…

b) Private benefits… are the benefit of an activity to an individual or a business.

e.g. sales revenues, profits, dividends to shareholders, etc…

c) Externalities… are the costs/ benefits generated by businesses activities, to the rest
of the society which can be negative / positive;
 “Negative Externalities”… are the costs to the rest of the society
 “Positive Externalities”… are the benefits to the rest of the society.

c) Social Costs… are the cost of an activity to society as well as to a business.

i.e. private costs + negative externalities generated

d) Social Benefits… are the benefits of an activity to society as well as to a business.

i.e. private benefits + positive externalities generated

The Costs & Benefits of Business Activity – Negative & Positive Externalities

It is obvious that when businesses conduct their activities, both “private costs”
(e.g. wages, direct material costs) and “private benefits” (e.g. revenue, profits) would
be generated. However, they might also create “other costs”,
e.g. A factory may dispose some of its waste in a local river.
Pollutants may be produced during factory production.

These kind of “extra costs” created, which have a negative impact on others, are
what we called, “Negative externalities”. They are normally created because
businesses failed to behave “ethically”. And of course, “Positive externalities” could
also be created when firms behave “ethically”, e.g. business activities may create
skills which can be used for other jobs in the area.

Different types of Negative Externalities & their impacts

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As we have mentioned in part 1, “Negative Externalities” can generates impacts

towards different stakeholders. However, this section will focus on “Environmental
Costs”

1) Air Pollution:
Sources: factories, machines or vehicles emitting poisonous gases into atmosphere.

Impacts: a) Acid rain, destroying thousands of forest.

b) CFCs. The use by some firms of CFCs in refrigerators has contributed to
the break down of the ozone.
c) Global Warming

2) Water Pollution:
Sources: Industries like brewing and chemical manufacturing dump waste to the
nearby water source.

Impacts: a) Polluting our drinking water.

b) Polluting the sea which threatens thousands of life in the ocean.

3) Congestion and Noise:

Sources: Businesses’ logistics activities

Impacts: a) Traffic congestion. Recent estimates have put the cost of this congestion
on British Roads as high as £15 billion
b) Noise Pollution, affecting local residents

4) Destruction of the environment:

Sources: Buildings in rural areas

Impacts: a) Deprive villagers and visitors of previously unspoilt countryside.

c) Increase noise and congestion levels in village.

5) Waste Disposal

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Part 3 – The Benefits & Effects of Ethical Behaviors

Focus point:
 Benefits and Drawbacks of behaving “ethically”.
 Methods of Controlling Environmental Costs
 Methods of encouraging “Ethical Behavior”

Benefits of behaving “Ethically”:

There are certain advantages for businesses in behaving in an ethical or socially

responsible way.

1) “Ethical Behavior can be good for sales”…

Increasing numbers of consumers are taking into account a firm’s behavior when
buying products. As a result, ethical behavior can be good for sales,
(E.g. Body Shop. A feature of body shop marketing is that its products are not
tested on animals. The company has also lent support to groups helping firms in
the world’s poorest countries.)

2) “Ethical behavior can improve the recruitment and retention of staff”…

Firms with an ethical approach believe that they will be more able to recruit well
qualified and motivated staff. In addition, ethical firms argue that they are able to
retain their staff better if they adopt a more caring approach to employees.
(E.g. Marks and Spencer provide their staff with a range of benefits, over and
above those usually provided in the retail sector. They are benefited by achieving
one of the lowest rates of staff turnover in the UK. This has cut their recruitment
and retaining costs.)

3) “Ethical behavior can motivate employees”…

Ethical firms believe that their employees are more committed to their success as
a result. They may be prepared to work harder to allow the business to achieve its
aims.

Possible drawbacks of behaving “Ethically”:

1) “Increase in Costs”…

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E.g. an ethical firm may be forced to turn down cheaper supplies from a firm
which tests its products on animals. Similarly, costs may be raised by pollution
reducing filters put on coal-fire power station.

2) “Loss of profit”…

Firms may be forced to turn down profitable business due to their ethical stance.
(E.g. a business may reject a profitable investment opportunity in a company
which produces animal fur.)

3) “Conflicts: Profit Vs. Ethics”…

When a firm’s overall profitability comes into conflict with its ethical policy,
problem may result.
(E.g. the shareholders of a firm may object to the ethical policy as the return on
their investment is harmed.)

4) “Huge Range of Business practice”…

Businesses may need to alter the way in which it approaches a huge range of
business matters.
(E.g. considering the impact of its activities on the environment? Providing equal
opportunities for all applicants regardless of age, sex, ethnic background or
disability in its recruitment policy? The extent to which its advertisement are
offensive or in poor taste? The protection given consumers buying their products?)

Methods of Controlling Environmental Costs:

Because of concern about the impact of business on the environment, attention

has been focused on how pollution, congestion and other environmental costs can be
controlled:

1) “Through Government regulation”…

Using “LAW”, i.e. set limits on the maximum amount of pollution.

2) “Through Taxation”…
The aim of taxation is to ensure that the “social cost” of any pollution caused by a

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firm is paid for.

(E.g. A firm which produces a $5 product with “Environmental unfriendly”
packaging might be taxed $0.50 for this packaging, raising the price to $ 5.50.)
This tax revenue might be used to minimized the impact of this packaging to the
environment, as well as to act as an incentive for the firm to prouce more
environmental sensitive packaging.

3) “Through Compensation”…
Firms could be forced by law to compensate those affected by such negative
externalities.
(E.g. Airport might provide grants to nearby residents, so that they can purchase
double glazing and other types of insulation, which provide protection from
aircrafts noise.)

4) “Pollution Permits”…
These allow businesses a certain amount of emissions. If the business reduces its
pollution below a certain level, it can save the allowance and sell it.

Other alternatives including:

 Education,
 Government subsidization,
 Consumers pressure, etc…

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Methods of Encouraging “Ethical behavior”:

All businesses have to make many ethical decisions which some are affected by
“LAW”, e.g. it is illegal to dump waste by the roadside. However, many ethical
decisions have to be made without the help of law, e.g. should a company stop buying
goods from the Far East what it knows that work conditions are poor and wages are
very low?? Apart from control, we can also use the following methods to “encourage”
ethical behavior through…

1) Government intervention:
Government can intervene directly to ensure that a business accepts the
consequences of its behavior.
(E.g. in Germany, all retailers and manufacturers are required to recycle 80% of
their packaging.)

2) Self regulation:
Government can work with particular industries and business sectors to encourage
the creation of regulatory bodies which help to control the activities of business.
(E.g. the Press Complaints Authority and The Advertising Standards Authority in
UK.)

3) Market pressure:
Some commentators believe that there is no need for government to exert direct
pressures on businesses to act responsibly because the ‘free market’ will act
effectively to police less responsible businesses. The argument is that such
businesses will be unpopular with consumers, who will be less likely to purchase
their products. Thus consumers’ behavior will force irresponsible businesses to act
with greater accountability.

4) Pressure group:
Pressure group such as animal welfare pressure group can sometimes exert
influence over firms.

References:
1) A. Anderton, “AS Level Business Studies for AQA”, Causeway Press Ltd.
2) D. Hall, R. Jones, C, Raffo, “A2 Level Business Studies”, Causeway Press Ltd.