Proper ethical behavior is a significant part of conducting business. Organizations must therefore find ways to incorporate ethical considerations into their strategic plan. Firms need to practice self governance and obey existing laws if they are to ensure their survival and the well-being of the society in which they exist. The decisions made by an organization affect society as a whole. This paper will examine the social responsibilities of organizations to each of their stakeholders. These include: customers, employees, shareholders, suppliers, the local government and the environment. Each section of this report is supplemented with a case study illustrating the consequences of unethical behavior in business.
Ethics is a ubiquitous term that is subject to personal interpretation. Individuals and groups are guided by moral principles or values. Their beliefs help them to set standards for deciphering right from wrong (Little, 2011). Ethical values are dynamic and are therefore subject to renegotiation and change. These changes are often influenced by periodic and contextual circumstances.
As ethical beliefs differ from person to person, it may not be entirely possible to instill a universal set of values. Also, many individuals have different points of reference when determining what is right and what is wrong (Little, 2011). Domestically, ethical values tend to be closely aligned. Individuals who have been socialized in a particular region are more likely to have similar values, laws, religion, knowledge and culture.
With the emergence of free-trade agreements, many firms have the opportunity to conduct international business. Although these organizations are usually successful in aligning their economic interests, many have failed to recognize or understand the cultural norms, laws and ethical practices of the country they are conducting business with.
Defining Social Responsibility
An organization’s approach to social responsibility can impact its image and reputation. Depending on how an organization addresses this aspect of business, ethics can either be a strength or a weakness. Social responsibility can be divided into three categories: obligatory, reactive or responsive behavior (Duening & Ivancevisch, 2008). An organization that acts out of social obligation tends to direct its behavior to the legal pursuit of profit (Duening et al., 2008). Socially reactive organizations often adhere to social norms, values and performance expectations (Duening et al., 2008). These organizations must be accountable for the ecological, environmental and social costs incurred by their actions (Duening et al., 2008).
Lastly, socially responsive organizations often engage in behavior that exceeds the actions taken by socially obligated and socially reactive organizations. For example, these firms take stands on public issues, account for their actions, anticipate future needs of society, move toward satisfying them, and communicate with the government regarding existing and anticipated socially desirable legislation (Duening et al., 2008).
As illustrated above, social responsibility can mean different things to different people. In a broad sense, social responsibility is a compliance to the legal obligations, social norms and ethical standards of society. For the purpose of this paper, I will use the broad sense of the term, unless otherwise specified.
Social Responsibility of Organizations to Internal Beneficiaries
Social Responsibility to Employees
Legally, organizations are responsible for providing their employees with a minimum wage, safe working conditions and the freedom to form a union (Duening et al., 2008). These laws discourage management from creating workplaces that violate employee civil rights (Duening et al., 2008). However, many part-time employers, fast food restaurants and retailers provide only the minimum. Historically, employee benefits emerged out of pressure from employees, unions and the community. Today, most organizations are expected to go beyond the minimum legal requirements by providing their employees with “fringe benefits”, such as retirement funds, health and accident insurance (Duening et al., 2008).
Many socially reactive and socially responsive organizations have extended their benefits to include training, career development, counseling, employee assistance programs, day-care and flex-time policies. As employee family life becomes more complex, organizations must find ways to offer support. Many modern organizations are concerned about employee satisfaction and the benefits associated with it. Employees who are content demonstrate a higher commitment to the organization, which often translates into less absenteeism, higher morale and higher productivity. Overall, the modern worker wants his job to be both meaningful and fulfilling (Duening et al., 2008).
Social Irresponsibility to Employees: Wal-Mart
Wal-mart is one of the most profitable and efficiently run organizations in the world. In 2005, the corporation grossed two-hundred and forty billion dollars in sales, yet still failed to provide its employees with health care benefits and a livable wage (Greenwald & Gilliam, 2005). On numerous occasions, the organization neglected to provide its employees with the basic legal requirements. As a result, Wal-mart is now facing a number of class action law suits. Reports suggest that the organization is also notorious for keeping its stores understaffed. Although overtime is rarely an option, employees are still expected to work off the clock to get the job done (Greenwald et al., 2005).
Workers are ordered to complete their tasks and are often told that they can be replaced. Given their unfortunate personal circumstances, many employees put up with this abuse. In terms of employee well-being, a large majority of Walmart’s workers cannot afford the company’s basic medical insurance at just seventy-five dollars per month. (Greenwald et al., 2005). However, Wal-mart encourages its employees to seek out section-8 housing, food stamps and government-provided health insurance. (Greenwald et al., 2005).
Evidently, Wal-mart’s everyday low prices are a result of taxpayer subsidies. Nationwide, Wal-mart is costing taxpayers over one and a half billion dollars a year in subsidies for its employees (Greenwald et al., 2005). As a result of these policies, Walmart’s average sales employee is living below the Federal Poverty Line. (Greenwald et al., 2005).
In 2001, Barbara Ehrenreich conducted a sociological study to determine whether or not she could survive on a low wage. She found a job at Wal-mart in Minnesota. Her study reaffirmed the poor working conditions that Wal-mart employees often endure. In the following quote Ehrenreich talks about a shirt that she wanted to purchase for work:
“One of the rules is that our shirts have to have collars, so they have to be polos, not tees. Somehow I’d missed this during orientation… At $7 an hour, a $7 shirt is just not going to make it to my shopping list” (Ehrenreich, 2002, p.88).
Given the low wage that she earns, she has difficulty justifying the purchase of a seven dollar work shirt. In the next quote, her co-worker Alyssa finds herself in a more difficult situation:
“Alyssa is another target for my crusade. When she returns to check yet again on that $7 polo, she finds a stain on it. What could she get off for that? I think 10 percent, and if you add in the 10 percent employee discount, we’d be down to $5.60. I’m trying to negotiate a 20 percent price reduction with the fitting room lady when rotten luck Howard shows up and announces that there are no reductions and no employee discounts on clearanced items. Those are the rules. Alyssa looks crushed, and I tell her, when Howard’s out of sight, that there’s something wrong when you’re not paid enough to buy a Wal-Mart shirt, a clearanced Wal-Mart shirt with a stain on it. “I hear you,” she says, and admits Wal-Mart isn’t working for her either, if the goal is to make a living” (Ehrenreich, 2002, p.100).
Wal-mart is also notorious for squashing unions. If a branch plans to hold a union vote, the organization will hire new employees to dilute the number of people who are pro union. Moreover, the organization allots each store a seven-thousand dollar anti-union package; a thirty-thousand dollar undercover spy van, access to the organization’s one hundred thousand dollar anti-union hot-line; and the use of its seven-million dollar corporate jet for rapid response (Greenwald et al., 2005). If a branch is successful in a union vote, Wal-mart will not hesitate to close down that particular retail outlet. In summary, with the absence of unions and the current mind-set of management, it is highly unlikely that employee working conditions will improve any time soon.
Social Responsibility to Shareholders
Organizations have a social responsibility to their shareholders and must provide accurate information for investment decisions. (Duening et al., 2008). As stated by Duening and Ivancevich, “the ultimate action a stockholder can take is to sell the stock” (2008). It is important that organizational information be transparent and accessible. Also, organizations must be as efficient and effective as possible with the use of their resources. Any process or product feature that does not add value is wasteful and has an adverse effect on the bottom line.
Investors of the twenty-first century want instant gratification and are therefore often fixated on short-term earnings. As corporations and their managers face pressure from shareholders to produce appeasing quarterly results, they often fail to think about the long-term well being of the organization, its employees and the environment. In recent years, there has been a significant increase in performance-based bonuses. In many multinational organizations, executives earn exponentially more than their lowest paid employees.
As an incentive, executives often receive options for shares in the company. The value of those options is contingent upon the company’s short, medium or long-term performance. In 2010, chief executives at the United States’ five hundred largest firms collectively took home four billion dollars (DeCarlo, 2010). The value realized from exercised stock options accounted for the main component of their pay (DeCarlo, 2010). When managers act in their own self interest, bonus-based compensation schemes can have dire consequences for all parties involved.
Social Irresponsibility to Shareholders: Enron
In 2001, Enron filed for bankruptcy (Bryce, 2003). At the time, it was the largest bankruptcy in the history of the United States. The management cooked the books and misrepresented their position to shareholders (Little, 2011). Enron used mark-to-market accounting practices to manipulate earnings and to create a mirage of success. On several occasions, company executives lied to investors, overstated earnings and omitted critical information (Bryce, 2003). As a result, stakeholders lost billions of dollars.
Also, the employee pension plan contained over two billion dollars in assets with sixty-two percent of the funds invested in Enron stock (Bryce, 2003). Thousands of Enron employees lost a bulk of their life savings. In addition, the California Public Employees Retirement system lost three billion dollars (Bryce, 2003). Many individuals, investment firms and hedge funds lost billions of dollars as well. While thousands of individuals lost large sums of money, Enron executives netted significant returns from their unethical stock manipulation and insider trading.
Social Responsibility to the Supply Chain
The supply chain is a system of organizations, people, technology, activities, information and resources involved in moving a product or service from the supplier to the consumer (Shafer et al., 2010). Within the chain, an organization can be both a supplier and a customer. Today, many organizations realize the importance of strengthening relationships and working with fewer suppliers. In effect, suppliers and their customers have become interdependent on one another. Traditionally, customers pitted suppliers against each other in hopes of getting the best price. Today, however, many suppliers play a vital role in the operations process.
Through vendor-managed inventory systems, organizations have been able to avoid stockouts, thus reducing inventory costs (Shafer et al., 2010). Corporations that rely on sole sourcing have a partner-like relationship with their suppliers. The just-in-time delivery system is based on customers pulling their orders through the supply chain while suppliers ensure the inputs arrive according to schedule. Companies are also responsible for ensuring that their suppliers are treated respectfully and paid on time. In this relationship, both organizations have to turn a profit to ensure their survival.
Social Irresponsibility to the Supply Chain: Monsanto
Monsanto is an organization that has little regard for the farmers who use its products or the end users that consume them. In 1994, Monsanto introduced Posilac to the American market. Posilac is a bovine growth hormone that was developed to increase milk production. Today, “the United States is the only developed nation that permits humans to drink milk from cows that have been given artificial growth hormone” (Laskawy, 2010, para 3). This product was banned in twenty-seven countries including Canada and the European Union (Achbar et al.,2004). Moreover, Posilac was tested for only ninety days to assess for human toxicity (Achbar et al., 2004).
There is widespread concern regarding the long-term effects of this product on the well-being of humans and animals. Despite these concerns, this product was approved by the Food and Drug Administration. Either Monsanto misreported its findings or the Food and Drug Administration did not look at them. Health Canada research showed that bovine growth hormone could be absorbed by the human body with the possibility of a link to cancer (Achbar et al.,2004). In addition to being harmful, Posilac is of little value to farmers and end users. Prior to Posilac’s release, there was an abundance of milk in the marketplace and farmers were told to produce less of it (Achbar et al.,2004)
Monsanto is an organization that supplies harmful products and expects farmers to distribute them to the general population. This organization is responsible for the premature release of bio-engineered foods in the marketplace. The long-term effects of genetically-modified food are still unknown. However, Monsanto requires a high level of coordination to get its products to market. The firm often requires help from politicians, professors, scientists, experts, the general public, reporters, and the Food and Drug Administration (Achbar et al.,2004).
Monsanto also engineers terminator seeds. These are seeds that terminate themselves through a suicide gene (Achbar et al.,2004). Since terminator seeds are only good for one season, Monsanto has lowered the intrinsic value of them. In nature, seeds are meant to be replanted annually. However, this product goes against evolution and human well-being. There are billions of people around the world who are starving to death and farmers have been denied the opportunity to replant their seeds on an annual basis.This product is immoral to its customers, the end users, and humanity as a whole. Nonetheless, Monsanto still expects its customers to distribute these products to the end users.
Social Responsibility to Customers
Value is defined as any action or process that a customer is willing to pay for (Shafer & Meredith, 2010). To eliminate unnecessary waste, organizations should always be mindful of customer needs. Processes that drive up costs but do not increase the overall value of a product are wasteful. Firms should strive to reduce overproduction, inventory costs, unnecessary processing, wait times, transportation costs, and unnecessary human motions while minimizing the number of defects (Shafer et al., 2010).
Competitive organizations continue to improve the quality and durability of their products (Shafer et al., 2010). However, if an organization fails to use its resources efficiently and effectively, it will likely be punished in the marketplace. A consumer has the ultimate decision on whether or not they will purchase a particular product. Therefore, companies should be adequately prepared to address consumer concerns and after-service needs, should they arise. Also, consumer goods should not do any biological or psychological harm to their customers. Products that have the potential to do harm to others should be put through rigorous testing to ensure they are safe for human use and consumption.
Social Irresponsibility to Customers: Aguas del Tunari
For twenty years, the World Bank has been working alongside successive governments toward independent development in Bolivia. The World Bank believes that a high proportion of leaders in developing nations are susceptible to corruption, including those in Bolivia. As a result, the organization has played a significant role in assisting the Bolivian government with privatization of its state-owned enterprises. In 2000, Aguas del Tunari corporation signed a forty-year contract with the Bolivian government to provide water to impoverished citizens in Cochabamba City, Bolivia. Aguas del Tunari was guaranteed a minimum annual return of fifteen percent on their two-and-a-half billion dollar investment (Salina & Starr, 2008).
As part of the deal, Aguas del Tunari Corporation agreed to repay thirty million dollars of debt accumulated by the state utility company (Salina et al., 2008). In an effort to pay off the debt, Aguas del Tunari corporation increased water rates to twenty dollars per month — a thirty-five percent increase (Achbar, Abbott, Bakan & Simpson, ,2004). However, the company failed to consider the fact that many of its new clients were surviving on only two dollars a day (Achbar et al., 2004). This meant that the cost of water would account for roughly twenty-five percent of their daily income (Achbar et al., 2004).
To make matters worse, the government had privatized rain water, making it illegal to collect the rainfall (Achbar et al.,2004). When the newly-owned utility company shut off the water supply to non-paying customers, violent protests erupted across all classes of society. Ninety-six percent of citizens demanded that the contract with Aguas del Tunari be terminated (Salina & Starr, 2008) . The government of Bolivia refused and told its citizens that there was nothing to negotiate. Protests spread to other major cities in Bolivia, eventually causing a ripple effect that would put the country into a state of emergency. To remedy this problem, the Bolivian government kicked Aguas del Tunari out of the country and resumed its role as the nation’s utility operator.
In this unique case, it is difficult to conceptualize water as a commodity. Water is essential for survival and is seen as a birth right. Many would argue that the local government is responsible for regulating the cost of water and ensuring that it is affordable for all citizens. Since water surrounds us and falls naturally from the sky, it is difficult for a corporation to add value to it. Privatization of rain water is an extreme concept and certainly crosses some ethical boundaries.
Social Responsibility of Corporations to External Beneficiaries
Social Responsibility to Local Governments
Elected officials have a social responsibility to the people whom they represent. Although corporations cannot directly cast a vote, they can leverage their power by donating large sums of money to political campaigns. In return, they often expect regulatory favors, exceptions, and preferential treatment. Corporations must however respect the local government and prohibit themselves from lobbying, bribing or manipulating local officials for the financial benefit of the organization.
Although firms should not tempt government officials, politicians should also avoid situations where they may become vulnerable. As governments and organizations continue to work closely to achieve their objectives, they must ensure they maintain their ethical boundaries. When corporations gain power, the relative authority of local government diminishes and their authoritative power is often confined to their given jurisdiction. As organizations continue to grow, it is becoming increasingly difficult for them to be audited by local governments and regulatory bodies. For this reason, governments should consider implementing more rules and tougher sanctions to prevent legal and ethical misconduct. As history has shown, corporations are not always capable of self- governance.
Social Irresponsibility to Local Governments:
Long-Term Capital Management
Deregulation of public enterprises and new business practices may not always be in the best interest of the general public. In 2000, the Clinton administration passed a bill that would deregulate the derivatives market and establish legal certainty for bankers (Lowenstein, 2002). The three major classes of derivatives are: futures, options and swaps. In detail, the derivatives market is not well understood by policy makers. There have been numerous cases of corporate fraud, financial mismanagement and unnecessary risk. Moreover, taxpayers have fronted billions of dollars to bail out financial institutions. In 2008, the value of the overall derivatives market was an astonishing six-hundred and sixty-eight trillion dollars (Sheridan, 2008).
In 1994, Long-term Capital Management took the financial world by storm. This hedge fund was established by two proven Wall Street traders and two Nobel Laureates (Lowenstein, 2002). The fund started with four billion dollars in capital from its investors. The firm enjoyed four straight years of prosperity without a single monthly loss to be reported on their balance sheet. LTCM was thought to be the perfect hedge fund. It simply could not lose. LTCM leveraged its balance sheet trading by 30 to 1, while leveraging its off balance sheet trading by 250 to 1 (Lowenstein, 2002).
At one point, the company had in excess of one trillion dollars in derivatives exposure (Lowenstein, 2002). In a short period of time, LTCM had lost nearly everything and turned to banks and the federal reserve for a bailout. At the time, this was the largest bailout ever. In Wall Street’s eyes, LTCM was simply too big to fail. It was thought that its demise would have had dire consequences for the entire economy.
Since then, bigger investment firms have failed, bigger bailouts have been distributed and derivatives are still being heavily traded. It appears Wall Street still has a lesson to learn. It was the government’s deregulation of derivatives that allowed LTCM and other investment firms to behave unethically and do as they pleased. As a regulatory body, the Federal Reserve sent out the wrong message by bailing out LTCM. Condoning the behavior of this hedge fund created an environment that would encourage other financial institutions to take the same risks.
Social Responsibility to the Environment and Future Generations
Today, consumers and citizens increasingly expect more from organizations. Traditionally, firms externalized their costs while internalizing their profits. Today, however, many corporations are becoming ethically conscious and are working toward minimizing their carbon footprint. They have started to use mechanisms known as stakeholder management devices to respond to stakeholder claims (Duening et al., 2008). Progressive organizations have started working toward sustainable development to help create a world that is suitable for future generations.
Many firms are also taking an interest in social issues. Some have started practicing corporate philanthropy. These positive efforts enhance a corporation’s good will and improves its overall image. This often translates into more sales and higher profit margins.
Organizations that fail to take responsibility for their actions are often looked down upon. For example, an organization that shows complete disregard for the environment will likely tarnish their image and build up ill will. In effect, companies that act out of social obligation are viewed less positively than those that are socially responsive.
Social Responsibility to the Environment and Future Generations:
Tokyo Electric Power Company
In March of 2011, the Japanese coast was rattled by a forceful 9.0 earthquake and a gigantic tsunami. The Fukushima Dai-chi and Fukushima Dai-ni power plants sustained critical damage (TEPCO to Compensate Nuclear Plant Victims, 2011). Both of these power plants are privately owned by the Tokyo Electric Power Company (TEPCO to Compensate Nuclear Plant Victims, 2011). The nuclear disaster revealed the company’s misplaced confidence and a failure to adequately forecast its worst case scenario. Furthermore, the company chose to disregard Japan’s tsunami history and relevant GPS data.
TEPCO engineers did not factor in earthquakes that occurred prior to 1896 (TEPCO Dimissed Important Scientific Evidence in Planning Nuclear Plant’s Defense, 2011). Tsunami modelers at TEPCO factored in an earthquake of 8.6 magnitude in its worst case scenario model (TEPCO Dimissed Important Scientific Evidence in Planning Nuclear Plant’s Defense, 2011). The earthquake that occured on March 11, 2011 was four times more powerful than the maximum presumed (TEPCO Dimissed Important Scientific Evidence in Planning Nuclear Plant’s Defense, 2011). Given Japan’s geographical position and the volatility of nuclear energy, TEPCO should have put more thought into their calculations.
After much delay, the Japanese government has ordered TEPCO to pay partial retribution to the citizens affected by this nuclear catastrophe. Beginning on April 28, 2011, TEPCO has started to compensate families in the nominal sum of twelve-thousand dollars for losses attributed to evacuation, having to stay indoors and nuclear contamination (TEPCO to Compensate Nuclear Plant Victims, 2011).
These partial retributions are miniscule. Often times it is cheaper for a corporation to hire a good public relations specialist than to rectify the actual problem. This nuclear disaster has crippled local businesses, fishing operations, tourism and the livelihood of citizens. TEPCO’s greed and irresponsibility has cost the citizens of Japan and the nation at large by causing tremendous losses. Moreover, citizens in neighboring countries and the Western part of the United States have grown concerned over their personal well-being.
In TEPCO’s case, the local government should have taken extra measures to ensure the facilities were built to withstand an earthquake of great proportion. Local governments are elected and represent the interest of the people. Therefore, it is their responsibility to ensure private organizations behave ethically. Companies should be forced to take full accountability for their actions. In regard to privatization of nuclear energy, governments should pressure organizations to strive for seven-sigma quality. As we have witnessed, a defect in nuclear energy can have significant implications for the general population.
As illustrated in this paper, organizations have a social responsibility to both their internal and external beneficiaries. Firms should always conduct business with integrity and concern for others. Although many organizations may feel pressure to increase their short-term earnings, they must retain their focus and uphold their social responsibilities to their stakeholders. Through long-term objectives, organizations can set standards that will ensure their survival.
It’s important to emphasize that the decisions an organization makes will often affect society as a whole. As illustrated in the case studies above, companies that go astray or act in their own self interest can adversely affect the well-being of many stakeholders. However, tougher sanctions and an organizational credo may help give an organization ethical focus. In conclusion, by practicing self-governance and obeying existing laws, corporations will be well on their way to becoming socially responsible and dependable organizations.
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