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Ghilarducci- Economics of Ethics (Summary)

Corporate Social Responsibility (CSR) is an obligation of organizations. F. Ken Chenault, former Chairman and CEO of American Express said, “A socially responsible company strives to meet a standard that’s higher than the bottom line. We must remember that corporations exist because society says they can—and society assumes we’ll contribute to the common good. That’s the bargain we strike. The social compact.”

I use the terms Ethics and CSR interchangeably. Ethics are the underpinnings of CSR; any action which deliberately mistreats or abuses any stakeholder is, by its very nature, unethical conduct. It sounds straightforward enough; a company acts in a socially responsible fashion, treats its shareholders fairly, and generates a profit. Why, then, is it so difficult for companies to follow this path? This paper provides information that supports the premise that companies can do well by doing good– they can be profitable and successful while respecting the rights of their stakeholders.

This type of unethical and illegal conduct is not uncommon. “The Department of Justice claims in its press releases that since fiscal 2009 it has filed over 18,000 financial fraud cases against more than 25,000 defendants.” I am convinced that acting ethically is advantageous to appease stakeholders, both in the short and long term, and it is also profitable. Company leadership must find a suitable balance between maximizing returns and doing it in a socially responsible fashion.

Companies are potentially subjected to three pressures that cause focus on profit (return) maximization at the expense of the stakeholders:

  1. Pressure brought by the Board of Directors. The CEO is driven to deliver handsome dividends and appreciated stock prices. This then becomes the primary focus of the firm– to increase the wealth of the investors.
  2. Activist investors who demand performance as they wield an axe, ready to replace the often-competent executives with parties who will accede to their demands.
  3. Executives motivated by millions of dollars in stock options that are tied solely to stock price appreciation. Beyond the greed that clouds their decisions is the notoriety provided by the reputation of enhancing a company’s performance… in the short-term.

Companies routinely defer or compromise their commitments or obligations to stakeholders. The impact on the employees has the potential to create a cycle that can lead the company to cross the proverbial line of ethical conduct.

There is a razor’s edge between betraying CSR and illegal conduct. The ethical bar is higher than the legal standard. It is important to keep in mind that companies are not ethical or unethical; they don’t obey or break laws. It’s the human beings that work in companies- often at high levels of management- that make decisions, evaluate choices, and take actions that determine the fate of the firm and its stakeholders.

Short Termism is a phrase used to describe the methodology whereby a company is guided to seek maximum value in the immediate term. This practice goes far beyond high profile CEOs. According to the Ethics Research Center, 30 percent of those surveyed said organization compensation plans created pressure to break the law.

A lack of consistency between the firm’s espoused values, what they say, and their enacted values, what they do creates a culture of confusion. As a result, employees are more likely to take shortcuts or act unethically; the ends are seen to justify the means. “One of the biggest risk factors for companies today revolves around culture. If employees, the eyes and ears of the company, are afraid to raise issues or challenge management, the company is disadvantaged if not doomed.”

There are solutions to minimize unethical conduct and lead an organization to acting socially responsible:

  • Full disclosure and an irrepressible commitment to the company’s core values is the starting point for change. The company must make certain its goals are consistent with its values and actively engage employees to make certain their personal and professional goals are aligned with those of the organization
  • An organization must promote openness; employees at any level should be able to call attention to issues of concern or opportunities to demonstrate company values.
  • Organizations must practice creative abrasion to stimulate growth and challenge complacency. “Creative Abrasion is the ability to create a marketplace of ideas to generate, refine, and evolve a multitude of options through discourse, debate and even conflict.”
  • To combat a fear-based culture, the organization needs to commit time and resources to becoming a learning organization. This includes becoming deliberately developmental. This means it is accepting of the mistakes of their employees, which is part of the human condition. Mistakes should be shared, discussed, and dissected so they are opportunities to learn and grow for everyone in the team, department, or company.
  • Another part of the solution is making the core values and commitment to those values part of the company’s message to the public. It provides an opportunity for a company to declare and live their values through their actions.

Let’s define some of the benefits reaped by a socially responsible organization. According to a 2015 study conducted by Good.Must.Grow, “64 percent of customers prefer to buy from socially responsible companies.” According to The Guardian, 62% of the Millennial generation, the fastest growing segment of the work force, want to work for an ethical company.

An article in the May-June 2017 Harvard Business Review titled “The Data: Where Long-Termism Pays Off’ published a study after tracking data on 615 non-financial companies from 2001-2014. They identified 167 companies (27% of the set) had a long-term motivation.

The results fully supported a socially responsible orientation:

  • Average revenue 47% higher.
  • Average earnings 36% higher.
  • Average market capitalization 58% higher.
  • Average economic profit 81% higher.
  • Average job creation 132% higher.

Had all U.S. companies taken a similar long-term approach the results would have added more than $1 trillion in asset value and created 5,000,000 more jobs in the U.S., unlocking an additional $1 trillion in GDP.

Organizations of all sizes should examine their current views and practices with respect to social responsibility (ethics). PWC states, “A well-designed compliance programme—supported by a focus on supporting ethical behaviors—can offer clear strategic benefits.” “Unilever CEO Paul Polman argues that over the long term, social and environmental investments will lead to greater profits whereas a singular focus on short-term profits can fuel decisions that harm society and the environment.”

A socially responsible firm contributes broadly to society; they have every right to leverage their conduct into a competitive advantage with customers, suppliers, the community, and especially employees. “Corporate social responsibility initiatives can also contribute to strengthen a firm’s competitive advantage through establishing its relationship with its customers Through cause marketing companies are able to illustrate that they can mutually pursue their profitability goals and meet the needs of different stakeholders in society.”

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Economics of Ethics

Corporate Social Responsibility (CSR) is an obligation of organizations. F. Ken Chenault, former Chairman and CEO of American Express said, “A socially responsible company strives to meet a standard that’s higher than the bottom line. We must remember that corporations exist because society says they can—and society assumes we’ll contribute to the common good. That’s the bargain we strike. The social compact.”

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