NEW Business and Society A Strategic Approach To Social Responsibility

BUSINESS
SOCIETY
and
A Strategic Approach to
Social Responsibility & Ethics
Seventh Edition
O. C. Ferrell
Auburn University
Debbie Thorne
Texas State University
Linda Ferrell
Auburn University
CBP_Ferrell_FM.indd 1 03/18/2020 - tp-70a028a4-6922-11ea-a484-024 (temp temp) - Business and Society 12/9/2019 6:30:41 PM
BUSINESS & SOCIETY:
A STRATEGIC APPROACH TO SOCIAL RESPONSIBILITY & ETHICS
© 2021 Chicago Business Press
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ISBN: 978-1-948426-22-0
Brief Table of Contents
1 Social Responsibility Framework 2
2 Strategic Management of Stakeholder Relationships 36
3 Corporate Governance 64
4 Business, Government, and Regulation 94
5 The Impact of Business on Government and the

Political Environment 120
6 Business Ethics and Ethical Decision-Making 146
7 Strategic Approaches to Improving Ethical Behavior 178
8 Employee Relations 212
9 Consumer Relations 248
10 Community Relations and Strategic Philanthropy 274
11 Technology Issues 306
12 Sustainability Issues 340
13 Social Responsibility in a Global Environment 378
Case 1 Uber Fuels Controversy 399

Case 2 Fixer Upper: Home Depot Works on Stakeholder
Relationships 405
Case 3 Big-Box Retailer Walmart Manages Big Responsibility 412
Case 4 Google Searches for Solutions to Privacy Issues 425
Case 5 CVS Smokes the Competition in Corporate Social Responsibility 439
iii
iv Brief Table of Contents
Case 6 Volkswagen Charts a New Course: The Road to Sustainability 448

Case 7 Wells Fargo Banks on Recovery 453
Case 8 A Brew above the Rest: New Belgium Brewing 460
Case 9 Starbucks Takes on Coffee Culture 468
Case 10 If the Shoe Fits: TOMS and the One for One Movement 478
Case 11 Apple Bites into Ethics 486
Case 12 The Hershey Company’s Bittersweet Success 498
Case 13 Corporate Social Responsibility from the Outside In at Patagonia 508
Case 14 Johnson & Johnson Experiences the Pain of Recalls 512
Case 15 Herbalife Nutrition: Managing Risks and Achieving Success 520
Glossary 531
Notes 539
Index 573
Table of Contents
Preface xiii
1 Social Responsibility Framework 2

Social Responsibility Defined 4
Social Responsibility Applies to All Types of Businesses 7
Social Responsibility Needs a Strategic Focus 8
Social Responsibility Fulfills Society’s Expectations 9
Social Responsibility Requires a Stakeholder Orientation 12
Development of Social Responsibility 12
Historical Review of Social Responsibility 13
Recent Developments in Social Responsibility 15
Future Developments in Social Responsibility 16
Global Nature of Social Responsibility 18
Benefits of Social Responsibility 20
Trust 21
Customer Loyalty 22
Employee Commitment 22
Shareholder Support 23
The Bottom Line: Profits 24
National Economy 25
Framework for Studying Social Responsibility 26
Strategic Management of Stakeholder Relationships 28
Corporate Governance 28
Legal, Regulatory, and Political Issues 28
Business Ethics and Strategic Approaches to Improving Ethical Behavior 28
Employee Relations 28
Consumer Relations 29
Community and Philanthropy 29
Technology Issues 29
Sustainability Issues 29
Global Social Responsibility 30
Summary 32
Responsible Business Debate: The Brand Name You Won’t Forget: Brandless 33
Key Terms 34
Discussion Questions 34
Experiential Exercise 35
Two Sides to Tobacco: What Would You Do? 35
vi Contents
Strategic Management of Stakeholder

2
Relationships 36
Stakeholders Defined 38
Stakeholder Issues and Interaction 40
Identifying Stakeholders 40
A Stakeholder Orientation 42
Stakeholder Attributes 44
Performance with Stakeholders 47
Reputation Management 47
Crisis Management 50
Development of Stakeholder Relationships 53
Implementing a Stakeholder Perspective in Social Responsibility 54
Step 1: Assessing the Corporate Culture 54
Step 2: Identifying Stakeholder Groups 55
Step 3: Identifying Stakeholder Issues 55
Step 4: Assessing the Organization’s Commitment to Social
Responsibility 56
Step 5: Identifying Resources and Determining Urgency 56
Step 6: Gaining Stakeholder Feedback 56
Link Between Stakeholder Relationships and Social Responsibility 57
Summary 59
Responsible Business Debate: Best Buy Excels in Stakeholder Communication 61
Key Terms 62
Thai Die…Environmental Exploitation or Economic Development:
What Would You Do? 62
3 Corporate Governance 64
Corporate Governance Defined 66
Corporate Governance Framework 67
History of Corporate Governance 70
Finance Reforms 72
Corporate Governance and Social Responsibility 72
Issues in Corporate Governance Systems 75
Boards of Directors 76
Shareholder Activism 79
Investor Confidence 80
Internal Control and Risk Management 80
Executive Compensation 84
Corporate Governance Around the World 86
Future of Corporate Governance 88
Summary 90
Responsible Business Debate: Does Aligning Pay to Performance Make Cents? 92
Key Terms 92
Core-Tex Creates a Vortex Around Aggressive Accounting:
What Would You Do? 93
Contents vii
4 Business, Government, and Regulation 94

Government’s Regulatory Influence on Business 96
The Rationale for Regulation 98
Costs and Benefits of Regulation 105
Self-Regulation 107
Global Regulation 108
Government’s Nonregulatory Influence on Business 110
Government’s Focus on Deregulation 111
Deregulation 111
Benefits of Deregulation 114
Costs of Deregulation 115
Summary 115
Responsible Business Debate: Uber Puts It in Reverse on International Expansion 116
Key Terms 117
The Taxing Role of Being a Politician: What Would You Do? 118
5 The Impact of Business on Government and the

Political Environment 120
The Contemporary Political Environment 122
Changes in Congress 123
Rise of Special-Interest Groups 124
Influencing Government 124
Corporate Approaches to Influencing Government 127
Private Interest Group Influence 129
Laws and Regulations 131
Sherman Antitrust Act 131
Clayton Antitrust Act 131
Federal Trade Commission Act 133
Proposed Financial Reforms 133
Federal Sentencing Guidelines for Organizations 134
Sarbanes-Oxley Act 137
Dodd-Frank Wall Street Reform and Consumer
Protection Act 139
Summary 142
Responsible Business Debate: Good, Better, Best: The Better Business Bureau Fights for
Good Business 143
Key Terms 144
The Case of the Weight-Loss Radio Ads: What Would You Do? 145
Business Ethics and Ethical

6
Decision-Making 146
The Nature of Business Ethics 149
Foundations of Business Ethics 150
Recognizing an Ethical Issue 151
viii Contents
Ethical Issues in Business 152

Abusive or Intimidating Behavior 153
Misuse of Company Time and Resources 154
Conflict of Interest 155
Bribery 155
Discrimination and Sexual Harassment 156
Fraud 158
Privacy 159
AI and Ethics: An Emerging Issue 160
Understanding the Ethical Decision-Making Process 162
Individual Factors 162
Organizational Relationships 165
Opportunity 169
Developing an Ethical Culture 170
Organizational Values 171
Normative Considerations of Ethical Decision-Making 171
Managing the Ethical Culture: Variations of Employee Conduct 172
Summary 173
Responsible Business Debate: Sherwin-Williams Painted into a Corner 175
Key Terms 175
Moonlighting Monica: What Would You Do? 176
7 Strategic Approaches to Improving Ethical

Behavior 178
Scope and Purpose of Organizational Ethics Programs 180
Codes of Conduct 183
Ethics and Compliance Officers 185
Ethics Training and Communication 186
Establishing Systems to Monitor and Enforce Ethical Standards 189
Systems to Monitor and Enforce Ethical Standards 189
Observation and Feedback 190
Whistleblowing 191
Continuous Improvement of the Ethics Program 192
Institutionalization of Business Ethics 193
Voluntary, Core Practices, and Mandatory Boundaries of Ethics Programs 193
Ethical Leadership 194
Leadership Power 196
The Role of an Ethical Corporate Culture 198
Requirements of Ethical Leadership 199
Benefits of Ethical Leadership 201
Leadership Styles 201
Leader-Follower Relationships 204
Ethical Leadership Communication 204
Summary 207
Responsible Business Debate: Trust Us...Good Ethics Is Good Business 209
Key Terms 210
Upcharging the Government: What Would You Do? 210
Contents ix
8 Employee Relations 212

Employee Stakeholders 214
Responsibilities to Employees 214
Economic Issues 215
Legal Issues 222
Ethical Issues 231
Philanthropic Issues 239
Strategic Implementation of Responsibilities to Employees 240
Summary 242
Responsible Business Debate: The Pros and Cons of Hiring Convicted Criminals 243
Key Terms 245
X, Y, & Millennial: What Would You Do? 245
9 Consumer Relations 248

Consumer Stakeholders 250
Responsibilities to Consumers 251
Economic Issues 251
Legal and Regulatory Issues 253
Ethical Issues 260
Strategic Implementation of Responsibilities to Consumers 269
Summary 270
Responsible Business Debate: Clearance Pricing: Business Communication in Practice 271
Key Terms 272
There’s a Ringing in My Ears: What Would You Do? 272
10 Community Relations and Strategic

Philanthropy 274
Community Stakeholders 276
Responsibilities to the Community 281
Economic Issues 281
Legal Issues 283
Ethical Issues 284
Philanthropic Contributions 286
Strategic Philanthropy Defined 289
Strategic Philanthropy and Social Responsibility 290
Strategic Philanthropy Versus Cause-Related Marketing 291
Social Entrepreneurship and Social Responsibility 293
History and Development of Social Entrepreneurship 293
Types of Social Entrepreneurship 295
Social Entrepreneurship and Strategic Philanthropy 295
Benefits of Strategic Philanthropy 296
Implementation of Strategic Philanthropy 299
x Contents
Top Management Support 299

Planning and Evaluating Strategic Philanthropy 299
Summary 302
Responsible Business Debate: The Giving Pledge 304
Key Terms 305
Creating “Buy-in” for Volunteerism: What Would You Do? 305
11 Technology Issues 306

The Nature of Technology 308
Characteristics of Technology 308
Effects of Technology 309
Technology’s Influence on the Economy 311
Economic Growth and Employment 311
Economic Concerns about the Use of Technology 312
Technology’s Influence on Society 313
The Internet 313
Privacy 316
Intellectual Property 322
Artificial Intelligence 325
Health and Biotechnology 328
Strategic Implementation of Responsibility for Technology 333
The Role of Government 333
The Role of Business 334
Strategic Technology Assessment 334
Summary 336
Responsible Business Debate: Ctrl-Alt-Delete: Exploring the Downside of Technology 337
Key Terms 338
The Email Police: What Would You Do? 339
12 Sustainability Issues 340

Defining Sustainability 342
How Sustainability Relates to Social Responsibility 343
Global Environmental Issues 344
Atmospheric Issues 344
Water Issues 350
Land Issues 352
Biodiversity 355
Genetically Modified Organisms 356
Environmental Policy and Regulation 359
Environmental Protection Agency 359
Environmental Legislation 360
Alternative Energy 363
Wind Power 364
Geothermal Power 364
Solar Power 365
Nuclear Power 365
Contents xi
Biofuels 365
Hydropower 366
Business Response to Sustainability Issues 366
Supply Chain Issues 367
Green Marketing 367
Greenwashing 368
Strategic Implementation of Environmental Responsibility 368
Recycling Initiatives 369
Stakeholder Assessment 370
Risk Analysis 370
The Strategic Environmental Audit 371
Summary 372
Responsible Business Debate: The Powers That Be: How Sustainable Is Nuclear Energy? 374
Key Terms 375
The “Sustainability” of Sustainability: What Would You Do? 375
13 Social Responsibility in a Global

Environment 378
Cultural Intelligence 380
Global Stakeholders 382
Shareholder Relations and Corporate Governance 384
Employee Relations 385
Consumer Relations 388
Global Development 389
Conventional Business Partnerships 391
Corporate Social Responsibility Partnerships 392
Corporate Accountability Partnerships 393
Social Economy Partnerships 393
Global Reporting Initiative 395
Summary 396
Responsible Business Debate: The Gloves Are Off: The U.S.-China Trade War
Escalates 397
Key Terms 398
Manufacturing Misconduct: What Would You Do? 398
Case 2 Fixer Upper: Home Depot Works on Stakeholder Relationships 405
Case 5 CVS Smokes the Competition in Corporate Social Responsibility 439
xii Contents
Case 15 Herbalife Nutrition: Managing Risks and Achieving Success 520
Glossary 531
Notes 539
Index 573
Preface
T
his edition of Business and Society: A Strategic Approach to Social
Responsibility has been thoroughly updated to capture new challenges
and evolving opportunities. We were one of the first business and society
textbooks to use a strategic framework that integrates business and society
into organizational strategies, and now we are pleased to introduce our seventh
edition. Today in corporate America, social responsibility is a major consideration
in strategic planning. Most boards of directors face issues related to sustain-
ability, legal responsibilities, employee well-being, consumer protection, corporate
governance, philanthropy, as well as emerging social issues. Social responsibility
has been linked to financial performance, and business and society courses are as
important as other functional areas in preparing students for their careers.
In this text, we demonstrate and help the instructor prove that social respon-
sibility is a theoretically grounded yet highly actionable and practical field of
interest. The relationship between business and society is inherently controversial
and complex, yet the intersection of its components, such as corporate governance,
workplace ethics, community needs, and technology, is experienced in every
organization. For this reason, we developed this text to effectively assist decision-
making and inspire the application of social responsibility principles to a variety
of situations and organizations.
Because of this transformation of corporate responsibility, the seventh edition
of Business and Society: A Strategic Approach to Social Responsibility is designed
to fully reflect these changes. We have been diligent in this revision about discuss-
ing the most current knowledge and describing best practices related to social
responsibility. The innovative text, cutting-edge cases, and comprehensive teach-
ing and learning package for Business and Society ensure that business students
understand and appreciate concerns about philanthropy, employee well-being,
corporate governance, consumer protection, social issues, and sustainability.
We also address how technology, including artificial intelligence (AI) and its
enablers, such as blockchain, drones, and robotics, is impacting the world we live
in. AI is rapidly changing business as we know it and raises many ethical concerns
about how the technology is used. For example, without ethical decision-making
abilities and parameters, AI could result in accidental or intentional discrimination.
Businesses must establish checks and balances to make public safety and security
a priority. Additionally, AI is quickly changing the workforce as more automated
tasks are performed by robots and drones. We address all of these advancements
in technology and the benefits and threats they bring.
Business and Society is a highly readable and teachable text that focuses on
the reality of social responsibility in the workplace. We have revised the seventh
edition to be the most practical and applied business and society text available. A
differentiating feature of this book is its focus on the role that social responsibility
takes in strategic business decisions. We demonstrate that studying social responsi-
bility provides knowledge and insights that positively contribute to organizational
performance and professional success. This text prepares students for the social
responsibility challenges and opportunities they will face throughout their careers.
xiii
xiv Preface
We provide the latest examples, stimulating cases, and unique learning tools that
capture the reality and complexity of social responsibility. Students and instructors
prefer this book because it presents examples, tools, and practices needed to
develop and implement a socially responsible business strategy. Finally, this book
makes the assumption that students will be working in an organization trying to
improve social responsibility and will not be just critics of business.
Important Changes to the Seventh Edition

The seventh edition has been revised to include new examples, vignettes, and cases.
A new full-color design is more engaging and helps the student better understand
the visual supports in the book.
Each chapter of the text has been updated to include recent social responsibil-
ity issues related to the economy, ethical decision-making, and concerns about
corporate governance. Chapter 4 has been broken out into two chapters: Chapter
4, Business, Government, and Regulation and Chapter 5, The Impact of Business
on Government and the Political Environment. This allowed us to expand the
content and include more real-world examples to help students better understand
the concepts. Chapter 11, Technology Issues, has been updated to include a new
section on artificial intelligence, introducing key terms such as machine learning
and deep learning.
Opening cases at the start of each chapter address a variety of issues related
to the chapter content, including strategic philanthropy, fraud, corporate culture,
and sustainability. Companies featured in these cases include IKEA, the NFL,
Cascade Engineering, and Alibaba. Additional real-world examples of corporate
social responsibility are provided in the Ethical Responsibilities and The Earth in
Balance boxed readings. The Ethical Responsibilities boxed readings include ethi-
cal challenges in different areas of business, including human resources, marketing,
banking, and technology. Topics discussed in these vignettes include blockchain
technology, the legalization of marijuana, and minimum wage. The Earth in the
Balance boxed readings focus on social responsibility related to sustainability
issues. These vignettes discuss green initiatives at companies such as Evrnu and
Patagonia.
The Responsible Business Debate exercise at the end of each chapter introduces
a business-related issue and presents two competing perspectives. The debate is posi-
tioned so that class teams can defend a position and analyze topics, giving students
the opportunity to engage in active learning. Topics discussed include the U.S.-China
trade war, the sustainability of nuclear energy, and the downside of technology.
We have provided 15 case studies at the back of book for use as assignments
and for class discussion. All of the cases are new or significantly updated. They
include Google and privacy solutions, Volkswagen and sustainability, and ethics
at Apple.
Content and Organization

Professors who teach business and society courses come from diverse backgrounds,
including law, management, marketing, philosophy, and many others. Such diver-
sity affords great opportunities to the field of business and society and showcases
the central role that social responsibility occupies within various academic, profes-
sional, and community circles. Because of the widespread interest and multiplicity
of stakeholders, the philosophy and practice of social responsibility is both exciting
and debatable; it is in a constant state of discussion and refinement—just like all
important business concepts and practices.
Preface xv
We define social responsibility in Chapter 1, “Social Responsibility

Framework,” as the strategic focus for fulfilling economic, legal, ethical, and
philanthropic responsibilities. To gain the benefits of social responsibility,
effective and mutually beneficial relationships must be developed with customers,
employees, investors, the government, communities, and others who have a stake
in the company. We believe that social responsibility must be fully valued and
championed by top managers and granted the same planning time, priority, and
management attention as any company initiative. Therefore, the framework for
the text reflects a process that begins with the social responsibility philosophy,
includes the four types of responsibilities, involves many types of stakeholders,
and ultimately results in both short- and long-term performance gains. We also
provide a strategic orientation, so students will develop the knowledge, skills,
and attitudes for understanding how organizations achieve many benefits through
social responsibility.
Chapter 2, “Strategic Management of Stakeholder Relationships,” examines
the types and attributes of stakeholders, how stakeholders become influential,
and the processes for integrating and managing their influence on a firm. The
chapter introduces the stakeholder interaction model and examines the impact
on global business, corporate reputation, and crisis situations on stakeholder
relationships.
Chapter 3, “Corporate Governance,” examines the rights of shareholders, the
accountability of top management for corporate actions, executive compensation,
and strategic-level processes for ensuring that economic, legal, ethical, and phil-
anthropic responsibilities are satisfied. Because both daily and strategic decisions
affect a variety of stakeholders, companies must maintain a governance structure
for ensuring proper control and responsibility for their actions. Corporate gov-
ernance is an integral element for social responsibility, which, until the recent
scandals, had not received the same level of emphasis as issues such as environment
and human rights.
Chapter 4, “Business, Government, and Regulation,” and Chapter 5, “The
Impact of Business on Government and the Political Environment,” explore the
complex relationship between business and government. Every business must be
aware of and abide by the laws and regulations that dictate required business
conduct. Chapter 5 also examines how businesses can participate in public policy
to influence government. A strategic approach for legal compliance, based on the
Federal Sentencing Guidelines for Organizations, is also provided.
Chapter 6, “Business Ethics and Ethical Decision-Making,” and Chapter 7,
“Strategic Approaches to Improving Ethical Behavior,” are devoted to exploring
the role of ethics and ethical leadership in business decision-making. Business eth-
ics relates to responsibilities and expectations that exist beyond legally prescribed
levels. We examine the factors that influence ethical decision-making and consider
how companies can apply this understanding to improve ethical conduct. We
fully describe the components of an organizational ethics program and detail the
implementation plans needed for effectiveness.
Chapter 8, “Employee Relations,” and Chapter 9, “Consumer Relations,”
explore relationships with two pivotal stakeholders—consumers and employees.
These constituencies, although different by definition, have similar expectations
of the economic, legal, ethical, and philanthropic responsibilities that must be
addressed by businesses.
Chapter 10, “Community Relations and Strategic Philanthropy,” examines
companies’ synergistic use of organizational core competencies and resources to
address key stakeholders’ interests and achieve both organizational and social
benefits. While traditional benevolent philanthropy involves donating a percentage
of sales to social causes, a strategic approach aligns employees and organizational
resources and expertise with the needs and concerns of stakeholders. Strategic
xvi Preface
philanthropy involves both financial and nonfinancial contributions to stakehold-

ers, but it also directly benefits the company.
Chapter 11, “Technology Issues,” covers the unique issues that arise as a result
of enhanced technology in the workplace and business environment, including
its effects on privacy, intellectual property, and health. This chapter explores the
ethical concerns raised by artificial intelligence and its enablers such as big data,
blockchain, drones, and robotics. The strategic direction for technology depends
on the government’s and businesses’ ability to plan, implement, and audit the
influence of technology on society.
Chapter 12, “Sustainability Issues,” explores the significant environmental
issues business and society face today, including air pollution, global warming,
water pollution and water quantity, land pollution, waste management, deforesta-
tion, urban sprawl, biodiversity, genetically modified organisms, and alternative
energy. This chapter also considers the impact of government environmental policy
and regulation and examines how some companies are going beyond these laws to
address environmental issues and act in an environmentally responsible manner.
Chapter 13, “Social Responsibility in a Global Environment,” is a chapter
that addresses the unique issues found in a global business environment. Emerging
trends and standards are placed in a global context.
Features
Chapter Opening Cases and Real Company Examples
Company examples and anecdotes from all over the world are found throughout
the text. The purpose of these tools is to take students through a complete strategic
planning and implementation perspective on business and society concerns by
incorporating an active and team-based learning perspective. Every chapter
opens with a vignette and includes examples that shed more light on how social
responsibility works in today’s business. In this edition, all boxed readings focus
on managerial and global dimensions of social responsibility. Chapter opening
objectives, a chapter summary, boldfaced key terms, and discussion questions at
the end of each chapter help direct students’ attention to key points.
Experiential Exercises
Experiential exercises at the end of each chapter help students apply social responsi-
bility concepts and ideas to business practice. Most of the exercises involve research
on the activities, programs, and philosophies that companies and organizations
are using to implement social responsibility today. These exercises are designed
for higher-level learning and require students to apply, analyze, synthesize, and
evaluate knowledge, concepts, practices, and possibilities for social responsibility.
At the same time, the instructor can generate rich and complex discussions from
student responses to exercises. For example, the experiential exercise for Chapter
1 asks students to examine Fortune magazine’s annual list of the Most Admired
Companies. This exercise sets the stage for a discussion on the broad context in
which stakeholders, business objectives, and responsibilities converge.
“What Would You Do?” exercises depict people in real-world scenarios who
are faced with decisions about social responsibility in the workplace. One exercise
(see Chapter 5) discusses the dilemma faced by a nutritional supplement company
that hired an advertising agency to promote its products. The agency and the
supplement company came under fire of the Federal Trade Commission for making
unsubstantiated claims. At the end of the exercise, students are asked to examine
liability and damage control.
Preface xvii
A new debate issue is also located at the end of each chapter. The topic of
each debate deals with a real-world company or dilemma that is both current and
controversial. Many students have not had the opportunity to engage in a debate
and to defend a position related to social responsibility. This feature highlights
the complexity of ethical issues by creating a dialog on the advantages and
disadvantages surrounding various issues. The debates also help students develop
their critical thinking, research, and communication skills.
Cases
So that students learn more about specific practices, problems, and opportunities
in social responsibility, 15 cases are provided at the end of the book. The cases
represent a comprehensive collection for examining social responsibility in a
multidimensional way. The 15 cases allow students to consider the effects of
stakeholders and responsibility expectations on larger and well-known businesses.
These cases represent the most up-to-date and compelling issues in social respon-
sibility. All of the cases used in this book are original and have been updated with
all developments that have occurred through 2019. Students will find these cases
to be pivotal to their understanding of the complexity of social responsibility in
practice. The following provides an overview of the 15 cases:
• Case 1: Uber Fuels Controversy. This case discusses the success of Uber
and the regulatory challenges they face as they expand globally. One of the
biggest controversies is the fact that Uber drivers do not always have to be
professionally licensed, unlike taxi company drivers. This has led several
cities worldwide to place bans on certain Uber services. This case also
examines Uber’s new product offerings.
• Case 2: Fixer Upper: Home Depot Works on Stakeholder Relationships.
Although Home Depot faced a decrease in customer satisfaction in the
past, they have implemented a number of initiatives to restore their
ethical reputation with stakeholders. Some major initiatives include their
diversity supplier program, their use of wood certified by the Forest
Stewardship Council, and their philanthropic involvement with Habitat
for Humanity. Above all, Home Depot has adopted a stakeholder
orientation that considers how they can best meet the needs of their
various stakeholders.
• Case 3: Big-Box Retailer Walmart Manages Big Responsibility. This case
examines the ups and downs of retail giant Walmart. Many feel that
Walmart has had a negative impact on many communities by putting small
business owners out of business, a sensation called the “Walmart Effect.”
Additionally, Walmart has faced ongoing criticism for the treatment and
pay of their employees. Additionally, this case explores Walmart’s strides in
sustainability and robotics.
• Case 4: Google Searches for Solutions to Privacy Issues. This case describes
Google’s path to success, their product mix, and their company culture. It
dives deep into the ongoing data privacy concerns Google has created as
well as the legal trouble the company faces worldwide.
• Case 5: CVS Smokes the Competition in Corporate Social Responsibility.
This case examines the corporate social responsibility initiatives of CVS as
well as ethical challenges they have faced. Of particular interest is CVS’s
decision to drop profitable tobacco products from stores to better align
themselves as a health services company.
• Case 6: Volkswagen Charts a New Course: The Road to Sustainability.
This case explores the origin of Volkswagen and the company’s rise in
popularity. This case focuses on the emissions scandal that undermined the
xviii Preface
firm’s previous reputation for quality and integrity. The case also examines
Volkswagen’s attempts to rebuild their reputation.
• Case 7: Wells Fargo Banks on Recovery. This case discusses what mistakes
Wells Fargo made that led to the creation of more than 3.5 million fake
customer accounts. Wells Fargo employees faced unrealistic goals, which
created a toxic corporate culture that fueled the fraud for years. The case
also explores the company’s struggle to regain the trust of their customers.
• Case 8: A Brew Above the Rest: New Belgium Brewing. This case examines
the background of New Belgium Brewing and their social responsibility
initiatives. The company’s strong emphasis on sustainability and employee
involvement are discussed as examples of how the craft brewery has been
able to maintain their corporate values since their founding.
• Case 9: Starbucks Takes on Coffee Culture. This case examines Starbucks’
foundation for a socially responsible culture. It describes how Starbucks
strives to meet the needs of different stakeholders and how this stakeholder
emphasis has led to the development of successful products and a strong
brand image. This case also explores recent challenges the company has
faced with racial bias.
• Case 10: If the Shoe Fits: TOMS and the One for One Movement. TOMS
Shoes is a for-profit business with a large philanthropic component. This
case examines the One for One model and the movement TOMS created
with their product mix and promotion strategies. This case also explores
how TOMS is evolving both their mission and business model.
• Case 11: Apple Bites into Ethics. This case examines Apple’s early struggles
as a computer company as well as the company’s peak popularity. The case
considers Apple’s continued innovation and efforts to stay ahead of the
pack. This case also explores privacy concerns and antitrust issues faced by
the tech giant.
• Case 12: The Hershey Company’s Bittersweet Success. This case explores
Hershey’s success and considers the inherent ethical conflicts that come from
operating in the cocoa industry. It also examines Hershey’s commitment to
ethics and social responsibility as wells as the challenges the firm faces.
• Case 13: Corporate Social Responsibility from the Outside In at Patagonia.
Patagonia has integrated core beliefs and values into every product they
produce and is known for their innovative designs, exceptional quality, and
environmental ingenuity. This case examines Patagonia’s unique promotion
strategies and how their corporate culture aligns with their values.
• Case 14: Johnson & Johnson Experiences the Pain of Recalls. This case
examines the struggle of Johnson & Johnson, one of the world’s most
admired companies, as they faced multiple product recalls of their Tylenol
product and legal issues with their baby powder.
• Case 15: Herbalife Nutrition: Managing Risks and Achieving Success. This
case considers the accusations levied against Herbalife by activist investor
William Ackman charging Herbalife’s business model as being a pyramid
scheme. It also highlights the difference between a pyramid scheme and a
multilevel marketing compensation model and applies this distinction to
Herbalife’s business model.
Role-Play Exercises
In addition to many examples, end-of-chapter exercises, and the cases, we provide
three role-play exercises in the Instructor’s Manual. The role-play exercises, built
around a fictitious yet plausible scenario or case, support higher-level learning
objectives, require group decision-making skills, and can be used in classes of any
size. Implementation of the exercises can be customized to the time frame, course
Preface xix
objectives, student population, and other unique characteristics of a course. These

exercises are aligned with trends in higher education toward teamwork, active learn-
ing, and student experiences in handling real-world business issues. For example,
the National Farm & Garden exercise places students in a crisis situation involving
a product defect that requires an immediate response and consideration of changes
over the long term. The Soy-Dri exercise requires students to come up with an action
plan for how to deal with customer confusion over the appropriate use of different
products. The Shockvolt exercise places students in a situation in which they must
determine the ethics and potential legal implications for marketing an energy drink.
The role-play simulations (1) give students the opportunity to practice making
decisions that have consequences for social responsibility, (2) utilize a team-based
approach, (3) recreate the pressures, power, information flows, and other factors
that affect decision-making in the workplace, and (4) incorporate a debriefing
and feedback period for maximum learning and linkages to course objectives. We
developed the role-play exercises to enhance more traditional learning tools and to
complement the array of resources provided to users of this text. Few textbooks
offer this level of teaching support and proprietary learning devices.
Supplements
The comprehensive Instructor’s Manual includes chapter outlines, answers to the
discussion questions at the end of each chapter, comments on the experiential exer-
cises at the end of each chapter, comments on each case, and a sample syllabus.
The role-play exercises are included in the manual along with specific suggestions
for using and implementing them in class.
The Test Bank provides multiple choice and true-false questions for each
chapter and includes a mix of descriptive and application questions.
A PowerPoint slide program is available for easy downloading and provides a
recap of the highlights in each chapter.
Visit www.chicagobusinesspress.com to request access to the instructor
supplements.
The book is also available with CourseBank, a pre-built online course of assets
and auto-graded assignments that easily integrates with Blackboard, Canvas, D2L,
Moodle, or any other LMS.
Authors’ Website
O. C. Ferrell and Linda Ferrell have established a teaching resource website with
the Center for Ethical Organizational Cultures at Auburn University’s Raymond
J. Harbert College of Business. Their publicly accessible website contains original
cases, debate issues, and role-play simulations on select business and society
topics as well as other resources such as articles on ethics and social responsibil-
ity education. It is possible to access this website at http://harbert.auburn.edu/
research-and-centers/center-for-ethical-organizational-cultures/.
Acknowledgments
A number of individuals provided reviews and suggestions that helped improve
the text and related materials, specifically, Justin Blount at Stephen F. Austin State
University, Martha Broderick at University of Maine, Bienvenido Cortes at Pittsburg
State University, Kathryn Coulter at Mount Mercy University, William Ferris at
Western New England University, David Jacobs at Morgan State University, Ricki
Ann Kaplan at East Tennessee State University, Velvet Landingham at Kent State
xx Preface
University, Vitaly Nishanov at University of Washington, Laura Rifkin at Pace

University, Sandra Roberts at Barry University, Brandon Shamim at Woodbury
University, Patricia Smith at North Carolina Wesleyan College, and Dan Thoman
at George Mason University. We sincerely appreciate their time, expertise, and
interest in this project.
We wish to acknowledge the many people who played an important role in the
development of this book. Kelsey Reddick, Sarah Sawayda, Jennifer Sawayda, and
Dr. Catherine Helmuth played a key role in research, writing, editing, and project
management. We would like to thank Paul and Jane Ducham at Chicago Business
Press for their leadership and support of this edition. Finally, we express much
appreciation to our colleagues and the administration at Texas State University-San
Marcos and Auburn University. Our goal is to provide materials and resources that
enhance and strengthen teaching, learning, and thinking about social responsibil-
ity. We invite your comments, concerns, and questions. Your suggestions will be
sincerely appreciated and utilized.
O. C. Ferrell
Debbie M. Thorne
Linda Ferrell
CHAPTER
1 Social
Responsibility
Framework
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IKEA Puts It All on the Table with Social Responsibility
IKEA is a favorite among customers searching for IKEA has also found that CSR is a powerful recruiting
well-designed products at low prices. IKEA stores tool. Many potential employees look for employers
sell ready-to-assemble furniture, appliances, and who share their values. Through CSR, IKEA can help
household goods. Today the firm is the largest fur- its community while attracting better talent.
niture retailer in the world, with 139,000 employees In 1982, IKEA launched the IKEA Foundation.
operating in 43 countries. Germany is the firm’s Initially, the foundation focused on architecture and
largest market, followed by the United States and interior design, but then it expanded to fight for
France. Its diverse variety of products includes furni- children’s rights and education. Recently, the IKEA
ture, food, large items such as cabinetry, and smaller Foundation awarded a grant of $2.3 million to the
items such as kitchenware, decor, and small plants. World Resources Institute to help bring clean elec-
IKEA also operates restaurants within its stores. tricity to 1 million people in India and East Africa. In
IKEA is highly focused on design, viewing it as these areas, many schools, clinics, and agricultural
a competitive advantage. For instance, IKEA stores facilities are without power. The grant will be used to
have been designed intentionally to what some create a map that shows the demand for electricity
describe as a maze that encourages shoppers to in these areas. Once this map is created, the World
go through the entire store. Some customers find Resources Institute will be able to better identify
themselves lost or retracing their steps. This strategy areas in need of electricity and other resources.
allows shoppers to see a wide variety of IKEA items, Another focus for IKEA is reducing carbon emis-
possibly leading to impulse or add-on purchases. sions. In fact, IKEA’s long-term goal is to become
IKEA was founded in Sweden in 1943 by Ingvar carbon positive, which means they will remove more
Kamprad. The culture of the company heavily carbon dioxide than they create. IKEA is already
reflects Swedish culture, which values hard-working, moving toward this goal by switching to electric
friendly, and helpful people. These values helped delivery trucks. The company plans to switch to
create IKEA’s vision, which is “to create a better only electric trucks in major cities like New York and
everyday life for the many people,” according to the Paris and is committed to completely switching over
company’s website. IKEA aims to accomplish this to electric trucks in every location by 2025. IKEA
Shutterstock/Nut Witchuwatanakorn
not only through selling affordable home furnishing has already invested around $2 billion in renewable
products, but also by helping people around the energy. By 2030, IKEA plans to cut emissions from
world. One way that IKEA hopes to help people is stores by 80 percent and reduce emissions from
by helping the planet, by reducing carbon emis- deliveries and customer travel by 50 percent. These
sions and creating sustainable energy through solar are lofty goals, but the company has invested con-
panels that they sell. siderable resources into becoming carbon positive.
Corporate social responsibility (CSR) is a large For IKEA, CSR is at the very core of its heritage
factor in IKEA’s company culture. IKEA uses CSR to and current culture. IKEA aims to create value for
expose its employees to new challenges. Employees customers by selling stylish, low-cost home furnish-
at IKEA are encouraged to mentor young students, ing products. However, the company doesn’t stop
assist senior citizens, and other altruistic actions. By there. It also feels that to sustain the planet, it must
volunteering for these tasks, employees can learn reduce its environmental impact and encourage its
valuable skills that they can transfer to their jobs. customers to do the same.1
Chapter Objectives
●● Define the concept of social responsibility
●● Trace the development of social responsibility
●● Examine the global nature of social responsibility
●● Discuss the benefits of social responsibility
●● Introduce a framework for understanding social responsibility
4 Business and Society
B usinesses today must cope with challenging decisions related to their

interface with society. Consumers and other stakeholders are increas-
ingly emphasizing the importance of companies’ reputations, which are
often based on ethics and social responsibility. The meaning of the term “social
responsibility” goes beyond being philanthropic or environmentally sustainable.
Recent research has concluded that a clear majority (75 percent) of consumers
feel that social responsibility is important in developing their attitudes toward the
brands they purchase. Social responsibility actions are often quite visible and dis-
coverable, unlike other types of actions that companies take.2 In an era of intense
global competition and increasing media scrutiny, consumer activism, and govern-
ment regulation, all types of organizations need to become adept at fulfilling these
expectations. Like IKEA, many companies are trying, with varying results, to meet
the many economic, legal, ethical, and philanthropic responsibilities they now
face. Satisfying the expectations of social responsibility is a never-ending process
of continuous improvement that requires leadership from top management, buy-in
from employees, and good relationships across the community, industry, market,
and government. Companies must plan, allocate, and use resources properly to
satisfy the demands placed on them by investors, employees, customers, business
partners, the government, the community, and others. Those who have an interest
or stake in the company are referred to as “stakeholders.”
In this chapter, we examine the concept of social responsibility and how it
relates to today’s complex business environment. First, we define social responsi-
bility. Next, we consider the development of social responsibility, its benefits to
organizations, and the changing nature of expectations in our increasingly global
economy. Finally, we introduce the framework for studying social responsibility
used in this text, which includes such elements as strategic management for stake-
holder relations; legal, regulatory, and political issues; business ethics; corporate
governance; consumer relations; employee relations; philanthropy and community
relations; technology issues; sustainability issues; and global relations.
Social Responsibility Defined

Business ethics, corporate volunteerism, philanthropic activities, going green,
sustainability, corporate governance, reputation management—these are concepts
that you may have heard used, or even used yourself, to describe the various rights
and responsibilities of business organizations. You may have thought about what
these concepts actually mean for business practice. You may also have wondered
how businesses engage in these behaviors or contribute to these outcomes. In
this chapter, we clarify some of the confusion that exists in the terminology that
people use when they talk about expectations for business. To this end, we begin
by defining social responsibility.
license to operate In most societies, businesses are granted a license to operate and the right
permission to conduct a business to exist through a combination of social and legal institutions. Businesses are
activity, subject to regulation by
expected to provide quality goods and services, abide by laws and regulations,
the licensing authority
treat employees fairly, follow through on contracts, protect the natural environ-
ment, meet warranty obligations, and adhere to many other standards of good
business conduct. Companies that continuously meet and exceed these standards
are often rewarded with customer satisfaction, employee dedication, investor
loyalty, strong relationships in the community, positive news and social media
reports, and the time and energy to continue focusing on business-related concerns.
Firms that fail to meet these responsibilities can face penalties, both formal and
informal, and may have their attention diverted from core business practice. For
example, Volkswagen received a number of penalties, negative media coverage,
and criticisms for installing so-called defeat devices into its diesel vehicles, which
Chapter 1 Social Responsibility Framework 5
were intended to fool regulators. While the cars were undergoing emissions
testing, they ran below their actual emissions performance to meet requirements.
However, when on the road, these same cars emitted 40 times the allowable limit
of emissions in the United States. Perhaps most damaging to the firm is that this
scandal was a clear and deliberate attempt to bypass environmental rules. German
prosecutors launched an investigation to determine whether top executives also
misled investors by failing to inform them about complaints filed against the
company in a timely manner. Overall, recent reports estimate that Volkswagen has
paid $25 billion due to the firm’s unlawful actions in the “dieselgate” scandal.3
The goal is to prevent these negative outcomes in the future.
A large multinational corporation may be faced with protestors who voice
their disdain publicly. More firms realize when their products are used in contro-
versially debated activities, they assume the burden. For example, international
tensions erupted when Caterpillar and Volvo’s bulldozers were scheduled to be
used to destroy a Palestinian village. Activists and humanitarian groups took to
social media to demand a boycott of Caterpillar and Volvo due to their products’
involvement in the planned destruction of Palestinian homes and structures.4
Whether the public attacks are physical or virtual, companies often spend signifi-
cant resources in explaining and defending their business decisions.
Finally, a company engaged in alleged deceptive practices may face formal
investigation by a government agency and spend years defending itself. In many
cases, these strategies have proved unsuccessful and led to significant penalties,
oversight and monitoring agreements, investor lawsuits, and new regulations for
the company’s entire industry. For example, the Federal Trade Commission (FTC)
opened an investigation in 2017 after Equifax disclosed that the firm suffered a
major data breach that affected approximately 143 million Americans by allowing
hackers unfettered access to their social security numbers, birth dates, and home
addresses.5 While the FTC does not always publicly confirm its investigations, the
enormity of Equifax’s data breach and subsequent public outcry led the FTC to
disclose its plan. Members of Equifax’s executive leadership team added insult to
injury when reports surfaced that top managers sold large qualities of stock before
the data breach was disclosed to the public. The Equifax example demonstrates that
governmental agencies will use their full authority to investigate dubious corporate
activities.6
Businesses today are expected to look beyond their self-interest and recognize
that they belong to a larger group, or society, that expects responsible participa-
tion. Therefore, if any group, society, or institution is to function, there must be a
delicate interplay between rights (i.e., what people expect to get) and responsibili-
ties (i.e., what people are expected to contribute) for the common good. Research
indicates that the most ethical and socially responsible companies are the most
profitable.7 Therefore, responsible conduct and policies yield significant benefits
to society, as well as to shareholders and other investors. While the media provide
much coverage of misconduct and illegal activities in business, most businesses try
to act in an ethical and socially responsible manner.
The term social responsibility came into widespread use in the business world
during the 1970s. It has evolved to emphasize seven main areas: social issues,
consumer protection, sustainability, corporate governance, philanthropy, legal
responsibilities, and employee well-being. common good
the development of social
We identify seven issues within social responsibility. First, social issues are
conditions that allow for societal
linked with the idea of common good. The common good is associated with the welfare and fulfillment to be
development of social conditions that allow societal welfare and fulfillment to be achieved
achieved. In other words, social issues involve the ethical responsibilities a firm owes
to society. Equal rights, gender roles, marketing to vulnerable populations, data consumer protection laws
regulations enacted to protect
protection, and internet tracking are examples of social issues common in business. vulnerable members of society
Second, consumer protection laws were enacted to protect vulnerable members with formal safeguards for
of society. Consumer protection laws were necessary because they created consumers
formalized safeguards for unsuspecting consumers. For example, the FTC’s Bureau
of Consumer Protection attempts to limit prejudicial and deceitful business
practices by gathering consumer complaints of deceptive conduct. From a legal
perspective, the Bureau of Consumer Protection researches unlawful behavior, sues
perpetrating organizations, ensures just marketplace practices, and teaches consum-
ers and companies of their responsibilities and rights. As a society, it is important to
provide legal protection and education for consumers and businesses alike.8
sustainability Third, sustainability has also become a growing area of concern in society.
a company’s economic, In the United States, the term is used more often to refer to the environmental
environmental, and social
impact on stakeholders. Green marketing practices, consumption of resources, and
performance
greenhouse gas emissions are important sustainability considerations that socially
responsible businesses will have to address.
corporate governance Fourth, corporate governance refers to formal systems of accountability, over-
a company’s formal system of sight, and control. Corporate governance is becoming an increasingly important
accountability, oversight, and
topic in light of the number of business scandals over the last 10 to 15 years. Issues
control
in corporate governance include concerns over executive compensation, internal
control mechanisms, and risk management.
philanthropy Fifth, philanthropy is a key element of social responsibility. Corporate philan-
the desire to improve the welfare thropy is demonstrated in many forms. For example, corporations can contribute
of others through donations of
financially through cash donations or organizational members can gift their time
money, resources, or effort
through volunteerism. Another way that organizations undertake philanthropic
initiatives is through outside partnerships with nonprofit firms and charities.
Alternatively, corporations may establish in-house philanthropic programs,
thereby overseeing their own socially responsible works, when executives feel that
their firms’ philanthropic giving and strategic direction are aligned.9
legal responsibility Sixth, legal responsibility is a central factor of social responsibility. Legal
the most basic expectation that a responsibility is often thought of as the most basic expectation. Accordingly,
company must comply with the law
organizations must show that they have exceeded their legal responsibilities before
they can address their ethical purposes and standards. Legal responsibility is a key
foundational issue that affects firms’ stakeholder evaluations.10
employee well-being Finally, employee well-being occurs when organizations create a safe and
the health and wellness of healthy employment environment for their workforce. Such activities include
employees, including how workers
protecting employees’ health and safety while creating job opportunities for
feel about their work and their
working environment development and growth. Employees thrive when their managers treat them
with dignity and provide an atmosphere that emphasizes dynamic opportunities
to contribute to the firm’s overall mission and vision.11 Taken together, social
responsibility issues speak to the diverse array of corporate practices that affect
firms’ decision-making processes. Figure 1.1 discusses the social responsibility
issues that we will be covering in this text.
Figure 1.1 Major Emphases of Social Responsibility
Issues
Recognition Outcomes
Social issues
Consumer protection
Issue Awareness Decisions
Sustainability
Corporate governance
Philanthropy
Legal responsibilities
Employee well-being
Stakeholder Evaluations
Source: © O.C. Ferrell, 2019.
These seven areas of social responsibility tend to conflict with the traditional
or neoclassical view of a business’s responsibility to society. The traditional view
of social responsibility, articulated in the famous economist Milton Friedman’s
1962 Capitalism and Freedom, asserts that a business has one purpose—satisfying
its investors or shareholders—and that any other considerations are outside its
scope.12 Although this view still exists today, it has lost credibility as more and more
companies have assumed a social responsibility orientation.13 Companies see social
responsibility as part of their overall corporate strategy and a benefit that directly
increases the bottom line. We define social responsibility as a strategic focus for social responsibility
fulfilling economic, legal, ethical, and philanthropic responsibilities. Social responsi- a strategic focus for fulfilling
economic, legal, ethical, and
bility can also be referred to as corporate social responsibility (CSR) when adopted
philanthropic responsibilities, can
by a business. This definition encompasses a wide range of objectives and activities, also be referred to as corporate
including both historical views of business and perceptions that have emerged in the social responsibility (CSR) when
last decade. Let’s take a closer look at the parts of this definition. adopted by a business
Social Responsibility Applies to All Types of Businesses

It is important to recognize that all types of businesses—small and large, sole pro-
prietorships and partnerships, and large corporations—implement social responsi-
bility initiatives to further their relationships with their customers, their employees,
and their community at large. For example, the automaker BMW is often regarded
as a socially responsible corporate partner. It earned this reputation by forming
educational programs that emphasize key social and environmental issues. BMW
has pledged to help over 1 million people through various pro-social initiatives,
such as the “The Schools Environmental Education Development Project.”14 Thus,
the ideas advanced in this book are equally relevant and applicable across a wide
variety of businesses and nonprofits.
Nonprofit organizations are expected to be socially responsible. Relationships
with stakeholders—including employees, those that are served, and the commu-
nity—affect their reputation. For example, the Southern California chapter of the
Better Business Bureau was expelled from the organization after evidence emerged
that it had been operating a pay-for-play scheme. The Better Business Bureau is
a nonprofit self-regulatory organization that objectively rates businesses on how
they treat consumers and handle consumer complaints. Investigations revealed that
employees at the Southern California bureau were awarding businesses high rank-
ings only if they paid to become members. The bureau is the largest ever expelled
for misconduct.15 This example demonstrates that nonprofit organizations must
also develop strategic plans for social responsibility. In addition, government
agencies are expected to uphold the common good and act in an ethical and
responsible manner.
Although the social responsibility efforts of large corporations usually receive
the most attention, the activities of small businesses may have a greater impact
on local communities.16 Owners of small businesses often serve as community
leaders, provide goods and services for customers in smaller markets that larger
corporations are not interested in serving, create jobs, and donate resources to
local community causes. Medium-sized businesses and their employees have simi-
lar roles and functions on both a local and a regional level. Although larger firms
produce a substantial portion of the gross national output of the United States,
small businesses represent more than 47 percent of U.S. employees and generate
more than 32 percent of U.S. exports.17 In addition to these economic outcomes,
small businesses present an entrepreneurial opportunity to many people, some
of whom have been shut out of the traditional labor force. Women, minorities,
and veterans are increasingly interested in self-employment and other forms of
small business activity. It is vital that all businesses consider the relationships and
expectations that our definition of social responsibility suggests.
Social Responsibility Needs a Strategic Focus

Table 1.1 Herman Miller’s Values in Social responsibility is an important business concept and involves sig-
Action nificant planning and implementation. Our definition of social respon-
• Operational excellence sibility requires a formal commitment, or a way of communicating
• Better World Report the company’s social responsibility philosophy. For example, Herman
• Environmental advocacy Miller, a multinational provider of office, residential, and healthcare
• Inclusiveness and diversity furniture and services, established a set of values that create a strong
• Supplier diversity culture both within and outside the company (shown in Table 1.1).
• Health and well-being
This statement declares Herman Miller’s core values and the way
• Community service
it will fulfill its responsibilities to its customers, its shareholders, its
employees, the community, and the natural environment. Because this
Source: “Our Values,” Herman Miller, Inc., https://www.
hermanmiller.com/our-values/ (accessed July 31, 2019). statement takes into account all of Herman Miller’s constituents and
Courtesy of Herman Miller, Inc. applies directly to all of the company’s operations, products, markets,
and business relationships, it demonstrates the company’s strategic
focus on social responsibility. Other companies that embrace social responsibility
have incorporated similar elements into their strategic communications, including
mission statement mission and vision statements, annual reports, and websites. For example, Hershey
a summary of a company’s aims Entertainment & Resorts focuses on four pillars of CSR: (1) the environment and
and values
the goal to reduce the ecological footprint; (2) the community and being a positive,
vision statement productive, and informed partner; (3) the workplace, in fostering one that is safe,
a description of a company’s inclusive, desirable, and respectful; and (4) a marketplace and guest focus that
current and future objectives to considers the ethical treatment of all stakeholders.18
help align decisions with their
philosophy and goals
In addition to a company’s verbal and written commitment to social
responsibility, our definition requires action and results. To implement its social
responsibility philosophy, Herman Miller has developed and implemented
several corporate-wide strategic initiatives, including research on improving
work furniture and environment, innovation in the area of ergonomically correct
products, progressive employee development opportunities, volunteerism, and an
environmental stewardship program.19 As this example demonstrates, effective
social responsibility requires both words and action.
If any such initiative is to have strategic importance, it must be fully valued
and championed by top management. Leaders must believe in and support the
integration of stakeholder interests and economic, legal, ethical, and philanthropic
responsibilities into every corporate decision. For example, company objectives
for brand awareness and loyalty can be developed
and measured from both a marketing and a social
responsibility standpoint because researchers have
documented a relationship between consumers’
perceptions of a firm’s social responsibility and
their intentions to purchase that firm’s brands.20
There are various ways that companies align
stakeholder interests and social responsibility into
business decisions. For example, engineers can
integrate consumers’ desires for reduced negative
environmental impact into product design, and
marketers can ensure that a brand’s advertising
campaign incorporates this product benefit. Finally,
consumers’ desire for an environmentally sustain-
able product may stimulate a stronger company
interest in assuming environmental leadership in all
Shutterstock/JuShoot
aspects of its operations. Years ago, for example,

Home Depot responded to demands by consumers
and environmentalists for environmentally friendly
wood products by launching a new initiative that
gives preference to wood products certified as having been harvested responsibly

over those taken from endangered forests.21 With this action, the company—which
has long touted its environmental principles—has chosen to take a leadership role
in the campaign for environmental responsibility in the home improvement indus-
try. Although social responsibility depends on collaboration and coordination
across many parts of the business and among its constituencies, it also produces
effects throughout these same groups. We discuss some of these benefits later in
this chapter.
Because of the need for coordination, a large company that is committed to
social responsibility often creates specific positions or departments to spearhead
the various components of its program. For example, Starbucks has a depart-
ment of global responsibility that focuses on responsible and ethical behaviors
regarding the environment, employee relations, customer interactions, suppliers,
and communities. Starbucks practices conservation through its Ethical Sourcing
of Sustainable Products initiative. Under chief executive officer (CEO) Kevin
Johnson’s leadership, Starbucks believes that its success is linked to the farmers
and suppliers who cultivate and harvest their products. Accordingly, the company’s
goal is to produce 100 percent ethically sourced tea and cocoa over the next few
years.22 A smaller firm may give an executive, perhaps in human resources or the
business owner, the ability to make decisions regarding community involvement,
ethical standards, philanthropy, and other areas. Regardless of the formal or
informal nature of the structure, this department or executive should ensure
that social responsibility initiatives are aligned with the company’s corporate corporate culture
culture, integrated with companywide goals and plans, fully communicated within shared values, attitudes, and
beliefs that characterize members
and outside the company, and measured to determine their effectiveness and
of an organization
strategic impact. In sum, social responsibility must be given the same planning
time, priority, and management attention that are given to any other company
initiative, such as continuous improvement, cost management, investor relations,
research and development, human resources, or marketing research.
Social Responsibility Fulfills Society’s Expectations

Another element of our definition of social responsibility involves society’s expec-
tations of business conduct. Many people believe that businesses should accept and
abide by four types of responsibility: financial, legal, ethical, and philanthropic
(see Table 1.2). To varying degrees, the four types are required, expected, and/or
desired by society.23
In Stage 1, businesses have a responsibility to be financially viable so that
they can provide a return on investment for their owners, create and sustain
jobs for the community, and contribute goods and services to the economy. The
economy is influenced by the ways that organizations relate to their shareholders,
their customers, their employees, their suppliers, their competitors, their com-
munity, and even the natural environment. For example, in nations with corrupt
businesses and industries, the negative effects often pervade the entire society.
Transparency International, a German organization dedicated to curbing national
and international corruption, conducts an annual survey on the effects of business
and government corruption on a country’s economic growth and prospects. The
organization reports that corruption reduces economic growth, inhibits foreign
investment, and often channels investment and funds into “pet projects” that may
create little benefit other than high returns to the corrupt decision-makers. There
are a host of practical implications for the four levels of social responsibility,
business, and its effects on society.
In Stage 2, companies are required to maintain compliance with legal and
regulatory requirements specifying the nature of responsible business conduct.
Table 1.2 Social Responsibility Requirements

Stages Examples
Stage 1: Financial Viability Starbucks offers investors a healthy return on investment,
including paying dividends.
Stage 2: Compliance with Starbucks specifies in its code of conduct that payments made to
Legal and Regulatory foreign government officials must be lawful according to the laws
Requirements of the United States and the foreign country.
Stage 3: Ethics, Principles, Starbucks offers healthcare benefits to part-time employees and
and Values supports coffee growers so they get a fair price.
Stage 4: Philanthropic Starbucks created the Starbucks Foundation to award grants to
Activities eligible nonprofits and to give back to their communities.
Society enforces its expectations regarding the behavior of businesses through the
legal system. If a business chooses to behave in a way that customers, special-
interest groups, or other businesses perceive as irresponsible, these groups may ask
their elected representatives to draft legislation to regulate the business’s behavior,
or they may sue the firm in a court of law in an effort to force it to “play by
the rules.” For example, Coca-Cola faced backlash from consumers and special-
interest groups alike after reports surfaced that its delivery trucks released 3.7
million metric tons of greenhouse gases into the atmosphere. Such public outcries
caused Coca-Cola to transform its supply chain, including an investment in new
delivery trucks that utilize alternative fuels, which should reduce its gas emissions
by 25 percent.24
Beyond financial viability and legal compliance, companies must decide
what they consider to be just, fair, and right—the realm of ethics, principles,
business ethics and values—in Stage 3. Business ethics refers to the principles and standards
the principles and standards that that guide behavior in the world of business. Principles are specific and universal
guide behavior in the world of
boundaries for behavior that should never be violated. Principles such as fairness
business
and honesty are determined and expected by the public, government regulators,
special-interest groups, consumers, industry, and individual organizations. The
most basic of these principles have been codified into laws and regulations to
require that companies conduct themselves in ways that conform to society’s
expectations. Ethical issues exist in most managerial decisions. A firm needs to
create an ethical culture with values and norms that meet the expectations of
stakeholders. Values are enduring beliefs and ideals that are socially enforced.
Freedom of speech, for example, is a strong value in the Western world. For
example, Marriott, a leading hospitality company, values include putting people
first, pursuing excellence, embracing change, acting with integrity, and serving
our world.25
Many firms and industries have chosen to go beyond these basic laws in an
effort to act responsibly. The Direct Selling Association (DSA), for example, has
established a code of ethics that applies to all individual and company members of
the association. Because direct selling involves personal contact with consumers,
there are many ethical issues that can arise. For this reason, the DSA code directs
the association’s members to go beyond legal standards of conduct in areas such as
product representation, appropriate ways of contacting consumers, and warranties
and guarantees. In addition, the DSA actively works with government agencies
and consumer groups to ensure that ethical standards are pervasive in the direct
selling industry. The World Federation of Direct Selling Associations (WFDSA)
code of conduct also maintains a code of conduct that addresses dealing with consumers, conduct
a written collection of the toward direct sellers, and interactions within the industry. This code provides
rules, principles, values, and
guidance for direct sellers around the world in countries as diverse as Argentina,
expectations of employee
behavior Canada, Finland, Taiwan, and Poland.26
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In Stage 4 are philanthropic activities, which promote human welfare and philanthropic activities
goodwill. By making philanthropic donations of money, time, and other resources, efforts made by a company to
improve human welfare
companies can contribute to their communities and society and improve the
quality of life. For example, the UPS Foundation has been active in the global
community since 1951. It offers programs in philanthropy under its aptly named
philosophy, “The Logistics of Caring.” Donations total approximately $120
million worldwide annually. In addition to the monetary contributions, 2.9 million
annual volunteer hours by UPS employees have been given on an annual basis. The
foundation focuses its efforts on education, disaster preparedness and resiliency,
urgent response to unexpected disasters, post-disaster recovery, in-kind disaster
relief, skill-based volunteering, partnerships with humanitarian organizations, and
thought leadership.27
When these dimensions of social responsibility were first introduced, many
people assumed that there was a natural progression from financial viability to
philanthropic activities, meaning that a firm had to be financially viable before
it could properly consider the other three elements. Today, social responsibility
is viewed in a more holistic fashion, with all four dimensions seen as related and
integrated, and this is the view that we will use in this book.28 In fact, companies
demonstrate varying degrees of social responsibility at different points in time.
Figure 1.2 depicts the social responsibility continuum. Companies’ fulfillment of
their responsibilities can range from a minimal to a strategic focus that results in
a stakeholder orientation. Firms that focus only on shareholders and the bottom stakeholder orientation
line operate from a legal or compliance perspective.29 Activists argue that the the aim to benefit all parties
so-called opioid epidemic started, in part, because of the pharmaceutical industry’s affected by the success or failure
of an organization
profit-driven focus. While the opioid epidemic has sparked national debate,
Harvard University researchers found that the pharmaceutical industry has been
incentivizing doctors to prescribe opioids and downplaying the long-term patient
risks to the public. The pharmaceutical industry’s profit-maximization strategy,
which resulted in high investor returns, may have also led to a lethal consequence
for another stakeholder group: unintended consumer deaths.30
Resource advantage theory stresses that a firm’s resources provide competitive resource advantage theory
advantage. Promoting social trust and social responsibility develops the founda- a theory stating that the value of
a resource is viewed relative to
tion for economic growth in a firm as well as a society. Customers are often
its potential to create competitive
motivated to enhance organizations that exhibit socially responsible behavior. For differentiation or customer value
example, Warby Parker provides designer eyeglasses at a fraction of the cost of
its competitors. The firm also makes eyewear available at very low price points
to individuals in developing countries. In addition, Warby Parker donates one
pair for every pair sold. This illustrates how consumers with strong ethical values
are attracted to the brand. Thus, a company’s socially responsible behavior can
become a resource advantage.31
Strategic social responsibility is realized when a company has integrated a
range of expectations, desires, and constituencies into its strategic direction and
planning processes. In this case, an organization considers social responsibility an
Figure 1.2 Social Responsibility Continuum
Minimal Strategic
Considerations that focus Financial, legal, ethical, and

solely on shareholders philanthropic considerations
targeted at selected stakeholders

essential component of its vision, mission, values, and practices. Method, a popular
cleaning product business, demonstrates a high degree of social responsibility by
updating its corporate policies to help the environment. It made a strategic deci-
sion to modify its dish and hand soap packaging by using plastic recovered from
the ocean, which aligns with the company’s goal of “creating beautiful cleaning
products that are as kind to the planet as they are tough on dirt.” By using recycled
packaging and biodegradable soap, Method’s corporate vision aligns with its
founder’s strategic goal of “changing the world” through their promise to produce
effective consumer products that are safe for the environment.32 Executives with
this philosophy often maintain that customers will be lost, employees will become
dissatisfied, and other detrimental effects will occur if a firm abandons its strategic
responsibilities.
In this book, we will give many examples of firms that are at different places
along this continuum to show how the pursuit of social responsibility is never
ending.
Social Responsibility Requires a Stakeholder Orientation

The final element of our definition involves those to whom an organization is
responsible, including customers, employees, investors and shareholders, suppliers,
governments, communities, and many others. These constituents have a stake in,
or a claim on, some aspect of a company’s products, industry, markets, and out-
stakeholders comes and are thus known as stakeholders. We explore the roles and expectations
constituents who have an interest of stakeholders in Chapter 2. Companies that consider the diverse perspectives of
or stake in a company’s products,
these constituents in their daily operations and strategic planning are said to have a
industry, markets, and outcomes
stakeholder orientation, meaning that they are focused on stakeholders’ concerns.
Adopting this orientation is part of the social responsibility philosophy, which
implies that business is fundamentally connected to other parts of society and must
take responsibility for its effects in those areas.
R. E. Freeman, a developer of stakeholder theory, maintains that business
and society are “interpenetrating systems,” in that each affects and is affected
by the other.33 For the common good to be achieved, cross-institutional and
cross-organizational interactions must move society toward shared partnerships.
Research suggests interorganizational networks can be an important element of
interorganizational networks a successful corporate strategy that creates shared value. By definition, interorga-
a set of organizations that are nizational networks are a set of organizations that are associated through shared
associated through shared or
or mutual affiliations and interests. For example, interorganizational networks
mutual affiliations and interests
include strategic business alliances, supply chains, human and health services
consortia, public-private partnerships, and others. Identifying businesses that
are committed to similar environmental and societal issues and that promote a
shared operating environment can help create not only financial success, but also
socially responsible actions.34 Overall, companies may affect their communities
and beyond through partnering with other organizations with similar value
systems.35
Development of Social Responsibility

In 1959, Harvard economist Edward Mason asserted that business corporations
are “the most important economic institutions.”36 His declaration implied that
companies probably affect the community and society in social terms as much
as (or perhaps more than) in monetary, or financial, terms. Employment and
the benefits associated with a living wage are necessary to develop a sustainable
economy. The opportunity for individuals and businesses to attain economic

success is necessary to create a society that can address social issues. Today, some
question our economic system, but without economic resources, little progress
can be made in developing society. Social responsibility has always been a part of
our economic system. The history of American capitalism relates to the economic,
technological, political, and social development of the country. In the early and
mid-nineteenth century, most people lived in rural communities and were largely
reliant on trade surpluses and commodity exchanges for substance. In 1850s, for
instance, approximately 20 million of the 23 million Americans in the popula-
tion lived in rural areas where few businesses had more than 300 employees.
As industrialization advanced, rail systems and new technology provided an
opportunity for manufacturing and retail institutions to develop. Finally, by the
twentieth century, businesses were developed and their impact on society was much
greater.
Although some firms have more of a social impact than others, companies
influence many aspects of our lives, from the workplace to the natural environ-
ment. This influence has led many people to conclude that companies’ actions
should be designed to benefit employees, customers, business partners, and the
community as well as shareholders. Social responsibility has become a benchmark
for companies today.37 However, these expectations have changed over time. For
example, the first corporations in the United States were granted charters by vari-
ous state governments because they were needed to serve an important function in
society, such as transportation, insurance, water, or banking services. In addition
to serving as a license to operate, these charters specified the internal structure
of these firms, allowing their actions to be more closely monitored.38 During this
period, corporate charters were often granted for a limited period of time because
many people, including legislators, feared the power that corporations could
potentially wield. It was not until the mid-1800s and early 1900s that profit and
responsibility to stockholders became major corporate goals.39
Historical Review of Social Responsibility

After World War II, as many large U.S. firms came to dominate the global
economy, their actions inspired imitation in other nations. The definitive external
characteristic of these firms was their economic dominance. Internally, they were
marked by the virtually unlimited autonomy afforded to their top managers. This
total discretion meant that these firms’ top managers had the luxury of not having
to answer for some of their actions.40 In the current business mindset, such total
autonomy would be viewed as a hindrance to social responsibility because there
is no effective system of checks and balances. In a later chapter, we elaborate on
corporate governance, the process of control and accountability in organizations
that is necessary for social responsibility.
In the 1950s, the 130 or so largest companies in the United States provided
more than half of the country’s manufacturing output. The top 500 firms
accounted for almost two-thirds of the country’s nonagricultural economic activ-
ity.41 U.S. productivity and technological advancements dramatically outpaced
those of global competitors, such as Japan and Western Europe. For example, the
level of production in the United States was twice as high as that in Europe and
quadruple that in Japan. The level of research and development carried out by U.S.
corporations was also well ahead of overseas firms. For these reasons, the United
States was perceived as setting a global standard for other nations to emulate.
During the 1950s and 1960s, these companies provided benefits that are often
overlooked. Their contributions to charities, the arts, culture, and other com-
munity activities were beneficial to the industry or to society rather than simply to
the companies’ own profitability. For example, the lack of competition meant that

companies had the profits to invest in higher-quality products for consumer and
industrial use. Although the government passed laws that required companies to
take actions to protect the natural environment, make products safer, and promote
equity and diversity in the workplace, many companies voluntarily adopted
responsible practices rather than constantly fighting government regulations
and taxes. These corporations once provided many of the services that are now
provided by the government in the United States. For example, during this period,
the U.S. government spent less than the government of any other industrialized
nation on such things as pensions and health benefits, as these were provided by
companies rather than by the government.42 In the 1960s and 1970s, however, the
business landscape changed.
Economic turmoil during the 1970s and 1980s changed the role of corpora-
tions. Venerable firms that had dominated the economy in the 1950s and 1960s
became less important as a result of bankruptcies, takeovers, mergers, or other
threats, including high energy prices and an influx of foreign competitors. The
stability experienced by the U.S. firms of midcentury dissolved. During the 1960s
and 1970s, the Fortune 500 had a relatively low turnover of about 4 percent.
By 1990, however, one-third of the companies in the Fortune 500 of 1980 had
disappeared, primarily as a result of takeovers and bankruptcies. The threats and
instability led companies to protect themselves from business cycles by becoming
core competencies more focused on their core competencies and reducing their product diversity.
unique advantages that To combat takeovers, many companies adopted flatter organizational hierarchies.
differentiate a firm from its
Flatter organizations meant workforce reduction but also entailed increasing
competitors
empowerment of lower-level employees.
Thus, the 1980s and 1990s brought a new focus on profitability and economies
of scale. Efficiency and productivity became the primary objectives of business.
This fostered a wave of downsizing and restructuring that left some people and
communities without financial security. Before 1970, large corporations employed
about one of every five Americans, but by the 1990s, they employed only one in
ten. The familial relationship between employee and employer disappeared, and
along with it went employee loyalty and company promises of lifetime employ-
ment. Companies slashed their payrolls to reduce costs, and employees changed
jobs more often. Workforce reductions and “job hopping” were almost unheard
of in the 1960s but had become commonplace two decades later. These trends
made temporary employment and contract work the fastest-growing forms of
employment throughout the 1990s.43
Along with these changes, top managers were largely stripped of their former
freedom. Competition intensified, and both consumers and stockholders grew
more demanding. The increased competition led business managers to worry more
and more about the bottom line and about protecting the company. Escalating use
of the internet provided unprecedented access to information about corporate deci-
sions and conduct and fostered communication among once unconnected groups,
furthering consumer awareness and shareholder activism. Consumer demands put
more pressure on companies and their employees. The education and activism
of stockholders had top management fearing for their jobs. Throughout the last
two decades of the twentieth century, legislators and regulators initiated more
and more regulatory requirements every year. These factors resulted in difficult
trade-offs for management.
Corporate responsibilities were renewed in the 1990s. Partly as a result of
business scandals and Wall Street excesses in the 1980s, many industries and
companies decided to pursue and expect more responsible and respectable business
practices. Many of these practices focused on creating value for stakeholders
through more effective processes and decreased the narrow and sole emphasis
on corporate profitability. At the same time, consumers and employees became
less interested in making money for its own sake and turned toward intrinsic

rewards and a more holistic approach to life and work.44 This resulted in increased
interest in the development of human and intellectual capital; the installation of
corporate ethics programs; the development of programs to promote employee
volunteerism in the community; strategic philanthropy efforts and trust in the
workplace; and the initiation of a more open dialogue between companies and their
stakeholders.
Despite major advances in the 1990s, the sheer number of corporate scandals
at the beginning of the twenty-first century prompted a new era of social
responsibility. The downfall of Enron, WorldCom, and other corporate stalwarts
in the beginning of the 2000s caused regulators, former employees, investors,
nongovernmental organizations (NGOs), and ordinary citizens to question the role
and integrity of big business and the underlying economic system. Federal legisla-
tors passed the Sarbanes-Oxley Act to overhaul securities laws and governance
structures. A new Public Company Accounting Oversight Board was implemented
to regulate the accounting and auditing profession after Enron and WorldCom
failed due to accounting scandals. Newspapers, business magazines, and news
websites devoted entire sections—often titled “Corporate Scandal,” “Year of the
Apology,” or “Year of the Scandal”—to the trials and tribulations of executives,
their companies and auditors, and stock analysts.
Recent Developments in Social Responsibility

In 2007 and 2008, a housing boom in the United States collapsed, setting off a
financial crisis. Homeowners could not afford to pay their mortgages. Because
of the housing boom, in many cases the mortgages were higher than the houses
were worth. People all across the United States began to walk away from their
mortgages, leaving banks and other lenders with hundreds of thousands of houses
that had decreased in value.
Meanwhile, companies such as AIG were using complex financial instruments
known as “derivatives” to transfer the risks of securities such as mortgages, almost
as a type of insurance policy. The housing collapse created a number of demands
on financial firms that had sold these derivatives to pay their insurance contracts
on the defaulted debt securities, but financial firms did not have enough of a
safety net to cover so many defaults. The housing collapse created a chain reaction
that led to the worst recession since the Great Depression. The government was
forced to step in to bail out financial firms in order to keep the economy going
and prevent the economy from collapsing further. Many established organizations
such as Bear Stearns, Lehman Brothers, and Countrywide Financial went bankrupt
or were acquired by other firms at a fraction of what they were originally worth.
Table 1.3 describes some of the corporations and banks that collapsed in the
financial crisis.
In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer
Protection Act, the most sweeping legislation since Sarbanes-Oxley. Dodd-Frank
is intended to protect the economy from similar financial crises in the future by
creating more transparency in the financial industry. This complex law required
legislators to develop hundreds of laws to increase transparency and create
financial stability. The Dodd-Frank Act will be discussed in more detail in Chapter
4. The financial crisis and the collapse of many well-known institutions have led
to a renewed interest in business ethics and social responsibility.
In the last five years, the economy has stabilized and the stock market has
recovered. Even though many banks failed during the financial crisis, today banks
and the other financial institutions are much larger. The largest five banks are
twice as large as they were a decade ago.45 Rather than getting rid of too-big-
to-fail financial institutions, they seem to be growing much larger, despite recent
legislation.

Table 1.3 Corporations and Banks Involved in the Financial Crisis

Organization Outcome
General Motors (GM) Declared bankruptcy and required a government bailout of
$49.5 billion to reorganize. The government sold their last shares in
GM in 2013 and is estimated to have lost more than
$10 billion on its investment.
AIG Received a government bailout of $182 million and was criticized for
using bailout money to pay executives large bonuses. AIG repaid the
last of its loans in 2013.
Bank of America Received $42 billion in bailout money as part of the Troubled Asset
Relief Program (TARP). It paid back its loans in 2009.
Washington Mutual Its banking subsidiaries were sold by the Federal Deposit Insurance
Corporation to J. P. Morgan for $1.9 billion.
Chrysler Declared bankruptcy and required a government bailout of
$12.5 billion. By 2011, Chrysler had repaid most of the debt, and Fiat
agreed to purchase the rest of the U.S. Treasury’s shares in Chrysler
for $500 million.
Countrywide Financial Acquired by Bank of America for $4.1 billion. Bank of America
inherited many of the lawsuits against Countrywide claiming it had
engaged in fraudulent and discriminatory lending practices.
Future Developments in Social Responsibility

Technology includes the methods and processes creating applications to solve
problems, perform tasks, and make decisions. New technology associated
with artificial intelligence (AI) and blockchain are changing the way work is
accomplished. The result is driverless cars, drones, robotics and machines that can
communicate and make decisions like humans. This creates opportunities for new
business models and job opportunities.
artificial intelligence Artificial Intelligence AI relates to machine (computer) learning that can perform
machines learning and performing activities and tasks that usually require human intelligence, such as decisions,
tasks that typically require human
visual perceptions, and speech recognition. In short, AI allows computers to per-
intelligence by using algorithms
form humanlike functions. Recent advances within the literature suggest that AI
will influence both job creation and development. It is predicted that by 2025, AI
will perform half of all workplace jobs, as opposed to about 30 percent today.
AI has the potential to make the world more efficient by transforming the food
preparation, packaging, and welding industries by changing how firms source
repetitive tasks such as assembly-line activities.
Research suggests that AI may create new roles and professional opportunities
across a myriad of organizations.46 The computer science industry, for example,
uses robotic processes, including software bots with AI capabilities, to perform
tasks such as object recognition. In the automotive industry, AI is an important
element of autonomous driving systems. Indeed, industry experts are using AI
to program autonomous, self-driving cars to understand predictable encounters
on the open road. Finally, major changes are underway in the consumer service
industry. Firms are using machine technology to effectively analyze thousands of
consumer service emails with more robust response times compared to traditional
human-run responses. In fact, approximately 40 percent of Americans that use the
internet indicate they would rather use digital customer services than speak to a
service provider on the phone.47 Following this trend, corporations such as Google
and Amazon have introduced personal digital assistants that utilize AI technologies
to manage their consumer service needs.

AI has the potential to not only provide higher-quality consumer service, but
also create new challenges. Opponents of AI fear that it will reduce job prospects
because firms may use AI technologies to replace positions currently held by
humans. For example, in the accounting industry, employees who collect, record,
and reconcile payments could be replaced with advanced AI computer programs.
KPMG LLP, one of the largest accounting firms expects to have fewer entry-level
accountants in the future.48 Additionally, AI can be used in surveillance. Surveillance
is a sensitive issue related to privacy. Tracking communication, profiles, and other
searchable information will accelerate with AI. While AI’s impact on surveillance
and privacy issues needs to be addressed, machine learning opens opportunities
to perform crucial tasks with greater efficiency and be a catalyst for innovation.
AI has made significant advancements in recent years allowing companies to
perform and track all types of business activities through machine learning. A firm
can use these technologies to improve its CSR as well. AI, if developed properly,
allows for decisions and recommendations that benefit all parties, promoting the
idea that businesses can increase productivity while also helping the community
and environment. Ethical issues such as increasing unemployment and introducing
potential bias must be considered to ensure that AI’s benefits are maximized.
Both AI and blockchain have the potential to promote significant improvement in
business ethics and CSR.
Blockchain Blockchain will enable AI through the development of databases blockchain

that can be used in computer learning. Blockchain, discussed more thoroughly decentralized record-keeping
technology that stores an
in Chapter 11, is a linked group of ordered transactions that are a subset of a
immutable record of data blocks
database. The key is that no single authority can make changes to fit its needs, over time
improving the integrity of the data. The finance industry, supply chain, marketing,
human resource management, and most other areas of business will become more
efficient in developing and tracking information.49 This means that there will be
more tracking and transparency to prevent misconduct and manage CSR activities.
Blockchain has the potential to make databases and the digital infrastructures
more secure and trustworthy. For example, scanning data in a blockchain database
and tracking products from a point of production to consumption. This means
that the movement of agricultural products can be tracked from the farm to the
table. This will allow complete knowledge and the ability to trace the source of
products. For example, Walmart is requiring produce suppliers to track their
products through the entire supply chain to each store.50
Blockchain represents transactions and data that could provide services,
identity, verification, and almost any other activity.51 Blockchain combined with
AI can enable new business models. For example, cryptocurrency such as bitcoin
is based on blockchain technology. The ability to verify identities and chronicle
events can become an important information source to guide service providers.
These shared databases can then be combined with AI machine learning to interact
and provide important information and even decisions on key issues.
Blockchain acts as a distributed, incorruptible ledger. It is a decentralized data-
base with data that is unforgeable and permanent. For these reasons, blockchain
can serve as a powerful tool to confirm that money donated to a company’s CSR
projects is being used properly. With blockchain serving as the medium between
the donors and the organization, financial ledgers will be transparent, and people
will be able to confirm that the money is being funneled and used properly.
Blockchain can also be used to track the progress and success of these projects,
serving as another method of confirmation that companies are following through
with their stated initiatives.
While AI has been deployed to solve many business problems, it raises ethical
issues of its own. The rise of AI could increase unemployment as bots and com-
puter systems take jobs. Bots are being used in consumer service, telemarketing,
analytics, and sales and could spread further. In addition, the use of AI would

widen the pay gap between executives and other employees, where companies use
AI to strategize and make more money without having to pay employees more (or
at all). Unintended consequences are another concern with AI. If not developed
properly, an AI system would make poor decisions if it is not programmed to
consider consequences correctly.
Critics often describe the potential disaster of uncontrolled AI that chooses
optimal business decisions without considering ethical consequences, but AI can
actually be used to promote ethical decisions while still benefiting the interests of
the firm. An intelligent system has the potential to understand positive outcomes
for multiple parties. AI can remove bias from decision-making and provide the
best decisions and strategies based on their merits. AI also can assist with fraud
detection, deterring employees and customers from committing unethical acts.
More than ever, firms feel the need to broadcast a positive image of their brand,
and AI and blockchain can provide tools to improve CSR and promote ethics
inside as well as outside the organization.
Global Nature of Social Responsibility

Although many forces have shaped the debate on social responsibility, the increasing
globalization of business has made it an international concern. A common theme
is criticism of the increasing power and scope of business and income differences
among executives and employees. Questions of corruption, environmental protec-
tion, fair wages, safe working conditions, and the income gap between rich and
poor are posed. Many critics and protesters believe that global business involves
exploitation of the working poor, destruction of the planet, and a rise in inequal-
ity.52 After the financial crisis, global trust in business dropped significantly. More
recent polls indicate that trust is rebounding in certain countries, but companies
are still vulnerable to the ramifications of distrust. Approximately 50 percent of
the general public among global consumers indicate that they trust business. This
is even lower in the United States, where only 49 percent trust business overall.53
In an environment where consumers distrust business, greater regulation and lower
brand loyalty are the likely results. We discuss more of the relationship between
social responsibility and business outcomes later in this chapter.
The globalization of business has critics who believe that the movement
is detrimental because it destroys the unique cultural elements of individual
countries, concentrates power within developed nations and their corporations,
abuses natural resources, and takes advantage of people in developing countries.
Multinational corporations are perhaps most subject to criticism because of
their size and scope. Table 1.4 shows the world’s largest companies, which are
more powerful than many of the countries in which they do business. Because
of the economic and political power that they potentially wield, the actions of
large, multinational companies are under scrutiny by many stakeholders. Most
allegations by antiglobalization protestors are not extreme, but the issues are still
consequential. For example, the pharmaceutical industry has long been criticized
for excessively high pricing, interference with clinical evaluations, some disregard
for developing nations, and aggressive promotional practices. Critics have called
on governments, as well as public health organizations, to influence the industry
toward changing some of its practices.54
Advocates of the global economy counter these allegations by pointing to
increases in overall economic growth, new jobs, new and more effective products,
and other positive effects of global business. Although these differences of opinion
provide fuel for debate and discussion, the global economy probably “holds
much greater potential than its critics think, and much more disruption than
its advocates admit. By definition, a global economy is as big as it can get. This

Table 1.4 World’s 10 Largest Corporate Giants

Rank Company Name Headquarters Age (Years) Number of Employees
1 Apple United States 41 66,000
2 Alphabet United States 2 69,953
3 Microsoft United States 42 114,000
4 Berkshire Hathaway United States 128 360,000
5 Exxon Mobil United States 135 73,500
6 Amazon United States 22 222,400
7 Facebook United States 13 15,724
8 Johnson & Johnson United States 131 128,000
9 General Electric United States 139 333,000
10 China Mobile China 20 438,645
Source: Alex Gray, “These Are the World’s 10 Biggest Corporate Giants,” We Forum, https://www.weforum.org/agenda/
2017/01/worlds-biggest-corporate-giants/ (accessed July 31, 2019).
means that the scale of both the opportunity and the consequences are at an
apex.”55 In responding to this powerful situation, companies around the world are
increasingly implementing programs and practices that strive to achieve a balance
between economic responsibilities and other social responsibilities. Nestlé, a
global foods manufacturer and marketer, published the Nestlé Corporate Business
Principles in 1998 and has continually revised them. These principles serve as a
management tool for decision-making at Nestlé and have been translated into over
50 languages. The updated principles are consistent with the Global Compact, an
accord by the United Nations that covers environmental standards, human rights,
and labor conditions.56 We explore the global context of social responsibility more
fully throughout this book.
In most developed countries, social responsibility involves stakeholder
accountability and the financial, legal, ethical, and philanthropic dimensions
discussed earlier in the chapter. However, a key question for implementing social
responsibility on a global scale is: Who decides on these responsibilities? Many
executives and managers face the challenge of doing business in diverse countries
while attempting to maintain their employers’ corporate culture and satisfy
their expectations. Some companies have adopted an approach in which broad
corporate standards can be adapted at a local level. For example, a corporate goal
of demonstrating environmental leadership could be met in a number of different
ways, depending on local conditions and needs. The Coca-Cola Company releases
sustainability and social responsibility reports for each region in which it conducts
business. In Eurasia and Africa, the company highlights initiatives and progress
achieved regarding women’s empowerment, water conservation, and improvement
of communities. In Greece, the company contributed toward reforestation and to
active lifestyles for youth in the Netherlands. While some of the sustainability and
social responsibility initiatives are similar among countries, Coca-Cola’s focus on
each individual region allows them to make the most relevant contributions to
their stakeholders.57
Global social responsibility also involves the confluence of government,
business, trade associations, and other groups. For example, countries that
belong to the Asia-Pacific Economic Cooperation (APEC) are responsible for
half the world’s annual production and trade volume. As APEC works to reduce
trade barriers and tariffs, it has also developed meaningful projects in the areas
of sustainable development, clean technologies, workplace safety, management
of human resources, and the health of the marine environment. This powerful
trade group has demonstrated that financial, social, and ethical concerns can

be tackled simultaneously.58 Like APEC, other trade groups are also exploring
ways to enhance economic productivity within the context of legal, ethical, and
philanthropic responsibilities.
Another trend involves business leaders becoming so-called cosmopolitan
citizens by simultaneously harnessing their leadership skills, worldwide business
connections, access to funds, and beliefs about human and social rights. Bill Gates,
the cofounder of Microsoft, is no longer active day to day in the company, as he
and his wife spearhead the Bill and Melinda Gates Foundation to tackle AIDS,
poverty, malaria, and the need for educational resources. Golfer Jack Nicklaus and
his business partner, Jack Milstein, designed a line of golf balls whose proceeds
are designated to children’s health care.59 SurveyMonkey has a platform called
SurveyMonkey Contribute that allows people to earn rewards for taking surveys.
Every week, for each survey completed, SurveyMonkey will donate to a participat-
ing charity of the survey taker’s choice.60 Patagonia donates 1 percent of its profits
to environmental organizations. These business leaders are acting as agents to
ensure that the economic promises of globalization are met with true concern for
social and environmental considerations. In many cases, such efforts supplant
those historically associated with government responsibility and programs.61
In sum, progressive global businesses and executives recognize the shared
bottom line that results from the partnership among businesses, communities,
government, customers, and the natural environment. In a Nielsen survey of more
than 28,000 citizens in 56 countries, 76 percent of the respondents indicated that
they consult others online regarding the social responsibility of companies before
they make a purchase. The top three issues that are most important to consum-
ers include environmental sustainability, advancements in science, technology,
engineering, mathematics (STEM) education, and relieving hunger and poverty.62
Thus, our concept of social responsibility is applicable to businesses around the
world, although adaptations of implementation and other details on the local level
are definitely required. In companies around the world, there is also the recogni-
tion of a relationship between strategic social responsibility and benefits to society
and organizational performance.
Benefits of Social Responsibility

The importance of social responsibility initiatives in enhancing stakeholder rela-
tionships, improving performance, and creating other benefits has been debated
from many perspectives.63 Many business managers view such programs as costly
activities that provide rewards only to society, at the expense of their company’s
bottom line. Another view holds that some costs of social responsibility can be
recovered through improved performance. If social responsibility is strategic
and aligned with a firm’s mission and values, then improved performance can
be achieved. It is hard to measure the reputation of a firm, but it is important to
build trust and achieve success. Moreover, ample research evidence demonstrates
that companies which implement strategic social responsibility programs are more
profitable.
Some of the specific benefits include increased efficiency in daily operations,
greater employee commitment, higher product quality, improved decision-making,
and increased customer loyalty, as well as improved financial performance. In
short, companies that establish a reputation for trust, fairness, and integrity
develop a valuable resource advantage that fosters success, which then translates
to greater financial performance (see Figure 1.3). This section provides evidence
that resources invested in social responsibility programs reap positive outcomes for
both organizations and their stakeholders.

Figure 1.3 The Role of Social Responsibility in Performance
Stakeholder
Trust
Customer
Loyalty
Social Organizational
Responsibility Performance
Employee
Commitment
Shareholder
Support
Trust
Trust is the glue that holds organizations together and allows them to focus on
efficiency, productivity, and profits. According to Stephen R. Covey, author of The
7 Habits of Highly Effective People, “Trust lies at the very core of effective human
interactions. Compelling trust is the highest form of human motivation. It brings
out the very best in people, but it takes time and patience, and it doesn’t preclude
the necessity to train and develop people so their competency can rise to that level
of trust.” When trust is low, organizations decay and relationships deteriorate,
resulting in infighting, playing politics within the organization, and general
inefficiency. Employee commitment to the organization declines, product quality
suffers, employee turnover skyrockets, and customers turn to more trustworthy
competitors.64 Any stakeholder that loses trust can create a missing link necessary
for success.
In a trusting work environment, however, employees can reasonably expect to
be treated with respect and consideration by both their peers and their superiors.
They are also more willing to rely and act on the decisions and actions of their
coworkers. Thus, trusting relationships between managers and their subordinates
and among peers contribute to greater decision-making efficiency. Research by the
Ethics & Compliance Initiative indicates that this trust is pivotal for supporting
an ethical climate. Employees of an organization with a strong ethical culture
are much more likely to report misconduct but also much less likely to observe
misconduct than employees in firms with a weak ethical culture.65 Table 1.5 shows
Table 1.5 Indicators of Support, Trust, and Transparency

Employees believe that top management is open and honest.
Employees feel that they can openly disagree with their supervisor or raise issues of concern
without fear of retaliation.
Managers talk about values frequently and make them a regular and public part of business
decision-making.
Supervisors care about their employees as people.
Top managers do the right thing, even if it means that the company loses money, business, and/
or clients.
Source: Ethics & Compliance Initiative, “Building Companies Where Values and Ethical Conduct Matter,”
https://43wli92bfqd835mbif2ms9qz-wpengine.netdna-ssl.com/wp-content/uploads/2018/10/Q3GBESFinal.pdf (accessed
July 31, 2019).

five indicators of trust, support, and transparency that have a strong impact on
whether employees will report ethical issues. As the table demonstrates, a key
factor that inspires trust and transparency in organizations involves support and
consistent communication from senior leadership and supervisors.
Trust is also essential for a company to maintain positive long-term relation-
ships with customers. A study by Cone Communications reported that 42 percent
of consumers have boycotted companies that have demonstrated irresponsible
behavior in the last 12 months.66 For example, after the Deepwater Horizon oil
spill in 2010, certain groups and individual citizens aggressively boycotted BP due
to the vast environmental damage in the Gulf of Mexico. Stakeholders engaged in
boycotts often lose faith in both the competence and integrity of a company, both
of which have been shown to influence trust. Communities and regulators that
lose trust in a company can damage the firm’s reputation and relationships with
additional stakeholders, including shareholders, investors, and others.67
Customer Loyalty
The prevailing business philosophy about customer relationships is that a company
should strive to market products that satisfy customers’ needs through a coordi-
nated effort that also allows the company to achieve its own objectives. It is well
accepted that customer satisfaction is one of the most important factors for busi-
ness success. Although companies must continue to develop and adapt products to
keep pace with consumers’ changing desires, it is also crucial to develop long-term
relationships with customers. Relationships built on mutual respect and coopera-
tion facilitate the repeat purchases that are essential for success. By focusing on
customer satisfaction, a business can continually strengthen its customers’ trust
in the company, and as their confidence grows, this in turn increases the firm’s
understanding of their requirements.
In a Cone survey of consumer attitudes, 89 percent of consumers indicated
that they would be likely to switch to brands associated with a good cause if price
and quality were equal. These results show that consumers take for granted that
they can buy high-quality products at low prices; therefore, companies need to
stand out as doing something—something that demonstrates their commitment to
society.68 A study by Harris Interactive Inc. and the Reputation Institute reported
that one-quarter of the respondents had boycotted a firm’s products or lobbied
others to do so when they did not agree with the firm’s policies or activities.69
Another way of looking at these results is that irresponsible behavior could
trigger disloyalty and refusals to buy, whereas good social responsibility initiatives
could draw customers to a company’s products. For example, many firms use
cause-related marketing programs to donate part of a product’s sales revenue to a
charity that is meaningful to the product’s target market. Among the best-known
cause-related marketing programs is Avon’s “pink ribbon.”
Employee Commitment
Employee commitment stems from employees who are empowered with training
and autonomy. Sir Richard Branson, founder of the Virgin Group, has one of the
most committed groups of employees in business for these reasons, as well as many
others. He has created a culture wherein he personally asks employees for their
input, writes their ideas down, and incorporates them when relevant. He is a very
visible and approachable authority and inspires a “passion of commitment” for
customer service. Virgin Airlines is ranked as the highest in quality for domestic
airlines. In the end, empowered employees keep customers happy and coming
back for more.70 For instance, service quality is positively related to employee
loyalty. This, in turn, leads to higher customer satisfaction and customer loyalty.71

Evidence also suggests that CSR initia-

tives are a good way to retain and attract
employees.72
When companies fail to provide value
for their employees, loyalty and commit-
ment suffer. One survey by Gallup found
relatively low levels of employee loyalty
and commitment worldwide. The study,
which surveyed thousands of employees
in 142 countries, found that only 13 per-
cent of workers indicated feeling engaged
Shutterstock/Ceri Breeze
in their jobs.73 Employees spend many
of their waking hours at work; thus, an
organization’s commitment to goodwill
and respect of its employees usually
results in increased employee loyalty
and support of the company’s objectives.
Academic research on employee commit-
ment has highlighted the importance of communicating and implementing CSR
from a values perspective, not a compliance mandate. Employee commitment is
also enhanced when social responsibility principles are integrated into business
processes and practices and not just viewed as window dressing or a simple add-on
to corporate strategy.74
Shareholder Support
Investors look at a corporation’s bottom line for profits or the potential for
increased stock prices. To be successful, relationships with stockholders and
other investors must rest on dependability, trust, and commitment. But investors
also look for potential cracks or flaws in a company’s performance. Companies
perceived by their employees as having a high degree of honesty and integrity had
an average three-year total return to shareholders of 101 percent, whereas com-
panies perceived as having a low degree of honesty and integrity had a three-year
total return to shareholders of just 69 percent.75 After hackers broke into Target’s
databases and stole customers’ credit card numbers and other information, the
company’s stock fell 46 percent.76 Target has been criticized for its lack of suf-
ficient internal controls.
Many shareholders are also concerned about the reputation of companies in
which they invest. Investors have even been known to avoid buying the stock of
firms they view as irresponsible. For example, Warren Buffett sold 25 percent
of his holdings in General Motors (GM) after a series of recalls was initiated
following a federal investigation. The investigation concluded that the company
was responsible for several injuries and deaths resulting from negligence of a faulty
ignition switch.77 Many socially responsible mutual funds and asset management
firms are available to help concerned investors purchase stock in responsible
companies. These investors recognize that corporate responsibility is the founda-
tion for efficiency, productivity, and profits. In contrast, investors know that fines
or negative publicity can decrease a company’s stock price, customer loyalty, and
long-term viability. Consequently, many chief executives spend a great deal of
time communicating with investors about their firms’ reputations and financial
performance and trying to attract them to their stock.
The issue of drawing and retaining investors is critical for CEOs, as roughly 50
percent of investors sell their stock in companies within one year, and the average
household replaces 80 percent of its common stock portfolio each year.78 This
focus on short-term gains subjects corporate managers to tremendous pressure

to boost short-term earnings, often at the expense of long-term strategic plans,

including those needed to fulfill strategic social responsibility goals. The resulting
pressure for short-term gains deprives corporations of stable capital and forces
decision-makers into a “quarterly” mentality.
Conversely, those shareholders willing to hold onto their investments for
lengthy periods are more willing to sacrifice short-term gains for long-term
income. Attracting these long-term investors shields companies from the vagaries
of the stock market and gives them flexibility and stability in long-term strategic
planning. In the aftermath of the Enron scandal and other significant scandals, as
listed in Table 1.6, public trust and confidence in financial audits and published
financial statements were severely shaken.
Membership in grassroots investment clubs declined, retail stock investments
declined, and investors called for increased transparency in company operations
and reports.79 Gaining and retaining investors’ trust and confidence are vital
for sustaining a firm’s financial stability, as well as the stability of entire market
economies.
The Bottom Line: Profits

Social responsibility is positively associated with return on investment, return on
assets, and sales growth.80 A company cannot be socially responsible and nurture
and develop an ethical organizational culture continuously unless it has achieved
financial performance in terms of profits.
Businesses with greater resources—regardless of their staff size—have the
ability to promote their social responsibility along with serving their customers,
valuing their employees, and establishing trust with the public. As mentioned
before, the stock returns of the world’s most ethical companies are often higher
than that of companies listed on the S&P 500. Many studies have identified a
positive relationship between social responsibility and financial performance.81
For example, a survey of the 500 largest public corporations in the United States
found that those that commit to responsible behavior and emphasize compliance
with codes of conduct show better financial performance.82 A managerial focus on
stakeholder interests can affect financial performance, although the relationships
between stakeholders and financial performance vary and are very complex.83
A meta-analysis of 25 years of research identified 33 studies (63 percent)
Table 1.6 Top 10 Corporate Scandals

Rank Company Name Year Type of Scandal
1 Enron 2001 Fraudulent financial reporting
2 Volkswagen 2015 Emissions scandal
3 Lehman Brothers 2008 Subprime mortgage crisis
4 Uber 2017 Culture crisis
5 Apple 2017 Batterygate
6 BP 2010 Deepwater Horizon oil spill
7 Facebook 2013–2016 Privacy breach and dubious targeted ad
campaigns
8 Valeant Pharmaceuticals 2015 Drug price inflation
9 Kobe Steel 2017 Falsified data on product quality
10 Equifax 2017 Security breach
Source: Will Hall-Smith, “Top 10 Biggest Corporate Scandals and How They Affected Share Prices,” IG, https://www.
ig.com/no/tradingstrategier/top-10-biggest-corporate-scandals-and-how-they-affected-share-pr-181031 (accessed July 31,
2019).

demonstrating a positive relationship between corporate social performance and

corporate financial performance, 5 studies (about 10 percent) indicating a negative
relationship, and 14 studies (27 percent) yielding an inconclusive result or no rela-
tionship.84 Research on the effects of legal infractions suggests that the negative
effect of misconduct does not appear until the third year following a conviction,
with multiple convictions being more harmful than a single one.85
In summary, a company with strong efforts and results in social responsibility
is generally not penalized by market forces, including the intention of consumers
to purchase the firm’s products. Social responsibility efforts and performance
serve as a reputational lever and resource advantage that managers may use to
influence and cultivate stakeholders as partners. A high-performing company may
also receive endorsements from governmental officials or other influential groups,
and these are more believable than company messages. A company with a strong
social responsibility orientation often becomes quite proactive in managing and
changing conditions that yield economic benefits, including avoiding litigation and
increased regulation. Finally, corporate social performance and corporate financial
performance are positively correlated. These findings subjugate the belief that
social responsibility is just a “cost factor” for business and has no real benefits to
the firm.86
National Economy
An often-asked question is whether business conduct has any bearing on a nation’s
overall economic performance. Many economists have wondered why some
market-based economies are productive and provide a high standard of living
for their citizens, whereas other market-based economies lack the kinds of social
institutions that foster productivity and economic growth. Perhaps a society’s
economic problems can be explained by a lack of social responsibility. Trust stems
from principles of morality and serves as an important “lubricant of the social
system.”87 Many descriptions of market economies fail to take into account the
role of such institutions as family, education, and social systems in explaining
standards of living and economic success. Perhaps some countries do a better job
than others of developing economically and socially because of the social structure
of their economic relationships.
Social institutions, particularly those that promote trust, are important for
the economic well-being of a society.88 Society has become economically suc-
cessful over time “because of the underlying institutional framework persistently
reinforcing incentives for organizations to engage in productive activity.”89 In
some developing countries, opportunities for political and economic development
have been stifled by activities that promote monopolies, graft, and corruption and
by restrictions on opportunities to advance individual, as well as collective, well-
being. As found in Table 1.7, L. E. Harrison offers four fundamental factors that
promote economic well-being: “(1) The degree of identification with others in a
Table 1.7 Fundamental Factors That Promote Economic Well-Being

Four Fundamental Factors That Promote Economic Well-Being
Factor 1 The degree of identification with others in a society—the radius of trust or the sense of
community
Factor 2 The rigor of the ethical system
Factor 3 The way that authority is exercised within the society
Factor 4 Attitudes about work, innovation, saving, and profit
Source: Lawrence E. Harrison, Who Prospers? How Cultural Values Shape Economic and Political Success (New York:
Basic Books, 1992).

society—the radius of trust, or the sense of community; (2) the rigor of the ethical
system; (3) the way authority is exercised within the society; and (4) attitudes
about work, innovation, saving, and profit.”90
Countries with institutions based on strong trust foster a productivity-
enhancing environment because they have ethical systems in place that reduce
transaction costs and make competitive processes more efficient and effective.
In market-based systems with a great degree of trust, such as Australia, Canada,
Germany, the Netherlands, and the United Kingdom, highly successful enterprises
can develop through a spirit of cooperation and ease in conducting business.91
Superior financial performance at the firm level within a society is measured
as profits, earnings per share, return on investment, and capital appreciation.
Businesses must achieve a certain level of financial performance to survive and
reinvest in the various institutions in society that provide support. However, at
the institutional or societal level, a key factor distinguishing societies with high
standards of living from those with lower standards of living is whether the institu-
tions within the society are generally trustworthy. The challenge is to articulate the
process by which institutions that support social responsibility can contribute to
superior, firm-level financial performance.92
A comparison of countries that have high levels of corruption and underdevel-
oped social institutions with countries that have low levels of corruption reveals
differences in the economic well-being of the country’s citizens. Transparency
International, an organization discussed earlier, publishes an annual report on
global corruption that emphasizes the effects of corruption on the business and
social sectors. Table 1.8 lists the countries with the most- and least-corrupt public
sectors, as perceived by Transparency International. As stated several times in this
chapter, conducting business in an ethical and responsible manner generates trust
and leads to relationships that promote higher productivity and a positive cycle
of effects.93
Framework for Studying Social

Responsibility
The framework that we have developed for this text is designed to help you
understand how businesses fulfill social expectations. It begins with the social
responsibility philosophy, includes the four levels of social responsibilities, involves
many types of stakeholders, and ultimately results in both short- and long-term
performance benefits. As discussed earlier, social responsibility must have the
support of top management—both in words and deeds—before it can become
Table 1.8 Perceptions of Countries as Least/Most Corrupt

Least Corrupt Countries Most Corrupt Countries
Rank Country CPI Score Rank Country CPI Score
1 Denmark 88 180 Somalia 10
2 New Zealand 87 179 Syria 13
3 Finland 85 178 South Sudan 13
3 Singapore 85 177 Yemen 14
3 Sweden 85 176 North Korea 14
3 Switzerland 85 172 Sudan 16
Note: Corruption Perceptions Index (CPI) score relates to perceptions of the degree of public-sector corruption as seen
by businesspeople and country analysts and ranges between 10 (highly clear) and 0 (highly corrupt).
Source: Transparency International, Corruption Perceptions Index 2018, https://www.transparency.org/cpi2018 (accessed
August 14, 2019).

an organizational reality. Like many organizations, Cummins Engine Company

has faced a number of challenges over the past several decades. Cummins is
currently the world leader in the design and manufacture of diesel engines and
was the largest employer in Columbus, Indiana, for many years. Cummins’s drive
to build positive relationships with employees, customers, and community led
Business Ethics to rank the firm on its list of the “100 Best Corporate Citizens.”
The company received the highest possible rating for their corporate governance
practices from Governance Metrics International (GMI), even during the global
recession of 2009. In addition, Ethisphere magazine has named the company as
one of the “World’s Most Ethical Companies” for 12 years in a row.94
Once the social responsibility philosophy is accepted, the four aspects of
CSR are defined, implemented, and refined through programs that incorporate
stakeholder input and feedback. Cummins, like other companies, is aware of
the potential costs associated with addressing social responsibility issues and
stakeholder requirements. For example, as part of its ethics and compliance
program, Cummins discloses its tax strategy, which is to fully comply with tax law
in all jurisdictions in which it operates. The strategy also includes the deliberate
avoidance of transactions that are primarily designed to reap a tax advantage.95
When social responsibility programs are put into action, they have both immediate
and delayed outcomes.
Figure 1.4 depicts how the chapters of this book fit into our framework. This
framework begins with a look at the importance of working with stakeholders
to achieve social responsibility objectives. It also includes an examination of the
influence on business decisions and actions of the legal, regulatory, and political
environment; business ethics; and corporate governance. The remaining chapters
of the book explore the responsibilities associated with specific stakeholders and
Figure 1.4 An Overview of This Book
Corporate
Social Governance
Responsibility (Chapter 3)
in a Global Business,
Environment Government,
(Chapter 13) and Regulation
(Chapter 4)
Sustainability
Strategic Management of The Impact of
Issues
Stakeholder Relationships Business on
(Chapter 12)
(Chapter 2) Government
and the Political
Technology Environment
Issues (Chapter 5)
Decision
(Chapter 11)
Maker
Business Ethics
Community and Ethical
Relations and Decision-Making
Strategic (Chapter 6)
Philanthropy
(Chapter 10)
Strategic
Approaches to
Consumer Improving
Relations Ethical Behavior
(Chapter 9) (Chapter 7)
Employee
Relations
(Chapter 8)

issues that confront business decision-makers today, including the process of

implementing a social responsibility audit.
Strategic Management of Stakeholder Relationships

Social responsibility is grounded in effective and mutually beneficial relationships
with customers, employees, investors, competitors, government, the community, and
others who have a stake in the company. Increasingly, companies are recognizing
that these constituents both affect and are affected by their actions. For this reason,
many companies attempt to address the concerns of stakeholder groups, recognizing
that failure to do so can have serious long-term consequences. For example, the
Better Business Bureau of the Alaska, Oregon, and Western Washington region
revoked the membership of 12 businesses in a period of three months for not meet-
ing the organization’s standards.96 Chapter 2 examines the types of stakeholders
and their attributes, how stakeholders become influential, and the processes for
integrating and managing stakeholders’ influence on a firm. It also examines the
impact of corporate reputation and crisis situations on stakeholder relationships.
Corporate Governance
Because both daily and strategic decisions affect a variety of stakeholders, compa-
nies must maintain a governance structure to ensure proper control of their actions
and assign responsibility for those actions. In Chapter 3, we define corporate
governance and discuss its role in achieving strategic social responsibility. Key gov-
ernance issues addressed include the rights of shareholders, the accountability of
top management for corporate actions, executive compensation, and strategic-level
processes for ensuring that financial, legal, ethical, and philanthropic responsibili-
ties are satisfied.
Legal, Regulatory, and Political Issues

In Chapters 4 and 5, we explore the complex relationship between business and
government. Every business must be aware of and abide by the laws and regula-
tions that dictate acceptable business conduct. These chapters also examine how
business can influence government by participating in the public policy process. A
strategic approach for legal compliance is also provided.
Business Ethics and Strategic Approaches to Improving

Ethical Behavior
Because individual values are a component of organizational conduct, these
findings raise concerns about the ethics of future business leaders. Chapters 6 and
7 are devoted to exploring the role of ethics in business decision-making. These
chapters explore business responsibilities that go beyond the conduct that is legally
prescribed. We examine the factors that influence ethical decision-making and
consider how companies can apply this understanding to increase their ethical
conduct. We also examine ethical leadership and how it contributes to an ethical
corporate culture.
Employee Relations
In today’s business environment, most organizations want to build long-term
relationships with a variety of stakeholders, but particularly with employees—the
focus of Chapter 8. Employees today want fair treatment, excellent compensation
and benefits, and assistance in balancing work and family obligations. This is

increasingly important, as employee privacy issues have become a major concern

in recent years. Raytheon developed a computer program called SilentRunner
that can detect patterns of data activity that may reflect employee fraud, insider
trading, espionage, or other unauthorized activity.97 Critics, however, question
whether the use of such software contributes to an environment of trust and com-
mitment. Research has shown that committed and satisfied employees are more
productive, serve customers better, and are less likely to leave their employers.
These benefits are important to successful business performance, but organizations
must be proactive in their human resources programs if they are to receive them.
Consumer Relations
Chapter 9 explores companies’ relationships with consumers or consumer
relations. This constituency is part of a firm’s primary stakeholder group, and
there are a number of financial, legal, ethical, and philanthropic responsibilities
that companies must address. This chapter, therefore, considers the obligations
that companies have toward their customers, including health and safety issues,
honesty in marketing, consumer rights, and related responsibilities.
Community and Philanthropy

Chapter 10 examines community relations and strategic philanthropy, which is
the synergistic use of organizational core competencies and resources to address
key stakeholders’ interests and to achieve both organizational and social benefits.
Whereas traditional benevolent philanthropy involves donating a percentage of
sales to social causes, a strategic approach aligns employees and organizational
resources and expertise with the needs and concerns of stakeholders, especially
the community. Strategic philanthropy involves both financial and nonfinancial
contributions (employee time, goods and services, technology and equipment, and
facilities) to stakeholders and reaps benefits for the community and company.
Technology Issues
In Chapter 11, we examine the issues that arise as a result of enhanced technology
in the business environment, including the effects of new technology on privacy,
intellectual property, and health. We also discuss the rise of artificial intelligence
and its enablers, such as big data, blockchain, drones, and robotics. The strategic
direction for technology depends on government, as well as on a business’s ability
to plan the implementation of new technology and to assess the influence of that
technology on society.
Thanks to the internet and other technological advances, we can communicate
faster than ever before, find information about just about anything, and live
longer, healthier lives. However, not all of the changes that occur as a result of new
technologies are positive. For example, because shopping via the internet does not
require a signature to verify transactions, online credit card fraud is significantly
greater than fraud through mail-order catalogs and traditional storefront retailers.
A major identity theft ring in New York affected thousands of people. Members
of the theft ring illegally obtained the credit records of consumers and then sold
them to criminals for about $60 per record. The criminals used the credit records
to obtain loans, drain bank accounts, and perform other fraudulent activities.98
Sustainability Issues
In Chapter 12, we dedicate the entire content to issues of sustainability, including
the interdependent nature of economic development, social development, and

environmental impact. “Sustainability” has become a watchword in business and

community circles, and this chapter explores the ways in which companies define
and develop goals, implement programs, and contribute to sustainability concerns.
The Dow Jones Sustainability Index (DJSI) makes an annual assessment of
companies’ economic, environmental, and social performance based on more than
50 general and industry-specific criteria. The DJSI includes 2,500 companies from
20 countries and is used by investors who prefer to make financial investments in
companies engaged in socially responsible and sustainable practices.99
Global Social Responsibility

Finally, for many businesses to remain competitive, they must evolve continually
to reach global markets and anticipate emerging world trends. Chapter 13
delves into the complex and intriguing nature of social responsibility in a global
economy. Building on key concepts discussed throughout this book, we examine
the forces that make overseas business plans and activities of paramount concern
to host countries, local and national governments, NGOs, and other members of
society. The chapter covers a wide range of challenges and opportunities, such as
outsourcing, environmental protection, living wages, labor standards, and trade
restrictions.
We hope that this framework provides you with a way of understanding
the range of concepts, ideas, and practices that are involved in an effective
social responsibility initiative. So that you can learn more about the practices
of specific companies, a number of cases are provided at the end of the book.
In addition, every chapter includes an opening vignette and other examples that
shed more light on how social responsibility works in today’s businesses. Every
chapter also includes a real-life scenario entitled “What Would You Do?” a
contemporary debate issue, and another exercise to help you apply concepts and
examine your own decision-making process. As you will soon see, the concept of
social responsibility is both exciting and controversial; it is in a constant state of
development—just like all important business concepts and practices. A recent
survey of thought leaders in the area of social responsibility found that a majority
believes that social responsibility has made steady progress into conventional
business thinking. Much like the social responsibility continuum introduced in this
chapter, the thought leaders described several stages of commitment to CSR. These
stages range from shallow, where companies are concerned about responding to
complaints, to deep, where companies are founded on a business model of improv-
ing social or environmental circumstances. Many companies fall somewhere in
between, with a focus on complying with new standards and surviving in a climate
of increasing social responsibility expectations.100 We encourage you to draw on
current news events and your own experiences to understand social responsibility
and the challenges and opportunities that it poses for your career, profession, role
as a consumer, and leadership approach, as well as the business world.

Earth in the Balance
Sustainable Fashion Is the Dress Code at Evrnu

The apparel industry is one of the worst polluters of our this is driving the high clothing disposal rate. While the rate
environment. According to Evrnu, an organization that has of growth is increasing, the rate of recycling and reuse is
invested in regenerative fiber technology, “the clothing staying stagnant. This is what creates enormous amounts
we wear is contributing to some of the world’s worst of textile waste and why the percentage of waste increase
environmental health issues.” The cofounder and CEO of is so exorbitant. Textile-sorting technologies and recycling
Evrnu, Stacy Flynn, realized that she was playing a role in convenience for consumers are projected to improve
the pollution of our environment when she and a coworker recycling rates. The Council for Textile Recycling states
were on a business trip to China. She stepped out of the that the average US citizen throws away 70 pounds of
car and could barely see through the smog that was being clothing a year, while donating or recycling only 12 pounds.
generated by the country’s local textile industry. Instead If recycling textiles were more convenient, this number
of doing nothing, Flynn started working on producing could be dramatically lowered. After clothing is donated or
recycled fibers and collaborating with apparel makers to recycled, 45 percent is reused and recycled, 30 percent is
turn textile waste into sustainable pieces. Not only is the recycled and converted into cleaning rags, and 20 percent
creation of clothing creating problems for the health of our is recycled into fiber.
environment, what our clothing is made of is affecting the The answer to the textile waste problem is more recy-
world we live in. cling. There are a couple of companies that have answers
According to the World Wildlife Fund, it takes about as to what should be done with clothes that thrown away
2,700 liters of water—equal to more than 700 gallons—to or donated. Retailers like American Eagle Outfitters and
produce the cotton that is needed to make one T-shirt. H&M offer in-store clothing recycling bins to collect cloth-
Evrnu is stepping up to change these numbers. More ing and accessories from any brand. Patagonia, another
global organizations like IKEA also have plans to switch retailer that encourages recycling, asks its loyal customer
to 100% Better Cotton. Another problem with human base to buy less, not more. It encourages its customers to
clothing is the amount of plastic that it contains. Polyester, bring their clothes in for repair rather than replacing them
acrylic, nylon, and Spandex are all plastics that are used to immediately.
make clothing. Even cotton isn’t totally free from harmful Reducing consumption creates the most positive impact
products and contains insecticides a lot of the time. It just of all. Patagonia has a website called Worn Wear, which is
takes one person to notice the impact people have on the where customers can trade in their used Patagonia gear
environment and make changes to the way we go about at any retail location and receive a credit toward another
creating our products. new or used Patagonia garment. If the gear is not in good
When looking at textile waste, the U.S. Environmental enough condition for resale, the company recycles the
Protection Agency (EPA) found that from the year 2003 to textiles for other uses. Patagonia urges its customers to
the year 2013, the generation of textile and apparel waste make recycling less of a hassle by doing it when they are
increased by 43 percent, which is more than double the already running errands. This company is doing every-
growth of other waste categories. There are two reasons thing it can to curb the growth of textile waste. If more
why this is happening. The apparel industry is rapidly organizations were to take on efforts like this, it would be
producing more styles of clothing at faster rates and fascinating to see the impact.
cheaper prices. This is called “fast fashion,” and in turn,
Sources: Heather Green, “Patagonia’s Ongoing Recycling Program,” Bloomberg, November 5, 2018, www.bloomberg.com/news/articles/2008-11-05/
patagonias-ongoing-recycling-programbusinessweek-business-news-stock-market-and-financial-advice (accessed October 2, 2018); Anne Johnson
and Marisa Adler, “Textile Waste,” Recycle.com, February 23, 2017, recycle.com/textile-recycling/ (accessed October 2, 2018); Valerie Vande Panne,
“Want Sustainable Clothing? It’s Time to Meet Regenerative Fiber,” EcoWatch, March 4, 2018, www.ecowatch.com/fast-fashion-environmental-
impact-2541799617.html (accessed October 2, 2018); “How to Recycle Clothing & Accessories,” Earth911.com, earth911.com/recycling-guide/how-to-
recycle-clothing-accessories/ (accessed October 2, 2018); World Wildlife Fund, “The Impact of a Cotton T-Shirt,” January 16, 2013, www.worldwildlife.
org/stories/the-impact-of-a-cotton-t-shirt (accessed October 2, 2019); Evrnu, “The Problem: Textile Waste,” https://www.evrnu.com/ (accessed October 2,
2018); “The Lifecycle of Secondhand Clothing,” Council for Textile Recycling, weardonaterecycle.org/about/clothing-life-cycle.html (accessed October 2,
2018); “Why Recycle Shoes and Clothing?” World Wear Project, worldwearproject.com/about-us/global-responsibility (accessed October 2, 2018).

Summary
The term social responsibility came into widespread use during the last several
decades, but there remains some confusion over the term’s exact meaning. This
text defines social responsibility as the adoption by a business of a strategic
focus for fulfilling the economic, legal, ethical, and philanthropic responsibilities
expected of it by its stakeholders.
All types of businesses can implement social responsibility initiatives to further
their relationships with their customers, their employees, and the community at
large. Although the efforts of large corporations usually receive the most attention,
the actions of small businesses may have a greater impact on local communities.
The definition of social responsibility involves the extent to which a firm
embraces the social responsibility philosophy and follows through with the imple-
mentation of initiatives. Seven main areas of social responsibility include social
issues, consumer protection, sustainability, corporate governance, philanthropy,
legal responsibilities, and employee well-being. Social responsibility must be fully
valued and championed by top managers and given the same planning time,
priority, and management attention as is given to any other company initiative.
Many people believe that businesses should accept and abide by four types
of responsibilities: financial, legal, ethical, and philanthropic. Companies have
a responsibility to be financially or economically viable so that they can provide
a return on investment for their owners, create jobs for the community, and
contribute goods and services to the economy. They are also expected to obey
laws and regulations that specify what is responsible business conduct. “Business
ethics” refers to the principles and standards that guide behavior in the world
of business. Philanthropic activities promote human welfare or goodwill. These
responsibilities can be viewed holistically, with all four related and integrated
into a comprehensive approach. Social responsibility can also be expressed as a
continuum. Because customers, employees, investors and shareholders, suppliers,
governments, communities, and others have a stake in or claim on some aspect
of a company’s products, operations, markets, industry, and outcomes, they are
known as “stakeholders.” Adopting a stakeholder orientation is part of the social
responsibility philosophy.
The influence of business has led many people to conclude that corporations
should benefit their employees, their customers, their business partners, and
their community as well as their shareholders. However, these responsibilities
and expectations have changed over time. After World War II, many large U.S.
firms dominated the global economy. Their power was largely mirrored by the
autonomy of their top managers. Because of the relative lack of global competi-
tion and stockholder input during the 1950s and 1960s, there were few formal
governance procedures to restrain management’s actions. The stability experienced
by midcentury firms dissolved in the economic turmoil of the 1970s and 1980s,
leading companies to focus more on their core competencies and reduce their
product diversity. The 1980s and 1990s brought a new focus on efficiency and
productivity, which fostered a wave of downsizing and restructuring. Concern for
corporate responsibilities was renewed in the 1990s. In the 1990s and beyond, the
balance between the global market economy and an interest in social justice and
cohesion best characterizes the intent and need for social responsibility. Despite
major advances in the 1990s, the sheer number of corporate scandals at the
beginning of the twenty-first century prompted a new era of social responsibility.
The increasing globalization of business has made social responsibility an
international concern. In most developed countries, social responsibility involves
economic, legal, ethical, and philanthropic responsibilities to a variety of stake-
holders. Global social responsibility also involves responsibilities to a confluence

of governments, businesses, trade associations, and other groups. Progressive

global businesses recognize the shared bottom line that results from the partner-
ship among businesses, communities, governments, and other stakeholders.
The importance of social responsibility initiatives in enhancing stakeholder
relationships, improving performance, and creating other benefits has been
debated from many perspectives. Many business managers view such programs as
costly activities that provide rewards only to society, at the expense of their bottom
line. Others hold that some costs of social responsibility can be recovered through
improved performance. Although it is true that some aspects of social responsibil-
ity may not accrue directly to the bottom line, we believe that organizations benefit
indirectly over the long run from these activities. Moreover, ample research and
anecdotal evidence demonstrate that there are many rewards for companies that
implement such programs.
The process of social responsibility begins with the social responsibility
philosophy, includes the four responsibilities, involves many types of stakeholders,
and ultimately results in both short- and long-term performance benefits. Once
the social responsibility philosophy is accepted, the four types of responsibility are
defined and implemented through programs that incorporate stakeholder input
and feedback.
Responsible Business Debate
The Brand Name You Won’t Forget: Brandless

Issue: Can a company compete without a brand? products are promoted as being free of any branding,
as the name of the company would suggest. Sharkey
When Tina Sharkey set out to build an online marketplace, estimates that customers are saving about 70 percent
she knew that it would be difficult to gain traction with compared to national brands by shopping at Brandless,
consumers, especially in the early stages of the business. and the majority of those savings simply come from
The majority of people go to their favorite grocery store, eliminating the manufacturers’ branding and marketing
visit a big-box retailer, or simply use a website like Amazon expenses. Sharkey wanted to make shopping as simple as
to buy food, as well as household and personal items. possible, so her third focus was to sell all the company’s
Despite this, she recognized an opportunity to enter the products for $3. When customers shop at Brandless, they
“better for you” (BFY) market, targeting conscious millenni- don’t have to consider prices because everything sells for
als who wish to take care of their bodies with healthy, safe a simple, low price. This strategy has allowed Sharkey and
foods and products. It’s been estimated that 77 percent the Brandless brand name to differentiate themselves and
of millennials don’t want to use the same products their attain positive media attention since the site launched in
parents use. Sharkey recognized this point and built a July 2017.
clean, easy-to-use website called Brandless that sells all The Brandless website emphasizes the idea of
products at the same price. Brandless quickly drew in community. In an interview with Medha Agarwal at
customers of all ages, selling the idea that people can Redpoint Ventures, Sharkey stated that Brandless is not an
buy high-quality products for low prices. The strategy was e-commerce company, but instead a community. She
based on integrity and sustainability. desires that her customers have trust in the “brand.” She
Tina Sharkey and her cofounder, Ido Leffler, began believes that brands should be about community, about
working on their idea for a BFY marketplace in 2014. “living more and branding less.” The Brandless philosophy
They decided to differentiate themselves in a few key is that people should transact kindness and be transparent.
ways. First and most important, all their products had to Through this community lifestyle, Sharkey and her team at
be healthy. All Brandless foods are from non-genetically Brandless believe that people everywhere deserve better
modified organisms and over 70 percent are organic. For without it having to cost more. A visit to Whole Foods
beauty and personal care products, the company ensures can be an expensive trip, and Sharkey understands that
that over 400 toxic ingredients are banned, including average Americans don’t have the resources to shop at
phthalates, sulfates, or anything artificial. Second, all upscale grocery stores. As an entrepreneur, Sharkey is

taking the initiative to be available to everyone. Instead of to plan our collection.” The Brandless organization is built
focusing on the strategy of serving only a certain type of around their customers, customers’ feedback, and the
customer or target market, Brandless is treating all people interests of society in general.
the same by doing what they do best—serving.
Sharkey and the team at Brandless want to live out the There Are Two Sides to Every Issue
ideals that they are trying to create around the world. In her 1. Brandless has become an antidote to an overcom-
words, they want to “model the behavior that [they] want mercialized and expensive retail marketplace and
to see in the world.” People come first for the community has a great opportunity to set itself apart from other
at Brandless. The company wants to have a relationship competitors.
with their consumers by staying in constant contact with 2. In reality, Brandless is a brand name. Despite the com-
those that are a part of their community. Sharkey recently pany’s intentions and core values, Brandless is still
said, “We pay attention to what people buy and listen competing with traditional and popular retailers.
closely to what matters to them, and use that feedback
Sources: Agarwal, Medha, 2018, “A Conversation with Tina Sharkey, Co-founder and CEO of Brandless,” Medium, https://medium.com/redpoint-ventures/
a-conversation-with-tina-sharkey-co-founder-and-ceo-of-brandless-88efdb0abe2b (accessed September 19, 2018); Brandless, “Better Stuff, Fewer
Dollars. It’s That Simple.” https://brandless.com/about, accessed September 27, 2018); Grisworld, Allison, 2017, “Hot New E-commerce Startup Brandless
Is Totally Obsessed with Its Own Brand,” Quartz, https://qz.com/1032202/tina-sharkeys-e-commerce-startup-brandless-is-totally-obsessed-with-its-own-
brand/ (accessed August 20, 2019); McBride, Sarah, 2018, “This No-Brand Startup Won $240 Million to Fight Amazon on Price and Quality,” Bloomberg,
https://www.bloomberg.com/news/articles/2018-07-31/brandless-is-battling-amazon-with-240-million-from-softbank (accessed August 20, 2019); Zarya,
Valentina, 2018, “Female Founders Got 2% of Venture Capital Dollars in 2017,” Fortune, January 31, http://fortune.com/2018/01/31/female-founders-
venture-capital-2017/ (accessed August 20, 2019).
Key Terms
artificial intelligence (p. 16) corporate governance (p. 6) philanthropy (p. 6)
blockchain (p. 17) employee well-being (p. 6) resource advantage theory (p. 11)
business ethics (p. 10) interorganizational networks (p. 12) social responsibility (p. 7)
code of conduct (p. 10) legal responsibility (p. 6) stakeholders (p. 12)
common good (p. 5) license to operate (p. 4) stakeholder orientation (p. 11)
consumer protection laws (p. 5) mission statement (p. 8) sustainability (p. 6)
core competencies (p. 14) philanthropic activities (p. 11) vision statement (p. 8)
corporate culture (p. 9)
Discussion Questions
1. Define social responsibility. How does this view 4. How would you respond to the statement that this
of the role of business differ from your previous chapter presents only the positive side of the argu-
perceptions? How is it consistent with your attitudes ment that social responsibility results in improved
and beliefs about business? organizational performance?
2. If a company is named to one of the “best in social 5. On the basis of the social responsibility model
responsibility” lists, what positive effects can they presented in this chapter, describe the philosophy,
potentially reap? What are the possible costs or responsibilities, and stakeholders that make up a
negative outcomes that may be associated with being company’s approach to social responsibility. What
named to one of these lists? are the short- and long-term outcomes of this effort?
3. What historical trends have affected the social 6. Consider the role that various business disciplines,
responsibilities of business? How have recent including marketing, finance, accounting, and
scandals affected the business climate, including any human resources, play in social responsibility. What
changes in responsibilities and expectations? specific views and philosophies do these disciplines
bring to the implementation of social responsibility?

Experiential Exercise
Evaluate Fortune magazine’s annual list of the most admired the welfare of stakeholders. If any of the companies have
companies found on the magazine’s website (fortune.com). experienced legal or ethical misconduct, explain how this
These companies as a group have superior financial per- may affect specific stakeholders. Rank the companies on
formance compared to other firms. Go to each company’s the basis of the information available and your opinion on
website and try to assess its management commitment to their fulfillment of social responsibility.
Two Sides to Tobacco: What Would You Do?

Jamie Ramos looked out her window at the early morning
?
program, create a quarterly newsletter, serve as a liaison
sky and gazed at the small crowd below. The words and to the company’s philanthropic foundation, develop solid
pictures on their posters were pretty tame this time, she relationships, and serve on various boards related to social
thought. The last protest group used pictures of tarred welfare and community needs. The company’s foundation
lungs, corpses, and other graphic photos to show the effects donated nearly $1.5 million a year to charities and causes.
of smoking on a person’s internal organs. Their words were Over one-quarter of its employees volunteered 10 hours a
also hateful—so much so that employees at the Unified month in their communities.
Tobacco headquarters were afraid to walk in and out of the Jamie reported to a vice president and was pleased
main building. Those who normally took smoking breaks with the career progress that she had made since graduating
on the back patio decided to skip them and eat something from college eight years earlier. Although some of her
at the company-subsidized cafeteria instead. friends wondered out loud how she could work for a
By midday, Unified hired extra security to escort tobacco company, Jamie was steadfast in her belief that
employees in and out of the building and to ensure that even a tobacco firm could contribute something meaningful
protestors followed the state guideline of staying at least to society. She had the chance to affect some of those
15 feet from the company’s entrance. The media picked up contributions in her community relations role.
on the story—and the photos—and it caused quite a stir Jamie’s phone rang and she took a call from her vice
in the national press. At least this protest group seemed president. The vice president indicated that, although the
fairly reasonable. Late yesterday, a state court had provided protestors seemed relatively calm this time, he was not
a reduced judgment to the family of a lifelong smoker, comfortable with their presence. Several employees had
now deceased. This meant that Unified was going to owe taped signs in office windows telling the protestors to “Go
millions less than originally expected. The length and stress away.” Other vice presidents had dropped by his office to
of the lawsuit had taken its toll, especially on top manage- discuss the protest and thought that the responsibility for
ment, although all employees were certainly affected. After handling these issues fell to his group. He went on to say
two years of being battered in the media, learning of a that he needed Jamie’s help, and the assistance of a few
huge settlement, and then continuing on with the appeals others, in formulating a plan to (1) deal with the protest
process, emotions were wearing thin under the brunt of the today and (2) strengthen the strategy for communicating
continued criticism. the company’s message and goodwill in the future. Their
Jamie wondered what this day would bring. As the meeting was slated to begin in one hour, so Jamie had some
manager of community relations, her job was to represent time to sketch out her recommendations on both issues.
Unified in the community, manage the employee volunteer What would you do?

CHAPTER
2 Strategic
Management
of Stakeholder
Relationships
Whole Foods: Challenging the “Whole Paycheck” Reputation
In 1978, two entrepreneurs, John Mackey and Rene years, such that many consumers viewed Whole
Hardy, began a challenging venture to create a Foods products as unaffordable. Even their 365
company that incorporated the values of healthy liv- Everyday Value brand, which was the supposedly
ing and conscious capitalism, all with a $45,000 loan. “generic” brand, failed to shake off this image.
Their efforts led them to open a small natural foods Due to the grocer’s financial struggles, Amazon
store named SaferWay, founded in Austin, Texas, in acquired Whole Foods in 2017 for $13.7 billion.
1980. The two founders had a difficult time beginning Stakeholder hopes were high that Amazon would
the company, and later they merged it with Clarksville decrease prices on Whole Foods goods and effec-
Natural Grocery. Together, the two companies tively compete with stores like Sprouts Farmer’s
became Whole Foods, the world’s largest retailer of Market. Shortly after Amazon acquired Whole
organic and natural food and personal care products. Foods, chief executive officer (CEO) John Mackey
Whole Foods has grown not only domestically, but stated in an interview with Food Business News
also internationally, since its initial expansion in 1984. that he felt the “whole paycheck” reputation had
The company’s values involve meeting cus- “disappeared.”
tomer needs and demonstrating its commitment According to Gordon Haskett Research
toward selling the highest-quality natural and Advisors, prices on over 100 Whole Foods items
organic products. Whole Foods also aims to create have dropped less than 1.5 percent within the
positive and ethical ongoing partnerships with sup- first year. Amazon has implemented discounts and
pliers, while simultaneously creating wealth through deals on Whole Foods products for Amazon Prime
profits and growth and caring about the community members to continue to improve their reputation
and environment. In addition, the company aims with stakeholders. Whole Foods dropped off of the
to delight customers by promoting the health of Fortune 100 “Best Companies to Work For” list for
all stakeholders through healthy eating education. the first time in 20 years, immediately after Amazon’s
Along with management striving to implement these acquisition, an indicator that the company has a lot
core values, employees help to create this environ- of work ahead of it before it finishes improving its
ment through daily interactions with customers. reputation. Whole Foods will continue to focus on all
Employees are highly valued at Whole Foods and their important stakeholders, including consumers,
Shutterstock/Y Photo Studio
are labeled “team members” as a symbol of their employees, suppliers, and responsibility to inves-
empowerment through their everyday contributions. tors. Now that the company is part of Amazon, it
Despite its success, the company has struggled can play an important role in advancing online food
to get rid of its “whole paycheck” reputation in recent retailing under the Amazon business model.1
Chapter Objectives
●● Define stakeholders and understand their importance
●● Distinguish between primary and secondary stakeholders
●● Discuss the global nature of stakeholder relationships
●● Consider the impact of reputation and crisis situations on social responsibility
performance
●● Examine the development of stakeholder relationships
●● Explore how stakeholder relationships are integral to social responsibility
37
A s this example illustrates, most organizations have a number of

constituents and a web of relationships that interface with society.
In this case, Amazon, the new owner of Whole Foods, faces the complex
task of balancing the concerns of consumers, the public, environmental groups,
and corporate culture. These stakeholders are increasingly expressing opinions and
taking actions that have an effect on the industry’s reputation, relationships, and
products. Today, many organizations are learning to anticipate such issues and to
address them in their strategies long before they become the subject of negative
media stories.
In this chapter, we examine the concept of stakeholders and explore why
these groups are important for today’s businesses. First, we define stakeholders
and examine primary, secondary, and global stakeholders. Then, we examine the
concept of a stakeholder orientation to enhance social responsibility. Next, we
consider the impact of corporate reputation and crisis situations on stakeholder
relationships. Finally, we examine the development of stakeholder relationships
implementing a stakeholder perspective and the link between stakeholder relation-
ships and social responsibility.
Stakeholders Defined
In Chapter 1, we defined “stakeholders” as those people and groups to whom an
organization is responsible—including customers, shareholders, employees, suppli-
ers, governments, communities, and many others—because they have a “stake,” or
claim, in some aspect of a company’s products, operations, markets, industry, or
outcomes. These groups not only are influenced by businesses, but they also have
the ability to influence businesses in return.
Responsibility issues, conflicts, and successes revolve around stakeholder rela-
tionships. Building effective relationships is considered one of the more important
areas of business today. The stakeholder framework is recognized as a management
theory that attempts to balance stakeholder interests. Issues related to indivisible
resources and unequal levels of stakeholder influence and importance constrain
managers’ efforts to balance stakeholder interests.2 A business exists because of
relationships among employees, customers, shareholders or investors, suppliers,
and managers that help them develop strategies to attain success. In addition, an
organization usually has a governing authority, often called a “board of direc-
tors,” which provides oversight and direction to make sure that the organization
stays focused on objectives in an ethical, legal, and socially responsible manner.
Corporate governance is discussed in Chapter 3. When misconduct is discovered in
organizations, it is often found that in most instances, there is knowing coopera-
tion or compliance that facilitates the acceptance and perpetuation of unethical
conduct.3 Therefore, relationships are associated not only with organizational
success, but also with organizational failure to assume responsibility.
These perspectives take into account both market and nonmarket constituen-
cies that may interact with a business and have some effect on the firm’s policies
and strategy.4 Market constituencies are those that are directly involved and
affected by the business purpose, including investors, employees, customers, and
other business partners. Nonmarket constituencies include the general community,
media, government, special-interest groups, and others who are not always directly
tied to issues of profitability and performance.
The historical assumption that the foremost objective of business is profit
maximization led to the belief that business is accountable primarily to shareholders
and others involved in the market and economic aspects of an organization. Because
shareholders and other investors provide the financial foundation for business and
expect something in return, managers and executives naturally strive to maintain

Chapter 2 Strategic Management of Stakeholder Relationships 39
positive relationships with them.5 In the latter half of the twentieth century, how-
ever, perceptions of business accountability evolved toward an expanded model of
the role and responsibilities of business in society. The expansion included questions
about the normative role of business, including: “What is the appropriate role for
business to play in society?” and “Should profit be the sole objective of business?”6
Many businesspeople and scholars have questioned the role of social responsi-
bility in business. Legal and economic responsibilities are generally accepted as the
most important determinants of performance: “If this is well done,” say classical
economic theorists, “profits are maximized more or less continuously and firms
carry out their major responsibilities to society.”7 Some economists believe that
if companies address economic and legal issues, they are satisfying the demands
of society and trying to anticipate and meet additional needs would be almost
impossible. Milton Friedman has been quoted as saying that “the basic mission of
business [is] thus to produce goods and services at a profit, and in doing this, busi-
ness [is] making its maximum contribution to society and, in fact, being socially
responsible.”8 Even with the business ethics scandals of the twenty-first century,
Friedman suggests that, although individuals guilty of wrongdoing should be held
accountable, the market is a better deterrent than new laws and regulations that
discourage firms from wrongdoing and punish them for it.9 Thus, he would dimin-
ish the role of stakeholders such as the government and employees in requiring that
businesses demonstrate responsible and ethical behavior.
This form of capitalism has unfortunately been exported to many less-
developed and developing countries without the appropriate concerns for ethics
and social responsibility. Friedman’s capitalism is a far cry from that of Adam
Smith, one of the founders of capitalism. Smith created the concept of the invisible
hand and spoke about self-interest; however, he went on to explain that this com-
mon good is associated with psychological motives and that each individual has
to produce for the common good with values such as propriety, prudence, reason,
sentiment, and “promoting the happiness of mankind.”10 These values could be
associated with the needs and concerns of stakeholders.
In the twenty-first century, Friedman’s form of capitalism is being replaced
by Smith’s original concept (what is now called enlightened capitalism), a notion enlightened capitalism
of capitalism that reemphasizes stakeholder concerns and issues. The acceptance a theory of capitalism originally
proposed by Adam Smith as
of enlightened capitalism may be occurring faster in developed countries than in
“promoting the happiness of
those that are still developing. Theodore Levitt, a renowned business professor, mankind” that emphasizes
once wrote that although profit is required for business, just as food is required stakeholder concerns and issues
for living, profit is not the purpose of business any more than food is the purpose
of life.11 Norman Bowie, a well-known philosopher, extended Levitt’s sentiment
by noting that focusing on profit alone can create an unfavorable paradox that
causes a firm to fail to achieve its objectives. Bowie contends that when a business
also cares about the well-being of stakeholders, it earns trust and cooperation
that ultimately reduce costs and increase productivity.12 This in turn results in the
organization’s increased profits and success.
Some critics of business believe there is a trade-off between profits and social
responsibility. They believe that to increase profits, a firm must view social
responsibility as a cost that reduces profits. However, there is much evidence
that social responsibility is associated with increased profits. For example, 55
percent of adults worldwide are willing to pay more for goods from companies
demonstrating social responsibility. Younger generations are more likely to factor
social responsibility into purchases than older generations, which indicates that
social responsibility will become even more important as time goes on. There is a
trade-off for the costs of social responsibility, but the benefits could attract more
customers and increase customer retention.13 As mentioned in Chapter 1, the
Ethisphere Institute has found that the world’s most ethical companies outperform
the companies on the Standard & Poor’s (S&P) index. This clearly demonstrates
that social responsibility decisions are good for business.

Stakeholder Issues and Interaction

Stakeholders provide resources that are more or less critical to a firm’s long-term
success. These resources may be both tangible and intangible. Shareholders, for
example, supply capital; suppliers offer material resources or intangible knowledge;
employees and managers grant expertise, leadership, and commitment; customers
generate revenue and provide loyalty and positive or negative word-of-mouth
promotion; local communities provide infrastructure; and the media transmits
positive or negative corporate images. When individual stakeholders share similar
expectations about desirable business conduct, they may choose to establish or
join formal communities that are dedicated to better defining and advocating
these values and expectations. Stakeholders’ ability to withdraw—or threaten to
withdraw—these needed resources gives them power over businesses.14
New reforms to improve corporate accountability and transparency also
suggest that stakeholders such as suppliers—including banks, law firms, and public
accounting firms—can play a major role in fostering responsible decision-making.
Stakeholders apply their values and standards to many diverse issues, such as
working conditions, consumer rights, environmental conservation, product safety,
and proper information disclosure. These are issues that may or may not directly
affect an individual stakeholder’s own welfare. We can assess the level of social
responsibility that an organization bears by scrutinizing its efforts and communica-
stakeholder engagement tion on the issues of concern to its stakeholders. Stakeholder engagement refers
the organizational process of to the process of involving stakeholders who may be affected by an organization’s
involving stakeholders who may
decisions or that may influence the content or implementation of the organiza-
be affected by the decisions
it makes or may influence the tion’s decisions. Engagement with stakeholders takes place over a broad range of
content and implementation of its concerns and issues. Table 2.1 provides examples of common stakeholder issues,
decisions along with indicators of businesses’ impacts on these issues.15
Identifying Stakeholders
primary stakeholders We can identify two types of stakeholders: primary and secondary. Primary
people or groups who are stakeholders are those whose continued association is absolutely necessary for a
fundamental to a company’s
firm’s survival; these include employees, customers, suppliers, and shareholders,
operations and survival; these
include shareholders and as well as the governments and communities that provide necessary infrastructure.
investors, employees, customers, After a tax reform bill passed in 2017, many large companies decided to reward
suppliers, and public stakeholders, stakeholders with bonuses or raises. For example, the cable company Cox
such as government and the Enterprises gave bonuses of $1,000 to $2,000 to most of their 60,000 employees
community
to give back some of the savings that the 2017 tax reform provided. Initiatives that
reward primary stakeholders can enhance employer-employee relationships, which
we discuss in a later chapter.16 Other primary stakeholders, such as customers, are
directly affected by the quality of products and the integrity of communication and
relationships. Shareholders depend on transparency regarding financial informa-
tion, as well as forward-looking statements about sales and profits.
secondary stakeholders Secondary stakeholders do not typically engage in direct transactions with a
people or groups who do company and thus are not essential for its survival; these include the media, trade
not typically engage in direct
associations, and special-interest groups. For example, the American Association
transactions with a company
and thus are not essential for its of Retired People (AARP), a special-interest group, works to support the rights of
survival; these include the media, retirees in areas such as healthcare benefits. Both primary and secondary stakehold-
trade associations, and special- ers embrace specific values and standards that dictate what constitutes acceptable
interest groups or unacceptable corporate behaviors. It is important for managers to recognize
that primary groups may present more day-to-day concerns, but secondary groups
cannot be ignored or given less consideration. Sometimes a secondary stakeholder,
such as the media, can have more of an impact than a primary stakeholder.

Table 2.1 Examples of Stakeholder Issues and Associated Measures of Corporate Impacts
Stakeholder Groups and Issues Potential Indicators of Corporate Impact on
These Issues
Employees
1. Compensation and benefits 1. Average wage paid versus industry averages
2. Training and development 2. Changes in average training dollars spent
per year per employee; resources for ethics
training versus industry averages
3. Employee diversity 3. Percentages of employees from different
genders and races, especially in leadership
roles
4. Occupational health and safety 4. Standard injury rates and absentee rates
5. Communications with management 5. Availability of open-door policies or
ombudsmen management
Customers
1. Product safety and quality 1. Number of product recalls over time
2. Management of customers 2. Number of customer complaints and
availability of complaint procedures to
address them
3. Services to customers with disabilities 3. Availability and nature of measures taken to
ensure services to customers with disabilities
Investors
1. Transparency of shareholders 1. Availability of procedures to inform
shareholders about corporate activities
2. Shareholder rights 2. Frequency and type of litigation involving
violations of shareholder rights
Suppliers
1. Encouraging suppliers in developing 1. Prices offered to suppliers in developed
countries countries and developing countries in
comparison to other suppliers
2. Encouraging minority suppliers 2. Percentage of minority suppliers
Community
1. Public health and safety 1. Availability of emergency response plan
protection
2. Conservation of energy and materials 2. Data on reduction of waste produced and
materials comparison to industry
3. Donations and support of local organizations 3. Annual employee time spent in community
service organizations
Environmental Groups
1. Minimizing the use of energy 1. Amount of electricity purchased; percentage of
“green” electricity
2. Minimizing emissions and waste 2. Type, amount, and designation of waste
generated
3. Minimizing adverse environmental effect of 3. Percentage of product weight reclaimed after
products the product has been used

Ethical Responsibilities in HUMAN RESOURCES
Walmart’s Investment in Employees Beyond Wages

Raising the minimum wage for retail employees has been Beyond wages, Walmart rewards employee loyalty
a hot topic in the last few years. Many believe that retail by offering bonuses based on years of employment. For
chains should pay their employees a living wage (i.e., the example, Walmart employees who have been with the
minimum income needed to meet a worker’s basic needs). company for more than 20 years are eligible for a $1,000
Facing pressure from politicians and the general public, bonus. Additional bonuses range from $200 to $750,
some retailers such as Target have promised to raise their depending on years of service. In addition to bonuses,
minimum wage to $15 an hour in the near future. Walmart, Walmart extended its maternity and parental leave to a
however, has taken a different approach. combined 16 weeks for full-time hourly workers.
Rather than provide $15 at the start, Walmart has gradu- With the increases in pay, bonuses, and parental leave,
ally increased its employees’ hourly wages since 2015 Walmart is actively competing with other retailers. These
and has promoted employees to higher-paid positions. changes are made possible by the recent corporate tax
The company proudly points out that it pays greater than cut. Walmart is showing that their employees are important
minimum wage in 47 states and that 75 percent of its stakeholders and are using their tax cut to benefit their
managers are promoted from within. The average Walmart workers. Time will tell if these changes are enough to
employee makes $14.26 per hour, nearly twice the current compete with other retailers that are also using their tax
federal minimum wage of $7.25. cut to improve the lives of their employees.
Sources: Lauren Thomas and Courtney Reagan, “Walmart to Raise Its Starting Wage to $11, Give Some Employees Bonuses Following Tax Bill Passage,”
CNBC, January 11, 2018, https://www.cnbc.com/2018/01/11/walmart-to-boost-starting-wage-give-employees-bonus-after-tax-bill.html (accessed March 21,
2019); Daniel B. Kline, “How Much Does Walmart Pay Its Workers?” Motley Fool, April 30, 2018, https://www.fool.com/careers/2018/04/30/how-much-
does-walmart-pay-its-workers.aspx (accessed March 21, 2019); Dan Monk, “Kroger, Walmart in No Hurry to Match Amazon’s $15 Starting Pay,” WCPO
Insider, November 26, 2018, https://www.wcpo.com/news/insider/kroger-walmart-in-no-hurry-to-match-amazon-s-15-starting-pay (accessed March 21,
2019); Cameron Albert-Deitch, “Time for That Pay Raise? Walmart Employees Now Make More Than Minimum Wage,” Inc., May 9, 2019, https://www.inc.
com/cameron-albert-deitch/walmart-employee-compensation-report-minimum-wage.html (accessed August 19, 2019).
Figure 2.1 offers a conceptualization of the relationship between businesses

stakeholder interaction model and stakeholders. In this stakeholder interaction model, there are two-way
a model that conceptualizes the relationships between a firm and a host of stakeholders. In addition to the funda-
two-way relationships between a
mental input of investors, employees, and suppliers, this approach recognizes other
firm and a host of stakeholders
stakeholders and explicitly acknowledges the dialogue and interaction that exist
between a firm’s internal and external environments. The stakeholder interaction
model is a conceptual tool that a company may use to create a company-specific
stakeholder map stakeholder map that names the primary and secondary stakeholders, identifies
a company-specific map that salient issues, and illuminates relationships and networks. Through its process
names its primary and secondary
of stakeholder engagement and mapping, BSR (which stands for “Business for
stakeholders, identifies key issues,
and examines relationships Social Responsibility”) assisted Twin Metals Minnesota as the company planned
and networks between the to develop the world’s largest underground copper mine near an area widely used
organization and stakeholders for recreation and outdoor activities. Twin Metals continues to face criticism and
relies on its stakeholder map, as well as updates and changes to it, to engage with
stakeholders more effectively.17
A Stakeholder Orientation
The degree to which a firm understands and addresses stakeholder demands
stakeholder orientation
the degree to which a firm
can be referred to as a stakeholder orientation. This orientation comprises three
understands and addresses sets of activities: (1) the organizationwide generation of data about stakeholder
stakeholder demands groups and assessment of the firm’s effects on these groups, (2) the distribution
of this information throughout the firm, and (3) the organization’s responsiveness

Figure 2.1 Stakeholder Model for Implementing Social Responsibilities
Special-interest groups Mass media
Customers Employees
Government Organization Shareholders

regulations
Community Suppliers
Trade associations Competitors
Primary stakeholders Secondary stakeholders Society at large
Source: Adapted from Isabelle Maignan, O. C. Ferrell, and Linda Ferrell, “A Stakeholder Model for Implementing Social
Responsibility in Marketing,” European Journal of Marketing 39 (September/October 2005): 956–977.
as a whole to this intelligence. Generating data about stakeholders begins with

identifying the stakeholders that are relevant to the firm. Relevant stakeholder
communities should be analyzed on the basis of the power that each enjoys,
as well as by the ties among its parts. Next, the firm should characterize the
concerns about the business’s conduct that each relevant stakeholder group shares.
This information can be derived from formal research, including surveys, focus
groups, internet searches, or press reviews. For example, Ford Motor Company
obtains input on social and environmental responsibility issues from company
representatives, suppliers, customers, and community leaders. Shell has an online
discussion forum where website visitors are invited to express their opinions on
the company’s activities and their implications. Employees and managers can also
generate this information informally as they carry out their daily activities. For
example, purchasing managers know about suppliers’ demands, public relations
executives about the media, legal counselors about the regulatory environment,
financial executives about investors, sales representatives about customers, and
human resources advisors about employees. Finally, the company should evaluate
its impact on the issues that are important to the various stakeholders that it
has identified.18 To develop effective stakeholder dialogue, management needs
to appreciate how others perceive the risks of a specific decision. A multiple
stakeholder perspective must take into account communication content and trans-
parency when communicating with specific stakeholders.19
Given the variety of the employees involved in the generation of information
about stakeholders, it is essential that this intelligence be circulated throughout
the firm. This requires that the firm facilitate the communication of information
about the nature of relevant stakeholder communities, stakeholder issues, the
stakeholder map, and the current impact of the firm on these issues to all members
of the organization. The dissemination of stakeholder intelligence can be organized

formally through activities such as newsletters, internal databases and repositories,

and internal information forums.20
A stakeholder orientation is not complete unless it includes activities that
actually address stakeholder issues. For example, Cloetta, an international
confectionary company, has taken stakeholder orientation seriously. A page on
its website is dedicated to the topic and clearly identifies all of its stakeholders,
the issues that are important to them, and how the company interacts with
consumers to address these issues. Cloetta engages with all stakeholders through
various media: social media, face-to-face meetings, virtual meetings, surveys, and
influential leaders in the community. This allows for a free flow of information
between stakeholders and the company.21 The responsiveness of the organization
as a whole to stakeholder intelligence consists of the initiatives the firm adopts to
ensure that they abide by or exceed stakeholder expectations and have a positive
impact on stakeholder issues. Such activities are likely to be specific to a particular
stakeholder group (e.g., family-friendly work schedules) or to a particular stake-
holder issue (e.g., pollution-reduction programs). These responsiveness processes
typically involve the participation of the stakeholder groups in question. Kraft,
for example, includes special-interest groups and university representatives in its
programs in order to become sensitized to present and future ethical issues.
Stakeholder orientation can be viewed as a continuum, in that firms are likely
to adopt the concept to varying degrees. To gauge a given firm’s stakeholder ori-
entation, it is necessary to evaluate the extent to which the firm adopts behaviors
that typify both the generation and dissemination of stakeholder intelligence and
the responsiveness to it. A given organization may generate and disseminate more
intelligence about certain stakeholder communities than about others and, as a
result, may respond to that intelligence differently.22
Stakeholder Attributes
Traditionally, companies have had an easier time understanding the issues that
stakeholders raise than their attributes and the tactics they use to affect organiza-
tional decision-making. It is, therefore, necessary to understand both the content
(specific issues) and process (actions, tactics) of each stakeholder relationship.23
For example, animal rights activists sometimes use an unreasonable process to
communicate their beliefs. Some members of Direct Action Everywhere, an animal
rights group in California, recently faced felony charges for trespassing on farms
and stealing chickens they felt were being mistreated. Although animal rights
protests such as these are controversial, animal rights issues do have solid support
from a number of citizens.24 One mechanism for understanding stakeholders and
their potential salience to a firm involves assessing three stakeholder attributes:
power, legitimacy, and urgency. Table 2.2 describes these three attributes. This
assessment provides one analytical tool to help managers uncover the motivations
and needs of stakeholders and how they relate to the company and its interests. In
Table 2.2 Stakeholder Attributes

Attribute Examples
Power A well-established employee in a specialized field has power
if replacing the employee would require extensive training and
resources.
Legitimacy Special-interest groups that are against genetically modified
foods encourage protests after legislation favorable to
biotechnology companies is passed.
Urgency A company that has discovered a serious product defect that can
cause injury must immediately implement a product recall.

addition, stakeholder actions may sensitize the firm to issues and viewpoints not
previously considered.25
Power, legitimacy, and urgency are not constant, meaning that stakeholder
attributes can change over time and context. For example, there was a very strong
“Buy American” sentiment in the United States in the 1980s, a time when Japanese
manufacturers were making steady market share gains. As globalization increased
and overseas manufacturing became the norm, consumer activism or retailer
strategy on activism toward this nationalistic buying criterion waned. In the late
1990s and the first decade of the twenty-first century, there was increased urgency
concerning Chinese manufacturers and legitimate claims concerning market share
gains. However, nationalism, as it relates to retail purchasing, seems to contribute
to the intensity of the power gained in the stakeholder environment. This was
largely because the U.S. economy was strong, so products from other countries
were not seen as threatening. The “Buy American” sentiment rose again after the
advent of the Great Recession in 2008–2009, as Americans felt the sting of job
losses. American manufacturing came to the forefront of consumer consciousness
through organizations and movements promoting American-made products and
activists pressuring companies to bring manufacturing back to the United States.
More recently, although controversial, the use of hydraulic fracturing (fracking)
of shale, a method of extracting natural gas from the earth by means of fluid and
other substances, has significantly increased American gas and oil production,
making the country more energy independent. The signing of the American
Recovery and Investment Act also put pressure on domestic sourcing, investment,
and reinvestment in the United States. Some companies have taken this sentiment
to heart and are investing in American manufacturing.26
Power A stakeholder has power to the extent that it can gain access to coercive, power
utilitarian, or symbolic means to impose or communicate its views to an organiza- the extent to which a stakeholder
can gain access to coercive,
tion.27 Coercive power involves the use of fear, suppression, punishment, or some
utilitarian, or symbolic means to
type of restraint. Utilitarian power involves financial or material control based impose or communicate its views
on a decision’s utility or usefulness. Finally, symbolic power relies on the use of to an organization
symbols that connote social acceptance, prestige, or some other attribute.
Symbolism contained in letter-writing campaigns, advertising messages, and
websites can be used to generate awareness and enthusiasm for more responsible
business actions. In fact, the internet has conferred tremendous power on stake-
holder groups in recent years. Disgruntled stakeholders, especially customers and
former employees, may share their concerns or dissatisfaction on social media
sites. Even current employees are increasingly expressing their job frustrations over
the internet. But symbolic power is the least threatening of the three types.
Utilitarian measures, including boycotts and lawsuits, are also fairly prevalent,
although they often come about after symbolic strategies fail to yield the desired
response. For example, the government, an important stakeholder for most firms,
banned the importation of goods made by children under the age of 15 through
indentured or forced labor.28 This action came about after the media and activist
groups exposed widespread abuses in the apparel industry. This law carries finan-
cial—utilitarian—repercussions for firms that purchase products manufactured
under unacceptable labor conditions. Utilitarian power also can be exerted over
the fear that profits will fall if the company spends too much on managing labor
or sustainability.
Finally, some stakeholders use coercive power to communicate their message,
especially when the issue is emotionally charged and somewhat controversial. For
example, a protest in Denton, Texas, resulted in several fracking protesters being
arrested by police for trespassing. Protesting of this nature is not exclusive to the
United States. In 2018, antifracking protestors in England were jailed for impeding
equipment and workers from engaging in fracking.29

Legitimacy The second stakeholder attribute is

legitimacy, which is the perception or belief that
a stakeholder’s actions are proper, desirable, or
appropriate in a given context.30 This definition
suggests that stakeholder actions are considered
legitimate when claims are judged to be reasonable
by other stakeholders and by society in general.
Legitimacy is gained through the stakeholder’s
ability and willingness to explore the issue from a
variety of perspectives, and then to communicate
in an effective and respectful manner on the desire
for change. Legitimacy is also linked to compliance
with regulations, values, and norms that support
ethical conduct.
Thus, extremist views are less likely to be
considered legitimate because these groups often
Shutterstock/VectorMine
use covert and inflammatory measures that over-

shadow the issues and create animosity. Over the
years, extreme groups have destroyed property,
threatened customers, and committed other acts of
violence that ultimately discredit their legitimacy.
Opponents of fracking are at risk of delegitimizing
their efforts if the main theme of their communica-
legitimacy tion is violent. It is important to remember that this issue is highly controversial,
the perception or belief that a and it is in the best interest of companies engaged in this activity to be sensitive to
stakeholder’s actions are proper,
the requests of stakeholders. After many years of stakeholders requesting acknowl-
desirable, or appropriate in a
given context edgment and measurement of the risks of fracking from various oil and energy
companies, ExxonMobil agreed to become the first to disclose such information.
Its report addressed fracking’s effects on air and water quality, roads, and poten-
tial effects of the chemicals used in the process. While some stakeholders were not
completely satisfied with the details of this report, as they think many more issues
need to be addressed, ExxonMobil has taken a step in the right direction toward
becoming more transparent in addressing stakeholder concerns. The pressure that
stakeholders in this example have exerted on the industry was seen as a legitimate
concern to ExxonMobil. This report may spur other energy companies to follow
their lead. Although an issue may be legitimate, such as environmental sensitivity,
it is difficult for the claim to be evaluated independent of the way the stakeholder
group communicates on it.31
Urgency Stakeholders exercise greater pressures on managers and organiza-

urgency tions when they stress the urgency of their claims. Urgency is based on two
the time sensitivity and the characteristics: time sensitivity and the importance of the claim to the stakeholder.
importance of the claim to the
Time sensitivity usually heightens the stakeholder’s effort and may compress an
stakeholder
organization’s ability to research and react to a claim. For example, hundreds of
protesters in Bangladesh took to the streets after a major garment factory fire in
2012 killed over 100 workers. This fire came after a string of similar incidents in
the region, which caused the death of more than 600 workers in a period of six
years. The aim of the protest was to obtain justice for the death of the workers.
Factory owners and managers had known that the factory was deemed an unsafe
workplace, but they allowed work to continue despite this knowledge. The urgency
of the protestors resulted in the arrest of factory managers, investigations into
the safety practices for factories in the region, and a refocusing of multinational
companies that used the factories in their operations.32
In another example, labor and human rights are widely recognized as critical
issues because they are fundamental to the well-being of people around the world.
These rights have become a focal point for college student associations that
criticized Nike, the world’s leading shoe company, for its failure to improve the
working conditions of employees of suppliers and in not making information avail-
able to interested stakeholders. Nike experienced a public backlash from its use of
offshore subcontractors to manufacture its shoes and clothing. When Nike claimed
no responsibility for the subcontractors’ poor working conditions and extremely
low wages, some consumers demanded greater accountability and responsibility by
engaging in boycotts, letter-writing campaigns, public-service announcements, and
so forth. Nike ultimately responded to the growing negative publicity by changing
its practices and becoming a model company in managing offshore manufacturing.
Overall, stakeholders are considered more important to an organization when
their issues are legitimate, their claims are urgent, and they can make use of their
power on the organization. These attributes assist the firm and employees in
determining the relative importance of specific stakeholders and making resource
allocations for developing and managing the stakeholder relationship.
Performance with Stakeholders

Effectively managing stakeholder relationships requires careful attention to a
firm’s reputation and the effective handling of crisis situations. Boeing’s release of
the acclaimed 787 Dreamliner was grounded when the plane’s lithium ion battery
began to overheat. The company had outsourced production of many components
of the aircraft, one of which was the battery to Japanese manufacturer GS Yuasa.
Although the 787 Dreamliner had undergone many tests, the company learned that
excessive outsourcing could cause coordination issues, as well as some unforeseen
quality issues. CVS made the strategic decision to drop tobacco products from its
offerings, forgoing $2 billion in tobacco sales. The pharmacy, which was the first
national chain to do so, believes selling a harmful and addictive substance is con-
trary to its goal of becoming a healthcare firm. Despite its short-term losses, CVS
believed that it would gain long-term stakeholder relationships. Not all pharmacies
have followed CVS’s lead, although cities and states have enacted regulations that
prevent pharmacies from selling tobacco products.33
Reputation Management
There are short- and long-term outcomes associated with positive stakeholder relation-
ships. One of the most significant of these is a positive reputation. Because a company’s
reputation has the power to attract or repel stakeholders, it can be either an asset or a
liability in developing and implementing strategic plans and social responsibility initia-
tives.34 Reputations take a long time to build or change, and it is far more important
to monitor reputation than many companies believe. Whereas a strong reputation may
take years to build, it can be destroyed seemingly overnight if a company does not
handle crisis situations to the satisfaction of the various stakeholders involved.
Corporate reputation, image, and brands are more important than ever and
are among the most critical aspects of sustaining relationships with constituents,
including investors, customers, financial analysts, media, and government watch-
dogs. It takes companies decades to build a great reputation, yet just one slip can
cost a company dearly. Although an organization does not control its reputation
in a direct sense, its actions, choices, behaviors, and consequences do influence
the reputation that exists in perceptions of stakeholders. A corporate reputation
poll showed that quality is typically the biggest driver of corporate reputation,
but company purpose and vision play a big role. While consumers are primarily
concerned about the quality of their goods and services, consumers also want
companies to maintain strong values through their vision and purpose.35

reputation management Reputation management is the process of building and sustaining a company’s
the process of building and good name and generating positive feedback from stakeholders. A company’s repu-
sustaining a company’s good
tation is affected by every contact with a stakeholder.36 Various trends may affect
name and generating positive
feedback from stakeholders how companies manage their reputations. These trends include market factors, such
as increased consumer knowledge, the emergence of instantaneous communication,
stakeholder activism, and community access to information, and workplace factors,
including technological advances, closer vendor relationships, and more inquisitive
employees. These factors make companies more cautious about their actions and
words because increased scrutiny in this area requires more attention from manage-
ment. A company needs to understand these factors and how to properly address
them to build a strong reputation. These factors have also helped companies
recognize the link between reputation and competitive advantage. If these trends
are dealt with wisely and if internal and external communication strategies are
used effectively, a firm can position itself positively in stakeholders’ minds and thus
create a competitive advantage. Intangible factors related to reputation can account
for as much as 50 percent of a firm’s market valuation.37
The importance of corporate reputation has created a need for accurate reputation
measures. As indicated in Table 2.3, business publications, research firms, consultants,
and public relations agencies have established a foothold in the new field of reputation
management through research and lists of “the most reputable” firms. However, some
Table 2.3 Reputation Measures

Reputation List Conducted By Groups Surveyed Primary Purpose
100 Best Fortune magazine, Companies that are at least five Publication
Companies Great Place to Work years old and employ at least
to Work for in Institute 1,000 employees; employees
America and top managers are surveyed
100 Best Corporate Russell 1000 companies Publication
Corporate Citizens Responsibility
magazine, Corporate
Responsibility Officers
Association (CROA)
America’s Fortune magazine, Fortune 1000 companies and Publication
Most Admired Hay Group Fortune’s Global 500 with
Companies revenues at or over $10 billion;
company executives, directors,
and analysts are surveyed
Best and Fortune magazine, Fortune 1000 companies and Publication
Worst: Social Hay Group Fortune’s Global 500 with
Responsibility revenues at or over $10 billion;
company executives, directors,
and analysts are surveyed
Corporate CoreBrand, LLC Business executives Customized for
Branding Index responsible for purchasing and clients
strategic relationship decisions
from the top brands with over
$50 million as well as high-
level customers
Global Reputation Reputation Institute All of the company’s Customized for
Pulse stakeholders clients
Reputation Reputation Institute General public Customized for
Quotient and Harris Interactive Clients
World’s Most Barron’s Professional money managers Publication
Respected
Companies

questions have arisen as to who can best determine corporate reputation. For example,
some measures survey only chief executives, whereas others also elicit perceptions
from the general public. Although executives may be biased toward a firm’s financial
performance, the general public may lack experience or data on which to evaluate a
company’s reputation. Regardless of how it is measured, reputation is the result of a
process involving an organization and various constituents.38
The process of reputation management involves four components that work
together: organizational identity, image, performance, and ultimately, reputa-
tion.39 Organizational performance involves the actual interaction between the
company and its stakeholders.
To build and manage a good reputation, these four areas must be aligned.
Companies must manage identity and culture by pinpointing those standards
and responsibilities that will allow them to achieve their objectives, work with
stakeholders effectively, and continuously monitor and change for effectiveness.40
For example, Microsoft, which is recognized for its outstanding performance
in corporate responsibility, has the mission to “empower every person and every
organization on the planet to achieve more.” It accomplishes this mission through
its focus on technology, diversity, and corporate social responsibility (CSR). For
example, in keeping in line with their mission, Microsoft has been carbon neutral
since 2012. The company is not solely focused on its own sustainability efforts;
it also contributes to environmental projects around the world. For instance,
Microsoft has aided Taiwan in increasing renewable energy for the country by
over 15 percent by 2025. Leading by example, Microsoft invested in hydrorenew-
able energy credits to power their businesses in Taiwan. One of Microsoft’s most
innovative services has been its Airband Initiative, which allows populations in
rural and hard-to-reach geographic locations around the world to gain access
to broadband internet. In addition, Microsoft has partnered with places in
Colombia, South Africa, Kenya, and India to bring this technology to farmers and
communities where internet connectivity was previously impossible or impractical.
This technology has had a dramatic effect on improving the educational needs
of children in rural areas of the United States, as well as businesses in places all
over the world. Given these helpful initiatives, it appears that Microsoft has been
successful in balancing its goals and objectives with the desires and demands of
its stakeholders.41 Table 2.4 lists 10 socially responsible companies known for
their CSR initiatives. Salesforce. com, for instance, has developed a model called
the 1-1-1 model, which contributes 1 percent of the company’s time, 1 percent of
equity, and 1 percent of company products to worthy causes, such as significantly
discounting its products for nonprofit organizations.
Thus, all these elements must be continually implemented to ensure that the
company’s reputation is maximized through community relations. However, most
firms will, at one time or another, experience crisis situations that threaten or harm
this reputation. How a company reacts, responds, and learns from the situation
marketplace of ideas
is indicative of its commitment and implementation of social responsibility. The the assumption that ideas
acceptance and implementation of reputation management strategies, concurrent compete against one another for
with widespread use of the internet and social media, also may bring challenges to truth and acceptability
the marketplace of ideas. Unlike the traditional economic marketplace,
where competition determines superior products and services, an ideas
Table 2.4 Ten Socially Responsible
marketplace assumes that ideas compete against one another for truth Companies
and acceptability. Although the marketplace of ideas was initially
conceptualized with respect to free speech, it also applies to the dual AT&T Patagonia
responsibility of executives and managers with respect to reputation Bueno Foods Salesforce.com
management: advocating for the company while simultaneously ensuring Cummins SC Johnson
transparency and full disclosure with stakeholders.42 Eaton Starbucks
Reputation management is a key consideration for corporations
Marriott Whole Foods
around the world. An annual poll by Edelman revealed an increase

in trust of businesses for both the informed public and the general population.
According to The Reputation Institute, the 10 businesses with the best reputations
in the world are Rolex, LEGO, Walt Disney Company, Adidas Group, Microsoft,
Sony, Canon, Michelin, Netflix, and Bosch. Netflix has increased its reputation so
much that it went from number 24 to number 9 in just one year. The Reputation
Institute speculates that part of the reason for this jump from 24 to 9 could be
tied to its termination of Kevin Spacey from House of Cards shortly after sexual
harassment accusations against him.43
Crisis Management
Organizational crises are far-reaching events that can have dramatic effects on
both the organization and its stakeholders. Along with the industrialization of
society, companies and their products have become ever more complex, and
therefore more susceptible to crisis. As a result, disasters and crisis situations are
increasingly common events from which few organizations are exempt.44 In April
2018, an engine that blew out on a Southwest Airlines flight caused the death of
one passenger who was partially sucked out of the broken window of the airplane.
Linda Rutherford, chief communications officer, started by quickly communicating
all known facts shortly after the incident and updating information as new facts
emerged, with a sympathetic tone toward the victims. For airlines, most flights are
uneventful and go unnoticed. But when a high-profile accident like this occurs, it
receives enormous media coverage. Proper crisis management is necessary, and
companies must be ready at any moment to adapt to challenges.45
ethical misconduct disaster An ethical misconduct disaster (EMD) can be an unexpected organizational
(EMD) crisis that results from employee misconduct, illegal activities such as fraud, or
an unexpected organizational
crisis that results from employee
unethical decisions and that significantly disrupts operations and threatens or
misconduct, illegal activities such is perceived to threaten the firm’s continuity of operations. An EMD can even
as fraud, or unethical decisions be more devastating than natural disasters such as a hurricane or technology
and that significantly disrupts disruptions.46 Table 2.5 discusses some recent EMDs that happened due to lapses
operations and threatens or is in leadership and the failure to manage risks properly.
perceived to threaten the firm’s
continuity of operations As organizations plan for natural disasters and insure against traditional
risks, so too should they prepare for ethical crises. An EMD can be managed
by organizational initiatives to recognize, avoid, discover, address, and recover
from the misconduct. The potential damage of an ethical disaster can affect both
business and society. The costs of an EMD from both financial and reputation
Table 2.5 Ethical Misconduct Disasters

Company Disaster
FIFA Engaged in widespread corruption by top officials, including bribery,
racketeering, and fraud
Credit Suisse Pleaded guilty to helping Americans evade taxes and agreed to pay
$2.5 billion in penalties
Target Appeared to ignore warnings of potential hacking activity, resulting in the
theft of the personal information of millions of customers
U.S. Air Force Discovered a massive cheating scandal at its base in Montana among officers
involved in the launching of intercontinental ballistic missiles
GlaxoSmithKline Paid $3 billion to settle allegations that it had marketed various medications
for uses that were unapproved by the Food and Drug Administration (FDA)
Volkswagen Purposefully installed defeat devices in diesel vehicles to fool regulators
during emissions testing
Barclay’s Bank Rigged the Libor rate—used as the benchmark for trillions of dollars of loans—
to benefit the company

perspectives can be assessed, as well as the need for planning to avoid an EMD in
the first place. The role of leadership in preventing a crisis relates to a contingency
plan to develop effective crisis management programs.
The risks facing organizations today are significant, and the reputational
damage caused can be far greater for companies that find themselves unprepared.
The key is to recognize that the risks associated with misconduct are real and that,
if insufficient controls are in place, the company can suddenly find itself the subject
of an EMD. Although it is hard to predict an ethical disaster, companies can and
must prepare for one.
Data protection is a major issue in the modern era, and companies now have
more responsibility to protect consumer data. In 2017, Equifax leaked the data for
more than 143 million American consumers. Data included social security num-
bers, driver’s license numbers, and other identifying information. Hackers were
able to access the information due to weak data protection policies implemented
by the agency. Public outcry for this incident sparked a national debate about data
protection and privacy issues for consumers. As a response, Equifax reported the
breach to law enforcement and hired a cybersecurity firm to help determine the
scale of the breach. Additionally, Equifax created a website to help consumers
see if they were affected by the breach. Still, there is no way for the agency to fix
this issue, as the data had already been leaked. Consumer outrage was enormous,
and Equifax has struggled to reestablish a good corporate reputation since the
incident.47
Of course, not every unethical decision relates to negligence. Many often begin
as a marketing effort, and only in retrospect is it revealed to be unethical. And
clearly not every decision becomes a crisis. Lord & Taylor, for instance, settled
charges that it deceived consumers when it paid for a native advertisement in the
online publication Nylon without including a disclosure that the article was paid
content. It also paid 50 fashion influencers to wear one of its dresses without
disclosing that it had done so. This was found to be deceptive because consumers
were not aware of the company’s direct connections to these promotions.48
It is critical for companies to manage crises effectively because research suggests
that these events are a leading cause of organizational mortality. What follows
are some key issues to consider in crisis management, the process of handling a crisis management
high-impact event characterized by ambiguity and the need for swift action. In most the process of handling a high-
impact event characterized
cases, the crisis situation will not be handled in a completely effective or ineffective
by ambiguity and the need for
manner. Thus, a crisis usually leads to both success and failure outcomes for a swift action
business and its stakeholders and provides information that can be used to make
improvements to future crisis management and social responsibility efforts.49
Organizational crises are characterized by a threat to a company’s high-priority
goals, surprise to its membership, and stakeholder demands for a short response
time. The nature of crises requires a firm’s leadership to communicate in an often
stressful, emotional, uncertain, and demanding context. Crises are very difficult
on a company’s stakeholders as well. For this reason, the firm’s stakeholders,
especially its employees, shareholders, customers, government regulators, competi-
tors, creditors, and the media, will scrutinize communication after a crisis. Hence,
a crisis has widespread implications not only for the organization, but also for each
group affected by the crisis. To better understand how crises develop and move
toward resolution, some researchers use a medical analogy. Using that analogy, the
organization proceeds through chronological stages, similar to a person with an
illness. The prodromal stage is a precrisis period, during which warning signs may
exist. Next is the acute stage, in which the actual crisis occurs. During the chronic
stage, the business is required to explain their actions sufficiently for them to move
to the final stage, crisis resolution. Figure 2.2 illustrates these stages. Although
the stages are conceptually distinct, some crises happen so quickly, and without
warning, that the organization may move from the prodromal to the acute stage

Figure 2.2 The Crisis Management Process
Prodromal Stage Acute Stage Chronic Stage Crisis Resolution
Warning signs Crisis occurs. Ongoing Success and

and symptoms crisis requires failure outcomes
may occur. explanation and for the firm and
decision-making. stakeholders.
within minutes. Many organizations faced this situation after Hurricane Katrina
crashed into New Orleans and the Mississippi Gulf Coast in 2005, disrupting
all business and social activity for years. More recent natural disasters, such as
Hurricane Harvey in Texas in 2017, have also modified the economic landscape,
especially for small and medium-sized businesses.
One of the fundamental difficulties that a company faces is how to communi-
cate effectively to stakeholders during and after a disaster. Once a crisis strikes, the
firm’s stakeholders need a quick response in the midst of the duress and confusion.
They need information about how the company plans to resolve the crisis, as well
as what each constituent can do to mitigate its own negative effects. If a company
is slow to respond, stakeholders may feel that the company does not care about
their needs or is not concerned or remorseful (if the company is at fault) about
the crisis. Furthermore, a delayed response may in fact increase the suffering
of particular stakeholder groups. For instance, some stakeholders may take on
considerable debt due to medical expenses as a result of the crisis. Therefore, a
rapid response to stakeholders is central to any crisis resolution strategy so that
these various groups can plan their recovery.
Ironically, crisis events are often so chaotic that a company’s leadership may
not be certain of the cause of the situation before the media and other relevant
groups demand a statement. Thus, it is not surprising for organizations to begin
their crisis responses with some degree of ambiguity in their statements. In fact,
some crisis theorists advise companies to avoid too much detail in their initial
responses due to the embarrassment that results from changing positions later in
the crisis, when more information is available. Still, stakeholder groups want or, as
a matter of safety in some cases, need access to whatever information the firm can
share. Although tensions between the public’s needs and the organization’s fear of
litigation can hamper the willingness to communicate, the demand for information
in such situations is unyielding.
Not only should the firm’s leadership make a public statement quickly, but
it is also necessary for the organization to communicate about specific issues to
stakeholder groups. First, leadership should express concern and/or remorse for
the event. Second, the organization should delineate guidelines regarding how
they intend to address the crisis so that stakeholders can be confident that the
situation will not escalate or reoccur. Finally, the company should provide explicit
criteria to stakeholders regarding how each group will be compensated for any
negative effects it experiences as a result of the crisis. Many companies, however,
overlook these three essential conditions of crisis management. More often, they
focus on minimizing harm to the organization’s image, denying responsibility
for the crisis, and shifting blame away from the organization and toward other
stakeholder groups. Although this may be an appropriate strategy when firms are
not actually responsible, too often they choose this course of action under the
stress of the crisis when they are responsible (or partially responsible) for the crisis
without expressing sufficient remorse for their involvement or concern for their
stakeholders.

The varying communication needs and levels of concern of stakeholders during

and after a crisis often hamper effective communication. The firm’s leadership
should try to communicate as much accurate information to these groups as
possible to minimize their uncertainty. When a firm fails to do so, their credibility,
legitimacy, and reputation in the eyes of stakeholders often suffer. Adding to the
complexity of communication challenges, the needs of various stakeholder groups
may conflict. For instance, the needs of customers who become ill as a result of a
contaminated product and their desire to have medical bills paid may be at odds
with the company’s ability to bolster their stock price to satisfy shareholders.
Some stakeholders will obviously have more opportunities than others to voice
their concerns after a crisis. Victims and the general public rarely have an oppor-
tunity to meet with the organization’s leadership after a crisis. Conversely, the
organization’s stockholders and employees will likely have a greater opportunity
to express their views about the crisis and therefore may have their ideas accepted
by management. Some researchers suggest that, due to this ability to communicate
directly with leadership, internal stakeholder needs often take precedence over
those of external stakeholders.
Organizations have a responsibility to manage the competing interests of stake-
holders to ensure that all stakeholder groups are treated fairly in the aftermath of a
crisis. Responsible companies try to balance the needs of their stakeholders rather
than favoring some groups over others. The Walt Disney Corporation experienced
a major crisis in 2016, when an alligator killed a two-year-old boy who was
wading in a lake at one of Disney’s resorts. Although Disney had posted “Do not
swim” signs around the lake and had worked with Florida wildlife officials to
remove alligators from the lake in the past, it did not have signs posted warning
about alligators, despite the fact that they were likely to be present. While Disney
may face legal repercussions for not warning consumers about the possibility of
alligators, crisis-communication experts praised the response of Disney’s CEO,
George Kalogridis, who personally contacted the parents from Shanghai to offer
condolences. Other experts, however, thought that the company could have done
a better job of placing a public statement of regret on their websites. Disney has
since put up signs warning about the possibility of dangerous wildlife.50
Organizations that fail to accomplish effective crisis communication alien-
ate stakeholder groups and intensify the negative media attention toward the
company. For many reasons, including effective crisis management, organizations
need to understand and pursue solid and mutually beneficial relationships with
stakeholders.
Development of Stakeholder Relationships

Relationships of any type, whether they involve family, friends, coworkers, or
companies, are founded on principles of trust, commitment, and transparent
communication. They also are associated with a certain degree of time, interaction,
and shared expectations. For instance, we do not normally speak of “having a
relationship” with someone we have just met. We even differentiate between
casual acquaintances, work colleagues, and close friends.
In business, the concept of relationships has gained much acceptance. Instead
of just pursuing one-time transactions, companies are now searching for ways
to develop long-term and collaborative relationships with their customers and
business partners.51 Many companies focus on relationships with suppliers, buyers,
employees, and others directly involved in economic exchange. These relation-
ships involve investments of several types. Some investments are tangible, such
as buildings, equipment, new tools, and other elements dedicated to a particular
relationship. Apple made an unprecedented move in this regard when it launched

an iPhone trade-in day in select retail locations. Some owners of older iPhones
were sent an email invitation to upgrade to a new device.52 Other investments are
less tangible, such as the time, effort, trust, and commitment required to develop
a relationship with customers. Southwest Airlines develops the intangible aspect
of relationships through the level of customer service they provide, as well as the
enjoyable experience they offer.53
Whereas tangible investments are often customized for a specific business
relationship, intangible efforts have a more lucid and permeable quality. Although
social responsibility involves tangible activities and other communication signals,
the key to good stakeholder relationships resides in trust, communication quality,
and mutual respect. As a company strives to develop a dialogue and a solid rela-
tionship with one stakeholder, investments and lessons learned through the process
should add value to other stakeholder relationships. For example, Starbucks
provides excellent benefits, including healthcare for part-time employees, and
supports fair trade or a fair income for the farmers who grow the coffee they sell.
social capital These efforts result in social capital, an asset that resides in relationships
an asset that resides and is characterized by mutual goals and trust.54 Social capital include the social
in relationships and is
connections that can provide economic benefits that are mutually advantageous.
characterized by mutual goals
and trust Social capital provides social networks that have value. Like financial and intel-
lectual capital, social capital facilitates internal and external transactions and
processes. This is especially true as more businesses become part of the sharing
economy. Companies such as Airbnb, a home rental sharing company, and Uber,
a car reservation company, are prime examples of businesses whose level of social
capital is necessary for their success. These business models depend upon building
and reinforcing transparency and accountability among users, as well as between
users and the company.55
Unlike financial and intellectual capital, however, social capital is not tangible
or the obvious property of one organization. In this same regard, social respon-
sibility is not compartmentalized or reserved for a few issues or stakeholders but
should have the companywide strategic focus discussed in Chapter 1.
Implementing a Stakeholder Perspective in

Social Responsibility
An organization that develops effective corporate governance and understands the
importance of business ethics and social responsibility in achieving success should
develop some processes for managing these important concerns. Although there
are many approaches, we provide some steps that have been found effective to
utilize the stakeholder framework in managing responsibility and business ethics,
including (1) assessing the corporate culture, (2) identifying stakeholder groups,
(3) identifying stakeholder issues, (4) assessing the organization’s commitment to
social responsibility, (5) identifying resources and determining urgency, and (6)
gaining stakeholder feedback. The importance of these steps is to include feedback
from relevant stakeholders in formulating organizational strategy and implementa-
tion.56 Table 2.6 summarizes these six steps.
Step 1: Assessing the Corporate Culture

To enhance organizational fit, a social responsibility program must align with the
corporate culture of the organization. The purpose of this first step is to identify
the organizational mission, values, and norms that are likely to have implications
for social responsibility. In particular, relevant existing values and norms are those
that specify the stakeholder groups and stakeholder issues that are deemed most
important by the organization. Very often, relevant organizational values and

Table 2.6 Six Steps for Utilizing a Stakeholder Framework

Steps Example
Assess the corporate New Belgium Brewing decides to invest in wind power because
culture. doing so aligns with its mission of environmental responsibility.
Identify stakeholder groups. Whole Foods recognizes the importance of working with animal
activist organizations to ensure that the animals supplying its meat
products are treated humanely.
Identify stakeholder issues. Chevron identifies sustainability and the increasing concern
over greenhouse gas emissions as important stakeholder
considerations affecting the industry.
Assess the organization’s CVS determines that eliminating cigarette sales will reinforce its
commitment to social commitment toward becoming a health services company.
responsibility.
Identify resources and Home Depot provides emergency supplies in areas that are struck
determine urgency. by natural disasters.
Gain stakeholder feedback. Best Buy asked consumers for feedback and realized that the
recycling of electronic waste was a major concern.
norms can be found in corporate documents such as the mission statement, annual
reports, sales brochures, or websites. For example, REI crafts its corporate culture
around love of the outdoors. Because of this, the company puts a heavy emphasis
on protecting the environment. REI has initiatives to reduce packaging waste, to
increase recycling, and to increase green building practices. The REI Foundation
was created to help the environment, encourage outdoor activities, and help com-
munities recover from natural disasters.57
Step 2: Identifying Stakeholder Groups

In managing this stage, it is important to recognize stakeholder needs, wants,
and desires. There are many important issues that gain visibility because key
constituencies such as consumer groups, regulators, and the media express an
interest. When agreement, collaboration, or even confrontation exists around an
issue, there is a need for a decision-making process. A model of collaboration
to overcome the adversarial approaches to problem-solving has been suggested.
Managers can identify relevant stakeholders that may be affected by or may
influence the development of organizational policy, which is an important element
of stakeholder engagement.
Stakeholders have some level of power over a business because they are in the
position to withhold, or at least threaten to withhold, organizational resources.
Stakeholders have most power when their own survival is not really affected by
the success of the organization, and when they have access to vital organizational
resources. For example, most consumers of shoes do not have a specific need to
buy Nike shoes. Therefore, if they decide to boycott Nike, they have to endure only
minor inconvenience. Nevertheless, their loyalty to Nike is vital to the continued
success of the sport apparel giant. The proper assessment of the power held by a
given stakeholder community also requires an evaluation of the extent to which
that community can collaborate with others to pressure the firm.
Step 3: Identifying Stakeholder Issues

Together, Steps 1 and 2 lead to the identification of the stakeholders who are both
the most powerful and legitimate. The level of power and legitimacy determines the
degree of urgency in addressing their needs. Step 3, then, consists of understanding
the nature of the main issues of concern to these stakeholders. A stakeholder map

may be especially useful at this stage.

Conditions for collaboration exist when
problems are so complex that multiple
stakeholders are required to resolve the
issue and the weaknesses of adversarial
approaches are understood.
For example, environmental issues
have become a huge issue for stake-
holders. Companies now must focus on
their environmental impact and how
their productions affect the environment
and their stakeholders. Many companies
Shutterstock/mariakray
have begun to reduce their emissions

and focus on using recyclable material
and renewable energy as a response to
environmental concerns.
Step 4: Assessing the Organization’s Commitment to

Steps 1 through 3 consist of generating information about social responsibility
among a variety of influencers in and around the organization. Step 4 brings these
three first stages together to arrive at an understanding of social responsibility that
specifically matches the organization of interest. This general definition will then
be used to evaluate current practices and to select concrete social responsibility
initiatives. Firms such as Starbucks have selected activities that address stakeholder
concerns. Starbucks has formalized its initiatives in official documents such as
annual reports, webpages, and company brochures. They also have a website
devoted to social responsibility. Starbucks is concerned with the environment and
integrates policies and programs throughout all aspects of operations to minimize
their environmental impact. They also have many community-building programs
that help them be good neighbors and contribute positively to the communities
where their partners and customers live, work, and play.58
Step 5: Identifying Resources and Determining Urgency

The prioritization of stakeholders and issues, along with the assessment of past
performance, provide for allocating resources. Two main criteria can be considered.
First, the levels of financial and organizational investments required by various
actions should be determined. A second criterion when prioritizing social respon-
sibility challenges is urgency. When the challenge under consideration is viewed as
significant, and when stakeholder pressures on the issue could be expected, then the
challenge can be treated as urgent. For example, environmental issues have become
a huge concern across groups and stakeholders. Companies now must focus on
their environmental impact and how their productions affect the environment and
their stakeholders. Many companies have begun to reduce their emissions and focus
on using recyclable material and renewable energy as a response.59
Step 6: Gaining Stakeholder Feedback

Stakeholders’ feedback can be generated through a variety of means. First, their
general assessment of the firm and its practices can be obtained through satisfac-
tion or reputation surveys. Second, to gauge stakeholders’ perceptions of the
firm’s contributions to specific issues, stakeholder-generated media such as blogs,
websites, podcasts, and newsletters can be assessed. Third, more formal research
may be conducted using focus groups, observation, and surveys. Websites can be
both positive and negative; for example, user review sites such as Yelp have both
generated and decreased sales of business establishments based on reviews left
on the site. Because so many consumers refer to these websites before visiting a
business, many companies are focusing on good customer service to ensure good
reviews. However, these reviews can be misleading and do harm to a business.
For example, the owner of a small salon expressed concern over the effect of one
negative review left by a customer who never set foot in her place. The customer
perceived the salon owner as rude and rushed in a telephone call and wrote about
it. The owner has seen a decrease in business that she attributes to the review.60
In the process of developing stakeholder relationships, most strategies are focused
on increasing the trust that a stakeholder has in a particular company. Of course, there
is no “one size fits all” approach for building and sustaining trusting relationships
with stakeholders. As discussed earlier in the chapter, not all stakeholders engage
with a company with the same level of intensity or locus of control, whether internal
or external. For example, employees are highly engaged internal stakeholders, while
suppliers may be considered low-intensity external stakeholders. Depending on the
specific issues at hand, historical interactions, relationship intensity, and other factors,
managers must understand the relative importance of transparency, competence,
benevolence, integrity, values, and other factors.61
Link Between Stakeholder Relationships

and Social Responsibility
You may be wondering what motivations companies have for pursuing stakeholder
relationships. As the previous section indicates, a great deal of time, effort, and
commitment goes into the process of developing and implementing a stakeholder
perspective. Sometimes, however, these efforts do not have the desired effect.
Coca-Cola and PepsiCo have received criticism regarding the messages of their
social responsibility initiatives compared with their perceived role in the obesity
issue. For example, Coca-Cola partnered with the Rwandan government and other
organizations to open EKOCENTER, a site that will provide internet services, the
company’s products, clean water, and other basic goods for people in the local
community. Despite Coca-Cola’s impact on communities, some critics accuse the
firm of promoting soft drinks in low-income areas that would benefit more from
nutritious items rather than sugary, unhealthy drinks.62 As discussed in Chapter 1,
social responsibility is a relational approach that involves the views and stakes
of a number of groups. Stakeholders are engaged in the relationships that both
challenge and support a company’s efforts. Thus, without a solid understanding
of stakeholders and their interests, a firm may miss important trends and changes
in its environment and not achieve strategic social responsibility.
Rather than holding all companies to one standard, our approach to evaluating
performance and effectiveness resides in the specific expectations and actual results
that develop between each organization and its stakeholders. Max Clarkson, an
influential contributor to our understanding of stakeholders, sums up this view:
Performance is what counts. Performance can be measured and evaluated.

Whether a corporation and its management are motivated by enlightened
self-interest, common sense or high standards of ethical behavior cannot be
determined by empirical methodologies available today. These are not ques-
tions that can be answered by economists, sociologists, psychologists, or any
other kind of social scientist. They are interesting questions, but they are not
relevant when it comes to evaluating a company’s performance in managing
its relationships with its stakeholder groups.63

Although critics and some researchers may seek answers and evidence as to the
motivations of business for social responsibility, we are interested in what companies
are actually doing that is positive, negative, or neutral for their stakeholders and
their stakeholders’ interests. The Reactive–Defensive–Accommodative–Proactive
Scale (see Table 2.7) provides a method for assessing a company’s strategy and
performance for each stakeholder. This scale is based on a continuum of strategy
options and performance outcomes with respect to stakeholders.64 This evalua-
tion can take place as stakeholder issues arise or are identified. Therefore, it is
possible for one company to be rated at several different levels because of varying
performance and transitions over time. For example, a poorly handled crisis may
provide feedback for continuous improvement that creates more satisfactory
performance in the future. Or a company may demonstrate a proactive stance
toward employees, and yet be defensive with consumer activists.
The reactive approach involves denying responsibility and doing less than is
required. This approach can be characterized as “fighting it all the way.” A firm
that fails to invest in safety and health measures for employees is denying its
responsibilities. An organization with a defensive strategy acknowledges reluc-
tantly and partially the responsibility issues that may be raised by its stakeholders.
A firm in this category fulfills basic legal obligations and demonstrates the minimal
responsibility discussed in Chapter 1. With an accommodative strategy, a company
attempts to satisfy stakeholder demands by doing all that is required and may be
seen as progressive because it is obviously open to this expanded model of business
relationships. Today, many organizations are giving money and other resources
to community organizations as a way of demonstrating social responsibility.
Finally, the proactive approach not only accepts, but also anticipates stakeholder
interests. In this case, a company sincerely aligns legitimate stakeholder views with
its responsibilities and will do more than is required to meet them.65 Hoechst, a
German life sciences company that is now part of Aventis, gradually assumed the
proactive orientation with communities in which it operates. The initiation of a
community discussion group led to information sharing and trust building and
helped transform Hoechst into a society-driven company.66
The Reactive–Defensive–Accommodative–Proactive Scale is useful because it
evaluates real-life practices and allows an organization to see its strengths and
weaknesses within each stakeholder relationship. SABMiller, the second-largest
brewer in the world, uses a risk assessment program to understand the stakehold-
ers and issues that may pose a potential risk to its reputation. These risks are
prioritized, planned for, monitored, and if necessary, responded to if SABMiller
Table 2.7 The Reactive–Defensive–Accommodative–Proactive Scale

Rating Strategy Performance Example
Reactive Deny responsibility Doing less than Exxon refuses to continue oil
required spill cleanup after a certain date.
Defensive Admit responsibility, Doing the least that Valero Energy claims that
but “fight it all the is required it meets federal regulation;
way” therefore, community complaints
are not legitimate.
Accommodative Accept Doing all that is General Motors (GM) promises
responsibility required job security if productivity gains
are realized.
Proactive Anticipate Doing more than is Xerox shares product blueprints
responsibility required with suppliers and takes
suggestions before production.
Source: Adapted from Max B. E. Clarkson, “A Stakeholder Framework for Analyzing and Evaluating Corporate Social
Performance,” Academy of Management Review 20 (January 1995): 92–117; I. M. Jawahar and Gary McLaughlin, “Toward
a Descriptive Stakeholder Theory: An Organizational Life Cycle Approach,” Academy of Management Review 26 (July
2001): 397–414.

cannot predict, preempt, or avoid the concern.67 Results from a stakeholder assess-
ment like the one at SABMiller should be included in the social audit, the process social audit
of assessing and reporting a firm’s performance in adopting a strategic focus for the process of assessing and
reporting a firm’s performance
fulfilling the economic, legal, ethical, and philanthropic social responsibilities
in adopting a strategic focus for
expected of it by its stakeholders. Because stakeholders are so important to the fulfilling the economic, legal,
concept of social responsibility, as well as to business success, Chapters 3–13 are ethical, and philanthropic social
devoted to exploring significant stakeholder relationships and issues. responsibilities expected of it by
its stakeholders
Summary
Stakeholders refer to those people and groups who have a stake in some aspect of a
company’s products, operations, markets, industry, or outcomes. The relationship
between organizations and their stakeholders is a two-way street.
The historical assumption that the key objective of business is profit maximiza-
tion led to the belief that business is accountable primarily to investors and others
involved in the market and economic aspects of the organization. In the latter half
of the twentieth century, perceptions of business accountability evolved to include
both market constituencies that are directly involved and affected by the business
purpose (e.g., investors, employees, customers, and other business partners) and
nonmarket constituencies that are not always directly tied to issues of profitability
and performance (e.g., the general community, media, government, and special-
interest groups).
In the stakeholder model, relationships, investors, employees, and suppliers pro-
vide inputs for a company to benefit stakeholders. The stakeholder model assumes
a two-way relationship between the firm and a host of stakeholders. This approach
recognizes additional stakeholders and acknowledges the two-way dialogue and
effects that exist with a firm’s internal and external environment.
Primary stakeholders are fundamental to a company’s operations and survival
and include shareholders and investors, employees, customers, suppliers, and pub-
lic stakeholders, such as governments and communities. Secondary stakeholders
influence and/or are affected by a company but are neither engaged in transactions
with the firm nor essential for their survival.
As more firms conduct business overseas, they encounter the complexity of
stakeholder issues and relationships in tandem with other business operations and
decisions. Although general awareness of the concept of stakeholders is relatively
high around the world, the importance of stakeholders varies from country to
country. All types of organizations must understand the stakeholder interaction
model, as well as the utility of developing a stakeholder map.
A stakeholder has power to the extent that it can gain access to coercive,
utilitarian, or symbolic means to impose or communicate its views to the organiza-
tion. Legitimacy is the perception or belief that a stakeholder’s actions are proper,
desirable, or appropriate within a given context. Stakeholders exercise greater
pressures on managers and organizations when they stress the urgency of their
claims. These attributes can change over time and context.
The degree to which a firm understands and addresses stakeholder demands
can be referred to as a “stakeholder orientation.” This orientation comprises three
sets of activities: (1) the organizationwide generation of data about stakeholder
groups and assessment of the firm’s effects on these groups, (2) the distribution of
this information throughout the firm, and (3) the organization’s responsiveness
to this intelligence as a whole.
Reputation management is the process of building and sustaining a company’s
good name and generating positive feedback from stakeholders. The process of
reputation management involves the interaction of organizational identity (how
the firm wants to be viewed), organizational image (how stakeholders initially

perceive the firm), organizational performance (actual interaction between the

company and stakeholders), and organizational reputation (the collective view of
stakeholders after interactions with the company). Stakeholders will reassess their
views of the company on the basis of how the company has actually performed.
The widespread use of reputation management strategies, along with instantaneous
communication via social media and the internet, means that companies must also
understand the marketplace of ideas.
Crisis management is the process of handling a high-impact event character-
ized by ambiguity and the need for swift action. Some researchers describe an
organization’s progress through a prodromal, or precrisis, stage to the acute stage,
chronic stage, and finally, crisis resolution. Stakeholders need a quick response
from the company, with information about how the company plans to resolve
the crisis, as well as what the stakeholders can do to mitigate any negative effects
on themselves. It is also necessary to communicate specific issues to stakeholder
groups, including remorse for the event, guidelines as to how the organization is
going to address the crisis, and criteria regarding how stakeholder groups will be
compensated for negative effects.
Companies are searching for ways to develop long-term, collaborative
relationships with their stakeholders. These relationships involve both tangible
and intangible investments. Investments and lessons learned through the process of
developing a dialogue and relationship with one stakeholder should add value to
other stakeholder relationships. These efforts result in social capital, an asset that
resides in relationships and is characterized by mutual goals and trust.
The first step in developing stakeholder relationships is to acknowledge and
actively monitor the concerns of all legitimate stakeholders. A firm should adopt
processes and modes of behavior that are sensitive to the concerns and capabilities
of each stakeholder. Information should be communicated consistently across all
stakeholders. A firm should be willing to acknowledge and openly address poten-
tial conflicts. Investments in education, training, and information will improve
employees’ understanding of and relationships with stakeholders. Relationships
with stakeholders need to be periodically assessed through both formal and
informal means. Sharing feedback with stakeholders helps establish the two-way
dialogue that characterizes the stakeholder model.
An organization that develops effective corporate governance and understands
the importance of business ethics and social responsibility in achieving success should
develop some processes for managing these important concerns. Although there are
many approaches, we provide some steps that have been found effective to utilize
the stakeholder framework in managing responsibility and business ethics. The steps
include (1) assessing the corporate culture, (2) identifying stakeholder groups, (3)
identifying stakeholder issues, (4) assessing the organization’s commitment to social
responsibility, (5) identifying resources and determining urgency, and (6) gaining
stakeholder feedback. The importance of these steps is to include feedback from
relevant stakeholders in formulating organizational strategy and implementation.
The Reactive–Defensive–Accommodative–Proactive Scale provides a method
for assessing a company’s strategy and performance with one stakeholder. The
Reactive approach involves denying responsibility and doing less than is required.
The Defensive approach acknowledges only reluctantly and partially the respon-
sibility issues that may be raised by the firm’s stakeholders. The Accommodative
strategy attempts to satisfy stakeholder demands. The Proactive approach accepts
and anticipates stakeholder interests. Results from this stakeholder assessment
should be included in the social audit, which assesses and reports a firm’s
performance in fulfilling the economic, legal, ethical, and philanthropic social
responsibilities expected by the stakeholders.

Best Buy Excels in Stakeholder Communication

Issue: Is communication the key to stakeholder service called “Assured Living” in 2017, which uses smart
satisfaction? home technology to allow millennials/caregivers to look
in on their aging parents while permitting the seniors
Best Buy was founded in 1966 by Richard Schulze. Ranking to live independently. To communicate this new service
72 on the Fortune 500 list, it is known for its discounted, to consumers, Best Buy has developed a website and
high-quality products, customer-centered approach, has advisors that can offer more detailed information to
sustainable outreach, and extensive recycling program.
customers about the technology. Best Buy’s current CEO,
The success of Best Buy over the years can be attributed to Corie Barry, will work to continue this growth.
a variety of factors, including savvy business decisions and Best Buy invests in different platforms to foster its
services to increase employee and customer satisfaction. communication with employees. For example, Geek

As primary stakeholders, customers and employees Squad forums provide a way for all Best Buy employees
have a major impact on the continued existence and to exchange information and share ideas. In addition,
profit of Best Buy; therefore, their satisfaction is a high Best Buy has conducted a multitude of interviews with
priority. To meet stakeholders’ interests, Best Buy has employees to determine issues with usability of the store’s
implemented methods to foster communication with both products. In response to these interviews, according to
customers and employees. The company uses its website vice president of retail operations, Shari Rossow, Best Buy
to learn more about its customers’ needs and preferences, has invested in everyday products familiar to employees
and customers can use that website to rate every to cut back on necessary training, make employee duties
product purchased. It was this type of communication easier, and help employees focus more on customer
that led Best Buy to develop its first Corporate Social service than learning arduous programs. This not only
Responsibility Report in 2007. The report was a response benefits the employees, but also benefits customers and
to its customers’ repeated concerns over sustainability, Best Buy as a company.
particularly in the area of electronics. It showed c ustomers Stakeholder satisfaction is crucial to the success of any
that the company had received and understood their business, and communication with stakeholders is the key
concerns. Electronic waste was filling landfills, and
to that satisfaction. Best Buy has proved that it can listen to
customers wanted to see this problem addressed. In its stakeholders and will implement initiatives based upon
response, Best Buy implemented a w ide-scale electronics their feedback. This communication has been integral in
recycling program. The company has set a goal to cut allowing Best Buy to develop strong stakeholder relation-
carbon emissions by 60 percent in the next year and to ships, allowing the company to compete against online
be carbon neutral by 2050. rivals and adapt to an increasingly digital world.
After a period of stagnant growth, Best Buy hired a
new CEO, Hubert Joly, in 2012. Under Joly, Best Buy once There Are Two Sides to Every Issue
again became a growth company. Research has shown 1. Communication is the most important factor in stake-
that Best Buy’s advertisements tend to have more of an holder satisfaction.
impact when they highlight products, which is prompting 2. Though communication is critical, it is one of many
the company to engage in more product-oriented adver- factors in stakeholder satisfaction.
tising campaigns. For example, the company introduced a
Sources: Courtney Reagan, “Best Buy CEO Sees ‘Growth Opportunities’ Ahead, Wall Street Isn’t Buying It,” CNBC, September 19, 2017, https://www.
cnbc.com/2017/09/19/best-buy-ceo-weve-fixed-what-was-broken-now-focus-is-on-growth.html (accessed January 6, 2019); Adrianne Pasquarelli, “Why
Best Buy Is Reorganizing Its Marketing Team,” AdAge, April 21, 2017, http://adage.com/article/cmo-strategy/buy-reorganizes-marketing-team/308756/
(accessed January 6, 2019); Jeff Bullas, “How Best Buy Energized 170,000 Employees with Social Media,” jeffbullas.com, http://www.jeffbullas.com/how-
best-buy-energized-170000-employees-with-social-media/ (accessed January 6, 2019); Best Buy, “Corporate Responsibility and Sustainability,” 2018,
https://corporate.bestbuy.com/sustainability/ (accessed January 6, 2019); Corinne Ruff, “Why Best Buy Is Investing in Employees,” Retail Dive, February 7,
2018, https://www.retaildive.com/news/why-best-buy-is-investing-in-employees/516497/ (accessed January 6, 2019); “Fortune 500,” Fortune, 2018, http://
fortune.com/fortune500/list/ (accessed January 6, 2019).

Key Terms
crisis management (p. 51) power (p. 45) stakeholder engagement (p. 40)
enlightened capitalism (p. 39) primary stakeholders (p. 40) stakeholder interaction model
ethical misconduct disaster (EMD) reputation management (p. 48) (p. 42)
(p. 50) secondary stakeholders (p. 40) stakeholder map (p. 42)
legitimacy (p. 46) social audit (p. 59) stakeholder orientation (p. 42)
marketplace of ideas (p. 49) social capital (p. 54) urgency (p. 46)
1. Define “stakeholder” in your own terms. Compare 5. Define “crisis management.” What should a
your definition with the definition used in this chapter. company facing a crisis do to satisfy its stakeholders
2. What is the difference between primary and and protect its reputation?
secondary stakeholders? Why is it important for 6. Describe the process of developing stakeholder
companies to make this distinction? relationships. What parts of the process seem most
3. How do legitimacy, urgency, and power attributes important? What parts seem most difficult?
positively and negatively affect a stakeholder’s 7. How can a stakeholder orientation and
ability to develop relationships with organizations? stakeholder map be implemented to improve social
4. What is reputation management? Explain why responsibility?
companies are concerned about their reputation 8. What are the differences between the reactive,
and its effects on stakeholders. What are the defensive, accommodative, and proactive approaches
four elements of reputation management? How to stakeholder relationships?
has the marketplace of ideas affected reputation
management strategies in companies?
Choose two companies in different industries and visit primarily to the interests of investors. Make a list of the
their respective websites. Peruse these sites for information types of information that are on the site and indicate how
that is directed at three company stakeholders: employees, the information might be used and perceived by these three
customers, and the general public. For example, a company stakeholder groups. What differences and similarities did
that places its annual reports online may be appealing you find between the two companies?
?
Thai Die…Environmental Exploitation or
Economic Development: What Would You Do?
Literally hundreds of buildings dotted the ground below, focus on the history of Thailand and include a variety
and the thousands of cars on highways looked like ants of live performances, rides, exhibits, and restaurants.
on a mission. The jet airliner made its way to the Bangkok Domestic and international tourists who visited Phuket
International Airport and eased into the humid afternoon. would be the primary target market.
The group of four passed through customs control and Global Amusements had been in business for nearly
looked for the limousine provided by Suvar Corporation, 20 years and currently used a joint venture approach in
their Thai liaison in this new business venture. Representing establishing new properties. Suvar was its Thai partner,
Global Amusements were the vice president of corporate and the two firms had been successful two years ago in
development, director of Asian operations, vice president developing a water amusement park outside Bangkok.
of global relations, and director of governmental relations Phuket could hold much promise, but there were likely to
for Southeast Asia. be questions about the potential destruction of its beauty
Global Amusements, headquartered in London, was and the exploitation of this well-preserved island and
considering the development of a Thai cultural amuse- cultural reserve. These concerns were heightened as the
ment center on the island of Phuket. Phuket is a tourist island slowly recovered from the 2004 tsunami and set a
destination known for its stunning beaches, fine resorts, course for managing future development.
and famous Thai hospitality. Both Global Amusements Following a day to adjust to the time zone and refine
and Suvar Corporation believed that Phuket was a great the strategy for the visit, the next three days would be
candidate for a new project. The amusement center would spent in Bangkok, meeting with various company and

governmental officials who had a stake in the proposed After arriving at the hotel, the four employees of
amusement facility. After a short flight to Phuket, the Global Amusement agreed to meet later that evening
group would be the guest of the Southern Office of the to discuss their strategy for the visit. One of their main
Tourism Authority of Thailand for nearly a week. This part concerns was the development of an effective stakeholder
of the trip would involve visits to possible sites, as well as analysis. Each member of the group was asked to bring a
meetings with island government officials and local interest list of primary and secondary stakeholders and indicate the
groups. various concerns, or stakes, that each might have with the
proposed project. What would you do?

CHAPTER
3 Corporate
Governance

Bored with Male Dominance: California Requires Women on
Corporate Boards
The number of women on public company boards Given these benefits, there has been a push for
is growing but still small compared to the number of women to be included on corporate boards. Jerry
men. In the United States, only 19 percent of board Brown, former governor of California, signed a bill
members of S&P 500 companies are women. While requiring all California public companies to have at
women are as qualified as men to serve on boards, least one female board member by 2019. That num-
there has been a failure in developing diversity. This ber will increase by the end of 2021 to a minimum
is highly limiting for corporations, given the many of two to three women board members depending
benefits of having women on boards of directors. on the size of the board. If companies fail to comply
According to one study, having three or more with these requirements, they will face large fines.
female board members has been linked to more This push is not limited to the United States. Recently,
innovation and limits the chance that women’s views Germany passed a regulation stating that at least 30
will be sidelined. Another study by the European percent of board members must be women.
Corporate Governance Institute revealed that of the Although the California bill faces skepticism,
1,691 corporate boards studied, firms with a larger and many call it unconstitutional, it has received
female presence had larger dividend payouts. Tere overwhelming support. In addition to legal require-
Blanca, founder and chair of the commercial real ments, the 2020 Women on Boards campaign was
estate firm Blanca, says that studies back the idea dedicated to increasing the percentage of women
that better financial performance is linked to higher on corporate boards by 20 percent by 2020, a goal
representation of women. which was achieved. According to research done
Women are also becoming more educated than by the campaign, 60 percent of female board seats
men. According to data released by the National were added in 2019 instead of taking seats from
Center for Education Statistics, during the 2016– men.
2017 academic year, women earned 57 percent of Connecticut, Michigan, Minnesota, and
bachelor’s degrees, over 62 percent of master’s Washington are the leading states when it comes
degrees, and 53 percent of PhDs, medical degrees, to female representation, according to the 2020
and law degrees in the United States. This means Women on Boards campaign. As statistics show,
that there are more women educated at each level women are starting to accomplish a lot more than
each year than men. Therefore, women are just as men in all aspects of education. This could translate
Shutterstock/fizkes
qualified as men to serve at the highest levels in into more and more women leading the business
business. world in the near future.1
Chapter Objectives
●● Define corporate governance
●● Describe the history and practice of corporate governance
●● Examine key issues to consider in designing corporate governance systems
●● Describe the application of corporate governance principles around the world
●● Provide information on the future of corporate governance
65
B usiness decisions today are increasingly placed under a microscope by

stakeholders and the media, especially those made by high-level
personnel in publicly held corporations. Stakeholders are demanding
greater transparency in business, meaning that company motives and actions
must be clear, open for discussion, and subject to scrutiny. Recent scandals and
the associated focus on the role of business in society have highlighted a need for
systems that take into account the goals and expectations of various stakeholders.
Additionally, boards need to be representative of the larger population, as the push
for more female involvement on boards illustrates. To respond to these pressures,
businesses must effectively implement policies that provide strategic guidance on
appropriate courses of action. This focus is part of corporate governance, the
system of checks and balances that ensures that organizations are fulfilling the
goals of social responsibility.
Governance procedures and policies are typically discussed in the context of
publicly traded firms, especially as they relate to corporations’ responsibilities
to investors.2 However, the trend is toward discussing governance within many
industry sectors, including nonprofits, small businesses, and family-owned
enterprises. Corporate governance deserves broader consideration because there
is evidence of a link between good governance and strong social responsibility,
which is the adoption by a business of a strategic focus for fulfilling the economic,
legal, ethical, and philanthropic responsibilities that their stakeholders expect.
Corporate governance and accountability are key drivers of change for business
in the twenty-first century. The corporate misconduct at firms such as Wells
Fargo, Intel, and Volkswagen (VW) represent fundamental failures in corporate
governance systems that provide oversight. Investors and other stakeholders
must be able to trust management while boards of directors oversee managerial
decisions. During the Great Recession in 2008–2009, some of the nation’s oldest
and most respected financial institutions teetered on the brink of failure and were
either bailed out or acquired by other firms. Many problems in the financial sector
come from boards of directors allowing excessive risk taking.
In this chapter, we define corporate governance and integrate the concept
with the other elements of social responsibility. Then, we examine the corporate
governance framework used in this book. Next, we trace the evolution of corpo-
rate governance and provide information on the status of corporate governance
systems in several countries. We look at the history of corporate governance and
the relationship of corporate governance to social responsibility. We also examine
primary issues that should be considered in the development and improvement
of corporate governance systems, including the roles of boards of directors,
shareholder activism, internal control and risk management, and executive com-
pensation. Finally, we consider the future of corporate governance and indicate
how strong governance is tied to corporate performance and economic growth.
Our approach in this chapter is to demonstrate that corporate governance is a
fundamental aspect of social responsibility.
Corporate Governance Defined

In a general sense, the term governance relates to the exercise of oversight, control,
and authority. For example, most institutions, governments, and businesses are
organized so that oversight, control, and authority are clearly delineated. These
board of directors organizations usually have an owner, president, and chief executive officer (CEO),
a group of members who
represent shareholders and
as well as a board of directors that serves as the ultimate authority on decisions
oversee the firm’s operations and and actions. The board of directors is made up of members who represent
legal and ethical compliance shareholders and oversee the firm’s operations and legal and ethical compliance. A

Chapter 3 Corporate Governance 67
board of directors should have final authority on decisions, including the ability to
approve corporate strategy, provide financial oversight, and even remove the CEO.
Nonprofit organizations, such as homeowners’ associations, have a president and
a board of directors to make decisions in the interest of a specific community
(such as homeowners, in this example). A clear delineation of power and account-
ability helps stakeholders understand why and how the organization chooses and
achieves its goals. This delineation also demonstrates who bears the ultimate risk
for organizational decisions. Legally, Sarbanes-Oxley and the Federal Sentencing
Guidelines for Organizations (FGSO) place responsibility and accountability on
top officers and the board of directors. Although many companies have adopted
decentralized decision-making, empowerment, team projects, and less hierarchical
structures, governance remains a required mechanism for ensuring accountability
to regulatory authorities. Even if a company has adopted a consensus approach
for its operations, there has to be authority for delegating tasks, making tough
and controversial decisions, and balancing power throughout the organization.
Governance also provides oversight to uncover and address mistakes, risks, and
ethical and legal misconduct. More recently, boards at Wells Fargo and Nissan
have been criticized for issues such as failing to implement the division of leader-
ship, thereby giving certain members of their boards excessive power, and failing
to consider stakeholders such as employees in the governance decisions. On the
other hand, Hasbro and Estée Lauder have been celebrated for their innovation,
strong leaders who have capitalized on advances in technology, and executive
compensation that is dependent upon return on investment.3
We define corporate governance as the formal system of oversight of, account- corporate governance
ability for, and control over organizational decisions and resources. Oversight formal system of oversight of,
accountability for, and control
relates to a system of checks and balances that limit employees’ and managers’
over organizational decisions and
opportunities to deviate from policies and codes of conduct. Accountability resources
relates to how well the content of workplace decisions is aligned with a firm’s
stated strategic direction. Control involves the process of auditing and improving
organizational decisions and actions. The philosophy that is embraced by a board
or firm regarding oversight, accountability, and control directly affects how
corporate governance works. Table 3.1 describes some examples of important
corporate governance decisions.
Corporate Governance Framework

The majority of businesses and many courses taught in colleges of business
operate under the belief that the purpose of business is to maximize profits for
shareholders. A shareholder is any person or entity that owns at least one share shareholder
of a company’s stock. Shareholders are not liable for a company’s financial any person or entity that owns at
least one share of a company’s
stock
Table 3.1 Corporate Governance Decisions

Decision Area Example
Ethical and legal risks The board approve ethics and compliance programs
Regulatory financial reporting Audit committee oversees financial reporting
Compensation Committee approves compensation for top officers
Strategy The board approves decisions related to strategies, mergers,
and acquisitions
Finance Major decisions related to the use of financial assets, including
issuing stocks and bonds
Stakeholders Decisions regarding employee benefits, shareholder rights,
and contributions to society

obligations. The Michigan Supreme Court, in the 1919 case of Dodge v. Ford
Motor Co., ruled that a business exists for the profit of shareholders and the board
of directors should focus on that objective.4 On the other hand, the stakeholder
model places the board of directors in the central position in order to balance the
interests and conflicts of the various constituencies. As we will see, there should be
no conflict between maximizing profits and maintaining a stakeholder orientation.
External control of the corporation includes not only government regulations,
but also key stakeholders such as employees, consumers, and communities, who
exert pressure favoring responsible conduct. Many of the obligations to balance
stakeholder interest have been institutionalized in legislation that provides incen-
tives for responsible conduct. It is not correct to assume that it is necessary to take
advantage of or ignore stakeholders to maximize profits. There is much evidence
that a stakeholder orientation maximizes profits in the long run. By taking preven-
tive action against misconduct, a company may avoid onerous penalties should
a violation occur. Top officers and the board of directors are legally responsible
for accurate financial reporting, as well as providing oversight to manage ethical
decision-making. Today, most companies understand that ethical decision-making
supports their reputation and encourages the cooperation of their stakeholders.
Therefore, the failure to balance stakeholder interests can result in a failure
to maximize shareholders’ wealth. Sometimes the issue is so major that fines and
serious penalties occur as a result. For example, Tyson Foods pleaded guilty to
criminal charges for violating the Clean Water Act by improperly dumping waste.
Tyson Foods agreed to pay a $2 million criminal fine and a $500,000 fine to
help clean up the waste it dumped. Tyson chose to favor its shareholders over its
stakeholders by saving money through improper waste-dumping, but they ended
up harming stakeholders, many of which were also shareholders.5 Most firms are
moving more toward a balanced stakeholder model, as they see that this approach
will sustain the relationships necessary for long-run success.
Both directors and officers of corporations are fiduciaries for the shareholders.
fiduciaries Fiduciaries are persons placed in positions of trust who use due care and loyalty
persons placed in positions of in acting on behalf of the best interests of the organization. There is a duty of
trust who use due care and loyalty
care, also called a duty of diligence, to make informed and prudent decisions.6
in acting on behalf of the best
interests of the organization Directors have an obligation to avoid ethical misconduct in their role and to
provide leadership in decisions to prevent ethical misconduct in the organization.
duty of care Directors are not held responsible for negative outcomes if they are informed and
(also known as duty of diligence) diligent in their decision-making. For example, the directors of General Motors
the obligation of directors
and officers to avoid ethical
(GM) must be diligent in ensuring that financial reporting is accurate to the best of
misconduct and provide their knowledge. Manufacturing cars that lose market share is a serious concern,
leadership to prevent ethical although it is not a legal issue. On the other hand, if the directors know that the
misconduct in the organization firm is covering up a safety concern, then they can be held responsible. This means
directors have an obligation to request information, do research, use accountants
and attorneys, and obtain the services of consultants in matters where they need
assistance or advice.
duty of loyalty The duty of loyalty means that all decisions should be in the interests of the
the obligation of directors and corporation and its stakeholders. Conflicts of interest exist when a director uses
officers to make decisions in the
the position to obtain personal gain, usually at the expense of the organization. For
interests of the corporation and its
stakeholders example, Nissan’s former CEO Carlos Ghosn may have experienced a conflict of
interest when he served as the CEO and chairman of Nissan, the CEO and chair-
conflicts of interest man of Renault, and chairman of Mitsubishi. Following the termination and arrest
using one’s position within an of Ghosn, the Nissan board of directors approved the establishment of a Special
organization to obtain personal
gain, at the expense of the Committee for Improving Governance, which recommended that Nissan senior
organization executives refrain from working for either Renault or Mitsubishi. As they are
Nissan’s alliance partners, working for Renault or Mitsubishi poses a conflict of
interest for Nissan executives. Many corporate governance experts have criticized
appointing the same person as both CEO and chairman, although it has been a

common occurrence in U.S. companies. Recently, however, this has been changing.
The percentage of S&P 500 businesses with CEOs who also serve as chairman has
decreased by 3 percent from previous years.7
Officer compensation packages are a challenge for directors, especially
those on the board who are not independent of the company. Directors have an
opportunity to vote for others’ compensation in return for their own increased
compensation. Opportunities to know about the investments, business ventures,
and stock market information create issues that could violate the duty of loyalty.
Insider trading of a firm’s stock is illegal, and violations can result in serious
punishment. Insider trading is the act of purchasing or selling a public company’s insider trading
security with access to nonpublic information about the company. A probe of the act of purchasing or selling
a public company’s security with
Samsung involving several employees, including president-level executives, was
access to nonpublic information
launched to investigate whether the employees used insider trading tips to profit about the company
from an upcoming purchase. The employees allegedly purchased $43 million in a
Samsung de facto holding company before it disclosed plans to purchase an affili-
ate firm. This knowledge would have provided them with an unfair advantage that
other shareholders did not have. If found guilty, employees could face fines and
jail time.8 The ethical and legal obligations of directors and officers are intertwined
with their fiduciary relationships to the company. Ethical values should guide deci-
sions and protect against the possibility of illegal conduct. With increased pressure
on directors to provide oversight for organizational ethics and compliance, there
is a trend toward director training to increase their competence in ethics program
development, as well as other areas, such as accounting.
Corporate governance establishes fundamental systems and processes for
oversight, accountability, and control. This requires investigating, disciplining,
and planning for recovery and continuous improvement. Effective corporate
governance creates compliance and values so that employees feel that integrity
lies at the core of competitiveness.9 Even if a company has adopted a consensus
approach to decision-making, there should be oversight and authority for
delegating tasks, making difficult and sometimes controversial decisions, balancing
power throughout the firm, and maintaining social responsibility. Governance
also provides mechanisms for identifying risks and planning for recovery when
mistakes or problems occur.
The development of a stakeholder orientation should work with the corpora-
tion’s governance structure. Corporate governance is also the part of a firm’s
corporate culture that establishes the integrity of all relationships. A governance
system that does not provide checks and balances creates opportunities for top
managers to put their own self-interests before those of important stakeholders.
Medical products distributor McKesson Corp. announced changes in corporate
governance at the behest of stakeholders. CEO John H. Hammergren’s compensa-
tion has been called into question for reaching unprecedented levels, and the
restructuring addressed these issues. The company reevaluated other aspects of
governance and plans to implement more changes in phases. McKesson Corp.
has demonstrated transparency on their website by listing all of the members of
the board and various committees, including an independent chair of the board
of directors.10 Concerns about the need for greater corporate governance are
not limited to the United States. Reforms in governance structures and issues are
occurring all over the world.11 In many nations, companies are being pressured to
implement stronger corporate governance mechanisms by international investors;
by the process of becoming privatized after years of unaccountability as state
companies; or by the desire to imitate successful governance movements in the
United States, Japan, and the European Union.12 As the business world becomes
more global, standardization of governance becomes important in order for
multinational and international companies to maintain standards and a level of
control.

Table 3.2 lists examples of major corporate governance issues. These issues
normally involve strategic-level decisions and actions taken by boards of directors,
business owners, top executives, and other managers with high levels of authority
and accountability. Although these people have often been relatively free from
scrutiny, changes in technology, consumer activism, government attention, recent
ethical scandals, and other factors have brought new attention to such issues as
transparency, executive pay, risk and control, resource accountability, strategic
direction, stockholder rights, and other decisions made for the organization.
History of Corporate Governance

In the United States, a discussion of corporate governance draws on many parallels
with the goals and values held by the U.S. founders.13 As mentioned earlier in the
chapter, governance involves a system of checks and balances, a concept associated
with the distribution of power within the executive, judiciary, and legislative
branches of the U.S. government. The U.S. Constitution and other documents have
a strong focus on accountability, individual rights, and the representation of broad
interests in decision-making and resource allocation.
In the late 1800s and early 1900s, corporations were headed by such familiar
names as Andrew Carnegie, E.I. DuPont, and John D. Rockefeller. These so-called
captains of industry had ownership investment and managerial control over their
businesses. Thus, there was less reason to talk about corporate governance because
the owner of the firm was the same individual who made strategic decisions about
the business. The owner primarily bore the consequences—positive or negative—of
decisions. During the twentieth century, however, an increasing number of public
companies and investors brought about a shift in the separation of ownership and
control. By the 1930s, corporate ownership was dispersed across a large number
of individuals. This raised new questions about control and accountability for
organizational resources and decisions.
One of the first known anecdotes that helped shape our current understanding
of accountability and control in business occurred in the 1930s. In 1932, Lewis
Gilbert, a stockholder in New York’s Consolidated Gas Company, found his ques-
tions repeatedly ignored at the firm’s annual shareholders’ meeting. Gilbert and
his brother took the problem to the federal government and pushed for reform,
U.S. Securities and Exchange which led to the creation of the U.S. Securities and Exchange Commission (SEC).
Commission (SEC) The SEC is the government agency that oversees the operations and protection of
the government agency that
oversees the operations and
securities markets and investors. Because of the Gilbert brothers’ activism, the SEC
protection of securities markets
and investors
Table 3.2 Corporate Governance Issues
Shareholder rights
Executive compensation
Composition and structure of the board of directors
Auditing and control
Risk management
CEO selection and termination decisions
Integrity of financial reporting
Stakeholder participation and input into decisions
Compliance with corporate governance reform
Role of the CEO in board decisions
Organizational ethics programs

formalized the process by which executives and boards of directors respond to the
concerns and questions of investors.14
Since the mid-1900s, the approach to corporate governance has involved a
legal discussion of principals and agents to the business relationship. Essentially,
owners are “principals” who hire “agents,” the executives, to run the business.
A key goal of businesses is to align the interests of principals and agents so that
organizational value and viability are maintained. Achieving this balance has
been difficult, as evidenced by these business terms coined by the media—junk
bonds, empire building, golden parachute, and merger madness—all of which
have negative connotations. In these cases, the long-term value and competitive
stance of organizations were traded for short-term financial gains or rewards. The
results of this short-term view included workforce reduction, closed manufacturing
plants, struggling communities, and a generally negative perception of corporate
leadership. In our philosophy of social responsibility, these long-term effects
should be considered alongside decisions designed to generate short-run gains in
financial performance.
The Sarbanes-Oxley Act was the most significant piece of corporate gover-
nance reform at the time since the 1930s. Under these rules, both CEOs and chief
financial officers (CFOs) are required to certify that their quarterly and annual
reports accurately reflect performance and comply with the requirements of the
SEC. Among other changes, the act also required more independence of boards
of directors, protected whistleblowers, and established the Public Company
Accounting Oversight Board (PCAOB). The New York Stock Exchange (NYSE)
and NASDAQ also overhauled the governance standards required for listed firms.
Business ethics, director qualifications, unique concerns of foreign firms, loans to
officers and directors, internal auditing, and many other issues were part of the
NYSE and NASDAQ reforms.15
Despite the implementation of Sarbanes-Oxley, corporate misconduct and the
quest for short-term profits led the U.S. financial system to a near-collapse during
the last recession. The cause was a pervasive use of instruments like credit default
swaps, risky debt like subprime lending, and corruption in major corporations. The
government was forced to step in and bail out many financial companies. Later,
because of the weak financial system and reduced consumption, the government
also had to step in to help the major automotive companies GM and Chrysler. The
U.S. government became a majority shareholder in GM, an unprecedented move
(it has since divested itself of its final shares). Not since the Great Depression and
President Franklin Delano Roosevelt has the United States seen such widespread
government intervention and regulation—something that most deem necessary
but is nevertheless worrisome to free market capitalists. The basic assumptions
of capitalism are under debate as countries around the world work to stabilize
markets and question those that managed the money of individual corporations
and nonprofits. The latest recession caused many to question government institu-
tions that provide oversight and regulation. As changes are made, there is a need to
address issues related to law, ethics, and the required level of compliance necessary
for government and business to serve the public interest.
In recent years, diversity has become an important issue in corporate gover-
nance. Corporate boards are traditionally comprised only of men, which can lead
to a lack of perspective. In response, some countries have passed laws mandating
a certain number of women on corporate boards. For example, Germany passed
a law requiring boards to be comprised of at least 30 percent women. In the
United States, there is no federal mandate to include women in corporate boards;
however, California recently passed a law requiring that at least one woman be
included on a corporate board for a publicly traded company. Critics argue that
this practice could lead to more unqualified board members, but proponents argue
that without such quotas, companies won’t diversify their boards.16

Finance Reforms
Table 3.3 Companies with The lack of effective control and accountability mechanisms prompted a strong
Good Corporate Governance interest in corporate governance. In 2010, the Dodd-Frank Wall Street Reform
AT&T and Consumer Protection Act was passed to protect consumers from overly
complex financial instruments, better regulate the financial industry, and prevent
Coeur Mining
too-big-to-fail financial institutions. (One of the reasons why the government had
Comscore
to intervene during the financial meltdown was that allowing large institutions
General Motors Company such as Bank of America or AIG to fail would devastate the economy at a much
Guardian Life higher rate.) The Dodd-Frank Wall Street Reform and Consumer Protection
IBM Act established a Consumer Financial Protection Bureau (CFPB), among other
agencies. The CFPB is similar to the Bureau of Consumer Protection of the Federal
NorthWestern Energy
Trade Commission (FTC), in that its purpose is to protect consumers from being
Royal Bank of Canada deceived by institutions selling high-risk financial products. The Dodd-Frank Act
Salesforce.com will be discussed in detail in the following chapter. Boards of directors have the
VF Corporation responsibility to provide oversight and compliance with regulations.
Source: IR Media Group Ltd., Beyond the legal issues associated with governance, there has also been interest
“Corporate Governance Awards in the board’s role in social responsibility and stakeholder engagement. Table 3.3
2019,” Corporate Secretary, 2019,
https://events.irmagazine.com/cga/
provides a list of companies with good corporate governance. The board of direc-
wp-content/uploads/sites/122/2019/11/ tors should provide leadership for social responsibility initiatives. It is apparent
CGA19-short-lists-FINAL-WINNERS.pdf. that some boards have been assuming greater responsibility for strategic decisions
and have decided to focus on building more effective social responsibility.
Corporate Governance and Social

Responsibility
Corporate social responsibility (CSR) can be a difficult concept to define. While
there is broad agreement among professionals, academics, and policymakers
that being socially responsible does pay, CSR always involves trade-offs, and
most businesses have yet to formulate an idea of what social responsibility really
entails for their organizations.17 Interpreted narrowly, a company can consider
itself socially responsible if it generates returns for shareholders and provides
jobs for employees (called the shareholder model). A broad definition of social
responsibility interprets the corporation as a vehicle for stakeholders and for
public policy (called the stakeholder model). A company that takes the latter view
would be more concerned with the public good, as well as with profitability and
shareholder return. Because most firms have so many potential stakeholders, a key
to developing a socially responsible agenda involves determining which of these
groups are most important for your business. Social responsibility should seek to
help a firm’s principal stakeholders. For example, a line of high-end organic soaps
might seek to source its ingredients from sustainable sources, avoid products that
have been tested on animals, and hire workers at living wages.
To understand the role of corporate governance in business today, it is also
important to consider how it relates to fundamental beliefs about the purpose
of business organizations. Some people believe that so long as a company is
maximizing shareholder wealth and profitability, it is fulfilling its core responsibil-
ity. Although this must be accomplished in accordance with legal and ethical
standards, the primary focus is on the economic dimension of social responsibility.
Thus, this belief places the philanthropic dimension beyond the scope of business.
Other people, however, take the view that a business is an important member, or
citizen, of society and must assume broad responsibilities. This view assumes that
business performance is reflexive, meaning it both affects and is influenced by
internal and external factors. In this case, performance is often considered from a
financial, social, and ethical perspective. From these assumptions, we can derive

two major conceptualizations of corporate governance: the shareholder model and

the stakeholder model.
The shareholder model of corporate governance is founded in classic economic shareholder model of
precepts, including the maximization of wealth for investors and owners. For corporate governance
founded in classic economic
publicly traded firms, corporate governance focuses on developing and improving precepts, a model that focuses on
the formal system of performance accountability between top management and the making decisions toward what is in
firms’ shareholders.18 Thus, the shareholder model should drive management deci- the best interest of investors
sions toward what is in the best interests of investors. Underlying these decisions
is a classic agency problem, where ownership (i.e., investors) and control (i.e.,
managers) are separate. Managers act as agents for investors, and their primary
goal is to generate value for shareholders. However, investors and managers are
distinct parties with unique insights, goals, and values with respect to the business.
Managers, for example, may have motivations beyond shareholder value, such as
market share, personal compensation, or attachment to particular products and
projects. Because of these potential differences, corporate governance mechanisms
are needed to ensure an alignment between investor and management interests.
For example, Deutsche Bank was investigated for a number of questionable
practices, including possible manipulation of worldwide benchmark interest rates
and legality of payment processing in various countries. These activities generated
profits and raised the company’s stock price. As a result of alleged misconduct,
numerous employees were fired, at least $6.9 billion were paid in fines and penal-
ties, and former senior executive William Broeksmit died by suicide in 2014 after
displaying anxiety toward potential investigations of Deutsche Bank. This caused
harm to investors, as these costs drove down the stock price.19 The shareholder
model has been criticized for its somewhat singular purpose and focus because
there are other ways of investing in a business. Suppliers, creditors, customers,
employees, business partners, the community, and others also “invest” their
resources in the success of the firm.
In the stakeholder model of corporate governance, the purpose of business stakeholder model of
is conceived in a broader fashion. Although a company has a responsibility for corporate governance
a model where the business is
economic success and viability, it must also answer to other parties, including accountable to all its stakeholders,
employees, suppliers, government agencies, communities, and groups with not just shareholders
which it interacts. This model presumes a collaborative and relational approach
to business and its constituents. Because management time and resources are
limited, a key decision within the stakeholder model is
to determine which stakeholders are primary. Once pri-
mary groups have been identified, appropriate corporate
governance mechanisms are implemented to promote the
development of long-term relationships.20 As discussed
in Chapter 2, primary stakeholders include sharehold-
ers, suppliers, customers, employees, the government,
and the community. Governance systems that consider
stakeholder welfare in tandem with corporate needs
and interests characterize this approach. For instance,
several companies, including ASOS, Marks & Spencer,
and Uniqlo, have been accused of using child labor in their
supply chains in order to produce their products.
Questionable market channels can damage a firm’s
reputation and social responsibility agenda. For example,
Shutterstock/Leonard Zhukovsky
students of Georgetown University staged several pro-

tests over the university’s licensing agreement with Nike.
Students were concerned over labor conditions for Nike
employees in foreign countries like Vietnam. The company
barred third-party monitors from investigating working
conditions in Vietnam and engaged in labor abuses like
wage theft, forced overtime, and dangerous working

conditions. These protests damaged Nike’s reputation and pressured the company
into agreeing to better monitor labor conditions in their foreign factories.21
Although these two approaches seem to represent opposite ends of a
continuum, the reality is that the shareholder model is often a precursor to the
stakeholder model. Many businesses have evolved into the stakeholder model
as a result of government initiatives, consumer activism, industry activity, and
other external forces. In the aftermath of corporate scandals, it became clear how
the economic accountability of corporations could not be detached from other
responsibilities and stakeholder concerns. Although this trend began with large,
publicly held firms, its aftereffects are being felt in other types of organizations
and industries as well. Figure 3.1 illustrates a continuum of stakeholder concerns.
One end demonstrates the shareholder model. The other end demonstrates a
stakeholder model, with concern for various company stakeholders.
The shareholder model focuses on a primary stakeholder—the investor—
whereas the stakeholder model incorporates a broader philosophy toward internal
and external constituents. According to the World Bank, a development institution
whose goal is to reduce poverty by promoting sustainable economic growth
around the world, corporate governance is defined by both internal (i.e., long-term
value and efficient operations) and external (i.e., public policy and economic
development) factors.22 We are concerned with the broader conceptualization of
corporate governance in this chapter.
In the social responsibility model that we propose, governance is the organizing
dimension for keeping a firm focused on continuous improvement, accountability,
and engagement with stakeholders. Although financial return, or economic viabil-
ity, is an important measure of success for all firms, the legal dimension of social
responsibility is also a compulsory consideration. The ethical and philanthropic
dimensions, however, have not been traditionally mandated through regulation
or contracts. This represents a critical divide in our social responsibility model
and associated governance goals and systems because there are some critics
who challenge the use of organizational resources for concerns beyond financial
performance and legalities. This view was summarized in an editorial in National
Journal, a nonpartisan magazine on politics and government: “Corporations are
not governments. In the everyday course of their business, they are not accountable
to society or to the citizenry at large.… Corporations are bound by the law, and
by the rules of what you might call ordinary decency. Beyond this, however, they
have no duty to pursue the collective goals of society.”23 This type of philosophy,
long associated with the shareholder model of corporate governance, prevailed
throughout the twentieth century. However, as the consequences of neglecting the
stakeholder model of CSR have become clearer, fewer firms persist in adhering to
such a narrow view.
Figure 3.1 The Stakeholder Continuum
Employees
Customers
Shareholders
Shareholder profits Focus on selected stakeholders
Suppliers
Regulators
Communities
Shareholder Model Stakeholder Model

Ethical Responsibilities in MANAGEMENT
Home Depot Levels Out Its Management System

When Home Depot was founded by Bernie Marcus and After seven years with the company, Blake stepped
Arthur Blank in 1979, the two men built a strong culture down as CEO and was replaced by Craig Menear, who
that placed customers and employees at the top and continues to hold the position. The succession was
executives at the bottom. Home Depot’s store-centric smooth—so well planned, in fact, that it had a minimal effect
culture put emphasis on the satisfaction of the customer on Home Depot’s stock price. Much like Blake, Menear
and the associate, leading to many years of success. proved that he would continue to focus on the core culture
However, after Robert Nardelli, a high-level executive of the company. The 12-member board includes 3 women,
at General Electric (GE), took over as CEO in December and it regularly engages in board refreshment practices
2000, the style of leadership at Home Depot abruptly where board members from different backgrounds and
changed. Nardelli took a top-down approach to running genders are included in executive roles.
the company: executives at the top and customers and The firm has focused on employees and customers
employees at the bottom. over the last five years, with a 135 percent increase in
The new Home Depot culture created a hostile work value for investors who bought shares. Executives are
environment for employees and executives, as Nardelli at the bottom of the pyramid, with employees being well
ran the store more like a military work environment compensated. They are given opportunities for learning
than the laid-back climate workers were accustomed to. and career development and provide excellent service
While sales doubled under Nardelli and many successful to customers. Home Depot believes having managers
technology initiatives were implemented, the board of at the bottom of the pyramid makes them take on the
directors faced negative feedback from stakeholders. most responsibility in the business in order to provide
Nardelli was replaced by Frank Blake as CEO in employees with the resources that they need to focus on
2007. Blake quickly refocused on the inverted pyramid customers. The board of directors continues to provide
and began to restore the customer experience. When leadership to support executives in developing and imple-
Blake took over as CEO, customer satisfaction was at an menting the employee- and market-focused culture. Home
all-time low. He admitted that there were customer service Depot has overcome many issues in its culture, and the
problems, and each of the complaints was addressed. future is bright.
Sources: Julie Creswell and Michael Barbaro, “Home Depot Ousts Highly Paid Chief,” The New York Times, January 4, 2007, http://www.nytimes.
com/2007/01/04/business/04home.html?mcubz=3 (accessed April 25, 2019); Nathan Owen Rosenberg, “The Key to Home Depot’s Success is
Transformational Leadership,” Insigniam, http://insigniam.com/blog/the-key-to-home-depots-success-is-transformational-leadership/ (accessed April 25,
2019); Rachel Tobin, “Frank Blake Is Home Depot’s ‘Calmer-in-Chief’,” Seattle Times, September 4, 2010, https://www.seattletimes.com/business/frank-
blake-is-home-depots-calmer-in-chief/ (accessed April 25, 2019); Home Depot, “Proxy Statement and Notice of 2019 Annual Meeting of Shareholders,”
April 8, 2019, https://ir.homedepot.com/~/media/Files/H/HomeDepot-IR/2019_Proxy_Updates/Final%202019%20Proxy%20Statement_vF.PDF (accessed
April 25, 2019); Joseph McAdory, “Student Center for Public Trust: Carol Tome,” Center for Ethical Organizational Cultures, September 27, 2018, http://
harbert.auburn.edu/research-and-centers/center-for-ethical-organizational-cultures/student-center-for-public-trust.php (accessed April 25, 2019).
Issues in Corporate Governance Systems

Organizations that strive to develop effective corporate governance systems
consider a number of internal and external issues. In this section, we look at four
areas that need to be addressed in the design and improvement of governance
mechanisms. We begin with boards of directors, which have the ultimate respon-
sibility for ensuring governance. Then, we discuss shareholder activism, internal
control and risk management, and executive compensation within the governance
system. These issues affect most organizations, although individual businesses may
face unique factors that create additional governance questions. For example, a
company operating in several countries will need to resolve issues related to inter-

national governance policy. Table 3.4 discusses major areas of risk in corporate
governance that organizational leaders are facing across various corporations.
Boards of Directors
A company’s board of directors assumes responsibility for their resources and
legal and ethical compliance. The board appoints top executive officers and is
responsible for overseeing their performance. This is also true of a university’s
board of trustees, and there are similar arrangements in the nonprofit sector. In
each of these cases, board members have a fiduciary duty, as discussed earlier in
this chapter. These responsibilities include acting in the best interests of those they
serve. Thus, board membership is not designed as a vehicle for personal financial
gain; rather, it provides the intangible benefit of ensuring the success of the orga-
nization and the stakeholders affected and involved in the fiduciary arrangement.
In the case of public corporations, boards of directors hold the ultimate
responsibility for their firms’ ethical culture and legal compliance. This governing
authority is held responsible by the 2004 and 2007 amendments to the Federal
Sentencing Guidelines for Organizations (FGSO), for creating an ethical culture
that provides leadership, values, and compliance. The members of a company’s
board of directors assume legal responsibility for the firm’s resources and deci-
sions, and they appoint its top executive officers. For example, Citigroup’s board
of directors decided that it was best to avoid conflicts of interest in corporate
governance by separating the role of CEO from that of chairman.24
The traditional approach to directorship assumed that board members man-
aged the corporation’s business. Research and practical observation have shown
that boards of directors rarely, if ever, perform the management function.25
Because boards usually meet four to six times a year, there is no way that time
allocation would allow effective management. In small nonprofit organizations,
the board may manage most resources and decisions. The complexity of large
organizations requires full attention on a daily basis. Today, boards of directors
are concerned primarily with monitoring the decisions made by managers on
behalf of the company. This includes choosing top executives, assessing their
performances, helping to set strategic direction, evaluating company performance,
developing CEO succession plans, communicating with stakeholders, maintaining
legal and ethical practices, ensuring that control and accountability mechanisms
are in place, choosing and communicating with auditors, and evaluating the
board’s own performance.
Table 3.4 Challenges in Corporate Governance

Challenge Example
Independence Increasing the percentage of independent directors who do not own
shares or otherwise have a material interest in the company
Quality Tracking quality control issues and ensuring that the organization meets
benchmarks for product quality
Performance Ensuring that performance meets shareholder expectations
Shareholder activism Dealing with shareholder demands, such as calls for limiting executive
compensation
Internal controls Appointing an ethics officer to oversee the company’s ethics and
compliance program
Audits Auditing different areas of the company periodically to determine areas
of improvement
Risk management Understanding major risks that the company faces and developing
controls to limit these risks

Independence Just as social responsibility objectives require more employees and

executives, boards of directors are also experiencing increasing accountability and
disclosure mandates. The desire for independence is one reason that a few firms
have chosen to split the powerful roles of chair of the board and CEO. Although
the practice is common in the United Kingdom and activists have called for this
move for years, the idea is newer to the United States and is sometimes met with
resistance.
For instance, pressure has been repeatedly placed on JPMorgan Chase chair-
man and CEO James Dimon. After a number of regulatory hearings concerning the
London Whale fiasco in which a trader lost billions for the bank, lack of oversight
in the Bernard Madoff Ponzi scheme, and risky loans before the Great Recession,
shareholders at JPMorgan requested that the chairman and CEO roles be divided.
The request was met with resistance and did not pass a board vote, but Dimon
did relinquish his role as chairman of the banking business. Some think this is
an acknowledgment of responsibility and a step in the right direction concerning
better corporate governance.26
Traditionally, board members were retired company executives or friends
of current executives, but the trend since the corporate scandals associated with
Enron, WorldCom, and more recently Countrywide Financial and JPMorgan has
been toward independent directors who have valuable expertise, but little vested
interest in the firm before assuming the director role. According to Rule 303A.01
of the NYSE corporate governance guidelines, the boards of listed companies must
be comprised of a majority of independent directors.27 However, a listed company
in which more than 50 percent of the voting power for the election of directors is
held by a group or individual does not have to abide by Rule 303A.01.28
Thus, directors today are more likely chosen for their competence, motivation,
and ability to bring enlightened and diverse perspectives to strategic discussions.
Outside directors are thought to bring more independence to the monitoring
function because they are not bound by past allegiances, friendships, current
roles in the company, or some other matter that may create a conflict of interest.
However, independent directors who sit on a board for a long time may eventually
lose some of their outsider perspective. Also, while they are more likely to be
impartial, independent directors are not always guaranteed to avoid conflict of
interest issues. For example, the Galleon Group, a hedge fund management firm,
had independent directors on its board, but this did not stop massive misconduct.
Founder Raj Rajaratnam was convicted of insider trading and was sentenced to
11 years in prison, one of the longest sentences to date for this crime. Directors
have to avoid “groupthink” and be competent enough to understand risks. They
must also be willing to ask for informa-
tion relevant to avoiding organizational
misconduct.
Quality Finding board members who

have some expertise in the firm’s industry
or who have served as chief executives
at similar-sized organizations is a good
strategy for improving the board’s overall
quality. Directors with competence and
experiences that reflect some of the firm’s
core issues should bring valuable insights
to bear on discussions and decisions.
Directors without direct industry or
Shutterstock/fizkes
comparable executive experience may

bring expertise on important issues, such
as auditing, executive compensation, suc-
cession planning, and risk management,

to improve decision-making. Board members must understand the company’s

strategy and operations; this suggests that members should limit the number of
boards on which they serve. Directors need time to read reports, attend board and
committee meetings, and participate in continuing education that promotes strong
understanding and quality guidance. For example, directors on the board’s audit
committee may need to be educated on new accounting and auditing standards.
Experts recommend that fully employed board members sit on no more than four
boards, whereas retired members should limit their memberships to seven boards.
Directors should be able to attend at least 75 percent of the meetings. Thus, many
of the factors that promote board quality are within the control of directors.29
Performance An effective board of directors can serve as a type of insurance

against the business cycle and the natural highs and lows of the economy. A
company with a strong board free from conflicts of interest and clearly stated
corporate governance rules will be more likely to weather a storm if something bad
does happen.30 As federal regulations increase and the latitude afforded boards
of directors shrinks, boards are going to be faced with greater responsibility and
transparency.
Board independence, along with board quality, stock ownership, and corporate
performance, is often used to assess the quality of corporate boards of directors.
Many CEOs have lost their jobs because the board of directors have concerns
about performance, ethics, and social responsibility. The main reason for this is
the boards’ fear of losing their personal assets, which stems from shareholders
who have sued the directors of financial firms over their roles in the collapse on
shareholder lawsuits Wall Street. Shareholder lawsuits are lawsuits brought against a key member of a
lawsuits brought against a company, like a director or executive, where a shareholder or group of sharehold-
key member of a company
ers is suing on behalf of the corporation. If the lawsuit is won, the proceeds go
by a shareholder or group of
shareholders suing on behalf of back to the corporation, not the shareholder who brought the suit. These events
the corporation make it clear that board members are accountable for oversight.
Just as improved ethical decision-making requires more of employees and
executives, so too are boards of directors feeling greater demands for ethics and
transparency. Directors today are increasingly chosen for their proficiency and
ability to bring different perspectives to strategic discussions. As mentioned earlier,
outside directors are thought to bring more independence to the monitoring
function because they are not bound by past allegiances and other issues that may
create a conflict of interest. The chair of the board audit committee must be an
outside independent director with financial expertise.
Many of the corporate scandals uncovered in recent years might have been
prevented if the companies’ boards of directors had been better qualified, more
knowledgeable, and less biased. The institution of the Volcker Rule, one compo-
nent of the Dodd-Frank Act, provides stricter rules on financial management and
controls on hedge funds and money-market mutual funds. The aim is to ensure that
banks will have more liquid assets than before. It also aims to provide increased
openness and transparency, greater oversight and enforcement, and clearer, more
common-sense language in the financial system.31 Board members are being asked
to understand changes in regulations and participate in providing better oversight
on risk-taking in their firms.
Rules promulgated by the Sarbanes-Oxley Act and various stock exchanges
now require a majority of independent directors on the board that have no material
relationship to the firm; regular meetings between nonmanagement board mem-
bers; audit, compensation, governance, and nominating committees either fully
made up of or with a majority of independent directors; no more than $120,000
in compensation for independent directors per year; and a financial expert on
the audit committee. The governance area will continue to evolve as corporate
scandals are resolved and the government and companies begin to implement and
test new policies and practices. Regardless of the size and type of business for

which boards are responsible, a system of governance is needed to ensure effective

control and accountability. As a corporation grows, matures, enters international
markets, and takes other strategic directions, it is likely that the board of directors
will evolve to meet its new demands. Sir Adrian Cadbury, former president of the
Centre for Board Effectiveness at the Henley Business School in Reading, England,
and an architect of corporate governance changes around the world, outlined the
following responsibilities of strong boards:
• Boards are responsible for developing company purpose statements that
cover a range of aims and stakeholder concerns.
• Annual reports and other documents must include more nonfinancial
information.
• Boards are required to define their role and implement self-assessment
processes better.
• Selection of board members must be increasingly formalized, with less
emphasis on personal networks and word of mouth.
• Boards need to work effectively as teams.
• Serving on boards will require more time and commitment than in the
past.32
These trends are consistent with our previous discussion of social responsibility.
In all facets of organizational life, greater demands are being placed on business
decisions and businesspeople. Many of these expectations emanate from those who
provide substantial resources in the organization—namely, shareholders and other
investors.
Shareholder Activism
Shareholders, including large institutional ones, have become more active in
articulating their positions with respect to company strategy and executive
decision-making. Activism is a broad term that can encompass engaging in
dialogue with management, attending annual meetings, submitting shareholder
resolutions, bringing lawsuits, and other mechanisms designed to communicate
shareholder interests to the corporation. Table 3.5 lists characteristics of effective
shareholder activism campaigns.
Shareholder resolutions are nonbinding, yet important, statements about shareholder resolutions
shareholder concerns. A shareholder that meets certain guidelines may bring one nonbinding, yet important,
statements about shareholder
resolution per year to a proxy vote of all shareholders at a corporation’s annual
concerns
meeting. A proxy is an agent who is legally authorized to act on behalf of another
person/party. It is commonly used as a voting mechanism when a shareholder is proxy
an agent legally authorized to act
on behalf of another person/party.
Used as a voting mechanism when
Table 3.5 Characteristics of Successful Shareholder Activism Campaigns a shareholder is not present at a
shareholder’s meeting
Characteristics Description
Alliances Partnerships with public interest groups with shared goals.
Grass-roots pressure Encouraging the general public to contact government officials
and legislators to generate support for a cause.
Public Relations Proactive media outreach, media monitoring, and analysis of
public sentiment.
Senior decision-makers High-level negotiations and discussions with company
executives and directors.
Adjusting the climate A compelling financial argument, that makes it difficult for
company management and other shareholders to say no.
Persistence Commitment to the campaign, no matter how long it takes.

not able to physically attend a shareholder’s meeting. Recent resolutions brought

forth relate to auditor independence, executive compensation, independent direc-
tors, environmental impact, human rights, and other social responsibility issues. In
some cases, the company will modify its policies or practices before the resolution
is ever brought to a vote. In other situations, a resolution will receive less than a
majority vote, but the media attention, educational value, and other stakeholder
effects will cause a firm to reconsider, if not change, its original position to meet
the resolution’s proposal. For example, shareholders of Procter & Gamble (P&G)
engaged in one of the biggest and most expensive proxy battles in the United
States. Nearly 2 billion votes were cast to appoint Nelson Peltz to the P&G board
of directors. While the proxy vote narrowly failed, Peltz was still appointed to the
board after a recount. The proxy battle was estimated to cost more than $100
million.
Although labor and public pension fund activists have waged hundreds of
proxy battles in recent years, they rarely have much effect on the target companies.
Now shareholder activists are attacking the process by which directors themselves
proxy access are elected. This includes proxy access, where a long-term shareholder, or a group
the ability of long-term of long-term shareholders, has the ability to nominate alternative candidates for
shareholders to nominate
the board of directors on the company’s annual shareholder meeting ballot. After a
alternative candidates for
the board of directors on the poor performance leading up to the latest recession, Bank of America shareholders
company’s annual shareholder voted to oust six board members. The move got rid of entrenched directors with
meeting ballot possible conflicts of interest and replaced them with qualified financial experts.34
Although shareholders and investors want their resources used efficiently and
effectively, they are increasingly willing to take a stand to encourage companies to
make changes for reasons beyond financial return.
Investor Confidence
Shareholders and other investors must have assurance that their money is being
placed in the care of capable and trustworthy organizations. These primary stake-
holders are expecting a solid return for their investment, but as illustrated earlier,
they have additional concerns about social responsibility. When these fundamental
expectations are not met, the confidence that investors and shareholders have
in corporations, market analysts, investment houses, stockbrokers, mutual fund
managers, financial planners, and other economic players and institutions can be
severely tested. In Chapter 1, we discussed the importance of investor trust and
loyalty to organizational and societal performance. Part of this trust relates to the
perceived efficacy of corporate governance. Table 3.6 shows the characteristics of
a well-governed board of directors.
Internal Control and Risk Management

Controls and a strong risk management system are fundamental to effective
operations, as they allow comparisons between the actual performance and the
planned performance and goals of the organization. Controls are used to safeguard
corporate assets and resources, protect the reliability of organizational information,
risk management and ensure compliance with regulations, laws, and contracts. Risk management
hedging uncertainty while involves hedging uncertainty through quantitative plans and models and is the
ensuring that leadership is taking
the appropriate steps to move
process used to anticipate and shield the organization from unnecessary or
the organization and its strategy overwhelming circumstances, while ensuring that executive leadership is taking the
forward appropriate steps to move the organization and its strategy forward.
Internal and External Audits Auditing, both internal and external, is the linchpin
between risk and controls and corporate governance. Boards of directors must
ensure that the internal auditing function of the company is provided with

Table 3.6 Attributes of a Highly Functioning Board

Attribute Description
Skills and knowledge The board understands the attributes of successful leaders and how to
apply them to the organization and its strategic plans; has experience
developing leadership pipelines in organizations of similar size and
scale; understands the mechanics of the company’s compensation
plans and the risks inherent in those plans.
Process • Appoints the CEO and oversees the CEO’s development, goal-
setting, and compensation
• Approves and monitors compensation performance metrics for
the CEO
• Oversees CEO compensation and transparent disclosure of executive
compensation to stakeholders
• Ensures the development of executive succession plans that
contemplate various scenarios
• Collaborates with management to develop and adopt a
compensation philosophy for the organization
• Meets periodically with executive leadership, including risk
management and human resources, to understand organizational
compensation plans, talent pipeline, and underlying risks
• Monitors external stakeholder considerations related to executive
management and compensation
Information Obtains independent views and peer-company benchmarks of
compensation plans proposed by management; has access to
and receives periodic reports related to compensation plans,
including internal audit and other reports; and monitors marketplace
developments.
Behavior Board leadership takes responsibility for the development of the CEO;
appropriately supports and mentors the CEO; develops and maintains
relationships with other key executives, especially those with potential
to succeed the CEO.
Source: “Framing the Future of Corporate Governance,” Deloitte, 2016, http://www2.deloitte.com/content/dam/Deloitte/
us/Documents/risk/us-aers-framing-the-future-of-corporate-governance-09262014.pdf (accessed August 14, 2019).
adequate funding, up-to-date technology, unrestricted access, independence,

and the authority to carry out its audit plan. To ensure these characteristics, the
internal audit executive should report to the board’s audit committee and, in most
cases, the CEO.35
The external auditor should be chosen by the board and must clearly identify
its client as the board, not the company’s CFO. Under Sarbanes-Oxley, the board’s
audit committee should be directly responsible for the selection, payment, and
supervision of the company’s external auditor. Auditors are required to report
directly to the board’s audit committee rather than management. The act also
prohibits an external auditing firm from performing some nonauditing work for
the same public company, including bookkeeping, human resources, actuarial
services, valuation services, legal services, and investment banking. However,
even with regulations in place, many auditors failed to do their jobs properly. For
example, trustees of New Century Financial Corporation sued its auditor, KPMG
LLP, for “reckless and grossly negligent audits” that hid the company’s financial
problems and sped its collapse. New Century was one of the early casualties of the
subprime mortgage crisis, but it was once one of the country’s largest mortgage
lenders to those with poor credit histories. After it disclosed accounting errors not
discovered by KPMG, New Century collapsed.36 Part of the problem relates to
the sheer size and complexity of organizations, but these factors do not negate the
tremendous responsibility that external auditors assume.

Control Systems The area of internal control covers a wide range of company
decisions and actions, not just the accuracy of financial statements and accounting
records. Controls also foster understanding when discrepancies exist between
corporate expectations and stakeholder interests and issues. Internal controls
effectively limit employee or management opportunism or the use of corporate
assets for individualistic or nonstrategic purposes. Controls also ensure the board
of directors has access to timely and quality information that can be used to deter-
mine strategic options and effectiveness. For these reasons, the board should have
ultimate oversight of the integrity of the internal control system.37 Although board
members do not develop or administer the control system, they are responsible for
ensuring that an effective system exists. The need for internal controls is rarely
disputed, but implementation can vary. The CEO or chair appears to be the key
decision-maker relating to public and political debates that have an impact on
shareholder value. Thus, internal control represents a set of tasks and resource
commitments that require high-level attention. See Table 3.7 for an integrated
framework for implementing internal controls.
Although most large publicly traded corporations have designed internal
controls, smaller private companies and nonprofit organizations are less likely to
have invested in a complete system. For example, the electric car company Green
Tech Automotive came under investigation by the SEC for questionable practices
in recruiting foreign investors. The claims that the company overstated guaranteed
returns on investment and accepted investment from investors that may com-
promise national security are highlighted in the investigation. This investigation
contributed to the company eventually declaring bankruptcy. While not the main
reason for the bankruptcy, the investigation did not help improve public opinion
of the company.38 Such questionable behaviors are common in private businesses
because they often lack effective internal controls. The framework in Table 3.7,
while developed for large corporations, can be used in all types of organizations.
These techniques are not always costly, and they conform to best practices in the
prevention of ethical and legal problems that threaten the efficacy of governance
mechanisms.
Amendments to the FGSO make it clear that a corporation’s governing author-
ity must be well informed about its control systems with respect to implementation
and effectiveness. This places the responsibility squarely on the shoulders of the
firm’s leadership (usually the board of directors). The board must ensure that there
is a high-ranking officer accountable for the day-to-day operational responsibility
of the control systems. The board must also have adequate authority and resources
and offer access to the board or an appropriate subcommittee of the board. The
guidelines further call for confidential mechanisms whereby the organization’s
employees and agents may report or seek guidance about potential or actual
misconduct without fear of retaliation. Finally, the board is required to oversee
the discovery of risks and to design, implement, and modify approaches to deal
with those risks. Thus, the board of directors is clearly accountable for discovering
risks associated with a firm’s specific industry and assessing their ethics program
to ensure that it is capable of uncovering misconduct.39
Risk Management A strong internal control system should alert decision-makers

to possible problems, or risks, that may threaten business operations, including
worker safety, company solvency, vendor relationships, proprietary information,
environmental impact, and other concerns. As discussed in Chapter 2, having a
strong crisis management plan is part of the process for managing risk. The term
risk management is normally used in a narrow sense to indicate responsibilities
associated with insurance, liability, financial decisions, and related issues. Kraft
General Foods, for example, has a risk management policy for understanding how
prices of commodities, such as coffee, sugar, wheat, and cocoa, will affect their
relationships throughout the supply chain.40

Table 3.7 An Integrated Framework for Internal Control

Components of Description
Internal Control
Control environment • The organization demonstrates a commitment to integrity and ethical
values.
• The board of directors demonstrates independence from management
and exercises oversight of the development and performance of
internal control.
• Management establishes, with board oversight, structures, reporting
lines, and appropriate authorities and responsibilities in the pursuit of
objectives.
• The organization demonstrates a commitment to attract, develop, and
retain competent individuals in alignment with objectives.
• The organization holds individuals accountable for their internal control
responsibilities in the pursuit of objectives.
Risk assessment • The organization specifies objectives with sufficient clarity to enable
the identification and assessment of risks relating to objectives.
• The organization identifies risks to the achievement of its objectives
across the entity and analyzes risks as a basis for determining how
they should be managed.
• The organization considers the potential for fraud in assessing risks to
the achievement of objectives.
• The organization identifies and assesses changes that could
significantly impact the system of internal control.
Control activities • The organization selects and develops control activities that contribute
to the mitigation of risks to the achievement of objectives to
acceptable levels.
• The organization selects and develops general control activities over
technology to support the achievement of objectives.
• The organization deploys control activities through policies that
establish what is expected and procedures that put policies into action.
Information and • The organization obtains or generates and uses relevant, high-quality
communication information to support the functioning of internal control.
• The organization internally communicates information, including
objectives and responsibility for internal control, necessary to support
the functioning of internal control.
• The organization communicates with external parties regarding
matters affecting the functioning of internal control.
Monitoring activities • The organization selects, develops, and performs ongoing and/or
separate evaluations to ascertain whether the components of internal
control are present and functioning.
• The organization evaluates and communicates internal control
deficiencies in a timely manner to those parties responsible for taking
corrective action, including senior management and the board of
directors, as appropriate.
Source: “Internal Control—Integrated Framework Executive Summary,” Committee of Sponsoring Organizations of the
Treadway Commission, May 2013, https://www.coso.org/Documents/990025P-Executive-Summary-final-may20.pdf
(accessed August 14, 2019).
Most corporate leaders’ greatest fear is discovering serious misconduct or

illegal activity somewhere in their organization. The fear is that a public discovery
can immediately be used by critics in the mass media, competitors, and skeptical
stakeholders to undermine a firm’s reputation. Corporate leaders worry that
something outside their control will be uncovered that will jeopardize their careers
and their organizations. Fear is a paralyzing emotion. Of course, maybe even
organizational leaders such as the Galleon Group’s Raj Rajaratnam experienced
fear as they participated in misconduct. The former chairman of Satyam Computer

Services, Ramalinga Raju, said that it was a terrifying experience to watch a small
act of fudging some numbers snowball out of control. He compared knowingly
engaging in misconduct for years to “riding a tiger, not knowing how to get off
without being eaten.”41 These leaders were the captains of their respective ships,
and they made a conscious decision to steer their firms into treacherous waters
with a high probability of striking an iceberg.42
Corporate leaders do fear the possibility of damage to reputation, financial
loss, or a regulatory event that could potentially end their careers, and even
threaten their personal lives through fines or prison sentences. Indeed, the whole
concept of risk management involves recognizing the possibility of a misfortune
that could jeopardize or even destroy the corporation.43 Organizations face
significant risks and threats from financial misconduct. There is a need to identify
potential risks that relate to misconduct that could devastate the organization.
If risks and misconduct are discovered and disclosed, they are more likely to be
resolved before they become front-page news.
Risk is always present within organizations, so executives must develop
processes for remedying or managing its effects. A board of directors will expect
the top management team to have risk management skills and plans in place.
There are at least three ways to consider how risk could pose either a negative
or positive concern for organizations.44 First, risk can be categorized as a hazard.
In this view, risk management is focused on minimizing negative situations, such
as fraud, injury, or financial loss. Second, risk may be considered an uncertainty
that needs to be hedged through quantitative plans and models. This type of risk
is best associated with the term risk management, which is used in financial and
business literature. Third, risk also creates the opportunity for innovation and
entrepreneurship. Just as management can be criticized for taking too much risk,
it can also be subject to concerns about not taking enough risk.
All three types of risk are implicitly covered by our definition of corporate
governance because there are risks for both control (i.e., preventing fraud and
ensuring accuracy of financial statements) and accountability (i.e., innovation
to develop new products and markets). For example, the internet and electronic
commerce capabilities have introduced new risks of all types for organizations.
Privacy, as discussed in Chapter 10, is a major concern for many stakeholders and
has created the need for policies and certification procedures. A board of directors
may ensure that its company has established privacy policies that are not only
effective, but also can be properly monitored and improved as new technology
risks and opportunities emerge in the business environment.45
Executive Compensation
Executive compensation has been a topic rife with controversy. In the midst of
government bailouts of corporations and financial institutions and loss of jobs and
life savings, top executives continued to receive incredibly high bonuses and golden
parachutes. This brought attention to the manner in which executives are paid,
which had largely been left uninvestigated up to this point. The Dodd-Frank Act
included a number of measures to rein in overcompensation, including a “say-on-
pay” mandate, requiring shareholders to vote on their company’s compensation
policies; and “compensation committee independence,” requiring board members
in charge of determining compensation to be independent from the company’s
management. Other mandates that have been proposed by the SEC include
requiring companies to disclose the ratio between CEO and employee pay, the
disclosure of pay as it relates to performance, the process of recovering compensa-
tion that was wrongly awarded, and disclosure of any hedging activities conducted
by directors or employees. While these measures have been controversial, the
SEC has passed the mandate for businesses to disclose CEO-to-employee pay
ratios.46

Executive compensation is such an important matter that many boards spend

more time deciding how much to compensate top executives than they might do
with ensuring the integrity of the company’s financial reporting systems. Because
of the large government bailouts during the last recession, many people became
enraged because they felt that the government was sponsoring corporate excess
with taxpayer money. This was a major contributor to the Occupy Wall Street
protests of 2011. Even many boards of directors—which are responsible for setting
executive pay—believe that the United States has a problem in that executive pay
is not in line with performance or demonstration of stewardship to the company.47
According to the AFL-CIO, average executive pay is $14.5 million, which is
287 times the pay of the average U.S. worker.48
Executive pay can be controversial, especially for companies struggling to
make a profit. For example, Uber paid its top five executives a total of $143 mil-
lion in cash and stock options. For Uber, executive pay was under much scrutiny,
especially as Uber’s drivers have complained about low pay. The average Uber
driver earns $783 a month.49
An increasing number of corporate boards are imposing performance targets
on the stock and stock options they include in their CEOs’ pay packages. A stock stock option
option gives a shareholder the right to buy or sell a stock at a set price for a certain a financial tool that gives a
shareholder the right to buy or sell
amount of time. Stock options are not considered obligations to the option buyer
a stock at a set price for a certain
and often have an expiration date. The SEC proposed that companies disclose how amount of time
they compensate lower-ranking employees, as well as top executives. This was part
of a review of executive pay policies that addresses the belief that many financial
corporations have historically taken on too much risk. The SEC believes that
compensation may be linked to excessive risk-taking.50 Another issue is whether
performance-linked compensation encourages executives to focus on short-term
performance at the expense of long-term growth.51 Shareholders today, however,
may be growing more concerned about transparency than short-term performance
and executive compensation.
Some people argue that executives deserve the rewards that follow from
strong company performance because they assume so much risk on behalf of the
company. In addition, many executives’ personal and professional lives meld to the
point that they are “on call” 24 hours a day. Because not everyone has the skill,
experience, and desire to become an executive, with the accompanying pressure
and responsibility, market forces dictate a high level of compensation. When the
pool of qualified individuals is limited, many corporate board members feel that
offering large compensation packages is the only way to attract and retain top
executives and thereby ensure that their firms are not left without strong leader-
ship. In an era when top executives are increasingly willing to “jump ship” to other
firms that offer higher pay, potentially lucrative stock options, bonuses, and other
benefits, such thinking is not without merit.52
Executive compensation is a difficult but important issue for boards of
directors and other stakeholders to consider because it receives much attention
in the media, sparks shareholder concern, and is hotly debated in discussions
of corporate governance. One area for board members to consider is the extent
to which executive compensation is linked to company performance. Corporate
plans that base compensation on the achievement of several performance goals,
including profits and revenues, are intended to align the interests of owners with
management. For example, GE CEO Jeff Immelt missed his five-year performance
target and lost out on a stock award that was valued at more than $3 million.53
Table 3.8 shows CEO compensation at some of the world’s largest companies.
While still hundreds of times higher than what the average worker makes, CEO
compensation is decreasing overall, indicating a possible change in the way that
executives are compensated. But critics still believe that there is a mismatch
between the compensation of Wall Street CEOs and company performance. In
2015, Wall Street CEOs saw their pay rise about 10 percent, even though shares

Table 3.8 Examples of CEO Compensation

Company Executive Pay
Discovery Inc. David M. Zaslav $129,499,005
Walt Disney Company Robert A. Iger $65,645,214
Jefferies Group Richard B. Handler $44,674,213
Hologic Stephen P. MacMillan $42,040,142
Align Technology Joseph M. Hogan $41,758,338
PayPal Daniel H. Schulman $37,764,588
Netflix Reed Hastings $36,080,417
Comcast Brian L. Roberts $35,026,207
Activision Blizzard Robert A. Kotick $30,841,004
JPMorgan Chase James Dimon $30,019,840
Source: “Equilar/Associated Press CEO Pay Study 2019,” Equilar, May 24, 2019, https://www.equilar.com/reports/
65-equilar-associated-press-ceo-pay-study-2019.html (accessed August 14, 2019).
of major banks fell. In addition, an analysis of over 100 S&P 500 CEO salaries
showed an increase in pay from $11.7 million to $12.4 million in 2018.54
Corporate Governance Around the World

Increased globalization, enhanced electronic communications, economic agree-
ments and zones, and the reduction of trade barriers have created opportunities
for firms around the world to conduct business with both international consumers
and industrial partners. These factors propel the need for greater homogenization
in corporate governance principles. Standard & Poor’s (S&P) has a service called
Corporate Governance Scores, which analyzes four macroforces that affect the
general governance climate of a country, including legal infrastructure, regulation,
information infrastructure, and market infrastructure. On the basis of these fac-
tors, a country can be categorized as having strong, moderate, or weak support
for effective governance practices at the company level. Institutional investors are
very interested in this measure, as it helps determine possible risk.55 As financial,
human, and intellectual capital crosses borders, a number of business, social, and
cultural concerns arise. Institutional investors in companies based in emerging
markets claim to be willing to pay more for shares in companies that are well
governed. Global shareholders also would like companies in their countries to
disclose more financial data, to adopt CEO pay plans that reward only strong
performance, and to use independent boards, with no ties to management.
In response to this business climate, the Organisation for Economic
Co-operation and Development (OECD), a forum for governments to discuss,
develop, and enhance economic and social policy, issued a set of principles
intended to serve as a global model for corporate governance.56 The purpose of
the OECD Principles of Corporate Governance (see Table 3.9) is to formulate
minimum standards of fairness, transparency, accountability, disclosure, and
responsibility for business practice. The principles focus on the board of directors,
which the OECD says should recognize the impact of governance on the firm’s
competitiveness. In addition, the OECD charges boards, executives, and corpora-
tions with maximizing shareholder value, while responding to the demands and
expectations of their key stakeholders. After years of discussion and debate among
institutional investors, business executives, government representatives, trade
unions, and nongovernmental organizations, 30 OECD member-governments
signaled their agreement with the principles by signing a declaration to integrate
them within their countries’ economic systems and institutions.

Table 3.9 OECD Principles of Corporate Governance

Principle Explanation
1. Ensuring the basis for an The corporate governance framework should promote
effective corporate governance transparent and efficient markets, be consistent with the rule
framework of law and clearly articulate the division of responsibilities
among different supervisory, regulatory and enforcement
authorities.
2. The rights of shareholders The corporate governance framework should protect facilitate
and key ownership functions the exercise of shareholders’ rights.
3. The equitable treatment of The corporate governance framework should ensure the
shareholders equitable treatment of all shareholders, including minority
and foreign shareholders. All shareholders should have the
opportunity to obtain effective redress for violation of their
rights.
4. The role of stakeholders in The corporate governance framework should recognize the
corporate governance rights of stakeholders as established by law and encourage
active cooperation between corporations and stakeholders in
creating wealth, jobs, and the sustainability of financially sound
enterprises.
5. Disclosure and transparency The corporate governance framework should ensure that
timely and accurate disclosure is made on all material matters
regarding the corporation, including the financial situation,
performance, ownership, and governance of the company.
6. The responsibilities of the The corporate governance framework should ensure the
board strategic guidance of the company, the effective monitoring of
management by the board, and the board’s accountability to
the company and the shareholders.
Source: ComplianceOnline.com, “OECD Principles of Corporate Governance,” http://www.complianceonline.com/
dictionary/OECD_Principles_of_Corporate_Governance.html (accessed August 14, 2019).
The OECD Principles of Corporate Governance cover many specific best

practices, including (1) ensuring the basis for an effective corporate governance
framework; (2) guaranteeing the rights of shareholders to vote and influence
corporate strategy; (3) having greater numbers of skilled, independent members on
boards of directors; (4) implementing fewer techniques to protect failing manage-
ment and strategy; (5) having wider use of international accounting standards; and
(6) improving disclosure of executive pay and remuneration. Although member-
governments of the OECD are expected to uphold the governance principles, there
is some room for cultural adaptation.
Best practices may vary slightly from country to country because of unique
factors such as market structure, government control, role of banks and lending
institutions, labor unions, and other economic, legal, and historical factors.
Both industry groups and government regulators moved quickly in the United
Kingdom after the Enron crisis. Because some British bankers were indicted in the
scandal, corporate governance concerns increased. Several British reforms resulted,
including annual shareholders’ votes on board compensation policies and greater
supervision of investment analysts and the accounting profession.
Corporate governance, or lack of it, was one of the reasons for the financial
crisis that occurred in Southeast Asia in the late 1990s. For example, the
government structure of some Asian countries created greater opportunities for
corruption and nepotism. Banks were encouraged to extend credit to companies
favored by the government. In many cases, these companies were in the export
business, which created an imbalance in financing for other types of businesses.
The concentration of business power within a few families and tycoons reduced
overall competitiveness and transparency. Many of these businesses were more
focused on size and expanded operations than profitability. Foreign investors

recognized the weakening economies and pulled their money out of investments.
India has experienced a decrease in foreign investment for this reason. Despite the
government’s maneuvers to improve the economy, by easing restrictions on joint
ventures in certain sectors, foreign firms decided against investing, as this was not
enough incentive in light of the nation’s weakening currency.57
To encourage greater transparency and corporate governance practices that
foreign investors would approve of, businesses in India have made dramatic
changes since the 1990s. For example, family-owned businesses began shifting
executive power to outside parties, the internal actions of the businesses became
known to people outside the family system, and boards of directors were subject
to higher scrutiny than before. These changes, while difficult for executives, have
proved successful for businesses such as the Mahindra group and the Aditya Birla
group.58
Future of Corporate Governance

As the issues discussed in the previous sections demonstrate, corporate governance
is primarily focused on strategic-level concerns for accountability and control.
Although many discussions of corporate governance still revolve around respon-
sibility in investor-owned companies, good governance is fundamental to effective
performance in all types of organizations. As you have gleaned from history and
government classes, a system of checks and balances is important for ensuring a
focus on multiple perspectives and constituencies; proper distribution of resources,
power, and decision authority; and the responsibility for making changes and
setting directions.
To pursue social responsibility successfully, organizations must consider issues
of control and accountability. As we learned earlier, the concept of corporate
governance is in transition from the shareholder model to one that considers
broader stakeholder concerns and inputs to financial performance. A number of
market and environmental forces, such as the OECD and shareholder activism,
have created pressures in this direction. This evolution is consistent with our view
of social responsibility. Although some critics deride this expanded focus, a num-
ber of external and internal forces are driving businesses toward the stakeholder
orientation and the formalization of governance mechanisms. One concern centers
on the cost of governance. Companies like Nike have had problems in the past
and have implemented strong ethics and compliance systems. However, many of
the largest firms on Wall Street, which were overleveraged and did not have strong
ethics and compliance programs in place, either failed or had to be bailed out to
prevent failure.59
Most businesspeople and academicians agree that the benefits of a strong
approach to corporate governance outweigh the costs. However, the positive
return on governance goes beyond organizational performance to benefit the
industrial competitiveness of entire nations, something that was discussed in
Chapter 1. For example, corrupt organizations often fail to develop competitive-
ness on a global scale and can leave behind financial ruin, thus negating the overall
economic growth of the entire region or nation. At the same time, corrupt govern-
ments usually have difficulty sustaining and supporting the types of organizations
that can succeed in global markets. Thus, lack of good governance can lead to
insular and selfish motives because no effective system of checks and balances is
in place. In today’s interactive and interdependent business environment, most
organizations are learning the benefits of a more cooperative approach to com-
merce. It is possible for a company to retain its competitive nature while seeking
a “win-win” solution for all parties to the exchange.60 Furthermore, as nations
with large economies embrace responsible governance principles, it becomes even
more difficult for nations and organizations that do not abide by such principles

to compete in these lucrative and rich markets. There is a contagion effect toward
corporate governance among members of the global economy, much as peer
pressure influences the actions and decisions of individuals.
Because governance is concerned with the decisions made by boards of
directors and executives, it has the potential for far-reaching positive—and
negative—effects. A recent study by the OECD found that stronger financial
performance is the result of several governance factors and practices, including
(1) large institutional shareholders that are active monitors of company decisions
and boards; (2) owner-controlled firms; (3) fewer mergers, especially between
firms with disparate corporate values and business lines; and (4) decisions by
shareholders, not board of directors, on executive remuneration.61 The authors of
the study note that these practices may not hold true for strong performance in all
countries and economic systems. However, they also point out that a consensus
view is emerging, with fewer differences among OECD countries than among
all other nations. Similarities in organizational-level accountability and control
should lead to smoother operations between various companies and countries,
thereby bolstering competitiveness on many levels.
The future of corporate governance is directly linked to the future of social
responsibility. Because governance is the control and accountability process for
achieving social responsibility, it is important to consider who should be involved
in the future. First and most obviously, business leaders and managers will need
to embrace governance as an essential part of effective performance. Some of the
elements of corporate governance, particularly executive pay, board composition,
and shareholder rights, are likely to stir debate for many years. However, business
leaders must recognize the forces that have brought governance to the forefront
as a precondition of management responsibility. Thus, they may need to accept
the “creative tension” that exists among managers, owners, and other primary
stakeholders as the preferable route to mutual success.62
Second, governments have a key role to play in corporate governance. National
competitiveness depends on the strength of various institutions, with primacy
on the effective performance of business and capital markets. Strong corporate
governance is essential to this performance, and thus governments will need to
be actively engaged in affording both protection and accountability for corporate
power and decisions. Just like the corporate crises in the United States, the Asian
economic crisis discussed earlier prompted companies and governments around
the world to consider tighter governance procedures. Finally, other stakeholders
may become more willing to use governance mechanisms to influence corporate
strategy or decision-making. Investors—whether shareholders, employees, or busi-
ness partners—have a stake in decisions and should be willing to take steps to align
various interests for long-term benefits. There are many investors and stakeholders
willing to exert great influence on underperforming companies.
Until recently, governance was one area in the business literature that had not
received the same level of attention as other issues, such as environmental impact,
diversity, and sexual harassment. Over the next few years, however, corporate
governance will emerge as the operational centerpiece to the social responsibility
effort. The future will require that business leaders have a different set of skills
and attitudes, including the ability to balance multiple interests, handle ambiguity,
manage complex systems and networks, create trust among stakeholders, and
improve processes so that leadership is pervasive throughout the organization.63
In the past, the primary emphasis of governance systems and theory was on
conflicts of interest between management and investors.64 Governance today
holds people at the highest organizational levels accountable and responsible to
a broad and diverse set of stakeholders. Although top managers and boards of
directors have always assumed responsibility, their actions are now subject to
greater accountability and transparency. A writer for The Wall Street Journal put
the shift succinctly: “Boards of directors have been put on notice.” A key issue

going forward will be a board’s ability to align corporate decisions with various
stakeholder interests.65 Robert Monks, the activist money manager and leader in
corporate governance issues, wrote that effective corporate governance requires
understanding that the “indispensable link between the corporate constituents is
the creation of a credible structure (with incentives and disincentives) that enables
people with overlapping but not entirely congruent interests to have a sufficient
level of confidence in each other and the viability of the enterprise as a whole.”66
We will take a closer look at some of these constituents and their concerns in the
next few chapters.
Summary
To respond to stakeholder pressures for companies to be more accountable for
organizational decisions and policies, organizations must implement policies
that provide strategic guidance on appropriate courses of action. Such policies
are often known as corporate governance, the formal system of accountability
and control for organizational decisions and resources. Accountability relates
to how well the content of workplace decisions is aligned with the firm’s stated
strategic direction, whereas control involves the process of auditing and improving
organizational decisions and actions. Both directors and officers of corporations
are fiduciaries for the shareholders. Fiduciaries are persons placed in positions of
trust who are loyal and take due care in acting on behalf of the best interests of
the organization. There is a duty of care, also called a duty of diligence, to make
informed and prudent decisions. As directors, they too have a duty to avoid ethical
misconduct and to provide leadership in decisions to prevent ethical misconduct in
the organization. Directors are not held responsible for negative outcomes if they
are informed and diligent in their decision-making. The duty of loyalty means that
all decisions should be in the interests of the corporation and its stakeholders.
Conflicts of interest exist when a director uses the position to obtain personal gain,
usually at the expense of the organization.
There are two major conceptualizations of corporate governance. The share
holder model of corporate governance focuses on developing and improving the
formal system of performance accountability between the top management and
the firm’s shareholders. The stakeholder model of corporate governance views
the purpose of business in a broader fashion, in which the organization not only
has a responsibility for economic success and viability, but also must answer to
other stakeholders. The shareholder model focuses on a primary stakeholder—the
investor—whereas the stakeholder model incorporates a broader philosophy that
focuses on internal and external constituents.
Governance is the organizing dimension that keeps a firm focused on continu-
ous improvement, accountability, and engagement with stakeholders. Although
financial return, or economic viability, is an important measure of success for all
firms, the legal dimension of social responsibility is also a compulsory consider-
ation. The ethical and philanthropic dimensions, however, traditionally have not
been mandated through regulation or contracts. This represents a critical divide
in our social responsibility model and associated governance goals and systems
because there are some critics who challenge the use of organizational resources
for concerns beyond financial performance and legalities.
In the late 1800s and early 1900s, corporate governance was not a major
issue because company owners made strategic decisions about their businesses.
By the 1930s, ownership was dispersed across many individuals, raising questions
about control and accountability. In response to shareholder activism, the SEC

required corporations to allow shareholder resolutions to be brought to a vote of

all shareholders. Since the mid-1900s, the approach to corporate governance has
involved a legal discussion of principals (owners) and agents (managers) in the
business relationship.
The lack of effective control and accountability mechanisms in years past
has prompted a current trend toward boards of directors playing a greater role
in strategy formulation than they did in the early 1990s. The board of directors
assumes legal responsibility and a fiduciary duty for organizational resources and
decisions. Boards today are concerned primarily with monitoring the decisions
made by managers on behalf of the company. The trend today is toward boards
being composed of external directors who have little vested interest in the firm.
Shareholder activism is helping to propel this trend, as they seek better representa-
tion from boards that are less likely to have conflicts of interest.
Another significant governance issue is internal control and risk management.
Controls allow comparisons between actual performance and the planned perfor-
mance and goals of the organization. They are used to safeguard corporate assets
and resources, protect the reliability of organizational information, and ensure
compliance with regulations, laws, and contracts. Controls foster understanding
when discrepancies exist between corporate expectations and stakeholder interests
and issues. A strong internal control system should alert decision-makers to
possible problems or risks that may threaten business operations. Risk can be
categorized (1) as a hazard, in which case risk management focuses on minimizing
negative situations, such as fraud, injury, or financial loss; (2) as an uncertainty
that needs to be hedged through quantitative plans and models; or (3) as an
opportunity for innovation and entrepreneurship.
How executives are compensated for their leadership, service, and perfor-
mance is another governance issue. Many people believe the ratio between the
highest-paid executives and median employee wages in the company should be
reasonable. Others argue that because executives assume so much risk on behalf
of the organization, they deserve the rewards that follow from strong company
performance. One area for board members to consider is the extent to which
executive compensation is linked to company performance.
The Organisation for Economic Co-operation and Development (OECD) has
issued a set of principles from which to formulate minimum standards of fairness,
transparency, accountability, disclosure, and responsibility for business practices.
These principles help guide companies around the world and are part of the
convergence that is occurring with respect to corporate governance.
Most businesspeople and academicians agree that the benefits of a strong
approach to corporate governance outweigh its costs. Because governance is
concerned with the decisions taken by boards of directors and executives, it has the
potential for far-reaching positive (and negative) effects. The future of corporate
governance is directly linked to the future of social responsibility. Business leaders
and managers will need to embrace governance as an essential part of effective per-
formance. Governments also have a role to play in corporate governance. National
competitiveness depends on the strength of various institutions, with primacy on
the effective performance of business and capital markets. Other stakeholders may
become more willing to use governance mechanisms to affect corporate strategy
or decision-making.

Does Aligning Pay to Performance Make Cents?

Issue: Should businesses align pay with performance? well but earn less if the company does not meet expecta-
tions. Shareholders are now allowed to vote on executive
Corporate governance is the formal system of oversight, pay. Although these votes are nonbinding, negative votes
accountability, and control for organizational decisions. provide clear indicators of shareholder discontent.
During the financial recession of 2007–2009, many Yet not everyone is in favor of aligning executive
respected companies showed a failure in corporate overcompensation closely to company performance. Critics
sight and decision-making, even as they required massive claim that while performance-based compensation works
government bailouts to stay afloat. When AIG announced well for jobs that perform routine day-to-day activities, the
it was awarding $165 million to executives after accepting challenges of running a company and a quickly changing
$170 billion in taxpayer money, the resulting outcry business environment make this an unfeasible solution for
prompted demands for executive pay to be tied more to executives. They argue that it can hinder executives from
performance. coming up with creative solutions to company problems
More than 10 years later, the debate rages on. With because a misstep could easily lead to negative conse-
the two CEOs of Oracle receiving $108.3 million in one quences. Another argument is that performance-based
year, the discrepancy between the pay of executives and pay tends to look more at earnings in the short term than
the average employee can be great indeed. At one large the long term. With no clear consensus in sight, the debate
company, the CEO made nearly 5,000 times the median is likely to continue into the foreseeable future.
pay of employees.
On the other hand, more companies are making efforts There Are Two Sides to Every Issue
to align executive compensation more closely to com- 1. Businesses should align pay with performance to best
pany performance. Mondelez International, for instance, compensate employees.
announced that it was increasing the amount of executive 2. Aligning pay with performance isn’t the best way to
compensation tied to business performance. Under this compensate employees.
system, executives earn large salaries if the company does
Source: “Highest-Paid CEOs at America’s Largest Companies,” USA Today, May 3, 2019, https://www.usatoday.com/picture-gallery/money/2019/04/24/
highest-paid-ceos-at-americas-largest-companies/39390367/ (accessed May 3, 2019); Emily Stewart, “How Does a Company’s CEO Pay Compare to Its
Workers? Now You Can Find Out,” Vox, April 8, 2018, https://www.vox.com/policy-and-politics/2018/4/8/17212796/ceo-pay-ratio-corporate-governance-
wealth-inequality (accessed May 3, 2019); Alexia Elejalde-Ruiz, “After CEO Got $42.4 Million in 2017, Oreo-maker Vows to Link Executive Pay to Business
Performance,” Chicago Tribune, April 30, 2019, https://www.bizjournals.com/philadelphia/news/2019/05/03/proxy-advisors-and-executive-compensation-
watchers.html (accessed May 3, 2019); Dan Cable and Freek Vermeulen, “Stop Paying Executives for Performance,” Harvard Business Review, February
23, 2016, https://hbr.org/2016/02/stop-paying-executives-for-performance (accessed May 3, 2019); Daniel R. Kinel, “The Impact of the Dodd-Frank Act
on Executive Compensation and Corporate Governance,” The Marcum Advisor, October 2010, http://www.marcumllp.com/insights-news/the-impact-of-
the-dodd-frank-act-on-executive-compensation-and-corporate-governance (accessed May 3, 2019); Joshua Zumbrun, “AIG’s Bonus Distraction,” Forbes,
March 16, 2009, https://www.forbes.com/2009/03/16/bailout-bonus-aig-business-washington-aig.html#39eb1e9e4e92 (accessed May 3, 2019).
Key Terms
board of directors (p. 66) proxy (p. 79) shareholder resolutions (p. 79)
conflicts of interest (p. 68) proxy access (p. 80) stakeholder model of
corporate governance (p. 67) risk management (p. 80) corporate governance (p. 73)
duty of care (p. 68) shareholder (p. 67) stock option (p. 85)
duty of loyalty (p. 68) shareholder lawsuits (p. 78) U.S. Securities and Exchange
fiduciaries (p. 68) shareholder model of Commission (SEC) (p. 70)
insider trading (p. 69) corporate governance (p. 73)

1. What is corporate governance? Why is it an 5. What role do shareholders and other investors play
important concern for companies pursuing the in corporate governance? How can investors effect
social responsibility approach? How does it improve change?
or change the nature of executive and managerial 6. Why are internal control and risk management
decision-making? important in corporate governance? Describe
2. Compare the shareholder and stakeholder models three approaches that organizations may take to
of corporate governance. Which one seems to manage risk.
predominate today? What implications does this have 7. Why is the issue of executive compensation contro-
for businesses in today’s complex environment? versial? Are today’s corporate executives worth the
3. What role does executive compensation play in compensation packages they receive?
risk-taking and accountability? Why do some people 8. In what ways are corporate governance practices
partially blame compensation for the failures of becoming standardized around the world? What
the subprime mortgage and financial industries in differences exist?
2008–2009? 9. As corporate governance becomes a significant
4. What is the role of the board of directors in aspect of social responsibility, what new skills and
corporate governance? What responsibilities does the characteristics will managers and executives need
board have? to possess? Consider how pressures for governance
require managers and executives to relate and
interact with stakeholders in new ways.
Visit the website of the Organisation for Economic 2. How would you describe OECD’s current areas of
Co-operation and Development (http://www.oecd.org). concern and focus?
Examine the origins of the organization and its unique role 3. What role do you think OECD will play in the
in the global economy. After visiting the site, answer the future with respect to corporate governance and
following questions: related issues?
1. What are the primary reasons that OECD exists?
?
Core-Tex Creates a Vortex Around Aggressive
Accounting: What Would You Do?
The statewide news carried a story about Core-Tex that had cautioned the executive group earlier that week about
evening. There were rumors swirling that one of the largest communicating too much to the media and other constitu-
manufacturers in the state was facing serious questions ents. The firm’s vice president for marketing countered the
about its social responsibility. A former accountant for attorney by insisting that Core-Tex needed to stay ahead of
Core-Tex, whose identity was not revealed, made allega- the rumors and assumptions that were being made about the
tions about aggressive accounting methods and practices company. He said that suppliers and business partners were
that overstated company earnings. He said he left Core-Tex starting to question Core-Tex’s financial viability. The vice
after his supervisor and colleagues did not take his concerns president of information technology and the vice president of
seriously. The former accountant hinted that the company’s operations were undecided on the next step, while the vice
relationship with its external auditor was quite close, since president of manufacturing had not attended the meeting.
Core-Tex’s new CFO had once been on the external audit- Buscio wondered what tomorrow could bring.
ing team. Core-Tex had recently laid off 270 employees—a To her surprise, the newspapers had gone easy on
move that was not unexpected given the turbulent financial Core-Tex the next day, owing to a shift in the media
times. However, the layoffs hit some parts of the site’s attention on a major oil spill, the retirement of a Fortune
community pretty hard. Finally, inspectors from the state 500 CEO, and a major league baseball championship
environmental protection agency had just issued a series of game the night before. The company’s stock price, which
citations to Core-Tex for improper disposal methods and averaged around $11.15, was down $0.35 by midmorning.
high emissions at one of its larger manufacturing plants. A The vice-president of marketing suggested that employees
television station had run an exposé on the environmental needed to hear from the CEO and be reassured about Core-
citations a week ago. Tex’s strong future. Her first call after lunch came from a
CEO Kelly Buscio clicked off the television set and member of the board asking Buscio what the board could
thought about the company’s next steps. Core-Tex’s attorney do to help the situation. What would you do?

CHAPTER
4 Business,
Government,
and Regulation

Regulating Trade for Global Business
Responsible, transparent, and ethical leadership Agreement (USMCA). This agreement, which is
is needed in order for companies to develop and intended to replace NAFTA, changes the require-
maintain a long-term commitment to social responsi- ments for certain industries. For example, car compa-
bility for the benefit of multiple stakeholders. This is nies must use parts primarily made in North America
especially true of multinational corporations (MNCs) or pay tariffs for noncompliance. Under NAFTA, the
because of the power and influence that these requirement was that 62.5 percent of parts had to
businesses and their executives represent. MNCs be made in North America, while under USMCA, the
operate in multiple environments and contexts in number has increased to 75 percent. Higher worker
which laws, rules, expectations, and social mores are wages, increased intellectual property protections,
divergent. In addition, the enforcement and monitor- and the growth of certain agricultural products such
ing mechanisms to oversee these expectations as dairy are addressed in the latter agreement.
range from barely existent entities to well-resourced Economists debate how the USMCA will affect
government agencies. the financial situation of Mexico, Canada, and
The failure to have a global legal and regulatory the United States. The U.S. International Trade
scheme has resulted in environmental disasters, Commission believes that the impact will be positive
child labor, financial fraud, antitrust violations, tainted but only minimal, predicting that the gross domestic
food products, and other problems. For example, product (GDP) in the United States would increase
Google was charged more than €1 billion (nearly by 0.35 percent and jobs would increase by 0.12
$1.2 billion) in fines for antitrust violations in Europe. percent. Technology, data requirements, and
The European Union (EU) fined the company for concerns that were not as prevalent in 1994 are
preventing competitors from advertising on certain addressed in USMCA, which economists see as a
websites. Google was able to do this mainly because benefit. However, the restrictions on automotive
of contractual clauses that restricted competition, as parts are expected to raise the prices of vehicles
well as its search engine control. The company’s and lower the number of purchases. Companies
third violation in the EU has brought up other con- may view the tariffs for noncompliance to be more
cerns about the regulation of large businesses. bearable than the cost of compliance. Additionally,
Shutterstock/Angel Soler Collonet
Multilateral trade agreements are made to help tariffs imposed on Canada and Mexico for aluminum
regulate business trade among several countries. and steel products are a source of debate among
The North American Free Trade Agreement (NAFTA) the countries.
was created in 1994 to establish regulations and Trade wars result from imposing tariffs to
assist with business among the United States, accomplish a trade objective, such as creating a
Canada, and Mexico, mainly by removing trade t ariffs fair balance of trade. Most recently, a trade war has
among the countries. In 2018, a new agreement developed between the United States and China
was signed by the leaders of the three countries over protection of intellectual property, laws that
and renamed the United States-Mexico-Canada protected Chinese firms, and a trade imbalance.1
Chapter Objectives
●● Understand the rationale for government regulation of business
●● Analyze the role of regulatory agencies in the enforcement of public policy
●● Examine the costs and benefits of regulation
●● Analyze global regulation
●● Assess the nonregulatory influence of governments on business
●● Provide an overview of government deregulation
95
T he government has the power, through laws and regulations, to

structure how businesses and individuals achieve their goals. The
purpose of regulating firms is to create a fair competitive environment
for businesses, consumers, and society. All stakeholders need to demonstrate a
commitment to social responsibility through compliance with relevant laws and
proactive consideration of social needs. The law is one of the most important
business subjects, in terms of its effect on organizational practices and activities.
Thus, compliance with the law is a fundamental expectation of social responsibil-
ity. Because the law is based on principles, norms, and values found within society,
the law is the foundation of responsible decision-making.
This chapter explores the complex relationship between business and govern-
ment. First, we discuss some of the laws that structure the environment for the
regulation regulation of business. Regulation refers to the act of creating and enforcing rules
the act of creating and enforcing for a specific purpose. For businesses, the government typically provides this
rules for a specific purpose
oversight to ensure ethical and legal practices among corporations. The costs and
benefits of regulation are reviewed, as well as the unique issues that occur in global
regulation. We discuss the nonregulatory influence of governments on business
and conclude with a consideration of deregulation.2
Government’s Regulatory Influence

on Business
The government has a profound influence on business. Most Western countries
have a history of elected representatives working through democratic institutions
to provide a structure for the regulation of business conduct. For example, one of
the differences that have long characterized the two major parties in U.S. politics
involves the government’s role with respect to business. In general, the Republican
Party tends to favor smaller, central government, with less regulation of business,
while the Democratic Party is more open to government oversight, federal aid
programs, and sometimes higher taxes. From the start, President Barack Obama
worried some businesspeople, as he favored more oversight of many areas of
the economy. For example, he promised to be tough on antitrust violations and
followed through by reversing a policy from the George W. Bush administration
that made it more difficult for the government to pursue such violations.3
Over the past 10 years, there have been major conflicts between the Democrats
and Republicans over regulation of business. While President Obama wanted more
regulation and social programs, including healthcare coverage for all Americans,
his successor, President Donald Trump, reversed rules that regulated businesses
and was able to reduce corporate taxes. President Obama brought U.S. policy
regarding antitrust cases more in line with Europe’s model. This trend continued
with the Trump administration. While it was unsuccessful in defeating the merger
between AT&T and Time Warner in 2019, cracking down on antitrust violations
and breaking up monopolies was a stated goal of the Trump administration.4
Third-party and independent candidates typically focus on specific business issues
or proclaim their distance from the two major political parties. However, the
power and freedom of big business have resulted in conflicts among private busi-
nesses, governments, private interest groups, and even individuals as businesses try
to influence policymakers.
In the United States, the roles that society delegates to government are to
provide laws that are logically deduced from the U.S. Constitution and the Bill
of Rights and to enforce these laws through the judicial system. Individuals and
businesses, therefore, live under a rule of law designed to protect society and
support an acceptable quality of life. Ideally, by limiting the influence and force

Chapter 4 Business, Government, and Regulation 97
exerted by some parties, the overall welfare and freedom of all participants in the
social system will be protected.
The provision of a court system to settle disputes and punish criminals, both
organizational and individual, provides justice and order in society. Both Google
(now a subsidiary of Alphabet, Inc.) and Microsoft have come under numerous
ongoing investigations for alleged antitrust activity in Europe, where the companies
have been accused of engaging in behavior that prevents smaller companies from
competing. In just over a year, the EU’s antitrust regulator filed four charges
against Alphabet alleging that, among other actions, Google favored its search
functions over rival sites, it restricted how a website could show advertisements
from other companies, and it forced smartphone makers into preinstalling its
search engine as the default on their mobile devices.5 The EU is famous for being
tough on companies suspected of antitrust violations, igniting the ire of many
multinational corporations that feel as if they are being punished for being success-
ful. Being aware of antitrust laws is important for all large corporations around
the world because judicial systems can punish businesses that fail to comply with
laws and regulatory requirements.
The legal system is not always accepted in some countries as insurance that
business will be conducted in a legitimate way. For example, after generations of
being known for its top-secret bank accounts, Swiss banks were ordered by the
U.S. Internal Revenue Service (IRS) to disclose information about some of their
clients because of concerns over illegal activities. In many places around the world,
the business climate has become less tolerant of illegal and immoral actions, and
countries like Switzerland, Liechtenstein, and Luxembourg now are being pressured
to share information on potential tax dodgers with government agencies like the
IRS. Credit Suisse pleaded guilty to aiding wealthy Americans in tax evasion. The
company was ordered to give the U.S. Department of Justice all records concerning
American clients and was charged a fine of $2.6 billion for criminal misconduct.6
This case illustrates the complexity of complying with international business laws.
While many businesses may object to regulations aimed at maintaining ethical
cultures and preserving stakeholder welfare, the very existence of businesses is
based on laws permitting their creation, organization, and dissolution. From a
social perspective, it is significant that a corporation has the same legal status as
a “person” who can sue, be sued, and be held liable for debts. Laws may protect
managers and stockholders from being personally liable for a company’s debts, but
both individuals and organizations remain responsible for their conduct. Because
corporations have a perpetual life, larger companies like ExxonMobil, Ford, and
Sony take on an organizational culture, including social responsibility values, that
extends beyond a specific time period, management team, or geographical region.
Organizational culture plays an important role in the ability of corporations to
outlive individual executives—it sets the tone for businesses and allows continuity
even during times of leadership turnover.
Most, generally smaller, companies are owned by individual proprietors
or operated as partnerships. However, large incorporated firms like those just
mentioned often receive more attention because of their size, visibility, and impact
on so many aspects of the economy and society. In a pluralistic society, diverse
stakeholder groups such as businesses, workers, consumers, environmentalists,
privacy advocates, and others attempt to influence public officials who legislate,
interpret laws, and regulate business. The public interest is served through open
participation and debate that result in effective policy. Because no system of
government is perfect, legal and regulatory systems are constantly evolving in
response to changes in the business environment and social institutions. For
example, increasing use of the internet for information and business has created
a need for legislation and regulations to protect the owners of creative materials
from unauthorized use and consumers from fraud and invasions of privacy. The
line between acceptable and illegal activity on the internet is increasingly difficult

to discern and is often determined by judges and

juries and discussed widely in the media.
New disruptive technology is changing both the
business and the regulatory environment. Artificial
intelligence (AI) enabled by big data drones, facial
recognition, and other technology provides more
opportunity to create business models that current
regulation does not adequately address. Humans
are being replaced by robots in some cases, and
the work environment is changing to address
more technology and digital communication. AI
Shutterstock/Andrey_Popov
will provide more information and oversight of

employees, and both government and investors
will have access to operations, accounting, and
financial results. The amount of data about a firm’s
activities is exploding. This will cause a review and
update of existing regulations.
In the next section, we take a closer look at
disruptive technology why and how the government affects businesses through regulation, the costs and
new technology that displaces benefits of regulation, and how regulation may affect companies doing business in
an established technology and
foreign countries.
changes an industry or a unique
new product that creates a
completely new industry
The Rationale for Regulation
The United States was established as a capitalist system, but the prevailing capi-
talistic theory has changed over time. Adam Smith published his critical economic
ideas in The Theory of Moral Sentiments and Inquiry into the Nature and Causes
of the Wealth of Nations (often abbreviated to The Wealth of Nations) during the
late 1700s, which are still considered important today. Smith observed the supply
and demand, contractual efficiency, and division of labor of various companies
within England. His writings formed the basis of modern economics. Smith’s idea
of laissez faire, otherwise known as “the invisible hand,” is critical to capitalism,
in that it assumes that the market, through its own inherent mechanisms, will keep
commerce in equilibrium.
A second form of capitalism gained support at the beginning of the Great
Depression. During the 1930s, John Maynard Keynes argued that the state could
stimulate economic growth and improve stability in the private sector—through,
for example, controlling interest rates, taxation, and public projects.7
Keynes argued that government policies could be used to increase aggregate
demand, thus increasing economic activity and reducing unemployment and
deflation. He argued that the solution to depression was to stimulate the economy
through some combination of a reduction in interest rates or government invest-
ment in infrastructure. President Franklin D. Roosevelt employed Keynesian
economic theories to pull the United States out of the Great Depression.
The third form of capitalism was developed by Milton Friedman and
represented a swing to the right on the political spectrum. Friedman had lived
through the Great Depression, but he rejected the Keynesian conclusion that the
market sometimes needs some intervention to function most efficiently. Friedman
instead believed in deregulation because he thought that the system could reach
equilibrium without government intervention.8 Friedman’s ideas were the guiding
principles for government policymaking in the United States, and increasingly
throughout the world, starting in the second half of the twentieth century,
especially during the presidencies of Ronald Reagan, George H. W. Bush, Bill
Clinton, and George W. Bush. However, President Obama’s policies moved back
in the direction of Keynesian capitalism, with higher taxes and more spending on
healthcare, as well as other public projects related to stabilizing the economy after
the financial crisis. When Trump took over from Obama, a transition back to
Friedman capitalism was expected. However, while Trump did institute major tax
cuts, he also increased government spending on infrastructure. Thus, some claimed
that he took a more Keynesian economic stance than his Republican predecessors.9
Many communist countries also are adopting components of capitalism. State
capitalism occurs when the government runs commercial activity in a capitalist
manner. In China, for instance, many of the largest for-profit firms are owned in
some capacity by the government. Despite this ownership, the day-to-day workings
of the companies operate in a capitalist manner. This gives them the ability to com-
pete against global firms. Table 4.1 gives a brief overview of the forms of capitalism.
Although the opinions about which form of capitalism is the better option
have changed over time, the federal and state governments in the United States
have always stepped in to enact legislation and create regulations to address
particular issues and restrict the behavior of business in accordance with society’s
wishes. Many of the issues used to justify business regulation can be categorized
as economic or social.
Economic Regulation A great number of regulations have been passed by

legislatures over the last 100 years in an effort to level the playing field on which
businesses operate. Economic regulation has the goal of providing a fair and open
market to encourage a balance in supply and demand in the economic system.
Economic regulation addresses the power of monopolies or firms that use their size
to create undesirable results.10
Antitrust legislation attempts to provide fair competition to protect com-
petitors and the public. The Federal Trade Commission (FTC) exists to protect
consumers and prevent anticompetitive activities. The FTC stops unfair, deceptive,
or fraudulent practices from happening. It also enforces antitrust laws to make
sure that the economic market continues to be open and free. The agency is able to
do this through tools developed to help better stop the unfair practices. We discuss
the FTC in more detail in Chapter 5.
The Securities and Exchange Commission (SEC) protects investors and attempts
to promote a transparent system for investment markets to function. The SEC
requires that public companies disclose any financial and other information that
may be meaningful to an investor. It believes that investors should be privy to
basic facts before they decide whether they want to invest. When the United States
became an independent nation in the eighteenth century, the business environment
consisted of many small farms, manufacturers, and cottage industries operating on a
primarily local scale. With the increasing industrialization of the United States after
the Civil War, so-called captains of industry like John D. Rockefeller (oil), Andrew
Table 4.1 Forms of Capitalism

Type of Capitalism Description Example
Adam Smith’s laissez-faire The market, through its own Popular in the United States
approach inherent mechanisms, will keep during the nineteenth century
commerce in equilibrium.
Keynesian capitalism Government policies can be Popular in the United States after
used to stimulate growth. the Great Depression
Friedman capitalism This approach emphasizes Popular in the second half of the
deregulation and significantly twentieth century
less government intervention.
State capitalism Major organizations are owned China’s economic system
by the government, but are run
in a capitalist manner.

Carnegie (railroads and steel), Andrew Mellon (aluminum), and J. P. Morgan

(banking) began to consolidate their business holdings into large national trusts.
trusts Trusts are organizations generally established to gain control of a product
organizations established to gain market or industry by eliminating competition. Such organizations are often
control of a product market or
considered detrimental because, without serious competition, they can potentially
industry by eliminating competition
charge higher prices and provide lower-quality products to consumers. Thus, as
these firms grew in size and power, public distrust of them likewise grew because
of often-legitimate concerns about unfair competition. This suspicion and the
public’s desire to require these increasingly powerful companies to act responsibly
spurred the first antitrust legislation. If trusts are successful in eliminating competi-
tion, a monopoly can result.
monopoly A monopoly occurs when just one business provides a good or service in a
a market type in which just one given market. Natural monopolies are monopolies that occur because of the unique
business provides a good or
nature of the product or components of the product such as technology. They can
service in a given market
also occur when one corporation is able to engage in the business while competitors
are unable to engage due to costs and other entry barriers.11 Utility companies that
supply electricity, natural gas, water, or cable television are examples of monopo-
lies, but that is starting to change. The government tolerates these monopolies
because the cost of supplying the good or providing the service is so great that few
companies would be willing to invest in new markets without some protection
patent laws from competition. Monopolies may also be allowed by patent laws that grant the
laws that grant the developer a developer of a new technology a period of time (usually 20 years), during which no
period of time (usually 20 years)
other firm can use the same technology without the patent holder’s consent. Patent
during which no other firm can use
the same technology without the protections are permitted to encourage businesses to engage in riskier research and
patent holder’s consent development by allowing them time to recoup their research, development, and
production expenses and to earn a reasonable profit.
Because trusts and monopolies lack serious competition, there are concerns
that they may either exploit their market dominance to restrict their output and
raise prices or reduce quality to gain greater profits. This concern is the primary
rationalization for their regulation by the government. Public utilities, for example,
are regulated by state public utility commissions and, where they involve interstate
commerce, are subject to federal regulation as well. Some of these industries have
been deregulated with the idea that greater competition will police the behavior of
individual firms. However, in areas like utilities, it is difficult to develop perfect
competition because of the large sunk costs required. Often, deregulation has led
to increased costs to stakeholders. For example, Maryland deregulated the state’s
residential energy market in the late 1990s, and when rate caps came off in 2004,
residences were hit with skyrocketing utility costs. The problem has been market
prices—when petroleum costs are high, so are the costs to generate energy. In
a deregulated privatized market, these costs are passed on to consumers. The
governor has tried numerous tactics to relieve the burden, including a one-time
handout, but stakeholders remain concerned.12
Related to the issue of regulation of trusts and monopolies is the society’s
desire to restrict destructive or unfair competition. What is considered unfair
varies with the standard practice of the industry, the impact of specific conduct,
and the individual case. When one company dominates a particular industry,
it may engage in destructive competition or employ anticompetitive tactics.
For example, it may slash prices in an effort to drive competitors out of the
market and then raise prices later. It may conspire with other competitors to
set, or “fix,” prices so that each firm can ensure a certain level of profit. Other
examples of unfair competitive trade practices are stealing trade secrets or
obtaining confidential information from a competitor’s employees, trademark
and copyright infringement, false advertising, and deceptive selling methods
such as “bait and switch” and false representation of products.
Regulation is also intended to protect consumers from unethical business
practices. For instance, the government has been scrutinizing large-scale increases

in the price of pharmaceuticals. Although businesses generally have freedom to

determine their pricing strategies, pharmaceuticals are a hot-button issue because
of their impact on people’s health. The nation was outraged, for instance, when
Turing Pharmaceuticals and their cofounder and CEO Martin Skreli raised the
price of an old generic drug 5,000 percent in 2015. Even though most pharma-
ceutical firms do not implement such massive price increases, many are increasing
their prices. There is some concern among drug makers that Congress might
implement controls on the amount that pharmaceutical companies can raise the
prices of their drugs.13
Real-world customers often lack complete information about products they
might buy, or they may have difficulty understanding technical terms describing
goods like cars, pharmaceutical drugs, and mortgages. Consumer protection
regulations help by requiring companies to spell out the features and risks of their
products. In the real world, markets are often dominated by a small number of
sellers—sometimes only one—who can limit production and force customers to
pay artificially high prices. Antimonopoly regulations can ensure greater competi-
tion and fairer prices.
Social Regulation Regulation may also occur when marketing activities result
in undesirable consequences for society. Social regulation is concerned with the social regulation
overall welfare of citizens. Protecting and supporting consumers and providing the protection and support for
consumers providing safe work
work environment with safe work conditions, equal opportunity, and healthcare
conditions, equal opportunity, and
are the focus of social regulation. On the other hand, economic regulation focuses healthcare
on creating a strong economy and the protection of competition to provide an
opportunity for organizations and individuals to be financially successful. This economic regulation
success supports employment, as well as the tax base to support most government protection of competition
to provide opportunity for
services. Therefore, social and economic regulation work together to promote the organizations and individuals to be
health, welfare, and a standard of living to support society. financially successful in order to
An example of social regulation is the Affordable Health Care Act (ACA) create a strong economy
passed in 2009. The ACA, also known as “Obamacare,” had three primary goals
when it was formed. The first was to allow more people to have affordable health
insurance; the second was to expand the Medicaid program to cover more adults;
and the third was to support innovative healthcare delivery methods. All of these
goals were directed to lowering the cost of healthcare. Social regulation focuses are
not limited to one industry and can address issues such as consumer protection,
pollution, job safety, discrimination, and the right of employees and consumers to
seek remedy for damages.
Many manufacturing processes, for example, create air, water, or land pollu-
tion. Such consequences create uncounted “costs” in the form of contamination
of natural resources, illness, and so on that neither the manufacturer nor the
consumer “pays” for directly, although consumers may end up paying for these
costs nevertheless. Because few companies are willing to shoulder these costs
voluntarily, regulation is necessary to ensure that all firms within an industry do
their part to minimize damages and pay their fair share. Likewise, regulations
have proved necessary to protect natural (e.g., forests, fishing grounds, and other
habitats) and social resources (e.g., historical and architecturally or archeologically
significant structures). We will take a closer look at some of these environmental
protection regulations and related issues in Chapter 12, on sustainability.
Other regulations have come about in response to social demands for equality
in the workplace, especially after the 1960s. Such laws and regulations require
that companies ignore race, ethnicity, gender, religion, and disabilities in favor of
qualifications that more accurately reflect an individual’s capacity for performing
a particular job.
Likewise, deaths and injuries because of employer negligence resulted in
regulations designed to ensure that people can enjoy a safe working environment.
The airline industry has become a prime example of how tough economic times

result in overworked, undertrained employees. Many pilots receive low compensa-

tion, poor health benefits, and are forced to work long hours—all factors that
contribute to challenging organizational culture. For example, the crash of the
Boeing 737 MAX 8 aircraft in Indonesia in October 2018 and a subsequent
crash in Ethiopia may have been the result of flaws in a new antistall system and
lack of pilot training. There is evidence that Boeing did not properly prepare the
pilots in Indonesia to work with the new system. The Ethiopian pilots had been
trained; however, it is uncertain if their training was sufficient. Furthermore, flaws
in the system made it difficult to maintain control of the plane in both crashes.
A major issue that has surfaced in the aftermath of the crashes is Boeing’s lack
of intervention when pilots reported problems with the new aircraft. Prior to the
Ethiopian crash, American Airlines pilots suggested grounding the plane until the
system was fixed, but upper management did not agree. The Boeing 737 MAX 8
were grounded until investigations could be completed and improvements could
be made. The grounding of these planes has cost Boeing in both reputation and
finances. Regulators also are being investigated for suspicions about the certifica-
tion process for the MAX 8. As the reaction from the crashes shows, consumers
are holding businesses and regulatory bodies accountable for their behavior.14
Still other regulations have resulted from special-interest group crusades for
safer products. For example, special-interest groups such as the Center for Food
Safety (CFS), Consumers Union, and U.S. Right to Know have spoken out against
genetically modified (GM) organisms in American foods. These groups have
argued that GM foods are dangerous to health and that stricter regulations need
to be made to inform the public about GM products. In response to this outcry,
the U.S. government passed the National Bioengineered Food Disclosure Law in
2016. The law required the development of regulations around bioengineered
food labeling. This led to the National Bioengineered Food Disclosure Standard,
which requires GM ingredients to be disclosed on food products. Companies have
several options for how to display the label, one of which is via QR codes. The
CFS has argued that the QR code option is discriminatory towards low-income
consumers who may not have the means to scan QR codes. According to the Non-
GMO Project, 64 countries in the world require labeling of genetically modified
(GM) foods. The specifics of each law vary from country to country. The debate
continues on the safety of GM goods as well as the best way to inform the public
of foods containing GM organisms.15
Cannabis and hemp legalization and regulation have also attracted public inter-
est, and regulations differ at both the state and federal levels. Medical marijuana
has been legalized by 33 states, and rec-
reational marijuana has been legalized by
10 states. At the federal level, both medi-
cal and recreational marijuana are illegal.
Hemp, a product of the cannabis plant
that contains 0.3 percent or less of the
chemical tetrahydrocannabinol (THC),
was legalized federally by the 2018 Farm
Bill. Cannabidiol (CBD), a substance from
the cannabis plant that has been shown
to have medicinal qualities, was also
legalized federally, with restrictions. Only
CBD derived from hemp is legal feder-
ally under the Farm Bill; CBD derived
Shutterstock/kostrez
from marijuana is still illegal. This subtle

distinction has confused consumers, and
many hope that all CBD and marijuana
products will soon be fully legalized in
the United States. Regulation of hemp growth will occur at both the federal and
the state level.16 As we will see in Chapter 9, consumer activists also helped secure
passage of several other consumer protection laws, such as the Wholesome Meat
Act of 1967, the Clean Water Act of 1972, and the Toxic Substance Act of 1976.
Issues arising from the increasing use of the internet have led to demands for new
laws protecting consumers and business. Laws such as the Stop Online Piracy Act
(SOPA) and the Protect Intellectual Property Act (PIPA) were proposed to prevent
copyright infringement over the internet. Under these provisions companies could
be penalized for posting pirated content over the internet. However, Google, Yahoo,
and other internet companies protested the bills, saying that it gave the government
too much power to shut down websites and infringe on freedom of speech.17
Wikipedia, Google, and other websites underwent a service blackout for an entire
day to protest the bills. The proposed laws were defeated, much to the frustration of
content providers who hoped the bills would help protect their intellectual property.
Intellectual property protection versus freedom of speech is a tricky balance that
requires legislators to research solutions that respect both of these rights.
As we shall see in Chapter 11, the technology associated with the internet
has generated a number of issues related to privacy, fraud, and copyright law.
For instance, creators of copyrighted works such as movies, books, and music are
calling for new laws and regulations to safeguard their ownership of these works.
In response to these concerns, Congress enacted the Digital Millennium Copyright
Act in 1998, which extended existing copyright laws to better protect digital
recordings of music, movies, and the like. While other countries have implemented
similar measures, copyright violations continue to plague many global industries,
which to some critics calls into question the effectiveness of legal action. A team
of security specialists recommends technological, not legal, solutions as being most
effective in the fight against piracy and copyright infringement.18
Concerns about the collection and use of personal information, especially
regarding children, resulted in the passage of the Children’s Online Privacy
Protection Act of 2000 (COPPA). The Act was revised in 2012 and is enforced
by the FTC levying fines against noncompliant website operators. For example, in
2016 the Singapore-based mobile advertising firm InMobi paid $950,000 in civil
penalties for tracking the locations of hundreds of millions of consumers (many of
them children) for the purpose of geotargeting ads.19
Internet safety among children is a major topic of concern. This is true for
children of all ages. Studies have shown that approximately 50 percent of children
between the ages of six and nine use social media, and over 90 percent of children
under the age of two have accessible information online, including photos and other
personal information. A study showed that children aged three to four increased
their internet use by 20 percent in five years. While there are many contributing
factors to the access and amount of time spent online among children, online safety
is a concern for all children. Many are urging parents to encourage their children
to practice safe online behavior, such as using privacy restrictions and not posting
information or photos that contain too much personal information.20
New technology continues to challenge the legal system. AI involving machine
learning can simulate human cognitive functions, while predictive analytics can
make decisions that relate to human resource management and relationships with
customers. This can create ethical and legal conflicts because machines may not
understand bias in hiring or discrimination in interactions with different types of
people. Early use of AI found that there could be racial or gender bias. Therefore,
going forward, consideration of these legal implications will be required. Law
schools are already offering classes in AI regulatory issues.
Over the last several years, data privacy issues have become a significant public
interest issue as large, notable companies like Google, Facebook, Target, and
Marriott have been breached, allowing millions of users’ personal data to fall into

Ethical Responsibilities in MARKETING
Dieselgate: Volkswagen Fools Regulators

Volkswagen (VW) was founded in 1937 in Nazi Germany as did not have accurate information, so they were not able
a pet project of Adolf Hitler, who desired to develop what to make informed purchasing decisions. As a global firm,
he termed the “people’s car” (which is what “Volkswagen” VW lost the trust of regulators—a major obstacle in future
literally means in German). After the war, VW sales were global relationships. To restore consumer trust, the CEO,
slower in the United States than in other areas because Martin Winterkorn, resigned and VW offered a $1,000
of its questionable origins, but the introduction of the goodwill package to its American car owners. The cars
VW Beetle to the U.S. market in 1947 caused sales to affected by the scandal were also recalled.
skyrocket. VW was highly valued for its sustainability While these steps helped rehabilitate VW’s reputation,
goals. For instance, it became the first car manufacturer another scandal threatens to damage it once again. VW
to adopt ISO 14001 principles, international environmental is accused of selling preproduction vehicles under the
principles that act as standards for global firms. When VW title “Certified Pre-Owned.” Preproduction vehicles cannot
introduced the VW XL1, it claimed that the vehicle was the be sold to consumers legally because they do not meet
most fuel-efficient car in the world at the time. The com- U.S. safety regulations. VW again used technology to
pany’s reputation for sustainability worsened the blow to deceive consumers. Referred to as “odometer fraud,” the
its reputation when it all came crashing down years later. automaker provided secret data to CARFAX, a website
It was discovered that VW had purposefully fooled with information on vehicles’ history, to create the illusion
regulators and consumers with its emissions claims. The that a car had a driving history similar to a preowned
company used a so-called defeat device in its software vehicle. In addition, the vehicles were sold as “CARFAX
that changed the vehicle’s performance depending upon 1-Owner vehicles,” when in reality, they were press cars
the environment. For instance, the software was able to driven by journalists or corporate pool-fleet cars. To
detect when vehicles were undergoing emissions testing. attract publicity for new vehicles, companies often have
During this testing, the software made the vehicles run automotive journalists drive the cars. These press vehicles
below performance, which released fewer emissions and often include features desirable to the journalist, rather
met the requirements. However, on the road, the cars ran than the standard features. In addition, journalists do not
at maximum performance and gave off up to 40 times always take the best care of these cars while test-driving
the allowable limit for emissions in the United States. VW them, according to a Jalopnik journalist. The cars are often
estimated that 11 million vehicles in the United States and destroyed after testing.
Europe were affected by this defeat device. The fact that VW sold these cars under false labeling
The automaker pled guilty to three criminal felony and violated safety regulations resulted in a lawsuit.
charges that included defrauding the U.S. government, Recalls had been made on the vehicles, but the lawsuit
violating environmental regulations, obstructing justice, claims that VW delayed acting on the recalls and did
engaging in wire fraud, and violating import regulations. not recall all the vehicles in the scandal. Additionally, the
Such fraud not only violates ethical standards, but also company will have to contend with its growing scandalous
laws and regulations in Europe and the United States. reputation and mistrust from consumers as the lawsuit
Perhaps the worst impact the scandal caused was continues. The company’s exploits present an example of
to VW’s reputation. Many VW customers claimed they how the failure to not only follow laws and regulations of
purchased the cars because they believed them to be a country, but also to make amends and remain transpar-
better for the environment and felt utterly betrayed by the ent with customers after a scandal, can severely hurt a
company. Consumer rights were violated because buyers business.
Sources: A&E Television News Networks, LLC, “This Day in History,” History.com, 2017, http://www.history.com/this-day-in-history/volkswagen-is-
founded (accessed May 9, 2019); Sam Abuelsamid, “Does VW Diesel Cheating Threaten Consumer Trust of Automotive Software?” Forbes, October 21,
2015, http://www.forbes.com/sites/pikeresearch/2015/10/21/vw-diesel/ (accessed May 9, 2019); Sarah Griffiths, “The Most Fuel-Efficient Car in the
World: Volkswagen XL1 Does 300 MILES to the Gallon (And It Looks Cool Too),” Daily Mail, January 16, 2014, http://www.dailymail.co.uk/sciencetech/
article-2540618/The-fuel-efficient-car-world-Volkswagen-XL1-does-300-MILES-gallon-looks-cool-too.html (accessed May 10, 2019); Russell Hotten,
“Volkswagen: The Scandal Explained,” BBC News, November 4, 2015, http://www.bbc.com/news/business-34324772 (accessed May 10, 2019); Mike
Spector and Mike Colias, “Volkswagen Faces up to Penalties,” The Wall Street Journal, March 1–12, 2017, B1–B2; William Wilkes, “Volkswagen Adds
to Scandal Cost,” The Wall Street Journal, February 2, 2017, B3; EHS Today Staff, “Lawsuit: Volkswagen Sold Cars in Violation of Safety Standards:
Automobile Manufacturer Allegedly Misrepresented Prior Use of Vehicles,” EHS Today, April 15, 2019, https://www.ehstoday.com/safety/lawsuit-
volkswagen-sold-cars-violation-safety-standards (accessed May 9, 2019); Matt Hardigree, “The Truth About Press Cars,” Jalopnik, June 29, 2015,
https://jalopnik.com/the-truth-about-press-cars-1714460086 (accessed May 13, 2019); Sean Szymkowski, “Another Scandal at VW: Automaker Sold
Pre-production Vehicles as Used Cars,” MotorAuthority, December 11, 2018, https://www.motorauthority.com/news/1120404_another-scandal-at-vw-
automaker-sold-pre-production-vehicles-as-used-cars (accessed May 13, 2019).

the wrong hands. Questions have been raised as to why these companies are not
doing more to protect users, and as a result, regulators are lobbying for legislation
that would hold corporate executives criminally liable for negligence that relates
to data and privacy breaches. As it stands now, there is little accountability
for executives when these breaches occur. Some corporations suffer short-term
financial losses and receive negative publicity, while others walk away completely
unscathed. For instance, 1 in 10 Facebook users have quit the popular social
media platform due to privacy issues. Facebook stock dipped after their scandal
but is back on the rise again. But although they were plagued by several data and
privacy issues, Google beat analysts’ expected sales and earnings numbers and, as
a result, the company still has a healthy stock price. Passing regulation takes time,
but companies can take quick, low-cost steps to improve their cybersecurity by
properly training their employees and installing oversight frameworks in the hope
of regaining public trust.21
Another major concern is online fraud. Online fraudsters use more than 70
types of scams, some of which are directed toward specific populations, like the
elderly. The Internet Crime Complaint Center reported that between 2014 and
2018, online crimes caused $7.45 billion in losses.22 The EU has introduced many
new regulations that pertain to policies on data privacy and protection. While
these changes have not yet occurred in the United States, many people suggest that
changes are coming, and businesses should be prepared to adhere to a more strin-
gent policy. Also, if there is a company in the United States with an international
presence, then these changes will certainly affect them. The costs of noncompliance
can be potentially devastating for a small business—fines of 4 percent of annual
global turnover or up to 20 million euros, whichever is greater.
Costs and Benefits of Regulation

Regulation results in numerous costs for businesses, consumers, and society at
large. Although many experts have attempted to quantify these costs, it is quite
difficult to find an accurate measurement tool. To generate such measurements,
economists often classify regulations as economic or social. One yardstick for the
direct costs of regulation is the administrative spending patterns of federal regula-
tory agencies. The 2018 estimated cost of regulatory activities was $70 billion,
which was up by approximately 4.7 percent from the previous year. Many people
in the business world and beyond are concerned about the upward trajectory of
regulatory costs. Another way to measure the direct cost of regulation is to look
at the staffing levels of federal regulatory agencies. The expenditures and staffing
of state and local regulatory agencies also generate direct costs to society. Federal
regulatory agency jobs have been on the rise, growing to 280,872 jobs in recent
years. However, 2019 saw a decline in federal agency staffing by 604 jobs. More
cuts were made in social regulation programs than economic regulation programs.
The one exception was that jobs with the U.S. Department of Homeland Security,
part of social regulation programs, did increase.23
Still another way to approach the measurement of the costs of regulation is to
consider the burden that businesses incur in complying with them. Various federal
regulations, for example, may require companies to change their manufacturing
processes or facilities (e.g., smokestack “scrubbers,” to clean the air, and wheel-
chair ramps, to make facilities accessible to people with disabilities). Companies
also must keep records to document their compliance and obtain permits to imple-
ment plans that fall under the scope of specific regulatory agencies. Again, state
regulatory agencies often add costs to this burden. Regulated firms may also spend
large amounts of money and other resources to prevent additional legislation and
to appear responsible. Of course, businesses generally pass these regulatory costs
on to consumers in the form of higher prices, a cost that some label a “hidden tax”

of government. Additionally, some businesses contend that the financial and time
costs of complying with regulations stifle their ability to develop new products
and make investments in facilities and equipment. Moreover, society must pay
for the cost of staffing and operating regulatory agencies, and these costs may be
reflected in federal income taxes. Table 4.2 describes the primary drivers of the
costs of regulation, including those associated with administering, enforcing, and
complying with regulations.
Despite business complaints about the costs of regulation, it provides many
benefits to business, consumers, and society as a whole. These benefits include
greater equality in the workplace, safer workplaces, resources for disadvantaged
members of society, safer products, more information about and greater choices
among products, cleaner air and water, and the preservation of wildlife habitats to
ensure that future generations can enjoy their beauty and diversity.
Companies that fail to respond to consumer desires or that employ inefficient
processes are often forced out of the marketplace by more efficient and effective
firms. Truly competitive markets also spur companies to invest in researching and
developing product innovations, as well as new, more efficient methods of produc-
tion. These innovations benefit consumers through lower prices and improved
goods and services. For example, companies such as Apple, Samsung, and Lenovo
continue to engineer smaller, faster, and more powerful computers and mobile
devices that help individuals and businesses to be more productive.
Regulatory Reform Many businesses and individuals believe that the costs of
regulation outweigh its benefits. They argue that removing regulation will allow
Adam Smith’s “invisible hand of competition” to dictate business conduct more
effectively and efficiently. Some people desire complete deregulation—the removal
of all regulatory authority. Proponents of deregulation believe that less govern-
ment intervention allows business markets to work more effectively. For example,
many companies want their industries deregulated to decrease their costs of doing
business. Many industries have been deregulated to a certain extent since the
1980s, including trucking, airlines, telecommunications (long-distance telephone
and cable television), and electric utilities. In many cases, this deregulation has
resulted in lower prices for consumers, as well as greater product choice.
However, the onset of the 2008–2009 financial crisis, now known as the
Great Recession, slowed the call for deregulation. After the economy plummeted,
the United States and other countries around the world saw the need for greater
regulation, particularly of the financial industry, and began to reverse the
deregulatory trend of the previous two or three decades. Although the economic
crisis stemmed from a variety of factors, many perceived that much of it stemmed
from a lack of appropriate governmental oversight and a lack of ethical leadership
Table 4.2 The Costs of Regulation

Type of Cost Description
Administration and Expenditures by government to develop and administer regulatory
enforcement requirements, including the salaries of government workers, hiring
inspectors, purchasing office supplies, and other overhead expenses
Compliance Expenditures by organizations, both private and public, to meet
regulatory requirements, such as reporting activities and establishing
an ethics and compliance program
Costs of legal Expenditures by organizations to hire companies or legal consultants
consultants to deal with legal accusations or issues associated with regulations
Additional costs to Additional costs to the operations of an organization related to
operations improved safety, sustainability, communication, product requirements,
and other elements

in businesses. However, governments’ reactions and plans have many worrying

that governments will take too much control. There has always been considerable
debate on the relative merits and costs of regulation, and these new changes
resulting from the worst financial crisis since the Great Depression are not likely
to lessen this controversy.
According to an article by the Pew Charitable Trusts, reporting of compliance
costs is often misleading and inaccurate. Compliance costs are often predicted
to be higher than they actually are, leading many to believe that deregulation is
better for the economy. However, the article argues that regulations have been
very helpful to environmental causes, as well as automobile safety. For example,
without regulations, cars might not have seat belts or airbags in them. Proponents
of regulation argue that even when costs to comply with regulations are high for
consumers, the benefits far outweigh the monetary sacrifices.
Another benefit of regulation is preventing market entry for competitors.
Governmental regulation can help domestic businesses by placing restrictions on
foreign companies. This lack of competition helps local businesses seize market
opportunities.24
Self-Regulation
Self-regulation, is when an industry-level organization, such as a trade association or self-regulation
professional society, creates a set of rules and enforces regulations within its industry when an industry-level
organization, such as a trade
without outside prodding. Many companies join industry groups in an effort to
association or professional society,
demonstrate legal compliance and social responsibility, to signal responsibility to creates a set of rules and enforces
stakeholders, and to preclude further regulation by federal or state government. regulations within its industry
Many firms choose to join trade associations that have self-regulatory programs,
often established as a preventative measure to stop or delay the development
of laws and regulations that would restrict the business practices of association
members. Some trade associations establish codes of conduct by which their
members must abide or else risk discipline or expulsion from the association.
Trade associations will be further discussed in Chapter 5.
Perhaps the best-known self-regulatory association is the Better Business Better Business Bureau (BBB)
Bureau (BBB). Founded in 1912, the BBB is a self-regulatory association supported a self-regulatory association
supported by businesses
by businesses. It offers an Online Accredited Business certification to retailers,
which certifies their high ethical standards and safety for online shoppers. The BBB
lists the companies on its website and directs consumers to approved businesses’
websites. Over 14,000 BBB Business Reviews are viewed by consumers daily. Today
there are more than 128 bureaus in the United States, Canada, and Puerto Rico. The
bureaus have accredited almost 400,000 local and national businesses and charities
and resolve problems for millions of consumers and businesses each year.25
Each bureau also works to champion good business practices within a com-
munity, although it usually does not have strong tools for enforcing its business
conduct rules. When a company violates what the BBB believes to be good business National Advertising Division
practices, the bureau warns consumers through local newspapers or broadcast (NAD)
an investigatory branch of the
media. If the offending organization is a member of the BBB, it may be expelled
National Advertising Review
from the local chapter. For example, the BBB revoked accreditation for two Texas Council (NARC) that provides
businesses for not adhering to its standards. One firm agreed to arbitration with reviews of advertisements for
the customer but failed to honor the arbitrator’s decision.26 accuracy and truthfulness and
The National Advertising Division (NAD), a program of the BBB, was created resolves disputes
in 1971 as an investigatory branch of the National Advertising Review Council Data and Marketing Association
(NARC). NAD provides reviews of advertisements to check for accuracy and (DMA)
truthfulness, as well as to resolve disputes. The NAD is generally more cost- a self-regulatory resource that
effective than legal counsel when a claim is filed. By taking on this role, NAD helps assists its business members in
becoming more efficient and up
the FTC focus on other more pressing matters.27 to date in marketing by relying
The Data and Marketing Association (DMA), formerly known as the Direct on accurate consumer data and
Marketing Association, is another major self-regulatory resource for businesses. adjusting to new technology

The focus of the DMA is direct marketing businesses, and it offers membership
to companies as diverse as technology companies, service providers, and media
businesses. The association assists businesses in becoming more efficient and up to
date in their marketing endeavors by relying on accurate consumer data and adjust-
ing to new technology. It also provides training and workshops for businesses to
learn more about new features in marketing, as well as how to ethically implement
marketing changes. The DMA has outlined several regulations for their members in
a formal document called “the Code.” The Code highlights different rules on how
members are to treat customers, as well as each other. It emphasizes the following
core values: Respect privacy, be honest and fair, be diligent with data, and take
responsibility. It also discusses benefits to members’ businesses, while emphasizing
that the customer comes first. Transparency is a huge regulatory practice with
DMA. For example, members are required to be honest and open about exactly
who they are and what the data they collect will be used for. They must also
provide a way for consumers to end future communication if the consumer so
chooses.28
Self-regulatory programs like the BBB and DMA have a number of advantages
over government regulation. The establishment and implementation of such
programs are usually less costly, and their guidelines or codes of conduct are gener-
ally more practical and realistic. Furthermore, effective self-regulatory programs
reduce the need to expand government bureaucracy. However, self-regulation has
several limitations. Nonmember firms are under no obligation to abide by a trade
association’s industry guidelines or codes. Moreover, most associations lack the
tools or authority to enforce their guidelines. Finally, these guidelines are often less
strict than the regulations established by government agencies.
Global Regulation
The twentieth century brought a number of regional trade agreements that decreased
the barriers to international trade. NAFTA and the EU are two such alliances that
were formed with the intention of enhancing regional competitiveness and decreas-
ing inequalities. NAFTA, which eliminates virtually all tariffs on goods produced
and traded between the United States, Canada, and Mexico, makes it easier for
businesses of each country to invest in the other member-countries. The agreement
also provides some coordination of legal standards governing business transactions
among the three countries. NAFTA promotes cooperation among various regulatory
agencies to encourage effective law enforcement in the free trade area. Within the
framework of NAFTA, the United States and Canada have developed many agree-
ments to enforce each other’s antitrust laws. The agreement provides for cooperation
in investigations, including requests for information and the opportunity to visit
the territory of the other nation in the course of conducting investigations. The
pending United States-Mexico-Canada Agreement (USMCA), which is intended to
modernize and replace NAFTA, also supports trade in North America.
The EU was established in 1958 to promote free trade among its members
and now includes 28 European nations, with more expected to join in the coming
years.29 However, in 2016, the United Kingdom (UK) voted to leave the EU. If
the separation takes place, it will take some years for it to occur. As shown in
Table 4.3, these changes will likely have a profound impact on both the UK and the
EU economy.
To facilitate trade among its members, the EU standardized business laws and
trade barriers, eliminated customs checks among its members, and introduced
the euro as a standard currency. Moreover, the Commission of the European
Communities entered into an agreement with the United States, similar to NAFTA,
regarding joint antitrust laws. The EU is in favor of tighter financial-market
regulation in the wake of the most recent financial crisis. Proposals discussed by
the European Commission include laws restricting proprietary trading at large

Table 4.3 Projected Impact of Brexit on the UK

Annual Impact of Leaving the EU on the UK after 15 Years
(Difference from Being in the EU)
European Negotiated World Trade
Economic Area Bilateral Organization
Agreement
GDP level – central −3.8% −6.2% −7.5%
GDP level −3.4% to −4.3% −4.6% to −7.8% −5.4% to −9.5%
GDP per capita – central* −£1,100 −£1,800 −£2,100
GDP per capita* −£1,000 to −£1,200 −£1,300 to −£2,200 −£1,500 to −£2,700
GDP per household – central* −£2,600 −£4,300 −£5,200
GDP per household* −£2,400 to −£2,900 −£3,200 to −£5,400 −£3,700 to −£6,600
Net impact on receipts −£20 billion −£36 billion −£45 billion
Adapted from HM Treasury Analysis: The Long-Term Economic Impact of EU Membership and the Alternatives, April 2016;
*Expressed in terms of 2015 GDP in 2015 prices, rounded to the nearest £100
Source: Will Kenton, “Brexit,” Investopedia, May 24, 2019, https://www.investopedia.com/terms/b/brexit.asp (accessed
June 10, 2019).
banks, revisions on rules regulating occupational pension funds, and improving

benchmarks used as reference prices for financial instruments.30 However, not
all countries in the EU agree on which reforms to adopt. Citizens in the United
Kingdom disagreed on certain policies such as immigration and disliked the impact
the EU’s financial struggles were having on the economy. This likely contributed to
the Brexit vote to leave the EU. It is noteworthy that the vote won by only a slim
margin—less than 4 percent.31
A company that engages in commerce beyond its own country’s borders must
contend with the potentially complex relationship among the laws of its own
nation, international laws, and the laws of the nation in which it will be trading, as
well as restrictions imposed on international trade. International business activities
are affected to varying degrees by each nation’s laws, regulatory agencies, courts,
political environment, and special-interest groups. The EU, for example, has been
tough on large businesses, leaving some critics in the United States to call the
EU anticompetitive and anti-innovative. However, as regulations in the United
States and the EU continue to be modified as a result of the 2008–2009 financial
crisis, incongruences from each side can be seen. For example, as part of the
Dodd-Frank Wall Street Reform and Consumer Protection Act, the United States
mandated that large banks rely more on liquid capital than on debt for financing.
While this mandate seems to reduce risks in the financial industry, those banks in
the EU see this mandate as creating a competitive disadvantage. Financial firms
have historically been held to the local standards of the country where business
is conducted. EU regulators fear that this new capital requirement will restrict
economic growth and give U.S. firms an advantage over those in the EU. They also
cite potential issues regarding international trade.32
This example demonstrates how companies can experience major barriers
when doing business in foreign countries. In addition to stricter regulations,
countries can establish import barriers, including tariffs, quotas, minimum price
levels, and port-of-entry taxes that affect the importation of products. Other laws
govern product quality and safety, distribution methods, and sales and advertising
practices.
Although there is considerable variation in focus among different nations’
laws, many countries have laws that are quite similar to those in the United States.
Indeed, the Sherman Antitrust Act has been copied throughout the world as the
basis for regulating fair competition. Antitrust issues, such as price fixing and

Table 4.4 Signs of Possible Antitrust Violations

• Any evidence that two or more competing sellers of similar products have agreed to price their
products a certain way, to sell only a certain amount of their product, or to sell only in certain
areas or to certain customers.
•
Large price changes involving more than one seller of very similar products of different
brands, particularly if the price changes are of an equal amount and occur at about the
same time.
• Suspicious statements from a seller suggesting that only one firm can sell to a particular cus-
tomer or type of customer.
• Fewer competitors than normal submit bids on a project.
• Competitors submit identical bids.
• The same company repeatedly has been the low bidder on contracts for a certain product or
service or in a particular area.
• Bidders seem to win bids on a fixed rotation.
• There is an unusual and unexplainable large dollar difference between the winning bid and all
other bids.
• The same bidder bids substantially higher on some bids than on others, and there is no logical
cost reason to explain the difference.
Source: U.S. Department of Justice, “Antitrust Enforcement and the Consumer,” http://www.justice.gov/atr/public/div_
stats/antitrust-enfor-consumer.pdf (accessed June 17, 2016).
market allocation, have become a major arena of international cooperation in the

regulation of business.33 Table 4.4 provides a list of situations and signs indicating
that antitrust violations may become a concern.
Government’s Nonregulatory Influence on

Business
Governments can have influence on business through nonregulatory actions
without enforcement. Government can encourage industries to engage in self-
regulation. The growth of voluntary civil regulations has advanced in the global
civil regulations economy. Civil regulations include pressures exerted in society to encourage and
pressures exerted in society persuade organizations to address issues in the social and physical environments.
to encourage and persuade
organizations to address issues
For example, pressure is placed on firms to address sustainability. The widespread
in the social and physical acceptance of fair trade, which addresses economic, social, and environmental
environment inequalities, is an example of a nongovernment global initiative. Government often
supports these types of global initiatives. Civil regulations include multishareholder
nongovernmental organizations codes and the involvement of nongovernmental organizations (NGOs).
(NGOs) Industry agreements include product certifications that can persuade govern-
nonprofit, citizen-based groups
that function independent of
ment to decrease or avoid regulations. The key to avoiding formal regulations is
government to achieve assurance that businesses understand the formal regulatory environment
and are addressing legal and ethical challenges. The government often provides
resources and works with NGOs and businesses to reach standards and informa-
tion to achieve best practices of appropriate conduct. As mentioned previously,
the NAD independently evaluates the truth and accuracy of advertising. If an
advertiser disagrees, they can appeal the decision. If not resolved, the FTC may
evaluate and take action on the case. Therefore, the agency supports and cooper-
ates with the NAD. National conferences include advertisers, NAD staff, and FTC
Ethics & Compliance Initiative staff. The Ethics & Compliance Initiative (ECI) educates and guides organizations
(ECI) on regulatory compliance, as well as best ethical practices. Government officials
a community of organizations
that educates about regulatory
from regulatory agencies, such as the U.S. Department of Justice, often speak at
compliance and best ethical their conferences.
practices

An important way that government can have a nonregulatory influence on

business is through the issuance of resources for businesses to use as guidelines. The
Department of Justice has a page on its website that is dedicated to Compliance
Assistance Resources, including sections on “Statutory Provisions” and “Guidelines
and Policy Statements.” The latter section has information on merger enforcement
and criminal enforcement, as well as other guidelines. The Department of Justice
also provides guidance on intellectual property. This is a great resource for any
start-up or established business that wants to learn more about the application
of general principles or to understand more about markets that are affected by
licensing arrangements.
Another example of government’s nonregulatory influence on business is the
Public Company Accounting Oversight Board (PCAOB), a private, nonprofit
company that oversees the audits of public companies. Its goal is to protect the
integrity of the financial information that is published by public companies and
used by investors and others. In addition to the PCAOB’s standards and rules, it
also provides guidance that is used by many public companies. For example, it
provides staff audit practice alerts to call attention to new or noteworthy matters
that have the potential to impact how auditors conduct audits. All this informa-
tion is easily accessible and improves the quality and effectiveness of accounting
audits. It also can have the potential to decrease misconduct. The PCAOB will be
discussed further in Chapter 5.
Along with ethical auditing, online security is a growing interest in both the
private and public sectors. The Federal Communications Commission (FCC), for
instance, has a section on its website that provides guidance on cybersecurity for
small businesses. This guidance provides tips to help protect businesses, customers,
and data that may be under attack by a cybersecurity threat. Some of these include
helping secure Wi-Fi networks, limiting employees’ access to data and information,
and making backup copies of that important data and information. The website
also provides resources from the U.S. government on cybersecurity.
Government’s Focus on Deregulation

Thus far, we have seen that, although legal and regulatory forces have a strong
influence on business operations, businesses can also affect these forces through
the political process. In addition, socially responsible firms strive to comply with
society’s wishes for responsible conduct via legal and ethical behavior. Indeed, the
most effective way for businesses to manage the legal and regulatory environment
is to establish values and policies that communicate and reward appropriate
conduct. Most employees will try to comply with an organization’s leadership and
directions for responsible conduct. Therefore, top management must develop and
implement a highly visible strategy for effective compliance. This means that top
managers must take responsibility and be accountable for assessing legal risks and
developing corporate programs that promote acceptable conduct.
Deregulation
Deregulation, introduced earlier in the chapter, involves changing or deleting deregulation
existing laws or regulations to provide less oversight of business activities, opera- changing or deleting existing laws
or regulations to provide less
tion, and outcomes. The amount of regulation seems to be cyclical with change in oversight of business activities,
political control of Congress and the executive branch of government. President operation, and outcomes
Ronald Reagan, for example, is known for scaling down regulation to let the free
market work better. His philosophy was, “Government is not the solution to
our problem; it is the problem.” Reagan cut taxes, eliminated price controls, and
reduced regulations that restricted free market trade.

George H. W. Bush took a slightly

different approach to regulation and
deregulation. He encouraged increased
regulation when it came to certain envi-
ronmental goals. For example, he pushed
for changes to the Clean Air Act, and
passed the Clean Air Act Amendments of
1990 with support from both Democrats
and Republicans. President Bush also
passed the Global Change Research Act
to study global changes in the environ-
Shutterstock/Luca Perra
ment. Due to the growing recession, the

president allowed regulations over savings
and loans companies in the bank bailout
of 1989. However, one of President
Bush’s main regulatory accomplishments
was the creation of the Americans with
Disabilities Act (ADA). Signed in 1990,
the ADA provided regulations on employees and changes in accessibility for those
with disabilities. In contrast to his regulatory acts, President Bush was instrumen-
tal in the deregulation of tariffs in North American countries, culminating in the
passage of NAFTA in 1994, which greatly reduced tariffs on trade between the
United States, Mexico, and Canada.34 Though NAFTA began as a Republican
initiative, its passage is often viewed as one of Bill Clinton’s first major victories,
as it created the largest free trade area in the world.35 The policies under Clinton
resulted in strong economic growth, low unemployment, and a surplus in the
federal budget. In fact, by the final year of his presidency, unemployment was as
low as 3.8 percent.36
Despite these victories, many suggest that Clinton’s deregulation of finance,
particularly the repeal of the Glass-Steagall Act in 1999, greatly contributed to
the Great Recession. The Act, which kept investment and retail banking separate,
was implemented in 1933 during the Great Depression to end bank runs and
irresponsible banking practices Deregulating allowed banks to become “too big to
fail” once more and later resulted in the bank bailout of 2008.37
George W. Bush continued the deregulatory approach but made an exception
with the Sarbanes-Oxley Act in 2002, which will be discussed further in Chapter 5.
This was a government regulation that required auditors to be more independent
of the firms that they were auditing and required corporations to improve their
financial reporting controls. This act was the result of major corporations not
having proper regulation of their financial reporting. But Bush was a supporter
of free trade and tried to push bilateral trade agreements with multiple countries.
With the effects of the Great Recession that began in 2007, investment bank
Bear Stearns began to collapse. The federal government stepped in and bailed out
banks, industrial firms, and passed the Troubled Asset Relief Program (TARP)
under the Emergency Economic Stabilization Act of 2008.
TARP attempted to improve the recession by obtaining ownership of
stocks and assets of banks and financial companies that were devastated by the
financial crisis. The government then provided loans from these funds to support
struggling businesses. The program provided money to the auto industry, citizens
facing foreclosure, banks, and financial institutions. It also set up a system
to encourage banks to pay back the money they were loaned as the economy
improved. This was successful, and the government actually made a profit from
TARP.38
Obama’s presidency took place immediately following the financial recession,
and he promised his efforts to deregulate would be “more sensibly targeted.”
He sought to bring more order to regulations that “had become a patchwork of

overlapping rules.” His intention was to increase input from experts, businesses,
and ordinary citizens.39 The first goal was to reestablish the government’s relations
with corporate America, which had been strained during the financial crisis. He
increased federal spending by pushing a $787 billion stimulus package to restore
the financial market. He was successful in raising the GDP by the end of his
first year as president. He also established federal regulations within the Federal
Reserve that allowed the government to shut down and take over large, struggling
financial firms. This legislation enabled increased monitoring of the financial
system and government control over derivatives.40 By the end of his first term,
Obama had signed three significant bills to stimulate the economy, increase access
and affordability of healthcare, and reform U.S. financial institutions. He signed
an executive order as “a government-wide review of the rules already on the books
to remove outdated regulations that stifle job creation and make our economy less
competitive.”41 Overall, Obama issued 101 regulations that reduced compliance
costs. On an annualized basis, he was able to reduce $7.9 billion in costs through
deregulation.42
The next president, Donald Trump, embarked on a major deregulation phi-
losophy in an effort to reduce redundancy. This resulted in federal agencies issuing
22 deregulatory actions for every new regulatory action.43 On the other hand, he
started a trade war with China by placing 25 percent tariffs on a majority of their
products at one point. China retaliated by placing a tariff on many U.S. products,
but exports from China far exceed U.S. imports to China.44 In addition, Trump
lowered taxes for individuals and corporations and reduced some healthcare
services. He supported legislation related to economic development, such as the
Farm Act of 2018.45
Overall, deregulation has been a popular theme for Republicans, with
Democrats being more receptive to the idea of government oversight of business;
however, over the last 40 years, all presidents have engaged in some level of
deregulation. Deregulation is a very popular issue with voters based on the belief
that it will lower the costs of business, which will subsequently stimulate the
economy, create jobs, and reduce oversight activities that provide no benefit.
The proponents of deregulation, on the other hand, see government as blocking
free markets and efficient operations in business. Globally, deregulation is also
popular, with legislation such as the Deregulation Act in the UK, which addressed
housing controls, insurance, energy, and urban development.
Role of Deregulation While regulatory measures taken by the government do have

some benefits, some argue that the market would function better with deregulation
than it would with regulation. Some believe if there is a strong judicial system in
place, then there is no need for regulating bodies to stop businesses from creating
faulty products because any business that creates poor goods will not stay in
business. In addition, a strong judicial system would ensure that anyone who does
anything to recklessly put consumers at risk would be prosecuted.
Beyond safety regulations, banking regulations are also seen as unnecessary by
those who call for deregulation. The argument is that governmental regulations
of banks do not benefit the economy and cost the United States a great deal of
money. Regulating product prices does not lead to market fairness either; rather,
competition among businesses does. Therefore, some believe that regulations harm
more than they help.
A major area of contention among businesses is financial regulations. With
the passing of the Dodd-Frank Act in 2010, financial institutions such as banks
were required to adhere to a multitude of new regulations. For example, various
councils and bureaus were set up under the Act with the power to liquidate large
financial companies that could result in devastating economic consequences if they

fail. While the Dodd-Frank Act was meant to help prevent another recession, many
do not feel that it is beneficial to a free market. A new bill called the Economic
Growth, Regulatory Relief and Consumer Protection Act passed during the Trump
administration revised several parts of the Act for this reason. The Dodd-Frank
Act will be discussed in more detail in Chapter 5.46
Benefits of Deregulation
As shown in Table 4.5, there are arguments against regulations. Complying with
government regulations costs Americans a lot of money and time that could be
spent elsewhere. For example, it cost businesses approximately $1.96 trillion in
2017 to comply with governmental regulations. Many believe that saving this
money is just as vital to the health of the U.S. economy as tax cuts. Another
argument concerns worker benefits. Regulatory costs can take away from certain
benefits that employees would have gotten without the regulations.
The amount of regulations that occur every year at both the state and federal
levels is staggering. These regulations often are not self-explanatory and can be
very difficult to enforce within a business due to their complexity. Additionally,
the benefits of regulation to consumers are not always readily seen, thus begging
the question of who actually benefits from governmental regulation.47
An important area of regulation and potential benefit of deregulation can
be found in energy. As sustainable and ecofriendly options become more readily
available, businesses are not limited to one source of energy. They have the option,
in a deregulated market, to purchase energy from alternative, competitive sources
such as American Power and Gas. Switching to a different energy company is also
easier under deregulation than if energy were highly regulated.
Beyond the practical benefits, deregulation of energy, as well as other business
necessities, can provide a better working environment. When companies are
competing to obtain customers, there is more focus on positive customer service.
Companies that do not treat their customers with the utmost respect and attention
to service could lose their customers to competitors. With deregulation and more
of a free market, customers can choose where and when to go for their needs, and
businesses are held to a higher standard, knowing that slip-ups can result in loss
of revenue.48
In the aviation industry, deregulation has resulted in lower prices to travel
and increased productivity for airlines. These improvements came in the wake of
the Airline Deregulation Act of 1978 in the United States. With less regulation,
airliners are able to make more decisions about how to include more people on
flights, what routes to take, and what to charge for flights. Freedom in route
navigation, in particular, has led to more competition between airlines. Airlines
also installed hub-and-spoke systems, which helped planes engage in more
Table 4.5 Arguments Against Regulations

• Government regulations are a hidden tax on the market.
• Government regulations hinder competitive market forces by erecting barriers to entry.
• Government regulations are a form of special-interest protection and rent-seeking by the
business community.
• Government regulations are redundant because the free market is self-regulating.
• Government regulations threaten the rule of law and violate property rights, often subverting
market forces to the arbitrary whims of bureaucratic decision-makers.
• Government regulations are rarely subject to thorough cost-benefit analysis.
Source: Tom Lehman, “Six Arguments Against Government Regulations,” Capitalism.com, May 19, 2017, https://www.
capitalism.com/six-arguments-government-regulations/ (accessed June 10, 2019).

resourceful flights with more appropriate and individualized equipment for each
flight.
Costs of Deregulation
While deregulation has brought about noticeable benefits, problems have occurred
as a result of the lack of regulation. While a competitive market is beneficial in
driving prices down and allowing consumers more options, it can also weed out
smaller businesses. For example, 85 percent of the airline industry is controlled
by United, Delta, American, and Southwest, effectively excluding smaller airlines.
Monopolies and mergers between large companies have resulted in unfair
pricing for passengers, who cannot enjoy discounts or deals when paying fares.
To help with unfair pricing, the government could increase competition in the
market by further removing regulations from the airline industry. It could also
be more diligent about penalizing antitrust law violators. As a last resort for a
deregulated airline industry, the government could reinstate price ceilings. Some
argue that deregulation of the airline industry has led to an increasingly miserable
flying experience, with overcrowded planes and airports.49 However, this can
be seen as a consequence of the industry itself, rather than deregulation per se.
As competition increases, airports offer more and more deals to passengers and
encourage more and more passengers to fly. This can create congestion and too
many people for the resources that are available to airports to handle. Ironically,
airports rely on the government to provide resources, so a shortage of resources
based on demand can be seen as a governmental distribution issue rather than a
cost of deregulation.50
From an economic perspective, regulation and deregulation can be beneficial,
but it depends on the area of the market. The Council of Economic Advisors argues
that some regulations are helpful and necessary for a stable market. However, it
also argues for deregulation in certain sectors, such as healthcare and rental hous-
ing. Therefore, the debate for whether deregulation is best for the economy and
American citizens continues.51
Summary
The government has a profound influence on business. There has been conflict
over the regulation of business. The legal system is not always accepted in some
countries as insurance that business will be conducted in a legitimate way. While
many businesses may object to regulations aimed at maintaining ethical cultures
and preserving stakeholder welfare, the very existence of businesses is based on
laws permitting their creation, organization, and dissolution. Large, incorporated
firms often receive more attention than small businesses because of their size, vis-
ibility, and impact on so many aspects of the economy and society. Many diverse
stakeholder groups attempt to influence the public officials who legislate, interpret
laws, and regulate business. Additionally, new disruptive technology is changing
both the business and the regulatory environment.
Economic reasons for regulation often relate to efforts to level the playing field
on which businesses operate. These efforts include regulating trusts, which are
generally established to gain control of a product market or industry by eliminat-
ing competition, and eliminating monopolies, which occur when just one business
provides a good or service in a given market. Another rationale for regulation
is society’s desire to restrict destructive or unfair competition. Social regulation
is concerned with the overall welfare of citizens. Protecting and supporting
consumers and providing the work environment with safe work conditions, equal
opportunity, and healthcare are the focus of social regulations.

Regulation creates numerous costs for businesses, consumers, and society at

large. Some measures of these costs include administrative spending patterns, staff-
ing levels of federal regulatory agencies, and costs businesses incur in complying
with regulations. The cost of regulation is passed on to consumers in the form of
higher prices and may stifle product innovation and investments in new facilities
and equipment. Regulation also provides many benefits, including greater equality
in the workplace, safer workplaces, resources for disadvantaged members of soci-
ety, safer products, more information about and greater choices among products,
cleaner air and water, and the preservation of wildlife habitats. Antitrust laws and
regulations strengthen competition and spur companies to invest in research and
development. Many businesses and individuals believe that the costs of regulation
outweigh its benefits. Some people desire complete deregulation, or removal of
regulatory authority.
There are many benefits of deregulation. These include a more competitive,
free market, more control and choice for consumers over goods and services,
and less regulatory costs to businesses. Deregulation has occurred in many areas,
often depending on the political stance of the government. One of the main ones
is an increase in money for the economy. Deregulation can also provide a better
working environment. In the aviation industry, deregulation has resulted in lower
prices to travel and increased productivity for airlines.
Because government is a stakeholder of business (and vice versa), businesses
and government can work together as both legitimately participate in the political
process. Business participation can act in society’s interests either positively or
negatively, based not only on the outcome, but also on the perspective of the
stakeholders.
Uber Puts It in Reverse on International Expansion

Issue: Should businesses proactively adapt to local laws firm’s business model clearly infringes on the Personal
and regulations? Transportation Law because drivers are transporting riders
without a personal transportation license.
Uber Technologies, Inc. first began doing business in the Regulatory issues such as these forced Uber to tem-
United States utilizing the sharing economy. It quickly porarily pull out of most German cities. Rather than
expanded internationally, setting up in countries such as insisting on its own business methods that align with U.S.
China, India, Germany, and France. While this expansion regulations, Uber reentered Germany with the mindset
has been beneficial for Uber, international markets involve that it will adapt its business to the laws and regulations of
unique challenges in the realms of regulation and law. the country it is in. For example, transportation drivers are
Regulatory requirements differ from country to country. legally required in Germany to report to a garage or home
The company has run into problems because it has base between rides. While this is less cost effective for the
attempted to apply the same practices in other countries drivers, Uber is attempting to follow that rule. At the same
as it does in the United States. time, management is working with the government to alter
A wide-reaching problem that has occurred for Uber is some of the regulatory requirements and is using already-
the failure to obtain taxi licenses, even though Uber d
rivers licensed drivers in order to reinstate Uber’s business in
offer many of the same services as taxis. Governments various German towns.
have responded by banning Uber or certain Uber services Although Uber defines itself as an “agent” of its
due to the lack of professional licenses for drivers. For “individual contractors,” many courts do not view its
instance, in Germany, a court banned Uber services services in the same way. They are forcing Uber to comply
if they used unlicensed drivers. Uber challenged this with licensing laws or stop doing business in certain areas.
decision, but the Federal Court of Justice ruled that the Working with governments, knowing the laws of each

country that the company expands into, and changing the There Are Two Sides to Every Issue
business to fit the local laws and regulations are important 1. It’s more beneficial for businesses to adapt to local laws
lessons that Uber is learning. Time will tell whether Uber’s and regulations prior to entering new countries.
changes will be enough to restore trust in the company 2. It’s more beneficial for businesses to expand and adapt
in some of the countries that have banned its services in to local laws and regulations as needed after entering
the past. new countries.
Sources: Eric Auchard and Christoph Steitz, “German Court Bans Uber’s Unlicensed Taxi Services,” Reuters, March 18, 2015, http://www.reuters.com/
article/2015/03/18/us-uber-germany-ban-idUSKBN0ME1L820150318 (accessed May 8, 2019); Rob Davies, “Uber Suffers Legal Setbacks in France and
Germany,” The Guardian, June 9, 2016, https://www.theguardian.com/technology/2016/jun/09/uber-suffers-legal-setbacks-in-france-and-germany
(accessed May 8, 2019); Economist staff, “Uberworld,” The Economist, September 3, 2016, p. 9; Jefferson Graham, “App Greases the Wheels,” USA
Today, May 27, 2015, p. 5B; Felicitas Hackmann, “UberPOP, Uber’s Ride-Sharing Service, Pops up in More EU Cities,” VentureBeat, April 15, 2014,
http://venturebeat.com/2014/04/15/uberpop-ubers-peer-to-peer-service-pops-up-in-more-eu-cities/ (accessed May 8, 2019); Sam Schechner and Tom
Fairless, “Europe Steps up Pressure on Tech Giants,” The Wall Street Journal, April 2, 2015, http://www.wsj.com/articles/europe-steps-up-pressure-on-
technology-giants-1428020273 (accessed May 8, 2019); Spiegel, “Vermittlung Privater Fahrer: Gericht Verbietet Uber deutschlandweit,” http://www.
spiegel.de/wirtschaft/unternehmen/uber-urteil-gericht-verbietet-uber-deutschlandweit-a-1024214.html (accessed May 8, 2019); Uber, Home Page, https://
www.uber.com/ (accessed May 8, 2019); UNM Daniels Fund Ethics Initiative, “Truth, Transparency, and Trust: Uber Important in the Sharing Economy,”
slide presentation, https://danielsethics.mgt.unm.edu/teaching-resources/presentations.asp (accessed May 8, 2019); Adam Satariano, “Needing Growth,
Uber Returns to Germany. This Time on Best Behavior,” The New York Times, November 19, 2018, https://www.nytimes.com/2018/11/19/technology/uber-
growth-ipo-germany.html (accessed May 8, 2019).
Key Terms
Better Business Bureau (BBB) (p. 107) Ethics & Compliance Initiative patent laws (p. 100)
civil regulations (p. 110) (ECI) (p. 110) regulation (p. 96)
Data and Marketing Association monopoly (p. 100) self-regulation (p. 107)
(DMA) (p. 107) National Advertising Division social regulation (p. 101)
deregulation (p. 111) (NAD) (p. 107) trusts (p. 100)
disruptive technology (p. 98) nongovernmental organizations
economic regulation (p. 101) (NGOs) (p. 110)
1. Discuss the existence of both cooperation and 5. In what ways is disruptive technology changing the
conflict between government and businesses regulatory environment?
concerning the regulation of business. 6. How are social regulation and economic regulation
2. What is the rationale for government to regulate the different? How do they work together?
activities of businesses? How is our economic and 7. What are the benefits of joining trade associations
social existence shaped by government regulations? with self-regulatory programs?
3. What is the role and function of the FTC in the 8. Why are civil regulations effective? What are
regulation of business? How does the FTC engage in possible limitations to their influence?
proactive activities to avoid government regulation? 9. Compare the costs and benefits of regulation. In
4. How do global regulations influence U.S. businesses your opinion, do the benefits outweigh the costs or
operating internationally? What are the major vice versa? What are the advantages and disadvan-
obstacles to global regulation? tages of deregulation?
Visit the Better Business Bureau website (https://www.bbb.
org/). What is the BBB’s current vision? What is the BBB’s
current mission? Review the news updates on the site. On the
basis of these posts, how does the BBB help businesses? How
does the BBB help consumers?

The Taxing Role of Being a Politician: What Would You Do?

The election of a new governor brings many changes to
?
During the next few months, Joe was involved in
any state capital, including the shuffling of a variety of a number of issues that could potentially help or harm
appointed positions. In most cases, political appointees agriculture-based industries. Various reports and policy
have contributed a great deal to the governor’s election statements within the Agricultural Commission were being
bid and have expertise in a specific area related to the used to tailor state legislation and regulatory proposals.
appointed post. Joe Barritz was in that position when he The beef and cotton councils were actively supporting a
became assistant agricultural commissioner in January proposal that would provide tax breaks to farmers and
2020. He was instrumental in getting the governor elected, ranchers. The staff on the Agricultural Commission were
especially through his fundraising efforts. Joe’s family mixed on the proposal, but Joe was expected to deliver
owned thousands of acres in the state and had been farming a report to a legislative committee on the commission’s
and ranching since the 1930s. Joe earned a bachelor’s preferences. His presentation was scheduled for October
degree in agricultural economics and policy and a law 17.
degree from one of the state’s top institutions. He worked On October 5, nearly 60 of Joe’s friends gathered at
as an attorney in the state’s capital city for over 18 years and the catered reception to reminisce and congratulate him
represented a range of clients, most of whom were involved on his success. Most were good friends and acquaintances,
in agriculture. Thus, he possessed many characteristics that so the mood and conversation were relatively light that
made him a strong candidate for assistant commissioner. evening. A college football game between two big rivals
In June, after about six months on the job, Joe had drew most people to the big-screen TV. By midnight, the
lunch with a couple of friends he had known for many guests were gone. Back at the office the following week,
years. During that lunch, they had a casual conversation Joe began working on his presentation for the legislative
about the fact that Joe never did have a true “celebration” committee. Through a series of economic analyses, long
after being named assistant agricultural commissioner. meetings, and electronic discussions, he decided to support
His friends decided to discuss with others and plan such the tax benefits for farmers and ranchers. News reports
a celebration in a few months. Before long, eight of Joe’s carried information from his presentation.
friends were busy planning to hold a reception in his honor It was not long before some reporters made a connec-
on October 5. Two of these friends were currently employed tion between the reception in Joe’s honor and his stand on
as lobbyists. One represented the beef industry association, the tax breaks for agriculture industries. An investigation
and the other worked for the cotton industry council. quickly ensued, including reports that the beef and cotton
They asked Joe if they could hold the celebration at his industry associations had not only been present, but also
lake home in the capital. Joe talked with the commission’s financially supported the reception. The small company
ethics officer about the party and learned that these types used to plan and cater the party indicated that checks from
of parties, between close friends, were common for newly the cotton industry council and beef industry association
appointed and elected officials. The ethics officer told Joe were used to cover some of the expenses. A relationship
that the reception and location were fine, but only if his between the gift of the reception and Joe’s presentation to
lobbyist friends paid for the reception with personal funds. the legislative committee would be a breach of his oath of
The state’s ethics rules did not allow a standing government office, as well as state ethics rules. If you were Joe, what
official to take any type of gift, including corporate dollars, would you do?
that might influence his or her decision-making. Joe com-
municated this information to his friends.

CHAPTER
5 The Impact of
Business on
Government and the
Political Environment
NFL’s Headaches over Concussion Responsibility
Playing professional football, almost by definition, issue of making the game safer. The class-action
is not one of the safest jobs in the world, especially lawsuit was officially settled by the NFL giving each
at the level of the National Football League (NFL), player a maximum of $5 million each.
where players get injured almost every week of Just one year after the settlement, the NFL
play. Sprained ankles, torn ligaments, concussions, contributed $100 million for brain research and
and broken bones are pretty much par for the development and instituted a new policy for handling
course. More than 200 concussions are reported concussions in players. Though the league is taking
during a typical football season. It is possible that if measures to improve safety, some fans as well as
the NFL does not resolve the issue, regulatory and athletes have criticized the new rules for softening
administrative agencies could get involved. the sport of football, saying defenses have become
Over the past few decades, retired NFL p layers less effective at stopping offense players.
in particular, have raised concerns about how Later, the league was dealt another blow.
repetitive head injuries and concussions that they Researchers discovered after examining the post-
sustained while playing in the NFL have negatively mortem brains of 202 men who had played football
affected them later in life. Evidence began to mount sometime during their lives from pre–high school
that many retired NFL players faced considerable to the NFL—that 177 showed evidence of chronic
neurological problems, including permanent brain traumatic encephalopathy (CTE), a degenerative
damage, dementia, and much higher than a verage brain disease and one of the most common long-
incidents of Alzheimer’s disease and clinical depres- term injuries linked to concussion among football
sion. Some NFL players have arguably even died by players. These brains were donated rather than
suicide due to their degenerative brain disease. selected at random, though, and so the results
Players have argued that the NFL knew or should could be skewed. However, the findings suggest
have known the risks that they were incurring that concussion trauma among NFL players is much
due to concussions and traumatic repetitive brain more prevalent than originally thought.
injuries suffered during games, and that the NFL did The risks of suffering from permanent brain
not do enough to prevent these injuries. damage and other injuries have already convinced
In 2013 the league announced that a neurologist some NFL players (such as Indianapolis Colts
would be present on the field of every NFL game quarterback Andrew Luck in 2019) to retire early.
Shutterstock/Billion Photos
as a new concussion safety measure. Additionally, One poll found that parents are 44 percent less
the league introduced new penalties for crown of likely to allow their children to play football.
the helmet hits where players lower their helmet Addressing these issues is vital to the continued
before a tackle. Soon after, the league agreed to existence of the NFL. The league has said that they
settle a series of lawsuits by paying nearly $1 billion are pushing for players to wear helmets that are
to retired football players who suffered these types more impact-resistant and shock-absorbent, and
of injury. Moreover, it gave $10 million to fund brain the use of these helmets may be a factor in fewer
injury research and various education and safety concussions. Recently, concussions decreased by
programs. Considering that in one year, the NFL’s 30 percent during the regular season, according
total revenues amounted to about $14 billion, many to the NFL. Along with improved helmets, the NFL
felt that $1 billion was insufficient—only a drop in the continues to do research on the impact of injuries
bucket. In addition, there were concerns that the on the brain and how to better protect football
agreement did not really reach the more systemic players.1
Chapter Objectives
●● Understand changes in the contemporary political environment
●● Examine how business participates in and influences public policy
●● Describe the government’s approach to ensuring legal and ethical compliance
121
T he government has the power, through laws and regulations, to

struc
ture how businesses and individuals achieve their goals. The
purpose of regulating firms is to create a fair competitive environment
for businesses, consumers, and society. All stakeholders need to demonstrate a
commitment to corporate social responsibility through compliance with relevant
laws and proactive consideration of social needs. The law is one of the most
important business subjects in terms of its effect on organizational practices and
activities. Thus, compliance with the law is a fundamental expectation of social
responsibility. Because the law is based on principles, norms, and values found
within society, the law is the foundation of responsible decision-making.
This chapter explores the complex relationship between business and govern-
ment. First, we discuss the contemporary political environment. We examine the
historical context related to major social and economic events and political and
regulatory initiatives. This includes sustainability, technology, social issues, and
the reaction of the U.S. Congress to address issues. The role of special-interest
groups is involved in influencing political decisions.
The Contemporary Political Environment

During the 1960s, a significant “antiestablishment” movement manifested in the
form of hostile protests toward businesses. These efforts spurred a 15-year wave
of legislation and regulation to address a number of issues of the day, including
product safety, employment discrimination, human rights, energy shortages,
environmental degradation, and scandals related to bribery and payoffs. During
the 1980s, the pendulum swung back in favor of business, and the economic pros-
perity of the 1990s was driven by technological advances and the self-regulation
of business. In addition, businesses’ priorities were beginning to be focused on
protecting competition and the natural environment. These policies continued
through 2008, with continued self-regulation of industries and the rolling back of
environmental laws that businesses deemed detrimental. However, the regulatory
climate changed again in 2009 toward more regulation of environmental and
health issues, resulting in higher taxes and increased social services. The onset of
the financial crisis created an even greater need for stricter legislation, such as the
Troubled Assets Recovery Troubled Assets Recovery Program (TARP) that authorized the U.S. Treasury to
Program (TARP) purchase up to $700 billion of troubled assets like mortgage-backed securities. It
a law authorizing the U.S. Treasury
to purchase up to $700 billion of
has also resulted in support for entirely new regulation and regulatory agencies
troubled assets such as mortgage- such as the Consumer Financial Protection Bureau (CFPB). These new regulations
based securities have had wide-sweeping effects on the financial industry. Other organizations,
such as the Environmental Protection Agency (EPA) and the Food and Drug
Administration (FDA) in the United States, also began to regulate with renewed
vigor, with the aim of protecting stakeholders. Recent years have seen a swing
toward deregulation. For example, the Affordable Care Act (ACA), passed during
the administration of President Barack Obama, has been dialed back. Previously,
there was a penalty (which the Supreme Court ruled was a tax) that uninsured
individuals were required to pay. But this was eliminated from the ACA after
the White House Council of Economic Advisers argued that deregulating health
insurance by removing the mandate and easing requirements on health insurers
would not destabilize the insurance market.2
Such changes in the political environment over the last 60 years shaped the
political environment in which businesses operate and created new avenues for
businesses to participate in the political process. Among the most significant
factors shaping the political environment were changes in Congress and the rise
of special-interest groups. As the Obama administration sought to revive and even

Chapter 5 The Impact of Business on Government and the Political Environment 123
increase oversight of the finance industry, more companies became interested

in hiring lobbyists to campaign on behalf of their interests in Washington. The
administration of Obama’s successor, Donald Trump, saw an increase in regula-
tory lobbying. According to a Brookings report, while lobbying increased, the
administration did not necessarily give lobbying groups increased priority. Both
big business and industry trade association lobbying increased in both the Obama
and Trump administrations.3
Changes in Congress
Among the calls for social reform in the 1960s were pressures for changes within
the federal legislative process itself. Bowing to this pressure, Congress enacted an
amendment to the Legislative Reorganization Act in 1970, which ushered in a new
era of change for the political process. This legislation significantly revamped the
procedures of congressional committees, most notably stripping committee chair-
persons of many of their powers, equalizing committee and chair assignments,
and requiring committees to record and publish all roll-call votes taken in the
committee. By opening up the committee process to public scrutiny and reducing
the power of senior members and committee leaders, the act reduced the level of
secrecy surrounding the legislative process and effectively brought an end to an era
of autonomous committee chairs and senior members.4
Another significant change occurred in 1974, when Congress amended the
Federal Election Campaign Act to limit contributions from individuals, political
parties, and special-interest groups organized to get specific candidates elected or
policies enacted.5 Around the same time, many states began to shift their electoral
processes from the traditional party caucus to primary elections, further eroding
the influence of the party in the political process. These changes ultimately had
the effect of reducing the importance of political parties by decreasing members’
dependence on their parties. Many candidates for elected offices began to turn
to special-interest groups to raise enough funds to mount serious campaigns and
reelection bids.
In 2002, Congress passed the Bipartisan Campaign Reform Act (BRCA), spon-
sored by senators John McCain and Russell Feingold. This new legislation limited
the amount of contributions that parties could make to political campaigns, and
it implemented rules for how corporate and labor funds could be used in federal
elections. The Act also forbade national party committees from raising or spending
unregulated funds. Though it outraged certain legislators, who appealed to the
Supreme Court over its constitutionality, the Supreme Court upheld it.6 However,
the decision, popularly referred to as Citizens United, also granted more powers to
organizations regarding corporate contributions. The decision gave corporations
the right to spend as much as they want in independent political expenditures to
support governmental candidates. These independent political expenditures are
provided through political action committees (PACs), organizations that solicit political action committees
donations from individuals and then contribute these funds to candidates running (PACs)
organizations that solicit
for political office. Companies can organize PACs to which their executives, donations from individuals and
employees, and stockholders can make significant donations as individuals. PACs then contribute these funds to
operate independently of business and are usually incorporated. Labor unions candidates running for political
and other special-interest groups, such as teachers and medical doctors, can also office
establish PACs to promote their goals.
The Citizens United decision enabled the creation of what has been termed
“super PACs,” because of what is seen as their unlimited ability to receive political
donations.7 Before Citizens United, individuals were able to contribute no more
than $2,500 to PACs, and unions and corporations were not allowed to con-
tribute at all. The Supreme Court ruled that these prohibitions violated the First
Amendment. The Federal Election Committee has rules to restrict PAC donations

to $5,000 per candidate for each election. However, many PACs exploit loopholes
in these regulations by donating so-called soft money to political parties, which
is money that does not support a specific candidate for federal office. Under the
current rules, these contributors can make unlimited donations to political parties
for general activities. Donors can donate through a company they own without
disclosing their name.
gerrymandering Congressional maps have been in the spotlight since the Supreme Court
the practice of manipulating district ruled in 2019 that the Constitution doesn’t bar gerrymandering, the practice
boundaries for partisan political of manipulating district boundaries for partisan political advantage. The court
advantage which ultimately has
decided that the question of gerrymandering must be resolved by the elected
the power to greatly influence
legislation branches of government, not the courts. In 2018, the Pennsylvania Supreme Court
declared the state’s Republican-drawn congressional map was unconstitutional
based on the state constitution. Partisan gerrymandering has the power to greatly
influence legislation.8
Rise of Special-Interest Groups

The success of activists’ efforts in the 1960s and 1970s marked the rise of special-
interest groups. The movements to promote African American and women’s rights
and to protest the Vietnam War and environmental degradation evolved into
well-organized groups working to educate the public about significant social issues
and to crusade for legislation and regulation of business conduct that they deemed
irresponsible. These progressive groups were soon joined on Capitol Hill by more
conservative groups working to further their agenda on issues such as business
deregulation, restriction of abortion and gun control, and promotion of prayer in
schools. Businesses joined in by forming industry and trade associations.
These increasingly powerful special-interest groups now focused on getting
candidates elected who could further the groups’ political agendas. Common
Common Cause Cause, for example, is a nonprofit, nonpartisan organization working to fight
a nonprofit, nonpartisan
corrupt government and special interests backed by large sums of money. Since
organization that fights corrupt
government and special interests 1970, Common Cause, with over 1 million members, has campaigned for greater
openness and accountability in government. Some of its self-proclaimed victories
include reform of presidential campaign finances, tax systems, congressional eth-
ics, open meeting standards, and disclosure requirements for lobbyists. Table 5.1
lists the dates and areas of Common Cause’s major accomplishments over the
past three decades.9 Today, the organization is trying to modernize the election
process by allowing automatic voter registration, election-day registration at
polling stations, online registration, and preregistration for high school students.
At least partly due to their efforts, automatic voter registration has been adopted
in 17 states. Also, Common Cause is promoting increased voting security by
lobbying for eliminating online voting, which is subject to hacking; ensuring that
paper backups of votes are created; retiring old voting machines; and requiring
risk-limiting audits of voting. Common Cause promotes the integrity of the
voting process through these solutions so that citizens can have confidence in the
results of elections and feel that their votes have been protected from potential
threats.10
Influencing Government
The political environment has a strong impact on a company’s economic value,
and new regulations can affect how businesses operate. To influence government,
many businesses and private interest groups proactively participate in the political
process.

Table 5.1 Accomplishments of Common Cause

1971: Helps pass the Twenty-Sixth Amendment, giving 18-year-olds the right to vote
1974: Leads efforts to pass presidential public financing, contribution limits, and disclosure
requirements
1974–1975: Helps pass Freedom of Information Act (FOIA) and open meetings laws at federal,
state, and local levels
1978: Leads efforts to pass the historic Ethics in Government Act of 1978, requiring financial
disclosure for government officials and restricting the “revolving door” between business and
government
1982: Works to pass extension of the Voting Rights Act
1990: Works to help pass the Americans with Disabilities Act (ADA), guaranteeing civil rights for
the disabled
1995: Lobbies for limits on gifts in the House and Senate and for passage of the Lobby Reform
Act, providing disclosure of lobbyists’ activity and spending
2000: Successfully works for legislation to unmask and require disclosure of “527” political
groups which are tax-exempt organizations created primarily to get candidates elected or
appointed to local, state, or federal office
2001: Lobbies successfully with a coalition for the Help America Vote Act, which provided
funding to states for improvement of the nation’s system of voting
2002: Leads successful multiyear campaign to enact the Bipartisan Campaign Reform Act,
banning soft money in federal campaigns. In 2003, in a landmark decision, the U.S. Supreme
Court upheld the law
2004: Launches major voter mobilization and election monitoring programs for presidential
election
2005: Wins the fight against efforts to cut federal funding for the Corporation for Public
Broadcasting, and gathers 150,000 petition signatures calling for the resignation of CPB chairman
Ken Tomlinson for partisan and unethical behavior
2005/2006: Leads the charge against disgraced Majority Leader Tom DeLay and fights for major
ethics reform
2007: Fights successfully for passage of the Honest Leadership and Open Government Act of
2007, making major improvements in ethics and lobby laws and rules
2008: Leads successful campaign to create the first-ever independent ethics commission in the
U.S. House of Representatives
2010: Spurred by the U.S. Supreme Court’s Citizens United decision that lifted the decades-old
ban on corporate and union spending around elections, Common Cause redoubles efforts to
pass the Fair Elections Now Act, which would allow candidates to run competitive campaigns on
small donations and fair elections funds
2011: Successfully helps pass Online Voter Registration Senate Bill 397, resulting in thousands of
people in California registering online to vote
2012: Pushes for the Assembly Bill 1436 in California, which give voters more opportunity to vote
closer to the election
2016: Voter’s Choice Act passes; meant to take effect in 2018, allows voters in California to have
different options in voting methods
2017: Works with the California Clean Money Campaign to pass the California DISCLOSE Act,
requiring transparency regarding funding for voting advertisements
2018: Helps pass the Legislative Employee Whistleblower Protection Act for legislative employee
protection in California
Sources: California Common Cause, “Our Successes,” Common Cause, https://www.commoncause.org/california/about-

us/our-impact/ (accessed June 19, 2019); Assembly Bill No. 1436, Chapter 497, California Legislative Information, https://
www.commoncause.org/california/about-us/our-impact/ (accessed June 19, 2019); Assembly Bill No. 403, Chapter 2,
California Legislative Information, https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180AB403
(accessed June 19, 2019).

Ethical Responsibilities in SOCIETY
High Society: Marijuana on the Slow Road to Legalization

Marijuana can be dated back as far as 6000 BC, when The group spending the most on lobbying to defend and
its seeds were used for food in China. During the time of expand the cannabis industry is the National Cannabis
Napoleon, it was used for its pain-relieving mechanisms Industry Association, a nonprofit representing about 2,000
and sedative effects. Marijuana is made from the flowering businesses. While medical marijuana has been increasingly
top of the Cannabis sativa plant and contains tetrahydro accepted by Americans, recreational marijuana has been
cannabinol (THC), which is what causes a mind-altering strongly debated. In 2012, Colorado and Washington became
state in marijuana users. About $2.3 million is spent the first states to legalize the use of recreational marijuana for
annually on lobbying in the marijuana industry. adults over 21. Colorado’s marijuana industry has surpassed
Marijuana is also used for its psychoactive effects. For $6 billion in total sales since its legalization. Many states have
instance, it has been used to induce changes in mood followed suit, creating a multibillion-dollar industry.
and consciousness, as well as to relax and calm down. Along with marijuana, other products from the cannabis
Studies indicate that the use of marijuana can have plant have attracted interest. For example, the 2018 Farm
both positive and negative effects on overall health. For Bill addressed hemp production. Hemp is defined as a
example, research has shown that using marijuana reduces substance containing 0.3 percent or less of tetrahydrocan-
the nausea and vomiting of cancer patients receiving nabinol (THC). Because of the limited amount of THC, hemp
chemotherapy. Negative short-term effects of marijuana is thought to be safer than marijuana. The 2018 Farm Bill
use include inability to concentrate and distortion of sense legalized hemp production and sale at the federal level. In
and time. The long-term effects can include respiratory addition, hemp can now be sold across state lines without
issues, fatigue, decreases in libido, impaired fertility, and federal penalties. Marijuana, on the other hand, has not
unfavorable changes in fat and muscle mass. been legalized at the federal level, even under the new bill.
One ethical concern is the lack of extensive testing. Hemp is used in a variety of items, from household goods
Testing is expensive, and there aren’t enough approved to medicinal products. Cannabidiol (CBD) has increased in
testing laboratories. Because marijuana is still illegal at the popularity over the years as a medicinal agent. Under the
federal level, insufficient funds are set aside for cannabis 2018 Farm Bill, CBD products cultivated from hemp plants
research. Additionally, there are no federal standards or are now legal federally, but CBD cultivated from marijuana
procedures in place for testing labs, meaning that two labs continues to be illegal. The process of growing hemp will
can follow different procedures and thus produce different be regulated by the federal government under the bill, as
results running the same test. This has led to inconsistent well as state legislature. Those growing hemp must have
and inconclusive results. Additionally, conflicting federal a license in order to operate legally.
and state laws create an ethical gray area for many Continual research into the benefits and possible
individuals and businesses. For example, providing legal pitfalls of hemp products is also encouraged under the new
services to clients in the marijuana industry could still be bill. Hemp farmers are now considered to be controlled by
considered a violation of federal law, even if marijuana use the Federal Crop Insurance Act, giving them equal rights
is legal in the state. with other farmers. The bill is a success for those who are
The majority of states have legalized marijuana for hoping to move closer to marijuana legalization. The political
medicinal purposes because of the potential positive environment and government regulation will determine
effects of its use, while attempting to mitigate the potential further actions for or against marijuana legalization, at both
negative effects via medical oversight of its administration. the medicinal and recreational levels.
Sources: Aaron Cadena, “Hemp vs. Marijuana: The Difference Explained (2019 Update),” Medium, September 10, 2018, https://medium.com/cbd-origin/
hemp-vs-marijuana-the-difference-explained-a837c51aa8f7; John Hudak, “The Farm Bill, Hemp Legalization, and the Status of CBD: An Explainer,”
Brookings Institution, December 14, 2018, https://www.brookings.edu/blog/fixgov/2018/12/14/the-farm-bill-hemp-and-cbd-explainer/; Michael Nepveux,
“2018 Farm Bill Provides a Path Forward for Industrial Hemp,” American Farm Bureau Federation, February 28, 2019, https://www.fb.org/market-intel/
2018-farm-bill-provides-a-path-forward-for-industrial-hemp; National Commission of Marijuana and Drug Abuse, “History of Medical Marijuana Use,” Erowid,
1972, http://www.erowid.org/plants/cannabis/cannabis_medical_info3.shtml; “Cannabis in the Clinic? The Medical Marijuana Debate,” Learn Genetics
Utah Education, January 24, 2011, https://learn.genetics.utah.edu/content/addiction/cannabis/; Thomas J. Bouril, “Marijuana and Hemp: The Untold Story,”
1997, http://azinelibrary.org/trash/Marijuana_and_Hemp-_The_Untold_Story.pdf; T. T. Brown and A. S. Dobs, “Endocrine Effects of Marijuana,” Journal of
Clinical Pharmacology, 42(2002), 90–96; Maia Szalavitz, “Study: Marijuana Not Linked with Long-Term Cognitive Development,” TIME, July 19, 2011, http://
healthland.time.com/2011/07/19/study-marijuana-not-linked-with-long-term-cognitive-impairment/; Aaron Smith, “Marijuana legalization Passes in Colorado,
Washington,” CNNMoney, November 8, 2012, http://money.cnn.com/2012/11/07/news/economy/marijuana-legalization-washington-colorado/index.html;
Matt Ferner, “Marijuana Legalization: What Everyone Needs to Know: Authors Discuss Risks and Rewards of Legal Weed,” Huffington Post, September
4, 2012, http://www.huffingtonpost.com/2012/09/04/marijuana-legalization-research_n_1850470.html; Open Secrets, “Lobbying Spending in Marijuana,
2019,” https://www.opensecrets.org/lobby/indusclient.php?id=N09; Sandra Fish, “Cannabis Lobby Gains New Clout in Colorado as Its Spending Tripled in
the Past Five Years,” Colorado Sun, March 13, 2019, https://coloradosun.com/2019/03/13/colorado-cannabis-lobby-clout-legislature/.

Corporate Approaches to Influencing Government

Although some businesses view regulatory and legal forces as beyond their control
and simply react to conditions arising from those forces, other firms actively seek
to influence the political process to achieve their goals. In some cases, companies
publicly protest the actions of legislative bodies. More often, companies work
for the election of political candidates who look upon them positively. Lobbying,
PACs, and campaign contributions are some of the tools that businesses employ
to influence the political process.
Lobbying
Among the most powerful tactics a business can employ to participate in public
policy decisions is direct representation through full-time staff who communicate
with elected officials. Lobbying is the process of working to persuade public lobbying
and/or government officials to favor a particular position in decision-making. the process of working to
persuade public and/or
Organizations may lobby officials either directly or by combining their efforts with government officials to favor a
other organizations. particular position in
Many companies concerned about the threat of legislation or regulation that decision-making
may affect their operations negatively will employ lobbyists to communicate
their concerns to officials on their behalf. For example, 1,300 clients lobbied on
issues related to tariffs and trade in response to the trade war between the United
States and China in 2018. Also, General Motors (GM), which manufactures
many vehicles in Mexico, has lobbied in an attempt to block new tariffs on
imported cars.11 Table 5.2 lists the organizations that spend the most money on
lobbying.
Table 5.2 Top Spenders in Lobbying

Lobbying Client Total
U.S. Chamber of Commerce $ 1,528,450,680
National Association of Realtors $ 557,674,732
American Medical Association $ 400,154,500
American Hospital Association $ 378,868,630
Pharmaceutical Research and Manufacturers of America $ 374,388,550
GE $ 359,742,000
Blue Cross/Blue Shield $ 353,789,086
Business Roundtable $ 287,680,000
AARP $ 284,461,064
Boeing Company $ 278,133,310
Northrop Grumman $ 277,852,213
Lockheed Martin $ 259,162,792
ExxonMobil $ 257,572,742
AT&T Inc. $ 251,474,644
Verizon Communications $ 247,836,109
National Association of Broadcasters $ 233,188,000
Edison Electric Institute $ 227,185,085
Southern Company $ 226,280,694
Comcast Corporation $ 201,034,323
Altria Group $ 200,265,200
Source: Center for Responsive Politics, “Top Spenders,” Open Secrets, 2019, https://www.opensecrets.org/lobby/top.
php?indexType=s (accessed June 18, 2019).

The financial industry has long

employed lobbyists to push for increased
deregulation so that it can pursue more
profitable (but riskier) avenues. However,
changes in regulation and compensation
practices in the financial sector are making
this a more difficult task. In the past, bank
officials have often been rewarded for the
quantity of business they do, rather than
the quality, which encouraged employees
to engage in riskier business practices
to increase their compensation packages.
Shutterstock/EQRoy
Some changes in bank compensation pack-

ages include adjusting pay to account for
any risks taken in the process of generating
profits and changing the system of award-
ing bonuses from a more individualistic
focus to one that is more encompassing
of the entire organization. Additionally, Treasury rules mandate banks to better
inform borrowers about the costs of certain loans, create greater supervision of
bank practices, and even establish a capital surcharge for certain banks. Banks
and other financial organizations voiced their opinions on these financial reforms
through discreet lobbying and industry groups.12
Corporations can influence shareholders to become lobbyists. If the govern-
ment is proposing a bill that could have a negative impact on a corporation, then
that corporation can send a message to its shareholders detailing the impact. If
there is a large enough public impact made by the shareholders of that corpora-
tion, then they have come together as lobbyists for the corporation. A lobbyist
doesn’t have to be a professional. It can be any people or entities that use their
voice to make sure that the government understands their position. Corporate
lobbying can affect many aspects of the economy. Most of the time, lobbying
will focus on controversial topics. In 2018, more than $3.4 billion was spent on
federal lobbying—the most that has been spent in eight years. Another more than
$1 billion was spent by corporations at the state level.13
Companies may attempt to influence the legislative or regulatory process more
indirectly as well, through trade associations and umbrella organizations that
represent the collective business interests of many firms. Virtually every industry
has one or more trade associations that represent the interests of their members
to federal officials and provide public education and other services for their
members. Examples of such trade associations include the National Association of
Home Builders, the American Booksellers Association, and the Pet Food Institute.
Additionally, there are often state trade associations, such as the Hawaii Coffee
Association and the Michigan Beer and Wine Wholesalers Association, which
work on state and regional-level issues.
Umbrella organizations such as the National Federation of Independent
Businesses and the U.S. Chamber of Commerce also help promote business
interests to government officials. The Chamber of Commerce takes positions on
many political, regulatory, and economic questions. With more than 3 million
member-companies, its goal is to promote its members’ views of the ideal free
enterprise marketplace. The cozy relationship between corporations and the
government has been a growing concern for years, and was a topic of serious
discussion after the 2008–2009 financial crisis. For example, 48 members of the
Energy and Commerce Committee of the House of Representatives, which was at
the forefront of climate change legislation, owned stock in energy, oil, and natural
gas companies. This was a concern to some citizens, as these investments could
create a conflict of interest among legislators. However, House and Senate ethics
do not forbid members of Congress from having a stake in companies unless they
pass a law that benefits only their own interests.14
In 2012, the Stop Trading on Congressional Knowledge (STOCK) Act banned
Congress from insider trading and stock trades using information obtained in the
government. The STOCK Act was designed to prevent conflict of interest when
information was not yet publicly available. Additionally, the legislation requires
congressmen to report trading within 45 days.15
Congressional rules allow members of the House and Senate to own compa-
nies (or shares in companies), as well as sit on corporate boards, so long as they
do not draw a salary. The concept behind this allowance is that executive branch
officials do not want to deny congresspeople the opportunity to accept positions
on the boards of charities or other philanthropic organizations. However, it does
create a conflict of interest when members of Congress feel loyalty to a business
and share information that they obtained in the government with the business.
Even nonprofits have an interest in seeing certain legislation passed. Additionally,
serving on a board can become a distraction with the full-time responsibilities of
being in Congress.16
Campaign Contributions Corporate money can also be channeled into candidates’

campaign coffers as corporate executives’ or stockholders’ personal contributions.
A sizable contribution to a candidate may carry with it an implied understanding
that the elected official will perform some favor, such as voting on a particular
law in accordance with the contributor’s wishes. Occasionally, some businesses
find it so important to ensure favorable treatment that they make illegal corporate
contributions to campaign funds. As mentioned earlier, it is also common for
businesses and other organizations to make donations to political parties through
PACs. As previously discussed, critics are concerned that decisions such as Citizens
United will give organizations unfettered power and allow large corporations to
effectively “buy” elections.17
Private Interest Group Influence

Similar to businesses, private interest groups actively work to influence the
government. Private interest groups are people with a shared interest who work to private interest groups
influence public policy in their favor in various ways, including lobbying. people with a shared interest who
work to influence public policy in
their favor
Trade Associations In the business world, members of certain industries
sometimes form groups to promote the interests of their industry. These groups
are called trade associations. Trade associations serve the function of promoting trade associations
the interest of their industry through lobbying, publishing, advertising, and more. groups formed by members of
industries to promote the interests
One trade association, the American Medical Association (AMA), publishes its
of their industry through means
own journal, the Journal of the American Medical Association, to educate its such as lobbying, publishing, and
members. Other trade associations, like the American Institute of Certified Public advertising
Accountants, help with rule-making and standard setting in the certified public
accountant (CPA) profession.
Trade associations represent the voice of their industry and act as the main
point of contact in communication with the industry. They bring value to their
stakeholders through the knowledge and expertise that they pass to regulators
and policymakers. Trade associations have membership criteria ensuring their
members have sufficient credibility in the industry. Trade associations are able to
support multiple stakeholders’ platforms, organize forums and conferences, and
develop joint positions on questions submitted by authorities. Trade associations
are allies that work to reach consensus and unity among the industry and do not
intend to create division.

Medical Nutrition International Industry (MNI) is a trade association that

serves the public interest by forming effective evidence-based and future-proof
policies in the healthcare industry. They represent companies seeking solutions
for nutritional therapy, including oral supplements and intravenous feeding. MNI
enforces detailed criteria for membership to ensure that its members are reputable
businesses committed to achieving better patient care across all demographics.
The group promotes awareness of the prevalence of malnutrition and recognizes
that their primary responsibility is to educate regulators and the general public to
address this public health issue. In 2014, MNI launched a campaign to promote
malnutrition screening in Europe. The experts involved worked together to
enhance policies to provide equal nutritional care for patients.18
Self-Regulatory Community
Self-regulation, previously discussed in Chapter 4, is when an industry-level
organization, such as a trade association or professional society, creates a set of
rules and enforces regulations within its industry. Examples of self-regulatory
organizations include the New York Stock Exchange (NYSE) and the Chicago
Board of Trade. Businesses can often be wary of using questionable practices
when they are unsure of whether their competition is using these practices as well.
Self-regulation helps the industry agree on acceptable practices. The government
encourages self-regulation and often helps industries have internal regulators to
develop self-regulatory programs. Most people have shied away from following
these guidelines because there is a history of repeated failures in the programs that
have been put forth. Businesses could take it upon themselves to have a fair self-
regulation and work with the government to help tailor the rules and regulations
accordingly for each industry.19
The American College of Physicians (ACP), a national professional organiza-
tion for physicians who practice internal medicine, created new guidelines in 2019
that establish the professional obligation of healthcare organizations to address
the issue of impaired physicians. A physician is impaired when she or he is unable
to provide patient care safely and effectively. This may be due to mental illness,
substance abuse, or deterioration of skills due to aging or illness. The Ethics,
Professionalism, and Human Rights Committee of the ACP published five posi-
tions detailing the expectations of the profession to respond to these situations and
the profession’s commitment to public safety. Position 1 states, “The professional
duties of competence and self-regulation require physicians to recognize and
address physician illness and impairment.”20
Corporate Public Affairs Activities

Public affairs can be any issue that concerns building a relationship between an
organization and a governmental body or group of politicians. The government
is responsible for making decisions that can affect public and private businesses.
corporate public affairs The objective of corporate public affairs activities is to mold and influence the
activities decisions that the government makes to be in the best interest of corporations.
actions that build a relationship
Public relations (PR) departments try to present information and statistics to help
between a corporation and a
governmental body or politician to persuade what laws and regulations get passed. If a corporation can bring enough
mold and influence the decisions attention to a situation via the media, then the government will be more likely to
that the government makes to be respond to the attention that is being raised.21
in the best interest of corporations General Electric (GE) owns the NBC network and has used this major media
outlet to influence government to legislate in their favor. For example, the GE vice
president and the NBC president lobbied the New York City Council against a
pending resolution to support the EPA’s proposal to clean up the Hudson River.
GE was able to gain political influence through the use of media.22

Corporations have more ability to engage in the media today, thanks to

various social media platforms and the universality of the internet. Companies can
easily share and “like” content, or leave comments on matters they wish to engage
in. The online presence of a company indicates their values and the issues that they
would like resolved. The ability to influence through involvement in the media is
much easier in today’s technological era.23
Laws and Regulations

As a result of business abuses and social demands for reform, the federal govern-
ment began to pass legislation to regulate business conduct in the late nineteenth
century. In this section, we will look at a few of the most significant of these laws.
Table 5.3 summarizes many of the laws that affect business operations.
Sherman Antitrust Act

The Sherman Antitrust Act, passed in 1890, is the principal tool employed by the Sherman Antitrust Act
federal government to prevent businesses from restraining trade and monopolizing the principal tool used to prevent
businesses from restraining trade
markets. Congress passed the law, almost unanimously, in response to public and monopolizing markets
demands to curtail the growing power and abuses of trusts in the late nineteenth
century. The law outlaws “every contract, combination in the form of trust or
otherwise, or conspiracy, in restraint of trade or commerce.” It also makes a viola-
tion a felony, punishable by a fine of up to $100 million for corporate violators
and $1 million and/or 10 years in prison for individual offenders.24
The Sherman Antitrust Act applies to all firms operating in interstate com-
merce, as well as to U.S. firms engaged in foreign commerce. The law has been used
to break up some of the most powerful companies in the United States, including
the Standard Oil Company (1911), the American Tobacco Company (1911), and
AT&T (1984). Google was placed under investigation by the U.S. Department of
Justice to determine whether they violated fair competition laws. That company
is dominant in the search engine industry and controls the technology used to buy
online advertisements. Complaints were made by other web companies, such as
Yelp and TripAdvisor, that Google uses its market dominance to unfairly promote
its own services through skewing search results. Most of Google’s revenue comes
from advertisements tied to search results. Google was required to make mild
changes to its business practices and was allowed to continue to promote its own
services in search results.25
The Federal Trade Commission (FTC) launched a special task force to monitor
the tech industry including Google, Amazon, Apple, and Facebook. With current
public concern about data privacy on the rise, Google and Facebook have been
under scrutiny because they collect the personal data of their users to better target
advertising to them. Many people believe that these companies have too much
power over the economy, society in general, and democracy.26 The Sherman Act
remains the primary source of antitrust law in the United States, although it has
been supplemented by several amendments and additional legislation.
Clayton Antitrust Act
created to clarify the Sherman
Clayton Antitrust Act Antitrust Act and limit mergers
and acquisitions, prohibit price
Because the provisions of the Sherman Antitrust Act were vague, the courts have discrimination, tying agreements,
interpreted the law in various ways. To rectify this situation, Congress enacted exclusive agreements, and the
acquisition of stock in another
the Clayton Antitrust Act in 1914 to limit mergers and acquisitions that have corporation where the effect may
the potential to stifle competition.27 The Clayton Antitrust Act also specifically be to hinder competition or create
prohibits price discrimination, tying agreements (when a supplier furnishes a a monopoly

Table 5.3 Major Federal Legislation Regulating Business

Sherman Antitrust Act, 1890 Prohibits monopolies
Clayton Act, 1914 Prohibits price discrimination, exclusive dealing, and other
efforts to restrict competition
Federal Trade Commission Act, Created the FTC to help enforce antitrust laws
1914
Robinson-Patman Act, 1936 Prohibits price discrimination between retailers and
wholesalers
Wheeler-Lea Act, 1938 Prohibits unfair and deceptive acts, regardless of whether
competition is injured
Lanham Act, 1946 Protects and regulates brand names, brand marks, trade
names, and trademarks
Celler-Kefauver Act, 1950 Prohibits one corporation from controlling another when
the effect substantially lessens competition
Consumer Goods Pricing Act, 1975 Prohibits price maintenance agreements among
manufacturers and resellers in interstate commerce
Antitrust Improvements Act, 1976 Strengthens earlier antitrust laws; gives Department of
Justice more investigative authority
Federal Corrupt Practices Act, 1977 Makes it illegal to pay foreign government officials to
facilitate business or to use third parties such as agents
and consultants to provide bribes to such officials
Trademark Counterfeiting Act, 1984 Provides penalties for individuals dealing in counterfeit
goods
Trademark Law Revision Act, 1988 Amends the Lanham Act to allow brands not yet introduced
to be protected through patent and trademark registration
Federal Trademark Dilution Act, Provides trademark owners the right to protect trademarks
1995 and requires them to relinquish those that match or parallel
existing trademarks
Digital Millennium Copyright Act, Refines copyright laws to protect digital versions of
1998 copyrighted materials, including music and movies
Sarbanes-Oxley Act, 2002 Made securities fraud a criminal offense; stiffened penalties
for corporate fraud; created an accounting oversight board;
and instituted numerous other provisions designed to
increase corporate transparency and compliance
Controlling the Assault of Non- Bans fraudulent or deceptive unsolicited commercial
solicited Pornography and email and requires senders to provide information on how
Marketing Act (CAN-SPAM), 2003 recipients can opt out of receiving additional messages
Fraud Enforcement and Recovery Strengthens provisions to improve the criminal
Act, 2009 enforcement of fraud laws, including mortgage fraud,
securities fraud, financial institutions fraud, and fraud
related to the federal assistance relief program
Dodd-Frank Wall Street Reform and Increases accountability and transparency in the financial
Consumer Protection Act (2010) industry, protects consumers from deceptive financial
practices, and establishes the CFPB
product to a buyer with the stipulation that the buyer must purchase other
products as well), exclusive agreements (when a supplier forbids an intermediary
to carry products of competing manufacturers), and the acquisition of stock in
another corporation where the effect may be to substantially lessen competition
or to tend to create a monopoly. In addition, the Clayton Antitrust Act prohibits
members of one company’s board of directors from holding seats on the boards of
competing corporations, and exempts farm corporations and labor organizations
from antitrust laws.

Federal Trade Commission Act

In the same year that the Clayton Act was passed, Congress also enacted the
Federal Trade Commission Act to further strengthen the antitrust provisions of
the Sherman Act. Unlike the Clayton Act, which prohibits specific practices, the
Federal Trade Commission Act more broadly prohibits unfair methods of competi- Federal Trade Commission Act
tion. Of all the federal regulatory agencies, the FTC has the greatest influence on a law enacted to further
strengthen the antitrust provisions
business activities.
of the Sherman Antitrust Act and
When the FTC receives a complaint about a business or finds reason to believe broadly prohibit unfair methods of
that a company is engaging in illegal conduct, it issues a formal complaint stating competition
that the company is in violation of the law. If the company continues the unlawful
practice, the agency can issue a cease-and-desist order, which requires the offender
to stop the specified behavior. Many complaints have been waged against the
weight loss industry. Tachht, Inc., and Teqqi, LLC, were required to pay a fee of
$500,000 to customers who bought their weight loss products. The FTC took the
companies to court for using illegal email techniques, publishing fake celebrity
endorsements, and making unsubstantiated health benefits of using its products.28
Although a firm can appeal to the federal courts to have the order rescinded,
the FTC can seek civil penalties in court, up to a maximum penalty of $10,000 a
day for each infraction, if a cease-and-desist order is ignored. The commission can
also require businesses to air corrective ads to counter previous advertising that
the commission considers misleading. For example, LASIK surgery providers were
required by the FTC to run corrective advertising to inform consumers about the
risks of undergoing the irreversible surgery, along with the benefits.29
In addition, the FTC helps to resolve disputes and makes rulings on business
decisions. The mattress company Moonlight Slumber, LLC, was charged with
misleading advertising claiming organic materials were being used in their baby
mattresses. The company claimed that “natural” and “organic” materials made
up the majority of two of their mattress brands, while in reality inorganic and
synthetic materials were mainly used. The result was that the FTC implemented
several restrictions on Moonlight Slumber’s ecofriendly advertising.30
Proposed Financial Reforms

In response to the 2008–2009 financial crisis, government leaders proposed sweep-
ing reforms to increase consumer protection. This proposed legislation was a step
away from the deregulation practices of the last several decades. Instead, it gave
government a freer hand in regulating the financial industry, in some instances
engaging in reregulation. The Obama administration, for example, gave the Federal
Reserve more power over the financial industry and established the Consumer
Financial Protection Bureau (CFPB), which aids in regulating banks, credit card
companies, and other financial institutions. More specifically, the agency monitors
financial instruments like subprime mortgages and other high-risk lending practices.
The problems leading up to the financial crisis included inaction on the part of
federal regulators to protect consumers from fraud and predatory lending practices,
lack of responsibility on the part of mortgage brokers, taking large risks, conflicts
of interest among credit rating industries, and complex financial instruments that
investors did not understand.
To prevent these problems from leading to future financial crises, the Obama
administration removed some of the FTC’s powers, created the CFPB, created
the Financial Stability Oversight Council to identify and address key risks to the
financial industry, required loan bundlers to retain a percentage of what they sell
(a proposal also being considered by the European Union); provided new powers
for the Securities and Exchange Commission (SEC) to monitor credit rating
industries for objectivity; and required complex financial instruments to be traded
on a regulated exchange.

The FTC has remained in place, though it has not filed as many actions against
financial institutions as it did during the Obama administration. While some are
concerned that this indicates less government protection for consumers, others
feel that the numbers do not necessarily show the effectiveness of the current
administration.31
Federal Sentencing Guidelines for Organizations

Companies are increasingly establishing organizational compliance programs to
ensure that they operate legally and responsibly, as well as to generate a competitive
advantage based on a reputation for responsible citizenship. There are also strong
Federal Sentencing Guidelines legal incentives to establish such programs. The Federal Sentencing Guidelines
for Organizations (FSGO) for Organizations (FSGO) were developed by the U.S. Sentencing Commission and
a set of standards developed by
the U.S. Sentencing Commission
approved by Congress in November 1991. These guidelines streamline sentencing
and approved by Congress in and punishment for organizational crimes and holds companies, as well as their
November 1991 to streamline employees, responsible for misconduct. The guidelines codified into law incentives
sentencing and punishment for to reward organizations for implementing controls to prevent misconduct, such
organizational crimes and holds as developing effective internal legal and ethical compliance programs.32 The
companies and employees
responsible for misconduct commission describes seven steps that companies must implement to demonstrate
due diligence. These steps are discussed in Table 5.4.
The assumption underlying the FSGO is that good, socially responsible
organizations maintain compliance systems and internal governance controls that
deter misconduct by their employees. Thus, these guidelines provide guidance for
both organizations and courts regarding program effectiveness. Organizations
have flexibility about the type of program they develop; the seven steps are not
a checklist requiring that legal procedures be followed to gain certification of an
effective program. Organizations implement the guidelines through effective core
practices that are appropriate for their firms. The programs they put into effect
must be capable of reducing the opportunity for organizational misconduct.
The guidelines pertain to all felonies and class A misdemeanors committed
by employees regarding their work. Organizations demonstrating due diligence
in developing effective compliance programs can avoid or reduce organizational
penalties if an employee commits a crime.33 The number of cases per year involv-
ing organizational offenders is declining. In recent years, the number of reported
cases is the lowest since 1996.34 As seen in Figure 5.1, the most common offenses
are fraud (such as mail or wire fraud, healthcare fraud, and false statements) and
environmental crimes (such as water, air, wildlife, and hazardous material–related
offenses). A breakdown of types of fraud offenses can be seen in Figure 5.2.
Pacific Gas and Electric Company (PG&E) faced a $3 million fine, 10,000
hours of community service, and five years of probation after a pipeline explosion
killed eight people. During its probationary period, a federal judge barred PG&E
from paying dividends to shareholders after the company’s equipment was linked
to California wildfires. The judge’s order could set a precedent for repeat corporate
Table 5.4 Seven Steps to Effective Compliance and Ethics Programs

1. Establish codes of conduct (identify key risk areas).
2. Appoint or hire a high-level compliance manager (e.g., an ethics and compliance officer).
3. Take care in delegating authority (background checks on employees).
4. Institute a training program and communication system (e.g., ethics training).
5. Monitor and audit for misconduct (e.g., institute reporting mechanisms).
6. Enforce and discipline (e.g., management implementation of policy).
7. Revise the programs as needed (e.g., feedback and action).
Source: U.S. Federal Sentencing Guidelines for Organizations.

Figure 5.1 Organizational Cases by Primary Offense Figure 5.2 Types of Fraud Offenses
Other1 False
Fraud Statements
25.2%
29.0% 13.2%
Mail or
Other2 Wire
Antitrust 18.4% 47.4%
5.3%
Import/Export
6.1% Healthcare
Environmental 21.1%
Food & Drugs 28.2%
6.1%
Source: U.S. Sentencing Commission, “Quick Facts on Organizational Offenders,” 2013–2017, https://www.ussc.gov/sites/
default/files/pdf/research-and-publications/quick-facts/Organizational-Offenders_FY17.pdf (accessed July 25, 2019).
Note: Only organizations convicted of a federal offense are included in Commission data. It does not collect data on
other dispositions, including nonprosecution or deferred prosecution agreements.
1The “Other” primary offense category includes drugs, bribery, immigration, obstruction of justice, money laundering,
administration of justice, copyright/trademark infringement, firearms, gambling, larceny/embezzlement, racketeering, and
tax offenses, among others.
2The “Other” fraud offense category includes bank fraud and false claims offenses, as well as others.
offenders.35 Overall, the spirit behind the FSGO is that legal violations can be
prevented through organizational values and a commitment to ethical conduct.
The law develops new amendments frequently. Table 5.5 shows a selection of the
amendments made to date.
In 2004, an amendment to the FSGO placed responsibility on the business’s
governing authority, requiring them to be knowledgeable about the company’s
ethics program regarding content, implementation, and effectiveness. Usually the
governing authority in an organization is the board of directors, which must make
certain there is a high-ranking manager responsible for the daily oversight of the
ethics program; provide for sufficient authority, resources, and access to the board
or an appropriate board subcommittee; and ensure that there are confidential
mechanisms so the organization’s employees and agents may ask questions or
report concerns without fear of retaliation. The board is also required to oversee
the discovery of risks and to design, apply, and modify approaches to deal with
those risks. If board members do not understand how to execute an ethics
program, the organization risks insufficient oversight and misconduct that can
snowball into a crisis.36
In 2005, the Supreme Court held that the FSGO were not mandatory but
would act as recommendations for judges to use in their decisions. Some legal
experts thought that this might weaken the effectiveness of the FSGO, but the
majority of federal sentences have remained similar to what they had been before
the Supreme Court decision. Thus, the guidelines are important in developing a
successful ethics and compliance program.37
The 2007–2008 amendments to the FSGO extend the necessary ethics training
to board members or the governing authority, managers, employees, and the
organizations’ agents. This change pertains to mandatory training at all organiza-
tional levels. Simply disseminating a code of ethics is not enough to meet training
requirements. The new amendments compelled most governmental contractors to
implement ethics and compliance training.
In 2010, the FSGO adopted four new amendments. The first simplified
reporting relationships by recommending that ethics and compliance officers
report misconduct directly to the board or to a board committee, rather than
simply to the general counsel. The second encouraged organizations to strengthen

Table 5.5 Institutionalization of Ethics Through the Federal Sentencing Guidelines for
Organizations (FSGO)
Laws: In 1991, the FSGO was created for federal prosecutions of organizations. These guidelines
provide for just punishment, adequate deterrence, and incentives for organizations to prevent,
detect, and report misconduct. Organizations need to have an effective ethics and compliance
program to receive incentives in the case of misconduct.
Amendments: The definition of an effective ethics program now includes the development of an
ethical organizational culture. Executives and board members must assume the responsibility of
identifying areas of risk, providing ethics training, creating reporting mechanisms, and establishing
ethics program oversight.
Firms should focus on due diligence to detect and prevent misconduct and to promote an
organizational culture that encourages ethical conduct. More details are provided, encouraging
the assessment of risk and outlining appropriate steps in designing, implementing, and modifying
ethics programs and training that will include all employees, top management, and the board
or governing authority. These modifications continue to reinforce the importance of an ethical
culture in preventing misconduct.
Chief compliance officers are directed to make their reports to their firm’s board rather than to
the general counsel. Companies are encouraged to create hotlines, perform self-audit programs,
and adopt controls to detect misconduct internally. More specific language has been added to
the word prompt with regard to what it means to promptly report misconduct. The amendment
also extends operational responsibility to all personnel within a company’s ethics and compliance
program.
Sources: “U.S. Sentencing Guidelines Changes Become Effective November 1,” FCPA Compliance & Ethics, November
2, 2010, http://fcpacompliancereport.com/2010/11/us-sentencing-guidelines-changes-become-effective-november-1/
(accessed July 25, 2019). U.S. Sentencing Commission, “Amendments to the Sentencing Guidelines,” April 30, 2012,
http://www.ussc.gov/Legal/Amendments/Reader-Friendly/20120430_RF_Amendments.pdf (accessed July 25, 2019);
Paula Desio, Deputy General Counsel, An Overview of the Organizational Guidelines, http://www.ussc.gov/sites/default/
files/pdf/training/organizational-guidelines/ORGOVERVIEW.pdf (accessed July 9, 2019).
internal controls through hotlines, self-auditing programs, and other mechanisms

to increase the chances that misconduct will be detected internally instead of exter-
nally. The third adopted more specific wording to clarify what it means to report
an ethical violation promptly. Finally, a fourth amendment extended operational
responsibility to all personnel within a company’s ethics and compliance program.
This means that everyone in an organization has a responsibility to ensure ethical
conduct.38
In 2014, the Federal Sentencing Commission reiterated the importance of best
practices in organizations. The commission advocated the sharing of best practices
among regulatory and law enforcement agencies. Agencies such as the Department
of Justice’s Antitrust Division are using the FSGO’s seven steps for ethics programs
to develop their own compliance programs. The Commission also encourages the
sharing of best practices among industry associations. The FSGO does not believe
this sharing of best practices should be limited to for-profit organizations, how-
ever. It also assessed the success of nonprofit organizations, businesses, regulators,
and other organizations in creating effective organizational cultures that will work
toward preventing misconduct. The emphasis of the FSGO is increasingly geared
toward stressing best practices, principles, and values over formal regulations in
which organizations would do the bare minimum to comply with the law.39
The Department of Justice also recommended general principles to apply in
cases of corporate misconduct. Ethics and compliance programs are essential in
discovering the types of misconduct common in a particular organization’s indus-
try. If an organization does not have an effective ethics and compliance program in
place, a firm convicted of misconduct will likely not be treated lightly, particularly
as the prosecutor has a large amount of freedom in determining when, whom,
and whether to prosecute illegal conduct. Even minor misconduct could result in
significant penalties if committed by a large number of employees or approved
by upper management. Without an effective ethics and compliance program

to identify misconduct, a firm can face severe consequences from legal issues,
enforcement, and sentencing.40 Legal and administrative policies mostly agree that
an effective ethics and compliance program is required to prevent misconduct and
reduce legal repercussions should it occur.
Sarbanes-Oxley Act
The Sarbanes-Oxley (SOX) Act was enacted to restore stakeholder confidence and Sarbanes-Oxley (SOX) Act
provide a new standard of ethical behavior for U.S. businesses in the wake of legislation created to protect
investors by improving the
Enron and WorldCom in the early 2000s. During probes into financial reporting
accuracy and reliability of
fraud at many of the world’s largest companies, investigators learned that hun- corporate disclosures
dreds of public corporations were not reporting their financial results accurately.
Accounting firms, lawyers, top corporate officers, and boards of directors had
developed a culture of deception in an attempt to gain investor approval and
competitive advantage. The downfall of many of these companies resulted in huge
losses to thousands of investors, and employees even lost much of their savings
from 401ks.
The SOX Act legislation protects investors by improving the accuracy and
reliability of corporate disclosures. The act had almost unanimous support by
Congress, government regulatory agencies, and the general public. When President
George W. Bush signed the bill into law, he emphasized the need for the standards
it provides, especially for top management and boards of directors responsible for
company oversight. Table 5.6 details the requirements of the Act.
The section of SOX that initially caused the most concern for companies was
compliance with section 404. Section 404 comprises three central issues: (1) it
requires that management create reliable internal financial controls; (2) it requires
that management attest to the reliability of those controls and the accuracy of finan-
cial statements that result from those controls; and (3) it requires an independent
Table 5.6 Major Provisions of the Sarbanes-Oxley Act

Requires the establishment of an Independent Accounting Oversight Board, in charge of
regulations administered by the SEC.
Requires CEOs and CFOs to certify that their companies’ financial statements are true and
include no misleading statements.
Requires that corporate board of directors’ audit committees consist of independent members
with no material interests in the company.
Prohibits corporations from making or offering loans to officers and board members.
Requires codes of ethics for senior financial officers; code must be registered with the SEC.
Prohibits accounting firms from providing both auditing and consulting services to the same
client.
Requires company attorneys to report wrongdoing to top managers and, if necessary, to the
board of directors; if managers and directors fail to respond to reports of wrongdoing, the
attorneys should stop representing the company.
Mandates “whistleblower protection” for persons who disclose wrongdoing to authorities.
Requires financial securities analysts to certify that their recommendations are based on
objective reports.
Requires mutual fund managers to disclose how they vote shareholder proxies, giving investors
information about how their shares influence decisions.
Establishes a 10-year penalty for mail or wire fraud.
Prohibits the two senior auditors from working on a corporation’s account for more than 5 years;
other auditors are prohibited from working on an account for more than 7 years; in other words,
accounting firms must rotate individual auditors from one account to another from time to time.

auditor to further attest to the statements made by management. Because the cost
of compliance was so high for many companies, some publicly traded companies
considered delisting themselves from the NYSE. Compliance costs have varied over
the years since Sarbanes-Oxley was passed. Although compliance costs dropped by
50 percent in recent years, costs rose for many companies. The study showed that
compliance costs ranged from between $750,000 to $1,501,300. Many factors are
involved in the rise and fall of compliance costs, and researchers have stated that
the Sarbanes-Oxley costs seem to be normalizing.41
Public Company Accounting To address fraudulent occurrences, SOX required the creation of the Public
Oversight Board (PCAOB) Company Accounting Oversight Board (PCAOB), which provides oversight of the
required by the Sarbanes-Oxley
accounting firms that audit public companies and sets standards for the auditors
Act, a private, nonprofit company
that provides oversight of the in these firms. The board has investigatory and disciplinary power over accounting
accounting firms that audit public firm auditors and securities analysts who issue reports about companies. Specific
companies and sets standards for duties include (1) registration of public accounting firms; (2) establishment of
the auditors in these firms auditing, quality control, ethics, independence, and other standards relating to
preparation of audit reports; (3) inspection of accounting firms; (4) investigations,
disciplinary proceedings, and imposition of sanctions; and (5) enforcement of
compliance with accounting rules of the board, professional standards, and securi-
ties laws relating to the preparation and issuance of audit reports and obligations
and liabilities of accountants.
SOX also requires corporations to take more responsibility and to provide
principles-based ethical leadership. Enhanced financial disclosures are required,
including certification by top officers that audit reports are complete and nothing
has been withheld from auditors. For example, registered public accounting firms
are now required to identify all material correcting adjustments to reflect accurate
financial statements. Also, all material off-balance sheet transactions and other
relationships with unconsolidated entities that affect current or future financial
conditions of a public company must be disclosed in each annual and quarterly
financial report. In addition, public companies must report “on a rapid and cur-
rent basis” material changes in the financial condition or operations. Section 201
of SOX prohibits registered public accounting firms from providing both audit
and nonaudit services to a public company, a major issue with the now-defunct
accounting firm Arthur Andersen in its relationship with Enron.
whistleblower Other provisions of the Act include whistleblower protections, which prohibit
a person who exposes an
employer’s wrongdoing to
an employer from taking certain actions against employees who lawfully disclose
outsiders, such as the media or private employer information to, among others, parties in a judicial proceeding
government regulatory agencies involving a fraud claim, and which change the attorney-client relationship so
that attorneys are now required to report
wrongdoing to top managers or to the
board of directors, even if it violates
client confidentiality. Employees of pub-
lic companies and accounting firms, in
general, are also accountable to report
unethical behavior. SOX is designed to
motivate employees by offering to shield
whistleblowers. Whistleblowers are also
granted a remedy of special damages and
attorney’s fees. This protection is designed
to encourage whistleblowers to come for-
Shutterstock/wutzkohphoto
ward when detecting business misconduct,

as much of the fraud that eludes audits
or other controls may be detected by
employees. According to a 2018 report
published by the Association of Certified
Fraud Examiners, data compiled on 2,690
cases of occupational fraud showed that 40 percent of the cases were detected by
tipsters and 53 percent of those tips were provided by employees.42 Acts of retali-
ation that harm informants, including interference with the lawful employment or
livelihood of any person, shall result in fines and/or imprisonment for 10 years.
Dodd-Frank Wall Street Reform and Consumer

Protection Act
In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was Dodd–Frank Wall Street Reform
passed. The Act was hailed as “a sweeping overhaul of the financial regulatory and Consumer Protection Act
legislation created to prevent
system...on a scale not seen since the reforms that followed the Great Depression.” financial crisis by increased
Dodd-Frank seeks to prevent financial crisis through improved financial regula- financial deregulation, additional
tion, additional oversight of the industry, and preventative measures to reduce oversight of the industry, and
the types of risk-taking, deceptive practices, and lack of oversight that led to the preventative measures against
financial crisis in 2007–2008.43 Its provisions include increasing the transparency unhealthy risk-taking and
deceptive practices
of financial institutions, creating a bureau to educate consumers about financial
products and protect them from deceptive financial practices, implementing added
incentives for whistleblowers, increasing oversight of the financial industry, and
regulating the use of derivatives. In 2019, the SEC and the Commodity Futures
Trading Commission announced an agreement on how much capital and margin
firms need to hold when trading swaps based on securities.44
Unlike Sarbanes-Oxley, there was not a clear consensus on the Dodd-Frank
Act. Opponents of the Act expressed many concerns, asserting that the rules on
derivatives would be too difficult to follow, the changes would create chaos in
the financial system, and the government could gain too much power.45 J. P.
Morgan claimed that they supported the law but were against certain provisions.46
Included in these provisions was the creation of new financial regulatory agencies
that would increase government oversight of the financial system. Eight years after
passing Dodd-Frank, some rules were loosened. The regulatory rollback freed
banks with less than $250 billion in assets from regulatory burdens. Supporters of
the rollback said that the purpose of the move was to stop overregulation.47
The Office of Financial Research was developed, with the responsibility
to improve the quality of financial data accessible to government officials and
construct an improved system of analysis for the finance industry.48 The Financial
Stability Oversight Council (FSOC) was also created, with the responsibility to
keep the financial system stabilized through market monitoring, threat identifica-
tion, the promotion of market discipline among public constituents, and responses
to risks that threaten stability.49 FSOC can limit or supervise financial risks, create
more stringent rules for banking and nonbanking financial organizations, and
break up financial organizations that present major risks to market stability.50
The purpose of these two agencies is to eliminate loopholes that allowed financial
companies to commit the types of risky and deceptive actions that led up to the
financial crisis.
The Dodd-Frank Act also developed the Consumer Financial Protection Consumer Financial Protection
Bureau (CFPB). The CFPB is an independent agency within the Federal Reserve Bureau (CFPB)
an independent agency within the
System that “regulate[s] the offering and provision of consumer financial products Federal Reserve System that was
or services under the Federal consumer financial laws.”51 A major problem leading established by the Dodd-Frank
up to the Great Recession of 2008–2009 was that average investors usually did Act to regulate banks and other
not understand the complex financial products that they were trading. The federal financial institutions by monitoring
government has granted the CFPB supervisory power over credit markets and the consumer financial products and
services
ability to monitor lenders to ensure that they are in legal compliance. The CFPB
also has the authority to restrict unfair lending and credit card practices, enforce
consumer financial protection laws, and ensure the safety of financial products
before their release onto the market.52

Some have major concerns about the extent of the agency’s powers. For
instance, critics are concerned that this increased power could lead to severe sanc-
tions or overly heavy regulations.53 Goldman Sachs was one financial organization
affected by the regulations. To comply with part of the Dodd-Frank Act, it was
forced to limit investing in its own private-equity funds. This provision restricts
financial organizations from using their own money to make large bets.54 The
CFPB has oversight powers over organizations that tend to be accused of question-
able conduct, such as payday lenders and debt collectors.55 The bureau’s goal is to
maintain a more transparent financial environment for consumers.
In addition to overseeing large financial institutions like Goldman Sachs, the
CFPB provides financial information to students, retirees, and consumers who are
interested in learning more about home ownership. While the CFPB continues
to receive mixed views on its relevance, the agency has several accomplishments.
It is credited with discovering expensive fraudulent activities and penalizing the
companies responsible for them. For example, the CFPB was instrumental in hold-
ing Wells Fargo accountable for millions of fake accounts that the bank created in
customers’ names. It charged the bank millions of dollars in restitution, so it would
serve as an example of the cost of fraud. The agency also listens to consumer
complaints and helps facilitate conversation between companies and consumers.
From a political standpoint, studies have shown that the CFPB is regarded favor-
ably by the majority of both Democrats and Republicans.56
Finally, the Dodd-Frank law created a whistleblower bounty program.
Whistleblowers who report financial fraud to government agencies are eligible to
receive 10–30 percent of fines and settlements if their reports result in convictions
of more than $1 million in penalties.57 In 2012, the government awarded its
first payout, $50,000 to a whistleblower who assisted regulators in convicting a
company of fraud.58
Enforcement of the Laws Because violations of the Sherman Act are felonies,
the Antitrust Division of the Department of Justice enforces it. The FTC enforces
antitrust regulations of a civil, rather than criminal, nature. There are many
additional federal regulatory agencies (see Table 5.7) that oversee the enforcement
of other laws and regulations. Most states also have regulatory agencies that make
and enforce laws for individuals and businesses. Over the years, cooperation
among state attorneys general, regulatory agencies, and the federal government has
increased, particularly in efforts related to the control of drugs, organized crime,
and pollution.
The 2008–2009 financial crisis revealed the need for better enforcement of
the financial industry. Institutions took advantage of loopholes in the regulation
system to make quick profits. For example, some adjustable mortgage rates
offered low “teaser” rates that did not even cover the monthly interest on the
loans. This ended up increasing the principal balances on mortgages, resulting in
debt that many consumers could not pay off. Unethical actions such as these led
to the financial crisis. However, because these institutions were not as carefully
monitored as other institutions, such as banks, regulators did not catch them until
it was too late.59
New enforcement aims to require brokers to show a greater fiduciary duty
to their clients, requiring them to put their clients’ interests above their own and
eliminate any conflicts of interest. This could cause them to offer products that are
less costly and more tax-efficient for consumers rather than promoting products
that would benefit their companies at consumers’ expense.60
In addition to enforcing stricter regulations for financial institutions, the
Obama administration took steps to protect consumers. This included encouraging
consumers to manage credit cards, savings, and mortgages more carefully; provid-
ing cardholders with warnings about how long it will take to pay off their debt

Table 5.7 Federal Regulatory Agencies

Food and Drug Administration Enforces laws and regulations to prevent the distribution of
(FDA), 1906 adulterated or misbranded foods, drugs, medical devices,
cosmetics, veterinary products, and potentially hazardous
consumer products
Federal Reserve Board, 1913 Regulates banking institutions; protects the credit rights of
consumers; maintains the stability of the financial system;
conducts the nation’s monetary policy; and serves as the
nation’s central bank
Federal Trade Commission (FTC), Enforces laws and guidelines regarding business practices;
1914 takes action to stop false and deceptive advertising and
labeling
Federal Deposit Insurance Insures deposits in banks and thrift institutions for at least
Corporation, 1933 $250,000; identifies and monitors risks related to deposit
insurance funds; and limits the economic effects when
banks or thrift institutions fail
Federal Communications Regulates communication by wire, radio, and television in
Commission (FCC), 1934 interstate and foreign commerce
Securities and Exchange Regulates the offering and trading of securities, including
Commission (SEC), 1934 stocks and bonds
National Labor Relations Board, Enforces the National Labor Relations Act; investigates and
1935 rectifies unfair labor practices by employers and unions
Equal Employment Opportunity Promotes equal opportunity in employment through
Commission, 1970 administrative and judicial enforcement of civil rights laws
and through education and technical assistance
Environmental Protection Develops and enforces environmental protection standards
Agency (EPA), 1970 and conducts research into the adverse effects of pollution
Occupational Safety and Health Enforces the Occupational Safety and Health Act and other
Administration, 1971 workplace health and safety laws and regulations; makes
surprise inspections of facilities to ensure safe workplaces
Consumer Product Safety Ensures compliance with the Consumer Product Safety Act;
Commission, 1972 protects the public from unreasonable risk of injury from any
consumer product not covered by other regulatory agencies
Commodity Futures Trading Regulates commodity futures and options markets; protects
Commission, 1974 market users from fraud and abusive trading practices
Federal Housing Finance Combined the agencies of the Office of the Federal Housing
Industry, 2008 Enterprise Oversight, the Federal Housing Finance Board,
and the GSE mission office of the Department of Housing
and Urban Development to oversee the country’s secondary
mortgage markets
Consumer Financial Protection Created as part of the Dodd-Frank Act to educate
Bureau (CFPB), 2010 consumers and protect them from deceptive financial
products and services
if they pay only the minimum on their credit cards each month; and preventing
certain credit card issuers from offering credit cards to people under the age of 21.
In addition to enforcement by state and federal authorities, lawsuits by private
citizens, competitors, and special-interest groups are used to enforce legal and
regulatory policy. Through private civil action, an individual or organization can
file a lawsuit related to issues such as antitrust, price fixing, or unfair advertising.
An organization can even ask for assistance from a federal agency to address
a concern. For example, broadcasting companies gained the assistance of the
Department of Justice in fighting the start-up service Aereo, which used equipment
to stream local television content to consumers for a fee. The case was eventually

taken to the Supreme Court, where it was ruled that Aereo needed to secure
permission from content providers.61
Apple was under an antitrust investigation for fixing prices on electronic
books as a means to block competition with Amazon. A U.S. District Court judge
ruled that the computer company colluded with five e-book publishers on pricing.
Apple denied any wrongdoing and claimed that their pricing was due to natural
competitive pressures that resulted as they entered the market. The company filed
an appeal to the ruling, which was denied. Apple was forced to pay $400 million
in compensation. Consumers who purchased e-books from The New York Times
bestseller lists received a $6.93 credit for every purchase.62
Summary
While regulations are highly influential to businesses, as was seen in Chapter 4,
businesses have a great impact on the government and the political environment
as well. Changes over the last 60 years have shaped the political environment
in which businesses operate. Among the most significant of these changes were
amendments to the Legislative Reorganization Act and the Federal Election
Campaign Act, which had the effect of reducing the importance of political
parties. Many candidates for elected office turned to increasingly powerful
special-interest groups to raise funds to campaign for elected office. Until the
Supreme Court’s Citizens United decision, corporations were restricted in giving
contributions to PACs. However, the decision gives corporations the right to
spend as much as they want in political independent expenditures to support
governmental candidates.
Some organizations view regulatory and legal forces as beyond their control
and simply react to conditions arising from those forces; other firms seek to influ-
ence the political process to achieve their goals. One way that they can do this is
through lobbying, the process of working to persuade public and/or government
officials to favor a particular position in decision-making. Companies can also
influence the political process through PACs, organizations that solicit donations
from individuals and then contribute these funds to candidates running for political
office. Corporate funds may also be channeled into candidates’ campaign coffers
as corporate executives’ or stockholders’ personal contributions, although such
donations can violate the spirit of corporate campaign laws. It is also common
for businesses and other organizations to make donations to political parties. The
creation of trade associations, self-regulatory communities, and mutual marketing
and advertising communications between business and the government are all
examples of the interrelationship between business and the government. Business
participation can be a positive or negative force in society’s interest, depending not
only on the outcome, but also on the perspective of various stakeholders.
The federal government passed legislation to regulate business conduct in the
late nineteenth century. The Sherman Antitrust Act is the principal tool used to
prevent businesses from restraining trade and monopolizing markets. The Clayton
Antitrust Act limits mergers and acquisitions that could stifle competition and
prohibits specific activities that could substantially lessen competition or tend to
create a monopoly. The Federal Trade Commission Act prohibits unfair methods
of competition and created the FTC. Legal and regulatory policy is also enforced
through lawsuits by private citizens, competing companies, and special-interest
groups. A company that engages in commerce beyond its own country must con-
tend with the complex relationship among the laws of its own nation, international
law, and the laws of the nation in which it will be trading. There is considerable
variation and focus among different nations’ laws, but many countries’ antitrust
laws are quite similar to those of the United States.

More companies are establishing organizational compliance programs to

ensure that they operate legally and responsibly, as well as to generate a com-
petitive advantage based on a reputation for good citizenship. Under the Federal
Sentencing Guidelines for Organizations (FSGO), a company that wants to avoid
or limit fines and other penalties as a result of an employee’s crime must be
able to demonstrate that it has implemented a reasonable program for deterring
and preventing misconduct. To implement an effective compliance program,
an organization should develop a code of conduct that communicates expected
standards, assign oversight of the program to high-ranking personnel who abide
by legal and ethical standards, communicate standards through training and
other mechanisms, monitor and audit to detect wrongdoing, punish individuals
responsible for misconduct, and take steps to continuously improve the program.
A strong compliance program acts as a buffer to keep employees from committing
crimes and to protect a company’s reputation should wrongdoing occur despite its
best efforts.
Enacted after many corporate financial fraud scandals, the Sarbanes-Oxley
Act created the Public Company Accounting Oversight Board (PCAOB) to provide
oversight and set standards for the accounting firms that audit public companies.
The board has investigatory and disciplinary power over accounting firm auditors
and securities analysts. The act requires corporations to take responsibility to pro-
vide principles-based ethical leadership and holds chief executive officers (CEOs)
and chief financial officers (CFOs) personally accountable for the credibility and
accuracy of their company’s financial statements.
However, the 2008–2009 recession, which included the collapse of the sub-
prime mortgage market, and troubles on Wall Street all pointed to systemic flaws
and gaps in the regulatory system. In 2010, the Obama administration passed
the Dodd-Frank Wall Street Reform and Consumer Protection Act. Dodd-Frank
seeks to prevent financial crisis through the improvement of financial regulation,
increase in oversight of the industry, and preventative measures to reduce types
of risk-taking, deceptive practices, and lack of oversight. It established several
agencies, including the Consumer Financial Protection Bureau (CFPB), to protect
consumers from deceptive financial products and services. It also established a
whistleblower bounty program, in which whistleblowers are eligible to receive
10–30 percent of fines and settlements if their reports result in convictions of more
than $1 million in penalties.
Good, Better, Best: The Better Business Bureau Fights for

Good Business
Issue: How do trade associations protect businesses? newspapers, and the media to inform consumers of
businesses that violate these standards. These bad actors
The Better Business Bureau (BBB) is one of the best-known may also receive low ratings in BBB reliability reports, and
self-regulatory trade associations in the United States. accredited members can be expelled from the association.
Trade associations such as the BBB create self-regulatory The mission of the BBB is “to be the leader in advancing
programs for their members. Self-regulation expresses a marketplace trust” by creating a community of trustworthy
commitment on a company’s part to adhere to certain rules businesses, setting standards for marketplace trust,
that demonstrate best practices and social responsibility. encouraging and supporting best practices, celebrating
Although their standards do not have the force of law, marketplace roles, and denouncing substandard
companies that engage in self-regulation agree to go marketplace behavior. The BBB has accredited about
beyond what is legally required. The BBB uses its website, 400,000 businesses based on BBB standards and

provides a BBB Accredited Business Seal for approved responsibility would fall solely upon the FTC. Therefore,
businesses to place on their websites. the NAD saves resources and time for the FTC so that it
The BBB developed a formula of 17 metrics used can focus on more significant issues.
to arrive at a business’s rating, which currently uses As a nongovernment agency, the NAD is restricted
an alphabetic system of A–F. Companies that get low in the actions it can take. The division does not have
ratings can change their scores by addressing customer the authority to issue subpoenas, hold hearings, or levy
complaints, and many companies do so because they do damages. The NAD’s lack of authority makes the voluntary
not want to lose their client base. Investigations by the self-regulation from companies a challenging issue. The
BBB are an important tool in self-regulation. Advertising Self-Regulatory Council (ASRC) was created
In addition to the BBB, the National Advertising Division to help companies self-regulate and avoid unnecessary
(NAD) is very helpful to consumers. In 1971 the NAD was investigations by creating policies and procedures
created as the investigatory arm of the National Advertising when developing advertisements. The idea is to get all
Review Council (NARC). The division provides services companies to self-regulate their advertisements voluntarily,
to companies that run national advertising campaigns, before the NAD has to step in and provide guidance for
typically involving advertisement reviews completed by an organization. Despite the many challenges of self-
professional counsel and usually released within 60 days. regulation, both the BBB and the NAD are highly important
The services have a low cost compared to the cost of entities and are used by millions of people worldwide.
legal proceedings. NAD’s procedures give advertisers an
automatic right to appeal to the self-regulatory system’s There Are Two Sides to Every Issue
peer review body, the National Advertising Review Board. 1. The BBB mostly benefits businesses.
The NAD’s secondary purpose is to aid the FTC. If the NAD 2. The BBB mostly benefits consumers.
did not investigate the accuracy of advertisements, this
Sources: “About BBB,” Better Business Bureau, https://www.bbb.org/about-bbb (accessed May 17, 2019); “What Is a BBB?” Better Business Bureau,
https://www.bbb.org/iowa/get-to-know-us/about-us/what-is-a-bbb/ (accessed May 17, 2019); “Get Accredited,” Better Business Bureau, https://www.
bbb.org/lexington/for-businesses/about-bbb-accreditation/ (accessed May 17, 2019). “BBB Dynamic Seal,” Better Business Bureau, https://www.bbb.
org/lexington/for-businesses/about-bbb-accreditation/for-accredited-businesses/bbb-dynamic-seal/ (accessed May 17, 2019). “BBB Standards for
Trust,” Better Business Bureau, https://www.bbb.org/standards-for-trust (accessed May 17, 2019). “Council of Better Business Bureaus,” Better Business
Bureau, https://www.bbb.org/council/about/council-of-better-business-bureaus/ (accessed May 17, 2019); “FAQs,” Better Business Bureau, https://
www.bbb.org/council/about/frequently-asked-questions/ (accessed May 17, 2019); Give.org, Home Page, http://www.give.org/ (accessed May 17, 2019);
“History and Traditions,” Better Business Bureau, https://www.bbb.org/atlanta/get-to-know-us/history-and-traditions (accessed May 17, 2019); “Mission
& Vision,” Better Business Bureau, https://www.bbb.org/council/about/vision-mission-and-values/ (accessed May 17, 2019); ASRC, “About NAD,” http://
www.asrcreviews.org/ (accessed May 17, 2019); Better Business Bureau, “National Advertising Division (NAD),” https://bbbprograms.org/programs/nad/
(accessed May 17, 2019); “Overview of BBB Rating,” Better Business Bureau, https://www.bbb.org/council/overview-of-bbb-grade/ (accessed May 17,
2019); “The Complaint Form: The Complaint Process,” Better Business Bureau, http://odrcomplaint.bbb.org/odrweb/public/ourbbbcomplaintprocess.
aspx?bbbid=3 (accessed May 17, 2019); Council of Better Business Bureaus, “Self-Regulation: Leadership and Support,” Advertising Self-Regulatory
Council, 2019, http://www.asrcreviews.org/supporting-advertising-industry-self-regulation/ (accessed May 17, 2019); D. McPherson, “NAD: Testimonials on
Pinterest Need Disclaimers,” Response, 2012, 10; C. Lee Peeler, “Four Decades Later, Ad Industry’s Self-Regulation Remains the Gold Standard, Yet the
Program Does Not Enjoy Broad-Based Financial Support,” Advertising Age, March 13, 2013, http://adage.com/article/guestcolumnists/40-years-adland-s-
regulation-remains-gold-standard/240245/ (accessed May 17, 2019); David Roos, “How Better Business Bureaus Work,” How Stuff Works, https://money.
howstuffworks.com/better-business-bureau4.htm (accessed May 17, 2019); John E. VillaFranco and Katherine E. Riley, “So You Want to Self-Regulate?
The National Advertising Division as Standard Bearer,” Antitrust 27(2), 2013, 79–84.
Key Terms
Clayton Antitrust Act (p. 131) Federal Sentencing Guidelines for Public Company Accounting
Common Cause (p. 124) Organizations (FSGO) (p. 134) Oversight Board (PCAOB)
Consumer Financial Protection Federal Trade Commission Act (p. 138)
Bureau (CFPB) (p. 139) (p. 133) Sarbanes-Oxley (SOX) Act (p. 137)
corporate public affairs activities gerrymandering (p. 124) Sherman Antitrust Act (p. 131)
(p. 130) lobbying (p. 127) trade associations (p. 129)
Dodd–Frank Wall Street Reform political action committees (PACs) Troubled Assets Recovery Program
and Consumer Protection (p. 123) (TARP) (p. 122)
Act (p. 139) private interest groups (p. 129) whistleblower (p. 138)

1. What was the historical background that encour- the strengths and weaknesses of each of these
aged the government to enact legislation such as the approaches.
Sherman Antitrust Act and the Clayton Antitrust 4. How do PACs influence society, and what is their
Act? Do these same conditions exist today? appropriate role in a democratic society?
2. What is the role and function of the FTC? How does 5. Why should an organization implement the FSGO as
it engage in proactive activities to avoid government a strategic approach for legal compliance?
regulation? 6. What is the significance of Sarbanes-Oxley and the
3. Name three tools that businesses can employ to Dodd-Frank Act to business operations in the United
influence government and public policy. Evaluate States?
Visit the website of the FTC (http://www.ftc.gov/). What is Review the press releases of the last two months: On the
the agency’s current mission? What are the primary areas basis of these releases, what appear to be major issues of
for which the FTC is responsible? concern at this time?
The Case of the Weight-Loss Radio Ads: What Would You Do?
A company based in Salt Lake City manufacturers and mar-
?
In addition to the radio advertising, M&M provided
kets some products that are comprised of acai berries and interactive voice-response telemarketing support for sales.
other antioxidants. Natural Oxidant Relief (NOR) markets They used a proprietary automated computer system that
these nutritional supplements in support of weight loss. The let consumers place orders through bots, without human
company recently began advertising these products nation- interaction. The FTC and Utah’s attorney general began
ally through radio ads (on broadcast and subscription investigating the support for NOR’s dramatic weight-loss
media). Nutritional supplements are unregulated, and their claims, looking for scientifically supported clinical trials
safety is of particular concern to pregnant women, nursing to validate the product claims. The investigation led to
mothers, children, and those with medical conditions, the conclusion that the dramatic weight-loss claims were
compromised immune systems, or take other medications. unsubstantiated or downright false.
NOR hired M&M Advertising, out of New York, to The FTC maintains ongoing concerns about companies
create their advertising. The agency met extensively with who market weight-loss products without sound science in
the company to determine the target market, the salient support of their claims. In addition, there were concerns
advertising claims that would drive awareness of the NOR about the “framing” of the radio ads. One ad sounded
products, and sales. In addition, subscriptions (involving like a health news report, another was like a public service
automated shipment of products for ease and convenience, announcement, and a third claimed that the message “was
as well as to achieve the best prices for customers) were not a radio commercial.”
being promoted. NOR continues to deny responsibility for not having
M&M quickly grasped these claims and created performed the proper testing to validate the advertised
messages that touted that the products were so effective claims. What do you do if you work for M&M Advertising?
that they worked day and night (even during sleep). The The agency was the one that created the advertising
products were also believed to “boost metabollic rate,” campaigns; so, are they responsible for potential damage to
resulting in greater calorie burning. NOR supplements consumers? What is M&M’s liability or potential liability?
were believed to allow people to live a normal lifestyle, What would you do if you were the account supervisor of
eating the foods they enjoy, and to support dramatic weight the NOR account?
loss, with testimonials of users who claimed to “lose up to *Note: This scenario was based on actual FTC cases.
30 pounds in 6 months.”

CHAPTER
6 Business Ethics
and Ethical
Decision-Making

A Tough Pill to Swallow: The Ethics of Raising Drug Prices
It is no surprise that drug pricing has become treat an ailment in a single treatment. Insurance
a hot topic in the last decade. With healthcare companies are concerned about what they would
reform being a huge issue during both the Obama have to pay upfront, given the expensive nature of
and the Trump administrations, drug cost debates these drugs. For example, a drug called Zolgensma
have become prominent. Many stakeholders have was developed to treat spinal muscular atrophy
decried the high cost of certain pharmaceuticals. (SMA). The drug could cost between $1.5 to
Even those with insurance often pay a significant $5 million, and there are multiple issues regarding
percentage of the cost. Other times, insurers will who would pay and how. One major issue, as with
restrict access to drugs that are highly expensive, other pharmaceutical drugs, is whether or not the
which could result in the patient not getting as pricing of the drug is ethical and reasonable as
much of the medicine as he or she needs. And new drugs are developed. The drug pricing issue is
while the state healthcare systems of many other complex, and several suggestions have been made
countries cap drug prices and work directly with to address it.
pharmaceutical companies to manage prices, this is One of these is to restructure the rebate
not the case for the United States. system to benefit both patients and research and
Another issue is the fact that many pharmaceutical development of new drugs. Another suggestion
companies have artificial monopolies on new drugs is government intervention to restrict drug pricing.
because of patents. Under a patent, competitors Additionally, according to the American Medical
cannot copy or sell a drug for 20 years. With patents, Association, pricing methods are kept hidden from
companies can use innovation to develop new consumers, so transparency could be a first step
products and earn enough revenue to recoup their in lowering drug prescription prices. The Trump
investment and make a profit. Unfortunately, this administration ruled that drug ads that specifically
also can lead companies to overprice products. As target consumers must include the list price of the
the only seller of a product, a company can charge drug if it costs $35 or more a month. Pharmaceutical
whatever it wants. companies have argued that the ruling violates free
Critics feel that lack of competition has led to speech and could confuse consumers about the
pharmaceutical firms setting exorbitant prices that actual price that they will pay. Others have argued
most consumers cannot afford. Another reason that doing this will lead to greater transparency, and
Shutterstock/i viewfinder
that pharmaceutical companies are thought to thus more ability for consumers to choose which
charge such high prices is that in the United States, companies they do business with. In addition, some
they work mostly with insurance companies and argue that although list prices are not typically paid
healthcare systems. Therefore, they are pricing by consumers due to rebates and health insurance,
their drugs at whatever they believe the insurance many people have high deductibles or no health
companies are willing to cover, rather than at a price insurance at all, thus requiring them to pay the list
point the average consumer can afford to pay. price of the medications. The debate continues and
A more recent development in the will be influenced by the political environment of the
pharmaceutical realm is drugs that can effectively United States in the coming years.1
Chapter Objectives
●● Define and describe the importance of business ethics
●● Understand the diverse and complex nature of existing and emerging ethical issues
●● Discuss the individual factors that influence ethical or unethical decisions
●● Explore the effects of organizational relationships on ethical decision-making
●● Evaluate how opportunity influences ethical or unethical decisions
●● Understand how to implement an ethical culture
147
K ey business ethics concerns relate to questions about whether

various stakeholders consider specific business practices accept-
able. A reputation as an ethical firm takes a long time to earn, but
just minutes to lose. Once lost, it can take considerable time to restore goodwill
with stakeholders. For example, banks and financial institutions have had major
reputational damage. The financial services industry ranks the lowest in con-
sumer and investor trust. About 57 percent of the general population claim they
trust the financial services industry. The informed public far exceeds the mass
population on trust of the financial services industry, however.2 Business ethics
is important to build trust and create an organizational culture that establishes
a good reputation.
By its very nature, the field of business ethics is complex because organiza-
tional issues often require subject matter knowledge. For example, accounting
ethics is embedded with principles, rules, and regulatory requirements. Most
businesses are establishing initiatives that include the development and imple-
mentation of ethics programs designed to deter misconduct. Raytheon Company,
a long-established defense and security company employing more than 75,000
people worldwide, has a comprehensive ethics and compliance program. The
company has a strong ethics education program to help employees make ethical
decisions. The strength of the program has contributed to a strong organizational
culture of integrity. Employees engage in annual “Ethics Checkpoint” peer meet-
ings, where everyone has an opportunity to reflect on and provide solutions to
real-life ethical dilemmas. Thousands of employees have utilized these sessions,
lending support to its effectiveness. Video vignettes and other online educational
materials on supplier relations, product integrity, and labor issues are also
utilized. The company displays an outward focus on ethics by supporting educa-
tion and proper conduct in defense and university programs. In addition, more
than 100,000 modules in compliance have been held to train employees. When
ethical issues do occur, employees are encouraged to report them. Raytheon
clearly expresses how to go about making an ethics complaint on its website.
Employees and consumers can choose to call or use the online reporting system,
but both use anonymous communication technology. Raytheon has a ranking
of 92 percent on the Corporate Social Responsibility and Environment, Social,
Governance (CSR/ESG) Metrics scale. This indicates a high score on social and
corporate responsibility.3
The definition of social responsibility that appears in Chapter 1 incorporates
society’s expectations and includes four levels of concern: economic, legal,
ethical, and philanthropic. Because ethics is becoming an increasingly important
issue in business today, this chapter and Chapter 7 are devoted to exploring this
dimension of corporate social responsibility (CSR). First, we define business
ethics, examine its importance from an organizational perspective, and review its
foundations. Next, we define ethical issues in business to help understand areas of
risk. We then look at the individual, organizational, and opportunity factors that
influence ethical decision-making in the workplace. We conclude by examining
requirements for developing an ethical organizational culture.

Chapter 6 Business Ethics and Ethical Decision-Making 149
The Nature of Business Ethics

Business decisions can be both acceptable and beneficial to society. It is necessary
to examine business ethics to understand decisions made in the context of an
organizational culture. The term ethics relates to choices and judgments about
acceptable standards of conduct that guide the behavior of individuals and groups.
These standards require both organizations and individuals to accept responsibility
for their actions and to comply with established principles, values, and norms.
Without a shared view of which values and norms are appropriate and acceptable,
companies will not have consistency in decisions, with individuals differing in how
they resolve issues. Building an ethical culture results in shareholder loyalty and
can contribute to success that supports even broader social causes and concerns.
The director of sustainability at the Verdigris Group, Garratt Hasenstab, has stated
regarding its CSR initiatives that “the true value we receive from our ongoing
initiatives is that of social goodwill—we believe that setting a good example is the
greatest benefit.”4 Society has developed rules—both legal and implied—to guide
companies in their efforts to earn profits through means that do not cause harm to
individuals or to society at large.
Business ethics comprises the principles and standards that guide the behavior business ethics
of individuals and groups when carrying out tasks to meet business objectives. the principles and standards that
guide the behavior of individuals
Most definitions of business ethics relate to rules, standards, and principles
and groups when carrying out
regarding what is right or wrong in specific situations. Principles are specific and tasks to meet business objectives
pervasive boundaries for behavior that are universal and absolute, and that often
become the basis for rules. Some examples of principles include freedom of speech, principles
principles of justice, and equal rights to civil liberties. Values are used to develop specific and pervasive boundaries
for behavior that are universal and
norms that are socially enforced. Integrity, accountability, and trust are examples absolute and often form the basis
of values. Investors, employees, customers, interest groups, the legal system, and for rules
the community often determine whether a specific action is right or wrong, ethical
or unethical. Although these groups are not necessarily right, their judgments values
norms that are socially enforced,
influence society’s acceptance or rejection of a business and its activities. such as integrity, accountability,
Managers, employees, consumers, industry associations, government regula- and trust
tors, business partners, and special interest groups all contribute to these
conventions, and they may change over time. The most basic of these standards
have been codified as laws and regulations to encourage companies to conform to
society’s expectations of business conduct. As stated in Chapter 5, public concerns
about accounting fraud and conflicts of interest in the securities industry led to the
passage of the Sarbanes-Oxley Act to restore the public’s trust in the stock market.
It is vital to recognize that business ethics goes beyond legal issues. Ethical
business decisions foster trust in business relationships, and as discussed in
Chapter 1, trust is a key factor in improving productivity and achieving success
in most organizations. When companies deviate from the prevailing standards
of industry and society, the result is customer dissatisfaction, lack of trust, and
lawsuits. In the case of Yahoo’s former chief executive officer (CEO), Scott
Thompson, failure to tell the truth resulted in major consequences. Thompson lied
about having a degree in computing and falsely placed the degree on his resume.
Not only did he lose his job, but the incident raised suspicion about the duties of
the board members to thoroughly investigate those they hire.5
Some businesspeople choose to behave ethically because of enlightened
self-interest, or the expectation that “ethics pays.” They want to act responsibly
and assume that the public and customers will reward a company for their
ethical actions. For example, Patagonia’s founder, Yvon Chouinard, helped start
the 1% for the Planet movement. Patagonia donates 1 percent of their sales to
environmental causes and encourages customers not to buy their products if they
do not need them. While these activities have the potential to negatively affect
the company’s sales, consumers value Patagonia’s responsible message and opt to

support them over other outdoor retailers, which could increase long-run profit-
ability. The 1% for the Planet movement has over 1,800 members and is popular
worldwide, demonstrating that consumers will reward ethical behavior.6
Foundations of Business Ethics

Because all individuals and groups within a company may not embrace the same
ethical conflict set of values, there is always the possibility of ethical conflict. Most ethical issues
a situation where individuals and in an organizational context are addressed openly whenever a policy, code, or rule
groups within a company do not
is questioned. Even then, it may be hard to distinguish between the ethical issue
embrace the same set of values
and the legal means used to resolve it. Because it is difficult to draw a boundary
between legal and ethical issues, all questionable issues need an organizational
mechanism for resolution.
The legal ramifications of some issues and situations may be obvious, but
questionable decisions and actions more often result in disputes that must be
resolved through some type of negotiation or even litigation. Companies that
sell e-cigarettes, for instance, may be subject to such risks, similar to traditional
tobacco firms. The Food and Drug Administration (FDA) issued tough new rules
for e-cigarettes that ban selling to minors, require warning labels on packaging, and
have all e-cigarette products undergo government approval. While it was federally
illegal to sell e-cigarettes to minors under these rules, the sales continued. Failure
to uphold legal controls can lead to increased regulations and laws. E-cigarette
businesses face greater restrictions on flavored products due to noncompliance
among retailers.7 Such highly publicized issues strengthen the perception that
ethical standards in business need to be raised.
When ethical disputes wind up in court, the costs and distractions associated
with litigation can be devastating to a business. In addition to the compensatory
or nominal damages actually incurred, punitive damages may be imposed on a
company that is judged to have acted improperly to punish the firm and to send an
intimidating message to others. The legal system, therefore, provides a formal venue
for businesspeople to resolve both ethical and legal disputes; in fact, many of the
examples cited in this chapter had to be resolved through the courts. To avoid the
costs of litigation, companies should develop systems to monitor complaints, sugges-
tions, and other feedback from stakeholders. In many cases, issues can be negotiated
or resolved without legal intervention. Strategic responsibility entails systems for
listening to, understanding, and effectively managing stakeholder concerns.8
A high level of personal morality may not be sufficient to prevent an individual
from violating the law in an organizational context in which even experienced
attorneys sometimes debate the exact meaning of a law. Because it is impossible
to train all the members of an organization as lawyers, the identification of ethical
issues and the implementation of standards of conduct that incorporate both legal
and ethical concerns are the best approaches to preventing crime and avoiding civil
litigation. Codifying ethical standards into meaningful policies that spell out what is
and is not acceptable gives businesspeople an opportunity to reduce the probability
of behavior that could create legal problems. Without proper ethical training and
guidance, it is impossible for the average business manager to understand the exact
boundaries for illegal behavior in the areas of product safety, price fixing, fraud,
collusion, copyright violations, and so on. For example, 20 drug companies were
sued in a class-action lawsuit for price fixing. Teva Pharmaceuticals, the main drug
company accused in the suit, was charged with leading a conspiracy to increase
generic drug prices over several years. The drug companies colluded to increase
prices and prevent competition for their drugs, thus hurting the American people
and the drug industry. The lawsuit included 44 U.S. states and argued that the
inflation rate of the drugs was as high as 1,000 percent.9

Although the values of honesty, respect, and trust are often assumed to be
self-evident and universally accepted, business decisions involve complex and
detailed discussions in which correctness may not be so clear-cut. Both employees
and managers need experience within their specific industry to understand how
to operate in gray areas or to handle close calls in evolving areas. Warren Buffett
and his company, Berkshire Hathaway, command significant respect from
investors because of their track record of financial returns and the integrity of
their organizations. Buffett says, “I want employees to ask themselves whether
they are willing to have any contemplated act appear the next day on the front
page of their local paper—to be read by their spouses, children and friends—with
the reporting done by an informed and critical reporter.” The high level of
accountability and trust that Buffett places in employees translates into investor
trust and confidence.10
Many people with limited business experience suddenly find themselves
required to make decisions about product quality, advertising, pricing, sales
techniques, hiring practices, privacy, and pollution control. For example, how
do advertisers know when they are making misleading statements in advertising,
as opposed to puffery, exaggerated statements that no reasonable person would puffery
believe to be fact? Bayer is “the world’s best aspirin,” Snapple “made from the best exaggerated statements that no
reasonable person would believe
stuff on Earth,” and Firestone (before recalling 6.5 million tires) promised “quality
to be fact
you can trust.”11 The personal values learned through nonwork socialization from
family, religion, and school may not provide specific guidelines for these complex
business decisions. In other words, a person’s experiences and decisions at home,
in school, and in the community may be quite different from the experiences and
the decisions that he or she has to make at work. Moreover, the interests and
values of individual employees may differ from those of the company in which
they work, from industry standards, and from society in general. When personal
values are inconsistent with the configuration of values held by the work group,
ethical conflict may ensue. Conflict that is dealt with openly and effectively can be
a positive growth opportunity. However, when employees’ personal values clash
with those of the organization and the conflict is not dealt with appropriately or
is ignored, it can lead to lower worker productivity, higher turnover rates, and
increased unethical behavior.12
It is important that a shared vision of acceptable behavior develop from an
organizational perspective to cultivate consistent and reliable relationships with
all concerned stakeholders. A shared vision of ethics that is part of an organiza-
tion’s culture can be questioned, analyzed, and modified as new issues develop.
However, business ethics should relate to work environment decisions and should
not control or influence personal ethical issues.
Recognizing an Ethical Issue

Although we have described a number of relationships and situations that may
generate ethical issues, it can be difficult to recognize specific ethical issues in
practice. Failure to acknowledge ethical issues is a great danger in any organiza-
tion, particularly if business is treated as a game in which ordinary rules of fairness
do not apply. Sometimes people who take this view do things that are not only
unethical, but also illegal, to maximize their own position or boost the profits or
goals of the organization.
Figure 6.1 provides the reasons why observed misconduct is not reported.
It was found that 74 percent fear that the report would not be confidential, and
69 percent are concerned that there would be no action taken. This demonstrates
the need for a confidential reporting system associated with comprehensive ethics
and compliance standards. According to a study by the Institute of Business Ethics,
30 percent of workers across Europe have observed misconduct in the workplace.

Figure 6.1 Why Observed Misconduct Is Not Reported

76%
74%
74%
72%
70% 69%
68%
Percent
66%
64%
64%
63%
62%
60%
58%
55%
The report would not Corrective action They could not report They would be
be confidential would not be taken anonymously labeled a snitch
Reason
Source: Ethics and Compliance Initiative, “Interactive Maps: 2018 Global Benchmark on Workplace Ethics,” https://www.
ethics.org/knowledge-center/interactive-maps/ (accessed July 15, 2019).
The study found that the United Kingdom is the most likely to notify others of the
misconduct at 67 percent, and Portugal is the least likely, at 49 percent.13
However, just because an unsettled situation or activity is an ethical issue does
not mean that the behavior is necessarily unethical. An ethical issue may relate to
a situation, a problem, or even an opportunity that requires thought, discussion,
or investigation to determine the potential impact of the decision. Because the
business world is dynamic, new ethical issues are emerging all the time.
One way to determine whether a specific behavior or situation has an ethical
component is to ask other individuals in the business for feedback and guidance,
or approval/disapproval of your decision. Another way is to determine whether
the organization has adopted specific policies or whether there are legal ramifica-
tions. An activity approved of by most members of an organization, if it is also
customary in the industry, is probably ethical. An issue, activity, or situation
that can withstand open discussion between many stakeholders, both inside and
outside the organization, and survive untarnished probably does not pose a threat.
For instance, it is a common legal practice for medical device manufacturers to
have close relationships with medical practitioners, which often include monetary
transactions. However, the nature of these relationships may concern outside
stakeholders, especially when devices are found to malfunction and cause patients
harm. For instance, Medtronic was targeted by a lawsuit that resulted in a settle-
ment of $2.8 million when it was found that sales representatives of the company
were directed to promise thousands of dollars in profit for doctors who would
market Medtronic products using specific billing codes. The neurostimulation
products sold by Medtronic were not adequately tested and were not approved
by the FDA; but the billing codes that the doctors were instructed to use indicated
that the devices had been FDA-approved. It is estimated that doctors in at least 20
states were misled by Medtronic.14
ethical issue
Ethical Issues in Business
a problem, situation, or opportunity An ethical issue is a problem, situation, or opportunity requiring an individual,
requiring an individual, group, or group, or organization to choose among several actions that must be evaluated
organization to choose among
several actions that must be
as right or wrong, ethical or unethical. Surveys can render a useful overview
evaluated as right or wrong, of the many unsettled ethical issues in business. A constructive step toward
ethical or unethical identifying and resolving ethical issues is to classify the issues relevant to most

business organizations. In this section, we examine ethical issues related to abusive

behavior, misuse of company resources, conflict of interest, bribery, discrimination
and sexual harassment, fraud, and privacy issues.
Although not all-inclusive or mutually exclusive, these classifications provide
an overview of some major ethical issues that business decision-makers face.
Table 6.1 provides statistics on organizational misconduct in the United States.
Putting one’s own interests ahead of those of the organization, displaying abusive
behavior, and lying to employees are all personal in nature and present three major
issues that directly relate to the firm’s agenda.
Although Table 6.1 documents some ethical issues that exist in global orga-
nizations, due to the almost infinite number of ways that misconduct can occur,
we cover only the major organizational ethical issues. Any type of manipulation,
deceit, or the absence of transparency in decision-making can cause harm to
others.
Abusive or Intimidating Behavior

Abusive or intimidating behavior is the most common ethical problem for employ-
ees, but what does it mean to be abusive or intimidating? The concepts can mean
anything from physical threats, false accusations, annoying a coworker, profanity,
insults, yelling, harshness, and ignoring someone to the point of being unreason-
able, and the meaning of these words are subjective and can vary from person to
person. It is important to understand that each term falls on a continuum. For
example, what one person may define as yelling might be another’s definition
of normal speech. A lack of civility in our society has been a concern, and the
workplace is no exception. The productivity level of many organizations has
declined on account of the time spent unraveling abusive relationships.
Table 6.1 Organizational Misconduct in the U.S. Workplace

Types of Interpersonal Misconduct Observation Rate
Verbal 88%
Physical 24%
Online 21%
Sexual Harassment
Unwelcome sexual comments 70%
Intentional physical contact 56%
Unwelcome sexual advances or propositions 55%
Pressure to engage in sexual activity 32%
Preferential treatment for submitting to sexual conduct 28%
Discrimination
Race 58%
Gender 49%
Ethnicity 47%
Age 42%
Sexual orientation 34%
Disability 29%
Religion 26%
Source: Ethics and Compliance Initiative, Interpersonal Misconduct in the Workplace, December 2018 (Vienna, VA: Ethics
and Compliance Initiative 2018), 7.

Collection agencies and finance companies often use abusive approaches to

collect debts. As discussed in Chapter 5, the Consumer Financial Protection Bureau
(CFPB) prohibits abusive acts or practices. Its newest standard provides broader
protection against “unfair, deceptive, or abusive acts or practices.” A business
should know what constitutes abusive behavior and avoid engaging in it.15
Abusive behavior from supervisors is a problem that has been studied for
decades. Researcher Bennett Tepper has found that about 10 percent of bosses
in various fields can be considered abusive. Among college sports, the percentage
increases to about 30 percent. Studies also show that abusive behavior from
supervisors causes stress and loss of productivity in employees, greater turnover
of hard-working and highly productive employees, and negative health effects for
both employees and the bosses who treat them badly. There are some companies
that are trying to curb the causes of abusive behavior in the workplace. For
example, Netflix has voiced a desire for employees to speak candidly about how
business is going, whether positive or negative. Because many supervisors become
upset at bad news because they fear they will be blamed for it, by creating a safe
place for honest communication, Netflix is making a positive move away from
abusive behavior.16
Within the concept of abusive behavior, intent should be a consideration. If
the employee was trying to give someone a compliment but that person considers
the comment abusive, then it was probably a mistake. The way that a word is
spoken (voice inflection) can be important. Add to this the fact that we now live
in a multicultural environment, doing business and working with many cultural
groups, and the businessperson soon realizes the depth of the ethical and legal
issues that may arise. There are problems of word meanings across various age
groups and cultures. For example, an expression such as, “Did you guys hook
up last night?” can have a number of meanings, including some that could be
considered offensive in a work environment.
Misuse of Company Time and Resources

time theft The “theft” of time is estimated to cost companies hundreds of billions of dollars
a major form of observed annually. It is estimated that the average employee steals more than 10 hours
misconduct including late arrivals, per week by arriving late to work, taking long lunch breaks, leaving early,
long lunch breaks, leaving daydreaming, excessive socializing, engaging in personal activities, and using
early, day dreaming, excessive
socializing, and use of social
social networking sites such as Facebook.17 The misuse of time and resources
media that costs companies has been identified by the Ethics Resource Center as a major form of observed
billions annually misconduct. In one survey, 43 percent of respondents stated that they participated
in time theft through exaggerating their
hours worked, and 23 percent admitted
to punching in for employees who were
absent from work or coming in late, also
known as buddy punching.18
According to a survey by International
Data Corp., nearly 38 percent of informa-
tion technology (IT) managers were aware
that employees installed personal software
on company computers, and 57 percent of
employees admitted to this practice. The
Shutterstock/Georgejmclittle
personal software downloaded enables

the employees to use company time to
complete personal work. When enforce-
ment is lax or nonexistent, employees
may get the impression that they are
entitled to certain company resources.
Using company computer equipment for personal business is a common way

employees engage in time theft. While employees might recognize that spending the
workday talking with friends and relatives is unacceptable, they might not hesitate
to go online and do the same thing. Typical examples of misusing company
computers include sending personal emails, socializing on Facebook, shopping
on Amazon or eBay, downloading music, doing personal banking, or watching
sporting events online. Many employees, for instance, engage in time theft during
“March Madness” (the annual college basketball tournament). As a result, many
organizations block websites on which employees could watch sports events. Some
also block sites such as Netflix and Pandora to prevent employees from watching
video clips or streaming music.19
To deter this type of misconduct, many organizations implement policies
describing the acceptable use of such resources. For example, Boeing’s code of
ethics states that limited resource use is acceptable with the consent of manage-
ment, and only if it has no negative consequences for the company. In addition,
the code states that such activity must not conflict with Boeing’s policies, disrupt
productivity, or reduce the security of company resources. Boeing also has
guidelines for how employees are to use company information on social media and
outside internet platforms.20
Conflict of Interest
A conflict of interest exists when an individual has competing interests and must conflict of interest
choose whether to advance his or her own interests, those of his or her organiza- an issue that arises when an
individual has competing interests
tion, or those of some other group. For example, the Transportation Demand
and must choose whether to
Management Program in Sunnyvale, California, required businesses to encourage advance his or her own interests,
carpooling systems for employees to reduce traffic. Google agreed to pay $1.23 those of his or her organization, or
million for the city of Sunnyvale to hire a traffic engineer and a transportation those of some other group
manager to help with the traffic. However, it was discovered that the traffic engi-
neer helped review Google’s vehicle reduction plan for the offices in Sunnyvale,
creating a conflict of interest. Because the employee’s wages were paid by a private
corporation, it raised concerns that Google may receive preferential treatment.21
To avoid conflicts of interest, employees must be able to separate their private
interests from their work roles. Organizations, too, must avoid potential conflicts
of interest in providing goods or services. The Sierra Club, an environmental
organization, requested documents from the U.S. State Department regarding the
hiring of Environmental Resources Management, a contractor set to work on the
Keystone XL pipeline. The documents revealed several conflicts of interest, as
many of its consultants also worked for companies that benefited greatly from the
completion of the pipeline. It was found that the company did not disclose these
issues, nor did it appear that the U.S. government investigated them.22
Bribery
Bribery is the practice of offering something, such as money, entertainment, travel, bribery
or other gifts to gain an illicit advantage from someone in authority. The definition the practice of offering something,
such as money, entertainment,
of bribery depends upon whether the illicit payment or favor is used to gain an
travel, or other gifts to gain an
advantage in a relationship. In many developed countries, society generally recognizes illicit advantage from someone in
that employees should not accept bribes or special favors from people who could authority
influence the outcome of a decision. For example, the IT consulting firm Computech
Corporation and its former CEO are banned from doing business in Detroit after
bribing a city department head. The company is banned for 10 years while the CEO
is banned for 20. The former IT head of Detroit pled guilty to accepting bribes from
Computech, which provided IT services and personnel to the city. The bribes included
cash payments, trips, and other incentives.23 The U.S. Securities and Exchange

Commission (SEC) has cracked down on cases of bribery involving hundreds of

companies. For example, Cognizant Technology Solutions Corporation paid a $25
million settlement after two former corporate executives were found to have bribed a
government official in India to obtain a building permit for the company.24
Bribery is considered an unlawful act in the United States and other Western
countries, but in some cultures, bribing business or government officials with
fees is considered standard practice. In this case, this becomes a business ethics
issue. According to the United Nations, global corruption, which includes bribery,
incurs a cost of $3.6 trillion each year. Not only have bribes led to the downfall of
many managers, legislators, and government officials, but it has also contributed
to poverty. In a survey by Transparency International, 25 percent of respondents
stated that paying bribes was necessary for them to access public services like
healthcare. Often, it is the poor who are forced to pay bribes, and this creates an
ethical issue for international business.25
In the United States, where bribery is strongly discouraged and punished when
discovered, there are still those who utilize corruption to get ahead. While bribery
may not be as widespread in the United States as it is in other countries, it can
and does often result in unsafe business practices and fallout for consumers. For
example, Philip Esformes, owner of nursing homes and assisted living facilities
in Miami, was convicted of money laundering, defrauding the United States,
and other charges. He was accused of giving patients unnecessary treatments in
his facilities and then billing these charges to Medicare and Medicaid. He also
bribed doctors and healthcare regulators involved in the scheme. In addition to
this money laundering, it was discovered that Esformes bribed the University of
Pennsylvania’s basketball coach to get his son admitted to the university. This
college admissions scandal was part of a large conspiracy by more than 50 parents
across the United States who paid money to William Rick Singer, the organizer
of the scheme. Parents included celebrities Felicity Huffman and Lori Loughlin.
Singer used money to fraudulently inflate college entrance exam scores and bribe
college officials.26
When a government official accepts a bribe, it is usually from a business that
seeks some advantage, perhaps to obtain business or the opportunity to avoid
regulation. Giving bribes to legislators or public officials, then, is both a legal and
a business ethics issue. It is a legal issue in the United States under the Foreign
Foreign Corrupt Practices Act Corrupt Practices Act (FCPA). This Act maintains that it is illegal for individuals,
(FCPA) firms, or third parties doing business in U.S. markets to “make payments to foreign
maintains that it is illegal for
government officials to assist in obtaining or retaining business.”27 Companies
individuals, firms, or third parties
doing business in U.S. markets have paid billions of dollars in fines to the U.S. Department of Justice for bribery
to, in the words of the law, “make violations. The law applies not only to American firms, but to all firms transacting
payments to foreign government business with operations in the United States. This also means that firms do not
officials to assist in obtaining or necessarily have to commit bribery in the United States to be held accountable.
retaining business”
The Bribery Act, passed in 2010 in the United Kingdom, is similar to the FCPA
but is more encompassing. For instance, while the FCPA applies to bribing foreign
government officials, the Bribery Act holds people or businesses responsible
for commercial bribery as well. The first cases convicted under the Bribery Act
were acts committed largely by individuals, such as a student who tried to bribe
a professor to let him pass her course. The Act also does not allow facilitation
payments or small payments to get normal services performed. Like the FCPA, any
organization is subject to the Bribery Act if it does business in the United Kingdom,
no matter where the bribery occurred.
Discrimination and Sexual Harassment

Discrimination remains a significant ethical issue in business despite nearly 60
years of legislation outlawing it. Once dominated by white middle-aged men,

today’s U.S. workforce includes significantly more women, African Americans,

Hispanics, LGBTQ, and other minorities, as well as workers with disabilities and
older workers. These groups have traditionally faced discrimination and higher
unemployment rates and have been denied opportunities to assume leadership roles
in corporate America. Experts project that within the next 25–30 years, Hispanic
Americans will represent 24.6 percent of the population, African Americans and
Asian Americans will represent 13.1 percent and 7.9 percent of the population,
respectively, and European Americans will be the minority.28
The most significant piece of legislation against discrimination is Title VII of the Title VII of the Civil Rights Act
Civil Rights Act of 1964, which prohibits employment discrimination on the basis of 1964
prohibits employment
of race, national origin, color, religion, and gender, and applies to employers with discrimination on the basis
15 or more employees, including state and local governments. This law is funda- of race, national origin, color,
mental to employees’ right to join and advance in an organization according to religion, and gender, and applies
merit, rather than one of the characteristics just mentioned.29 As a result of racial to employers with 15 or more
discrimination class-action settlements, some companies, such as Coca-Cola, were employees, including state and
local governments
required to establish an independent task force to monitor and modify company
practices to combat racial discrimination.
Additional laws passed in the 1970s, 1980s, and 1990s were designed to
prohibit discrimination related to pregnancy, disabilities, age, and other factors.
The Americans with Disabilities Act (ADA), for example, prohibits companies
from discriminating on the basis of physical or mental disability in all employment
practices and requires them to make facilities accessible to and usable by persons
with disabilities. The Age Discrimination in Employment Act specifically outlaws
hiring practices that discriminate against people ages 40 or older, but it also bans
policies that require employees to retire before the age of 70.
Despite this legislation, charges of age discrimination persist in the workplace.
Currently, about half of the United States workforce is 40 or older. This is a large
segment of the workplace, and naturally age discrimination lawsuits are prevalent.
In a 5–4 decision, the U.S. Supreme Court ruled to make it more difficult for
workers to claim age discrimination in lawsuits. Now employees must be able
to prove that their employers terminated them for age-related reasons which is
a difficult thing to prove. The ruling was part of a case brought to trial by Jack
Gross, who at 54 was demoted from a director position by his employer, FBL
Financial Group.31 However, a bipartisan proposal called the Protecting Older
Workers Against Discrimination (POWAD) Act would overturn the Gross v. FBL
Financial Services decision. Under the Act, workers would only have to prove that
age discrimination was part of the reason they received negative treatment such as
termination rather than the only reason. Given that more than 30 percent of the
nation’s workers will be 50 years old or older by 2022, the new legislation would
help change companies’ approach toward older workers.30
Along with racial and age discrimination, gender discrimination also occurs in
the workplace. The women’s rights movement, first begun in 1848 and resulting
in the 19th Amendment, increased awareness of gender equality disparities.
Voting was initially the right that was won for women, but as the years have
progressed, new challenges have surfaced. Gender discrimination, particularly in
the form of pay, has been subject to legal action. For example, the U.S. Women’s
National Soccer Team filed a lawsuit against the U.S. Soccer Federation just
months after the kickoff of the World Cup in 2019. The women alleged gender
discrimination due to female players earning less than their male counterparts on
the U.S. National Soccer Team. The women stated that they have the same job
responsibilities and have even had more success on the field than the men. They
pointed out that the men’s team has never won the World Cup and did not even
qualify for the tournament in 2018, whereas the women’s teams won the World
Cup three times (in 1991, 1999, and 2015); they would go on to win again in
2019. A comparison showed that if each team played and won 20 tournament

games a year, a top-tier women’s player would earn 38 percent of what a men’s
player could make.32
Sexual harassment is a form of sex discrimination that violates Title VII of
sexual harassment the Civil Rights Act of 1964. Sexual harassment can be defined as any repeated,
any repeated, unwanted behavior unwanted behavior of a sexual nature perpetrated upon one individual by another.
of a sexual nature perpetrated
It may be verbal, visual, written, or physical and can occur between people of dif-
upon one individual by another; it
may be verbal, visual, written, or ferent genders or those of the same gender. Displaying sexually explicit materials
physical and can occur between “may create a hostile work environment or constitute harassment, even though the
people of different genders or private possession, reading, and consensual sharing of such materials is protected
those of the same gender under the Constitution.”33 Title VII applies to employers with 15 or more
employees, including state and local governments. It also applies to employment
agencies, labor organizations, and the federal government.
When investigating sexual harassment allegations, the U.S. Equal Employment
Opportunity Commission (EEOC) looks at the circumstances of each case, includ-
ing the nature of the alleged acts and the context of the situation. The EEOC
determines the course of action based on each individual case. The commission
contacts the employer to notify them of the sexual harassment complaint and the
investigation. If the EEOC cannot settle the issue, it dismisses the case and issues
a “right-to-sue” letter to the person who filed the complaint. In sexual harass-
ment cases, as with other claims of discrimination, the employer is prohibited
by law from retaliating against the employee who filed the complaint. Along
with the EEOC, many states also have agencies that enforce state laws regarding
sexual harassment in the workplace.34 The EEOC received 7,609 charges of
sexual harassment in one year, of which men filed almost 16 percent. In the same
year, the commission resolved 7,986 sexual harassment charges and recovered
$56.6 million in penalties.35
To establish sexual harassment, an employee must understand the definition of
hostile work environment a hostile work environment, for which three criteria must be met: (1) the conduct
a kind of workplace environment was unwelcome; (2) the conduct was severe, pervasive, and regarded by the
where the conduct is unwelcome;
claimant as so hostile or offensive as to alter his or her conditions of employment;
severe, pervasive, and hostile
such as to affect conditions of and (3) the conduct was such that a reasonable person would find it hostile or
employment; and offensive to a offensive. To assert a hostile work environment, an employee need not prove that
reasonable person it seriously affected his or her psychological well-being or that it caused an injury;
the decisive issue is whether the conduct interfered with the claimant’s work
performance.36
Fraud
When an individual engages in deceptive practices to advance his or her own
interests over those of the organization or some other group, charges of illegal
fraud fraud may result. In general, fraud is any false communication that deceives,
any false communication that manipulates, or conceals facts to create a false impression when others are damaged
deceives, manipulates, or
or denied a benefit. It is considered a crime, and convictions may result in fines,
conceals facts to create a false
impression when others are imprisonment, or both. For example, Elizabeth Holmes, founder of Theranos,
damaged or denied a benefit was indicted on charges of defrauding investors. The company misled doctors and
patients with promises of revolutionizing healthcare through quick and painless
finger pricking; however, the company never produced a working product. The
U.S. attorney’s office in San Francisco filed the indictment after the SEC settled
civil fraud charges against Holmes. Holmes, through Theranos, scammed many
people out of hundreds of millions of dollars.37
Employee expense fraud is estimated to cost businesses more than $7 billion
annually. The Association of Certified Fraud Examiners found that asset misap-
propriation such as larceny and fraudulent disbursements was the most common
type of fraud, followed by corruption and financial statement fraud. Financial
statement fraud, though the least likely to occur, costs companies the most.38

Table 6.2 indicates how occupational fraud is committed by employees. Table 6.2 How Is Occupational
Misappropriation of assets represents the greatest source of fraud.39 Fraud Committed?
Corruption 38%
Conflicts of interest
Privacy Purchasing schemes
The final category of ethical issues relates to privacy, especially within Sales schemes
the healthcare and internet industries. Some privacy issues that busi- Bribery
nesses must address include the monitoring of employees’ use of available
Invoice kickbacks
technology, consumer privacy, and online marketing. Companies often
use cookies or other devices to engage in online tracking, and many Bid rigging
websites use consumer information to improve services. Although this Illegal gratuities
can benefit consumers in the form of better marketing and tailored Economic extortion
searches, it is also controversial because many consumers do not want
Asset Misappropriation 89%
their information being tracked. Others are still willing to provide
personal information despite the potential risks.40 The challenge for Theft of cash on hand
today’s firms is balancing their need for consumer or employee informa- Theft of cash receipts
tion with the desire for privacy. In terms of employees, there are few Skimming
legal protections for their right to privacy, giving businesses flexibility Cash larceny
in establishing policies regarding employee privacy while using company
Fraudulent disbursements
equipment on company property. Some common ways that an employer
might track employee use of equipment is through computer monitoring, Billing schemes
telephone monitoring, video surveillance, and global positioning system Payroll schemes
(GPS) satellite tracking. Although employers have the right to make sure Expense reimbursement schemes
that their resources are being used for appropriate purposes, the ability Check tampering
to gather and use data about employee behavior creates the need for trust
Register disbursements
and responsibility.
The use of biometric data, including fingerprints and facial scans, Inventory and all other assets
is creating ethical issues. It is used as a common method for companies Misuse
with warehouses to verify employee hours and check workers in and out Larceny
of their facilities. Lawsuits have been filed by employees regarding how Financial Statement Fraud 10%
firms use and store their personal biometric data. Illinois is regarded as
Net worth/net income overstatements
having stringent privacy protection laws. According to their Biometric
Information Privacy Act, companies that collect this data must first Net worth/net income understatements
obtain user consent and notify the individuals about why, how, and how Source: Association of Certified Fraud Examiners,
long their data will be used and stored. The risks involved with biometric Report to the Nations 2018 Global Study on
Occupational Fraud and Abuse, 2018 https://www.
data is that privacy could be compromised and ultimately lead to identity acfe.com/report-to-the-nations/2018/ (accessed
theft. This could occur if the data were subject to data breaches or if July 15, 2019).
access was incorrectly given to a third party. 41
There are two issues involving consumer privacy: consumer awareness of privacy issues
information collection and growing lack of consumer control with respect to issues that businesses must
how organizations use personal information. For example, many are not aware address that include the
that Google reserves the right to track each time they click on a link from one monitoring of employees’ use of
available technology, consumer
of their searches.42 Data tracking of information about consumers without their privacy, and online marketing
knowledge or consent occurs daily. Cookies are a common way for websites to
track users, but third-party trackers use more sophisticated tracking methods to biometric data
collect personal data on visitors. This nonconsensual collection of personal data digital data used for personal
verification or identification that
has led to such regulatory measures as the passage of the General Data Protection includes fingerprints, facial scans,
Regulation (GDPR) in Europe. The GDPR will be discussed in more detail in retina scans, voice, and DNA
Chapter 11.43
Consumer information is valuable not only to businesses, but also to crimi-
nals. An identity is stolen approximately once every two to three seconds in the
United States.44 Criminals may try to steal personal consumer information and sell
it online. Some of this information comes from publicly accessible sources, such as
social networking profiles, but poorly protected corporate files are another major
source for criminals. Recently, Marriott International had a privacy breach that

resulted in the exposure of the personal information of 500 million people. The
hackers who accessed the information stole a great deal of data, including people’s
full names, addresses, passport numbers, and date of birth.45
To reassure consumers that their information will be protected, an increasing
number of companies are displaying an online seal from the Better Business Bureau
(BBB), which is available to websites that subscribe to certain standards. A similar
seal is provided through the TRUSTe certification program from TrustArc. These
seals assure customers that the websites adhere to certain policies meant to protect
their privacy.
AI and Ethics: An Emerging Issue

Emerging technologies are disrupting the workplace and creating new challenges
to ethical decision-making. Transformative technology such as three-dimensional
(3D) printing, the Internet of Things (IoT), drones, and robotics are enabled by
artificial intelligence (AI). All of these developments need oversight to monitor,
audit, and ensure accountability for ethical decisions.46
AI involves machine learning that can simulate some aspects of human behav-
ior. AI can exhibit cognitive functions associated with humans, as well as problem
solving and learning at a complexity beyond what a human being can process.
The ability of AI to incorporate ethical decision-making has been challenged. The
important question is how AI should make ethical decisions. What is a responsible
role for AI in our society? Big data enables AI to engage in advanced analytics
combined with cloud computing to create “smart” systems to interact and provide
information and solutions in business. There is the potential for AI to disrupt and
change all aspects of business.
Introducing AI requires public safety, security, and privacy, as well as building
trust and understanding. Values, norms, and behavior relate to social and cultural
human decisions. As AI systems become more complex, there is a need to explore
the ethics-related impact and develop ethics components to machine learning.
Ethical concerns exist because of the ability to make autonomous decisions.
AI can make decisions and implement actions based on the algorithms or rules
provided by the programmers. In addition, an AI program will need oversight
to monitor and access outcomes that result from decisions or directions from
machine learning.47
There is evidence that AI systems have been involved in accidental or in some
cases intentional ethical dilemmas that could have major consequences. Targeting
markets based on demographics could even result in discrimination. Predictive
analytics can target market segments, but it can also involve data privacy issues.
For example, Facebook is facing backlash
for allowing companies to target consum-
ers via sharing private data without con-
sumers’ permission. A code of ethics has
become increasingly important as data
breaches and unauthorized data sharing
have grown. This will require the design
of AI systems that are programmed with
an ethical decision-making component,
as well as transparency with the public
on the algorithms used to ensure ethical
decision-making. AI machines will require
Shutterstock/Flystock
complex algorithms that are similar to the

ethical decision-making of their human
partners. In the future, humans will be
working alongside AI-enabled robots,
drones, and other devices and will depend on these machines to help maintain
ethical organizational cultures.
Another ethical consideration is the organization of the workforce. Companies
will have to make ethical decisions about how to retain employees as jobs become
more automated. They will also have to decide how to redistribute work tasks
between AI devices and human workers to encourage efficient human-machine
partnerships.
The development of an independent code of ethics for specific AI applications
will be needed to address risk areas. General value statements used in organiza-
tional codes of ethics may be too broad to provide directions. AI initially will rely
more on compliance algorithms, such as directions on privacy. Should AI-enabled
drones scan to identify individuals and their behavior? Methodologies will need
to be developed to render decisions in the same way that humans make ethical
decisions. AI will not only be concerned about ethical decisions, but also legal
compliance must be built into machine learning. Mandated boundaries will need
to be imposed to address laws, regulations, and other requirements. Ethics will be
a buffer that develops areas such as industry self-regulation and core practices that
meet societal expectations.
As AI advances, there may be new laws to protect consumers and employees.
Laws promoting equity and safety as well as competitive relations may be needed.
Microsoft was the first tech company to call for regulation of facial-recognition
technology. A key challenge will be transparency about how algorithms work to
make ethical decisions. Already, some systems have been found to discriminate
against African Americans and Hispanics, and safeguards need to be put in place
to prevent future discrimination. Additionally, AI is used to observe cities in
China.
Developing AI for the common good of society should be the objective. From
diagnosing cancer to performing high-risk jobs, this technology has the potential
to make the business world more responsible and accountable. AI for the common
good should be focused beyond individual and business interests. In a way, it may
change relationships with many stakeholders who have an interest in the company.
Therefore, AI must operate to understand the impact on a firm’s social responsibil-
ity. There will be a need to look beyond just the impact on internal organizational,
legal, and ethical concerns, but also issues such as sustainability, consumer protec-
tion, employee welfare, social issues, and even corporate governance.
AI enabled by blockchain has the potential to improve ethics. Blockchain, as
discussed in detail in Chapter 11, is a series of blocks of information that record
ordered transactions and data. This information system is decentralized and
distributed on a peer-to-peer network. No one can change the history or data to
take advantage of others. This immutable audit trail means financial transactions
will be less susceptible to fraud.48 In accounting and financial reporting, there
will be a permanent record and identification of who made the entries. Carrefour
SA and Walmart are already using blockchain to improve food safety. Through
blockchain, suppliers have the ability to quickly trace food that can cause health
dangers such as norovirus or listeria, which can save lives.49
Finally, there is concern that AI will result in unemployment because it will
displace workers. However, employment has remained high over the last 100 years
despite drastic changes in technology. New technology requires new types of jobs.
This means that the labor force will need education and training to fill these new
high-tech jobs. These “new-collar” jobs, as compared to white- and blue-collar
jobs, will be needed to build, maintain, and operate the AI-driven replacements for
some existing occupations. Society is in the early stage of identifying the issues and
solutions related to incorporating AI into business and society. But the benefits of
AI are so great that the ethical challenges need to be resolved to create integrity in
this powerful technology.50

Understanding the Ethical Decision-Making

Process
To grasp the significance of ethics in business decision-making, it is important to
understand how ethical decisions are made within the context of an organization.
Understanding the ethical decision-making process can help individuals and busi-
nesses design strategies to deter misconduct. Our descriptive approach to under-
standing ethical decision-making does not prescribe what to do; rather, it provides
a framework for managing ethical behavior in the workplace. Figure 6.2 depicts
this framework, which shows how individual factors, organizational relationships,
and opportunities interact when making ethical decisions in business.
Individual Factors
Individuals make ethical choices on the basis of their own concepts of right or
wrong, and they act accordingly in their daily lives. Studies suggest that individual
ethics are reaching a new low, but also that individual ethics are increasingly
important to new generations. A survey by Bloomberg News and Morning
Consult found that individual values are very important to today’s youth. To
capitalize on this, companies have to market their products to a younger, more
sustainability-minded public. For example, the Kellogg Company has used teenag-
ers to help create new flavors of cereal, and Ulta Beauty has marketed makeup that
is environmentally friendly.51 If today’s students are tomorrow’s leaders, there is
likely to be a correlation between acceptable behavior today and tomorrow.
Significant factors that affect the ethical decision-making process include an
individual’s personal moral philosophy, motivation, and other personal factors
such as gender, age, and experience.
Ethical Theories Many people have justified difficult decisions by citing the
golden rule (“Do unto others as you would have them do unto you”) or some
other principle. Such principles, or rules, which individuals apply in deciding
moral philosophies what is right or wrong, are often referred to as moral philosophies. Morals refer
principles, or rules, which to the individuals’ philosophies about what is right or wrong. It is important to
individuals apply in deciding what
understand the distinction between moral philosophies and business ethics. A
is right or wrong; morals refers to
individuals’ philosophies about moral philosophy is a person’s principles and values that are used to define what is
what is right or wrong moral or immoral. Moral philosophies are person-specific, whereas business ethics
Figure 6.2 Factors That Influence the Ethical Decision-Making Process
Individual
Factors
Organizational Ethical or Unethical

Relationships Decisions
Opportunity

is based on decisions in groups or those made when carrying out tasks to meet
business objectives. Socialization by family members, social groups, religion, and
formal education teaches moral philosophies. This idea is particularly important to
the concept of social exchange theory, which states that social behavior is deter- social exchange theory
mined by social exchanges between different parties. Most moral philosophies can a theory stating that social
behavior is determined by social
be classified as consequentialism, ethical formalism, or deontology, or justice.
exchanges between different
Consequentialism is a class of moral philosophy that considers a decision right parties
or acceptable if it accomplishes a desired result, such as career growth, the realiza-
tion of self-interest, or utility in a decision. This looks at the moral outcome based consequentialism
on the consequences associated with decision-making. Egoism and utilitarianism a class of moral philosophy that
considers a decision right or
are two important consequentialist philosophies that often guide decision-making acceptable if it accomplishes a
in business. Egoism is a philosophy that defines right or acceptable conduct in desired result, such as career
terms of the consequences for the individual. Egoists believe that they should make growth, the realization of self-
decisions that maximize their own self-interest, which, depending on the individual, interest, or utility in a decision
may be defined as career success, power, fame, a satisfying career, a good family egoism
life, wealth, and so forth. In a decision-making situation, the egoist will probably a philosophy that defines right or
choose the alternative that most benefits his or her self-interest. Many people feel acceptable conduct in terms of the
that egoists are inherently unethical, that they focus on the short term, and that consequences for the individual
they will take advantage of any opportunity to exploit consumers or employees.
Utilitarianism is another consequentialist philosophy that is concerned with seeking utilitarianism
the greatest good for the greatest number of people. Using a cost-benefit analysis, a a consequentialist philosophy
that is concerned with seeking
utilitarian decision-maker calculates the utility of the consequences of all possible the greatest good for the greatest
alternatives and then chooses the one that achieves the greatest utility. number of people
In contrast with consequentialism, ethical formalism, or deontology, is a class
of moral philosophy that focuses on the rights of individuals and on the intentions ethical formalism
also known as deontology, class
associated with a particular behavior rather than on its consequences. This theory of moral philosophy that focuses
falls under what is known as rights-based ethics. Deontologists regard certain on the rights of individuals and on
behaviors as inherently right, and their determination of rightness focuses on the the intentions associated with a
individual actor, not on society. Thus, these perspectives are sometimes referred to particular behavior rather than on
its consequences
as nonconsequentialism and the ethics of respect for persons. Contemporary ethi-
cal formalism has been greatly influenced by the German philosopher Immanuel
Kant, who developed the so-called categorical imperative: “Act as if the maxim of
thy action were to become by thy will a universal law of nature.”52 Unlike utilitar-
ians, ethical formalists contend that there are some things that people should not
do, even to maximize utility. For example, an ethical formalist would consider it
unacceptable to allow a coal mine to continue to operate, even if it made a profit,
if some workers became ill and died of black lung disease. A utilitarian, however,
might consider some disease or death an acceptable consequence of a decision that
resulted in large-scale employment and economic prosperity.
Justice theory is a class of moral philosophy that relates to evaluations of justice theory
fairness, or the disposition to deal with the perceived injustices of others. Justice a class of moral philosophy that
relates to evaluations of fairness,
demands fair treatment and due reward in accordance with ethical or legal
or the disposition to deal with the
standards. A similar concept is the Principle of Equal Freedom, which asserts that perceived injustices of others
all persons must have equality under the law. In business, this requires that the
rules an individual uses to determine justice be based on the perceived rights of Principle of Equal Freedom
individuals and on the intentions associated with a business interaction. Justice, asserts that all persons must have
equality under the law
therefore, is more likely to be based on nonconsequentialist moral philosophies
than on consequentialist philosophies. Justice primarily addresses the issue of
what individuals feel they are due based on their rights and performance in the
workplace. For example, the EEOC exists to help employees who suspect the
injustice of discrimination in the workplace.
There are three types of justice that can be used to assess fairness in different
situations. Distributive justice evaluates the outcomes or results of a business rela-
tionship. For example, if an employee feels that she is paid less than her coworkers
for the same work, she has concerns about distributive justice. Procedural justice

assesses the processes and activities employed to produce an outcome or results

and is associated with group cohesiveness and helping behaviors. Such concerns
about compensation would relate to the perception that salary and benefit deci-
sions are consistent and fair to all categories of employees.53 Interactional justice
evaluates the communication processes used in the business relationship. Being
untruthful about the reasons for missing work is an example of an interactional
justice issue.54
It is important to recognize that there is no one “correct” moral philosophy
to apply in resolving ethical and legal issues in the workplace. It is also important
to acknowledge that each philosophy presents an ideal perspective and that most
people seem to adapt a number of moral philosophies as they interpret the context
of different decision-making situations. Each philosophy could result in a different
decision in a situation requiring an ethical judgment. And depending on the
situation, people may even change their value structure or moral philosophy when
making decisions.55
Strong evidence shows that individuals use different moral philosophies
depending on whether they are making a personal decision outside the work
environment or a work-related decision.56 Two possible reasons may explain this.
First, in the business arena, some goals and pressures for success differ from the
goals and pressures in a person’s life outside of work. As a result, an employee
might view a specific action as “good” in the business sector but “unacceptable”
in the nonwork environment. Business has two variables that are absent from
other situations: the profit motive and the influence of managers and coworkers
(corporate culture). The weights on the various factors that make up a person’s
moral philosophy are shifted in a business (profit) situation. The statement “it’s
not personal, it’s just business” demonstrates the conflict businesspeople can
have when their personal values do not align with utilitarian or profit-oriented
decisions. In extreme cases, this mentality could become Machiavellian in nature.
Machiavellianism Machiavellianism in business is the use of duplicity or cunning to achieve business
the use of duplicity or cunning to goals. The second reason people change moral philosophies could be the corporate
achieve business goals
culture where they work. When a child enters school, for example, he or she
learns certain rules, such as raising your hand to speak or asking permission to
use the restroom. So it is with a new employee. Rules, personalities, and historical
precedence exert pressure on the employee to conform to the new firm’s culture.
As this occurs, the individual’s moral philosophy may change to be compatible
with the work environment. Employees may alter some or all of the values within
their moral philosophy as they shift into the firm’s different moral philosophy.
There are many examples of people who are known for their goodness at home or
in their communities making unethical decisions in the workplace.
Ethical Diversity It is obvious that not everyone holds the same ethical values.
One person may have values that another person does not have, or that person
might value a certain trait more highly than another. Additionally, individuals can
have significantly different values than those of the organization.57 This concept
ethical diversity is referred to as ethical diversity, the fact that employee values often differ from
refers to the fact that employee person to person. Every employee has developed his or her personal values over a
values often differ from person to
lifetime, and these values are not likely to disappear just because they differ from
person
others or the organization. However, it also means that employees cannot be
allowed to bring their individual values to the workplace as they see fit. Imagine
the chaos that would happen if each employee acted in a way that was appropriate
in his or her eyes. Instead, members need to accept that some values are superior to
others and handle the organizational need to develop consensus among employees.
This may result in possible tensions and conflicts that must be figured out between
individual and organizational values.58 However, it is best to follow a consensus
approach, rather than just having managers assign and enforce their own individual

values to the organization. There should be group discussions, negotiations, and

modifications to determine how organizational values are implemented.59
Organizational Relationships
Although individuals can and do make ethical decisions, they do not operate in a
vacuum.60 Ethical choices in business are most often made jointly in committees
and work groups, or in conversations with coworkers. Moreover, people learn
to settle ethical issues not only from their individual backgrounds, but also from
others with whom they associate in the business environment. The outcome of
this learning process depends on the strength of each individual’s personal values,
opportunity for unethical behavior, and exposure to others who behave ethically
or unethically. Consequently, the culture of the organization, as well as superiors,
peers, and subordinates, can have a significant impact on the ethical decision-
making process.
Organizational Culture Organizational, (corporate) culture can be defined as a set organizational, (corporate)
of values, norms, and artifacts shared by members or employees of an organiza- culture
a set of values, beliefs, and
tion. It answers questions such as “What is important?” “How do we treat each artifacts shared by members or
other?” and “How do we do things around here?” Culture may be conveyed employees of an organization
formally in employee handbooks, codes of conduct, memos, and ceremonies, but
it is also expressed informally through dress codes, extracurricular activities, and
anecdotes. A firm’s culture gives its members meaning and offers direction as to
how to behave and deal with problems within the organization. The corporate
culture at American Express, for example, includes numerous anecdotes about
employees who have gone beyond the call of duty to help customers out of difficult
situations. This strong tradition of customer service might encourage an American
Express employee to take extra steps to help a customer who encounters a problem
while traveling overseas.
Organizational culture depends on company strategy because it prioritizes
stakeholders. For example, Marriott prioritizes employees to provide exceptional
service for customers. Therefore, its strategic priority is keeping Marriott as one of
the best companies to work for. Walmart, on the other hand, values customers and
therefore places a priority on a low-cost, efficient operating environment. Amazon
has developed a culture that focuses on their competitors and is making extreme
inroads into traditional markets for durable goods sold in stores. Therefore,
the company’s strategy will help shape stakeholder relationships and the ethical
culture.
On the other hand, an organization’s culture can also encourage employees to
make decisions that others may judge as unethical, or it can encourage actions that
may be viewed as socially irresponsible. Some misconduct comes from employees
trying to attain the performance objectives of the firm, whatever they have to
do to accomplish it. While high performance objectives are not a bad thing, it is
important for managers to ensure that these objectives can be reached without
cutting corners or engaging in questionable conduct. For example, bankers who
worked for Wells Fargo felt downward pressure from upper management to open
more accounts at their banks. Wells Fargo’s intention when it started requesting
more accounts from its bankers was to generate more revenue by having more
customers do business with them. The senior leadership of Wells Fargo, however,
put extensive pressure on its employees, which created an unethical environment
for its retail banks. Many employees created fake accounts for customers who
didn’t exist, despite knowing that it was unethical. The drive to meet their sales
goals superseded their sense of right and wrong, and the scandal has had a lasting
effect on the company.61

Derivatives used in financial markets to transfer risk are so complex, difficult

to value, poorly regulated, and have been so widely used that they can bring down
a company. They also contributed a great deal to the severity of the U.S. recession,
challenging the entire country’s financial systems. To make ethical decisions when
using derivatives, one requires a great deal of transparency, financial expertise
and competence, and responsibility.62 Because of their complexity, derivatives
provide openings for manipulation and misconduct. When a corporation uses
certain compensation systems, employees striving for financial success could be
inadvertently rewarded for their sales of dangerous derivatives. The corporate
culture may drive decisions on developing and selling derivatives because of the
difficulty in applying moral reasoning.
Dressed for Success: Ethical Business Practices at Patagonia

The popular outdoor apparel store Patagonia was founded occurred. Consumers were more willing to do business
upon environmental principles with a three-part mission: with Patagonia due to its environmental consciousness
sell quality products, cause no unnecessary harm, and and the fact that they could trust Patagonia’s products to
find business solutions to environmental issues. One of last a long time. As the change to organic cotton shows,
Patagonia’s most infamous promotions featured its popu- Patagonia puts the values of integrity, accountability, and
lar R2 coat with the counterintuitive headline: “Don’t Buy trust into practice in its business by backing its mission
This Jacket.” The advertisement explained that although with action. The company is moving toward using recycled
the R2 used recycled materials, it was still harmful to the or renewable materials for 70 percent of its clothing.
environment. Because excessive consumption gener- Patagonia has spoken out about sustainability practices
ates waste, encouraging consumers to purchase less in areas besides its clothing. For example, the company
demonstrates Patagonia’s environmental commitment. has produced films about the environmental impacts of
The company wants consumers to purchase their apparel, common business practices. One of these films, called
but only as needed. Artifishal, discusses the need for more natural salmon
The company serves as an example of the concept fishing rather than relying on the controversial practices
“ethics pay,” meaning that society will reward Patagonia of fish hatcheries.
for its high standards, even though its finances may Patagonia’s commitment to the environment extends
initially take a hit. For example, to be more environmentally so far that they even urge their customers to return worn-
friendly, in 1996 the company switched to the more out merchandise so that the company can recycle it into
expensive organic cotton. This increased the firm’s supply something else. By 2025, Patagonia plans to be carbon
costs, but it also made its products more durable. It would neutral, and even to be carbon positive projecting into
be logical to think that the more durable the product, the future. Customer and shareholder loyalty continue to
the less customers need to purchase from the company, be strong for the company due to its ethical values and
and sales would go down. However, the exact opposite actions.
Sources: Tessa Byars, “Patagonia Releases a Documentary About The High Cost of Fish Hatcheries, Fish Farms, and Human Ignorance,” Patagonia
Works, April 12, 2019, http://www.patagoniaworks.com/press/2019/4/18/patagonia-releases-a-documentary-about-the-high-cost-of-fish-hatcheries-
fish-farms-and-human-ignorance (accessed May 28, 2019); Daniel Bentley, “Doing Good and Making a Profit: These Apparel Companies Are Proving
They Aren’t Mutually Exclusive,” Fortune, January 23, 2019, http://fortune.com/2019/01/23/patagonia-art-eden-sustainability/ (accessed May 28, 2019);
Tim Nudd, “Ad of the Day: Patagonia,” Ad Week, November 28, 2011, http://www.adweek.com/news/advertising-branding/ad-day-patagonia-136745
(accessed May 28, 2019); Kyle Stock, “Patagonia’s Confusing and Effective Campaign to Grudgingly Sell Stuff,” Bloomberg, November 25, 2013, https://
www.bloomberg.com/news/articles/2013-11-25/patagonias-confusing-and-effective-campaign-to-grudgingly-sell-stuff (accessed May 28, 2019); Andrew
Cave, “‘Don’t Buy This Racket’: Patagonia to Give Away All Retail Revenues on Black Friday,” Forbes, November 21, 2016, http://www.forbes.com/sites/
andrewcave/2016/11/21/dont-buy-this-racket-patagonia-to-give-away-all-retail-revenues-on-black-friday/#1ea56050230c (accessed May 28, 2019); J. B.
MacKinnon, “Patagonia’s Anti-Growth Strategy,” The New Yorker, May 21, 2017, https://www.newyorker.com/business/currency/patagonias-anti-growth-
strategy (accessed June 1, 2019); Nick Paumgarten, “Patagonia’s Philosopher-King,” The New Yorker, September 19, 2017, https://www.newyorker.com/
magazine/2016/09/19/patagonias-philosopher-king (accessed June 1, 2019); Daniela Sirtori-Cortin, “From Climber to Billionaire: How Yvon Chouinard
Built Patagonia into a Powerhouse His Own Way,” Forbes, March 20, 2017, https://www.forbes.com/sites/danielasirtori/2017/03/20/from-climber-to-
billionaire-how-yvon-chouinard-built-patagonia-into-a-powerhouse-his-own-way/#651643b2480c (accessed June 1, 2019); Patagonia, “20 Years of
Organic Cotton,” The Footprint Chronicles, https://eu.patagonia.com/cz/en/20-years-of-organic-cotton.html (accessed June 1, 2019).

Whereas a firm’s overall culture

establishes ideals that guide a wide range
of behaviors for members of the organiza-
tion, its ethical climate focuses specifically
on issues of right and wrong. We think of
ethical climate as the part of a corporate
culture that relates to an organization’s
expectations about appropriate conduct.
To some extent, ethical climate is the
character component of an organization.
Corporate policies and codes, the conduct
Shutterstock/Jim Lambert
of top managers, the values and moral
philosophies of coworkers, and oppor-
tunity for misconduct all contribute to a
firm’s ethical climate. When top managers
strive to establish an ethical climate based
on responsibility and citizenship, they set
the tone for ethical decisions.
New Belgium Brewing (NBB) is an example of a company in which their lead-
ers set the tone for the rest of the organization. Former CEO and current executive ethical climate
chair Kim Jordan helped cofound the company with her former husband, Jeff the part of a firm’s culture that
focuses specifically on issues of
Lebesch. Before starting NBB, the two carefully considered the values they wanted
appropriate conduct and right and
to use as the foundation for the company, including sustainability and employee wrong
empowerment. Under Jordan’s leadership, NBB’s ethical climate placed a great
deal of emphasis on these two values.63 Among a number of sustainability initia-
tives, the company became the first brewery to use 100 percent wind power.64
Over the years, NBB has become a 100 percent employee-owned company, giving
employees the ability to make crucial decisions regarding operations.65 Ethical
climate also determines whether an individual perceives an issue as having an ethi-
cal component. Recognizing ethical issues and generating alternatives to address
them are manifestations of ethical climate.
Significant Others Although people outside the firm, such as family members
and friends, also influence decision-makers, organizational structure and culture
operate through significant others to influence ethical decisions. Significant others significant others
include superiors, peers, subordinates, and others in an organization who influence superiors, peers, subordinates,
and others in an organization who
the ethical decision-making process.66 Reporting misconduct is most likely to
influence the ethical decision-
come from upper levels of management compared to lower-level supervisors and making process
nonmanagement employees. Employees in lower-level positions have a greater
tendency to not recognize misconduct or to be complacent about the misconduct
they observe. Having ethics and compliance officers is an option to allow employ-
ees to report misconduct when they are unable or unwilling to report to upper
management. Ethics and compliance officers are high-ranking employees known to
respect and understand legal and ethical standards. They help a company resolve
ethical dilemmas and uphold regulatory responsibilities.67 While ethics officers and
ethics hotlines exist, however, the vast majority of employees surveyed prefer to
report to supervisors and other higher management.
Most experts agree that the CEO establishes the ethical tone for the entire
firm. This can be problematic when managers are more likely to engage in certain
forms of misconduct. Table 6.3 shows that the type of misconduct, such as
abusive or intimidating behavior, sexual harassment, and discrimination, varies
by management level. Nonmanagement employees are the most likely to engage
in abusive or intimidating behavior and sexual harassment. Lower-level managers
pick up their cues from top managers, and they in turn impose some of their
personal values on the company. This interaction between corporate culture and

Table 6.3 Observed Misconduct by Perpetrator Level

Nonmanagement employee 34%
Senior leader 25%
Middle manager 22%
First-line supervisor 16%
Other 2%
Someone you work with outside the company 1%
Sexual Harassment
Middle manager 24%
Senior leader 23%
Other 2%
Discrimination
Middle manager 29%
Senior leader 28%
Other 1%
Source: Ethics and Compliance Initiative, 2018 Global Business Ethics Survey: Interpersonal Misconduct in the Workplace,
December 2018; https://www.ethics.org/download-the-2018-global-business-ethics-survey/ (accessed July 15, 2019).
executive leadership helps determine the ethical value system of a firm. However,
obedience to authority can also explain why many people resolve workplace issues
by following the directives of a superior. An employee may feel obligated to carry
out the orders of a superior, even if those orders conflict with the employee’s
values of right and wrong. If that decision is later judged to have been wrong, the
employee may justify it by saying, “I was only following orders” or “My boss told
me to do it this way.”
Coworkers’ influence on ethical decision-making depends on each person’s
exposure to unethical behavior when making ethical decisions. The more a person
is exposed to unethical activity by others in the organization, the more likely it is
that he or she will behave unethically, especially in (ethically) gray areas. Thus,
a decision-maker who associates with others who act unethically is more likely
to behave unethically as well. Within work groups, employees may be subject to
groupthink the phenomenon of groupthink, which means going along with group decisions
a phenomenon whereby even when those decisions run counter to their own values. They may rationalize
individuals go along with group
the decision with “safety in numbers” when everyone else appears to back a
decisions even when those
decisions run counter to one's particular decision. Most businesspeople take their cues or learn from coworkers
own values how to solve problems—including ethical dilemmas.68 Close friends at work
exert the most influence on ethical decisions that relate to roles associated with
a particular job.
Superiors and coworkers can create organizational pressure, which plays
a key role in creating ethical issues. Although power differences exist between
supervisors and their employees, ethical leaders attempt to reduce these differences
when communicating with employees. It is not uncommon for leaders within the
organization to adopt the habit of viewing employee information as unimportant.69

However, employees who feel that they are not being heard are less likely to report
concerns and more likely to ignore questionable conduct in the workplace. Ethical
leaders can help to reduce these perceived power differences through frequent
employee communication. This interaction creates more beneficial relationships
with employees, making them more comfortable in bringing up issues of concern
to their supervisors. Leader–follower congruence occurs when leaders and follow-
ers share the same organizational vision, ethical expectations, and objectives. A
crucial way to communicate ethical values to employees is through codes of ethics
and training to familiarize employees with the ethical decision-making process.
Nearly all businesspeople face difficult issues where solutions are not obvious
or where organizational objectives and personal ethical values may conflict. For
example, a salesperson for a web-based retailer may be asked by a superior to lie to
a customer over the telephone about a late product shipment. A study by the Ethics
Resource Center found that 22 percent of U.S. employees said they felt pressure
from other employees or managers to compromise their standards. In addition, 76
percent of employees reported misconduct after they observed it, and 53 percent
of these instances were met with some type of retaliation.70
Opportunity
Together, organizational culture and the influence of coworkers may foster
conditions that either hinder or permit misconduct. Opportunity is a set of opportunity
conditions that limits barriers or provides rewards. When these conditions provide a set of conditions that limits
rewards—be it financial gain, recognition, promotion, or simply the good feeling barriers or provides rewards
from a job well done—the opportunity for unethical conduct may be encouraged
or discouraged. For example, a company policy that fails to specify the punish-
ment for employees who violate the rules provides an opportunity for unethical
behavior because it allows individuals to engage in such behavior without fear of
consequences. Thus, company policies, processes, and other factors may create
opportunities to act unethically. Advancing technology associated with the internet
is challenging companies working to limit opportunities to engage in unethical
and illegal behavior. Individual factors as well as organizational relationships may
influence whether an individual becomes opportunistic and takes advantage of
situations in an unethical (or even illegal) manner.
Opportunity usually relates to employees’ immediate job context—where they
work, with whom they work, and the nature of the work. This context includes
the motivational “carrots and sticks,” or rewards and punishments, that superiors
can use to influence employee behavior. Rewards, or positive reinforcers, include
pay raises, bonuses, and public recognition, whereas reprimands, pay penalties,
demotions, and even firings act as negative reinforcers. For example, a manager
who decides to sell customers’ personal data may be confident that such behavior
is an easy way to boost revenue because other companies sell customer account
information. Even if this activity violates the employee’s personal
value system, it may be viewed as acceptable within the organization’s
Table 6.4 Most Common Items Stolen
culture. This manager may also be motivated by opportunities to by Employees
improve his or her performance standing within the organization by
taking such actions. A survey by Kessler International indicates that 1 Pens and pencils
52 percent of employees take office supplies for personal use. As 2 Notepads
Table 6.4 shows, many employees pilfer office supplies for matters 3 Printer paper
unrelated to the job. It is possible that the opportunity is provided for 4 Staplers
small-scale theft in the company; in some cases, no concern is shown
5 Food
about whether employees take pens, sticky notes, envelopes, notepads,
and paper. Printing large documents at work for their own or their Source: Kelly Meyers, “5 Things People Steal
from Work,” Radio.com, November 30, 2018,
spouse’s use, or even for their children’s school assignments, is a https://1079thelink.radio.com/blogs/kelly-meyers/5-
common form of misconduct. Additionally, some indicated that they things-people-steal-work (accessed July 2, 2019).

take more expensive items such as universial serial bus (USB) drives and computer
accessories.71 If there is no policy against this practice, employees will not learn
where to draw the line and will get into the habit of taking even more expensive
items for personal use.
Stealing office supplies and inflating business expenditure reports is prevalent
in businesses. While these acts do not seem serious, they build up over time and
establish norms. Studies show that employees have “blind spots” that cause
them to be unaware of the ethical and legal meanings behind their actions. The
opportunity to act unethically often arises in situations when employees are unsure
about the company standards, when the victims are not identified or are invisible
(such as public shareholders), or when performance goals are unrealistic.72
Often, opportunity can arise from someone whose job is to create opportunities
for others. Barbara Toffler, an ethics consultant and professor, learned firsthand
how difficult it can be to follow one’s own moral compass when she worked as a
consultant at Arthur Andersen, creating ethics programs for Andersen clients (the
firm itself had no internal ethics program). After charging a client $1 million for
developing an ethics program that should have cost $500,000, the praise Toffler
earned from Andersen “was the only day in four years that I felt truly valued by
Arthur Andersen.” Despite her expertise, she learned that “unethical or illegal
behavior happens when decent people are put under the unbearable pressure to
do their jobs and meet ambitious goals without the resources to get the job done
right.”73
General Electric (GE) has taken steps to place itself at the head of the ethical
pack. Its Ecomagination campaign is designed to “build innovative solutions
for today’s environmental challenges while driving economic growth.” It also
has an initiative called Healthymagination, which aims to improve the quality
of healthcare. As part of its investment, GE focuses on investigating clean-tech
research, releasing products that are ecofriendlier, partnering with community
health organizations, and continuing employee healthcare programs.74
If an employee takes advantage of an opportunity to act unethically and is
rewarded or at least suffers no penalty, he or she may repeat such acts as other
opportunities arise. Dov Charney, founder and former CEO of American Apparel,
was pushed out of his position by the board after allegations concerning sexual
misconduct and sexual harassment. These allegations had persisted for more than
a decade before he was eventually terminated.75 His removal as CEO demonstrates
the effectiveness of good corporate governance and the duty of the board of
directors to maintain an ethical organizational culture. When company managers
get away with unethical conduct, their behavior is reinforced, and a culture of
manipulation and misconduct can develop. Indeed, the opportunity to engage in
unethical conduct is often a better predictor of unethical activities than personal
values.76
In addition to rewards and the absence of punishment, other elements in the
business environment tend to create opportunities. Professional codes of conduct
and ethics-related corporate policies also influence opportunity by prescribing
what behaviors are acceptable. Compliance programs are necessary to provide
internal controls to prevent situations just discussed. The larger the rewards and
the milder the punishment for unethical behavior, the greater is the probability
that unethical behavior will be practiced.
ethical culture
refers to the character of the Developing an Ethical Culture
decision-making process that
employees use to determine if
Organizational ethics and compliance initiatives are developed to establish appro-
their responses to ethical issues priate conduct and core values. The term ethical culture refers to the character of
are right or wrong the decision-making process that employees use to determine if their responses to

ethical issues are right or wrong. Ethical culture is that part of corporate culture
that encompasses the values and norms an organization defines as appropriate
conduct. The goal of an ethical culture is to curtail the need for enforced compli-
ance of rules and amplify the use of principles that contribute to ethical reasoning
in complex or new situations. Ethical culture is positively related to organizations
with hotlines and with employees who confront ethics issues in the workplace
and/or report observed misconduct to management.77 Developing an ethical
culture involves communicating organizational values and norms to employees
throughout the organization, developing effective ethics programs, and appointing
ethics officers to run them. An ethical culture creates shared values and managerial
commitment for ethical decisions.
Organizational Values
Organizational values are abstract ideals distinct from individual values. Values organizational values
can evolve over time. They are more subjective and are viewed by societal abstract ideals distinct from
individual values
members as ethical or unethical. Values-based practices become the end results
and are separate from organizational practices based on technical or efficiency
considerations.78
Both stakeholders and the organizational culture affect the development of
organizational values. Because values are more subjective, they are influenced
by firm, industry, country, and global specific factors.79 For instance, firms from
countries that stress individualism might encourage the ability to work indepen-
dently, whereas firms from more collectivist nations might place more value on
teamwork. Additionally, core values might differ depending upon the industry.
Although safety is a core value of many firms, it is more likely to be emphasized in
a factory environment than in an office environment. For instance, organizations
from countries that value risk may value innovative risk taking, while organiza-
tions from countries more averse to risk may take a different position. Table 6.5
provides an example of the organizational values of Marriott. From these values,
one can determine that the hotel group tries to deliver exceptional customer ser-
vice and operate with high ethical standards. Marriott’s values reinforce its vision
“to be the #1 hospitality company in the world.”80 These types of organizational
values are critical to organizational ethical decision-making. Organizations that
have ethics programs based upon values tend to make a greater contribution than
those based simply on compliance, or obeying rules.81
Normative Considerations of Ethical Decision-Making normative approaches

provide a vision and
Earlier in this chapter, we described how ethical decision-making occurs in an recommendations for improving
organization. Understanding what affects the ethical decision-making process is ethical decision-making;
necessary for developing and managing an ethical culture within an organization. are concerned with how
organizational decision-makers
However, understanding how ethical decisions are made is different from deter- should approach an ethical issue
mining what ought to guide ethical decisions. Normative approaches
are concerned with how organizational decision-makers should Table 6.5 Organizational Values of
approach an ethical issue. It is concerned with providing a vision and Marriott
recommendations for improving ethical decision-making. Concepts
Put people first
like fairness, justice, and moral philosophies such as deontology and
utilitarianism are important to a normative approach. Strong norma- Pursue excellence
tive approaches in organizations have a positive relationship to ethical Embrace change
decision-making. Besides values, norms provide more specific beliefs Act with integrity
about expected behaviors in a specific context. Norms may exist about Serve our world
expected behavior in work groups and teams throughout the organiza-
Source: Marriott, “Core Values and Heritage,” https://
tion. Examples of norms could relate to expected professionalism and www.marriott.com/culture-and-values/core-values.mi
how to resolve a reoccurring ethical issue. (accessed August 24, 2019).

virtue ethics Virtue ethics involves adhering to general ideals, social values, and good char-
adhering to general ideas, social acter for appropriate ethical behavior. A virtue represents an acquired disposition
values, and good character for
valued as a part of an individual’s character. As individuals develop socially, they
appropriate ethical behavior
come to behave in ways they consider to be moral. A person with the virtue of
honesty, for example, will be predisposed to tell the truth because it is considered
to be the right approach in terms of human communication. Examples of busi-
ness virtues include trust, self-control, empathy, fairness, truthfulness, learning,
gratitude, civility, and moral leadership.82
Managing the Ethical Culture: Variations of Employee

Conduct
Despite the creation and implementation of shared organizational values, organi-
zations must recognize that employee behavior will still vary. Overall, it is up to
the organization to take responsibility for an ethical culture and implementation.
However, research indicates that there are major differences in the values and
philosophies that influence how individuals that comprise organizations make
ethical decisions.83 Due to their ethical diversity, employees will often interpret
situations differently and vary in their responses to an ethical issue.
Table 6.6 reflects a study that measures variation in employee conduct. It dem-
onstrates that approximately 10 percent of employees will take advantage of situa-
tions to further their own personal interests. These employees are often referred to
as “bad apples” and are more likely to manipulate, cheat, or be self-serving when
the benefits gained from misconduct are greater than the penalties. They are more
likely to steal office supplies or engage in other forms of misconduct. The lower
the risk of penalties, the higher the likelihood that this 10 percent of employees
will commit unethical activities.
Approximately 40 percent of workers go along with their work group on most
decisions. These employees are most concerned about the social implications of
their actions and desire to be accepted in the organization. They have their own
personal opinions but are easily affected by other employees around them. For
instance, they might be well aware that using office supplies for personal use is
improper. However, if it is common for other employees to take office supplies for
personal use, then these employees are likely to do the same just to fit in. These
employees tend to rationalize, claiming that the use of office supplies is just one
of the benefits of their jobs, and because there is no company policy prohibiting
it, then it must be acceptable. Coupled with this is the belief of safety in numbers.
These employees feel that they will not get into trouble because everybody is doing
it (groupthink, as discussed earlier in this chapter).
On the other hand, approximately 40 percent of a company’s employees always
try to follow company policies and rules. These workers have a strong understand-
ing of how their corporate culture defines acceptable behavior and try to comply
with organizational codes of ethics, ethics training, and other communications
Table 6.6 Variation in Employee Conduct

10 Percent 40 Percent 40 Percent 10 Percent
Follow their own values Always try to Go along with their Take advantage of
and beliefs; believe that follow company work group situations if the penalty is
their values are superior policies less than the benefit—the
to those of others in the risk of being caught is low
company
Source: These percentages are based on a number of studies in the popular press and data gathered by the authors.
The percentages are not exact and represent a general typology that may vary by organization. The 10 percent that
will take advantage is adapted from John Fraedrich and O. C. Ferrell, “Cognitive Consistency of Marketing Managers in
Ethical Situations,” Journal of the Academy of Marketing Science 20 (Summer 1992): 243–252.

about ethical conduct. In the office supply example, if the company has a policy
that prohibits taking office supplies from work for personal use, these employees
would most likely obey the policy. However, they probably would not tell anyone
about the 40 percent who go along with the work group, for these employees
prefer to focus on their jobs and avoid any conflicts or organizational misconduct.
These employees rely heavily on organizational communication and expectations.
If the organization fails to communicate standards for ethical conduct, then
members of this group will devise their own.
The final 10 percent of employees attempt to uphold formal ethical standards
focusing on rights, duties, and rules. They adopt values that support certain
inalienable rights and actions. From their perspective, these actions are always
ethically correct if they protect inalienable rights. Overall, these employees believe
that their values are correct and superior to the values of other employees in the
organization, or even to the organization’s own value system, when an ethical
issue arises. These employees tend to report observed misconduct or report when
they view activities within the organization that they believe are unethical. As
a result, these employees would most likely report coworkers who steal office
supplies.
It should be clear by now that employees use different approaches when making
ethical decisions. Because of the probability that a large percentage of employees
will take advantage of a situation or go along with the rest of employees, it is
important that companies provide communication and internal controls to support
an ethical culture. Organizations that do not monitor activities and enforce ethical
policies provide a low-risk environment for employees inclined to take advantage
of situations to accomplish their own personal objectives.
Although the percentages in Table 6.6 are only estimates, the specific percent-
ages are less important than the fact that research has identified these employee
variations as existing within most organizations. Organizations should pay
particular attention to managers who monitor the daily operations of employees.
They should also provide ethics training and communication to make certain that
the business operates in an ethical manner, misconduct is caught before it becomes
a major issue, and risk to stakeholders is eliminated or minimized.
Maintaining ethical conduct is a business goal that should be no different from
increasing profits. If progress in maintaining an ethical culture stalls, then the
organization must determine the reason and take corrective action by enforcing
existing standards or setting higher standards. If the code of ethics is strongly
enforced and becomes part of the corporate culture, it can lead to strong improve-
ments in the ethical conduct within the organization. On the other hand, if the
code of ethics and managerial commitment are merely window-dressing and not
truly a part of the corporate culture, they will not be effective.
Summary
Business ethics comprises principles and standards that guide individual and
work-group behavior in the world of business. Principles are specific and pervasive
boundaries that are absolute, while values are used to develop norms that are
socially enforced. Stakeholders determine these conventions, and they may change
over time. The most basic of these standards have been codified as laws and
regulations. Business ethics goes beyond legal issues.
Because individuals and groups within a company may not have embraced
the same set of values, ethical conflict may occur. An ethical issue is a problem,
situation, or opportunity that requires an individual, group, or organization to
choose among several actions that must be evaluated as right or wrong, ethical
or unethical. Questionable decisions and actions may result in disputes that must

be resolved through some type of negotiation or even litigation. Codifying ethical

standards into meaningful policies that spell out what is and is not acceptable gives
businesspeople an opportunity to reduce the possibility of behavior that could create
legal problems. Business decisions involve complex and detailed discussions in which
correctness may not be clear-cut. It is important that a shared vision of acceptable
behavior develops from an organizational perspective to create consistent and
reliable relationships with all concerned stakeholders. Common ethical issues faced
by businesses include abusive or intimidating behavior, misuse of company time and
resources, conflicts of interest, bribery, discrimination and sexual harassment, fraud,
and privacy issues. An emerging issue involves AI and ethical decision-making.
Understanding the ethical decision-making process can help individuals
and businesses design strategies to prevent misconduct. Three of the important
components of ethical decision-making are individual factors, organizational
relationships, and opportunity.
Significant individual factors that affect the ethical decision-making process
include personal moral philosophy, stage of moral development, motivation, and
other personal factors such as gender, age, and experience. Moral philosophies are
the principles or rules that individuals apply in deciding what is right or wrong.
Most moral philosophies can be classified as consequentialism, ethical formal-
ism, or justice. Consequentialist philosophies consider a decision to be right or
acceptable if it accomplishes a desired result such as pleasure, knowledge, career
growth, the realization of self-interest, or utility. Consequentialism may be further
classified as egoism and utilitarianism. Ethical formalism focuses on the rights
of individuals and on the intentions associated with a particular behavior rather
than on its consequences. Justice theory relates to evaluations of fairness or the
disposition to deal with perceived injustices of others.
The culture of the organization, as well as superiors, peers, and subordinates, can
have a significant impact on the ethical decision-making process. Organizational,
or corporate, culture can be defined as a set of values, beliefs, goals, norms, and
rituals shared by members or employees of an organization. Whereas a firm’s
overall culture establishes ideals that guide a wide range of behaviors for members
of the organization, its ethical climate focuses specifically on issues of right and
wrong. Significant others include superiors, peers, subordinates, and others in
the organization who influence the ethical decision-making process. Interaction
between corporate culture and executive leadership helps determine the ethical
value system of the firm, but obedience to authority can also explain why many
people resolve workplace issues by following the directives of a superior. The
more exposed a person is to unethical activity in the organization, the more likely
it is that he or she will behave unethically. Superiors and coworkers can create
organizational pressure, which plays a key role in creating ethical issues.
Opportunity is a set of conditions that limit barriers or provide rewards. If an
individual takes advantage of an opportunity to act unethically and escapes punish-
ment or gains a reward, that person may repeat such acts when circumstances favor it.
To develop an ethical culture, it is crucial for the organization to develop
strong organizational values to guide the organization. The values often form the
basis of a normative structure. A normative approach is concerned with how orga-
nizational decision-makers should approach an ethical issue. Finally, studies have
shown that employee ethical behavior in the workplace tends to vary. While 10
percent are bad apples who will take advantage of the organization, 40 percent of
employees are estimated to go along with the majority in ethical decision-making.
Another 40 percent are likely to obey policies and procedures themselves but will
not often report the misconduct of others. The final 10 percent view their values
as superior to others. They adhere to their high ethical values and will report
those employees whom they consider to be unethical. Organizations should pay
particular attention to managers who monitor the daily operations of employees.

Sherwin-Williams Painted into a Corner

Issue: Should Sherwin-Williams Be Liable for the Lead Supreme Court, who in 2018 refused to hear the case. The
Paint Debacle? lawsuit was a public-nuisance suit, and the two companies
argued that the suit violated their free speech and due
Most would agree that companies advertising a danger- process, and allowed businesses to be held account-
ous product should be held accountable. However, what able for decades-old advertising. Sherwin-Williams and
if the advertisement was more than a century old? This ConAgra were required to pay a $400 million settlement
is the dilemma that paint makers like Sherwin-Williams, after the Court decided not to hear the case.
NL Industries, and ConAgra faced from a California It is unclear how this lawsuit will affect the world of
lawsuit seeking damages for such firms’ marketing of advertising. Social responsibility and ethical presentation
lead paint in homes. For instance, Sherwin-Williams made of safe products are major concerns among businesses.
advertisements for paint that was lead-based in the early Advertisers may be called on to utilize more discretion,
1900s. In 1943, the company stopped selling white lead apply ethical guidelines, and consider the impact of their
paint for inside use. However, the California court argued advertisements (past, present, and future), when doing
that although lead paint wasn’t illegal until 1978, Sherwin- business with consumers. Although ethics guidelines do
Williams and these other companies knew about some of not hold the same weight as laws, the lawsuit against
the dangers of this product and continued marketing it to Sherwin-Williams demonstrates how important ethical
homeowners anyway. practices are to a business’s reputation and success.
In 2013, the California court ruled that Sherwin-Williams,
NL Industries, and ConAgra were liable for the cleanup. There Are Two Sides to Every Issue
Later, the damages were limited to paint used in houses 1. Despite the time that has passed, Sherwin-Williams
prior to 1950 because at this time, paint manufacturers should be held accountable.
began publicly acknowledging the dangers of lead paint. 2. Because of the time that has passed, Sherwin-Williams
NL Industries agreed to a $60 million settlement. should not be held accountable.
But Sherwin-Williams and ConAgra appealed to the U.S.
Source: Alexander Bruell, “Sherwin-Williams Lands in Trouble over 114-Year-Old Paint Ad,” Wall Street Journal, September 2, 2018, https://www.wsj.com/
articles/sherwin-williams-lands-in-trouble-over-114-year-old-paint-ad-1535886000?mod=searchresults&page=1&pos=1 (accessed March 8, 2019); Jon
Bilyk, “Lead Paint Makers Lose Another Round in Long-Running, $1.1 Billion California Lawsuit,” Forbes, November 14, 2017, https://www.forbes.com/
sites/legalnewsline/2017/11/14/lead-paint-makers-lose-another-round-in-long-running-1-1-billion-california-lawsuit/#e4d5c343b398 (accessed March 8,
2019); “$60 Million Settlement Reached in Lead Paint Lawsuit; Companies Fight to Overturn Court Ruling,” Silicon Valley Newsroom, May 18, 2018,
https://www.sanjoseinside.com/2018/05/18/60-million-settlement-reached-in-lead-paint-lawsuit-companies-fight-to-overturn-ruling/ (accessed March 8,
2019); Liam Dillon, “Paint Companies Pull Lead Cleanup Measure from California’s November Ballot,” Los Angeles Times, June 28, 2018, http://www.
latimes.com/politics/essential/la-pol-ca-essential-politics-may-2018-paint-companies-pull-lead-cleanup-1530233556-htmlstory.html (accessed March 8,
2019); John O’Brien, “Attack on Paint Industry Spreads to Pennsylvania; Sherwin-Williams Asks Judge for Help,” Forbes, October 31, 2018, https://www.
forbes.com/sites/legalnewsline/2018/10/31/attack-on-paint-industry-spreads-to-pennsylvania-sherwin-williams-asks-judge-for-help/#43c739a1400c
(accessed March 8, 2019); William Sassani, “Delaware County Fights for Its Right to Sue; Sherwin-Williams Wants to Block Pa. Lead Paint Litigation
Pushed by Private Lawyers,” PennRecord, January 23, 2019, https://pennrecord.com/stories/511719277-delaware-county-fights-for-its-right-to-sue-
sherwin-williams-wants-to-block-pa-lead-paint-litigation-pushed-by-private-lawyers (accessed March 8, 2019); Sam Allard, “Sherwin-Williams, ConAgra
Must Pay $400 Million for Lead Paint Remediation in California, Supreme Court Says,” Cleveland Scene, October 16, 2018, https://www.clevescene.
com/scene-and-heard/archives/2018/10/16/sherwin-williams-conagra-must-pay-400-million-for-lead-paint-remediation-in-california-supreme-court-says
(accessed March 8, 2019).
Key Terms
biometric data (p. 159) ethical culture (p. 170) hostile work environment (p. 158)
bribery (p. 155) ethical diversity (p. 164) justice theory (p. 163)
business ethics (p. 149) ethical formalism (p. 163) Machiavellianism (p. 164)
conflict of interest (p. 155) ethical issue (p. 152) moral philosophies (p. 162)
consequentialism (p. 163) Foreign Corrupt Practices Act normative approaches (p. 171)
egoism (p. 163) (FCPA) (p. 156) opportunity (p. 169)
ethical climate (p. 167) fraud (p. 158) organizational values (p. 171)
ethical conflict (p. 150) groupthink (p. 168)
continued

organizational (corporate) culture puffery (p. 151) Title VII of the Civil Rights Act of
(p. 165) sexual harassment (p. 158) 1964 (p. 157)
Principle of Equal Freedom (p. 163) significant others (p. 167) utilitarianism (p. 163)
principles (p. 149) social exchange theory (p. 163) values (p. 149)
privacy issues (p. 159) time theft (p. 154) virtue ethics (p. 172)
1. Why is business ethics a strategic consideration in 5. What are the potential benefits of an emphasis on
organizational decisions? procedural justice?
2. How do individual, organizational, and opportunity 6. Describe the importance of normative approaches to
factors interact to influence ethical or unethical ethical decision-making.
decisions? 7. How do organizations create an ethical climate?
3. How do moral philosophies influence the individual 8. Why are we seeing more evidence of widespread
factor in organizational ethical decision-making? ethical dilemmas within organizations?
4. How can ethical formalism be used in organizational 9. Describe the importance of organizational values to
ethics programs and still respect diversity and the the development of an ethical culture.
right for individual values? 10. Why is it important for managers to take ethical
diversity into account?
Visit www.bbb.org, the home page for the Better Business Find recent winners of the award and summarize what they
Bureau (BBB), and locate the International Marketplace did to achieve this recognition. Describe the role of the BBB
Ethics award criteria (https://www.bbb.org/council/ in supporting self-regulatory activities and business ethics.
international-torch-awards/how-to-apply/award-criteria/).
Moonlighting Monica: What Would You Do?

On Sunday, Armando went to work to pick up a report he
?
changes. Everyone on the team met that afternoon and
needed to review before an early Monday meeting. While Tuesday morning to develop a plan for revamping the HR
at work, he noticed a colleague’s light on and went over to system. By Tuesday afternoon, each member was working
her cubicle for a short visit. Monica was one of the newest on his or her part of the project again.
systems designers on the department’s staff. She was hired On Friday afternoon, David went up and down the
six weeks ago to assist with a series of human resources hall, encouraging everyone to go to happy hour at the pub
(HR) projects for the company. Before joining the firm, she down the street. About 10 people, including Monica and
had worked as an independent consultant to organizations Armando, went to the pub. The conversation was mainly
trying to upgrade their HR systems that track payroll, about work and the new HR project. On several occasions,
benefits, compliance, and other issues. Monica was very Monica offered ideas about other systems and companies
well qualified, detail oriented, and hardworking. She was with which she was familiar. Most of the systems designers
the only female on the systems staff. listened, but a few were quick to question her suggestions.
In his brief conversation with Monica, Armando felt Armando assumed her suggestions were the result of
that he was not getting the full story of her reason for work with previous clients. Over the weekend, however,
being at work on a Sunday. After all, the systems team Armando began to wonder whether Monica was talking
completed the first HR systems proposal on Thursday and about her current clients. He remembered their conversa-
was prepared to present its report and recommendations on tion on Sunday and decided to look into the matter.
Monday. Monica said she was “working on a few parts” On Monday, Armando asked Monica directly whether
of the project but did not get more specific. Her face turned she still had clients. Monica said yes and that she was
red when Armando joked, “With the beautiful weather finishing up on projects with two of them. She went on
outside, only someone hoping to earn a little extra money to say that she worked late hours and on the weekends
would be at work today.” and was not skimping on her company responsibilities.
Armando and another coworker, David, presented the Armando agreed that she was a good colleague but was
systems team’s report to the HR staff on Monday. The HR not comfortable with her use of company resources on
team was generally pleased with the recommendations but personal, moneymaking projects. He was also concerned
wanted a number of changes in specifications. This was that the team’s intellectual capital was being used. What
normal and the systems designers were prepared for the would you do?

CHAPTER
7 Strategic
Approaches to
Improving Ethical
Behavior
Deep in Fraud in Dixon, Illinois
The Rita Crundwell case in Dixon, Illinois, is a good check whether these projects were actually taking
example of the need for financial controls. Crundwell place.
was the treasurer of the small city of Dixon, Illinois. In The Fifth Third Bank and the city of Dixon also
2011, while she was out of the office, a city clerk filled share part of the blame for the fraud. The bank
in for Crundwell and came across a strange-looking allowed Crundwell to open an account without
bank account in the city’s name. Money from the formal documentation, such as a corporate resolu-
account was being used to purchase items such as tion. Checks were deposited under Crundwell’s
jewelry and vehicles. The suspicious account was name rather than “City of Dixon.” Furthermore, Dixon
reported to the mayor and the Federal Bureau of officials did not have the training in finances and
Investigation (FBI). The FBI arrested Crundwell for accounting to understand city documents. When
municipal fraud. She was found guilty of stealing $53 faced with a question about accounts they would
million from the city of Dixon over more than two just ask Crundwell. Therefore, she was considered
decades. Kathe Swanson, the clerk who reported to have expert power to run the city’s finances in
the fraud, is known today for her whistleblowing that their entirety.
brought down Crundwell’s corruption. Dixon has since put in place several controls to
The most notable aspect of this case is how prevent future fraud. After Crundwell was arrested,
easy it would have been to detect the fraud if the city hired a new finance director who reor-
proper controls had been in place. For instance, ganized the city’s finances and restructured the
Crundwell had accumulated hundreds of prize department. Internal controls were implemented
horses and various vehicles costing hundreds of so that no one person could complete an entire
thousands of dollars. On her tax returns, there were process alone. This included signing checks and
no documents to explain how she was making so approving payments.
much money—a fact that the city’s accounting firm, The city council’s role was changed into a
CliftonLarsonAllen, should have questioned. managerial role, with the City Manager serving
According to All the Queen’s Horses, a docu- executively. New council members were elected,
mentary about the fraud, CliftonLarsonAllen had and a new mayor. The city hired more clerks that
potential conflicts of interests in their dealings with specialize in specific areas, such as payroll and
Crundwell. The accounting firm wrote the financial billing. Mail, which had been picked up almost exclu-
statements for the city and then audited those sively by Crundwell, is now sent directly to City Hall.
Shutterstock/Zuzule
statements. In addition, the firm handled Crundwell’s This case shows that massive fraud does not
personal taxes. Despite the fact that Crundwell had always have to involve an elaborate, hard-to-detect
unexplainable cash inflow, the accounting firm never scheme. In fact, many instances of fraud would have
questioned her about the inconsistencies. Crundwell been obvious if the right questions were asked and
also provided fraudulent invoices for city projects suspicions were investigated. Controls must always
that did not look legitimate (and weren’t, it turned be adopted to ensure that financial gatekeepers are
out). It should also have been relatively simple to held accountable for the money in their charge.1
Chapter Objectives
●● Provide an overview of the need for an organizational ethics program
●● Consider crucial keys to the development of an effective ethics program
●● Demonstrate the elements of a corporate culture
●● Examine leadership and its importance to an ethical corporate culture
●● Discuss the requirements for ethical leadership
179
A strategic approach to ethical decisions will contribute to both business

and society. This chapter provides a framework that is consistent with
research, best practices, and regulatory requirements for improving
ethical conduct within the organization. Some companies have not implemented
effective business ethics programs, but they should because ethics and compli-
ance programs create good systems to manage organizational misconduct. Our
framework for developing effective ethics programs is consistent with the ethical
decision-making process described in Chapter 6. In addition, the strategic approach
to an ethics program presented here is consistent with the Federal Sentencing
Guidelines for Organizations (FSGO), the Sarbanes-Oxley Act, and the Dodd-Frank
Wall Street Reform and Consumer Protection Act described in Chapter 5. These
legislative reforms require managers to assume responsibility and ensure that ethical
standards are implemented properly on a daily basis. Ethics programs include not
only the need for top executive leadership, but also responsibility by boards of
directors for corporate governance. Unethical and illegal business conduct occurs,
even in organizations that have ethics programs. For example, although Facebook
has a code of conduct and is a member of the Better Business Bureau (BBB), the
company continues to have issues with ethical treatment of users’ information.2
Many business leaders believe that personal moral development and character
are all that is needed for corporate responsibility. There are those who feel that
ethics initiatives should arise inherently from a company’s culture, and hiring good
employees will limit unethical behavior within the organization. Many executives
and board members do not understand how organizational ethical decisions are
made, nor how to develop an ethical corporate culture. Customized ethics pro-
grams may help many organizations provide guidance for employees from diverse
backgrounds to gain an understanding of acceptable behavior within the organiza-
tion. Many ethical issues in business are complex and include considerations that
require organizational agreement regarding appropriate action. Top executives
and boards of directors must provide leadership, a system to resolve these issues,
and support for an ethical corporate culture.
In this chapter, we provide an overview of why businesses need to develop
organizational ethics and compliance programs. Next, we consider the factors that
are crucial for the development of such programs: a code of conduct, an ethics
officer and appropriate delegation of authority, effective ethics training, a system
to monitor and support ethical compliance, and continual efforts to improve
the ethics program. Next we discuss the institutionalization of business ethics
through mandated and voluntary programs. We discuss the importance of ethical
leadership to a company’s ethics program. Finally, we examine the requirements of
ethical leadership and its impact on organizational culture, including the different
forms of communication that an ethical leader must master.
Scope and Purpose of Organizational Ethics

Programs
Usually, an organization is held accountable for the conduct of its employees.
Companies must assess their ethical risks and develop values and compliance
systems to avoid legal and ethical mistakes that could damage the organization.
The FSGO holds corporations responsible for conduct engaged in as an entity.
Some corporate outcomes cannot be tied to one individual (or even a group), and
misconduct can result from a collective pattern of decisions supported by a corporate
culture. Therefore, corporations can be held accountable, fined, and even ordered to
close their doors when they are operating in a manner inconsistent with major legal

Chapter 7 Strategic Approaches to Improving Ethical Behavior 181
requirements. Organizations are typically careful to avoid infringing on employees’

personal freedoms and ethical beliefs. In cases where an individual’s personal beliefs
and activities are inconsistent with company policies on ethics, conflict may develop.
If the individual feels that ethics systems in the organization are deficient or directed
in an inappropriate manner, some type of open conflict resolution may be needed to
deal with the differences.
Understanding the factors that influence how individuals make decisions to
resolve ethical issues, as discussed in Chapter 6, can help companies encourage
ethical behavior and discourage undesirable conduct. Fostering ethical decisions
within an organization requires eliminating unethical behavior and improving the
firm’s ethical standards. Some people will always do things in their own self-interest,
regardless of organizational goals or accepted standards of conduct. For example,
professional athletes know that using performance-enhancing drugs is prohibited,
yet some players still choose to use them to gain an edge. Not only do athletes con-
tinue to use illegal substances like steroids to boost their performance, but doping
using legal substances is becoming more and more common. For instance, Olympic
swimmer Ryan Lochte was banned from the sport for 14 months after it was found
that he had engaged in doping using an intravenous (IV) infusion that was over
the limit and violated U.S. Anti-Doping Agency rules.3 Eliminating inappropriate
or abnormal behavior through screening techniques and enforcement of the firm’s
ethical standards can help improve the firm’s overall ethical conduct.
Organizations can foster unethical corporate cultures not because individuals
within them are bad, but because the pressures to succeed create opportunities
that reward unethical decisions. A study by the Reboot Digital Agency found
that 34 percent of respondents engaged in unethical behavior to meet deadlines.
It also found that 33 percent of workers have witnessed management rewarding
employees who engaged in unethical behavior to accomplish assignments. This
not only adds incentives for unethical business practices, but also can demoralize
employees who participate in ethical practices.4
In the case of an unethical corporate culture, the organization must redesign its
ethical standards to conform to industry and stakeholder standards of acceptable
behavior. Most businesses attempt to improve ethical decision-making by estab-
lishing and implementing a strategic approach to improving organizational ethics.
Companies such as Texas Instruments (TI), Starbucks, and Levi’s take a strategic
approach to organizational ethics but monitor their programs on a continuous
basis and make improvements when problems occur.5
To be socially responsible and promote legal and ethical conduct, an
organization should develop organizational ethics and compliance programs by organizational ethics and
establishing, communicating, and monitoring ethical values and legal requirements compliance programs
programs developed by an
that characterize its history, culture, industry, and operating environment. While organization to establish,
some companies treat ethics and compliance initiatives separately, the trend is to communicate, and monitor ethical
combine ethics and compliance programs. Without such programs and uniform values and legal requirements
standards and policies of conduct, it is difficult for employees to determine what that characterize its history,
culture, industry, and operating
behaviors are acceptable within a company. As discussed earlier, in the absence of
environment
such programs and standards, employees generally will make decisions based on
their observations of how their coworkers and managers behave. A strong ethics
and compliance program includes a written code of conduct, an officer to oversee
the program, careful delegation of authority, formal ethics training, auditing,
monitoring, enforcement, and periodic revision of program standards. Without a
strong customized program, problems are much more likely to arise. Figure 7.1
outlines the effectiveness of various types of misconduct training.
Trust in top management and business is low. According to the Grossman
Group, there are seven traits that can aid in building trust within corporations.
These traits include open communication with employees, transparency, and
clear explanation of company values and expectations.6 This is a recurring theme

Figure 7.1 Effectiveness of Types of Misconduct Training
6% 4% 6% 5%
4%
12% 11%
20% 81% 85%
31%
73%
62% 43% 50% Very ineffective
Somewhat ineffective
45%
31% Neither effective nor ineffective
Somewhat effective
Very effective
38% 35%
31% 28%
Interactive webinar Online training In-person external In-person internal

training distributed by my training training
place of work
Source: Brunswick Insight, “Workplace Conduct: A U.S. Benchmark Study,” October 29, 2018, https://www.
brunswickgroup.com/media/4973/workplace-conduct_national-benchmark-study.pdf (accessed August 9, 2019).
among primary stakeholders. Employees are looking for clear, creative, and
constructive leadership from chief executive officers (CEOs) that demonstrates
trust is a priority.
No universal standards exist that can be applied to ethics programs in all
organizations, but most companies develop codes, values, or policies for guidance
about business conduct. The majority of companies that have been in ethical or
ethics codes legal trouble usually do have stated ethics codes and programs. Ethics codes are
guidelines that businesses create guidelines that businesses create to maintain their company’s values and hold
to maintain their company’s
employees and employers accountable to ethical standards. Certain ethics codes are
values and hold employees and
employers accountable to ethical similar across businesses, such as intolerance of discrimination in the workplace,
standards while other codes are specific to the company.7 Often, the problem is that top man-
agement, as well as the overall corporate culture, has not integrated these codes,
values, and standards into daily decision-making. For example, Justin Caldbeck,
cofounder of Binary Capital, resigned after allegations were made against him
for sexual harassment. These allegations included using his position to grant
promotions in exchange for engaging in romantic relations with him, an act clearly
against the company’s ethics and values.8 If a company’s leadership fails to provide
the vision and support needed for ethical conduct, then an ethics program will not
be effective. Ethics is not something to be delegated to lower-level employees, while
top managers break the rules. Excellent leaders must lead by example and reinforce
the integrity of the organizational culture. Ethical leadership is so important that
the Ethisphere Institute awards companies for their ethical practices. The institute
named 128 companies as the World’s Most Ethical Companies, including Best
Buy, Canon, Hasbro, and Sony. To be included as one of the World’s Most Ethical
Companies, businesses must score high on the following five criteria: governance,
corporate citizenship and responsibility, leadership and reputation, ethics and
compliance program, and culture of ethics. In an era where business scandals can
severely hurt an enterprise, being considered one of the most ethical companies is
a major advantage when doing business.9
No matter what their specific goals, ethics programs are developed as organiza-
tional control systems, the aim of which is to create predictability and consistency
in employee behavior. There are two types of organizational control systems. A
compliance orientation creates order by requiring that employees identify with
and commit to specific required conduct. It uses legal terms and statutes that teach
employees the rules and penalties for noncompliance. The other type of system is a
values orientation, which strives to develop shared values. Although penalties are

attached, the focus is more on an abstract core of principles such as respect and
responsibility. The goal is to create an environment where employees are compelled
and willing to support an ethical organizational culture. More than half of employ-
ees in the KPMG Forensic Ethics Survey stated that they had observed misconduct
that could cause “a significant loss of public trust if discovered.” The industries in
which this type of misconduct increased the most include electronics, chemicals and
diversified industrials, consumer markets, and aerospace and defense.10 The goal
of an effective ethics program is to get employees to report wrongdoing when they
become aware of it and seek guidance when they are uncertain as to how to respond
in ambiguous circumstances.
Research into compliance and values-based approaches reveals that both types
of programs can interact or work toward the same end, but a values orientation
tends to have a stronger influence on employees. Values-based programs increase
employees’ awareness of ethics at work, their integrity, their willingness to deliver
bad news to supervisors, and the perception that better decisions are made.
Compliance-based programs are linked to employees’ awareness of ethical issues
at work and their perception that decision-making is better because of the expecta-
tions of its employees.
To meet the public’s escalating demands for ethical decision-making, companies
need to develop plans and structures for addressing ethical considerations. Some
directions for the improvement of ethics have been mandated through regulations,
but companies must be willing to have a values and ethics implementation system
in place that exceeds the minimum regulatory requirements. By implementing
values and ethics into corporate culture, businesses can encourage employees to
take a personal interest in the company, thus creating more incentive to uphold
ethical guidelines and report unethical behavior. Interestingly, companies that have
experienced reputational damage in the past are much further along than their
peers in establishing ethics and compliance programs.11
Codes of Conduct
Because people come from diverse family, educational, and business backgrounds,
it cannot be assumed that they know how to behave appropriately when they
enter a new organization or job. Most companies begin the process of establishing
organizational ethics programs by developing codes of conduct (also called codes codes of conduct
of ethics), which are formal statements that describe what an organization expects formal statements that describe
what an organization expects
of its employees. Table 7.1 depicts elements of an effective ethics and compliance
of its employees; also called
program (such as codes and training). Codes of ethics address risk areas that codes of ethics
organizations face and that employees may experience in the workplace.
A code of ethics has to reflect the board of directors’ and senior management’s
desire for organizational compliance with the values and principles, mission,
rules, and policies that support a climate of high ethics. The development of a
code of ethics should involve the board of directors, CEO, president, ethics and
compliance officer(s), and senior managers who will be implementing the code.
Legal staff should be called on to ensure that the code has correctly assessed key
areas of risk and that potential legal problems are buffered by standards in the
code. A code of ethics that does not address specific high-risk activities within the
scope of daily operations is inadequate for maintaining standards that can prevent
misconduct. Table 7.2 lists considerations in developing and implementing a code
of ethics.
Texas Instruments (TI) is a large, multinational firm that manufactures
computers, calculators, and other high-technology products. Its code of ethics has
some of the elements listed in Table 7.2 as its base. It addresses issues relating to
policies and procedures, government laws and regulations, acceptance of gifts,

Table 7.1 Elements of an Effective Ethics Program

1 Standards and codes Used to prevent and detect criminal conduct by expressing what
the right thing is, how it can be accomplished, and the expectations
to which the employee is held. They should be communicated and
written in a concise, clear language in codes of ethics.
2 Leadership and The company’s board of directors usually oversees the
the ethics and implementation of the program, and a senior executive or
compliance officer(s) committee of executives should be given overall responsibility for its
compliance. Many ethics and compliance officers report to the CEO
and interact with the board of directors on a regular basis.
3 Communication and The company must effectively implement the program through
effective training education and training. Training should be focused on industry-
specific areas of risk and should not merely recite the law, but
explicitly explain the company’s policies and ask employees to think
through complex “gray areas” that they may encounter in their day-
to-day tasks.
4 Monitoring and The ethics and compliance program should be implemented.
disclosure Employees should be asked about the “unwritten rules” within
the company to determine whether the program’s goals match
its actual operations. Employees must be provided with effective
mechanisms through which they can anonymously or confidentially
report potential misconduct or seek guidance on compliance issues,
be protected against retaliation if they do make a report, and
adequately follow up.
5 Observation and Appropriate incentives must be provided to encourage employees
reinforcement to comply with the program and impose appropriate disciplinary
measures if audits reveal that employees fail to do so. It is important
for the company to enforce these rules consistently to maintain the
credibility of the program.
6 Corrective action Misconduct must be addressed after it occurs, including self-
reporting to the authorities at times. Reasonable steps must be
taken to prevent similar misconduct in the future. In addition, the
company’s board or audit committee must receive regular and
meaningful reports on audit results and the status of corrective
action.
Source: Adapted from U.S. Federal Sentencing Guidelines, Chapter 8; 2012 Amendments to the U.S. Federal Sentencing
Guidelines; Kristin Graham Koehler and Brian P. Morrissey, “Seven Steps for Developing an Effective Compliance and
Ethics Program,” Chain Store Age, January 3, 2013, http://chainstoreage.com/article/seven-steps-developing-effective-
compliance-and-ethics-program (accessed August 9, 2019).
travel and entertainment, handling of proprietary information and trade secrets,

and more.12 To ensure that its employees understand the nature of business ethics
and the ethical standards they are expected to follow, TI provides an “Ethics
Quick Test” to help employees when they have doubts about the ethics of specific
situations and behaviors. It urges employees to reflect upon the following ques-
tions and statements:
• Is the action legal?
• Does it comply with our values?
• If you do it, will you feel bad?
• How will it look in a news story?
• If you know it’s wrong, don’t do it! If you’re not sure, ask.
• Keep asking until you get an answer.13
TI explicitly states what it expects of its employees and what behaviors are
unacceptable. When such standards of behavior are not made explicit, employees
sometimes base ethical decisions on their observations of the behavior of peers and
management. The use of rewards and punishments to enforce codes and policies

Table 7.2 Developing and Implementing a Code of Ethics

onsider areas of risk and state the values as well as the conduct necessary to comply with laws
C
and regulations. Values and principles are an important buffer in preventing serious misconduct.
Identify values and principles that specifically address current ethical issues.
Consider values and principles that link the organization to a stakeholder orientation. Attempt to
find overlaps in organizational and stakeholder values.
Make the code understandable by providing examples that reflect values.
Communicate the code frequently, and in language that employees can understand.
Revise the code every year with input from organizational members and stakeholders.
limits the opportunity to behave unethically and increases employees’ acceptance of

ethical standards.
As we stated, codes of conduct may address a variety of situations, from
internal operations to sales presentations and financial disclosure practices. For
example, Coca-Cola has been recognized for having an excellent code of conduct
for its employees. It covers topics such as the use of company assets, use of
information, conflicts of interest, and dealing with external stakeholders. The code
of conduct has great situational examples to educate employees in a practical way.
Additionally, it provides in-depth definitions and disciplinary action standards in
an easy-to-understand, visually appealing format for its readers.14
Research has found that corporate codes of ethics often have five to seven
core values or principles, in addition to more detailed descriptions and examples
of appropriate conduct.15 The six values that have been suggested as desirable
to appearing in the codes of ethics include (1) trustworthiness, (2) respect,
(3) responsibility, (4) fairness, (5) caring, and (6) citizenship. These values will not
be effective without distribution, training, and the support of top management
in making the values a part of the corporate culture. Employees need specific
examples of how the values can be implemented and guide ethical decision-making.
Codes of conduct will not resolve every ethical issue encountered in daily
operations, but they help employees and managers deal with ethical dilemmas by
prescribing or limiting specific actions. Many companies have a code of ethics,
but is it communicated effectively? According to the Ethics Resource Center, the
number of companies developing and implementing effective ethics and compli-
ance programs is increasing each year.16 A code that is placed on a website or in a
training manual is useless if it is not reinforced on a daily basis. By communicating
to employees both what is expected of them and what punishments they face if
they violate the rules, codes of conduct curtail opportunities for unethical behavior
and thereby improve ethical decision-making. For instance, Lockheed Martin has
a comprehensive code of ethics available online to employees and the general
public. The code specifies the company’s values, employee rights, and how to
report misconduct. Employees, including leadership, are required to engage in
ethics awareness training every year, and business conduct compliance training
is also provided to help workers understand and implement the code of ethics.17
Codes of conduct do not have to be so detailed that they take into account every
situation, but they should provide guidelines and principles that are capable of
helping employees achieve the organization’s ethical objectives and address risks
in an accepted manner.
Ethics and Compliance Officers

As mentioned in Chapter 6, organizational ethics and compliance programs also
must have oversight by a high-ranking person known to respect and understand

ethics officer legal and ethical standards. This person is often referred to as an ethics officer,
a high-ranking person known to but can also be the general counsel, the vice president of human resource (HR)
respect and understand legal and
ethical standards management, or any other officer. Corporate wrongdoings and scandal-grabbing
headlines have a profound negative impact on public trust. To ensure compli-
ance with state and federal regulations, many corporations are now appointing
compliance officer compliance officers and ethics and business conduct professionals to develop
one who develops and oversees and oversee corporate compliance programs. Many firms combine these two
corporate compliance programs to
roles.
ensure compliance with state and
federal regulations Consistent enforcement and necessary disciplinary action are essential to a
functional ethics and compliance program. The ethics or compliance officer is
usually responsible for companywide disciplinary systems and for implementing
all disciplinary actions the company takes in response to violations of its ethical
standards. Many companies are including ethics and compliance in employee per-
formance appraisals. During performance appraisals, employees may be asked
to sign an acknowledgment that they have read the company’s current guidelines
on its ethics policies. The company must also promptly investigate any known or
suspected misconduct. The appropriate official, often the ethics officer, needs to
make a recommendation to senior management on how to deal with a particular
ethics infraction. The Ethics & Compliance Initiative (ECI), discussed in Chapter
4, is a nonprofit organization that helps individuals and businesses understand the
best practices for keeping their company at the highest level of integrity and shares
strategies to maintain integrity and develop an in-house ethics program. ECI is the
leading organization in providing independent research on workplace integrity and
compliance practices.18
Ethics and compliance officers are instrumental in managing ethics programs
and have the ear of top managers and boards of directors.19 The ethics officer
position has existed for decades, but its importance increased tremendously when
the FSGO passed in 1991. The guidelines gave companies that faced federal
charges for misconduct the incentive of fine reductions of up to 95 percent
if they had an effective comprehensive ethics program in place. The financial
reporting requirements of the Sarbanes-Oxley Act put more pressure on ethics
officers to monitor financial reporting, as well as reporting of sales and inventory
movements to prevent fraud in reporting revenue and profits. While not always
deemed to be the most effective approach, it is recommended that ethics officers
report directly to the board of directors. Building an ethics program and hiring
an ethics officer to avoid fines will not be effective by themselves. Only with the
involvement of top management and the board can an ethics officer earn the trust
and cooperation of all key decision-makers. Ethics and compliance officers should
be knowledgeable about the industry’s laws and regulations, as well as adept at
communicating and reinforcing values that build an ethical corporate culture. For
example, Paula Goldman, the chief ethical and humane use officer for Salesforce.
com, is responsible for knowing the ethical implications of new technology and to
“develop a strategic framework for the ethical and humane use of technology” by
the company.20
Ethics Training and Communication

Instituting a training program and a system of communication to disseminate the
firm’s ethical standards is a major step in developing an effective ethics program.
Such training can educate employees about the firm’s policies and expectations,
relevant laws and regulations, and general social standards. Training programs
can make employees aware of available resources, support systems, and des-
ignated personnel who can assist them with ethical and legal advice. Training

also can help empower employees to ask tough questions and make ethical
decisions.
Ethics officers provide the oversight and management of most ethics training.
Although training and communication should reinforce values and provide learn-
ing opportunities about rules, risks, and acceptable behavior, it is only one part
of an effective ethics program. The employee’s capacity to exercise judgments that
result in ethical decisions must be reinforced and developed. Ethics training should
be customized to the specific risk areas they face. If ethical evaluations are not a
part of regular performance appraisals, the message that employees will receive is
that ethics is not an important component of decision-making. For ethics training
to make a difference, employees must understand why it is conducted, how it fits
into the organization, and their role in its implementation.
Top corporate executives must communicate with managers at the operations
level (e.g., in production, sales, and finance) and enforce overall ethical standards
within the organization. Table 7.3 lists the actions that are crucial to successful
ethics training. It is most important to help employees identify ethical issues and
give them the means to address and resolve such issues in ambiguous situations. In
addition, employees must be offered direction on seeking assistance from managers
or other designated personnel in resolving ethical problems. An effective ethics
program can reduce criminal, civil, and administrative consequences, including
fines, penalties, judgments, debarment from government contracts, and court
control of the organization. An ineffective ethics program that does not ward off
unethical acts may cause negative publicity, a decrease in organizational financial
performance, and lowered stakeholder trust. An ethical disaster can be more
damaging to an organization than a natural disaster because of the damage that
occurs to organizational reputation.
Companies can implement ethical principles in their organizations through
training programs. Discussions conducted in ethics training programs sometimes
break down into personal opinions about what should or should not be done in
particular situations. For example, Deluxe Corp. launched an ethics-compliance
course that required employees to respond to multiple-choice questions. The course
included scenarios including transgender harassment training. One employee felt
that the response options did not support his religious beliefs and requested to be
excused from the training course. Deluxe denied his request and suggested he take
a 1 percent salary reduction for failing to complete the course. The employee went
on to sue in the federal court under charges of discrimination. His charge was
dismissed in court.21
To be successful, business ethics programs need to educate employees about
how to identify and deal with business ethics issues. Employees are then able to
Table 7.3 Actions Crucial to Ethics Training

Identify the key ethical risk areas.
Relate ethical decisions to the organization’s values, principles, and culture.
Communicate company codes, policies, and procedures regarding ethical business conduct.
Provide leadership training to model desired behavior.
Provide directions for internal questions and nonretaliatory reporting mechanisms.
Engage in regular training events using a variety of educational tools.
Establish manuals, websites, social media, and other communication to reinforce ethics training.
Evaluate and use feedback to improve training.
Source: © O. C Ferrell 2019.

base ethical decisions on their knowledge

of appropriate actions, from an orga-
nizational perspective, rather than on
emotions.
Training and communication
initiatives should reflect the unique
characteristics of an organization: its
size, culture, values, management style,
Shutterstock/BlueBarronPhoto
and employee base. It is important for the

ethics program to differentiate between
personal and organizational ethics.
If ethics training is to be effective, it
must start with a foundation, a code of
ethics, commitment from all levels of the
organization, and executive priorities on
ethics that are communicated to employees. Managers from every department
must be involved in the development of an ethics training program.
Most experts agree that one of the most effective methods of ethics training
involves resolving ethical dilemmas that relate to actual situations employees may
encounter while performing their jobs. For example, Lockheed Martin developed
a training game called “Gray Matters.” This training device includes dilemmas
that can be resolved by teams. Each member of the team can offer his or her
perspective and understand the ramifications of a decision for coworkers and the
organization.22
Another training device is the behavioral simulation or role-play exercise, in
which participants are given a short hypothetical ethical issue scenario to review.
The participants are assigned roles within the hypothetical organization and are
provided with varying levels of information about the issue. They then must
interact to provide recommended courses of action representing short-term, mid-
range, and long-term considerations. The simulation re-creates the complexities of
organizational relationships and of having to address a situation without complete
information. Learning objectives of the simulation exercise include (1) increased
awareness by participants of the ethical, legal, and social dimensions of business
decision-making; (2) development of analytical skills for resolving ethical issues;
and (3) exposure to the complexity of ethical decision-making in organizations.
Simulations help teach students about why ethics is important, as well as how to
handle ethical conflict situations.23
A growing number of small businesses deliver learning-management systems
software and content to train and certify employees on a variety of topics. In
addition to streamlined training, the systems provide real-time records of instruc-
tion that increasingly are the first line of defense for companies facing litigation
or questions about whether they are accountable for an employee’s actions. The
e-learning market is growing very rapidly, both in education and business. For
multinational companies, the computerized training elements of such systems
provide consistency of content and delivery to all locations and allow for custom-
ization of languages and to cultures.
Navex Global offers various ethics and compliance training programs that are
trusted by 13,000 customers worldwide, including Toyota and Equifax. Its software
platform provides custom-made training plans that are adaptable to a specific
business’s needs. They also published a first-of-its kind ethics and compliance
benchmark report that gives insight about ethics and compliance research. Their
report analyzes the elements of the most effective ethics and compliance programs.
One identified element was risk-based training. They advise that ethics training
should support various languages and take culturally sensitive approaches, as
opposed to a one-size-fits-all training program. More advanced programs result in
better performance and effectiveness and are ultimately a worthwhile investment

for companies.24
Some of the goals of an ethics training program might be to improve employee
understanding of ethical issues and the ability to identify them, to inform employ-
ees of related procedures and rules, as well as to identify the contact person who
could help in resolving ethical problems. In keeping with these goals, the purpose
of Boeing’s Code of Ethics and Business Conduct program is to:
• Communicate the Boeing Values and standards of ethical business conduct
to employees.
• Inform employees of company policies and procedures regarding ethical
business conduct.
• Establish companywide processes to assist employees in obtaining guidance
and resolving questions regarding compliance with the company’s standards
of conduct and the Boeing Values.
• Establish companywide criteria for ethics education and awareness
programs.25
Ethical decision-making is influenced by organizational culture, by coworkers and
supervisors, and by the opportunity to engage in unethical behavior. All three types
of influence can be affected by ethics training. Full awareness of the philosophy of
management, rules, and procedures can strengthen both the organizational culture
and the ethical stance of peers and supervisors. Such awareness also arms employ-
ees against opportunities for unethical behavior and reduces the likelihood of
misconduct. Thus, the existence and enforcement of company rules and procedures
limit unethical practices in the organization. The primary goals of ethics training
are to make employees aware of the risks associated with their jobs, industry, and
stakeholders; provide an understanding of the culture and expectations within the
organization; create accountability for individual actions; and inform employees
not only of the behavior that is unacceptable, but also that which is acceptable and
supported in the organization.
Establishing Systems to Monitor and

Enforce Ethical Standards
Ethics and compliance programs also involve comparing employee ethical perfor-
mance with the organization’s ethical standards. Ethics programs can be measured
through employee observation, internal audits, surveys, reporting systems, and
investigations. An effective ethics program uses a variety of resources to effectively
monitor ethical conduct. Sometimes external auditing and review of company
activities are helpful in developing benchmarks of compliance and identifying areas
for improvement.
Systems to Monitor and Enforce Ethical Standards

Many companies set up ethics assistance lines, also known as hotlines, to
provide support and give employees the opportunity to ask questions or report
concerns. The most effective ethics hotlines operate on an anonymous basis and
are supported 24 hours a day, 365 days a year. Approximately 38 percent of the
employees who report concerns indicated using their company’s hotline to do so.
In addition, 23 percent use the company’s website to report misconduct, and 39
percent use other traditional methods such as face-to-face communication with
supervisors or managers, email, fax, and direct mail.26

It is interesting that most of the issues

reported do not relate to serious ethical
and legal issues. More than 70 percent
of the issues raised on hotlines relate to
HR, diversity, and respectful treatment in
the workplace. Other top issues reported
include business integrity, at 17 percent;
environment, health, and safety, at 7 per-
cent; misuse or misappropriation of assets,
at 5 percent; and accounting, auditing,
and financial reporting, at 3 percent.27
A help line or desk is characterized by
Shutterstock/MikeDotta
ease of accessibility and simple procedures,

and it serves as a safety net that facilitates
monitoring and reporting. Companies such
as Global Compliance provide automated
case management systems that collect,
categorize, and communicate alerts to the
appropriate managers for dealing with ethics issues in the organization. Companies
are increasingly using case management services and software to track employees
and issues throughout their entire organization. These programs provide reports
of employee concerns, complaints, or observations of misconduct. Systems such as
these allow the company to track investigations, analysis, resolutions, documenta-
tion, emerging/declining issues, and the time required for resolution.
In addition to hotlines, ethical counsel and education can be implemented as
a system monitor. For example, Airbnb general counsel Robert Chesnut helps
educate and promote ethics in the company in an extensive way. He helped the
executives write the code of ethics and posed questions that encouraged them to
think about how to best inform their employees on real-world scenarios, not just
a copy-and-paste general code of ethics. He also has a goal to embed ethics into
the office culture. He does this through training the company’s new hires, saying it
shows them in person how serious Airbnb is about ethics. He continues to enforce
ethics among existing employees by sending a monthly video series to keep ethics
at the top of everyone’s minds. Airbnb has a reporting email and ethical advisers
who are company employees that also serve as part-time volunteers for those
struggling with an ethical dilemma.28
Observation and Feedback

To determine whether a person is performing his or her job adequately and
ethically, observation might focus on how the person handles an ethically charged
situation. For example, during role-plays in the training sessions of salespeople and
managers, ethical issues can be introduced into the discussion, and the decisions
can be videotaped and outcomes evaluated by managers.
Questionnaires that survey employees’ ethical perceptions of their company,
their superiors, their coworkers, and themselves, as well as ratings of ethical
or unethical practices within the firm and industry, can serve as benchmarks
in an ongoing assessment of ethical performance. Then, if unethical behavior
is perceived to increase, management will have a better understanding of what
types of unethical practices may be occurring and why. A change in the ethics
training within the company may be necessary. In addition, organization-wide risk
management systems identify new and emerging risks employees face and to which
management must respond.
Appropriate action involves rewarding employees who comply with company
policies and standards and punishing those who do not. When employees comply
with organizational standards, their efforts may be acknowledged and rewarded

through public recognition, bonuses, raises, or some other means. Conversely,
when employees deviate from organizational standards, they may be reprimanded,
transferred, docked of pay, suspended, or even fired.
Whistleblowing
Interpersonal conflict ensues when employees think that they know the right
course of action in a situation, and yet their work group or company promotes or
requires a different, possibly unethical decision. In such cases, employees usually
follow their organization’s values. If they conclude that they cannot discuss what
they are doing or what should be done with their coworkers or immediate supervi-
sors, these employees may go outside the organization to publicize and correct the
unethical situation. Whistleblowing, as defined in Chapter 5, means exposing an
employer’s wrongdoing to outsiders, such as the media or government regulatory
agencies.
Whistleblowers have provided pivotal evidence documenting wrongdoing at a
number of companies. Since the institution of the Whistleblower Protection Act,
many employees have come forward to reveal company misdeeds to government
authorities. The Securities and Exchange Commission (SEC) awarded two people a
total of $50 million when they provided evidence related to a settlement involving
JPMorgan Chase. These whistleblowers were former employees of the bank, and
one was an executive at the time that the misconduct took place. The tips provided
led to the pursuit of JPMorgan because they were not disclosing to clients that they
preferred to invest in their own mutual and hedge funds. The employee received
$37 million, while the executive received $13 million. The SEC would not release
any information regarding the two whistleblowers, including whether they still
worked for JPMorgan.29
Despite these large monetary rewards, the fortunes of whistleblowers are pep-
pered with negative pushback. Most are labeled traitors, many lose their jobs, and
some find it difficult to gain new employment afterward. For example, associate
medical examiner Dr. Megan Quinn of Pierce County, Washington was suspended
from her job and accused of insubordination and sexual harassment after filing a
whistleblower complaint against medical examiner Dr. Thomas Clark. Quinn had
accused Clark of mishandling investigations into the deaths of children. Though
she received a settlement of $450,000, and an independent investigation cleared
Quinn of wrongdoing, she faced damage to her reputation and ultimately agreed
to resign from her job.30
Critics have stated that the potential for large monetary sums related to
whistleblowing encourage employees to come forward, regardless of whether
their claims are valid. However, a survey by the Ethics Resource Center showed
that only 14 percent of employees are motivated by such incentives. Rather, the
majority of external reporting is a result of other factors, such as lack of trust in
company authorities, experience of retaliation from prior internal reporting, and
the fear of losing one’s job.31 Although the SEC has given many whistleblowers
monetary rewards, whistleblowing is risky and involves a complex process. The
threat of retaliation has decreased over the years, but it still occurs. Risking retali-
ation makes whistleblowing less desirable to many people, despite the potential
monetary gains. The SEC has proposed new regulations for whistleblowing. For
example, whistleblowers have to participate in external reporting, not just internal,
to be considered a whistleblower. This may help mitigate any employees trying to
gain money by reporting false events, while also helping those who are genuinely
reporting misconduct in the workplace.32 Because of the risks involved in becom-
ing a whistleblower, an employee should ask questions before doing so. Table 7.4
provides a checklist of these possible questions.

Table 7.4 Questions to Ask Before Engaging in External Whistleblowing

Have I exhausted internal anonymous reporting opportunities within the organization?
Have I examined company policies and codes that outline acceptable behavior and violations of
standards?
Is this a personal issue that should be resolved through other means?
Can I manage the stress that may evolve from exposing potential wrongdoing in my
organization?
Can I deal with the consequences of resolving an ethical or legal conflict within my organization?
Source: © O. C. Ferrell 2019.
Continuous Improvement of the Ethics

Program
Improving the system that encourages employees to make more ethical deci-
sions is not very different from implementing other types of business strategies.
Implementation means putting strategies into action. In the context of ethics and
compliance, the term means the design of activities to achieve organizational
objectives using available resources and given existing constraints. Implementation
translates a plan for action into operational terms and establishes a means by which
organizational ethical performance will be monitored, controlled, and improved.
A firm’s ability to plan and implement ethical business standards depends in
part on the organization’s structuring of resources and activities to achieve its
ethical objectives in an effective and efficient manner. Some U.S. companies are
setting up computer systems that encourage whistleblowing. For instance, Marvin
Windows (one of the world’s largest custom manufacturers of wooden windows
and doors) was concerned about employees feeling comfortable reporting
violations of safety conditions, bad management, fraud, or theft. It established an
anonymous system that allows reporting in native-country languages. This system
is used to alert management to potential problems in the organization and to
facilitate an investigation.33 Systems such as these help alleviate employee concerns
when reporting observed misconduct.
Once a company determines that its ethical performance has been unsatisfac-
tory, the company’s management may want to reorganize the way that certain
ethical decisions are made. For example, a decentralized organization may need
to centralize key decisions, if only for a time, so that top-level managers can
ensure improved organizational decision-making. Centralization may reduce the
opportunity for lower-level managers and employees to make unethical decisions.
Top management can then focus on improving the corporate culture and infusing
more ethical values throughout the organization. Dell Computer is an example of a
centralized organization, possibly because of its focus on manufacturing processes.
In other companies, decentralization of important decisions may be a better way
to attack ethical problems so that lower-level managers, familiar with the forces of
the local business environment and local culture and values, can make more deci-
sions. Coca-Cola is a more decentralized company due to its use of independent
distributors and unique localized cultures. Whether the ethics function is central-
ized or decentralized, the key need is to delegate authority in such a way that the
organization can achieve ethical performance. For example, the former CEO of
Samsung, Lee Jae-yong, was arrested on allegations of bribery. After his arrest and
resignation, the company needed corrective action and improvement to establish
standards in its ethics program. As a result, the corporate legal office of Samsung
developed a compliance team and a Privacy Steering Committee to help advance
their compliance management and decision-making within top management.34

Institutionalization of Business Ethics

To successfully implement ethics and compliance programs, managers should be
aware of the core, legally mandated, and voluntary elements of organizational
business practices. All three should be incorporated into an organization’s ethics
program. This generates an ethical culture that successfully controls and manages
ethical risks. Institutionalization involves the legal and social forces that provide
organizational rewards and punishments based upon stakeholder assessments of an
organization’s behavior. In business ethics, institutionalization is associated with the
establishment of laws, regulations, norms, and organizational programs. A refusal
to conform to what is believed to be ethical conduct is often perceived to be an ethi-
cal issue and a concern to stakeholders. Institutions involve obligations, structures,
and social expectations that reward and limit ethical decisions. Federal agencies, for
instance, are institutions that mandate laws for appropriate conduct. They may even
recommend core practices for developing an ethical organizational culture.35
Voluntary, Core Practices, and Mandatory Boundaries of

Ethics Programs
Table 7.5 describes the three elements of institutionalization. Voluntary practices voluntary practices
are the beliefs, values, and voluntary responsibilities of an organization. All the beliefs, values, and voluntary
responsibilities of an organization
organizations engage in some level of voluntary activities to help different stake-
holders.36 These responsibilities often manifest themselves through philanthropy,
which occurs when businesses give back to communities and causes. For instance,
Home Depot strongly supports the nonprofit organization Habitat for Humanity
and encourages employees to volunteer. Evidence suggests that a sense of the law
and ethical behavior increases voluntary responsibility activities. Research has
also confirmed that when a company’s core practices support ethical and legal
responsibilities, they enhance economic performance.37
Core practices are recognized best practices that are often encouraged by core practices
regulatory forces and industry trade associations. As mentioned in the previous recognized best practices that are
often encouraged by regulatory
chapter, the Better Business Bureau (BBB) provides guidance for managing cus-
forces and industry trade
tomer conflicts and reviewing advertising disputes. Core practices are appropriate associations
practices often common to the industry. They guarantee compliance with legal
requirements and social expectations. Core practices align the expectations of
consumers with a business in order to create satisfying exchanges.38
Although core practices are not enforced on a legal basis, businesses can face
consequences for not engaging in them when misconduct occurs. For example,
the FSGO provides incentives for firms that effectively implement core practices.
Table 7.5 Voluntary Boundary, Core Practices, and Mandated Boundaries of Ethical
Decisions
Voluntary boundary A management-initiated boundary of conduct
(beliefs, values, voluntary policies, and
voluntary responsibilities)
Core practices Highly appropriate and common practices,
often common to an industry, that help ensure
compliance with legal requirements, industry
self-regulation, and societal expectations
Mandated boundary An externally imposed boundary of
conduct (laws, rules, regulations, and other
requirements)
Source: Adapted from the “Open Compliance Ethics Group (OCEG) Foundation Guidelines,” v1.0, Steering Committee
Update, December 2005, Phoenix; Open Compliance Ethics Group (OCEG), “Compliance Officers, Compliance
Professionals Are Part of GRC,” https://www.oceg.org/about/people-like-you-compliance/ (accessed November 20, 2019).

If misconduct occurs, firms that have demonstrated best practices may be able to
avoid serious penalties. However, if the board took no initiative to oversee ethics
and compliance in the organization, its failure could increase the level of punish-
ment the company experiences. In institutionalizing core practices, the government
allows organizations to structure their own methods and takes action only if viola-
mandated boundaries tions occur. Mandated boundaries are externally imposed boundaries of conduct,
externally imposed boundaries such as laws, rules, regulations, and other requirements. Laws regulating business
of conduct, such as laws,
competition are examples of mandated boundaries.
rules, regulations, and other
requirements Organizations manage stakeholder expectations for ethical conduct through
corporate governance mechanisms, compliance, risk management, and voluntary
activities. Government initiatives and stakeholder demands have helped to
institutionalize these drivers of an ethical organizational culture. For instance, the
governing authority of an organization structures corporate governance to provide
oversight, checks, and balances to ensure that the organization meets its ethical
objectives. Compliance represents areas that must follow laws and regulations.
Risk management examines the chance that misconduct may occur based on the
type of business and the risk areas it commonly faces. Voluntary activities often
involve the values and responsibilities organizations adopt in contributing to
stakeholder expectations. For example, Novo Nordisk is a healthcare company
that specializes in diabetes treatment. The business provides employees opportuni-
ties to volunteer up to 80 paid hours with various organizations.39 According
to their website, this allows the company to implement their Triple Bottom
Line framework by honoring their values while keeping return on investment in
mind.40
Ethical Leadership
A company’s leaders provide the blueprint for an organization’s corporate
culture.41 If organizational leaders do not display ethical conduct, the corporate
culture will evolve on its own to exhibit the organization’s norms and values.
Consider the infamous accounting firm Arthur Andersen, once one of the “Big
Five” accounting firms (they were reduced to the “Big Four” after Arthur
Andersen’s demise). Arthur Andersen, who founded the company, valued ethical
behavior. In one situation, he refused to improperly record an accounting entry
for a major client.42 Contrast this to the firm named for him a few years before
their demise, and you can see what can happen when an organization strays from
ethical leadership. Without ethical leadership, an organizational culture cannot
be maintained for long periods of time. Organizational leaders are important
to ethical decision-making because they have the ability to motivate employees
and enforce the organization’s norms, policies, and procedures. Ethical leaders
make certain that operational goals are achieved in an ethical manner. They do
not simply allow employees to follow their individual moral codes, but enforce
shared organizational values to support an ethical organizational culture. Ethical
leaders also take the responsibility to model acceptable conduct for employees.43
Ethical leadership is positively related to employee organizational citizenship;
conversely, it is negatively related to employee misconduct. In other words,
ethical leaders are more likely to have employees that support the organization’s
ethical culture and less likely to have employees that deviate from organizational
values.44
One great example of an ethical leader is Bill Gates. He is one of the richest
and most powerful people in business, but it doesn’t seem like that has changed
his character. In fact, it has amplified his ability to be able to contribute to causes
he believes in and work harder to give to others. He and his wife, Melinda, have
vowed to give away 95 percent of their wealth in their lifetime. The greatest example

Ethical Responsibilities in BANKING
Wells Fargo Pays the Price for Cultural Bankruptcy

In 2016, Wells Fargo announced the firing of thousands of scandal is that the bank offers a comprehensive code
employees for creating fake bank accounts. This has been of conduct that specifies: “If you violate any provision of
followed by millions of dollars in settlements and a cap of the Code or fail to cooperate fully with any inquiries or
Wells Fargo’s assets by the Federal Reserve. No company investigations, you will be subject to corrective action,
wants negative publicity, and Wells Fargo has had plenty which may include termination of your employment.” While
in recent years. To this day, the company is still trying to codes of conduct are necessary for businesses, they are
repair its reputation in the eyes of the public. ineffective if leadership does not follow them along with
During the investigation of the fake accounts scandal, their employees.
it was discovered that the employees who created the In the aftermath of the scandal, Wells Fargo has
accounts were put under immense pressure to meet been attempting to repair its reputation. In 2018, they
certain sales goals. According to one former branch launched an ad campaign called Re-Established. The first
manager, Susan Fischer, upper management informed her commercial released was titled “Trust” and featured a
that the employees had to make the sales goals “no matter background on Wells Fargo’s roots as a trusted carrier of
what.” Another former branch manager, Rasheeda Kamar, gold in the 1800s. The commercial stated that “‘we always
stated in an interview that her district manager expected found the way—until we lost it.’” The commercial went on
employees to convince customers to open accounts to note that Wells Fargo planned on making things right
whether the customers needed them or not. for their customers by focusing on a recommitment to
In addition to the pressures placed on the employees, them. Reviews on the campaign were mixed, with some
branch managers were micromanaged and deluged with approving of Wells Fargo taking responsibility and others
constant requests to report on the progress of their employ- wanting more involvement from the CEO.
ees. If the employees did not make their numbers, the Wells Fargo launched another ad campaign called
branch managers could be fired. Branch managers were not “This Is Wells Fargo.” Its focus was on demonstrating
the only ones at risk of being fired for refusing to act unethi- positive customer service by showing employees helping
cally. Whistleblowers were also at risk. Some employees customers in need of banking advice. The bank has also
utilized the ethics hotline of the bank to report the unethical made visual changes to its promotional material (namely,
behavior, but there is evidence that these employees were changing the stagecoach and changing the yellow letters
fired in retaliation. As this is a violation of the Sarbanes-Oxley to white on its logo). Considering that the Wells Fargo logo
Act, the bank had to make restitution to these employees. was iconic and had endured for over 100 years, these
As a result of these actions, Wells Fargo lost the trust changes were a big step in the bank’s quest to recover
of customers and the general public. The irony of this from the 2016 scandal.
Sources: BusinessWire, “Wells Fargo Launches New Brand Campaign, ‘This Is Wells Fargo,’ Focused on Customer Experience,” AP News, January 24,
2019, https://www.apnews.com/b4c9232e49194007918362683506086a (accessed June 3, 2019); Steve Cocheo and Bill Streeter, “Wells Fargo
Unveils New Logo to Rebuild Its Battered Brand,” The Financial Brand, 2019, https://thefinancialbrand.com/80290/wells-fargo-logo-rebrand/ (accessed
June 3, 2019); Jackie Wattles, Ben Geier, Matt Egan, and Danielle Wiener-Bronner, “Well Fargo’s 20-Month Nightmare,” CNN Business, April 24, 2018,
https://money.cnn.com/2018/04/24/news/companies/wells-fargo-timeline-shareholders/index.html (accessed June 3, 2019); Matt Egan, “The Two-
Year Wells Fargo Horror Story Just Won’t End,” CNN Business, September 7, 2018, https://money.cnn.com/2018/09/07/news/companies/wells-fargo-
scandal-two-years/index.html (accessed June 3, 2019); Erika Fry, “How Wells Fargo Is Dealing with Its Fake Accounts Scandal,” Fortune, October 3,
2018, http://fortune.com/2018/10/02/wells-fargo-fake-phony-accounts-scandal/ (accessed June 3, 2019); James F. Peltz, “Wells Fargo Launches
Ad Campaign to Leave Accounts Scandal Behind. Not Everyone is Buying It,” Los Angeles Times, May 9, 2018, https://www.latimes.com/business/
la-fi-wells-fargo-ad-campaign-20180509-story.html (accessed June 3, 2019); Matt Egan, “Wells Fargo Admits to Signs of Worker Retaliation,” CNN
Business, January 24, 2017, https://money.cnn.com/2017/01/23/investing/wells-fargo-retaliation-ethics-line/index.html?iid=EL (accessed June 3, 2019);
“Wells Fargo Team Member Code of Ethics and Business Conduct,” https://www.sec.gov/Archives/edgar/data/72971/000119312509127827/dex991.htm
(accessed June 3, 2019); Jason Zuckerman, “OSHA Orders Wells Fargo to Pay $5.4M to Whistleblower,” Zuckerman Law: Whistleblower Protection
Law Blog, January 1, 2019, https://www.zuckermanlaw.com/osha-orders-wells-fargo-pay-5-4m-whistleblower/ (accessed June 3, 2019); Alan R. Kabat,
“Retaliation Against Whistleblowers—The Wells Fargo Lesson,” Bernabei & Kabat, PLLC, 2019, https://www.bernabeipllc.com/Articles/Retaliation-Against-
Whistleblowers-The-Wells-Fargo-Lesson.shtml (accessed June 3, 2019).

of his ethical leadership is the Bill and Melinda Gates

Foundation, which has donated billions of dollars to
help research causes of all kinds, including healthcare
for the poor in developing countries and education
for youth in the United States. The foundation’s goals
show the character, ethical responsibility, and commit-
ment of Gates and his wife.45
In addition to CEOs and managers, the board of
Shutterstock/VDB Photos
directors is important in whether the organization

displays ethical leadership. Legally, the board has a
fiduciary duty to stakeholders to manage in the best
interests of the organization. However, it is not always
easy to determine what is in the best interests of the
organization. A good example would be whether
to engage in a risky activity that would result in
short-term gains, but could cost the organization significantly in the long run.
To determine the appropriate course of action, board members must consider the
impact that a decision will have on different stakeholders.46
So far, we have discussed individuals in a position of authority within an
organization. However, ethical leadership is not limited to authority figures. It
should also be practiced by employees at all levels of the organization. Often, the
actions of fellow employees significantly influence the ethical decision-making of
an individual.47 Thus, both leaders and regular employees within an organization
have the responsibility to demonstrate ethical leadership when making decisions.
If stakeholders are dissatisfied with an organizational leader, that leader will
not remain in that position. Ethical leaders must have the trust and respect of their
followers. For instance, Martin Winterkorn, the former CEO of Volkswagen,
stepped down after it was discovered that Volkswagen had installed defeat devices
into its diesel vehicles to fool regulators. Although initially is was unclear whether
Winterkorn knew about the misconduct, as the leader of the company, the
misconduct occurred during his watch—hence, he was responsible.48
Just as strong ethical leadership plays a key role in guiding employee behavior,
so does a strong corporate culture of support. A KPMG Forensic Integrity Survey
asked employees whether the leaders of their companies displayed personal integ-
rity and ethical leadership traits. Approximately 68 percent of employees indicated
that leaders emphasized ethics and integrity in the organization.49 These types of
responses are becoming more common as organizations continue strengthening
their ethics programs. The results of having an ethical focus are proving to be
beneficial toward business operations. Challenges persist, however, and ethical
leaders must be vigilant in nurturing the corporate culture of their organizations.
Leadership Power
As we have shown, organizational leaders use their power and influence to shape
corporate culture. Power refers to the influence that leaders and managers have
over the behavior and decisions of subordinates. An individual has power over
others when his or her presence causes them to behave differently. Exerting
power is one way to influence the ethical decision-making framework described in
Chapter 6 (especially significant others and opportunity).
The status and power of leaders are directly related to the amount of pressure
that they can exert on employees to conform to their expectations. A superior
in a position of authority can put strong pressure on employees to comply, even
when their personal ethical values conflict with the superior’s wishes. For example,
a manager might say to a subordinate, “I want the confidential data about our
competitor’s sales on my desk by Monday morning, and I don’t care how you
get it.” A subordinate who values his or her job or who does not realize the
ethical questions involved may feel pressured to do something unethical to obtain

the data. Unfortunately, there has been an increase in pressure from employers
toward employees. One study found that 16 percent of employees surveyed had
experienced pressure to comply with unethical requests, which is higher than it
was just a few years ago. In addition to placing employees in a difficult position,
pressure to engage in unethical behavior by employers can lead to an increase in
misconduct when the unethical behavior is rewarded by the boss.50
There are five power bases from which one person may influence another:
(1) reward power, (2) coercive power, (3) legitimate power, (4) expert power, and
(5) referent power.51 These five bases of power can be used to motivate individuals
to behave either ethically or unethically.
Reward Power Reward power refers to using incentives to get people to change
their behavior. Sometimes employee incentives can result in goal-fixation, which
can lead to unethical behavior. It can increase dishonesty in managers’ reporting
when hitting certain targets results in bonuses. While incentives are not intentionally
negative, they can lead to increased risk-taking, escalation of commitment, and lack
of self-control. For example, service professionals such as auditors or lawyers bill
hours against a target budget based on a fixed price. The incentive to overreport
hours in order to make more money presents an ethical dilemma that would nega-
tively affect the firm. Incentives at Wells Fargo encouraged sales staff to open new
accounts. This resulted in opening millions of accounts for customers without their
knowledge, damaging their credit rating.52 This “carrot dangling” and incentives
have been shown to be very effective in getting people to change their behavior in
the long run. In the short run, however, it is not as effective as coercive power.
Coercive Power Coercive power is essentially the opposite of reward power.

Instead of rewarding a person for doing something, coercive power penalizes
actions or behavior. As an example, suppose that a valuable client asks an
industrial salesperson for a bribe and insinuates that he will take his business
elsewhere if his demands are not met. Although the salesperson believes that
bribery is unethical, her boss has told her that she must keep the client happy or
lose her chance at promotion. The boss is also imposing a negative sanction if
certain actions are not performed. Every year, 20 percent of Enron’s workforce
was asked to leave because they were ranked as “needs improvement,” or because
of other issues. Employees not wanting to fall into the bottom 20 percent engaged
in corruption or showed complacency toward corruption.53
Coercive power relies on fear to change behavior. For this reason, it has been
found to be more effective in changing behavior in the short run than in the long
run. Coercion is often employed in situations where there is an extreme imbalance
in power. However, people who are continually subjected to coercion may seek a
counterbalance by aligning themselves with other more powerful persons or simply
by leaving the organization. In firms that use coercive power, relationships usually
break down in the long run. Power is an ethical issue not only for individuals, but
also for work groups that establish policy for large corporations.
Legitimate Power Legitimate power stems from the belief that a certain person has
the right to exert influence and certain others have an obligation to accept it. The
titles and positions of authority that organizations bestow on individuals appeal to
this traditional view of power. Many people readily acquiesce to those who wield
legitimate power, sometimes committing acts that are contrary to their beliefs and
values. Betty Vinson, an accountant at WorldCom, objected to her supervisor’s
requests to produce improper accounting entries in an effort to conceal WorldCom’s
deteriorating financial condition. She finally gave in to their requests, however, after
being told that this was the only way to save the company. She and other WorldCom
accountants eventually pleaded guilty to conspiracy and fraud charges.54

Such loyalty to authority figures can also be seen in corporations that have
strong charismatic leaders and centralized structures. In business, if a superior tells
an employee to increase sales “no matter what it takes,” and that employee has
a strong affiliation to legitimate power, she may try anything to fulfill that order.
Expert Power Expert power is derived from a person’s knowledge (or at least
the perception that the person possesses knowledge). Expert power usually stems
from a superior’s credibility with subordinates. Credibility, and thus expert power,
is positively related to the number of years that a person has worked in a firm
or industry, the person’s education, or the honors that he or she has received
for performance. Expert power can also be conferred on a person by others who
perceive him or her as an expert on a specific topic. A relatively low-level secretary
may have expert power because he or she knows specific details about how the
business operates and can even make suggestions on how to inflate revenue
through expense reimbursements.
Expert power may cause ethical problems when it is used to manipulate
others or to gain an unfair advantage. Physicians, lawyers, or consultants can take
unfair advantage of uninformed clients, for example. Accounting firms may gain
extra income by ignoring concerns about the accuracy of financial data they are
provided in an audit.
Referent Power Referent power may exist when one person perceives that his or
her goals or objectives are similar to another’s. The second person may attempt
to influence the first to take actions that will lead both to achieve their objectives.
Because they share the same objectives, the person influenced by the other will
perceive the other’s use of referent power as beneficial. For this power relationship
to be effective, however, some sort of empathy must exist between the individuals.
Identification with others helps to boost the decision-maker’s confidence when
making a decision, thus increasing his or her referent power.
Consider the following situation: Lisa Jones, a manager in the accounting
department of a manufacturing firm, has asked Michael Wong, a salesperson, to
speed up the delivery of sales contracts so that the revenue could be reported in
the current quarter. Michael protests that he is not to blame for the slow process.
In this case, Lisa is using referent power. She invites Michael to lunch, and they
discuss some of their work concerns. They agree to speed up document processing,
and Lisa suggests that Michael start asking for contracts that he expects in the
next quarter. He agrees to give it a try, and within several weeks, the contracts are
moving faster and revenue has increased in the current quarter. Lisa’s job is made
easier, and Michael gets his commission checks a little sooner. The one issue that
they would need to be aware of and prevent is channel stuffing in order to remain
ethical with their referent power relationship.
The five bases of power are not mutually exclusive. People typically use several
power bases to effect change in others. Although power in itself is neither ethical
nor unethical, its use can raise ethical issues. Sometimes a leader uses power to
manipulate a situation or a person’s values in a way that creates a conflict with
the person’s value structure. For example, a manager who forces an employee
to choose between staying home with his sick child and keeping his job is using
coercive power, which creates a direct conflict with the employee’s values.
The Role of an Ethical Corporate Culture

Top management sets the tone for the ethical culture of an organization. If
executives and CEOs do not explicitly address ethics issues, a culture may emerge
where unethical behavior is sanctioned and rewarded. To be most successful,
ethical standards and expected behaviors should be integrated throughout every
organizational process, from hiring, training, compensating, and rewarding

to firing. This requires ethical leadership. An ethical organizational culture is

important to employees. A fair, open, and trusting organizational climate supports
an ethical culture and can be attributed to lower turnover and higher employee
satisfaction. Southwest Airlines has a very strong organizational culture that has
remained consistent from the days of its key founder, Herb Kelleher. All Southwest
employees have heard the stories of Kelleher engaging employees and emphasizing
loyalty, teamwork, and the creation of a fun environment. By placing importance
on employees first, customers next, and shareholders last, while maintaining
care for all three stakeholders, Kelleher built a unique culture that has succeeded
for almost 50 years. He strove to treat employees like family. Today, Southwest
continues that legacy and culture. Pilots willingly support the Adopt-A-Pilot
program, which allows students countrywide to adopt a Southwest pilot to mentor
their classroom for a four-week educational program.55
Some leaders assume that hiring or promoting good, ethical managers will
automatically produce an ethical organizational climate. This ignores the fact that
an individual may have limited opportunity to enforce his or her own personal
ethics on management systems and informal decision-making that occurs in the
organization. The greatest influence on employee behavior is peers and coworkers.56
Many times, workers do not know what constitutes specific ethical violations such
as price fixing, deceptive advertising, consumer fraud, and copyright violations. The
more ethical the culture of the organization is perceived to be, the less likely it is
that unethical decision-making will occur. For example, FedEx maintains a strong
ethical culture and has woven its values and expectations throughout the company.
FedEx’s open-door policy specifies that employees may bring up any work issue or
problem with any manager in the organization.57
In the event that unethical decision-making does occur, businesses should
address it and seek to resolve the problem quickly. When this action does not
occur, businesses are vulnerable to misconduct. Over time, an organization’s
failure to monitor or manage its culture may foster questionable behavior.
Requirements of Ethical Leadership

Ethical leaders develop their skills through years of training, experience, and learn-
ing.58 In identifying what makes an effective leader, there is no clear consensus of
the exact skills needed. However, there are certain skills that seem to be common
to ethical organizational leaders. To be ethical organizational leaders, individuals
should model corporate values, place the organization’s own interests above their
own, understand their employees, develop tools for reporting, and recognize
the limitations of organizational rules and values.59 Additionally, ethical leaders
should never ignore issues of misconduct.
Ethical leaders do not live in a vacuum; they are constantly interacting with
others to encourage them to develop ethical leadership skills. Perhaps the best ethi-
cal leaders recognize their own limitations and establish strong support networks
within the organization to help them in the decision-making process. In so doing,
they motivate employees toward reaching their full potential and emphasize their
importance to the organization.60 They also establish incentives for those in the
organization who train new leaders.61 Developing effective ethical leaders should
be a never-ending process within an organization.
Archie Carroll developed a list of characteristics called the “7 Habits of Highly
Moral Leaders,” based on Stephen Covey’s The 7 Habits of Highly Effective
People.62 We have adapted Carroll’s work to develop “The 7 Habits of Strong
Ethical Leaders.”63 These characteristics include (1) having a strong personal char-
acter, (2) having a passion to do what is right, (3) being proactive, (4) considering
stakeholder interests, (5) modeling the organization’s values, (6) being transparent
and actively involved in organizational decision-making, and (7) being a competent

manager who takes a holistic view of the firm’s ethical culture. Ethical leadership
requires holistic thinking that is willing to take on the challenging issues that
organizations face every day. Strong ethical leaders have the knowledge and courage
to put together important information in order to make the most ethical decision.
Various stakeholder demands and conflicts make this a major challenge, but ethical
leaders are up to the task. Above all, ethical leaders abide by their principles. This
might even require the leader to leave the organization if he or she feels that the
culture is too unethical to change.
Additionally, effective ethical leaders are so passionate about the organization
and its success that they place the organizations’ interests above their own.64 It
also requires them to align employees behind a shared vision.65 Ethical leaders are
concerned with the legacy of their companies, desiring for the company’s success
to continue long after they are gone. For example, actor Paul Newman’s legacy
in the retail industry has continued more than a decade after his death. Newman
committed to and succeeded at giving all of the revenue from his company,
Newman’s Own, to charity. While companies cannot give away all of their revenue
as he did, placing importance on ethical allocation of funds and corporate social
responsibility (CSR) is vital for businesses. Newman’s company serves as a guide
for philanthropic and ethical business today.66
Ethical leaders must be proactive in anticipating, planning, and acting to avoid
potential ethical crises.67 They shoulder the important responsibility of developing
effective ethics programs to guide employees in their ethical decision-making.
Ethical leaders understand social needs and develop core practices of ethical
leadership. Former vice chairman Tom Mendoza of NetApp told managers to let
him know when employees were “doing something right.” Mendoza then called
the employees to thank them. He averaged approximately 10–20 personal “thank
you” calls per day.68 Recognizing employee accomplishments in promoting ethical
conduct is a great way to make employees feel appreciated and reinforce an ethical
organizational culture.
Finally, ethical leaders should be role models. If leaders do not model the
values that they advocate, then those values become little more than window dress-
ing. Behavioral scientist Brent Smith claims that leaders acting as role models are
the primary influence on individual ethical behavior. On the other hand, leaders
whose decisions go against the organization’s values signal to employees that their
ethical values are meaningless.69 Whole Foods is an example of a company that
strongly supports its core values. In addition to providing quality products, Whole
Foods establishes employee well-being through the creation of a transparent
workplace. To reduce the power gap between executives and employees, a salary
cap has been placed on executive compensation. Each Whole Foods store donates
at least 5 percent of profits to its communities.70 Table 7.6 displays the core values
of Whole Foods.
Table 7.6 The Core Values of Whole Foods

Sell the highest-quality natural and organic products.
Satisfy, delight, and nourish our customers.
Support team member happiness and excellence.
Create wealth through profits and growth.
Serve and support our global and local communities.
Practice and advance environmental stewardship.
Create ongoing win-win partnerships with our suppliers.
Promote the health of our stakeholders through healthy eating education.
Source: “Our Core Values,” Whole Foods Markets, https://www.wholefoodsmarket.com/mission-values/core-values
(accessed July 12, 2019).

Benefits of Ethical Leadership

Perhaps the most important influence of ethical leadership is its impact on
organizational culture.71 Because ethical leaders communicate and oversee the
implementation of an organization’s values, they make certain that employees are
familiar with core beliefs.72 Some may provide incentives for ethical conduct, such
as rewards for making ethical decisions. These incentives have a positive impact
on ethical conduct among employees.73 Teaching employees to value integrity is a
key component in creating an ethical organization.
Research has shown that ethical leadership tends to favor higher employee
satisfaction and commitment.74 Employees seem to like working for ethical
companies and are more likely to stay with ethical organizations.75 This saves the
firm money and leads to higher productivity. Employees at The Container Store
are provided with 263 hours of training, receive higher pay than at competing
stores, and are shown appreciation through events like We Love Our Employees
Day. This strong organizational culture has resulted in a turnover rate of
10 percent—compared to 100 percent for other retailers in the industry.76
In addition to employee satisfaction and productivity, ethical leadership
creates strong connections with stakeholders external to the organization. Studies
have revealed that customers are willing to pay higher prices for products from
companies they consider to be ethical.77 More than 90 percent of Millennials buy
more products from ethical companies than they do from companies perceived to
be unethical.78 A major factor in this purchasing pattern is trust. If consumers do
not trust the business, they are much less likely to buy products from that business.
Fortunately the Edelman Trust Barometer found that trust has increased toward
nongovernmental organizations (NGOs) and businesses among the informed
public and has remained neutral for the general population.79 Consumer trust for
businesses still has a long way to go after the latest recession, and organizations
that can establish trust are likely to receive a large and loyal customer following.
Ethical leadership also affects an organization’s long-term value. Evidence
shows that the ethical commitment of organizational members is positively
associated with the organization’s value on the stock market.80 This is because
reputation has a profound influence on whether an investor will even give money
to a company. Investors consider risk a major factor in their funding decisions,
and because corporate social responsibility (CSR) programs are negatively related
to long-term risks, ethical conduct is likely to improve reputation and consequently
lower the risks of investment.81 As already discussed in the previous chapters,
from a regulatory standpoint, organizations demonstrated as having strong ethics
programs are more likely to see reduced penalties if misconduct should happen.82
By creating strong relationships with a variety of stakeholders, ethical leaders are
able to develop major competitive advantages for their organizations. For example,
Coca-Cola engages with various stakeholders, including bottling partners, custom-
ers, the community, trade groups, and shareholders. In addition, the company is
active in the World Economic Forum and the United Nations Global Compact.83
Leadership Styles
Leadership styles affect not only how a leader leads but also how employees
accept and/or adhere to organizational norms and values.84 Clearly, leadership
styles that reinforce the development of organizational values are beneficial.
These styles of leadership affect the organization’s communication and oversight
of values, norms, and ethics codes.85 The challenge that leaders face is earning
employee trust. This trust is imperative if a leader hopes to guide employees into
ethical decision-making. Trustworthy leaders tend to be seen as ethical stewards.86
Employees often look to their organizational leaders to determine how to respond
to a situation, even when that response may be ethically questionable.

Effective ethical leadership requires

the leader to understand the organi-
zation’s vision and values, ethical
challenges, and risks involved in accom-
plishing their objectives. One of the big-
gest assumptions is that those who fail in
ethical leadership do not have an ethical
character. This is a fallacy. In reality,
there are a number of examples of people
implicated in misconduct who appeared
to have good character. For instance,
Rajat Gupta, who was convicted for
passing on insider trading tips, has been
Shutterstock/fizkes
recognized for his strong philanthropic

endeavors and exceptional kindness.87
Ethical leaders must learn from their
experiences and gain knowledge about
appropriate practices. They display trans-
parency in their leadership and have the ability to both understand current ethical
issues and anticipate future issues. These leaders often adopt a stakeholder orientation
approach to management. Peter Lynch, the former Fidelity manager, was so successful
with the company that he was able to retire at age 46, just 13 years after taking over
the Magellan Fund. He encouraged investors to become knowledgeable about their
investments, and his leadership benefited stakeholders immensely, with an annual
29 percent return on investment.88 It is also important to note that even the most ethi-
cal leaders are human; they will make ethical mistakes, but how they acknowledge
these mistakes is often what separates them from other leaders.
One important characteristic that many ethical leaders appear to possess is
emotional intelligence emotional intelligence, or the skills to manage themselves and their relationships
an important characteristic with others effectively. Emotionally intelligent leaders are characterized by self-
possessed by ethical leaders,
awareness, self-control, and relationship building. They see their efforts as achiev-
referring to the skills to manage
themselves and their relationships ing “something greater than themselves.”89 Warren Buffett and Howard Schultz
with others effectively are examples of emotionally intelligent leaders. These leaders are able to motivate
employees to support a common vision, making them feel that their efforts matter
in the successful operation of the organization.90 Because emotionally intelligent
leaders exhibit self-control and self-awareness, they are more proficient in tackling
stressful and challenging situations. Because of the impact of emotional intelligence
on the success of the organization, some employers have begun viewing emotional
intelligence as more important than IQ.91
Daniel Goleman examined leadership styles based upon emotional intelligence.
He came up with the following six styles:92
1. The coercive leader requires complete obedience and focuses on achieve-
ment, initiative, and self-control. This style can be highly effective during
times of crisis but tends to be detrimental to long-term performance.
2. The authoritative leader motivates employees to follow a shared vision,
embraces change, and creates a strongly positive performance climate.
3. The affiliative leader values people and their needs. This leader depends
upon friendship and trust to encourage flexibility and innovation.
4. The democratic leader values participation and teamwork to develop
collaborative decisions. This style focuses heavily on communication and
creating a positive work climate.
5. The pacesetting leader sets high standards of performance. This style works
well for achieving quick results from motivated, achievement-oriented
employees but can have negative results due to its stringent performance
standards.
6. The coaching leader creates a positive work climate by developing skills to

promote long-term success, delegating responsibility, and assigning challeng-
ing assignments.
Using Goleman’s research, Richard Boyatzis and Annie McKee came up with the
idea of a resonant leader. Resonant leaders are mindful of their emotions, believe
that goals can be achieved, and display a caring attitude toward other employees.
This leads to resonance within the organization, enhancing collaboration and the
ability of employees to work toward shared goals.93 Resonant leaders are highly
effective in creating an ethical corporate culture, as well as strong relationships
with employees.
The most successful leaders tend to adapt their styles based upon the situation.
Leadership style relies heavily on how the leader measures risks as well as his or
her desire to attain a positive corporate culture. Like other leadership character-
istics, many emotional intelligence skills can be learned. Starbucks places great
importance on emotional intelligence. New employees at the company undergo
a training program called the “Latte Method” to learn how to detect negative
emotions from their customers and the best ways of responding to them.94
Two dominant leadership styles in an organization are transactional and trans-
formational. Transactional leadership attempts to create employee satisfaction transactional leadership
through negotiating for levels of performance or “bartering” for desired behaviors. a leadership style that attempts
to create employee satisfaction
Transformational leadership, in contrast, tries to raise the level of commitment of
through negotiating for levels of
employees and creates greater trust and motivation.95 Transformational leaders performance or “bartering” for
attempt to promote activities and behavior through a shared vision and com- desired behaviors
mon learning experiences. Both transformational and transactional leaders can
positively influence an organizational climate. transformational leadership
a leadership style that tries to
Transformational leaders communicate a sense of mission, stimulate new raise the level of commitment of
ways of thinking, and enhance as well as generate new learning experiences. employees and creates greater
Transformational leadership considers the employees’ needs and aspirations in trust and motivation
conjunction with organizational needs. Therefore, transformational leaders have
a stronger influence on coworker support and the building of an ethical culture
than transactional leaders. Transformational leaders also build a commitment to
and respect for values that provide agreement on how to deal with ethical issues.
Transformational ethical leadership is best suited for higher levels of ethical com-
mitment among employees and strong stakeholder support for an ethical climate.
A number of industry trade associations, such as the American Institute
of Certified Public Accountants, Defense Industry Initiative on Business Ethics
and Conduct, and the Ethics and Compliance Officer Association, are assisting
companies in providing transformational leadership.96 Research suggests that
organizations with transformational leadership are more likely to be involved in
CSR activities.97
Transactional leadership focuses on ensuring that the required conduct and
procedures are implemented. The “barter” aspects of negotiations to achieve the
desired outcomes result in a dynamic relationship between lenders and employees
where reactions, conflicts, and crises influence the relationship more than ethical
concerns. Transactional leaders produce employees who achieve a negotiated level
of required ethical performance or compliance. So long as employees and leaders
find the exchange mutually rewarding, the compliance relationship is likely to be
successful. However, transactional leadership is best suited to quickly changing
ethical climates or ethical problems or issues. After a major leadership scandal at
Tyco resulted in the conviction of CEO Dennis Kozlowski and the removal of its
board members, the need for quick action to pull up the struggling company was
apparent. Without a quick turnaround—both in leadership and in the company’s
ethical conduct—Tyco may not have survived. Eric Pillmore was hired to be the
senior vice president of corporate governance at Tyco. Pillmore had to institute
ethics and corporate governance decisions quickly to aid in the turnaround. He

helmed a new ethics program that changed leadership policies and gave him direct
communications with the board of directors.98
Other leadership experts are classifying leaders into a new category based on
how they model organizational values. Authentic leadership includes individuals
who are passionate about the organization, display corporate values in their daily
behavior at work, and establish enduring relationships with stakeholders. Kim
Jordan, the former CEO of craft brewery New Belgium Brewing (NBB), is an
example of an authentic leader. She constantly attempts to embody NBB’s purpose
statement, to “manifest our love and talent by crafting our customers’ favorite
brands and proving business can be a force for good.”99 Jordan has also success-
fully aligned employees at NBB toward a shared goal of providing high-quality
products, improving sustainability, and embracing a stakeholder orientation.
Authentic leadership can also be learned. In fact, authentic leaders often learn
by observing the successful leadership habits of other strong leaders.100 Authentic
leaders possess principle-centered power, meaning that they can handle difficult
situations and are extremely dedicated to their organizations.101 They also exhibit
organizational core values and incorporate these values into daily operations. This
type of leadership should be the aim for all ethical leaders in an organization.
Leader-Follower Relationships
Communication is the key to establishing strong relationships between organi-
leader–follower congruence zational leaders and employees. Leader–follower congruence takes place when
when leaders and their followers leaders and their followers (i.e., employees) share the same organizational vision,
(i.e., employees) share the same
ethical expectations, and objectives. It is important for ethical leaders to get
organizational vision, ethical
expectations, and objectives employees to adopt shared organizational goals and values. If employees feel that
the organizational leaders are unapproachable, this will create a major obstacle to
the achievement of the organization’s vision and objectives.102
On the other hand, leaders may take the opposite approach by micromanaging
employees. Managing employees too closely will make them feel stifled and give
them the feeling that the management does not trust them. Micromanagement in
organizations is associated with lower morale, decreased productivity, and greater
tendency to leave the company.103 These disadvantages can be avoided when ethi-
cal leaders use communication to develop respectful relationships with employees.
These more positive relationships tend to increase job satisfaction and employee
commitment.104
Because organizational leaders are often managers or executives, they may
not work very much with lower-level employees. This could create a sense of
isolation in which the leader feels cut off from other employees. The more isolated
organizational leaders are, the less connected they will be with employees—and
the less likely they will be to detect organizational misconduct. Instead, ethical
leaders must interact frequently with employees. This takes the form of not only
speaking with them, but also listening to them and encouraging them to provide
feedback. Often employees tend to want to avoid discussing ethical issues in
the workplace. To get past this hesitation, ethical leaders must proactively
communicate the firm’s ethical values and develop a transparent workplace, in
which employees can feel comfortable expressing concerns.105 We discuss com-
munication in more detail in the next section. When organizational leaders and
employees are on the same page, they are able to advance the organization’s goals
and culture more effectively.
Ethical Leadership Communication

The development of an ethical culture is impossible without strong communication
in the organization. If an organizational leader communicates through highly
controlling speech that tolerates little criticism, employees will be reluctant to

Table 7.7 Communication Skills for Becoming an Ethical Leader

Tell employees the truth about the leader’s conduct.
Listen to employee concerns about ethical issues they observe.
Engage in direct personal communication about appropriate conduct.
Use coaching to provide expectations about behavior.
Include performance feedback on ethical evaluations.
Be sure that your feedback on ethical conduct is correct.
Always ask for feedback from employees.
Continue to develop your leadership skills.
bring up any ethical issues or problems.106 However, ethical leaders understand the
importance of frequent communication and interaction with employees. Table 7.7
lists the communication skills needed to become better leaders.
An ethical culture must contain both transparency and strong mechanisms for
reporting. Ethical leaders in the organization must create a transparent environment
where ethics is frequently discussed. This helps remove the idea that discussing issues
is a taboo topic. Reporting occurs when organizational leaders and their employees
communicate. Most of the time, employees report to the leaders. However, ethical
leaders should also be responsible for reporting crucial information to employees to
promote an ethical workplace and advance organizational goals.
Reporting can be either formal or informal. Formal reports occur in contexts
such as conferences and meetings. An important tool for formal reporting is an
anonymous ethics hotline that employees can use to report concerns, as discussed
previously. Informal reporting is no less important. It happens when ethical leaders
interact with their employees to keep them apprised of organizational policies,
expectations, and decisions.107 Informal discussions are incredibly important in
identifying ethical risk areas, as concerns are frequently expressed through casual
conversations. Ethical leaders must recognize the importance of both formal and
informal communication mechanisms.
Just as individuals can learn leadership skills, they can learn how to com-
municate effectively. Effective communication skills are often developed and
honed through training and experience. Organizational communication necessary
for the establishment of an ethical culture includes the following: interpersonal
communication, small group communication, nonverbal communication, and
listening. Table 7.8 summarizes the four categories of communication.
Interpersonal Communication Interpersonal communication is the most common

form of communication. It occurs when two or more people communicate with
one other.108 A meeting between an employee and her supervisor is an example of
interpersonal communication. Interpersonal communication (versus small group
Table 7.8 Four Categories of Communication

Communication Description
Interpersonal When two or more people communicate with one another
Small group Communication that occurs in small groups
Nonverbal Expressed through body language, actions, expressions, tone
of voice, proximity, volume, rhythm, or any other way that is not
oral or written
Listening Actively paying attention to another person’s verbal or
nonverbal behavior

communication) is more intimate because fewer people are involved. This type
of communication should occur often within an organization because it gives
ethical leaders a greater chance to uncover ethical risk areas, create better employee
relationships, and encourage feedback about the organization’s ethical climate. For
interpersonal communication to be effective, ethical leaders must show the employee
respect and dignity in order to maintain a positive relationship—even during
disciplinary procedures. Respecting an employee means that the leader cares about
what the employee has to say. On the other hand, this does not mean that ethical
leaders should ignore or compromise on unethical employee conduct. It is less about
placating an employee and more about showing him or her dignity as a person.
It is not uncommon for employees to feel intimidated by their superiors due
to power differences.109 An ethical leader can use communication to reassure
employees, as well as balance the interests of all relevant stakeholders.110 A good
way to reduce perceived power distances is for the ethical leader to be open and
respectful to the employee instead of being judgmental. This approach helps make
employees feel more comfortable about bringing up ethical concerns.111
Communication is not always black-and-white. Like many ethical issues,
there are times when an ethical leader will have different options on what to com-
municate, with some being more or less ethical than others. For instance, lying to
a customer is clearly unacceptable, but white lies that do not damage stakeholders
(such as complimenting an employee on a haircut despite the fact that it looks
awful) may be permissible in some instances. Additionally, as the Rajat Gupta
example from earlier demonstrates, communication that is not thought out care-
fully can have serious consequences. For Gupta, giving his friend Raj Rajaratnam
from the Galleon Group nonpublic information directly violated the law. Ethical
leaders will encounter numerous situations in which they must consider the ethical
consequences of communication with stakeholders. Leaders who strongly support
ethical interpersonal communication can empower employees while promoting the
organization’s ethical objectives.
Small Group Communication Small group communication is becoming increas-

ingly important to ethical decision-making.112 Because ethical decision-making
does not occur in a silo, small group communication is often necessary in order
for people to investigate and select the most ethical course of action. Small group
communication has an advantage over interpersonal communication because it
increases collaboration, explores more options, and allows employees to participate
more in ethical decision-making. Small groups generate a variety of perspectives
on a particular issue, enabling ethical leaders to look at an issue from a number of
different angles. This diversity of perspectives can lead to better solutions than if
the leader had tried to arrive at the outcome individually.
Small groups also help to create checks and balances through accountability.
An effective team holds individual members accountable for their contributions.
For effective small group communication to take place, all small group members
should feel comfortable with contributing input, understand the organization’s
ethical values, be trained in ethical communication, know how to listen to the
input of other members, try to understand the other person’s point of view, dem-
onstrate a readiness to seek common agreement, investigate different alternatives,
and commit to choosing the most ethical solution.113
However, ethical leaders should also recognize the limitations of small group
communication. Sometimes routine group decision-making can cause the group to
overlook possibilities. It is also not uncommon for teams to experience groupthink
group polarization or group polarization. Group polarization is the tendency to decide on a more
the tendency for a team to decide extreme solution than an individual might choose on his or her own. A small group,
on a more extreme solution than
for instance, might choose to pursue a riskier decision than normal.114 Groupthink
an individual might choose on
their own is when group members feel pressured to conform to the consensus, even if they
personally disagree with it. This could result in a less-than-optimal ethical decision.

Nonverbal Communication Nonverbal communication is a dimension of ethical

communication that is just as important as spoken forms. It is expressed through
body language, actions, expressions, tone of voice, proximity, volume, rhythm, or
any other way that is not oral or written. Nonverbal communication is important
because it provides clues to an individual’s emotional state.115 Paralanguage, which
includes the way we talk, can indicate whether a person is angry, sad, happy, or
feeling other emotions. Often nonverbal communication is more trustworthy than
spoken communication. For instance, although a person might say one thing,
if his or her body language communicates something else, then the nonverbal
communication is often a better indicator of what the person really means. This
is because nonverbal communication is harder to control than the spoken word,
as much of it occurs in the subconscious. One study found that up to 70 percent
of communication is nonverbal. This is seen mostly with emotional content and
works in tandem with verbal communication.116
Nonverbal communication helps to clarify ambiguous or confusing language,
alerting the communicator about whether the recipient understands the message.
Because nonverbal communication provides important insights into a person’s
feelings, ethical leaders should pay careful attention to their employees’ nonverbal
cues. Sometimes permission to engage in unethical activities is granted by an
expression or nodding of the head. They should also be careful to monitor their
own nonverbal cues so that they do not give the wrong impression to employees.
Listening Ethical communication is not limited to speaking or communicating

nonverbally. It also involves actively listening to the other person’s verbal or non-
verbal behavior.117 Communication between stakeholders cannot occur without
listening. Organizational leaders who fail to listen can overlook ethical issues
and fail to stop them before they snowball into a crisis. In fact, many employees
have cited the failure to listen as one of their top complaints in the workplace, so
listening to employee concerns is crucial in advancing an ethical organizational
culture.118 Without listening, ethical leaders cannot learn important information
from employee reports necessary in understanding the ethical climate of the firm.
On the other hand, listening to employees increases morale, as well as their
willingness to participate in the ethical decision-making process. Effective listening
skills create a sense of credibility and trustworthiness.119 This supports a transparent
organizational culture in which ethical concerns can be discussed freely. Because
ethical leaders act as role models, their ability to listen encourages employees to do
the same, further promoting the acceptance of the organization’s ethical values.
Summary
A strategic approach to ethical decisions will contribute to both business and society.
To be socially responsible and promote legal and ethical conduct, an organization
should develop an organizational ethics program by establishing, communicating,
and monitoring ethical values and legal requirements that characterize its history,
culture, industry, and operating environment. Most companies begin the process
of establishing an organizational ethics program by developing a code of conduct,
a formal statement that describes what the organization expects of its employees.
A code should reflect senior management’s desire for organizational compliance
with values, rules, and policies that support an ethical climate. Codes of conduct
help employees and managers address ethical dilemmas by prescribing or limiting
specific activities.
Organizational ethics programs must be overseen by high-ranking people
reputed for their legal and ethical standards. Ethics and compliance officers are
responsible for assessing the needs and risks to be addressed in an organization-
wide ethics program, developing and distributing a code of conduct, conducting

training programs for employees, establishing and maintaining a confidential

service to answer questions about ethical issues, making sure that the company
is in compliance with government regulations, monitoring and auditing ethical
conduct, taking action on possible violations of the organization’s code, and
reviewing and updating the code. Instituting a training program and a system to
communicate and educate employees about the firm’s ethical standards is a major
step in developing an effective ethics program. The Ethics & Compliance Initiative
(ECI) is a nonprofit organization that helps individuals with their businesses and
understanding the best practices for keeping their company at the highest level
of integrity. It also helps organizations by sharing strategies to maintain integrity
and develop an in-house ethics program, and it performs independent research on
workplace integrity and compliance practices.
Compliance involves comparing each employee’s ethical performance with
the organization’s ethical standards. Ethics programs can be measured through
employee observation, internal audits, reporting systems, and investigations. An
internal system for reporting misconduct is especially useful. Many companies
set up ethics assistance lines, also known as hotlines, to provide support and give
employees the opportunity to ask questions or report concerns. Employees who
conclude that they cannot discuss current or potential unethical activities with
coworkers or superiors and hence go outside the organization for help are known
as whistleblowers.
Consistent enforcement and necessary disciplinary action are essential to a
functional ethics and compliance program. Continuous improvement of the ethics
program is necessary. Ethical leadership and a strong corporate culture in support
of ethical behavior are required to implement an effective organizational ethics
program.
Having ethical leadership is particularly important to the organization’s
ethical culture. There are five power bases from which one person may influence
another: (1) reward power, (2) coercive power, (3) legitimate power, (4) expert
power, and (5) referent power. These five bases of power can be used to motivate
individuals to behave either ethically or unethically. The most effective leaders
are able to adapt their leadership styles—reward, coercive, legitimate, expert,
and referent—to the type of situation. These styles also have a major impact on
the organization’s corporate culture. Emotional intelligence is also an important
component of ethical leadership.
There are many requirements for ethical leadership, including a passion for
doing good, being competent and proactive, taking a holistic view of the ethics
program, considering stakeholder interests, and acting as a role model. Ethical
leadership leads to several benefits for the organization, including higher employee
satisfaction and productivity as well as the promotion of ethical values. Leaders
have different methods of leading. These methods, including transactional, trans-
formational, and authentic, have different impacts on the organization’s ethical
culture. To promote an ethical culture, it is necessary for leaders to have strong
positive relationships with the employees.
It is important for ethical leaders to get employees to adopt shared organiza-
tional goals and values (a concept known as leader-follower congruence). A major
way of maintaining these relationships is through communication. Ethical leaders
should master interpersonal, small group, and nonverbal communication, as well
as listening. Being an effective communicator helps the ethical leader to develop
positive employee relationships, uncover ethical issues, address employee concerns,
and include employees in the ethical decision-making process.

Trust Us…Good Ethics is Good Business

Issue: Are companies responsible for creating a strong so many directions. The greatest fear in this year’s study is
ethical culture? the fear of automation, with two-thirds of workers afraid of
being replaced by machines. With artificial intelligence (AI)–
Trust, a word that is thrown around quite a bit, is often enhanced robotics and AI affecting many organizational
coupled in opinion data with its opposite, distrust. Trust is processes and procedures, the uncertainty and fear of
the foundation of ethics and the glue that holds relation- change is looming. By 2025, AI will perform or assist in
ships together, both personal and with employers. That half of the jobs in the workplace, versus 30 percent today.
fact emerged loud and clear in the latest Edelman Trust Back to the original premise that “good ethics is good
Barometer, with 75 percent of employees indicating that business,” the Edelman study showed that highly trusted
their employer is their most trusted institution (above companies (those with ability, integrity, dependability,
NGOs, business, government, and media). The Edelman and purpose) outperformed their sector’s stock perfor-
Trust Barometer is an annual survey of more than 33,000 mance by 5 percent. This supports Ethisphere Magazine’s
respondents evaluating trust toward various institutions. assessment of the performance of the World’s Most Ethical
Increasingly, the data shows that companies need to Companies, showing that over three years, the companies
take control and manage both their profitability and their outperformed the U.S. Large Cap Index by nearly 5
support of economic and social causes in the communities percent. One reason for this is that consumers want to
where they operate. purchase from firms that they trust. If trust is broken, then
When there is increased alignment of values they may stop purchasing and find another firm they do
between employers and employees, employees become trust. Research indicates that the evaluation of a firm’s
bigger advocates, are more loyal, operate with greater business ethics has a direct impact on brand attitudes.
engagement, and maintain a stronger level of commitment. Corporate social responsibility also has a positive impact
This can manifest itself in organizational outcomes that go on brand attitudes, but unethical conduct can erode trust
toward the bottom line, including lower turnover, greater in the brand, even if a company takes part in positive CSR
productivity, and increased customer satisfaction. This is activities. With so much more information available on
not an unconditional relationship, however. Employees company behavior, a good reputation may get a customer
expect that their trust is earned and that their employers to buy a product, but, as the Edelman study shows, it will
recognize and then address societal problems. Finally, the take ongoing trust to maintain the relationship (67 percent
benefits of trust should help create a strong ethical culture. of the respondents agreed with that sentiment). The
Other interesting findings from the Edelman Trust mistrust that employees have of the wider society has cre-
Barometer include the fact that women are less trusting ated a real opportunity for companies, their leaders, and
than men, with women’s trust of business institutions 7 impassioned employees to take control of their community
points lower globally and 15 points lower in the United and societal impact and “do good while doing well.”
States. Speculation includes the fallout of the sexual
harassment cases that have been so visible in recent There Are Two Sides to Every Issue
years. In addition, pay inequity and glass ceilings with 1. Companies are responsible for creating a strong ethical
less leadership roles and opportunities may contribute to culture for their employees.
women being less trusting of business institutions. There 2. More important than culture is the alignment of indi-
is also a prevailing fear of the change that is coming from vidual values between employees and managers.
Sources: Edelman, “2019 Edelman Trust Barometer,” January 20, 2019, https://www.edelman.com/trust-barometer (accessed June 22, 2019); Patrick
Watson, “Machines Will Do Half Our Work by 2025,” Forbes, September 27, 2018; “Leading Practices and Trends from the 2018 World’s Most Ethical
Companies,” An Ethisphere Research Report, 2018. https://bela.ethisphere.com/wp-content/uploads/leading-practices-and-trends-from-the-2018-wmec.
pdf (accessed February 14, 2019); O. C. Ferrell, Dana Harrison, Linda Ferrell, and Joe Hair, “Business Ethics, Corporate Social Responsibility, and Brand
Attitudes: An Exploratory Study,” Journal of Business Research, 95 (February 2019): 491–501.

Key Terms
codes of conduct (p. 183) ethics officer (p. 186) organizational ethics and
compliance officers (p. 186) group polarization (p. 206) compliance programs (p. 181)
core practices (p. 193) leader–follower congruence transactional leadership (p. 203)
emotional intelligence (p. 202) (p. 204) transformational leadership (p. 203)
ethics codes (p. 182) mandated boundaries (p. 194) voluntary practices (p. 193)
1. How can an organization be socially responsible and 6. What role does leadership play in influencing
promote legal and ethical conduct? organizational behavior?
2. What are the elements that should be included in a 7. Describe some of the skills needed to be an ethical
strong ethics program? leader.
3. What is a code of conduct, and how can a code be 8. List some of the benefits of ethical leadership.
communicated effectively to employees? 9. Compare transformational leadership and
4. How and why are a training program and a transactional leadership.
communications system important in developing an 10. Describe the four types of communication.
effective ethics program?
5. What does ethical compliance involve, and how can
it be measured?
Visit the website of the Ethics and Compliance Officer comprise the ECOA’s most recent programs, publications,
Association (ECOA; http://www.theecoa.org). What is the and research. What trends do you find? What topics seem
association’s current mission and membership composition? most important to ethics officers today?
Review the website to determine the issues and concerns that
Upcharging the Government: What Would You Do?

Robert Rubine flipped through his messages and wondered
?
All employees are required to sign Medic-All’s code of
which call he should return first. It was only 3:30 p.m., ethics each year and attend an ethics training session.
but he felt as though he had been through a week’s worth Despite the importance of the inside sales force, Medic-
of decisions and worries. Mondays were normally busy, All has experienced a good deal of turnover in its sales
but this one was anything but normal. Robert’s employer, management team. A new lead manager was hired about
Medic-All, is in the business of selling a wide array of four months ago. Robert oversees the sales division in his
medical supplies and equipment. The company’s products role as vice president of marketing and operations.
range from relatively inexpensive items, like bandages, Late Friday afternoon last week, Robert received
gloves, and syringes, to more costly items, such as micro- word that two employees in the company’s headquarters
scopes, incubators, and examination tables. Although the were selling products to the government at a higher price
product line is broad, it represents the “basics” required than they were selling them to other organizations. Both
in most healthcare settings. Medic-All utilizes an inside employees have been on the job for over two years and
sales force to market its products to private hospitals, elder seem to be good performers. A few of their sales colleagues
care facilities, government healthcare institutions, and have complained to the lead sales manager about the high
other similar organizations. The company employs 275 quarterly commissions that the two employees recently
people and is considered a small business under government received. They insinuated that these commissions were
rules. earned unfairly, by charging government-run hospitals
The inside sales force has the authority to negotiate on artificially high prices. A cursory review of their accounts
price, which works well in the highly competitive market showed that, in many instances, the government was paying
of medical supplies and equipment. The salespeople are more than other organizations. Under procurement rules,
compensated primarily on a commission basis. The sales the government is supposed to pay a fair price—one that
force and other employees receive legal training annually. other cost-conscious customers would pay. When asked

about the situation, the two employees said that the price who committed acts without the approval of the manage-
offered was based on volume, so the pricing always varied ment to increase their commissions. They also discussed
from customer to customer. many issues and scenarios, such as how to deal with the
Robert took the information to his boss, the president. two salespeople, whether to continue the investigation and
The two of them discussed how these employees received inform the government, what strategies to put in place for
legal and ethics training, signed the company code of preventing similar problems in the future, how to protect
ethics, and should have been knowledgeable about the rules the firm’s good name, whether the company could face
related to government procurement. The president said that suspension from lucrative government business, and others.
these two salespeople sounded like “rogue employees,” What would you do?

CHAPTER
8 Employee Relations

The Container Store: An Employee-Centric Retailer
To early skeptics, The Container Store seemed like • The best selection, service, and price. We
an odd retail concept. Who would choose to special- work to offer a well-edited, carefully curated
ize in selling containers, shelving, and home storage collection of 10,000 products, expert advice
items, let alone make a profit from it? Yet with $800 and service that customers delight in, and
million in annual sales, The Container Store manages competitive prices.
to do both. The Container Store is a storage and • Intuition does not come to an unprepared
organization retailer that sells over 10,000 products mind. You need to train it before it hap-
to meet consumers’ needs, from desktop organizers pens. Our extensive training, coupled with our
to laundry racks and closet solutions. employees’ life experiences, allows them to
When cofounders Kip Tindell and Garrett Boone intuitively solve all of our customers’ storage
started The Container Store in 1978, their vision was and organization challenges.
to take a “solutions-based approach to retail” by • Serve the man in the desert. Imagine a man
selling products that would save consumers time lost in the desert. He stumbles across an oasis
and space. Throughout the years, The Container where he’s offered a glass of water because
Store gained widespread notoriety, not only for its he must be thirsty. But if you stop to think
eclectic assortment of goods, but also for its unique about what he’s just been through and what his
and compelling corporate culture. Perhaps most needs really are, you know that he needs more
strikingly, the retailer views shareholders as less than just water. He needs food, a comfortable
important stakeholders than customers and employ- place to sleep, and much, much more.
ees. Such a strong emphasis on corporate culture • Air of excitement. Three steps in the door and
over profits might appear risky, as every business you can tell whether or not a store has it.
requires profits—and the goodwill of shareholders
and investors—to survive. However, rather than dam- These principles demonstrate the importance of
aging The Container Store’s bottom line, its culture both customer service and employee engagement
has caused the company to thrive. Six principles at The Container Store. The retailer’s founders were
serve as the foundation of the retailer’s approach: determined to create a work environment where
employees can feel valued and appreciated. And
• One great person equals three good people. their efforts have met with success. The Container
Shutterstock/Anakumka
In terms of business productivity, one great Store has been on Fortune’s “100 Best Companies
person is equal to three good people. to Work For” for more than nineteen consecutive
• Communication IS leadership. Simply put, we years. Like most retailers, the company has experi-
want every single employee in our company to enced ups and downs in its 40-year history; recently,
know absolutely everything. The Container Store slipped out of the list of top
• Fill the other guy’s basket to the brim. Making places to work. Is this a temporary glitch in their
money then becomes an easy proposition. “culture of care,” or have other companies simply
Business is not a zero-sum game. Someone made more strides toward improving employee
doesn’t have to lose for someone else to win. relations, thus increasing the standard?1
Chapter Objectives
●● Discuss employees as stakeholders
●● Examine the economic, legal, ethical, and philanthropic responsibilities related to
employees
●● Describe an employer of choice and that employer’s relationship to social responsibility
213
T he Container Store illustrates the extent to which some firms consider

the needs, wants, and characteristics of employees and other stake-
holders in designing various business processes and practices. Although
it is widely understood that employees are of great importance, beliefs about the
extent and types of responsibilities that organizations should assume toward
employees are likely to vary. For example, some managers are primarily concerned
with economic and legal responsibilities, whereas proponents of the stakeholder
interaction model discussed in Chapter 2 advocate for a broader perspective. As
this chapter will show, a delicate balance of power, responsibility, and account-
ability exists in the relationships a company develops with its employees.
Because employee stakeholders are so important to the success of any
company, this chapter is devoted to the employer-employee relationship. We
explore the many issues related to the social responsibilities that employers have to
their employees, including the employee-employer contract, workforce reduction,
wages and benefits, labor unions, health and safety, equal opportunity, sexual
harassment, whistleblowing, diversity, and work/life balance. Along the way, we
discuss a number of significant laws that affect companies’ human resources (HR)
programs. Finally, we look at the concept of employer of choice and what it takes
to earn that reputation and distinction.
Employee Stakeholders
Think for a minute about the first job or volunteer position you held. What infor-
mation were you given about the organization’s strategic direction? How were you
managed and treated by supervisors? Did you feel empowered to make decisions?
How much training did you receive? The answers to these questions may reveal the
types of responsibilities that employers have toward employees. If you worked in a
restaurant, for example, training should have covered safety, cleanliness, and other
health issues mandated by law. If you volunteered at a hospital, you may have
learned about the ethical and economic considerations in providing healthcare for
the uninsured or poor and the philanthropic efforts used to support the hospital
financially. Although such issues may have seemed subtle, or even unimportant, at
the time, they are related to the responsibilities that employees, government, and
other stakeholders expect of employers.
Responsibilities to Employees
In her book The Working Life: The Promise and Betrayal of Modern Work,
business professor Joanne B. Ciulla writes about the different types of work, the
history of work, the value of work to a person’s self-concept, the relationship
between work and freedom, and as the title implies, the rewards and pitfalls that
exist in the employee-employer relationship. Ciulla contends that two common
phrases—“Get a job!” and “Get a life!”—are antithetical in today’s society,
meaning they seem diametrically opposed goals or values.2 For the ancient Greeks,
work was seen as the gods’ way of punishing humans. Centuries later, Benedictine
monks, who built farms, church abbeys, and villages, were considered the lowest
order of monks because they labored. By the eighteenth century, the Protestant
work ethic had emerged to imply that work was a method for discovering and
creating a person.3 Today, psychologists, families, and friends lament how work
has become the primary source of many individuals’ status, fulfillment, and
happiness. Critics point to the ways in which business influences the personal
choices that individuals make, not only as consumers, but as employees. As with

Chapter 8 Employee Relations 215
the complicated history of work, the responsibilities, obligations, and expectations

between employees and employers are also fraught with challenges, debates,
and opportunities. In this section, we review the four levels of corporate social
responsibility (CSR) as they relate to employees. Although we focus primarily on
the responsibilities of employers to employees, we also acknowledge the role that
employees have in achieving strategic social responsibility.
Economic Issues
The significance of the economic realm of employment is evident in the story of
Malden Mills Industries, a company established in 1906 and credited with invent-
ing synthetic fleece in 1981. In 1995, just a few weeks before the winter holidays,
the factory and office space at Malden Mills burned to the ground, injuring many
workers. In an unusual move, the company’s CEO, Aaron Feuerstein, paid full
wages, year-end bonuses, and benefits to employees while the buildings were
reconstructed. HR managers set up a temporary job-training center, collected
holiday gifts for employees’ children, and worked with community agencies to
support employees and their families.4 When economic factors forced Malden
Mills through several employee layoffs in the late 1990s, employees were offered
jobs at another plant and received career transition assistance. Feuerstein believed
in an unwritten contract that considers the economic prospects of both employer
and employees.
Several years later, Malden Mills filed for bankruptcy protection. The
company’s assets were sold and the company name was changed to Polartec,
LLC. Polartec started with the original synthetic fleece developed by Malden and
today offers 300 different fabrics. Customers include the U.S. military, L. L. Bean,
Patagonia, Jack Wolfskin, and other apparel brands around the world. While
Feuerstein is no longer at the company, his product inventions and commitment
to social responsibility continue to exist at Polartec, now a leader in sustainable
engineering and manufacturing.5
Employee-Employer Contract As discussed in Chapter 1, the recent history of

social responsibility has brought many changes to bear on stakeholder relation-
ships. One of the more dramatic shifts has been in the “contract” and mutual
understanding that exist between employee and employer. By the beginning of the
twenty-first century, many companies had to learn and accept new rules for recruit-
ing, retaining, and compensating employees. For example, although employers held
the position of power for many years, the new century brought record employment
rates and the tightest job market in years. Huge salaries, signing bonuses, multiple
offers, and flexible, not seniority-based, compensation plans became commonplace
throughout the late 1990s. However, the first decade of the 2000s reversed this
trend. Business scandals in the early 2000s, the World Trade Center attacks on
September 11, 2001, and the Great Recession of 2008–2009 brought a decline
in lucrative employment opportunities and forced many firms to implement
layoffs and other cost-cutting measures. At one point, the unemployment rate, unemployment rate
which is the percentage of the available labor force that is currently unemployed, the percentage of the available
labor force that is currently
in the United States reached 10 percent. Pay raises, healthcare benefits, mental
unemployed
health coverage, retirement funding, paid maternity leave, and other benefits were
reduced, or costs were shifted to employees.6
Bolstered by job growth, the U.S. economy rebounded, and by 2019, the
U.S. unemployment rate was less than 4 percent. From a statistical perspective, a full employment
very low unemployment rate in a growing economy is sometimes considered full occurs when the available
labor force is fully utilized and
employment because of sampling error and related concerns. Full employment employers have difficulty finding
occurs when the available labor force is fully utilized and employers have difficulty employees to fill available
finding employees to fill available positions. From a psychological perspective, positions

low unemployment rates generally make it easier for employees to change jobs
and employers, seek higher wages and new benefits, and otherwise exert more
stakeholder power in the employment relationship.
Regardless of the economy, employing organization, or salary and perks
psychological contract of a specific position, a psychological contract exists between an employee and
largely unwritten, it includes employer. This contract is largely unwritten and includes the beliefs, perceptions,
beliefs, perceptions,
expectations, and obligations
expectations, and obligations that make up the agreement between individuals
that make up the agreement and the organizations that employ them.7 Details of the contract develop through
between individuals and the communications, via interactions with managers and coworkers, and through
organizations that employ them perceptions of the corporate culture often formed by watching management
and leadership. These interactions are especially important for new employees,
who are trying to make sense of their new roles within the context of their prior
beliefs and experiences.8 New employee orientation, along with ongoing training,
performance evaluation discussions, internal newsletters, and company-sponsored
social events, are important mechanisms for introducing and communicating the
psychological contract.
This contract, though informal, has a significant influence on the way
employees act. When promises and expectations are not met, a psychological
contract breach occurs, and employees may become less loyal, less trusting, inat-
tentive to work, or otherwise dissatisfied with their employment situation.9 On
the other hand, when employers present information in a credible, competent, and
trustworthy manner, employees are more likely to be supportive of and committed
to the organization. Therefore, employers and employees are the two groups that
contribute to the development, maintenance, and evolution of the psychological
contract at work. Table 8.1 provides an overview of what is needed for employee
commitment to the firm and employer promises to the employee.
An employee’s perception of how well employer promises are kept provides
an ongoing psychological assessment of the employment relationship, including
whether the employee will choose to leave the organization, recommend it to
others, or increase commitment to the employer. Recent research has revealed that
the psychological contract is dynamic over the lifetime of an employment relation-
ship. Steps in the dynamic process include creation, maintenance, renegotiation,
and repair. Like other relationships, intentional maintenance is important, and
there may be times when perceived violations of trust, miscommunication, goal
incongruency, and other disruptive situations create the need for reconciliation
and repair. In the latter cases, the employer’s timeliness and responsiveness
to employee concerns is one of the main predictors of the
relationship’s health in the future. Experienced managers
Table 8.1 The Psychological Contract Between
maintain open and transparent communication, so that issues
Employee and Employer
are discussed and resolved before a serious breach in the
Employee Commitment Employer Promises psychological contract occurs.10 The promises, or induce-
Loyalty to the company Respect from ments, made by the organization are valuable to nearly all
management employees, but one study of over 5,000 employees indicates
Teamwork and Training opportunities this rank order for their importance to employees: (1) social
cooperation atmosphere, (2) career development opportunities, (3) job
Compliance with policies Opportunity to advance content, (4) work/life balance, and (5) financial rewards.
Ethical leadership and Adequate benefits
This same sample ranked the organizational fulfillment of
behavior these promises as: (1) job content, (2) social atmosphere,
Protection of company Fairness in work
(3) work/life balance, (4) career development opportunities, and
resources assignments (5) financial rewards. Based on these results, it is clear that
career development opportunities deserve more attention from
Volunteering to address Ethical culture
challenges managers to strengthen the psychological contract and pro-
vide incentives for employee retention. Organizations that are
Solving problems Financial rewards
independently
able to implement their key promises so that employees view
them as fulfilled reap rewards in terms of increased employee
Trust and confidentiality Work/life balance
loyalty and decreased intentions to leave and/or search for a

Table 8.2 Measuring Employee Engagement: Say, Stay, Strive

If they Say positive things about their organization and act as advocates
If they intend to Stay at their organization for a long time
If they are motivated to Strive to give their best efforts to help the organization succeed
Source: AON, “2018 Trends in Global Employee Engagement,” http://images.transcontinentalmedia.com/LAF/lacom/
Aon_2018_Trends_In_Global_Employee_Engagement.pdf (accessed November 19, 2019).
new employer.11 Employee engagement is the connection that employees have employee engagement
with their employers that influences behavior, effort, and commitment. Strong the connection that employees
have with their employers that
employee engagement is revealed through positive interactions with key stakehold- influences behavior, effort, and
ers, especially customers, and ultimately has a positive influence on organizational commitment
success, as discussed in Chapter 1.12
Employee engagement is an international phenomenon that has caught the
attention of leaders, managers, and researchers. Recently, more than 8 million
employees in 1,000 companies around the world participated in a study of
employee engagement. The study used the “Say, Stay, Strive” model for measuring
engagement found in Table 8.2.
The annual survey results indicated that while engagement is increasing in many
parts of the world, some areas are experiencing declining employee engagement.
Declines were found in several Latin American countries, including Argentina,
Brazil, and Mexico. Even with these declines, employees in the region maintain a
relatively high level of engagement (75 percent) compared to the global average
(65 percent). In contrast, results for employees in Algeria, South Africa, Nigeria,
and other African nations has improved dramatically since 2011, when 52 percent
of survey respondents indicated strong engagement. By 2017, this engagement
was at 66 percent, even though some of these nations have experienced economic
and social instability. In all likelihood, business leaders in Africa recognized the
disruptive effects of instability and implemented methods to strengthen employee
recruiting and retention efforts and fortify corporate cultures to withstand external
pressures.13
Just as in other stakeholder relationships, expectations in the employment
psychological contract are subject to a variety of influences. This section discusses
how the contract has generally ebbed and flowed over the last 100 years. Even
with these overarching trends, employers should be mindful of differences that
may exist in particular industries, geographic regions, job types, and employee
characteristics. Table 8.3 provides examples of the methods and programs that
companies prioritize and implement to fulfill aspects of the psychological contract.
These examples demonstrate that there is not a “one-size-fits-all” approach for
meeting the needs and expectations of employees.
Until the early 1900s, the relationship between employer and employee was
best characterized as a master-servant relationship.14 In this view, there was a
natural imbalance in power that meant employment was viewed as a privilege that
included few rights and many obligations. Employees were expected to work for
the best interests of the organization, even at the expense of personal and family
welfare. At this time, most psychologists and management scholars believed that
good leadership required aggressive and domineering behavior.15 Images from
Upton Sinclair’s novel The Jungle, which we discuss briefly in the next chapter,
characterized the extreme negative effects of this employment contract.16
In the 1920s and 1930s, employees assumed a relationship with an employer
that was more balanced in terms of power, responsibilities, and obligations. This
shift meant that employees and employers were coequals, and in legal terms,
employees had many more rights than under the master-servant model.17 Much of
the employment law in the United States was enacted in the 1930s, when legisla-
tors passed laws related to child labor, wages, working hours, and labor unions.18
Throughout the twentieth century, the employee-employer contract evolved along

Table 8.3 Methods That Companies Use to Fulfill Psychological Contracts

Company Employee Promise
Google Child care
Starbucks Two years of college tuition
The Container Store Extensive employee training and higher pay
SAS Free on-site healthcare clinic
REI Provides annual surveys to employees to get feedback on employee
engagement
Salesforce.com Employee recognition and reward programs for the company’s
salespeople
Wegman’s Market Strong growth opportunities in the company
W. L. Gore and Associates Flat nonhierarchical business structure
Nvidia Reimbursement for student loan debt
Baird Reverse mentoring program pairs senior leaders with junior employees
Pinterest Fertility benefits and coverage of in vitro fertilization treatments
the coequals model, although social critics began to question the influence that
large companies had on employees and the rest of society.
In the mid-twentieth century, companies exerted a more patriarchal approach
to employees, which emphasized job security along with generous benefits, retire-
ment income, and continuing professional development and growth. The concept
of the “company man” was born out of this time frame, with television and movies
depicting white-collar men working in stable and generous middle-class jobs in
exchange for company loyalty.19 In 1951, the political commentator and soci-
ologist C. Wright Mills criticized white-collar work as draining on employees’
time, energy, and even personalities. He also believed that individuals with
business power were apt to keep employees happy in an attempt to ward
off the development of stronger labor unions and unfavorable government
regulations.20 A few years later, the classic book The Organization Man by
William H. Whyte was published. This book examined the social nature of
work, including the inherent conflict between belonging and contributing to
a group on the job while maintaining a sense of independence and identity.21
Organizational researchers and managers in the 1960s began to question
authoritarian behavior and consider participatory management styles that assumed
that employees were motivated and eager to take responsibility for their work.
A study by the U.S. Department of Health, Education, and Welfare in the
early 1970s confirmed that employees wanted interesting work and a chance
to demonstrate their skills. The report also recommended job redesign and
managerial approaches that increased participation, freedom, and democracy
at work.22 By the 1980s, a family analogy was being used to describe the
workplace. This implied strong attention to employee welfare and prompted
the focus on business ethics that have been explored in previous chapters of
this book. At the same time, corporate mission statements touted the impor-
tance of customers and employees, and In Search of Excellence, a best-selling
book by Thomas J. Peters and business consultant Robert H. Waterman Jr.,
profiled companies with strong corporate cultures that inspired employees toward
better work, products, and customer satisfaction.23 The total quality management
(TQM) movement increased empowerment and teamwork on the job throughout
the 1990s and led the charge toward workplaces simultaneously devoted to
employee achievement at work and home.24
Although there were many positive initiatives for employees in the 1990s,
the confluence of economic progress with demands for global competitiveness
convinced many executives of the need for cost cutting. A common method for

cost reduction came in the form of outsourcing, which occurs when a company outsourcing
hires external parties to perform tasks and functions that had been previously the practice of hiring an outside
individual or organization to
performed by company employees. This practice has long been associated with
perform tasks and functions
plans to increase efficiencies, In the late 1930s and early 1940s, business writers traditionally performed by
exalted the practice of subcontracting as a way to ensure that the U.S. government company employees
had armament and other provisions to compete in World War II. Subcontracting
takes place when one company hires external parties to perform specific tasks subcontracting
the practice of hiring an outside
or functions in partial fulfillment of a larger contract. During World War II, individual or organization to
subcontracting created an economic ripple effect, as small businesses became part perform specific tasks and
of the supply chain and offered jobs when the country was in a state of austerity.25 functions in partial fulfillment of a
Unlike subcontracting, outsourcing is used for traditional business functions, like larger company contract
payroll, information technology (IT), accounting, auditing, and other services that
are largely independent of a company’s core business and mission. Outsourcing is
positioned as a way for companies to reduce distractions as well as costs.26
For individuals accustomed to messages about the importance of employees to
organizational success, workforce reduction was both unexpected and traumatic.
These experiences effectively ended the loyalty- and commitment-based contract
that employees had developed with employers. A study of young employees
showed that their greatest psychological need in the workplace was security, but
that they viewed many employers as “terminators.”27 By the time Barack Obama
became president of the United States in 2009, his administration was facing an
economy in terrible condition. By mid-2009, over 8 million employees had been
laid off and recessionary effects loomed large. The Conference Board, which
publishes the Employment Trend Index (ETI) monthly, announced the index was
declining faster than at any other time in the 35-year history of the ETI. Eight
indicators contribute to the index, including claims for unemployment insurance,
number of part-time workers due to economic reasons, consumer confidence,
industrial production, and manufacturing and trade sales, among others.
Although unemployment went as high as 10 percent during the Great
Recession, the economy slowly began to recover. In 2015, unemployment had
decreased to 5.3 percent, and the number of long-term unemployed individuals
had been reduced. According to economists, it had been the slowest recovery in
55 years.28 By 2019, unemployment in the United States was below 5 percent,
and some states, including Hawaii, reached unprecedented unemployment rates
of 2 percent.29 For a state that depends heavily on tourism, low unemployment
could mean that jobs in the retail, hospitality, and travel sectors go unfilled and the
overall tourist experience diminishes. However, this particular unemployment rate
in Hawaii was precipitated by a decline in tourism spending that resulted in job
losses.30 This is a cautionary tale on the importance of assessing the overall health
of the economy by multiple indicators. Unfortunately, recovery is often slower
for minorities and individuals under the age of 30. In 2019, unemployment for
younger adults aged 16 to 24 was 8 percent, double the national average.31 There
are concerns that the opportunities for employment based on education and skills
has diminished. For example, many college graduates experience underemployment underemployment
in their first jobs. Underemployment occurs when employees are engaged in work occurs when employees
engage in work that requires
that require skills or education below the qualifications of the employee. It also skills or education below their
occurs when an employee wishes to work on a full-time basis but can find only qualifications, or when employees
a part-time position. Like unemployment, time-based underemployment leads to want to work on a full-time
“enforced leisure,” a situation linked to increasing levels of stress, depression, and basis but can find only part-time
polarization in society.32 positions
Workforce Reduction At different points in a company’s history, there are likely

to be factors that beg the question, “How can we decrease our overall costs?”33 In
a highly competitive business environment, where new companies, customers, and
products emerge and disappear every day, there is a continuous push for greater
organizational efficiency and effectiveness. This pressure often leads to difficult

decisions, including ones that require

careful balance and consideration for the
short-run survival and long-term vision of
the company. This situation can create the
need for workforce reduction, the process
of eliminating employment positions. This
places considerable pressure on top man-
agement, causes speculation and tension
among employees, and raises public ire
about the role of business in society.34
There are several strategies that com-
panies use to reduce overall costs and
expenditures. For example, organizations
Shutterstock/fizkes
may choose to reduce the number of

employees, simplify products and pro-
cesses, decrease quality and promises in
service delivery, or develop some other
mechanism for eliminating resources or
workforce reduction nonperforming assets. Managers may find it difficult to communicate about cost
the process of eliminating reductions, as this message carries both emotional and social risk. Employees may
employment positions
wonder, “What value do I bring to the company?” and “Does anyone really care
about my years of service?” Customers may inquire, “Can we expect the same
level of service and product quality?” Governments and the community may
ask, “Is this really necessary? How will it affect our economy?” For all of these
questions, company leadership must have a clear answer that should be based on a
thorough analysis of costs within the organizational system and how any changes
are likely to affect business processes and outcomes. In 2016, Intel reduced its
global workforce by 11 percent. This is a decision that many large technology
companies are facing as newcomers in the industry gain more market share.35
In the last two decades, many firms chose to adopt the strategy that also creates
the most anxiety and criticism—the reduction of the workforce. Throughout the
1990s, the numbers were staggering, as Sears eliminated 50,000 jobs and Kodak
terminated nearly 17,000 people. Economic decline and financial scandals in the
first decade of the twenty-first century also created a wave of layoffs. General
Motors (GM) cut thousands of jobs and needed government assistance just to
stay afloat. These actions effectively signaled the “end of the old contract” that
downsizing employees had with employers.36 These strategies, sometimes called downsizing or
the process of making permanent rightsizing, may entail employee layoffs, reorganizations, and related measures. In
reductions in an organization’s
other cases, a company freezes new hiring, hopes for natural workforce attrition,
labor force
offers incentives for early retirement, brings in consultants to analyze workloads,
rightsizing or encourages job sharing among existing employees.
the process of reorganizing or
There are three tactics for downsizing. We have already discussed workforce
restructuring an organization’s
labor force reduction through layoffs, retirement incentives, buyout packages, and transfers.
Another tactic is organization redesign to eliminate organizational layers or func-
tions and/or merge units. The third tactic is systemic redesign, which necessitates a
major culture change, the simplification of processes, an emphasis on continuous
improvement, and changes in employee responsibilities.37 The reality is that some
employees will lose their current positions in one way or another. Thus, although
workforce reduction may be the strategy chosen to control and reduce costs, it
may have profound implications for the welfare of employees, their families, and
the economic prospects of a geographical region and other constituents, as well as
for the company itself.
As with other aspects of business, it is difficult to separate financial consider-
ations for costs from other obligations and expectations that develop between a
company and its stakeholders. Depending on a firm’s resource base and current
financial situation, the psychological contract that exists between an employer and
employee is likely to be broken through layoffs, and the social contract between social contract
employers, communities, and other groups may also be threatened. Downsizing an implicit agreement between
members of society that
makes the private relationship between employee and employer a public issue
establishes the rights and duties of
that affects many stakeholders and subsequently draws heavy criticism. 38 each party to the agreement
Fundamentally, top managers must recognize the many types of costs that occur
through workforce reduction. These include costs associated with future talent and
leadership, company morale, shareholder and analyst perceptions on Wall Street,
and rehiring needs.39
The impact of the workforce reduction process depends on a host of factors,
including corporate culture, long-term plans, and creative calculations on both
quantitative and qualitative aspects of the workplace. Because few HR directors
and other managers have extensive experience in restructuring the workforce,
there are several issues to consider before embarking on the process.40 First,
a comprehensive plan must be developed that takes into account the financial
implications and the qualitative and emotional toll of the reduction strategy.
This plan may include a systematic analysis of workflow so that management
understands how tasks are currently completed and how they will be completed
after restructuring. Second, the organization should commit to assisting employees
who must make a career transition as a result of the reduction process. To make
the transition productive for employees, this assistance should begin as soon as
management is aware of possible reductions. Through the Worker Adjustment and Worker Adjustment and
Retraining Notification (WARN) Act, U.S. employers are required to give at least Retraining Notification
(WARN) Act
60 days’ advance notice if a layoff will affect 500 or more employees or more a federal law requiring that U.S.
than one-third of the workforce.41 Offering career assistance and other services employers give at least 60 days’
is beneficial over the long term, as it demonstrates a firm’s commitment to social advance notice if a layoff will affect
responsibility. 500 or more employees or more
than one-third of the workforce
External factors also play a role in how quickly employees find new work and
affect perceptions of a firm’s decision to downsize. Michigan launched an initiative
called Community Ventures to connect the long-term unemployed with jobs. The
public-private partnership provides support and resources to participants, includ-
ing a success coach who offers assistance from job placement through at least one
year of employment and services such as literacy training, networking connections,
and transportation. Since its beginning, the initiative has put 6,600 hard-core
unemployed into new jobs.42 Those unemployed for long periods of time are likely
to experience feelings of discouragement and low morale. On the other hand, indi-
viduals who are reemployed quickly, whether through company efforts or market
circumstances, experience fewer negative economic and emotional repercussions.
In addition, employees who are kept well informed about the downsizing process
are more likely to retain a positive attitude toward the company, even if they
experience job loss.43
Companies must be willing to accept the consequences of terminating employ-
ees. Although workforce reduction can improve a firm’s financial performance,
especially in the short run, there are costs to consider, including the loss of intel-
lectual capital.44 The years of knowledge, skills, relationships, and commitment
that employees develop cannot be easily replaced, and the loss of one employee can
cost a firm between $50,000 and $100,000.45 So although workforce reduction
lowers costs, it often results in lost knowledge and experience, strained customer
relationships, negative media attention, and other issues that drain company
resources. Employees who retain their jobs may suffer guilt, depression, or stress as
a result of the reduction in the workforce. Thus, a long-term understanding of the
qualitative and quantitative costs and benefits should guide downsizing decisions.
Some researchers point to the lack of empirical evidence that workforce reduction
actually leads to sustainable financial gains and performance. Investors’ reactions
to downsizing announcements is critical because their immediate actions could
drastically reduce a corporation’s stock value and trigger other negative outcomes.
A recent study recommended that in order to hedge against the devastating effects,

companies introduce workforce reduction while firm performance is still strong,

concurrent with the downsizing plans of other industry players, and when the
macroeconomic outlook is improving.46
Although workforce reduction is a corporate decision, it is also important to
recognize the potential role of employees in these decisions. Whereas hiring and
job growth reached a frantic pace by the late 1990s, a wave of downsizings in the
early 1990s and 2000s meant that some individuals had embraced the reality of
having little job security. Instead of becoming cynical or angry, employees may
have reversed roles and began asking, “What is this company doing for me?”
and “Am I getting what I need from my employer?” Employees of all types began
taking more responsibility for career growth, demanding balance in work and
personal responsibilities, and seeking opportunities in start-up firms and emerging
industries. Thus, although workforce reduction has negative effects, it has also
shifted the psychological contract and power between employee and employer.
The following suggestions examine how individuals can potentially mitigate the
onset and effects of downsizing.
First, all employees should understand how their skills and competencies affect
business performance. Not recognizing and documenting this relationship makes it
more difficult to prove their worth to managers faced with workforce reduction deci-
sions. Second, employees should strive for cost-cutting and conservation strategies,
regardless of the employer’s current financial condition. This is a workforce’s first
line of defense against layoffs—assisting the organization in reducing its costs before
drastic measures are necessary. Third, today’s work environment requires that most
employees fulfill diverse and varying roles. For example, manufacturing managers
must understand the whole product development and introduction process, ranging
from engineering to marketing and distribution activities. Thus, another way of
ensuring worth to the company, and to potential employers, is through an employee’s
ability to navigate different customer environments and organizational systems. It is
cross-training now necessary to participate in cross-training, show flexibility, and learn the entire
the process of ensuring that business, even if a company does not offer a formal program for gaining this type
employees have the knowledge
and skills to perform more than a
of experience and exposure to a variety of job duties. In particular, cross-training
single set of job duties expands an employee’s ability to contribute in multiple roles. Although this advice
may not prevent workforce reduction, it does empower employees against some of
its harmful effects. Through laws and regulations, the government has also created a
system for ensuring that employees are treated properly on the job. The next section
covers the myriad of laws that all employers and employees should consider when
making both daily and long-term strategic decisions.
Department of Labor Legal Issues

the U.S. federal agency charged
with fostering, promoting, and Employment law is a very complex and evolving area. Most large companies and
developing the welfare of wage organizations employ HR managers and legal specialists who are trained in the detail
earners, job seekers, and retirees and implementation of specific statutes related to employee hiring, compensation,
in the United States; improving
benefits, safety, and other areas. Smaller organizations often send HR managers to
working conditions; advancing
opportunities for profitable workshops and conferences to keep abreast of legal imperatives in the workplace.
employment; and assuring work- Table 8.4 lists the major federal laws that cover employer responsibilities with
related benefits and rights respect to wages, labor unions, benefits, health and safety, equal opportunity, and
other areas. Most of these laws are overseen and enforced by the Department of
employment at will
a common-law doctrine that Labor, the federal agency charged with, among other things, promoting the welfare
allows either the employer or of wage earners, job seekers, and retirees and improving working conditions and
the employee to terminate the opportunities for employment. Until the early 1900s, employment was primarily
relationship at any time, so long as governed by the concept of employment at will, a common-law doctrine that
it does not violate an employment
contract so long as it does not
allows either the employer or the employee to terminate the relationship at any
violate an employment contract time, so long as it does not violate an employment contract or law. Today, many
or law states still use the employment-at-will philosophy, but laws and statutes may limit

Table 8.4 Major Employment Laws

Act (Date Enacted) Purpose
National Labor Relations Act (1935) Established the rights of employees to engage in
collective bargaining and to strike.
Fair Labor Standards Act (1938) Established minimum wage and overtime pay standards,
recordkeeping, and child labor standards for most private
and public employers.
Equal Pay Act (1963) Protects women and men who perform substantially equal
work in the same establishment from gender-based wage
discrimination.
Civil Rights Act, Title VII (1964) Prohibits employment discrimination on the basis of race,
national origin, color, religion, and gender.
Age Discrimination in Employment Protects individuals aged 40 or older from age-based
Act (1967) discrimination.
Occupational Safety and Health Act Ensures safe and healthy working conditions for all
(1970) employees by providing specific standards that employers
must meet.
Employee Retirement Income Sets uniform minimum standards to ensure that employee
Security Act (1974) benefit plans are established and maintained in a fair and
financially sound manner.
Americans with Disabilities Act Prohibits discrimination on the basis of physical or
(1990) mental disability in all employment practices and requires
employers to make reasonable accommodation to
make facilities accessible to and usable by persons with
disabilities.
Family and Medical Leave Act (1993) Requires certain employers to provide up to 12 weeks
of unpaid, job-protected leave to eligible employees for
certain family and medical reasons.
Uniformed Services Employment The preservice employer must reemploy service members
and Reemployment Rights Act returning from a period of service in the uniformed
(1994) services if those service members meet five criteria.
Patient Protection and Affordable Among other provisions, makes healthcare affordable
Care Act (2010) and universal so that all employees and Americans have
access to it.
Source: U.S. Department of Labor, Employment Law Guide, https://webapps.dol.gov/elaws/elg/ (accessed June 15, 2019).
total discretion in this regard.47 The following discussion highlights employment

laws and their fundamental contribution to social responsibility.48
Wages and Benefits After the Great Depression in the 1920s, the U.S. Congress
enacted a number of laws to protect employee rights and extend employer
responsibilities. The Fair Labor Standards Act (FLSA) of 1938 prescribed
minimum wage and overtime pay, recordkeeping, and child labor standards for
most private and public employers. The federal minimum wage is set by the U.S. minimum wage
government and is periodically revised, although states have the option to adopt the lowest hourly wage that may
be legally paid to employees
a higher standard. For example, the federal minimum wage was raised from
$6.55 per hour to $7.25 per hour in 2009. The minimum wage has been changed
over 30 times since it was first introduced in the 1930s. Table 8.5 documents many
of the changes that have been authorized in the minimum wage since that time.
In 2013, the Fair Minimum Wage Act was introduced. It proposed that the
federal minimum wage be raised to $10.10 per hour, but it did not pass. Various
members of Congress, including the U.S. Chamber of Commerce, have proposed
a $15 per hour minimum wage. Conversely, other members of the U.S. Congress
and aligned opponents are worried that a substantial minimum wage increase
would lead to job losses or higher prices for consumers. The nonprofit Empire

Table 8.5 History of the Center for New York State Policy has concerns that increasing the minimum
Minimum Wage wage too much will lead to increased costs for businesses, leading to a major
Year Hourly Wage detrimental impact on smaller businesses.49
As demonstrated, the minimum wage remains a highly debated topic,
1938 $ 0.25
especially since it roughly corresponds to federal poverty guidelines and not
1939 $ 0.30 the actual cost of living. According to the Department of Labor, a two-person
1950 $ 0.75 household with a combined annual income of less than $16,910 is at the
1961 $ 1.15 poverty level. Employees in full-time jobs being paid at minimum wage earn
1968 $ 1.60 just over $15,000 a year. Many workers are not earning enough to make
ends meet and, along with activist groups, are calling for a living wage
1977 $ 2.30
approach to worker compensation. Living wages take into account the costs
1981 $ 3.35 associated with basic necessities such as food, clothing, housing, transporta-
1997 $ 5.15 tion, and healthcare. Living wage calculators, like the one found at http://
2007 $ 5.85 livingwage.mit.edu/, incorporate actual costs, which vary dramatically from
2009 $ 7.25 state to state and city to city. Advocates for a living wage point to the ethical
obligations associated with employees and society.50 While many states abide
Source: U.S. Department of Labor, “History
of Federal Minimum Wage Rates Under by the federal standard, others, including Alaska, Arkansas, California,
the Fair Labor Standards Act, 1938–2009,” Florida, Massachusetts, Oregon, Vermont, and Washington have adopted a
https://www.dol.gov/whd/minwage/chart.htm
higher minimum wage. Most employees who work more than 40 hours per
week are entitled to overtime pay, amounting to one and a half times their
living wage regular pay. There are exemptions to the overtime pay provisions for four classes
an hourly wage on which it is of employees: executives, outside salespeople, administrators, and professionals.51
possible to live according to
The FLSA also affected child labor, including the provision that individuals
minimum standards
under the age of 14 are allowed to do only certain types of work, such as delivering
newspapers and working in their parents’ businesses. Children under age 16 are
often required to get a work permit, and their work hours are restricted so that
they can attend school. Persons between the ages of 16 and 18 are not restricted
in terms of number of work hours, but they cannot be employed in hazardous or
dangerous positions. Although passage of the FLSA was necessary to eliminate
abusive child labor practices, its restrictions may become somewhat problematic
when unemployment rates are extremely low. Some business owners may have
even considered lobbying for relaxed standards in very restrictive states so that
they could hire more teens. In addition, general FLSA restrictions have created
problems in implementing job-sharing and flextime arrangements with employees
who are paid on an hourly basis.52
vesting
Two other pieces of legislation relate to employer responsibilities for benefits
the legal right to pension plan and job security. The Employee Retirement Income Security Act (ERISA) of
benefits 1974 set uniform minimum standards to ensure that employee benefit plans are
established and maintained in a fair and
financially sound manner. ERISA does
not require companies to establish retire-
ment pension plans; instead, it developed
standards for the administration of
plans that management chooses to offer
employees. A key provision relates to
vesting, the legal right to pension plan
benefits. In general, contributions an
employee makes to the plan are vested
Shutterstock/Ternavskaia Olga Alibec
immediately, whereas company contribu-

tions are vested after five years of employ-
ment. ERISA is a very complicated aspect
of employer responsibilities because it
involves tax law, financial investments,
and plan participants and beneficiaries.53
The Family and Medical Leave
Act (FMLA) of 1993 requires certain
employers to provide up to 12 weeks of unpaid, job-protected leave to eligible

employees for certain family and medical reasons. Typical reasons for this type of
leave include the birth or adoption of a child, personal illness, or the serious health
condition of a close relative. However, if the employee is paid in the top 10 percent
of the entire workforce, the employer does not have to reinstate him or her in the
same or a comparable position.54 The FMLA applies to employers with 50 or more
employees, which means that its provisions do not cover a large number of U.S.
employees. In addition, employees must have worked at least one year for the firm
and at least 25 hours per week during the past year before the FMLA applies.
Labor Unions In one of the earliest pieces of employment legislation, the National
Labor Relations Act (NLRA) of 1935 legitimized the rights of employees to engage
in collective bargaining and to strike. Collective bargaining allows a group of collective bargaining
employees, through their unions, to negotiate employment contracts and conditions a negotiating process where
employees work through their
with their employers. This law was originally passed to protect employee rights, unions to establish employment
but subsequent legislation gave more rights to employers and restricted the contracts and conditions with their
power of unions. Before the NLRA, many companies attempted to prohibit their employers
employees from creating or joining labor organizations altogether. Employees who
were members of unions were often discriminated against in terms of hiring and
retention decisions. This act sought to eliminate the perceived imbalance of power
between employers and employees. Through unions, employees gained a collective
bargaining mechanism that enabled greater power on several fronts, including
wages and safety.55 For example, in a series of strikes against Walmart, members
of the Organization for United Respect at Walmart (OUR Walmart), founded by
the United Food and Commercial Workers (UFCW) union, called for the retailer
to offer employees a minimum of $25,000 per year and enough hours for workers
to support their families, ensure no more retaliation against those making these
requests, and provide fair treatment to pregnant workers. When the strikes were
ongoing, they had the following results: Walmart agreed to a $21 million settlement
regarding wages in one of its warehouses, the U.S. government initiated prosecutions
regarding illegal firing of workers, and the city of Portland cut ties with the retailer.
Health and Safety In 1970, the Occupational Safety and Health Act (OSHA)
sought to ensure safe and healthy working conditions for all employees by provid-
ing specific standards that employers must meet. This act led to the development
of the Occupational Safety and Health Administration (OSHA), the agency that Occupational Safety and Health
oversees the regulations intended to make U.S. workplaces the safest in the world. Administration (OSHA)
the U.S. government agency
In its more than 50 years of existence, OSHA has made great strides to improve
charged with ensuring safe and
and maintain the health and safety of employees. For example, since the 1970s, the healthful working conditions for
workplace death rate in the United States has been reduced by more than 60 per- working men and women by
cent, and the agency’s initiatives in cotton dust and lead standards have reduced setting and enforcing standards
disease in several industries. The agency continues to innovate and uses feedback and by providing training,
outreach, education, and
systems for improving its services and standards. As more Spanish-speaking assistance
workers entered the workforce, officials were concerned about their understanding
of the agency and their rights in the workplace. In response, OSHA translated a
variety of its documents into Spanish and posted them onto a prominent place
on its website.56 OSHA has the authority to enter and make inspections of most
employers.
Because of its far-reaching power and unwarranted inspections made in the
1970s, the agency’s relationship with business has not always been positive. For
example, OSHA proposed rules to increase employer responsibility for ergonomics, ergonomics
the design, arrangement, and use of equipment to maximize productivity and the design, arrangement, and
use of equipment to maximize
minimize fatigue and physical discomfort. Without proper attention to ergonom-
productivity and minimize fatigue
ics, employees may suffer injuries and long-term health issues as a result of work and physical discomfort
motion and tasks. Many business and industry associations initially opposed the
proposal, citing enormous costs and unsubstantiated claims. A federal ergonomics

rule was established during Bill Clinton’s presidency in the 1990s but was repealed
by his successor, President George W. Bush. However, the issue continues to
be raised on the regulatory agenda. OSHA has focused its ergonomics efforts
on developing guidelines for specific industries, including poultry processing,
beverage distribution, nursing homes, and retail grocery stores. Individual
states, such as Alaska, Washington, and California, have implemented their own
ergonomics rules.57 Despite differences between this federal agency and some
states and companies on a number of regulations, most employers are required to
display the poster shown in Figure 8.1, or one required by their state safety and
health agency. Gildan Activewear Inc., a manufacturer and marketer of clothing,
developed a program to improve ergonomic practices and reduce injuries. The
program includes access to in-house clinics, stretching and exercise sessions, and
opportunities for consultation on back and shoulder health. This is particularly
important because repetitive actions in the sewing industry are common and
prolonged repetitive actions can lead to injury over time.58
Figure 8.1 Job Safety and Health Protection Poster
Source: Occupational Safety and Health Administration, “OSHA’s Free Workplace Poster,” https://www.osha.gov/
Publications/poster.html (accessed June 15, 2019).

An emerging issue in the area of health and safety is the increasing rate of
violence in the workplace. According to OSHA, 2 million workers are assaulted,
and over 450 are the victim of homicide in the workplace every year.59 A 2019
survey of Fortune 1000 companies indicated that workplace violence is one of
the most important security issues they face, costs up to $36 billion annually, and
results in three deaths daily and thousands of injuries each year. Organizations in
particular industries, including public service, law enforcement, healthcare, and
transportation and delivery, are particularly susceptible to conditions associated
with violence in the workplace.60
The Society for Human Resource Management (SHRM) has identified four
types of workplace violence: (1) crimes committed by strangers and intruders in
the workplace; (2) acts committed by nonemployees, such as customers, patients,
students, and clients; (3) violence committed by coworkers; and (4) incidents
involving those with a personal relationship with an employee.61 Taxi drivers,
ride-share drivers, and clerks working late-night shifts at convenience stores
are often subject to the first type of violence. Airline attendants are increasingly
experiencing the second category of workplace violence when passengers become
unruly, drunk, or otherwise violent during a flight. Nurses and customer service
associates also experience verbal and sometimes physical violence from angry
patients and customers.
Many instances abound of employee-related workplace violence. A worker
at a lawn care company in Kansas opened fire, killing three people and injuring
an additional 16. The shooter himself was shot by a police officer. In a similar
incident, an engineer for the city of Virginia Beach opened fire and killed 12 people
in a city building. The shooter worked for the public utilities department.62 Today,
many organizations are developing emergency response plans and conducting
workplace shooter training in order to decrease the number of fatalities in these
types of violent situations. Although crimes reflect general problems in society,
employers have a responsibility to assess risks and provide security, training, and
safeguards to protect employees and other stakeholders from such acts. Companies
often purchase insurance policies to cover the costs of workplace violence,
including business interruption, psychological counseling, informant rewards,
and medical claims related to injuries. Experts recommend that all organizations
publish and communicate an antiviolence policy and make employees and manag-
ers aware of warning signs of possible workplace violence by current employees,
such as alcohol and drug use, visible signs of stress, disciplinary and termination
proceedings, isolation, and others.63
Equal Opportunity Title VII of the Civil Rights Act of 1964 prohibits employment
discrimination on the basis of race, national origin, color, religion, and gender.
This law is fundamental to employees’ rights to join and advance in an organiza-
tion according to merit rather than one of the characteristics just mentioned.
For example, employers are not permitted to categorize a job as only for men
or women unless there is a reason that gender is fundamental to the job’s tasks
and responsibilities. For example, a men’s fashion company is able to hire male
models exclusively. Additional laws passed in the 1970s, 1980s, and 1990s were
designed to prohibit discrimination related to pregnancy, disabilities, age, and
other factors. The Americans with Disabilities Act (ADA) prohibits companies
from discriminating on the basis of physical or mental disability in all employ-
ment practices and requires them to make facilities accessible to and usable by
persons with disabilities. The Pregnancy Discrimination Act, now more than 30
years old, was created to help protect the rights of mothers and mothers-to-be in
the workplace. The act has been modified many times since its inception. As a
result, the number of pregnancy discrimination complaints filed with the Equal
Employment Opportunity Commission (EEOC), discussed in earlier chapters, has

Figure 8.2 Growth in Filings and Resolutions of Pregnancy Discrimination Act Complaints
to the EEOC
4000
3500
3000
2500
2000
1500
1000
500
0
Receipts Resolutions
2015 2017
2016 2018
Source: U.S. Equal Employment Opportunity Commission, “Pregnancy Discrimination Charges,” https://www.eeoc.gov/
eeoc/statistics/enforcement/pregnancy_new.cfm (accessed June 19, 2019).
continually decreased over the years.64 Figure 8.2 depicts the number of complaints
and resolutions of pregnancy discrimination cases from 2015 through 2018.
These legal imperatives require that companies formalize employment prac-
tices to ensure that no discrimination is occurring. Thus, managers must be fully
aware of the types of practices that constitute discrimination and work to ensure
that hiring, promotion, annual evaluation, and other procedures are fair and based
on merit. The spread of HIV and AIDS has prompted multinational firms with
operations in Africa to distribute educational literature and launch prevention
programs. Some companies work with internal and external stakeholders and even
fund medical facilities that help prevent the disease and treat HIV/AIDS patients.
Another component to their initiatives involves education on fair treatment of
employees with the disease. Multinational companies in Mexico, for instance,
produced a written commitment to eliminate the stigma and discrimination that
often surrounds HIV/AIDS in the workplace.65
To ensure that they build balanced workforces, many companies have initiated
affirmative action programs, which involve efforts to recruit, hire, train, and promote
qualified individuals from groups that have traditionally been discriminated against
on the basis of race, sex, or other characteristics. Coca-Cola established a program
to create a level foundation so that all employees have access to the same informa-
tion and development opportunities.66 A key goal of these programs is to reduce any
bias that may exist in hiring, evaluating, and promoting employees. A special type of
discrimination, sexual harassment, is also prohibited through Title VII.
Sexual Harassment The flood of women into the workplace during the last
half of the twentieth century brought new challenges and opportunities for
organizations. Although harassment has probably always existed in the workplace,
the presence of both genders in roughly equal numbers changed norms and
expectations of behavior. When men dominated the workplace, photos of partially
nude women or sexually suggestive materials may have been posted on walls or
in lockers. Today, such materials could be viewed as illegal if they contribute to
a work environment that is intimidating, offensive, or otherwise interfering with
an employee’s work performance. The U.S. government indicates the nature of
this illegal activity: unwelcome sexual advances, requests for sexual favors, and

other verbal or physical conduct of a sexual nature constitutes sexual harassment sexual harassment
when submission to or rejection of this conduct explicitly or implicitly affects unwelcome sexual advances,
requests for sexual favors, and
an individual’s employment, unreasonably interferes with an individual’s work
other verbal or physical conduct
performance, or creates an intimidating, hostile, or offensive work environment.67 of a sexual nature which,
Prior to 1986, sexual harassment was not a specific violation of federal law when submitted to or rejected,
in the United States. In Meritor Savings Bank v. Vinson, the U.S. Supreme Court explicitly or implicitly affects
ruled that sexual harassment creates a “hostile environment” that violates Title an individual’s employment,
unreasonably interferes with an
VII of the Civil Rights Act, even in the absence of economic harm or demand for individual’s work performance, or
sexual favors in exchange for promotions, raises, or related work incentives.68 creates an intimidating, hostile,
In other countries, sexual harassment in the workplace is considered an illegal or offensive work environment
act, although the specific conditions may vary by legal and social culture. Until
recently, Mexican sexual harassment law protected public-sector employees only
if their jobs were jeopardized on the basis of the exchange of sexual favors or
relations. In the European Union (EU), sexual harassment legislation focuses on
the liability that employers carry when they fail to create a workplace culture free
of harassment and other forms of discrimination. The EU has strengthened its
rules on sexual harassment, including definitions of direct and indirect harassment,
the removal of an upper limit on victim compensation, and the requirement that
businesses develop and make “equality reports” available to employees.69
There are two general categories of sexual harassment: quid pro quo and
hostile work environment.70 Quid pro quo sexual harassment is a type of sexual quid pro quo sexual harassment
extortion where there is a proposed or explicit exchange of job benefits for sexual a type of sexual extortion where
there is a proposed or explicit
favors. For example, telling an employee, “You will get the promotion if you
exchange of job benefits for
spend the weekend with me in Las Vegas,” is a direct form of sexual harassment. sexual favors
Usually, the person making such a statement is in a position of authority over the
harassed employee, and thus, the threat of job loss is real. One incident of quid
pro quo harassment may create a justifiable legal claim. Hostile work environment hostile work environment sexual
sexual harassment is less direct than quid pro quo harassment and can involve harassment
a type of sexual harassment that
epithets, slurs, negative stereotyping, intimidating acts, graphic materials that involves epithets, slurs, negative
show hostility toward an individual or group, and other types of conduct that stereotyping, intimidating acts,
affect the employment situation. For example, at one automobile manufacturing graphic materials that show
plant, male employees drew inappropriate sexually explicit pictures on cars before hostility toward an individual or
they were painted. This was found to be sexual harassment. An email containing group, and other types of conduct
that affect the employment
sexually explicit jokes that is sent out to employees could be viewed as contribut- situation
ing to a hostile work environment. Some hostile work environment harassment is
nonsexual, meaning the harassing conduct is based on gender without explicit ref-
erence to sexual acts. For example, in Campbell v. Kansas State University (1991),
the U.S. District Court for the District of Kansas found repeated remarks about
women “being intellectually inferior to men” to be part of a hostile environment.
Unlike quid pro quo cases, one incident may not justify a legal claim. Instead, the
courts will examine a range of acts and circumstances to determine if the work
environment was intolerable and the victim’s job performance was impaired.71
From a social responsibility perspective, a key issue in both types of sexual
harassment is the employing organization’s knowledge and tolerance of these
types of behaviors. A number of court cases have shed more light on the issues
that constitute sexual harassment and organizations’ responsibility in this regard.
In Harris v. Forklift Systems (1993), Teresa Harris claimed that her boss
at Forklift Systems made suggestive sexual remarks, asked her to retrieve coins
from his pants pocket, and joked that they should go to a motel to “negotiate
her raise.” Courts at the state level threw out her case because she did not suffer
major psychological injury. The U.S. Supreme Court overturned these decisions,
though, ruling that employers can be forced to pay damages even if the worker
suffered no proven psychological harm. This case brought about the “reasonable
person” standard in evaluating what conduct constitutes sexual harassment. From
this case, juries now evaluate the alleged conduct with respect to commonly held
beliefs and expectations.72

Several firms have been embroiled in sexual harassment suits. For example,
Sterling Jewelers, the parent company of Kay Jewelers and Jared the Galleria
of Jewelry, is accused of discrimination against women for a period of over ten
years. The class-action suit, which at one point involved about 70,000 women,
could result in substantial punitive damages and fines.73 In another case, a jury
awarded the victim $95 million in damages due to years of experiencing severe
sexual harassment by a manager at the furniture rent-to-own store, Aarons Inc.
The manager’s behavior encouraged other male employees to harass the victim as
well, creating a hostile workplace. To make matters worse, the company neglected
to respond to the victim when she left a message on their hotline.74
U.S. Supreme Court decisions on sexual harassment cases indicate that
(1) employers are liable for the acts of supervisors; (2) employers are liable for
sexual harassment by supervisors that culminates in a tangible employment action
(loss of job, demotion, etc.); (3) employers are liable for a hostile environment
created by a supervisor but may escape liability if they demonstrate that they
exercised reasonable care to prevent and promptly correct any sexually harassing
behavior and that the plaintiff employee unreasonably failed to take advantage of
any preventive or corrective measures offered by the employer; and (4) claims of
hostile environment sexual harassment must be severe and pervasive to be viewed
as actionable by the courts.75
Much like the underlying philosophy of the Federal Sentencing Guidelines
for Organizations (FSGO) that we discussed in earlier chapters, these decisions
require top managers in organizations to take the detection and prevention of
sexual harassment seriously. To this end, many firms have implemented programs
on sexual harassment. To satisfy current legal standards and set a higher standard
for social responsibility, employees, supervisors, and other close business partners
zero tolerance should be educated on the company’s zero tolerance policy against harassment.
the practice of applying penalties Employees must also be educated on the policy prohibiting harassment, including
to even minor infractions of policy
the types of behaviors that constitute harassment, how offenders will be punished,
and what employees should do if they experience harassment. Just like an organi-
zational compliance program, employees must be assured of confidentiality and no
retaliation for reporting harassment.
Training on sexual harassment should be balanced in terms of legal definitions
and practical tips and tools. Although employees need to be aware of the legal
issues and ramifications, they also may need assistance in learning to recognize
and avoid behaviors that may constitute quid pro quo harassment, create a hostile
environment, or appear to be retaliatory in nature. In fact, retaliation claims have
more than doubled since the early 1990s, prompting many companies to incor-
porate this element into sexual harassment training. Finally, employees should
be aware that same-sex conduct may also constitute sexual harassment.76 Sexual
harassment from women to their male subordinates is yet another issue. One law
enforcement officer in Texas won a lawsuit against his female boss after claiming
that she frequently wanted sexual favors and touched him inappropriately.77
Table 8.6 lists facts about sexual harassment that should be used in company
communication and training on this workplace issue.
Whistleblowing An employee who reports individual or company wrongdoing to

either internal or external sources is considered a whistleblower.78 Whistleblowers
usually focus on issues or behaviors that need corrective action, although managers
and other employees may not appreciate reports that expose company weaknesses,
raise embarrassing questions, or otherwise detract from organizational tasks.
Although not all whistleblowing activity leads to an extreme reaction, whistleblowers
have been retaliated against, demoted, fired, and subject to even worse consequences
as a result of their actions.79 For example, Eddie Garcia, an energy specialist work-
ing for Santa Fe County in New Mexico, was accused of grand larceny and was
fired from his job after pointing out improper conduct on the part of an exclusive

Table 8.6 Sexual Harassment in the Workplace

Sexual harassment is a form of sex discrimination that violates Title VII of the Civil Rights Act of
1964.
Unwelcome sexual advances, requests for sexual favors, and other verbal or physical conduct
of a sexual nature constitute sexual harassment when submission to or rejection of this conduct
explicitly or implicitly affects an individual’s employment, unreasonably interferes with an
individual’s work performance, or creates an intimidating, hostile, or offensive work environment.
Sexual harassment can occur in a variety of circumstances, including but not limited to the
following:
• The victim as well as the harasser may be a woman or a man. The victim does not have to be
of the opposite sex.
• The harasser can be the victim’s supervisor, an agent of the employer, a supervisor in another
area, a coworker, or a nonemployee.
• The victim does not have to be the person harassed, but could be anyone affected by the
offensive conduct.
• Unlawful sexual harassment may occur without economic injury to or discharge of the victim.
• The harasser’s conduct must be unwelcome.
It is helpful for the victim to inform the harasser directly that the conduct is unwelcome and must
stop. The victim should use any employer complaint mechanism or grievance system available.
When investigating allegations of sexual harassment, the EEOC looks at the whole record: the
circumstances, such as the nature of the sexual advances, and the context in which the alleged
incidents occurred. A determination of the allegations is made from the facts on a case-by-case
basis.
Source: U.S. Equal Employment Opportunity Commission, “Facts About Sexual Harassment,” http://www.eeoc.gov/eeoc/
publications/fs-sex.cfm (accessed June 15, 2019).
government contractor. Garcia revealed to his supervisors that the contractor had
double-billed the county and was failing to obtain the required permits for work.
When they did not respond, he expressed his concerns to the media, which spurred
retaliation from his employer. In the end, the charges against Garcia were dropped
and he was awarded $180,000 in settlement fees, but he suffered personal and
professional hardship for five years as a result.80
Whistleblowers do have legal protections. The federal government and most
state governments in the United States have enacted a number of measures to
protect whistleblowers from retaliation. The Whistleblower Protection Act of
1986 shields federal employees from retaliatory behavior; the Sarbanes-Oxley Act
provides solid protection to whistleblowers and strong penalties for those who
retaliate against them; and other legislation such as the Dodd-Frank Wall Street
Reform and Consumer Protection Act has provisions to reward whistleblowers for
revealing illegal behavior. Even with this protection, most reported misconduct
to the government does not result in an investigation. Most internal and external
whistleblowers are not legal experts and use their own judgment about an issue.
Therefore, it is important to know the facts and conduct research before reporting.
Ethical Issues
Laws are imperative for social responsibility. The ethical climate of the workplace,
however, is values-driven and dependent on top management leadership and corpo-
rate culture. In this section, we examine several trends in employment practices that
have not fully reached the legal realm. Company initiatives in these areas indicate a
corporate philosophy or culture that respects and promotes certain ethical values.
Training and Development As discussed in Chapter 6, “Business Ethics and

Ethical Decision-Making,” organizational culture and the associated values, beliefs,
and norms operate on many levels and affect a number of workplace practices.
Organizations should value employees as individuals, not just as functional units

to do work. Firms with this ethical stance fund initiatives to develop employees’
skills, knowledge, and other personal characteristics. Although this development
is linked to business strategy and aids the employer, it also demonstrates a com-
mitment to the future of the employee and his or her interests. Jiffy Lube has been
listed as number one for Training Magazine’s list of top 125 employee training
programs. It was selected for focused approach on training on topics including
customer service, leadership, and new services. Its training program is credited
with helping the organization increase approval ratings by 93 percent.81
Professionals also appreciate and respect a training and development focus from
their employers. For example, the University of California, Berkeley incorporates
an Individual Development Plan (IDP) component into their professional employee
training program. The IDP is a one-on-one mentoring process between the
employee and supervisor, in which they discuss setting specific goals, how to
reach them, and overcoming obstacles.82 These organizations are enjoying many
benefits from employee training and development, including stronger employee
recruitment and retention strategies. Indeed, there is a link between investments
in employees and the amount of commitment, job satisfaction, and productivity
demonstrated by them. Happier employees tend to stay with their employer
and to better serve coworkers, customers, and other constituents, which has a
direct bearing on the quality of relationships and financial prospects of a firm.
Leadership training is also critical, as the main reason that employees leave a
company is poor or unskilled management and leadership, not salary, benefits, or
related factors. In exit interviews, departing employees often mention their desire
for more meaningful feedback and steady communication with managers.83
Employees recognize when a company is diligently investing in programs that
not only improve operations, but also increase their empowerment and provide
new opportunities to improve their knowledge and grow professionally. Through
formal training and development classes, workers get a better sense of where
they fit and how they contribute to the overall organization. This understanding
empowers them to become more responsive, accurate, and confident in workplace
decisions. Training also increases ethical decision-making skills, accountability,
and responsibility, reducing micromanaging or “hand-holding.” All these effects
contribute to the financial and cultural health of an organization.84 Thus, a com-
mitment to training enables a firm to enhance its organizational capacity to fulfill
stakeholder expectations.
Training and development activities require sufficient resources and the com-
mitment of all managers to be successful. For example, a departmental manager
must be supportive of an employee using part of the workday to attend a training
session on a new software package. At the same time, the organization must pay
for the training, regardless of whether it uses inside or outside trainers and devel-
ops in-house materials or purchases them from educational providers. A study by
the Association for Talent Development indicates that, on average, employers in
the U.S. spend about $1,296 per employee on training every year, and employees
engaged in approximately 34.1 hours of annual learning. The survey also tracked
the major topics offered to employees. Over 45 percent of material fell into the
following main topics: managerial and supervisory; mandatory and compliance;
processes, procedures, and business practices; and interpersonal skills.85Another
area that has received much attention in the United States involves support for
outside education. For example, Starbucks partnered with Arizona State University
to offer tuition coverage for eligible employees to earn their bachelor’s degrees.86
workplace diversity Diversity and Inclusion Whereas Title VII of the Civil Rights Act grants legal
recruiting and retaining individuals
protection to different types of employees, initiatives in workplace diversity
regardless of age, gender,
ethnicity, physical or mental ability, focus on recruiting and retaining a diverse workforce as a business imperative.87
or other characteristics With diversity programs, companies assume an ethical obligation to employ

and empower individuals regardless of age, gender, ethnicity, physical or mental

ability, or other characteristics. These firms go beyond compliance with govern-
ment guidelines to develop cultures that respect and embrace the unique skills,
backgrounds, and contributions of all types of people. Thus, legal statutes focus
on removing discrimination, whereas diversity represents a leadership approach
for cultivating and appreciating employee talent.88
Firms with an effective diversity effort link their diversity mission state-
ment with the corporate strategic plan, implement plans to recruit and retain
a diverse talent pool, support community programs of diverse groups, hold
management accountable for various types of diversity performance, and have
tangible outcomes of their diversity strategy. Each firm must tailor their diversity
initiative to meet unique employee, market, and industry conditions. To ensure
effectiveness, many large corporations have hired chief diversity officers (CDOs) chief diversity officer (CDO)
to move diversity to the forefront of decision-making, outcomes assessment, and the corporate executive
responsible for diversity and
resource allocation. By having CDOs in high-ranking positions, these firms are
inclusion initiatives and results
signaling their commitment to core values associated with tolerance, respect, and
transparency. Several studies have found that companies led by women are more
likely to employ CDOs than those led by men. This may be explained by the fact
that women are underrepresented in corporate executive roles, and thus may have
been outsiders on their way up the leadership ranks. Andrea Jung, the former
CEO of Avon, reflected that she was often the only woman and the only person
of Asian origin in meetings with other senior leaders.89 Jung expressed the theory
of intersectionality, which considers the multidimensional nature of identity and intersectionality theory
resulting effects on social dynamics. Catalyst, a nonprofit organization, recently a theory which focuses on the
multidimensional nature of
surveyed 1,600 people who identify as Asian, African-American, and Latino about
identity, including class, gender,
intersectionality in the workplace, specifically as a form of emotional tax. More and race, and its effects on social
than half of the respondents indicated that they felt “on guard,” with women more dimensions of differences
likely to report greater stress about racial bias than gender bias at work.90
Many firms embrace employee diversity to deal with supplier and customer
diversity. Their assumption is that to effectively design, market, and support
products for different target groups, a company must employ individuals who
reflect its customers’ characteristics.91 Organizations and industries with a
populationwide customer base may use national demographics for assessing their
diversity effort. Kaiser Permanente uses a dashboard to assess the links between its
senior-executive compensation and diversity. It is mandatory for company recruit-
ers to present diverse slates of candidates for open positions.92 As demographics
in the United States continue to shift, companies are faced with reconsidering
their marketing and hiring strategies, including the link between employee and
customer characteristics. The sharp growth in the Hispanic population is one of
the most important demographic shifts recorded. This has prompted firms to hire
Hispanic employees and consultants and tailor their offerings to this demographic.
Clorox and General Mills, for instance, are appealing to Hispanics with bilingual
advertisements via mobile apps.93
As discussed in Chapter 1, there are opportunities to link social responsibility
objectives with business performance, and many firms are learning the benefits of
employing individuals with different backgrounds and perspectives. For example,
at New York Life, diversity is treated like all other business goals. The company
employs a CDO to create accountability and inclusion strategies with employees,
suppliers, community members, and other stakeholders.94 Hewlett-Packard (HP),
a multinational IT company, is committed to including people with disabilities in
their workplace. The company was named Private-Sector Employer of the Year by
CAREERS & the disABLED Magazine, a publication that provides career advice
for people with disabilities. HP was recognized by the magazine’s readers for
providing a positive environment in which to work. The company values diversity
and believes that this component of their culture allows them to innovate in ways

that less diverse companies cannot do. In addition, HP designs goods and services
that are informed by its diverse workforce.95 Organizations with an intentional
commitment and sustainable outcomes with diversity management progress
workplace inclusion toward workplace inclusion, a culture that ensures that policies, procedures, and
organizational (corporate) practices are fair, transparent, supportive, and empowering for all employees.96
culture that ensures that policies,
Conflicting views and voices of different generations abound in the workplace,
procedures, and practices are
fair, transparent, supportive, and and this is the first time in history that the workforce has been composed of so
empowering for all employees many generations at one time. Generations have worked together in the past,
but these groups were usually divided by organizational stratification. Many
workplaces now include members of multiple generations working shoulder to
shoulder. The result may be greater dissension among the age groups than when
they were stratified by the organizational hierarchy. Because employees serve an
important role in the social responsibility framework, managers need to be aware
of generational differences and their potential effects on teamwork, conflict, and
other workplace behaviors. Table 8.7 lists the four generations present in today’s
workplace, as well as their key characteristics.
Baby boomers are service oriented, good team players, and want to please.
However, they are also known for being self-centered, overly sensitive to feedback,
and not budget-minded. People in Generation X are adaptable, technologically
literate, independent, and unintimidated by authority. However, their liabilities
include impatience, cynicism, and inexperience. Generation Y, whose members
are also called Millennials, is a technologically savvy group. In addition, they
bring the assets of collective action, optimism, multitasking ability, and tenacity to
the workplace. However, they also have the liabilities of inexperience, especially
with difficult people issues, and a need for supervision and structure. Members of
Generation Z are relatively new to the workplace, with many still in high school
and college. This generation is very diverse, aware of social justice issues, and on
track to becoming the most highly educated group in the workplace.
Although generational issues have always existed in the workforce, there are
some new twists today. The older generations no longer have all the money and
power. Times of anxiety and uncertainty can aggravate differences and genera-
tional conflict, and these conflicts need to be handled correctly when they occur.
Understanding the different generations and how they see things is a crucial part
of handling this conflict. The book Generations at Work: Managing the Clash of
Veterans, Boomers, Xers, and Nexters in Your Workplace developed the ACORN
acronym (detailed in Table 8.8) to describe five principles that managers can use
to deal with generational issues.
Accommodating employee differences entails treating employees as customers
and giving them the best service that the company can give. Creating workplace
choices as to what and how employees work can allow change and satisfaction.
Operating from a sophisticated management style requires that management be
Table 8.7 Profiles of Generations at Work

Generation Name Birth Years Key Characteristics
Baby boomers 1946–1964 Rejection of traditional values, optimistic,
achievement-oriented
Generation X 1965–1980 Family-oriented, impatient, individualistic
Generation Y (Millennials) 1981–1996 Technologically savvy, greater expectations for
workplace, optimistic
Generation Z After 1996 Ethically and racially diverse, aware of social justice,
entrepreneurial, digital natives
Source: Michael Dimock, “Defining Generations: Where Millennials End and Generation Z Begins,” Pew Research Center,
https://www.pewresearch.org/fact-tank/2019/01/17/where-millennials-end-and-generation-z-begins/ (accessed June 18, 2019).

direct, but tactful. Respecting competence and initiative assumes Table 8.8 ACORN: Principles for Managing
the best of the different generations and responds accordingly. Generations at Work
Nourishing retention means keeping the best employees. When Accommodate employee differences
combined with effective communication skills, the ACORN
Create choices in the workplace
principles can help managers mend generational conflicts for the
benefit of everyone in the company.97 As noted in Table 8.3 earlier Operate from a sophisticated management style
in this chapter, Baird, a private financial services firm, imple- Respect competence and initiative
mented a reverse mentoring program so that senior leaders had the Nourish employee retention
opportunity to learn from junior employees. This intergenerational Source: Ron Zemke, Claire Ranes, and Bob Filipczak,
program paired Millennials with executives born during the baby Generations at Work: Managing the Clash of Veterans,
Boomers, Xers, and Nexters in Your Workplace (New York:
boom and generation X time frame. GM, Microsoft, Sodexo, ACACOM, 2000).
UnitedHealth, and Procter & Gamble have also employed this
approach, which is recommended when employees would benefit
from getting to know and learning from other employees with different personal reverse mentoring
and professional characteristics. Lately, companies are investing in reverse mentor- organizational mentoring
ing as a way to cross the digital divide, where younger employees teach and inspire program where less experienced
employees mentor more
older employees to use technology for achieving daily tasks, as well as strategic experienced employees
goals. These programs may also reveal opportunities and problems that, to date,
have not been communicated to those in the executive suite.98
Although workplace diversity reaps benefits for both employees and employ-
ers, it also brings challenges that must be addressed. Diverse employees may have
more difficulty communicating and working with each other. Although differences
can breed innovation and creativity, they can also create an atmosphere of distrust,
dissatisfaction, or lack of cooperation.99 For example, growth in the number of
children and adults with autism spectrum disorders (ASD) has prompted compa-
nies to consider the ways in which this diagnosis affects the workplace, as well
as consumer interactions. Although high-functioning individuals with ASD and
similar neurodiverse diagnoses are capable of productive work and contributions,
they often face stigmas associated with mental health, fear, and accommodations.
Recognizing the value that these individuals bring to the workplace, Ernst &
Young, SAP, and other companies have instituted programs that provide an
environment and job structure that supports the special talents of employees
with ASD.100 As this example demonstrates, many organizations are seizing the
opportunity to discuss diversity and create stronger bonds among employees
with different ethnicities, religious backgrounds, beliefs, health conditions, sexual
orientations, generations, gender identities, and experiences. Coupled with a
commitment to authenticity in the workplace, firms engage employees in train-
ing programs, community service projects, and similar initiatives that promote
teamwork, relationship-building, and cohesion, and ultimately help to maximize
the positive effects and minimize the difficulties associated with diversity.
Finally, the diversity message will not be taken seriously unless top management
and organizational systems fully support a diverse workforce. After Home Depot
settled a gender-discrimination lawsuit, it developed an automated hiring and
promotion computer program. Although the Job Preference Program (JPP) system
was originally intended as insurance against discrimination, the system opens all
jobs and applicants to the companywide network, eliminates unqualified applicants,
and enables managers to learn about employee aspirations and skills in a more effec-
tive manner. JPP has also brought a positive change to the number of female and
minority managers at Home Depot.101 On the other hand, Silicon Valley has been
highly criticized for its apparent lack of diversity. Although many tech firms are set-
ting more diversity goals, companies like Facebook have made only minimal gains.
Facebook has often claimed that there is simply not enough available talent.102
In addition, some employees of companies with diversity training programs
have viewed such training as intended to blame or change white men only. Other
training has focused on the reasons that diversity should be important, though not

the actual changes in attitudes, work styles, expectations, and business processes
that are needed for diversity to work.103 Professional development initiatives to
unconscious bias reveal unconscious bias are particularly useful for employees, including those
a lack of awareness of one’s with a deep commitment to inclusion and diversity, who may be unaware of how
own unconscious attitudes and
unconscious attitudes and associations affect both daily and long-term aspects
associations
of work, including hiring practices, job promotions, networking, and mentoring
relationships. This lack of cognition about one’s own biases has led some research-
ers to conclude that effective diversity training includes educating employees about
implicit bias, teaching strategies to reduce bias, and motivating employees to act
in more egalitarian ways.104
Work/Life Balance Just as increasing numbers of women in the workplace have

changed the norms of behavior at work and prompted attention to sexual harass-
ment, they have also brought challenges in work/life balance. This balance is not
just an issue for women, as men also have multiple roles that can create the same
types of stress and conflict.105 The work/life balance may be described otherwise,
such as people who are torn between work and home on a regular basis. An
employee thinking about work (or actually working) when he is at home and vice
versa is ultimately struggling with multiple responsibilities.106
Because employees have roles within and outside the organization, there
is increasing corporate focus on the types of support that employees have in
balancing these obligations. Deloitte & Touche (now part of Deloitte Touche
Tohmatsu), an international professional services firm, was forced to address
issues of work/life balance when it discovered the alarming rate at which women
were leaving the firm. In the early 1990s, only 4 of the 50 employees being con-
sidered for partner status were women, despite the company’s heavy recruitment
of women from business schools. The company convened the Initiative for the
Retention and Advancement of Women task force and soon uncovered cultural
beliefs and practices that needed modification. The task force found that younger
employees—both male and female—wanted a balanced life, were willing to forgo
some pay for more time with family and less stress, and had similar career goals.
Therefore, Deloitte & Touche developed a major work/life balance initiative
that included reduced travel schedules and flexible work arrangements to benefit
work/life programs both men and women employed at the firm. According to a survey, issues related
programs that assist employees
in balancing work responsibilities
to work/life balance, such as telecommuting, flexible scheduling, and assistance
with personal and family with child care and elder care, are almost equally important to male and female
responsibilities employees. Whereas men rarely utilized these benefits in the past, this is no longer
the case. Many midlevel executives, both
male and female, are part of dual-earner
couples “sandwiched” between raising
children and caring for aging parents.107
Such work/life programs assist em
ployees in balancing work responsibilities
with personal and family responsibilities.
A central feature of these programs is
flexibility, such that employees of all types
are able to achieve their own definition of
balance. For example, a single parent
Shutterstock/Elizaveta Galitckaia
may want child care and consistent work

hours, whereas another employee may
need assistance in finding elder care for
a parent with Alzheimer’s disease. A
working mother may need access to
“just-in-time” care when a child is sick
or school is out of session. Employees of
all types appreciate flextime arrangements, which allow them to work 40 hours
per week on a schedule that they develop within a range of hours specified by
the company. Other employees work some hours at home or in a location more
conducive to their personal obligations. SAS Institute, the world’s largest private
software company, has been recognized by Glassdoor.com for its exceptional
work/life balance program. The company offers employees and their families many
perks supporting a balanced life, such as free access to a gymnasium, a healthcare
clinic on company grounds, discounted child care, free “work-life” counseling, and
more.108 Work/life balance not only enhances employee productivity, but it is also
an imperative to attracting and maintaining a healthy workforce.
More than 80 million Americans suffer from symptoms of stress at work,
including headaches, sleeplessness, and other physical ailments.109 To address
these concerns, Americans spend more than $20 billion per year on stress-reducing
goods, services, and strategies.110 Compared to Japanese and Chinese workers,
however, the U.S. figures are moderate. The term karoshi, which means, “death
from overwork,” became widely used in Japan. Thousands of deaths per year are
attributed to overwork, such as brain hemorrhages, heart attacks, and suicides.
The Japanese government passed legislations to establish support centers, assist
businesses in reducing the number of deaths, and conduct more research into the
phenomenon. China, as its economy continues to grow, is beginning to experience
the same issue. The death toll was estimated at 600,000 employees per year, or
1,600 per day.111
Managers must become sensitive to cues that employees need to create a
stronger work/life balance. Frustration, anger, moodiness, a myopic focus, and
physiological symptoms are often present when an employee needs to take a
vacation, work fewer hours, utilize flexible scheduling, or simply reduce his or her
workload. One manager of a telecommunications firm in California returned to
the workplace around 11:30 p.m. every night to send people home. Otherwise, she
knew that many of them would sleep on the floor in the office.
Not only do some employees work too many hours, but they may largely
ignore nutrition and fitness, friendships, community involvement, and other
aspects of work/life balance.112 For this reason, many organizations offer an
employee assistance program (EAP) that includes a range of services typically employee assistance program
associated with counseling and mental health. EAPs began in the United States in (EAP)
workplace program that provides
response to increasing rates of alcoholism and its effects in the workplace. Today, employees with services to
EAPs focus on broader issues that affect employees’ stress levels, well-being, and improve mental health and
productivity. The majority of companies with EAPs outsource them to other firms well-being
that specialize in meeting the personal needs of employees. EAPs are becoming
part of an organization’s ability to be globally competitive. A shift in beliefs
about work/life balance and mental health, along with changing regulations and
employee demand, is prompting more and more organizations to develop these
programs. Technology advancements have also spurred the online delivery of EAP
services.113 These programs may also be needed when a community is faced with
a crisis, such as natural disasters or violence. With the increase of mass shootings
in schools, EAPs continue to be needed to assist employees and first responders
dealing with significant trauma.114
There is no generic work/life program. Instead, companies need to consider
their employee base and the types of support that their employees are likely to
need and appreciate. James Goodnight, SAS’s founder, believes that dinnertime
should be spent with family and friends, not in the office. Most employees leave
by 5:00 p.m., and others participate in flextime or job-sharing arrangements. This,
among other characteristics listed earlier, has resulted in the company receiving
honors such as its high ranking on Fortune magazine’s annual list of the 100 Best
Companies to Work For and one of Computer World magazine’s 100 Best Places
to Work in IT.115

Ethical Issues in HUMAN RESOURCES
The Sharing Economy: Fueled by Independent Contractors

The sharing economy is a relatively new phenomenon, Uber drivers complained about their worker classifica-
largely propelled by innovative and disruptive approaches tion after Uber implemented penalties for drivers who failed
to traditional business models, advances in technology, to accept a high percentage of rides offered them. Although
and consumer use of the internet for all types of activi- such penalties may be effective in eliminating drivers who
ties, including purchasing. For example, the founders of are not committed to timely customer service, they may also
Uber wondered if there was a better and easier way for ensure that drivers cannot effectively represent multiple
customers to find a taxi ride. They also hoped that they transportation services. These Uber drivers perceived the
could hire drivers who were willing to use their personal tactic as a way of increasing their dependency on Uber and
vehicles to pick up and drive people to their destinations. decreasing their choices and independence.
The founders of Airbnb hoped that consumers would In response to a multitude of questions and complaints,
take a risk by staying in a stranger’s spare bedroom or the U.S. Department of Labor recently took action to
second home instead of an expensive hotel. They started answer worker complaints about misclassification. This is
the home-sharing company when they were struggling to a significant issue for the Department of Labor because
pay their rent in San Francisco and offered to rent air mat- employees improperly classified as independent
tresses in their apartment to attendees coming to a large contractors may not be provided workplace protections
conference. While their initial offering only attracted three such as the minimum wage, payment of overtime, and
conference-goers, the founders persevered and built a availability of unemployment and workers’ compensation
company with over $900 million in annual revenues. insurance coverage. These independent relationships
Currently, the cornerstone of the sharing economy is are deemed beneficial by workers who appreciate
the independent, nonemployee status of service provid- flexibility and personal control. However, regulators are
ers, suppliers, and partners of firms such as Airbnb, Lyft, concerned that some employees may be purposefully
HomeAway, and Uber. These firms are often referred to misclassified in an attempt to substantially reduce costs
as digital matching firms because they utilize technology and evade U.S. labor laws.
to link service or product providers to customers. Digital The Department of Labor recently reminded employers
matching firms have challenged the status quo in many that the classification of workers should be based on
industries where companies have traditionally relied on the suffer or permit to work standard pertaining to an
employees to deliver their services. individual’s degree of economic dependence on the
The Human Resources (HR) model of the sharing econ- employer. Cases and decisions made by the U.S. Supreme
omy relies on brief and electronically facilitated exchanges Court and U.S. Circuit Courts of Appeals have yielded the
between the digital matching firm, customers, and sup- economic realities test, which guides employers and the
pliers, rather than extensive hiring and training protocols Department of Labor in making this determination:
associated with best practices in HR management. Unlike
traditional employees, owners and partners in the sharing • Is the work performed by the worker essential or
economy may not be subject to thorough background fundamental to the business?
and reference checks and, given a technology-mediated • Does the worker’s managerial ability affect their
platform, do not have lengthy interactions with company prospects for financial gain or loss?
representatives to learn the organization’s values, ethical • How does the worker’s financial investment compare
standards, and culture. Reviews posted by customers help with the employer’s investment?
to assess service providers but are often limited in number • Is the worker required to exercise special skills and
and subject to credibility questions. initiative?
Current U.S. law takes a binary approach to worker • To what extent does the employer control the work?
classification: Either a worker depends on an organization
or is self-employed as an independent contractor. New In the absence of a new worker classification approach,
business practices by digital matching firms and others call critics worry that the sharing economy creates a business-
into question this two-pronged approach. To some observ- sided economic model that mirrors the labor market long
ers, the current classification system reflects the country’s before there were laws affecting wages, hours worked,
agrarian and manufacturing roots, not the service and safety, and other conditions. Traditional competitors of
technology economy of today. digital matching firms also question the independent

worker status because these firms are not required to how this ultimately affects power and fairness for both
provide or pay for overtime, sick leave, vacation leave, workers and competitors. As the sharing economy con-
retirement plans, health insurance, or other benefits. Legal tinues to expand, more research is needed to understand
scholars point to privacy concerns around the data and labor markets, worker classification, competition laws, and
monitoring that occurs within the sharing economy and other ramifications for stakeholders.
Sources: Ryan Calo and Alex Rosenblat, “The Taking Economy: Uber, Information, and Power,” Columbia Law Review 117 (October 2017): 1623–1690;
Juliet Schor, “Debating the Sharing Economy,” Journal of Self-Governance and Management Economics, 4 (2016): 7–22; Arun Sundararajan, The
Sharing Economy: The End of Employment and the Rise of Crowd-Based Capitalism (Cambridge, MA: MIT Press, 2017); Rudy Telles, Jr., “Digital
Matching Firms: A New Definition in the Sharing Economy Space,” U.S. Department of Commerce, Economics, and Statistics Administration, https://www.
commerce.gov/sites/default/files/migrated/reports/digital-matching-firms-new-definition-sharing-economy-space.pdf (accessed June 25, 2019); Debbie
M. Thorne and Floyd F. Quinn, “Supplier Resources in the Sharing Economy: Three Regulatory Concerns,” Journal of Marketing Channels 24 (2017):
73–83; U.S. Department of Labor, “Fair Labor Standards Act Advisor,” https://webapps.dol.gov/elaws/whd/flsa/scope/ee14.asp (accessed June 25, 2019);
U.S. Department of Labor, “The Application of the Fair Labor Standards Act’s “Suffer or Permit” Standard in the Identification of Employees Who Are
Misclassified as Independent Contractors,” https://casetext.com/analysis/the-application-of-the-fair-labor-standards-acts-suffer-or-permit-standard-in-the-
identification-of-employees-who-are-misclassified-as-independent-contractors-1 (accessed October 8, 2019).
Successful work/life programs, like that developed by the SAS Institute, are
an extension of the diversity philosophy such that employees are respected as
individuals in the process of contributing to company goals. Thus, connecting
employees’ personal needs, lives, and goals to strategic business issues can be fruit-
ful for both parties. This perspective is in contrast to the “employee goals versus
business goals” trade-off mentality that has been pervasive. IBM implemented
a work/life strategy over two decades ago and periodically conducts employee
surveys to see if changes or additions are needed.116
The Silk Road Survey found that 55 percent of all applicants consider work/
life balance the most important consideration in identifying potential employers
and considering job offers.117 For this reason, companies have become quite inno-
vative in their approach to work/life balance. Agilent Technologies, for example,
not only offers flexible work schedules and employee discounts, but also has
organized sports teams, massages on site, and yoga sessions.118 Nokia is known for
making employees feel cared for. Employees have noted that beyond flexible work
schedules and the ability to work from home, the company encourages them to
take time off and recharge.119 Such efforts demonstrate the company’s willingness
to accommodate employee needs and concerns beyond the workplace.
Philanthropic Issues
In later chapters of this book, we examine the philanthropic efforts of companies
and the important role that employees play in the process of selecting and imple-
menting projects that contribute time, resources, and human activity to worthy
causes. In social responsibility, philanthropic responsibilities are primarily directed
outside the organization, so they are not directly focused on employees. However,
employees benefit from participating in volunteerism and other philanthropic
projects. Employee volunteerism increases the level of engagement the employee
feels, which contributes not only to their performance, but also to the company’s
performance. The engagement is a result of many factors, including gaining a
sense of purpose through volunteering, having the ability to work in positions of
leadership, and gaining new skills. In addition, engaged employees are more likely
to stay with the company for longer periods of time.120
Many employers help organize employees to participate in walkathons,
marathons, bikeathons, and similar events. For example, Blue Cross Blue Shield
companies hold an annual event called National Walk@Lunch Day. The event

challenges employees and community members to put on their sneakers and walk
at least 30 minutes at lunch. Over a six-week period, participants log their steps
on the company’s Facebook page. At the end of the event, Blue Cross Blue Shield
donates up to $1 per mile reported to the American Diabetes Association.121 Thus,
the benefits of corporate philanthropy in the community reflect positively on the
organization. There are many strategies for demonstrating community involve-
ment and care. CA Technologies holds a monthlong volunteer program in which
employees from all over the world spend time volunteering at nonprofits in their
local communities.122
Strategic Implementation of Responsibilities

to Employees
As this chapter has demonstrated, a company’s responsibilities toward their
employees are varied and complex. The legal issues alone require full-time atten-
tion from lawyers and HR specialists. These issues are also emotional because
corporate decisions have ramifications on families and communities, as well
as on employees. In light of this complexity, many companies have chosen to
embrace these obligations to benefit both employee and organizational goals. This
philosophy stands in stark contrast to the master-servant model popular more than
100 years ago. Today, companies are using distinctive programs and initiatives to
set themselves apart and to become known as desirable employers. Low unem-
ployment levels before the last recession, along with diversity, work/life balance,
outsourcing, and generational differences, prompted companies to use marketing
strategy and business insights normally applied to customer development in the
employee recruitment and retention realm. Even in a time of economic downturn,
employers will need to be mindful of keeping top talent and maintaining employee
satisfaction. For example, Patagonia encourages its employees to stay physically
fit. It places so much emphasis on employee satisfaction and physical fitness, in
fact, that employees are allowed to go surfing in the middle of the workday.123
employer of choice An employer of choice is an organization of any size in any industry that
an organization of any size in any is able to attract, optimize, and retain the best employee talent over the long
industry that is able to attract,
term. AECOM, a global infrastructure firm, recently received a perfect score
optimize, and retain the best
employee talent over the long on the Corporate Equality Index, measured and reported by the Human Rights
term Campaign Foundation. The roots of AECOM’s commitment to being an employer
of choice are deep and emanate from a cross-functional and geographically diverse
committee that focused on ways in which AECOM’s top management can ensure
that integrity, respect, open communication, flexibility, and balance are the key
values and defining qualities of every employee’s career.124 Advertising, websites,
and other company communications often use the term to describe and market
the organization to current and potential employees. These messages center on
the various practices that companies have implemented to create employee
satisfaction. Firms with this distinction value the human component of business,
not just financial considerations, ensure that employees are engaged in meaningful
work, and stimulate the intellectual curiosity of employees. These businesses
have strong training practices, delegate authority, and recognize the link between
employee morale, customer satisfaction, and other performance measures.125 Thus,
becoming an employer of choice is an important manifestation of strategic social
responsibility. Potential employees may look for signs that social responsibility
is a top concern. College graduates may evaluate a potential employer’s socially
responsible and ethical behavior when deciding on a career path. Table 8.9 shows
the percentage of college students who indicated the job characteristics they
considered to be the most important. The table demonstrates the kind of culture
and messages companies should cultivate to attract employees.

Despite the negative effects that certain actions may Table 8.9 What College Students Consider the
have on perceptions of a company’s social responsibility, Most Important Characteristics of a Job
there are strategies and programs that demonstrate a Characteristic Percentage
proactive approach to employee relations. One traditional
1. Job security 82.9
way to strengthen trust is through employee stock owner-
ship plans (ESOPs), which provide the opportunity both 2.
O pportunity to develop job-specific 82.5
skills
to contribute to and benefit from organizational success.
Under these plans, employees must take on an ownership 3. Opportunity to develop applied skills 79.7
perspective, work as a team in an environment that forges 4. Friendly coworkers 78.8
trust, and provide excellent interactions and service to 5. Good insurance/benefits package 76.5
customers. Such programs confer not only ownership, but Source: National Association of Colleges and Employers, “Job
also opportunities for employees to participate in manage- Security Tops Students’ Wish List,” https://www.naceweb.org/talent-
ment planning, which foster an environment that many acquisition/student-attitudes/job-security-tops-students-wish-list/
organizations believe increases profits.
Several studies of companies with ESOPs cast a positive
light on these plans. ESOPs appear to increase sales by about 2.3–2.4 percent over employee stock ownership plans
what would have been expected otherwise. ESOP companies were also found to (ESOPs)
pay better benefits, higher wages, and provide nearly twice the retirement income employment benefits programs
that confer stock ownership
for employees than their non-ESOP counterparts. Some of the 7,000 “employee- to employees providing the
owned” firms include Dunn-Edwards Paints, Publix Supermarkets, and Round opportunity to contribute to
Table Pizza.126 Of Fortune magazine’s “100 Best Companies to Work For”, more and benefit from organizational
than half are employee-owned.127 Research has shown that the decision to become success
an employee-owned company enhances company performance and provides
higher wealth accumulation for employee-owners. Despite the advantages of
ESOPs, however, experts warn that some are potentially risky for employees, as
in the case of Enron.128 Just like any other company initiative, management must
take responsibility for managing an ESOP well.
Becoming an employer of choice has many benefits, including an enhanced
ability to hire and retain the best people, who in turn offer a strong commitment to
the company’s mission and stakeholders. The expectations of such businesses are
very high because employee stakeholders often have specific criteria in mind when
assessing the attractiveness of a particular employer. Some people may be focused
on specific environmental issues, whereas others may be searching for a company
that markets healthy and helpful products. Although top managers must decide on
how the firm will achieve strategic social responsibility with employees, Table 8.10
provides guidance on eight key principles that are typically exhibited and managed
by employers of choice. Although most companies have long understood the
importance of attracting and keeping customers through strong branding efforts,
many are relatively new to the implementation of strategies to create an employer
brand.129
Finally, the global dimensions of today’s workplace shape an organization’s
ability to effectively work with employee stakeholders and to become an employer
of choice. Firms with offices and sites around the world must deal with a complex-
ity of norms, laws, and expectations, all of which can affect its reputation at home.
For example, when Nike was first accused of dealing with suppliers that used
child labor in the mid-1990s, the company claimed that it was not in the business
of manufacturing shoes (only selling them), and that therefore it could not be
blamed for the practices of Asian manufacturers. Following media criticism, Nike
publicized a report claiming that the employees of its Indonesian and Vietnamese
suppliers were living quite well. The veracity of this report was tarnished by
contradictory evidence produced by activists. Next, Nike started introducing
workers’ rights and environmental guidelines for its suppliers. Yet some company
representatives explained that any additional social responsibility initiatives would
damage the competitive position of the firm.
In the late 1990s, Nike designed a suppliers’ auditing process that invited
student representatives, along with other activists, to visit manufacturing plants

Table 8.10 Key Principles of Employers of Choice

Principle Explanation
1. Organizational reputation Employees desire to work in an organization that maintains a good
reputation among stakeholders.
2. Organizational culture Employees want to work in an ethical organizational culture that
maintains integrity and encourages employee contributions.
3. Strong leadership Employees want to work in an environment that has strong ethical
leaders who care passionately about the company.
4. Interesting work Employees want their jobs to be challenging and rewarding, not
either mundane or too difficult.
5. Opportunities for growth Employees want to work in a job or industry where there are
significant opportunities for career advancement.
6. Employee recognition Employees appreciate being recognized for their contributions to
the company and are encouraged to continue serving.
7. Employee well-being Employees expect fair compensation, appropriate benefits, and an
adequate work/life balance from their employers.
8. Social responsibility Studies have demonstrated that employees enjoy working for a
company that considers the needs of stakeholders and contributes
toward improving society.
Sources: Roger E. Herman and Joyce L. Gioia, How to Become an Employer of Choice (Winchester, VA: Oakhill Press,
2000); Amy Hirsh Robinson, “Are You an ‘Employer of Choice’? 3 Ways to Attract the Best,” HR Specialist 17 (March 2019):
7; Jody Ordioni, “How to Become an Employee of Choice,” ere.net, July 15, 2013, http://www.eremedia.com/ere/how-to-
become-an-employer-of-choice/ (accessed June 21, 2019); Karnica Tanwar and Amresh Kumar, “Employer Brand, Person-
Organisation Fit and Employer of Choice,” Personnel Review 48 (2019): 799–823.
and provide recommendations for improving practices. Before the company’s shift,
many media reports discussed their manufacturing practices, and it is likely that
some consumers and potential employees were rejecting Nike. Nike actually settled
the legal case after losing a Supreme Court appeal. Nike agreed to pay $1.5 million
to the Fair Labor Association to help fund worker development programs. In this
case, Nike’s relationships with its manufacturing suppliers and their employees
affected its ability to achieve strategic social responsibility.130 Today, Nike’s supply
chain practices have improved considerably. The company has been awarded the
Corporate Register Reporting Award for excellence in global reporting, demon-
strating that its auditing and ethical programs for supply chains have significantly
increased the transparency and accountability of the company.131
Summary
Throughout history, people’s perceptions of work and employment have evolved
from a necessary evil to a source of fulfillment. The relationship between employer
and employee involves responsibilities, obligations, and expectations as well as
challenges.
On an economic level, many believe there is an unwritten, informal psycho-
logical contract that includes the beliefs, perceptions, expectations, and obligations
that make up the agreement between individuals and their employers. This con-
tract has evolved from a primarily master-servant relationship, in which employers
held the power, to one in which employees assume a more balanced relationship
with employers. Workforce reduction, the process of eliminating employment
positions, breaches the psychological contract that exists between an employer and
employee and threatens the social contract among employers, communities, and
other groups. Although workforce reduction lowers costs, it often results in lost
intellectual capital, strained customer relationships, negative media attention, and
other issues that drain company resources.

Employment law is a complex and ever-evolving area. In the past, employment

was primarily governed by employment at will, a common- law doctrine that allows
either the employer or employee to terminate the relationship at any time, so long
as it does not violate an employment contract. Many laws have been enacted to
regulate business conduct with regard to wages and benefits, labor unions, health
and safety, equal employment opportunity, sexual harassment, and whistle blow-
ing. Title VII of the Civil Rights Act, which prohibits employment discrimination
on the basis of race, national origin, color, religion, and gender, is fundamental to
employees’ rights to join and advance in an organization according to merit. Sexual
harassment is defined as unwelcome sexual advances, requests for sexual favors,
and other verbal or physical conduct of a sexual nature when submission to or
rejection of this conduct explicitly or implicitly affects an individual’s employment,
unreasonably interferes with an individual’s work performance, or creates an
intimidating, hostile, or offensive work environment. Sexual harassment may take
the form of either quid pro quo harassment or hostile work environment harassment.
An employee who reports individual or corporate wrongdoing to either internal or
external sources is considered a whistleblower and hence may have certain protec-
tions. Although legal compliance is imperative for social responsibility, the ethical
climate of the workplace is more subjective and dependent on top management
support and corporate culture. Companies with strong ethical standards are more
likely to fund initiatives to develop employees’ skills, knowledge, and other personal
characteristics. With diversity programs, companies assume an ethical obligation to
employ and empower individuals regardless of age, gender, physical and mental
ability, and other characteristics. Inclusion efforts take diversity management one
step further, by ensuring that organizational policies, procedures, and practices are
fair, transparent, supportive, and empowering for all employees. Many companies
are training employees to recognize their unconscious biases that affect both daily
and long-term aspects of work. Work/life programs assist employees in balancing
work responsibilities with personal and family responsibilities.
Employees may play an important role in a firm’s philanthropic efforts. Employees
benefit from such initiatives through participation in volunteerism and other projects.
In light of the complexity of and emotions involved with responsibilities
toward employees, many companies have chosen to embrace these obligations
to benefit both employee and organizational goals. An employer of choice is an
organization of any size in any industry that is able to attract, optimize, and retain
the best employee talent over the long term. One traditional way to strengthen
trust is through Employee Stock Ownership Plans (ESOPs), which provide the
opportunity both to contribute to and gain from organizational success. Finally,
the global dimensions of today’s workplace shape an organization’s ability to
effectively work with employee stakeholders and to become an employer of choice.
The Pros and Cons of Hiring Convicted Criminals

Issue: Should companies hire applicants with criminal to becoming a productive citizen. Like most criminal
backgrounds? offenders, however, he had a very difficult time finding
an employer to take a chance on him. Eventually with the
At age 23, Darrell Jobe, who spent his teenage years help of a friend’s father, Jobe found a job in the packaging
in and out of juvenile detention, decided to turn his life industry. By age 35, he had launched his own business,
around. He was determined to become a better father Vericool, specializing in sustainable and environmentally
than his own father had been. He was also committed friendly packaging. Vericool’s products are designed to

replace Styrofoam and other foam packaging for ship- strict policies prohibiting any criminal conduct by current
ments that need to stay cold, like food, flowers, and fish. employees. This apprehension is especially strong for
In recognition of the power of second chances, Vericool individuals with criminal pasts that include violent and
employs a number of former prisoners. Not only do these sexual acts.
individuals have a chance at employment, they also have To deter bias, a number of states have initiated “Ban the
the opportunity to become owners through the company’s Box” programs that revise how and when an applicant’s
stock-option plan. criminal history is revealed in the hiring process. These
Each year in the United States, more than 600,000 programs require employers to remove all questions about
people are released from prison. Most of these people criminal history from job applications and to ensure that
reenter a society that has changed, sometimes significantly, applications are reviewed for qualifications, skills, and other
since the time they were first incarcerated. Along with job-specific factors. Ban the Box allows potential employers
adjusting to freedom and new living arrangements, to assess and get to know applicants before a criminal
repairing relationships, and dealing with other changes, history is introduced. Background checks are typically per-
many individuals begin looking for employment. While formed once an applicant has been chosen as the finalist.
research has shown that employment is a key factor Recently, leaders in the business community launched an
for reducing recidivism, experts estimate that formerly initiative to change attitudes about hiring people with crimi-
incarcerated individuals experience unemployment at a nal records. Well-known organizations, including Butterball
much higher rate than other citizens. Even after five years Farms, Georgia-Pacific, Koch Industries, the National
of release from prison, 65 percent of these individuals Restaurant Association, Uber, and the U.S. Chamber of
remain unemployed or underemployed. Poor employment Commerce, have signed the “Getting Talent Back to Work”
prospects often have long-lasting negative effects on pledge to give job opportunities to qualified people with a
individuals, families, and communities. criminal background who are deserving of a second chance.
Legal and regulatory frameworks may prevent the The pledge is designed to end outdated and noninclusive
previously incarcerated from obtaining professional hiring practices and to enhance the labor pool.
licensure. This means employment in nursing, education, The pledge comes on the heels of the FIRST STEP Act
and other high-demand fields is off-limits. Regulations may passed by the U.S. Congress. The legislation emphasizes
also disqualify the previously incarcerated from securing rehabilitation, education, work-release, and other pro-
employment in fields that deal with vulnerable populations grams to support the successful reintegration of former
and law enforcement. Private employers use background prisoners. In the state of Wisconsin, the Department of
checks on a routine basis, and applicants with criminal Corrections already offers employers the opportunity
convictions are often disqualified from employment. to hire work-release participants who are nearing the
Although federal statutes do not prohibit discrimination end of their prison sentences. The Oneida Airport Hotel
on the basis of criminal history, the EEOC has advised Corporation in Green Bay, Wisconsin, was an early adopter
that a criminal background should not be used the sole of the work-release program. The company is now an
determinant of a prospective employee’s qualifications. advocate, citing the business, social, and intrinsic benefits
Instead, employers are expected to conduct an individual of helping ex-offenders resume healthy, stable, and pro-
assessment of the criminal convictions for severity, ductive roles.
job-relatedness, and recency.
Beyond the regulatory environment, hiring managers There Are Two Sides to Every Issue
may have an unconscious or conscious bias toward 1. Because of discrimination and bias against individuals
ex-offenders. Research has shown that employers often with criminal backgrounds, employers are missing a
view the previously incarcerated as untrustworthy, significant opportunity to enhance their workforces as
lacking in social skills, and more likely to steal. Some well as benefit society.
hiring managers may not believe that criminals can be 2. Because there are risks in hiring employees with crimi-
rehabilitated. Concerns about safety, liability, security, and nal backgrounds, employers are understandably hesi-
reputation also come into play, especially for firms with tant to consider individuals with criminal backgrounds.
Sources: Ifeoma Ajunwa and Angela Onwuachi-Willig, “Combating Discrimination Against the Formerly Incarcerated in the Labor Market,” Northwestern
University Law Review 112 (2018): 1385–1415; Barry Goldman, Dylan Cooper, and Tamar Kugler “Crime and Punishment,” International Journal of Conflict
Management 30 (January 2019): 2–23; Amy Feldman, “An Entrepreneur and His Ex-Cons: Meet the Former Gang Member Who Created a $10 Million
Packaging Startup That Hires Former Inmates,” Forbes.com, March 27, 2019, https://www.forbes.com/sites/amyfeldman/2019/03/27/from-bullets-to-
boxes-meet-the-former-gang-member-who-created-a-15m-packaging-startup-that-hires-ex-cons/#770ce6361895 (accessed June 24, 2019); Jakari N.
Griffith and Nicole C. Jones Young, “Hiring Ex-Offenders? The Case of Ban the Box,” Equality, Diversity, and Inclusion: An International Journal 36 (2017):
501–518; Society for Human Resource Management, “Getting Talent Back to Work,” https://www.gettingtalentbacktowork.org/ (accessed June 24, 2019);
Margaret Waldo, “Second Chances: Employing Convicted Felons.” HR Magazine 57 (March 2012): 36–40.

Key Terms
chief diversity officer (CDO) (p. 233) hostile work environment sexual social contract (p. 221)
collective bargaining (p. 225) harassment (p. 229) subcontracting (p. 219)
cross-training (p. 222) intersectionality theory (p. 233) unconscious bias (p. 236)
Department of Labor (p. 222) living wage (p. 224) underemployment (p. 219)
downsizing (p. 220) minimum wage (p. 223) unemployment rate (p. 215)
employee assistance program (EAP) Occupational Safety and Health vesting (p. 224)
(p. 237) Administration (OSHA) (p. 225) work/life programs (p. 236)
employee engagement (p. 217) outsourcing (p. 219) Worker Adjustment and Retraining
employee stock ownership plans psychological contract (p. 216) Notification (WARN) Act
(ESOPs) (p. 241) quid pro quo sexual harassment (p. 221)
employer of choice (p. 240) (p. 229) workforce reduction (p. 220)
employment at will (p. 222) reverse mentoring (p. 235) workplace diversity (p. 232)
ergonomics (p. 225) rightsizing (p. 220) workplace inclusion (p. 234)
full employment (p. 215) sexual harassment (p. 229) zero tolerance (p. 230)
1. Review Table 8.1 and indicate the positive effects 5. Why is it important to understand the profiles of
associated with the psychological contract’s char- different generations at work? How can managers
acteristics. For example, what is positive about an use the ACORN principles to develop a strong sense
employee’s ability to solve problems independently? of community and solidarity among all employee
2. What is workforce reduction? How does it affect groups?
employees, consumers, and the local community? 6. What trends have contributed to work/life pro-
What steps should a company take to address these grams? How do work/life programs help employees
effects? and organizations?
3. What responsibilities do companies have with 7. What is an employer of choice? Describe how a firm
respect to workplace violence? Using the categories could use traditional marketing concepts and strate-
of violence presented in the chapter, describe the gies to appeal to current and potential employees.
responsibilities and actions that you believe are 8. Review the best practices in Table 8.10 for becoming
necessary for an organization to demonstrate social an employer of choice. What are some potential
responsibility in this area. drawbacks to each practice? Rank the eight practices
4. Describe the differences between workplace diversity in terms of their importance to you.
and equal employment opportunity. How do these
differences affect managerial responsibilities and the
development of social responsibility programs?
Develop a list of five criteria that describe your employer of firm meets your description and criteria of your employer
choice. Then, visit the websites of three companies in which of choice. Finally, provide three recommendations on how
you have some employment interest. Peruse each firm’s website these companies can better communicate their commitment
to find evidence on how it fulfills your criteria. On the basis to employees and the employer of choice criteria.
of this evidence, develop a chart to show how well each
X, Y, & Millennial: What Would You Do?

Dawn Burke, director of employee relations, glanced at her
?
to meet the supervisor’s requests. The employee claimed
online calendar and remembered her appointment at 3:00 that the supervisor was too demanding and impatient.
p.m. today. She quickly found the file labeled “McCullen Their conflict had escalated to the point that both were
and Aranda” and started preparing for the meeting. She unhappy and uncomfortable in the work environment.
recalled that this was essentially an employee-supervisor Other employees had noticed, and overheard, some of the
case where the employee had been unwilling or unable negative interactions between them.

In her role, Dawn was responsible for many programs, degrees, and we haven’t been using computers since we
including a new mediation initiative to resolve workplace were young. I started working at this company about the
conflicts. The program was designed to help employees time she was born, and I am not sure that her management
develop stronger communication and conflict resolution skills. style is good for our department. Everything was going
In this case, the program was also providing an intermediary pretty well until we started changing our systems.”
step between informal and formal discipline. Today, she was Terry commented, “John is a valuable member of
meeting with both parties to discuss mediation guidelines, a the department, as he knows everyone at this company. I
timeline, their goal, and their general points of conflict. appreciate his knowledge and loyalty. On the other hand,
John McCullen, 51, a buyer in the facilities department, he has not completed several tasks in a timely manner,
and Terry Aranda, the director of facilities procurement, nor has he asked for an extension. I feel that I must check
arrived separately. John had been with the company for 32 up on his schedule and proof all of his work. John has
years and had started his career with the company right out attended several training classes, and I asked that he use
of high school. Terry, 31, was hired from another firm to an electronic calendar so that projects are completed on
oversee the procurement area a year ago and had recently time. He continues to ignore my advice and deadlines.
graduated from a prestigious MBA program. Dawn started We’ve had several conversations, but John’s work has not
the meeting by reviewing the mediation guidelines and substantially improved. We have many goals to achieve in
timeline. She reminded John and Terry that their goal was the department, and I need everyone’s best work in order
to develop a workable and agreeable solution to the current to make that happen.”
situation. Dawn then asked for each party to explain his or her Dawn thanked them for their candor and told them
position on the conflict. she would meet with them next week to start the mediation
John began, “Ms. Aranda is a very smart lady. She process. As she contemplated what each had said, she
seems to know the buying and procurement area, but she remembered an article that discussed how people born in
knows less about the company and its history. I am not different generations often have contrasting perceptions
sure she has taken the time to learn our ways and values. about work. Dawn started to jot a few notes about the next
Ms. Aranda is impatient with our use of the new software steps in resolving their conflict. What would you do?
and computer system. Some of us don’t have college

CHAPTER
9 Consumer
Relations

The Power of Positive Consumer Reviews
When consumers begin planning their vacations, The ratings culture primarily persists because
they are focused on finding the best location and business owners and managers believe that new
lodging to fulfill their desire for fun and relaxation. and continuing customers are driven by other
Increasingly, these would-be vacationers are opting consumers’ opinions. This was certainly the case
for private home rentals instead of hotels and resorts. for Shore to Please Vacations and Staffordshire
Driven by advances in technology and consumer Property Management. Both vacation rental com-
demand for spacious, private, and unique accompanies inserted nondisparagement clauses into the
modations, companies like Airbnb, HomeAway, and lengthy contracts that consumers signed to rent
others are thriving. While home rentals have been properties. These clauses sought to prevent con-
popular in Europe for years, tourists in the United sumers from leaving negative or less-than-perfect
States have more recently discovered the joys and reviews, but they are in violation of the Consumer
opportunities of “living like a local.” The annual Review Fairness Act (CRFA), administered by the
global vacation rental market is estimated at $24 Federal Trade Commission (FTC). These companies
billion and seems to be growing each year. also threatened consumers with significant penalties
Many of the same technologies and consumer for violating the clause—a minimum of $25,000 in
attitudes that bolstered vacation rentals have given the case of Shore to Please. After consumers left
rise to a culture of consumer ratings. Websites honest reviews, Shore to Please levied lawsuits
like Yelp, TripAdvisor, Rotten Tomatoes, and others against them for damages. The FTC said these
empower consumers to rate restaurants, movies, clauses violated the CRFA, and Shore to Please
television shows, retailers, and other providers of dismissed its pending lawsuits. Beyond the vacation
experience-based goods and services. Customer rental industry, the FTC found that companies in
satisfaction is a significant concern for all companies, the flooring, recreational, and air conditioning and
as ratings provide a mechanism for recognizing, heating industries have used nondisparagement
rewarding and even disciplining employees. For provisions in contracts.
example, the Net Promoter Score (NPS) has become Consumers are clearly a pivotal stakeholder
very important for many businesses. The NPS group and driver of business success. The far-
was developed by Fred Reichheld and uses only reaching nature of the internet means that product
one question: “How likely are you to recommend and service ratings are becoming more important
Company XX to a friend or colleague?” Even though as direct sources of information for consumer
Shutterstock/Gajus
statisticians and other experts warn against the use decision-making. Consumer influencers who
of a single indicator to measure customer loyalty, review and write about products attract millions
business leaders have wholeheartedly embraced to their blogs and websites. Many have become
NPS. While critics of NPS call it a “dubious manage- so instrumental that companies now compensate
ment fad,” and even Reichheld was puzzled at them for their opinions. Consumers around the
the way that NPS was being used to determine world are connected in real time and enjoy sharing
employee bonuses, corporate leaders are embed- their experiences and opinions as the electronic
ding the scores in annual reports and earnings equivalent of word of mouth, even while shopping
conference calls with Wall Street analysts. in physical stores.1
Chapter Objectives
●● Describe customers as stakeholders
●● Investigate consumer protection laws
●● Examine six consumer rights
●● Discuss the implementation of responsibilities to consumers
249
consumer relations
a firm’s process for creating and
maintaining a positive relationship
with consumers by meeting
T his case illustrates the complexities associated consumer relations, a
firm’s process for creating and maintaining a positive relationship with
consumers by meeting customer needs. From a social responsibility
customer needs perspective, the key challenge is how an organization assesses its stakeholders’
needs, integrates them with company strategy, reconciles differences between
stakeholders’ needs, strives for better relationships with stakeholders, achieves
mutual understandings with them, and finds solutions for problems. In this
chapter, we explore relationships with consumers and the expectations of the
economic, legal, ethical, and philanthropic responsibilities that must be addressed
by business.
Consumer Stakeholders
For the past 20 years, “green marketing,” the promotion of more environmentally
friendly products, has become a much-discussed strategy in the packaged goods
industry. Procter & Gamble (P&G), the venerable manufacturer of soap, paper
goods, and other household products, feared that increasing environmental
consciousness among consumers would lead to a resurgence in the use of cloth
diapers, which would have had a negative effect on its disposable diaper business.
P&G launched a marketing campaign touting the benefits of disposables, including
the fact that their use does not require hot water for laundering or fuel for diaper
service trucks. The company also initiated a pilot project for composting dispos-
able diapers. Today, the debate over cloth versus disposables has largely faded,
and the P&G marketing campaign has disappeared.
The dawn of the twenty-first century brought many new products, including
disposable tableware, food containers that can be used repeatedly or thrown
away, and electrostatic mops with cloths that are disposed of after one use.
Although these product introductions suggest a decline in environmental con-
sciousness among consumers, other initiatives counter this assumption. Whole
Foods Markets, a grocery chain that specializes in organic and environmentally
friendly items, reports $940 of sales per square foot, as opposed to the $496
per square foot earned by Kroger.2 Today, the company utilizes a wide variety
of approaches to reinforce its green philosophy, including blogs, store projects,
loans for local producers, selling organic foods, and the use of biodiesel for its
trucks.3 Indeed, environmental and related social initiatives have become a global
concern. One goal of the annual International Buy Nothing Day, sponsored by
consumer associations around the world, is to encourage consumers to consider
the environmental consequences of their buying habits. The 24-hour period occurs
on the same day that many Americans are launching the holiday shopping season,
the day after Thanksgiving, known as “Black Friday.” Another goal is to remind
consumers about the power of retail and the fact that the richest 20 percent of
people consume 80 percent of the world’s resources. The idea has spawned other
initiatives, including Buy Nothing community groups that aim to build trust and
reduce waste through a gift-giving and sharing economy.4
Although the future of different marketing strategies can be debated, the real
test of effectiveness lies in the expectations, attitudes, and ultimate buying patterns
of consumers. The preceding examples illustrate that there is no true consensus
around issues such as environmental responsibility; therefore, companies face
complex decisions about how to respond to them. This is true for all types of
expectations, including the ones explored in this chapter. In the sections that
consumers
follow, we examine the economic, legal, ethical, and philanthropic responsibilities
individuals who purchase, use,
and dispose of products for that businesses have to consumers, individuals who purchase, use, and dispose of
themselves and their households products for themselves and their households.

Chapter 9 Consumer Relations 251
Responsibilities to Consumers
Not too long ago, the emphasis of marketing was on investors and competitors.
However, as marketers began to develop a stakeholder orientation, the importance
of consumers as a primary stakeholder became apparent. Consumers are necessary
for the success of a business; any company that does not consider the impact that
its operations have on consumers will likely not be in business very long. As such,
organizations must consider their responsibility to meet consumer needs. The
following sections illustrate how the various components of social responsibility
are applied to consumers.
Economic Issues
As discussed in earlier chapters, consumers are primary stakeholders because their
awareness, purchase, use, and repurchase of products are vital to a company’s
existence. Fundamentally, therefore, consumers and businesses are connected by
an economic relationship. This relationship begins with an exchange, usually of a
good or service for money, which often leads to a deeper attachment or affiliation.
In addition to its well-known advertising slogan, “Delivering Happiness,” Zappos
launched an advertising campaign focused on real customer stories. These market-
ing approaches typify the close relationship that customers develop with the shoes
they purchase from Zappos.5 Other consumers may choose to shun particular
brands or opt for the environmentally sensitive products described earlier. In all
of these cases, however, consumers expect the products they purchase to perform
as guaranteed by their sellers. Thus, a firm’s economic responsibilities include
following through on promises made in the exchange process.
Although this responsibility may seem basic today, business practices have not
always been directed in this way. In the early part of the 1900s, the caveat “Let
the buyer beware” typified the power that business—not consumers—wielded
in most exchange relationships.6 In some parts of the world, this phrase often
accurately describes the consumer marketplace. For example, although Indonesia
has consumer protection laws, consumers often feel like they have to test products
in stores before purchasing them. It is not uncommon for them to take electronics
out of the packaging and plug them in to see if they work. Many Indonesian con-
sumers may not be fully aware of their rights in the exchange process.7 In a more
nefarious example, mothers in China continue to be concerned about the quality
of infant formula and milk produced by Chinese manufacturers. Fear was rampant
in 2008 when thousands of infants were poisoned by Chinese milk formula, and
the Chinese government eventually prosecuted business owners for contaminating
milk with melamine. Melamine is commonly used to manufacture plastics, paper
board, and industrial coatings. Consumer distrust continues over a decade later,
despite advances in safety protocols, inspections, and public relations efforts.8
Companies’ fulfillment of economic responsibilities depends on their interac-
tions with consumers. However, there are situations in which the consumer does
not act as a fair participant in the exchange.9 Consumer fraud involves intentional consumer fraud
deception to derive an unfair economic advantage over an organization. Examples intentional deception to derive an
unfair economic advantage over
of fraudulent activities include shoplifting, collusion or duplicity, and guile. an organization
Collusion typically involves an employee who assists the consumer in fraud. For
example, a cashier may not scan all merchandise or may give a customer an unwar-
ranted discount. Duplicity may involve a consumer staging a fake accident in a
grocery store and then seeking damages against the store for its lack of attention
to safety. A consumer may purchase, wear, and then return an item of clothing for
a full refund. In other situations, the consumer may ask for a refund by claiming
a defect that either is nonexistent or was caused by consumer misuse.10 Although

Table 9.1 Types of Consumer Fraud

Type Example
Shoplifting A teenager steals a flash drive from an office supply store.
Collusion An employee provides a consumer with substantial company discounts
because of their friendship.
Duplicity A consumer stages a fake accident with the intent to file false claims
against a retailer.
Tag switching A customer switches the tags of a higher-priced item with that of a lower-
priced item.
Credit card fraud A consumer uses a credit card that he or she got through fraudulent means.
some of these acts warrant legal prosecution, they can be very difficult to prove,
and many companies are reluctant to accuse patrons of a crime when there is no
way that it can be verified. Businesses that operate with the “customer is always
right” philosophy have found that some consumers will take advantage of this
promise and have therefore modified their return policies to curb unfair use. REI,
for instance, modified its 100 percent satisfaction guarantee; now, consumers have
a year to return defective or unwanted products (whereas previously there was no
limit). Other companies, especially electronic firms, charge a “restocking fee” if
goods are not returned within a specified time period.11 Table 9.1 describes types
of consumer fraud.
Because of the vague nature of some types of consumer fraud, its full financial
toll is somewhat difficult to tally. However, rough estimates indicate that the aver-
age inventory shrinkage—which occurs when inventory is lost through shoplifting,
vendor fraud, employee error, or other means—costs U.S. businesses more than
$46 billion per year.12 While shrinkage is most often considered in the context of
brick-and-mortar establishments, companies in many industries have problems
with fraud and related issues that raise costs and lower profitability. The internet
has complicated matters, as it can be harder for consumers to determine which
online retailers are legitimate. Table 9.2 shows some effective tools that individuals
can use to combat credit card fraud over the internet.
Many consumers, of course, do not engage in such activities. However, there
are cases when buyers and sellers disagree on whether or how well companies
have satisfied their economic responsibilities. Thus, a consumer may believe that
a product is not worth the price paid, perhaps because he or she believes that the
product’s benefits have been exaggerated by the seller. For example, although some
Table 9.2 Ways to Avoid Credit Card Fraud on the Internet

Don’t give out your credit card number unless the site is secure and reputable.
Before using the site, check out security software/encryption software that it uses.
Obtain a physical address and phone number, rather than settling for a post office box number.
Call the telephone number to ensure that the company is legitimate.
Check out the email address to make sure that it is active.
Check out the Better Business Bureau (BBB) from the seller’s area.
Check out other websites about this person/company.
When possible, purchase items with your credit card because you can dispute the charges if
something goes wrong.
Keep a list of all your credit cards, as well as the seller’s information. If anything looks suspicious,
immediately contact your credit card issuer.
Source: Federal Bureau of Investigations, “Credit Card Fraud,” https://www.fbi.gov/scams-and-safety/common-fraud-
schemes/credit-card-fraud (accessed June 4, 2019).

marketers claim that their creams, pills, special massages, and other techniques can
reduce or even eliminate cellulite, most medical experts and dermatologists believe
that only exercise and weight loss can reduce the appearance of this undesirable
condition. Products for reducing cellulite remain on the market, but many consum-
ers have returned these products and complained about the lack of results. In the
United Kingdom, a number of cosmetics companies have been reprimanded by the
Advertising Standards Authority for making misleading claims in advertising and
packaging.13 If a consumer believes that a firm has not fulfilled its basic economic
responsibilities, he or she may ask for a refund, tell others about the bad experi-
ence, discontinue patronage, post a complaint to a website, contact a consumer
agency, and even seek legal redress.
A variety of consumer and government agencies keep track of consumer
complaints. For example, the Federal Trade Commission (FTC) reports the top con- Federal Trade Commission (FTC)
sumer complaints across the nation every year. Problems related to identity theft, the U.S. government agency
charged with protecting
debt collection, fraud involving bankers and lenders, imposter scams, and scams consumers and competition
involving telephone and mobile services have been at the top of the list in recent by preventing anticompetitive,
years.14 To protect consumers and provide businesses with guidance, a number of deceptive, and unfair business
laws and regulations have been enacted to ensure that economic responsibility is practices through law
met in accordance with institutionalized standards. enforcement, advocacy, and
education about unduly burdening
legitimate business activities
Legal and Regulatory Issues

As discussed earlier, legal issues with respect to consumers in the United States
primarily fall under the domain of the FTC, which enforces federal antitrust and
consumer protection laws. Within this agency, the Bureau of Consumer Protection Bureau of Consumer Protection
works to protect consumers against unfair, deceptive, and fraudulent practices. a bureau within the Federal Trade
Commission (FTC) charged with
The bureau is further organized into eight divisions, including those focused on
protecting consumers against
marketing practices, privacy and identity protection, advertising practices, and unfair, deceptive, or fraudulent
international consumer protection.15 For example, the FTC charged Lumosity practices
for claiming that their brain-training devices could help with brain trauma and
cognitive decline. The FTC claims that the firm does not have sufficient evidence
to back this up. The agency is cracking down on firms that claim they can improve
cognitive ability without substantiation, especially because many ads for these
products tend to be geared toward elderly people more likely to suffer from
dementia or other cognitive issues.16
In addition to the FTC, several other federal agencies regulate specific
goods, services, or business practices to protect consumers. The Food and Drug Food and Drug Administration
Administration (FDA), for example, enforces laws and regulations enacted to (FDA)
the U.S. government agency
prevent distribution of adulterated or misbranded foods, drugs, medical devices, charged with protecting the public
cosmetics, veterinary products, and potentially hazardous consumer products. The health by ensuring the safety,
Consumer Product Safety Commission enforces laws and regulations designed to efficacy, and security of foods,
protect the public from unreasonable risk of injury from consumer products. This drugs, cosmetics, biological
products, medical devices,
commission is well known to many consumers because it works with manufactur-
tobacco, veterinary products, and
ers to widely communicate product recalls, warnings, and recommendations for electronic products that give off
future product use. Many states also have regulatory agencies that enforce laws radiation
and regulations regarding business practices within their states. This means a
U.S.-based company that only sells in the U.S. must comply with 51 sets of laws Consumer Product Safety
Commission
and regulations. Further, state and local laws can be more stringent than federal the U.S. government commission
statutes, so it is important that businesses fully investigate the laws applicable to charged with protecting the public
all markets in which they operate. In Texas, for example, the Deceptive Trade from unreasonable risks of injury
Practices Act prohibits a business from selling anything to a consumer that he or or death associated with the use
of thousands of types of consumer
she does not need or cannot afford.17 The Colorado Consumer Protection Law products under the agency’s
is a broad regulation protecting consumers from damages associated with fraud. jurisdiction
As noted in earlier chapters, laws in other countries are often quite different from
U.S. law, so companies operating in international markets must consider the

complex relationships among local, state, national, and international regulation

and laws.
Most federal agencies and states have consumer affairs or information
offices to help consumers remain informed about agency activities and alerts.
Federal Communications The Consumer Affairs and Outreach Division of the Federal Communications
Commission (FCC) Commission (FCC) educates consumers on issues related to cable and satellite
the U.S. government commission
charged with regulating interstate
service, telecommunications, wireless technology, and other areas under the
and international communications FCC’s domain.18 The Montana Department of Justice’s Consumer Protection
by radio, television, wire, satellite, Division publishes information on their website to assist consumers in complaining
and cable in all 50 states, the effectively, recognizing scams, and avoiding identity theft. They also post informa-
District of Columbia and U.S. tion specific to the region, such as farming and oil and gas industry concerns.19
territories
In this section, we focus on U.S. laws related to exchanges and relationships with
consumers. Table 9.3 summarizes some of the laws that are likely to affect a wide
range of companies and consumers.
Health and Safety One of the first consumer protection laws in the United States
came about in response to public outrage over a novel. In The Jungle, Upton
Sinclair exposed atrocities, including unsanitary conditions and inhumane labor
practices, by the meat-packing industry in Chicago at the turn of the twentieth
century. Appalled by the unwholesome practices described in the book, the public
demanded reform. Congress responded by passing the Pure Food and Drug Act in
1906, just six months after The Jungle was published.20 In addition to prohibiting
the adulteration and mislabeling of food and drug products, the new law also
established one of the nation’s first federal regulatory agencies, the Food and Drug
Administration.
Since the passage of the Pure Food and Drug Act, public health and safety have
been major targets of federal and state regulation. For example, the Consumer
Product Safety Act established the Consumer Product Safety Commission to
enforce rules relating to product safety. For example, IKEA recalled 36 million
dressers after three children were killed after the dressers fell on them. A second
recall for the dressers was issued after an eighth child died.21 Companies that pro-
vide defective or faulty products resulting in customer harm must respond quickly
to avoid government penalties. They will still probably face civil litigation from
those who were harmed or killed by the defective products. Other laws attempt to
protect children from harm, including the Child Protection and Toy Safety Act and
the Children’s Online Privacy Protection Act (COPPA).
Credit and Ownership Abuses and inequities associated with loans and credit have
resulted in the passage of laws designed to protect consumers’ rights and public
interests. The most significant of these laws prohibits discrimination in the exten-
sion of credit, requires creditors to disclose all finance charges and related aspects
of credit transactions, gives consumers the right to dispute and correct inaccurate
information on their credit reports, and regulates the activities of debt collectors.
For example, the Home Ownership and Equity Protection Act requires home
equity lenders to disclose, in writing, the borrower’s rights, payment amounts, and
the consequences of defaulting on the loan. Together, the Department of Justice
and the U.S. Department of Housing and Urban Development (HUD) enforce laws
that ensure equal access to sale and rental housing. Every April, the government
sponsors Fair Housing Month to educate property owners, agents, and consumers
on their rights with respect to housing.
While home ownership is often considered part of the American Dream,
specific business practices in the banking and finance industry have been ques-
tioned. Between 2007 and 2009, the alarming number of mortgage foreclosures
arose from a combustible situation involving risky lending practices, subprime
mortgage disasters, and a general economic downturn. Many Americans assumed

Table 9.3 Major Consumer Laws

Pure Food and Drug Act Established the FDA; outlaws the adulteration or mislabeling of food
(1906) and drug products sold in interstate commerce.
Cigarette Labeling and Requires manufacturers to add to package labels warnings about the
Advertising Act (1965) possible health hazards associated with smoking cigarettes.
Fair Packaging and Outlaws unfair or deceptive packaging or labeling of consumer
Labeling Act (1966) products.
Truth in Lending Act Requires creditors to disclose in writing all finance charges and
(1968) related aspects of credit transactions.
Child Protection and Toy Requires childproof devices and special labeling.
Safety Act (1969)
Fair Credit Reporting Act Promotes accuracy, fairness, and privacy of credit information; gives
(1970) consumers the right to see their personal credit reports and to
dispute any inaccurate information contained therein.
Consumer Product Established the Consumer Product Safety Commission to regulate
Safety Act (1972) potentially hazardous consumer products.
Equal Credit Opportunity Outlaws the denial of credit on the basis of race, color, religion,
Act (1974) national origin, sex, marital status, age, or receipt of public
assistance and requires creditors to provide applicants, on request,
with the reasons for credit denial.
Magnuson-Moss Warranty Establishes rules for consumer product warranties, including
(FTC) Act (1975) minimum content and disclosure standards; allows the FTC to
prescribe interpretive rules in policy statements regarding unfair or
deceptive practices.
Consumer Goods Pricing Prohibits the use of price maintenance agreements among
Act (1975) manufacturers and resellers in interstate commerce.
Fair Debt Collection Prohibits third-party debt collectors from engaging in deceptive
Practices Act (1977) or abusive conduct when collecting consumer debts incurred for
personal, family, or household purposes.
Toy Safety Act (1984) Authorizes the Consumer Product Safety Commission to recall
products intended for use by children when they present substantial
risk of injury.
Nutrition Labeling and Prohibits exaggerated health claims and requires all processed
Education Act (1990) foods to contain standardized labels with nutritional information.
Home Ownership and Requires home equity lenders to disclose to borrowers in writing the
Equity Protection Act payment amounts, the consequences of default, and the borrowers’
(1994) right to cancel the loan within a certain time period.
Telemarketing and Authorizes the FTC to establish regulations for telemarketing,
Consumer Fraud and including prohibiting deceptive, coercive, or privacy-invading
Abuse Prevention Act telemarketing practices; restricting the time during which unsolicited
(1994) telephone calls may be made to consumers; and requiring
telemarketers to disclose the nature of the call at the beginning of
an unsolicited sales call.
Identity Theft Assumption Makes the FTC a central clearinghouse for identity theft
and Deterrence Act (1998) complaints and requires the FTC to log and acknowledge such
complaints, provide victims with relevant information, and refer
their complaints to appropriate entities (e.g., the major national
consumer reporting agencies and other law enforcement
agencies).
Children’s Online Privacy Protects children’s privacy by giving parents the tools to control what
Protection Act (COPPA) information is collected from their children online.
(1998)
Do-Not-Call Registry Act Allows the FTC to implement and enforce a do-not-call registry.
(2003)
(continued on next page)

Table 9.3 (Continued )

Fair and Accurate Credit Amends the Fair Credit Reporting Act (FCRA), gives consumers
Transactions Act (2003) the right to one free credit report a year from the credit reporting
agencies, adds provisions designed to prevent and mitigate identity
theft, and grants consumers additional rights with respect to how
information is used.
Bankruptcy Abuse Amends the Truth in Lending Act to include requiring certain
Prevention and creditors to disclose on the front of billing statements a minimum
Consumer Protection monthly payment warning for consumers and a toll-free telephone
Act (2005) number, established and maintained by the FTC, for consumers
seeking information on the time required to repay specific credit
balances.
Credit Card Amends the Truth in Lending Act to prescribe fair practices regarding
Accountability the extension of credit under an open-end consumer credit plan.
Responsibility and
Disclosure Act (2009)
Dodd-Frank Wall Street Established the Consumer Financial Protection Bureau (CFPB) to
Reform and Consumer protect consumers from complex and deceptive financial products.
Protection Act, Titles X
and XIV (2010)
Economic Growth, Consumers are able to contact each of the three major credit-
Regulatory Relief, and reporting agencies and direct them to place a free freeze on the
Consumer Protection Act consumer’s credit file. A credit freeze makes it harder for identity
(2018) thieves to open new accounts in consumers’ names.
Sources: Federal Trade Commission, “Statutes Enforced or Administered by the Commission,” https://www.ftc.gov/
enforcement/statutes (accessed June 4, 2019).
high-interest-rate loans or bought a house that they could not really afford and
eventually could no longer make mortgage payments. In many cases, individuals
or institutions bought or sold financial products that they did not fully understand.
The response included Titles X and XIV of the Dodd-Frank Act, which established
the Consumer Financial Protection Bureau (CFPB) to oversee the finance industry
and help prevent financial practices that could deceive consumers. Concurrently,
the attorneys general of all 50 states launched investigations of industry players,
while the federal government pursued charges that ended in settlements of $26
billion dollars.22
Marketing, Advertising, and Packaging Legal issues in marketing often relate

to sales and advertising communications and information about product content
and safety. One of the more subtle regulatory concerns with marketing involves
product placement product placement, which is a type of advertising in which a company pays for
a type of advertising in which a its product to be viewed in a movie, television show, or other form of media. The
company pays for its product to FCC requires all sponsors to be identified so that consumers recognize the layers
be viewed in a movie, television
show, or other form of media
and types of advertising strategies employed within the media production. Use of
product placement has been common for media produced in the United States,
but other countries, including Great Britain, have only recently allowed these
placements. After a 2011 change in British law, a British soap opera, Coronation
Street, began product placement relationships with Costa Coffee and Co-op.
Not only are these two stores re-created on the set, the stores’ products are seen
throughout the show. Actors drink coffee from Costa Coffee at their workplaces
and carry grocery bags that read “Co-op” into their houses. While the producers
of British soap operas may entertain product placement relationships, placements
are not allowed in children’s programs, news shows, and current affairs programs.
Certain types of products may never be placed, including alcohol and foods that
are high in fat, salt, or sugar.23 While product placement is easily recognized by
some consumers as a promotional tool, ethical concerns have been raised about

product placement in video games, movies, and other outlets targeted to young
children. In 250 children’s movies that debuted between 1991 and 2005, over
64 percent of them included some form of product placement. Vehicles, clothing
and shoes, technical equipment, drinks, and media outlets were the most common
product categories represented. Surprisingly, toys were only present in about 3
percent of the movies.24
Abuses in promotion can range from exaggerated claims, concealed facts, and
deception to outright lying. Such misleading information creates legal and ethical
issues because these messages do not include all the information that consumers
need to make sound purchasing decisions. Skechers paid consumers $40 million
after they were found to have engaged in deceptive advertising. The company
claimed that its Shape-Up shoes, as well as other shoe lines, would help women
lose weight and shape their posteriors. This settlement came a year after Reebok
was forced to pay $25 million to settle deceptive advertising claims stating that its
EasyTone and RunTone shoes would help to tone glutes, thighs, and calves better
than regular walking shoes. The FTC determined that there was no evidence to
support either of these claims.25
Although a certain amount of exaggeration and puffery is tolerated, deceptive
claims or claims that cannot be substantiated are likely to invite legal action from
the FTC. For example, the FTC levied a $26.5 million fine against the marketers
of Sensa, a supposed weight loss company, for marketing campaigns that used
unsupported claims and misleading endorsements. The FTC also sued L’Occitane
over claims that their skin cream had slimming properties. Cases such as these
prompted the FTC to develop a list of phrases that should alert both consumers
and marketers to unsubstantiated or false claims about weight loss products (see
Figure 9.1).26
Since the FTC Act of 1914 outlawed all deceptive and unfair trade practices,
additional legislation has further delineated which activities are permissible as
opposed to illegal. For example, the Telemarketing and Consumer Fraud and
Abuse Prevention Act requires telemarketers to disclose the nature of the call at
the beginning of an unsolicited sales call and restricts the times during which such
calls may be made to consumers. Another legal issue in marketing has to do with
the promotion of products that may negatively affect health or safety. Numerous
laws regulate the promotion of alcohol and tobacco products, including the Public
Health Cigarette Smoking Act (1970) and the Cigarette Labeling and Advertising
Act (1965). The 18th Amendment to the U.S. Constitution prohibited the manu-
facture and sale of alcoholic beverages in 1919. Prohibition was repealed in 1933
by the 21st Amendment, but the new amendment gave states the power to regulate
the transportation of alcoholic beverages across state lines. Today, each state has
unique regulations, some of which require the use of wholesalers and retailers to
limit direct sales of alcoholic beverages to final consumers in other states. In this
Figure 9.1 Red Flags: Likely Inaccurate Claims About a Weight-Loss Product
• Cause weight loss of 2 pounds or more a week for a month or more without dieting or
exercise
• Cause substantial weight loss no matter what or how much the consumer eats
• Cause permanent weight loss (even when the consumer stops using the product)
• Block the absorption of fat or calories to enable consumers to lose substantial weight
• Cause substantial weight loss for all users
• Cause substantial weight loss by wearing it on the body or rubbing it into the skin
Source: Federal Trade Commission, “Gut Check: A Reference Guide for Media on Spotting False Weight Loss Claims,”
https://www.ftc.gov/tips-advice/business-center/guidance/gut-check-reference-guide-media-spotting-false-weight-loss

case, a law aimed at protecting consumers by promoting temperance in alcohol

consumption now affects wine sellers’ ability to implement e-commerce and sub-
sequent interstate sales. Currently, roughly 37 states prohibit interstate shipping
from retail wine shops. The U.S. Supreme Court struck down a Tennessee law that
permitted the granting of retail or wholesale liquor licenses only to individuals or
entities that have resided in the state for a specified time. While not directly related
to interstate sales, arguments in the case raised questions about the patchwork of
regulations that now govern liquor sales both within and between states.27
Sales and Warranties Another area of law that affects business relationships with
warranty consumers has to do with warranties. Many consumers consider the warranty
a written guarantee issued at the behind a product when making a purchase decision, especially for expensive
time of purchase that promises to
durable goods such as automobiles, computers and other technical equipment, and
repair or replace the purchased
product within a certain time frame appliances. One of the most significant laws affecting warranties is the Magnuson-
Moss Warranty (FTC) Act of 1975, which established rules for consumer product
warranties, including minimum content and standards for disclosure. All 50 states
have enacted “lemon laws” to ensure that automobile sales are accompanied
by appropriate warranties and remedies for defects that impair the safety, use,
or value of the vehicle. Courts have ruled that consumers who lease instead of
purchase automobiles are also entitled to warranty protection under Magnuson-
Moss.28 The consumer market for used electronics and other products has created
new challenges and opportunities with respect to warranties. Understandably,
consumers want assurance that a secondhand product is worth the advertised
price. Automobile companies provide these assurances on their branded cars
through “certified preowned” programs, which signal that the automaker has
evaluated the used car, made necessary repairs, and guarantees its quality. Other
products, such as secondhand electronics, may be sold through a variety of retailers
unaffiliated with the electronics brands. For used computers, mobile phones, and
televisions, retailers often rely on third-party warranty providers to assess, repair,
and guarantee the products, including providing service after the sale. SquareTrade
is a well-known third-party warranty provider that has partnerships with Amazon,
eBay, and other retailers to package product sales with warranty sales.29
Product Liability One area of law that has a profound effect on business and
product liability its relations with consumers is product liability, which refers to a business’s legal
a business’s legal responsibility for responsibility for the performance of its products. This responsibility, which has
the performance of its products
evolved through both legislation and court interpretation (common law), may
include a legal obligation to provide financial compensation to a consumer who
has been harmed by a defective product. To receive compensation, a consumer
who files suit in the United States must prove that the product was defective, that
the defect caused an injury, and that the defect made the product unreasonably
dangerous. Under the concept of strict liability, an injured consumer can apply
this legal responsibility to any firm in the supply chain of a defective product,
including contractors, suppliers of component parts, wholesalers, and retailers.
Companies with operations in other countries must understand the various
forms of product liability law that exist. For example, China passed a new law
providing parameters for product liability. The law, which was passed as a result
of many consumer injuries and deaths, covers medical devices, environmental
pollution, and automobiles. Prior to this legislation, victims could file civil suits,
but many claimed that doing so was insufficient. Now, consumers have a more
effective means of retribution through the courts and a chance to receive monetary
compensation for their distress.30
Because the law typically holds businesses liable for their products’ perfor-
mance, many companies choose to recall potentially harmful products; such recalls
may be required by legal or regulatory authorities as well. However, critics believe

that the FTC’s recall process is too slow.

For instance, it took 165 days for a nut
butter manufacturer to recall its products
after salmonella was detected. Part of the
delay may come from the firm’s chance to
issue a voluntary recall. The FDA would
prefer the firm to recall a dangerous
product voluntarily rather than having it
be mandatory.31
Product liability lawsuits have
increased dramatically in recent years,
and many suits have resulted in huge
Shutterstock/Christopher E Zimmer
damage awards to injured consumers or
their families. In a much-publicized case,
a jury awarded a McDonald’s customer
$2.9 million after she was scalded when
she spilled hot coffee on her lap. Although
that award was eventually reduced on
appeal, McDonald’s and other fast-food
restaurants now display warning signs
that their coffee is hot to eliminate both
further injury and liability. Most companies have taken steps to minimize their
liability, and some firms—such as medical technology company C. R. Bard—have
stopped making products or withdrawn completely from problematic markets
because of the high risk of expensive liability lawsuits. Johnson & Johnson discon-
tinued its power morcellator, used to remove uterine fibroids in women, because
it could spread undetected cancers. Multiple wrongful death and product liability
lawsuits were filed against the company, which spent millions to resolve these
cases.32 Although some states have limited damage awards and legislative reform
is often on the agenda, the issue of product liability remains politically sensitive.
Technology Issues Widespread use of the internet and social media has created
new opportunities, as well as potential problems related to consumer protection.
Many technology issues center on the collection and sale of consumer data, includ-
ing the ways in which consumers are informed about these practices. In particular,
social media creates business opportunities in dual markets, including the ability
of retailers to market products to consumers on social media sites and the ability
of social media sites to sell information gained about consumers back to retailers.
Given the number of consumers around the world using Facebook, Instagram, and
Twitter, the latter market has been subject to significant scrutiny, including legal
challenges.33
Privacy and technology also intersect in the Telephone Consumer Protection
Act, administered by the FCC. Many smartphone users are inundated with
automated phone calls that lead to recorded messages or worse, faintly veiled
attempts to scam or confuse consumers. These phone calls have left many consum-
ers without a desire to answer their phones. Sophisticated programming is used so
that incoming calls appear with the same area code as the phone being contacted,
creating more difficulty for legitimate callers to get wary consumers to answer
their phones. Each year, Americans receive more than 50 million robocalls, which
are dependent on Voice Over Internet Protocol (VOIP) infrastructure and U.S.
regulations that require the receiving party of a call to pay for any charges. Other
parts of the world, including the European Union (EU), require the calling party
to pay the charges. This regulatory environment has created a large number of
telecommunications firms in the United States. To answer consumer complaints,
the FCC recently launched an aggressive plan to curb illegal robocalling, especially

those individual and companies that have placed over 1 billion unsolicited calls to
promote financial schemes and scams.34
Beyond concerns about privacy and nuisance, technology facilitates new
methods for reaching consumers and engaging them in exchange relationships.
The founder of iBackPack, a new company dedicated to the development of
crowdfunding technology-enhanced backpacks and other products, used a crowdfunding
the practice of funding a project approach to generate start-up capital. Consumers donated over $800,000 to
or by securing relatively small
iBackPack on two crowdfunding sites, including Kickstarter and Indiegogo. Unlike
donations from a large number of
people strictly charitable donations, consumers were promised delivery of a specific
product in exchange for their donations. For example, consumers who donated
$169 were promised one of the start-up’s first products, the iBackPack 1.0 Power
Pack. When no products materialized, hundreds of consumers complained. In
2019, the FTC filed a complaint against the company and its founder, alleging
most of the donations were used for personal expenses or other expenses unrelated
to the development of new products.35
International Issues Concerns about protecting consumers’ legal rights are not
limited to the United States. Most developed nations have laws and offices devoted
to this goal. For example, the Chinese government enacted tougher safety stan-
dards for automobiles, bringing Chinese expectations in line with safety standards
in the United States and Europe.36 In the EU, the health and consumer protection
directorate general oversees efforts to increase consumer confidence in the uni-
fied market. Its initiatives center on health, safety, economic, and public-health
interests. One EU directive establishes minimum levels of consumer protection in
member-states. For example, EU consumers now have a legal guarantee of two
years on all consumer goods. If they find a defective product, they may choose
repair or replacement or, in special circumstances, ask for a price reduction or
rescind the contract altogether.37
In Japan, unlike in the United States, product liability lawsuits are much less
common. In the early 1990s, Chikara Minami filed one of the first such lawsuits,
against the Japanese automaker Mitsubishi. Minami’s suit alleged a defect in
the Mitsubishi Pajero. Although the court sided with the automaker in this case,
10 years later, Mitsubishi was accused of deliberately covering up consumer
complaints. Despite this revelation and an enhanced product liability law in
1995, consumer rights are often subverted to preserve the power and structure
of big business in Japan.38 Much like Japan, China’s consumer rights movement
is relatively new; it resulted from economic policy changes away from isolation-
ism and central economic planning. The China Consumers’ Association was
established in 1984 and has helped create consumer expectations and company
responses that are starting to resemble those found in Western economies. Despite
this action, however, there have been numerous consumer scares surrounding
products manufactured in China and other countries. Table 9.4 lists a number
of cases globally involving product recalls for food products, furniture, medicine,
automotive products, and toys.39
As discussed in this section, there are many laws that influence business
practices with respect to consumers all over the world. Every year, new laws are
enacted, and existing rules are modified in response to the changing business
environment, including the incidence of consumer product concerns. Although
companies must monitor and obey all laws and regulations, they also need to keep
abreast of the ethical obligations and standards that exist in the marketplace.
Consumer Bill of Rights
a group of four consumers
rights (to choose, to safety, to Ethical Issues
be informed, and to be heard)
first introduced by U.S. President In 1962, U.S. president John F. Kennedy proclaimed a Consumer Bill of Rights
John F. Kennedy in 1962 that includes the rights to choose, to safety, to be informed, and to be heard.

Table 9.4 Product Recalls

Year Recall Description
2007 Lead-painted toys It was discovered that many Mattel toys were painted using lead
paint, which is poisonous if ingested.
2007 Pet food Contaminated pet food from China resulted in the sickness
and death of many pets.
2010 Children’s medicines Johnson & Johnson issued a massive recall on children’s
medicines such as Tylenol due to product contamination.
2012 Peanut products Salmonella bacteria were detected in many peanut products,
including peanut butter.
2013 Yogurt Mold was detected in some Chobani yogurt products.
2014 General Motors (GM) GM issued a recall on several car models because of faulty
ignition switches.
2016 Samsung Samsung recalled its Galaxy Note 7 due to overheating and fire
risk.
2015 Takata Takata, the maker of airbags for automobiles, began a lengthy
recall of defective airbags.
2019 Knape & Vogt Sit-stand workstations manufactured by Knape & Vogt were
recalled due to problems with hydraulic gas pressure that enables
the workstations to be raised or lowered.
Kennedy also established the Consumer Advisory Council to integrate consumer

concerns into government regulations and processes. These four rights established
a philosophical basis on which state and local consumer protection rules were
later developed, with a clear emphasis on how regulation may serve the public
interest.40 Around the same time, Ralph Nader’s investigations of auto safety and
his publication of Unsafe at Any Speed in 1965 alerted citizens to the dangers of
a common consumer product. Nader’s activism and Kennedy’s speech provided
support for consumerism, the movement to protect consumers from an imbal- consumerism
ance of power on the side of business and to maximize consumer welfare in the the movement to protect
consumers from an imbalance of
marketplace.41 The consumer movement is a global phenomenon, as is indicated
power on the side of business and
by the annual celebration of World Consumer Rights Day. to maximize consumer welfare in
Over the last five decades, consumerism has affected public policy through a the marketplace
variety of mechanisms. Early efforts were aimed primarily at advocating for legis-
lation and regulation, whereas more recent efforts have shifted to education and
protection programs directed at consumers.42 For years, the Consumers Union, for
example, worked with regional and federal legislators and international groups to
protect consumer interests, sponsored conferences and research projects, tested
consumer products, and published the results in Consumer Reports magazine. The
magazine details business practices that are deemed to be unfair to consumers,
such as predatory lending, the poor value of some life insurance products, product
quality concerns, and advertisements aimed at vulnerable groups, like children
and senior citizens.43 Consumers Union has been absorbed into the Consumer
Reports organization, but consumer advocacy efforts are still on their agenda.
Over the past few years, Consumer Reports has advocated for a bipartisan bill
in the U.S. House of Representatives aimed at curbing robocalls, which are often
associated with scams. The organization also alerted consumers that many smart
televisions have built-in automatic content recognition (ACR), which tracks what
programs are watched on the television. ACR data are sent back to the television
manufacturer and its business partners, often resulting in recommendations for
other shows and the development of targeted marketing messages.
Consumer Reports has also dedicated their efforts toward many consumer
product categories, including automobiles, energy, health, food, and other areas

ambient advertising that permeate daily life. Ambient advertising, which places unconventional or
a form of advertising where unexpected messages in a target market’s social environment, is considered “ad
unconventional or unexpected
creep” by critics who lament the number of advertisements that consumers are
messages are placed in a target
market’s social environment exposed to each day. Thus, in addition to the content of advertising and unseen
data collection, consumer groups may express concerns about the timing and
placement of advertising. Many ambient advertisements appear in outdoor
locations, restroom stalls, taxis, or other places where consumers are not neces-
sarily expecting to see them. In other cases, technology is used to personalize
promotional messages and offers. Today, it is possible for companies to send
marketing messages to potential consumers based on location data sent from these
consumers’ smartphones. While some consumers appreciate marketing based on
physical proximity, others view the approach as a clear invasion of privacy, even
if they are able to refuse the wireless signal and communications.44
The internet and electronic communication have become main vehicles for
consumer advocacy, education, and protection. Visitors to the National Consumers
League (NCL) website at nclnet.org or consumerworld.org easily find publications
on many consumer issues, research and campaign reports, product reviews,
updates on legal matters, and many other types of services. Thus, consumer groups
and information services have shifted the balance of power between consumer
and business because consumers are able to compare prices, read independent
rankings, communicate with other buyers, and have greater knowledge about
products, companies, and competitors.45 Recently, the NCL launched information
resources about coding boot camps, which are technical training opportunities
that teach students how to develop computer code. While many boot camps are
legitimate, NCL recommends that potential students independently investigate the
job placement rates, tuition costs, and state authorizations for these schools.46
Despite the opportunities to exert more power, some researchers question
whether most consumers take the time and energy to do so. For example, although
the internet provides a great deal of information and choices, access to the internet
partly depends on educational level and income. In addition, the volume of
information available online may actually make it more difficult to analyze and
assimilate. Even with these issues, consumer groups have developed a legion of
e-activists who email legislators and regulators and work to get consumer protec-
tion legislation passed. These consumer activists hope to use their campaigns to
spur policy changes in the area of consumer protection. Some major accomplish-
ments include lower credit card rates, improved card services, and higher security
of financial information.47 Consumer Reports provides a number of consumer
advocacy tools on its website, such as the opportunity to sign petitions, read
letters written by Consumer Reports and other groups to government agencies
and corporations, report safety concerns, and submit stories and ideas for the
organization to investigate.
U.S. presidents since Kennedy have confirmed the four basic consumer rights
and added new ones in response to changing business conditions. President Bill
Clinton, for example, appointed a commission to study the changing healthcare
environment and its implications for consumer rights. The result was the proposal
of a Patient’s Bill of Rights and Responsibilities to ensure rights to confidentiality
of patient information, to participate in healthcare decisions, to access emergency
services, and other needs.48 During the same period, a Financial Consumer’s Bill of
Rights Act was proposed in the U.S. House of Representatives to curb high bank
fees, automated teller machine (ATM) surcharges, and other practices that have
angered consumers.49
Consumer rights were first formalized through a presidential speech and
subsequent affirmations, resulting in the legal establishment of specific elements of
these rights. However, the relatively broad nature of the rights means they must
be interpreted and implemented on a company-by-company basis. Table 9.5 lists
six consumer rights that have become part of the ethical expectations of business.

Table 9.5 Basic Consumer Rights

Right General Description
To choose Consumers have the opportunity to select from a variety of products at
reasonable prices.
To safety All products should be safe for their intended use, include instructions for
proper and safe use, and have been sufficiently tested to ensure reliability.
To be informed Information is accurate, adequate, and free of deception so that consumers can
make a sound decision.
To be heard Consumers have the opportunity to communicate or voice their concerns in the
public policy process.
To redress Consumers have the right to express dissatisfaction and seek restitution from a
business when a product does not meet their expectations.
To privacy This right is related to consumers’ awareness of how their personal data are
collected and used and places a burden on firms to protect this information.
Although these rights are not necessarily provided by all organizations, our social
responsibility philosophy requires their attention and implementation.
Right to Choose The right to choose implies that, to the extent possible, consum-
ers have the opportunity to select from a variety of products at competitive prices.
This right is based on the philosophy of the competitive nature of markets, which
should lead to high-quality products at reasonable prices. Antitrust activities that
reduce competition may jeopardize this right, and it has been called into question
with respect to safety in some parts of the United States. The right has manifested
itself differently in recent times. Google, for example, was ordered by an EU
ruling to erase consumers’ information in search results. The ruling, dubbed the
“right to be forgotten,” gives consumers in the EU more power to choose how
their information will be used. While the rule currently applies only in the EU, the
effects of this mandate are potentially far-reaching.50
Right to Safety The right to safety also implies that all products should be safe
for their intended use, include instructions for proper and safe use, and have
been sufficiently tested to ensure reliability. Companies must take great care in
designing warning messages about products with potentially dangerous or unsafe
effects. These messages should take into account consumers’ ability to understand
and respond to the information. Warnings should be relevant and meaningful
to every potential user of the product. Some warnings use symbols or pictures
to communicate no matter what languages consumers speak. Companies that
fail to honor the right to safety risk expensive product liability lawsuits and dam-
ages to their reputations.
McDonald’s announced its response to media allegations of serving unsafe
food items in China soon before World Consumer Rights Day. Claims involved
the serving of chicken an hour past the suggested time period after being cooked
and the serving of unsanitary beef. The incident damaged the company’s reputa-
tion and came at a most unfortunate time, as the fast food giant had launched
a marketing campaign highlighting their commitment to food quality and safety
only weeks before. Kentucky Fried Chicken (KFC) was embroiled in a chicken-
related scandal in China around the same time, and both companies used social
media to manage the crises. McDonald’s apologized within 24 hours of news
reports, which is very uncommon in a collectivist society like China that strives
to maintain “face.” On the other hand, KFC did not issue an apology until its
role in the scandal was verified over one month later. Researchers concluded
that McDonald’s approach both surprised and delighted consumers and other
stakeholders.51

Right to Be Informed Consumers also

have the right to be informed. Any infor-
mation, whether communicated in writ-
ten or verbal format, should be accurate,
adequate, and free of deception so that
consumers can make a sound decision.
This general assertion has also led to
specific legislation, such as the Nutrition
Labeling and Education Act of 1990,
which requires certain nutrition facts on
Shutterstock/Ekaterina_Minaeva
food labels. This right can be associated

with safety issues if consumers do not
have sufficient information to purchase
or use a product effectively. Other types
of violations include companies charging
customers for unrequested products or
not providing them with enough informa-
tion. The FCC fined AT&T $100 million
because it did not inform customers with unlimited plans that after using 5 GB of
data per month, the carrier would reduce transmission speeds. This slower speed
interfered with the functionality of mobile apps and appeared to contradict the
network speeds that AT&T advertised. The FCC believed this lack of disclosure
violated consumer rights.52
In an age of rapid technological advances and globalization, the degree of
complexity in product marketing is another concern related to consumers’ right to
information. This complexity may relate to the ways in which product features and
benefits are discussed in advertising, how effective salespeople are in answering
consumer questions, the expertise needed to operate or use the product, and the
ease of returning or exchanging the product. To help consumers make decisions
based on adequate and timely information, some organizations sponsor consumer
education programs. For example, pharmaceutical companies and health mainte-
nance organizations sponsor free seminars, health screenings, websites, and other
programs to educate consumers about their health and treatment options. The
nonprofit organization URAC (which stands for their original name, “Utilization
Review Accreditation Commission”) is committed to promoting healthcare quality
through a series of accreditations that companies and organizations may pursue.
The approval process is extensive, and applicants must provide evidence of meet-
ing national standards for healthcare quality, consumer protection, and health
outcomes. URAC is an independent, third-party quality validator that provides
a seal of approval to let consumers know which healthcare providers have met
rigorous standards in dentistry, telehealth, pharmacy, and other fields.53
Right to Be Heard The right to be heard relates to opportunities for consumers to

communicate or voice their concerns in the public policy process. This also implies
that governments have the responsibility to listen and take consumer issues and
concerns into account. One mechanism for fulfilling this responsibility is through
the FTC and state consumer affairs offices. Another vehicle includes congres-
sional hearings held to educate elected officials about specific issues of concern
to consumers. At the same time, consumers are expected to be full participants
in the process, meaning they must be informed and willing to take action against
misconduct in the marketplace.
Right to Seek Redress In addition to the rights described by Kennedy, consumers

have the right to express dissatisfaction and seek restitution from a business
when a good or service does not meet their expectations. However, consumers
Table 9.6 Dispute Resolution Services of the BBB

Mediation—BBB provides a professionally trained mediator to talk with the parties and guide
them in working out their own mutually agreeable solution.
Informal dispute resolution—BBB provides a professionally trained hearing officer who will listen
to both sides and make a nonbinding decision on how to resolve the dispute.
Conditionally binding arbitration—BBB provides a professionally trained arbitrator who will listen
to both sides and make a decision on how to resolve the dispute that is binding on the parties
only if the customer accepts the decision.
Binding arbitration—BBB provides a professionally trained arbitrator who will listen to both
sides, weigh the evidence presented, and make a decision on how to resolve the dispute that is
binding on all parties.
Source: Better Business Bureau, “Dispute Resolution Processes and Guides,” https://www.bbb.org/bbb-dispute-handling-
and-resolution/dispute-resolution-rules-and-brochures/dispute-resolution-processes-and-guides/ (access June 20, 2019).
need to be educated in the process for seeking redress and to recognize that the
first course of action in such cases should be with the seller. At the same time,
companies need to have explicit and formal processes for dealing with customer
dissatisfaction. Although some product problems lead to third-party intervention
or legal recourse, the majority of issues should be resolvable between the consumer
and the business. One third party that consumers may consult in such cases is the
Better Business Bureau (BBB), which promotes the self-regulation of business. To
gain and maintain membership, a firm must agree to abide by the ethical standards
established by the BBB. This organization collects complaints on businesses
and makes this information, along with other reports, available for consumer
decision-making. The BBB also operates the dispute resolution division to assist
in out-of-court settlements between consumers and businesses. These settlements
are less costly than litigation in terms of money, time, and stress. Specific dispute
resolution services fall into one of four categories, which are listed in Table 9.6.
Mediation offers the opportunity for a trained mediator to guide the customer
and company toward their own mutually acceptable solution, whereas informal
dispute resolution includes a more central role for a hearing officer, who makes
a nonbinding decision. A trained arbitrator is used in both conditionally binding
arbitration and binding arbitration, with the latter approach resulting in a decision
that is binding on all parties.54 This self-regulatory approach not only provides
differentiation in the market, but can also minimize or even prevent new laws and
regulations from being passed and imposed on businesses.
Right to Privacy Information technology and the use of the internet prompted
increasing concerns about consumer privacy. This right relates to consumers’
awareness of how personal data are collected and used, and it places a burden on
firms to protect this information. How information is used can create concerns
for consumers. Although some e-commerce firms have joined together to develop
privacy standards for the internet, many websites do not meet the FTC’s criteria
for fair information practices, including notice, choice, access, and security. Recent
action by the FTC resulted in a $235,000 settlement with Explore Talent, an
online talent search company. The firm violated provisions of the COPPA because
it collected personal information from children without gaining parental consent.55
We will take a closer look at the debate surrounding privacy rights in Chapter 10.
A firm’s ability to address these consumer rights can serve as a competitive
advantage. Service Line Warranties of America (SLWA), a utility service company
and a past recipient of the National Torch Award for Marketplace Ethics given
by the BBB, is highly regarded for their ethical approach to consumers. They help
consumers understand their responsibilities with respect to utility maintenance
so that they are not charged extra fees by their utility companies. The company’s

mission is to take care of the complexities of home ownership so that consumers

can enjoy more free time.56
Consumer Action When consumers believe that a firm is operating outside

ethical or legal standards, they may be motivated to take some type of action.
As discussed earlier, there are a number of strategies that consumers can employ
to communicate their dissatisfaction, such as complaining or discontinuing the
relationship. For example, some people believe that Walmart’s presence has
contributed to the demise of locally owned pharmacies and variety stores in many
small towns. The chain’s buying power ensures lower prices and wider product
variety for consumers, but it also makes it difficult for some smaller retailers to
compete. Other consumers and community leaders worry about the traffic conges-
tion and urban sprawl that accompany new retail sites. Some Walmart critics
have taken their discontent with the retailer to the internet. Disgruntled customers
and others share complaints about the retail chain, provide updates about legal
action, and promote campaigns against the retailer on changewalmart.org. The
website is managed by the United Food and Commercial Workers (UFCW) union,
although consumers are active participants in the effort. Walmart has sought legal
relief so that members of UFCW are permitted to shop there but may not picket,
protest, demonstrate, or otherwise disrupt customers, management, and store
operations.57
Stakeholders may use the three types of power—symbolic, utilitarian, and
coercive—discussed in earlier chapters to create organizational awareness of
important issues. For example, wealthy Thai consumers who support military rule
asked consumers to avoid purchasing European brands after the EU criticized a Thai
government coup. In particular, the EU criticized government decisions to make it
harder to express dissent, as well as delays in elections. Brussels announced that it
was suspending official visits to Thailand and would not sign an agreement with the
country. Wealthy Thai consumers felt betrayed by a region with which they exten-
sively trade.58 While this response is not a result of a company’s action, the situation
highlights the lingering contention between Thailand and the EU. These consumers
boycott are engaging in another form of consumer action, a boycott, by abstaining from
a form of consumer action in which using, purchasing, or dealing with a company or other organization.
consumers abstain from using,
Many groups choose to boycott certain businesses or products because of
purchasing, or dealing with a
company or other organization disagreements over an owner’s beliefs or a government’s policies. Famous celebri-
ties and organizations boycotted the Beverly Hills Hotel because of the actions
of its owner, Sultan Hassanal Bolkiah of Brunei, a country located on the north
coast of the island of Borneo. The boycott occurred after the sultan stated that he
was enforcing sharia law in his country. Boycotters protested against some of the
harsher punishments levied against certain people and groups convicted of crimes
under sharia law.59
Protests are also a common consumer method of showing displeasure with
consumer protest an organization’s policies and are often used in tandem with boycotts. Consumer
a form of consumer action that protests are a form of consumer action that involves the organized and public dis-
involves the organized and public play of consumers’ disapproval of a firm’s actions. Protests have been used around
display of consumers’ disapproval
of a firm’s actions
the world for years, including high-profile events in the United States that were
largely organized by women. In 1935, women in Chicago led a national campaign
to protest the high cost of meat. In the 1960s, women in Denver, Colorado, and
other large cities boycotted supermarkets to bring attention to the increasing cost
of consumer goods.60 More recently, oil and gas companies have been alarmed
by the number and actions of protestors who are against the development of
underground pipelines to transport oil and gas throughout parts of the United
States. Beyond crowds numbering over 4,000 people, protesters tried to close
pipeline valves manually in facilities near the Canadian border in October 2016.61
Today, consumer protests are often implemented online via social media channels,

Ethical Responsibilities in MARKETING
The Rise of Femtech

When health expert Tania Boler became pregnant, she the specific factors leading to their infertility. Using a data-
wondered why all of the options for breast pumps were base of millions of women, Celmatix analyzes a patient’s
loud, bulky, and looked like were designed in the 1980s. personal health profile against the profiles of other women
Armed with degrees from Oxford University (BA) and with similar health factors who have overcome fertility
Stanford University (MA), Boler set out to design the problems. Complex algorithms result in patient-specific
perfect breast pump for her—one that was discreet, quiet, recommendations, on the likelihood that a particular fertil-
and wearable. ity treatment will be successful. This big data approach
In the United States, approximately 80 percent of helps doctors create treatment plans and ensures that
women breastfeed their newborns. However, many of women and their partners understand potential genetic
them stop earlier than physicians recommend because difficulties on the pathway to conception. Celmatix has
of complications in the workplace and a lack of options raised over $70 million in investments.
that integrate with today’s fast-paced lifestyles. By using These female entrepreneurs are not alone. Other
modern technologies, like Wi-Fi, that most now take for companies have emerged to tackle issues related to
granted, Boler created a wireless, silent breast pump. menopause, breastfeeding, fertility, postpregnancy needs,
Marketed as the Elvie Pump, Boler’s invention allows birth control, and feminine hygiene. Beyond the knowl-
mothers to take care of their children without the struggle edge and understanding that these products bring to
of using outdated technology. Mothers use a smartphone women, they also instill a sense of agency and power.
app to remotely control the device and monitor the Based on the recent growth in femtech, some observers
volume of milk output. The Elvie has been worn on fashion have asked, “Why did it take so long for these solutions to
runways, sold out in five minutes when it debuted in emerge?” One answer may be that business leaders have
the United States, and recently raised over $40 million simply not been comfortable talking about—much less
in investment funding, providing evidence that a new developing products for—the female body, reproduction,
industry called femtech is emerging and much needed. and other facets of women’s health.
The term refers to an array of companies and technol- Another answer may lie in how venture capitalists, those
ogy that have been or will be created to help women individuals and companies who invest millions in start-up
better track, monitor, and understand the individual female ideas and firms, have traditionally viewed opportunities
body. Like Boler, Dr. Piraye Yurttas Beim realized an unmet led by female entrepreneurs, as well as new products that
need in the fertility business. In the United States alone, cater to women. According to recent estimates, less than
nearly 7 million women have trouble conceiving a baby, 5 percent of venture capital funding goes to female-led
and no two cases of infertility are alike. Yet fertility services start-ups. This is beginning to change, though, and femtech
are often designed using generic or broad factors, such is leading the way, with over $390 million in venture capital
as age. Dr. Beim’s company, Celmatix, allows women and committed in 2018 alone. As the Elvie website proudly
their partners to be more proactive and informed about proclaims, “It’s time for female-first innovation.”
Sources: Anna Altman, “Mommy and Data.” New Republic 250 (January/February 2019): 28–35; Elvie, https://www.elvie.com/ (accessed June 25,
2019); Tanya Klich, “Elvie, A FemTech Startup That Developed a Wireless and Wearable Breast Pump, Raises $42 Million in VC,” Forbes, April 2, 2019,
https://www.forbes.com/sites/tanyaklich/2019/04/02/elvie-a-femtech-startup-that-developed-a-wireless-and-wearable-breast-pump-raises-42-million-
in-vc/#2bef7ca32753 (accessed June 27, 2019); Dana Olsen, “The Top 13 VC Investors in Femtech Startups,” Pitchbook, https://pitchbook.com/news/
articles/the-top-13-vc-investors-in-femtech-startups (accessed June 27, 2019); Leena Rao, “This Entrepreneur Is Using Big Data to Help More Women Get
Pregnant,” Fortune, February 18, 2016, http://fortune.com/2016/02/18/piraye-yurtess-beim-entrepreneur-celmatix-fertility/ (accessed June 26, 2019).
blogs, message boards, closed group platforms, and other methods. In contrast
to protests that take place at specific locations and times, online protests often
surprise companies. Protests have the potential to negatively affect a company’s
reputation, sales, and stakeholder relationships. The effects of protests, however,
may be mitigated by crisis management plans and the effective implementation of
a stakeholder perspective discussed in Chapter 2.

Although relationships with consumers are fundamentally grounded in economic
exchanges, the previous sections demonstrate that additional levels of expectations
exist. Research continues to show that the majority of consumers would be likely
to switch to brands associated with a good cause, so long as price and quality
were equal. These results suggest that today’s consumers take for granted that they
can obtain high-quality products at reasonable prices, so businesses need to do
something to differentiate themselves from the competition. More firms, therefore,
are investigating ways to link their philanthropic efforts with consumer interests.
Starbucks, for example, has contributed to environmental programs, sustainable
farming initiatives, and investment in employee well-being and happiness. These
programs not only form a link between the company’s possible effects and its
interest in the natural environment, but also provide a service to its customers and
other stakeholders.
From a strategic perspective, a firm’s ability to link consumer interests to
philanthropy should lead to stronger economic relationships. As we shall see in
Chapter 10, philanthropic responsibilities to consumers usually entail broader
benefits, including those that affect the community. For example, large pharma-
ceutical and health insurance firms provided financial support to the Foundation
for Accountability (FACCT), a nonprofit organization that assisted healthcare
consumers in making better decisions from 1995 to 2004. FACCT initiated an
online system for patients to evaluate their physician on several quality indicators.
Although FACCT ceased its operations, the Markle Foundation continues to host
the nonprofit’s legacy with documents and white papers. The foundation partners
with other organizations to improve the role of technology in addressing critical
public health needs.62
A company will have more successful philanthropic efforts when the cause is a
good fit with their product category, industry, customer concerns, and/or location.
This alignment is an important contributor to the long-term relationships that often
develop between specific companies and cause-related organizations. Many firms
involved in medicine and pharmaceuticals will contribute to causes that improve
access to proper healthcare and medication, provide stronger patient support and
outcomes, decrease accidents and injuries, and respond to emergency or critical
needs of a community. Table 9.7 describes the philanthropic contribution levels of
the top 10 corporate foundations in the United States in terms of annual giving.
These companies have established corporate foundations with large endowments,
Table 9.7 Top 10 Corporate Foundations in the United States

Corporate Foundation Annual Giving
Novartis Patient Assistance Foundation, Inc. $ 542,136,898
Wells Fargo Foundation $226,902,237
Wal-Mart Foundation, Inc. $ 166,403,573
JPMorgan Chase Foundation $ 159,401,094
Bank of America Charitable Foundation, Inc. $ 149,183,853
GE Foundation $ 106,397,515
Coca-Cola Foundation, Inc $ 84,831,796
Citi Foundation $ 78,094,000
ExxonMobil Foundation $ 74,264,738
Johnson & Johnson Family of Companies Contribution Fund $ 66,469,618
Source: Foundation Center, “The 50 Largest Corporate Foundations by Total Giving,” http://data.foundationcenter.org/#/
foundations/corporate/nationwide/top:giving/list/2015 (accessed August 13, 2019).

which means that annual contributions are relatively unaffected by corporate

profitability and the economic cycle. Nonprofits prefer consistent donations rather
than wide variance from year to year.
Strategic Implementation of Responsibilities

to Consumers
As this chapter has demonstrated, social responsibility involves relationships with
many stakeholders—including consumers—and many firms are finding creative
ways to meet these responsibilities. Just as in other aspects of social responsibil-
ity, these relationships must be managed, nurtured, and continuously assessed.
Resources devoted to this effort may include programs for educating and listening
to consumers, surveys to discover strengths and weaknesses in stakeholder
relationships, the hiring of consumer affairs professionals, the development of a
community relations office, and other initiatives. Business in the Community, a
coalition of companies in the United Kingdom (UK), developed principles to guide
its members and other businesses in dealing with consumers and the supply chain.
Guided by a “Responsible Business Map,” the coalition offers training, tracking
mechanisms, and best practices for effectively putting principles into action.
Each year, the coalition honors companies with a variety of awards, including
“Responsible Small Business of the Year.” Salary Finance was recognized for
its innovative business purpose and outcomes, which center on the development
of employer-sponsored programs to provide employees with financial wellbeing
benefits such as debt consolidation, refinancing, and other measures. The small
firm, which was established in the UK, recently began operations in the United
States.63 Table 9.8 provides an overview of the Responsible Business program,
along with four key goals for a responsible business leader.
Understanding consumer and stakeholder issues can be especially complex in
the global environment. For example, PUMA intended to honor the United Arab
Emirates (UAE) in November 2011, as it celebrated its 40th National Day, by
developing a limited-edition shoe with the colors of the nation’s flag. However,
when the product was released, UAE consumers were outraged. They viewed it as
putting a respected symbol on shoes, something perceived to be unclean in Middle
Table 9.8 Responsible Business Principles According to Business in the Community

Business in the Community defines a responsible business as one that puts creating healthy
communities and a healthy environment at the center of its strategy to achieve long-term
financial value. A responsible business demands purposeful leaders to drive leadership at every
level in order to do the following:
• Understand where a business is able to have the most impact by identifying those material
issues that are of greatest importance to both commercial success and key stakeholders and
the long-term benefit to society.
• Understand how to take advantage of the opportunities brought by digital innovation (e.g.,
more efficient use of resources, access to new markets), as well as manage the unintended
consequences (e.g., cybersecurity, access to jobs, inequality).
• Support and empower customers, embrace the changing nature of work, deliver products
and services that serve society and drive a transparent, inclusive and productive value chain.
• Move from a “do less harm” approach to one where they are a genuine force for positive
change, creating competitive advantages, meeting changing customer needs, and attracting,
retaining, and developing the best talent.
Source: Business in the Community, “What Is Responsible Business?” https://www.bitc.org.uk/what-responsible-business

Eastern culture. PUMA had to apologize and recall all the shoes.64 Organizations
must understand the importance of integrating all stakeholders into their social
responsibility efforts, including employees, as we explored in Chapter 8, and the
general community, which we examine in Chapter 10.
Summary
Companies face complex decisions about how to respond to the expectations,
attitudes, and buying patterns of consumers—those individuals who purchase, use,
and dispose of products for personal and household use. Consumers are primary
stakeholders because their awareness, purchase, use, and repurchase of products
are vital to a company’s existence.
Consumers and businesses are fundamentally connected by an economic rela-
tionship. Economic responsibilities include following through on promises made
in the exchange process. Consumer fraud involves intentional deception to derive
an unfair economic advantage over an organization. If consumers believe that a
firm has not fulfilled its economic responsibility, they may ask for a refund, tell
others about the bad experience, discontinue their patronage, contact a consumer
agency, or seek legal redress.
In the United States, legal issues with respect to consumers fall under the
jurisdiction of the FTC, which enforces federal antitrust and consumer protection
laws. Other federal and state agencies regulate specific goods, services, or busi-
ness practices. Among the issues that may have been addressed through specific
state or federal laws and regulations are consumer health and safety, credit and
ownership, marketing and advertising, sales and warranties, and product liability.
Product liability refers to a business’s legal responsibility for the performance of
its products. Concerns about protecting consumers’ legal rights are not limited to
the United States.
Ethical issues related to consumers include the Consumer Bill of Rights enu-
merated by President Kennedy. Consumerism refers to the movement to protect
consumers from an imbalance of power with business and to maximize consumer
welfare in the marketplace. Some specific elements of consumer rights have been
mandated by law, but the relatively broad nature of the rights means they must be
interpreted and implemented on a company-by-company basis. Consumer rights
have evolved to include the right to choose, the right to safety, the right to be
informed, the right to be heard, the right to seek redress, and the right to privacy.
When consumers believe that a firm is operating outside ethical or legal standards,
they may be motivated to take action, including boycotting—abstaining from
using, purchasing, or dealing with an organization.
More firms are investigating ways to link their philanthropic efforts with
consumer interests. From a strategic perspective, a firm’s ability to link consumer
interests to philanthropy should lead to stronger economic relationships.
Many companies are finding creative ways to satisfy their responsibilities
to consumers. Much like employee relationships, these responsibilities must be
managed, nurtured, and continuously assessed. Resources devoted to this effort
may include programs for educating and listening to consumers, surveys to
discover strengths and weaknesses in stakeholder relationships, hiring consumer
affairs professionals, working with industry groups, and the development of other
initiatives that engage consumers.

Clearance Pricing: Business Communication in Practice

Issue: Should the use of clearance pricing be regulated? ruling was overturned, confirming that the term clearance
in the ad was an example of puffery.
Sales are price discounts that are designed to encour- However, do consumers themselves view the term
age purchase of a particular item. Sometimes the term clearance as an exaggerated claim that they should
clearance is used, but not together with the term sale not accept at face value? Critics argue no. It has been
because the use of the latter term is regulated in most generally accepted that clearance indicates substantial
states. According to the American Marketing Association, price discounts, so using that term inappropriately can
clearance is “an end-of-season sale to make room for be deceptive. Without regulation, they argue, retailers
more goods.” While retailers can offer sales for temporary can use the term to make consumers think that they are
time periods, items on clearance do not return to their receiving a substantial deal. In fact, research has shown
original prices. Rather, the product is discounted until it that less than 15 percent of consumers know the amount
is sold. Clearance events are often short in duration, and of the associated price discount. Because inventory
items under clearance are not always advertised. levels are not typically visible in online shopping websites,
Studies have demonstrated that many consumers consumers may be further disadvantaged in assessing the
view the word clearance as a signal indicating substantial relative scarcity of an item.
discounts. Yet unlike other forms of sales promotion, clear- On the other hand, regulating how the term clearance
ance events are less regulated. Many retailers, including is used could have negative repercussions. Like any form
Macy’s and other clothing stores, use the word clearance of business regulation, regulation of the word clearance
extensively. Experts estimate that more than 30 percent of would limit what a business can and cannot do. Placing
merchandise is now sold at clearance. Consumers may be limits on how clearance sales can be used will likely mean
attracted to clearance pricing due to the following factors: that retailers will display the term clearance sale less due
(1) fear that the product will be discontinued before they to the fear of violating FTC regulations. Yet clearance
purchase it, (2) belief that others will get to the item first sales can be important strategies for retailers, particularly
and another is not available, (3) perceived value of the for firms that face demand uncertainty for products,
product, (4) the belief that they are saving money, and sell perishable items, and sell demonstration models.
(5) an escalation of commitment due to time spent searching Clearance sales are common in the fast fashion industry,
for sales. where clothing is targeted to younger consumers who are
It has generally been ruled that the term clearance is interested in the latest fashions at low prices. In contrast
an example of puffery, an exaggerated promotional claim to traditional clothing retailers, fast fashion companies like
that should not be taken seriously by a reasonable person. H&M and Zara turn over inventory at a very quick pace and
For example, the state of Wisconsin filed a lawsuit against need to make room for new inventory on a regular basis.
American TV & Appliance alleging that the retailer’s claims
of offering “a clearance sale on the finest washers and There Are Two Sides to Every Issue
dryers you can buy” was deceptive due to the following 1. Retailers should be able to use the term clearance
factors: (1) the products were not actually of the finest qual- without having to qualify or justify the amount of the
ity, (2) the store was using the advertisement to get people discount.
in the store and then tried to upsell them higher-priced 2. Because the term clearance is potentially misleading,
products, and (3) the products were purchased exclusively use of it should be regulated, and it should not be used
for the event and therefore, it did not qualify as clearance. unless there are documented and substantial price
Although at first the courts ruled against the retailer, the discounts.
Sources: State of Wisconsin v. American TV & Appliance of Madison, Inc., 430 N.W.2d 709 (Wisc. App. Ct. 1988); Cullen Goretzke, “The Resurgence of
Caveat Emptor: Puffery Undermines the Pro-Consumer Trend in Wisconsin’s Misrepresentation Doctrine,” 2003 Wis. L. Rev. 171, 222; Kit Yarrow, “Why
Shoppers Just Can’t Resist Clearance Sales,” Time, http://business.time.com/2013/01/07/why-shoppers-just-cant- resist-clearance-sales/ (accessed June 5,
2019); Volker Nocke and Martie Peitz, “A Theory of Clearance Sales, Economic Journal 117, no. 522 (July 2007): 964; American Marketing Association,
“Clearance Sale,” Common Use Marketing Dictionary, https://marketing-dictionary.org/c/clearance-sale/ (accessed June 5, 2019); Kenneth C. Manning,
O. C. Ferrell, and Linda K. Ferrell, “Toward Understanding ‘Clearance’ Promotions,” Working paper; J. Jeffrey Inman, Leigh McAlister, and Wayne D.
Hoyer, “Promotion Signal: Proxy for a Price Cut?” Journal of Consumer Research 17 (June 1990): 74–81; Balram Avittathur and Indranil Biswas, “A Note
on Limited Clearance Sale Inventory Model,” International Journal of Production Economics, 193 (2017): 647–653.

Key Terms
ambient advertising (p. 262) consumer protest (p. 266) Federal Trade Commission (FTC)
boycott (p. 266) consumer relations (p. 250) (p. 253)
Bureau of Consumer Protection consumerism (p. 261) Food and Drug Administration
(p. 253) consumers (p. 250) (FDA) (p. 253)
Consumer Bill of Rights (p. 260) crowdfunding (p. 260) product liability (p. 258)
consumer fraud (p. 251) Federal Communications product placement (p. 256)
Consumer Product Safety Commission (FCC) (p. 254) warranty (p. 258)
Commission (p. 253)
1. List and describe the consumer rights that have 3. What is the purpose of a boycott? Describe the
become social expectations of business. Why have characteristics of companies and consumers that
some of these rights been formalized through are likely to be involved in a boycott situation.
legislation? Should these rights be considered ethical What circumstances would cause you to consider
standards? participating in a boycott?
2. Look at Southwest Airline’s Customer Service 4. How can companies strive for successful
Commitment at https://www.southwest.com/assets/ relationships with consumers, including meeting
pdfs/corporate-commitments/customer-service- their economic, legal, ethical, and philanthropic
commitment.pdf. Describe how different elements expectations?
of its commitment relate to specific economic, legal, 5. How will consumer rights and activism change over
ethical, or philanthropic responsibilities that the the next decade? Will the movement strengthen or
airline has to its customers. decline? Why?
Visit the website of Consumers International (http://www. issue. How useful is this information to you? With what
consumersinternational.org). What is the purpose of this information do you agree and/or disagree? How could a
website? Select a current issue and read the information business manager use this site to understand and improve
provided by the consumers’ groups organization on that a company’s relationship and reputation with consumers?
There’s a Ringing in My Ears: What Would You Do?

Justin Thompson was excited. He really enjoyed his
?
the special high school program. They watched a company
job at the Kingston’s department store downtown. This video that discussed Kingston’s history, ethics policy,
location housed Kingston’s first store and still had many current operations, and customer service philosophy. They
of its original features. As he rode the subway into the met with staff from HR to fill out paperwork. They
city center, Justin thought about the money he would earn learned how to scan merchandise and operate the computer
this summer and the great car that he hoped to buy before software and cash register. They toured the store’s three
school started. He was lucky to have secured this type levels and visited with each department manager. Justin
of job—many of his friends were working early or late was especially excited about working in the electronics
hours at fast-food chains or out in the summer heat. The department, but he was assigned to men’s clothing.
management team at Kingston’s had initiated a program Justin worked alongside several employees during the
with his high school counselors, hoping to attract top high first few weeks on the store floor. He watched the experi-
school seniors into retail management throughout their enced employees approach customers, help them, and ring
college career and beyond. Justin was a strong student up the sale. He noticed that some employees took personal
from a single-parent background, and his counselor was telephone calls, and others did not clean up the dressing
highly complementary of his work ethic and prospects for rooms or restock items very quickly. On slower days, he
professional employment. Justin’s first week was consumed eventually worked alone in the department. Several times
with various training sessions. There were eight students in when he came to work in the afternoon, he had to clean

up a mess left behind by the morning shift. When he spoke long, their hands were full of merchandise. The crowd was
to various colleagues about it in the break room, they told starting to wane, so Justin took a few minutes to clean up
him it was best to keep quiet. After all, he was a high school the dressing room. When he came out, his coworker was
student earning money for a car, not a “real employee,” ringing up his friends’ merchandise. Justin saw two ties go
with kids to feed and bills to pay. Justin assumed that retail into one of the bags, but only one was scanned into the
work was much like team projects in school—not everyone system. He saw an extra discount given on an expensive
pulled their weight, but it was hard to be the tattletale. shirt. Justin was shocked to see that not every item was
One Saturday morning was extremely busy, as scanned and that improper discounts were being applied,
Kingston’s was running a big sale. People were swarming and his mind was racing. Should he stop his coworker?
to the sales racks, and Justin was amazed at how fast the Should he “take a break” and get security? Was there
time was passing. In the late afternoon, several friends of another alternative? What would you do?
one of his coworkers dropped by the men’s section. Before

CHAPTER
10 Community
Relations
and Strategic
Philanthropy
Google Employee Volunteers Target Dark Side of the Web
The philanthropic arm of Google, Google.org, recently perpetrators. Text, phone numbers, and photos on
launched a fellowship program for employees to take the darkest reaches of the internet create millions
up to six months to do pro bono work for a nonprofit of pieces of data that can be mined for patterns and
or charitable organization. Google.org’s goal is to revelations.
deploy 50,000 employee volunteer hours each Like many organizations, Thorn grew out of
year through the program. With its vast resources innovation in technology. Despite its many positive
of technical know-how and expert employees, ramifications, technology has also made it easier to
Google.org is setting its sights on how technology exploit children. Based on its own research, Thorn
can help nonprofits solve emerging and ongoing acknowledges that more than 60 percent of
social challenges. exploited children are advertised on the internet
The program is an extension of Google.org’s or found on the dark web, parts of the internet that
philanthropy and community partnership efforts require specific software or authorization to access.
and aids the technology giant in achieving two The organization is recognized for employing the
goals: (1) support the community with the company’s first, or only, engineering and data analytics team
expertise and (2) motivate employees and help fully dedicated to combating online child abuse.
them improve their skills. Google.org has five The pilot program at Thorn was successful
areas of interest: economic opportunity, education, on many fronts, including employee engagement,
inclusion, crisis response, and the impact challenge, community relations, and strategic philanthropy.
where leaders and social entrepreneurs pitch Six months at Thorn convinced one engineer that
ideas for how they would make their community her technology skills could make a huge differ-
an even better place. Google.org communicates ence, especially in the lives of exploited children.
their approach as “data-driven, human-focused She admits that she became a better software
philanthropy—driven by Google.” designer as a result of seeing how the nonprofit
The fellowship program is the result of a six- organization operates with both efficiency and
month pilot initiative that placed Google employees elegance. Because of the sensitive and troubling
Shutterstock/freemind-production
with Thorn, a nonprofit organization dedicated to nature of its work, Thorn has developed a culture
fighting the exploitation of children on the internet. of self-care, empathy, and emotional awareness.
Thorn, established by celebrities Ashton Kutcher Ultimately, the experience at Thorn taught the
and Demi Moore, focuses on finding technology entire Google volunteer team how to be better
solutions that protect children from sexual abuse. colleagues and leaders. One member of the team
Five Google employees spent six months at the remarked, “My work with Thorn reminded me that
organization to assist with using artificial intel- our mission as engineers is not to simply build the
ligence (AI) to track down victims of child trafficking, newest and fastest technologies: our mission is to
unearth the origins of child pornography, and seek solutions to pressing problems no matter how
enable law enforcement to identify and apprehend daunting.”1
Chapter Objectives
●● Describe the community as a stakeholder
●● Discuss the community relations function
●● Distinguish between strategic philanthropy and cause-related marketing
●● Examine how social entrepreneurship relates to social responsibility
●● Identify the benefits of strategic philanthropy
●● Explain the key factors in implementing strategic philanthropy
275
G oogle, like most organizations with operational expertise and other core
competencies, can also focus on implementing social responsibility and
satisfying stakeholder groups. From a social responsibility perspective,
the key challenge is how an organization assesses its stakeholders’ needs, integrates
them with company strategy, reconciles differences between stakeholders’ needs,
strives for better relationships with stakeholders, achieves mutual understandings
with them, and finds solutions for problems. In this chapter, we explore com-
munity stakeholders and how organizations deal with stakeholder needs through
philanthropic initiatives. We explore the relationship with communities and the
economic, legal, ethical, and philanthropic responsibilities that must be addressed
by business. We define strategic philanthropy and integrate this concept with
other elements of social responsibility. Next, we trace the evolution of corporate
philanthropy and distinguish the concept from cause-related marketing. We also
provide examples of best practices of addressing stakeholders’ interests that meet
our definition of strategic philanthropy. From there, we define social entrepreneur-
ship and explain how it relates to strategic philanthropy and social responsibility.
Then we consider the benefits of investing in strategic philanthropy to satisfy
both stakeholders and corporate objectives. Finally, we examine the process of
implementing strategic philanthropy in business. Our approach in this chapter is to
demonstrate how companies can link strategic philanthropy with economic, legal,
and ethical concerns for the benefit of all stakeholders.
Community Stakeholders
The concept of community has many varying characteristics that make it a
challenge to define. The community does not always receive the same level of
acceptance as other stakeholders. Some people even wonder how a company
determines who is in the community. Is a community defined by city or county
boundaries? What if the firm operates in multiple locations? Or is a community
prescribed by the interactions a firm has with various constituents who do not
fit neatly into other stakeholder categories? For a small restaurant in a large city,
the owner may define the community as the immediate neighborhood where most
patrons live. The restaurant may demonstrate social responsibility by hiring people
from the neighborhood, participating in the neighborhood crime watch program,
donating food to the elementary school’s annual parent-teacher meetings, or
sponsoring a neighborhood Little League team. For example, JPMorgan Chase &
Co. has instituted a program called Corporate Challenge, a global initiative that
invites employees and others to participate in running events for charity. Today,
participants in the Corporate Challenge include teams from many other organiza-
tions although employees of JPMorgan Chase still produce the largest participa-
tion from a single company. One of the events, which took place in Syracuse, New
York, hosted over 28,000 runners and walkers from more than 350 companies.
The proceeds supported the local nonprofit Hillside Work-Scholarship Connection.
Now in its 43rd year, the challenge recently included 9,000 JP Morgan Chase
employees in seven countries and provided donations to causes around the world.
In the last few years, causes included support for indigenous Australians, a youth
foundation in China, sports in South Africa, and veterans.2 For a corporation with
facilities in North and South America, Europe, and Africa, the community may be
viewed as virtually the entire world. To focus its social responsibility efforts, the
multinational corporation might employ a community relations officer in each
facility who reports to and coordinates with the company’s head office.
Under our social responsibility philosophy, the term community should be
viewed from a global perspective, beyond the immediate town, city, or state where

Chapter 10 Community Relations and Strategic Philanthropy 277
a business is located. Thus, we define community as those members Table 10.1 Highest- and Lowest-Rated
of society who are aware of, concerned with, or in some way affected Countries for Quality of Life
by the operations and output of an organization. With information 1. Canada 76. Angola
technology, high-speed travel, and the emergence of global business 2. Sweden 77. Jordan
interests, the community as a constituency can be geographically, 3. Denmark 78. Lebanon
culturally, and attitudinally quite diverse. Issues that could become 4. Norway 79. Iran
important include pollution of the environment, land use, economic 5. Switzerland 80. Iraq
advantages to the region, and discrimination within the community,
as well as exploitation of workers, natural resources, or consumers.
From a positive perspective, an organization can significantly improve the community
quality of life for people in a community through employment opportunities, eco- members of society who are
nomic development, and financial contributions for educational, health, cultural, aware of, concerned with, or
in some way affected by the
and recreational activities. Quality of life is a broad concept, typically associated operations and output of an
with the social, physical, economic, and environmental health conditions that affect organization
an individual or group. U.S. News and World Report conducts an annual survey
of 20,000 citizens of 80 countries to determine its Best Country rankings. Part of quality of life
a measure of social, physical,
the survey relates to quality of life, which considers the quality of healthcare and economic, and environmental
public education, political and economic stability, and other factors. Table 10.1 health conditions affecting an
lists the highest- and lowest-rated countries for quality of life.3 individual or group
Countries with the highest ratings are known for their social safety nets,
progressive policies, and commitment to public health and education. Countries
at the bottom of the list have experienced years of strife, often brought on by war,
corruption, and unemployment. As discussed in earlier chapters, business both
affects society and is affected by it. The intersection of business and society, as
well as managerial attention and actions toward the intersection, lie at the heart of
the social responsibility orientation discussed in this book. Even a company with
a past reputation for damaging the quality of life in its community may be able to
overcome criticism and begin to forge a healthier relationship with its stakeholders.
The story of Asia Pulp & Paper (APP) demonstrates the power that stakehold-
ers have in changing corporate perspectives. Based in Indonesia, APP is one of
the largest producers of pulp and paper products in the world, with operations in
120 countries spread over six continents. For many years, critics of the company
pointed to its supply-chain practices and lack of consideration for the environment
and communities in which it operated. The Indonesian company was named in a
scathing report issued by Greenpeace about illegal logging activity in Indonesia
and its devastating effects on rainforests. The report, Partners in Crime, also took
aim at the companies that purchased from APP. When Greenpeace activists learned
that Mattel was using APP paperboard generated from rainforests to package its
popular Barbie doll, they draped a banner of
Ken, Barbie’s love interest, from the roof of
Mattel’s headquarters in California. Ken wore
a disapproving look amid the phrases, “Barbie,
it’s over. I don’t date girls that are into defor-
estation.” These efforts, and many more, led
hundreds of companies to stop doing business
with APP. Before long, company executives
committed to a host of sustainability policies
and action plans, including the involvement
Shutterstock/Ikhsan Prabowo Hadi
of the local community. Today, APP has a

full-fledged management approach to social
responsibility. While some critics still ques-
tion the company’s motives and outcomes,
other observers point to evidence of APP’s
turnaround. For example, APP has established
schools in several towns and cities to serve

local children, many of whom would have gone without much formal education.
The school curriculum includes science, engineering, forestry, and computing.
While the APP schools certainly change lives through education, they also ensure
the company is developing a strong future workforce.4
neighbor of choice Through long-term efforts, a firm may become a neighbor of choice, an orga-
an organization that builds nization that builds and sustains trust with the community.5 To become a neighbor
and sustains trust with the
of choice, a company should strive for positive and sustainable relationships with
community through employment
opportunities, economic key individuals, groups, and organizations; demonstrate sensitivity to community
development, and financial concerns and issues; and design and implement programs that improve the quality
contribution to education, health, of community life, while promoting the company’s long-term business strategies
artistic, and recreational activities and goals.6 Merck’s Neighbor of Choice program interacts with organizations
of the community
and initiatives that are in line with the company’s mission on well-being. The
program is dedicated to finding solutions to health and social issues where the
company is located, improving healthcare quality, and increasing access to care
for underserved populations in the areas of Alzheimer’s disease, cancer, diabetes,
heart disease, hepatitis C, HIV/AIDS, and maternal health. The company awards
grants to local nonprofit organizations in health, education, social services, and
international issues. In one year alone, 130 grants infused $3.1 million, along with
a cadre of employee volunteers, into communities around the world.7
Similar to other areas of life, the relationship between a business and the com-
munity should be symbiotic. A business may support educational opportunities in
the community because the owners feel it is the right thing to do, but it also helps
develop the human resources (HR) and consumer skills necessary to operate the
business. Customers and employees are also community members who benefit
from contributions supporting recreational activities, environmental initiatives,
safety, and education. Many firms rely on universities and community colleges
to provide support for ongoing education of their employees, as well as advances
in research. The Dow Chemical Company, for example, committed to an annual
investment of $250 million over the course of 10 years to universities for research
purposes. For example, Dow partnered with University of California, Santa Barbara, to
design a laboratory safety program that applies to both university settings and corporate
laboratories. Beyond that, the company has working relationships with faculty,
students, and other academicians to apply the research and create useful solutions
to pressing issues, including renewable energy.8
community relations To build and support these initiatives, companies may invest in community
the organizational function relations, the organizational function dedicated to building and maintaining
dedicated to building and
relationships and trust with the community. In the past, most businesses have
maintaining relationships and
trust with the community not viewed community relations as strategically important or associated them
with the firm’s ultimate performance. Although the community relations depart-
ment interacted with the community and often doled out large sums of money
to charities, it essentially served as a buffer between the organization and its
immediate community. Today, community relations activities have achieved greater
prominence and responsibility within most companies, especially due to the rise
of stakeholder power and global business interests. The function has gained
strategic importance through linking to overall business goals, professionalizing
its staff and their knowledge of business and community issues, assessing its
performance in quantitative and qualitative terms, and recognizing the breadth
of stakeholders to which the organization is accountable.9 Community relations
also assist in short-term crisis situations, such as disaster relief. The humanitarian
aid organization Direct Relief was given an Excellence Award by the Committee
Encouraging Corporate Philanthropy (CECP) for its collaboration with FedEx to
bring health services to people and places stricken by disaster. When a typhoon hit
the Philippines, more than 250,000 people received needed medical supplies. Direct
Relief and FedEx brought medications and other relief to Paraguay after flooding
left 70,000 people without shelter, food, and water. Additionally, the partnership

Table 10.2 Community Mission Statements

Organization Community Mission Statement
Capital One At Capital One, we have always believed that as business leaders, we have
a unique opportunity to create value in the communities where we live and
work. Applying the same principles we use in our business of innovation,
collaboration, and empowerment to our investments in the community helps
leverage our investment of time and money to fuel new ideas and inspire
others to act.
Education EAB’s mission to make education smarter and our communities stronger
Advisory Board infuses everything we do—especially our active, intentional approach to
(EAB) corporate social responsibility. It’s by design that our work with our members
and our communities intertwine: it allows us to have an outsized, positive
impact. This service orientation strengthens our own organization, too—by
ensuring we hire staff attuned to our members’ missions, by creating skill-
development opportunities beyond our office walls, and by giving employees
the fulfillment of serving communities where they live and work.
Eli Lilly and We have a long, proud heritage of strengthening the communities where we
Company work and live. We do this through giving, volunteering, and focusing on key
issues that affect our business, such as education. At the heart of our efforts
to strengthen communities are our employees, who donate their time, talent
and treasure in countless ways. As a company, we actively encourage our
employees to volunteer and give, and we develop programs that allow them to
help improve communities at home and around the world. We view this as an
important investment that connects us more deeply with the people we serve,
which helps make us a better company.
Pinnacol We have a policy of serving people. It’s pretty simple. We love our community.
Assurance For more than 100 years, our job has been all about protecting the health
and safety of people on their jobs. And that sense of caring extends to the
communities where we live and work. We donate time, money and support
through grants, sponsorships, our employee volunteer program and the
Pinnacol Foundation’s scholarship program.
UnitedHealth The people of UnitedHealth Group are working together in support of local
Group communities. UnitedHealth Group’s year-round giving program supports
employees’ desires and efforts to give back to the communities where they
live and work, across the nation and around the world. Through charitable
contributions and volunteering, our people are deeply and personally involved
in improving the health and welfare of their neighbors. The United Health
Foundation matches employee contributions, dollar for dollar, to nearly all
nonprofit organizations, doubling their impact. Employees have the ability to
give whenever, wherever and however they choose.
Volvo Group For the Volvo Group, creating shared value involves moving both our business
and society forward. We enhance our competitiveness while simultaneously
advancing the economic, environmental and social conditions of the societies
in which we operate. The highest potential for mutual benefit is where our
business significantly interacts with society. Therefore, our selected focus areas
are:
• Education and skills development
• Traffic and worksite safety
• Environmental sustainability
Sources: Capital One, “Capital One Community Involvement Report,” https://www.capitalone.com/media/doc/about/
capitalone-sustainability-report.pdf (accessed June 30, 2019); EAB, “Corporate Citizenship,” https://www.eab.com/
careers/corporate-citizenship (accessed June 30, 2019); Lilly, “Strengthening Communities,” https://www.lilly.com/caring/
strengthening-communities (accessed June 19, 2019); Pinnacol, “Community Relations,” https://www.pinnacol.com/
community-relations (accessed June 29, 2019); UnitedHealth Group, “Our People,” https://www.unitedhealthgroup.com/
social-responsibility/giving.html (accessed June 15, 2019); Volvo Group, “Societal Engagement,” https://www.volvogroup.
com/en-en/about-us/csr-and-sustainability/moving-business-and-society-forward.html (accessed June 29, 2019).

has provided over 10 million Americans with approximately $400 million in

necessary medications.10 Progressive companies manage community relations with
partnership in mind. They seek out community partners for a range of interests and
activities—philanthropy, volunteerism, creating a quality educational system and a
qualified workforce, appropriate roads and infrastructure, affordable housing, and
other community assets.
Over the past two decades, corporate support for philanthropy has been steadily
growing. According to Giving USA Foundation, corporate giving totaled more than
$20 billion in 2018. This number increased by 5.4 percent from the year before. The
sluggish recovery of the economy since the Great Recession had an effect on corporate
giving, but as the economy recovers corporate giving has begun to increase once more.
PepsiCo, for instance, has a matching gifts program and is involved in a number of
sustainability initiatives. The company donated a $1 million grant to Kiva, a nonprofit
organization that provides small loans to entrepreneurs in developing countries to
start their own businesses.11 Even before the economic downtown, corporate giving
was becoming more effective and strategic. Companies are working to align their
stakeholder interests and develop partnerships that are more closely aligned to busi-
ness goals, community interests, and sustainable activities.12
In a diverse society, however, there is no general agreement as to what
constitutes the ideal model of business responsibility to the community. Businesses
are likely to experience conflicts among stakeholders as to what constitutes a
real commitment to the community. Therefore, the community relations function
should cooperate with various internal and external constituents to develop
community mission statements and assess opportunities and develop priorities
for the types of contributions it will make to the community. Table 10.2 provides
several examples of company missions and programs with respect to community
involvement. As you can see, these missions are specific to the needs of the
Table 10.3 Community Needs Assessment

Community Issues Exceptional Adequate Inadequate Don’t Know
Parks 3 2 1 0
Culinary water system 3 2 1 0
Street maintenance 3 2 1 0
Garbage collection 3 2 1 0
Snow removal 3 2 1 0
Fire protection 3 2 1 0
Police protection 3 2 1 0
Ambulance service 3 2 1 0
Building inspection 3 2 1 0
Animal control 3 2 1 0
Other code enforcement 3 2 1 0
(weeds, junk cars, etc.)
Arts 3 2 1 0
Street lighting 3 2 1 0
Other issues that can be evaluated: grocery stores, pharmacies, clothing stores, fast-food
restaurants, entertainment, hardware/lumber stores, auto services, banking/financial services,
affordable housing, business offices, warehouses, convenience stores, community colleges,
higher education satellite campuses.
Source: Community Tool Box, “Community Needs Assessment Survey Guide,” https://ctb.ku.edu/en/table-of-contents/
assessment/assessing-community-needs-and-resources/conducting-needs-assessment-surveys/main (accessed June 27,
2019).

people and areas in which the companies operate and are usually aligned with the
competencies of the organizations involved and their employees.
Community mission statements are likely to change as needs are met and new
issues emerge. For example, as the Japan-based Takeda Pharmaceutical Company
Ltd. continues to expand operations throughout the world, their community
involvement also expands to meet the needs of each community. In Brazil, the
company focuses on renovating orphanages, while in South Africa, they have
initiatives teaching children to make blankets. When global communities experi-
ence unexpected disasters, such as flooding in Australia, Takeda has been there
to assist with the recovery. On its website, Takeda proudly displays recognition
as a top employer in most countries where it operates, including awards granted
in Ecuador, Spain, Russia, Ukraine, and the United States.13 Thus, as stakeholder
needs and concerns change, the organization will need to adapt its community
relations efforts. To determine key areas that require support and to refine the
mission statement, a company should periodically conduct a community needs
assessment, like the one presented in Table 10.3.14
Responsibilities to the Community

It is important for a company to view community stakeholders in a trusting man-
ner, recognizing the potential mutual benefit to each party. In a networked world,
much about a company can be learned with a few clicks of a mouse. Activists
and disgruntled individuals have used websites to publicize the questionable
activities of some companies. Target and Ryanair have been the focus of “hate”
websites that broadcast concerns about the company’s treatment of employees,
pricing strategies, and marketing and advertising tactics.15 Because of the visibility
of business activities and the desire for strategic social responsibility, successful
companies strive to build long-term mutually beneficial relationships with relevant
communities. Achieving these relationships may involve some trial and error.
Table 10.4 illustrates some of the common myths about community relations.
A positive example, on the other hand, is Lilly Pharmaceuticals’ strong support
for the Indianapolis Symphony Orchestra. In return, the orchestra stages private
concerts for Eli Lilly employees. Dell Computer has a similar relationship with
the Round Rock Express, a minor-league baseball team. A community focus can
be integrated with concerns for employees and consumers. Chapter 1 provided
evidence that satisfied customers and employees are correlated with improved
organizational performance.
Table 10.4 Common Myths About Community Relations

Support of political and regulatory officials is not needed.
We will cause a problem for our company if we engage in community relations.
The community has no expertise on our decisions and actions.
Engaging the community will delay us in finding the right solution.
Community officials have no concern for the cost of solutions to issues.
We serve the community simply through employment opportunities and paying taxes.
Our only focus is national and global relationships.
Community relationships involve only public relations.
The local community does not impact our success.
Spending time with the community distracts from the economic success of the firm.

Economic Issues
From an economic perspective, business is absolutely vital to a community.
Companies play a major role in community economic development by bringing
jobs to the community and allowing employees to support themselves and their
families. These companies also buy supplies, raw materials, utilities, advertising
services, and other goods and services from area firms; this in turn produces
more economic effects. In communities with few employers, an organization that
expands in or moves to the area can reduce some of the burden on community
services and other subsidized support. Even in large cities with many employers,
some companies choose to address social problems that tax the community. In
countries with developing economies, a business or industry can also provide many
benefits. A new company brings not only jobs, but also new technology, related
businesses, improvements to infrastructure, and other positive factors. Conversely,
globalization has incited criticism regarding the effects of U.S. businesses on other
parts of the world, namely developing countries. For example, Sig Sauer, a New
Hampshire-based manufacturer of a full range of firearms and ammunition, has
been condemned in the media for continuing to sell weapons in Mexico. The
company is the largest seller of firearms in Mexico and its customers include
federal, state, and local police. Given the rate of violence, organized crime, and
police corruption in the country, critics question why neither the U.S. government
nor Sig Sauer have put an end to shipping thousands of weapons across America’s
southern border. Similarly, Nestlé has been criticized for marketing baby formula
to nursing mothers in Turkey, claiming that their offspring will receive more nutri-
tion from the formula than from their mothers; aggressive selling of bottled water
in developing parts of the world, which is said to be expensive for consumers and
works as a deterrent to governments to solve water sanitation issues; and for child
labor accusations in African cocoa farms. The company has committed to “The
Nestlé Cocoa Plan,” which involves building schools and providing cocoa trees to
farmers with the aim of contributing to the betterment of the local community.16
Interactions with suppliers and other vendors also stimulate the economy.
Some companies are even dedicated to finding local or regional business partners
in an effort to enhance their economic responsibility. For example, Starbucks, in
an unprecedented move for the company, began franchising locations in Europe.
By having locals run the coffee chains’ stores, the company hopes to further its
influence in the region.17 Furthermore, there is often a contagion effect when one
business moves into an area: By virtue of its prestige or business relationships,
such a move can signal to other firms that the area is a viable and attractive
place for others to locate. There are parts of the United States that are highly
concentrated with automotive manufacturing, financial services, or technology.
Local chambers of commerce and economic development organizations often
entice new firms to a region because of the positive reputation and economic
contagion it brings. Finally, business contributions to local health, education, and
recreation projects not only benefit local residents and employees, but also may
bring additional revenue into the community from tourism and other businesses
that appreciate the region’s quality of life. AT&T, for example, has hosted the
Pebble Beach National Pro-Am golf tournament for more than 30 years. The
annual event honors influential groups each year and has raised more than $110
million that the Monterey Peninsula Foundation provides to local charities in
the counties that surround Monterey, California. After the event, tournament
banners are upcycled into backpacks, then stuffed with school supplies for area
schoolchildren in need.18
Just as a business brings positive economic effects by expanding in or relocating
to an area, it can also cause financial repercussions when it exits a particular
market or geographical location. Thus, workforce reduction, or downsizing—a

topic discussed in Chapter 8—is a key issue with respect to economic responsibility.
The impact of layoffs due to plant closings and corporate restructuring often
extends well beyond the financial well-being of affected employees. Laid-off
employees typically limit their spending to basic necessities while they look for new
employment, and many may ultimately leave the area altogether. Even employees
who retain their jobs in such a downsizing may suffer from poor morale, distrust,
guilt, and continued anxiety over their own job security, further stifling spending
in a community.
Because companies have such a profound impact on the economic viability
of the communities in which they operate, firms that value social responsibility
consider both the short- and long-term effects on the community of changes in their
workforce. Today, many companies that must reduce their workforce—regardless of
the reasons—strive to give both employees and the community advance notice and
offer placement services to help the community absorb employees who lose their
jobs. Quad/Graphics, one of the largest printers in the United States, closed plants
in Illinois and Minnesota. The company offered to transfer affected employees to
other plants in the nation. However, for those who did not want to transfer, Quad/
Graphics agreed to offer a severance package including pay, career placement
assistance, and extension of benefits.19 Depending on economic circumstances
and business profitability, companies may choose to offer extra compensation
commensurate with an employee’s length of employment that gives laid-off
employees a financial cushion while they find new work. However, the realities of
economic turmoil mean that many employees receive little compensation.
Legal Issues
To conduct business, a company must be granted a “license to operate.” For
many firms, a series of legal and regulatory matters must be resolved before the
first employee is hired or the first customer is served. If you open a restaurant,
for example, most states require a business license and sales tax number. These
documents require basic information, such as business type, ownership structure,
owner information, number of expected employees, and other data.
On a fundamental level, society has the ability to dictate what types of organi-
zations are allowed to operate. In exchange for the license to operate, organizations
are expected to uphold all legal obligations and standards. We have discussed many
of these laws throughout this book, although individual cities, counties, and munici-
palities will have additional laws and regulations that firms must obey. For example,
a construction company in Destin, Florida, was
charged with repeated safety violations that have
endangered employees. The leading cause of
fatality in the construction industry is falling, and
the company was found liable for neglecting to
provide employees with protections against this
well-known danger. Despite widespread news
stories and regulatory education about fatal falls,
engineering and construction companies con-
tinue to receive penalties. Two contractors were
assessed penalties of over $150,000 after two
workers were killed when scaffolding collapsed
Shutterstock/Cassionhabib
on an Orlando hotel project.20

Other communities have concerns about
whether and how businesses fit into existing
communities, especially those threatened by
urban sprawl and small towns working to

preserve a traditional way of life. Some states, cities, and counties have enacted
legislation that limits the square footage of stores in an effort to deter “big-box
stores,” such as Walmart and Home Depot, unless local voters specifically
approve their being allowed to build. In most cases, these communities have
called for such legislation to combat the noise and traffic congestion that may
be associated with such stores, to protect neighborhoods, and to preserve the
viability of local small businesses.21 Beyond big-box stores, online competition
is another threat to local businesses. In New York City, the owner of Gold Leaf
Stationers realized the power of community relations when a decrease in annual
sales meant that his store could no longer afford rent of $12,500 per month. The
store is housed in a co-op building controlled by a board of directors. The board,
which included many customers of Gold Leaf, voted to reduce the monthly rent
to $9,500 and capped the store’s share of annual real estate taxes due on the
co-op property. In this case, New York law allows the co-op board to make such
significant decisions. After the decision, the co-op president remarked, “This type
of store adds value to the fabric of the community.”22 Although the importance
of preserving small business, paying living wages, which we discussed in Chapter
8, and restricting store locations may be ethical issues for some communities,
consumers, and businesses, the legal environment may facilitate or restrict these
issues, as well.
Ethical Issues
As more companies view themselves as responsible to the community, they will
contemplate their role and the impact of their decisions on communities as they
make managerial ethical decisions. Many companies have opted to be proactive
on important issues, such as minimum wages and benefits for employees. While
legislative bills have been proposed on raising the minimum wage, it may take
time before any changes to federal law are made in this respect. Amazon, Target,
and Cox Communications, however, raised the minimum wage for employees in
all U.S. locations to $15 per hour because they believe it is the right thing to do.
Employees of Disney’s theme parks are also offered a starting wage of $15 per
hour. Other companies such as Costco have followed suit, raising its minimum
wage to $14 per hour.23 In 2018, Walmart raised wages so that new employees
will receive $11 per hour. The retail giant had been paying $9 to $10 per hour
to new hires, although long-term employees often make more than $14 per hour.
According to a recent social responsibility report, Walmart store managers in the
U.S. earn an average of $175,000 per year.24
Business leaders are increasingly recognizing the significance of the role
their firms play in the community and the need for their leadership in tackling
community problems. Bill Daniels, founder of Cablevision, was an extremely
successful entrepreneur. His approach to ethical decision-making in Cablevision
had a positive impact on the communities. He established the Daniels Fund, which
has a significant impact on business ethics education and other social concerns in
the states of Wyoming, Colorado, New Mexico, and Utah. Millions of dollars have
been donated to causes such as ethics and integrity, education, youth development,
and amateur sports.25
These examples demonstrate that the ethical dimension of community
responsibility can be multifaceted. This dimension and related programs are not
legally mandated but emanate from the particular philosophy of a company and
its top managers. Because many cities have not mandated a living wage, the actions
of Target, Amazon, and Costco are based on an ethical obligation felt toward
employees and the community as well as competition for the best employees. There
are many ways that a company can demonstrate its ethical commitment to the
community. As Bill Daniels’s commitment to business ethics illustrates, a common

extension of “doing the right thing” ethically provides a role model for all political
and civic leaders.
The community relations function has always been associated with philanthropy,
as one of the main historical roles of community relations was to provide gifts,
grants, and other resources to worthy causes. Today, that thinking has shifted.
Although businesses have the potential to help solve social issues, the success
of a business can be enhanced from the publicity generated by and through
stakeholder acceptance of community activities. For example, Colorado-based
New Belgium Brewing Company donates $1 for every barrel of beer brewed the
prior year to charities within the markets it serves. The brewery divides the funds
among states in proportion to interests and needs, considering environmental,
social, drug and alcohol awareness, and cultural issues. Donation decisions are
made by the firm’s coworker grants committee that, since 1995, has been the
backbone of the philanthropic program. The committee is open to all coworkers
and takes on the task of researching, reviewing and allocating funds to worthy
organizations. To date, the company has provided over $10.5 million in grants
to support efforts in climate change, social equity, smart growth, and sustainable
agriculture.26 However, New Belgium belongs to an industry that some members
of society believe contributes to social problems. Thus, regardless of the positive
contributions such a firm makes to the community, some members will always
have a negative view of the business.
One of the most significant ways that organizations are exercising their
philanthropic responsibilities is through volunteer programs. Volunteerism in the volunteerism
workplace, when employees spend company-supported time in support of social when employees spend
company-supported time in
causes, has become a routine expectation in companies of all sizes. Each year,
support of social causes
approximately 77.4 million Americans spend nearly 6.9 billion hours supporting
formal volunteer activities. The estimated value of these volunteer efforts is over
$166 billion. The four main activities that volunteers perform are fundraising,
collecting and distributing food, helping with general labor needs, and tutoring
or teaching. These activities are performed for a variety of organizations, with
religious, education, and social service agencies topping the list. Recent research
has examined the factors that either promote or inhibit volunteerism, with
shorter commute times, home ownership, and higher educational levels associ-
ated with higher rates of volunteerism.27 Figure 10.1 shows the states with the
Figure 10.1 States with Highest Volunteerism Rates
40.6%
51.0%
Utah
Minnesota
Oregon
41.5% Iowa
Alaska
45.1%
43.2%
Source: Corporation for National and Community Service, “Volunteering in America: States,” https://www.nationalservice.
gov/serve/via/states (accessed June 25, 2019).

highest percentage of their populations who are actively engaged in volunteer

activities.
People who volunteer feel more connected to other people and society and
ultimately have lower mortality rates, greater functional ability, and lower rates
of depression later in life than those who do not volunteer. When volunteering is
a result of employment, benefits of volunteering accrue to both the individual, in
terms of greater motivation, enjoyment, and satisfaction, and to the organization
through employee retention and productivity increases.28 Communities benefit
from the application of new skills and initiatives toward problems, better rela-
tions with business, a greater supply of volunteers, assistance to stretch limited
resources, and social and economic regeneration.29 Philanthropic issues are just
another dimension of voluntary social responsibility and relate to business’s
contributions to stakeholders.
Chicago-based Exelon Energy, for example, instituted their Powering
Communities volunteer engagement program that offers incentives to encourage
employees to volunteer. One of the incentives is the Dollars for Doers program
in which an employee can volunteer either 10, 20, or 40 hours per year at an
organization of his or her choice, and Exelon awards a corresponding grant to the
organization. In 2018, Exelon provided $1.1 million to recognize the volunteer
efforts of its employees. Employees who volunteer more than 50 hours per year are
nominated for the Exelon Employee Volunteer Award, and the recipients are then
recognized during National Volunteer Week. In the most recent year, employees
volunteered for over 240,000 hours, including 5,200 employees who participated
in National Volunteer Week and topped 18,000 hours of service.30
There are several considerations in deciding how to structure a volunteer
program. Attention must be paid to employee values and beliefs; therefore,
political or religious organizations should be supported on the basis of individual
employee initiative and interest. Some companies will partner with nonprofit
organizations as a means to give their employees more options for volunteerism.
For example, World Vision humanitarian organization partners with corporations
for financial, volunteer, and product donations, as well as opportunities for cause-
related marketing. Volunteer opportunities exist in education, sanitation, economic
development, and related areas all over the globe. World Vision even provides
guidance to corporate partners on how to integrate volunteerism and philanthropy
with their business goals.31
Another issue is what to do when some employees do not wish to volunteer. If
the company is not paying for the employees’ time to volunteer and volunteering
is not a condition of employment or an aspect of the job description, it may be dif-
ficult to convince a certain percentage of the workforce to participate. On the other
hand, if the organization is paying for one day a month to allow the employee
exposure to volunteering, then individual compliance is usually expected.
Philanthropic Contributions
philanthropy Philanthropy provides four major benefits to society. First, it improves the quality
acts such as donations to of life and helps make communities places where people want to do business, raise
charitable organizations to
improve quality of life, reduce
families, and enjoy life. Thus, improving the quality of life in a community makes
government involvement, develop it easier to attract and retain employees and customers. Second, philanthropy
employee leadership skills, reduces government involvement by providing assistance to stakeholders. Third,
and create an ethical culture to philanthropy develops employee leadership skills. Many firms, for example, use
act as buffer to organizational campaigns by the United Way and other community service organizations as
misconduct
leadership- and skill-building exercises for their employees. Philanthropy helps
create an ethical culture and promotes the values that can act as a buffer to

Figure 10.2 Sources of Charitable Giving
$300.0
$292.09
$250.0
$200.0
Billions
$150.0
$100.0
$75.86
$50.0 $39.71
$20.05
$0.0
Individuals Corporations Foundations Bequests
Source: “Giving USA 2019,” Giving USA, https://givingusa.org/giving-usa-2019-americans-gave-427-71-billion-to-charity-in-

2018-amid-complex-year-for-charitable-giving/ (accessed June 27, 2019).
organizational misconduct.32 In the United States, charitable giving has stagnated

at 2.1 percent of gross domestic product (GDP) annually.33
The most common way that businesses demonstrate philanthropy is through
donations to local and national charitable organizations. Corporations gave more
than $20.5 billion to environmental, educational, and social causes in a recent year.
Individual giving, which is always the largest component of charitable contribu-
tions, was an estimated $292.09 billion, or 71 percent of the total. Figure 10.2
displays the sources of charitable giving. Figure 10.3 displays the major recipients
Figure 10.3 Recipients of Charitable Giving
$140.00
$124.54
$120.00
$100.00
$80.00
Billions
$60.00 $58.90
$51.54 $50.29
$40.78
$40.00 $31.21
$22.88
$20.00
$0.00
s
ns
lth
y
n
l
na
ou
t
io
ic
ie
io
ea
rv
tio
at
oc
i
ig
t
Se
da
H
uc
na
l
/S
Re
un
Ed
r
an
lic
te
Fo
b
um
In
Pu
H
Billions
Source: “Giving USA 2019,” Giving USA, https://givingusa.org/giving-usa-2019-americans-gave-427-71-billion-to-charity-in-

2018-amid-complex-year-for-charitable-giving/ (accessed June 27, 2019).

of the $427 billion in philanthropic donations made in 2018. Religious organiza-

tions received about 30 percent of all contributions, with educational causes col-
lecting 13 percent of the funds While many areas experienced declines, donations
to nonprofits devoted to international affairs, the environment, and animals grew
year over year.34
In a general sense, philanthropy involves any acts of benevolence and goodwill,
such as making gifts to charity, volunteering for community projects, and taking
action to benefit others. For example, your parents may have spent time on
nonwork projects that directly benefited the community or a special population.
Perhaps you have participated in similar activities through work, school groups,
or associations. Have you ever served Thanksgiving dinner at a homeless shelter?
Have you ever raised money for a neighborhood school? Have you ever joined a
social club that volunteered member services to local charities? The Rockefeller
Philanthropy Advisors is a nonprofit group that provides guidance to individuals
on selecting and supporting nonprofits, including the key questions to ask before
making these plans. The first question, “Why are you giving?” sets the stage for
uncovering motivations, values, and interests. Figure 10.4 explores nine primary
motivations for philanthropy. In most cases, philanthropists have multiple reasons
intrinsic motivation for giving, including those driven by both intrinsic motivation and extrinsic
wanting to take action based on motivation.
internal factors
According to the Rockefeller group, individuals within families are increas-
extrinsic motivation ingly interested in giving as a collective group. Often, the family is motivated
wanting to take action based on by an ancestor or core values and beliefs. In other cases, philanthropists may be
external factors motivated by recognition and the rewards of being associated with specific efforts
and good works. Still others are looking for ways to minimize taxes and enable
future generations to benefit from estate planning.
Most religious organizations, educational institutions, and arts programs
rely heavily on philanthropic donations from both individuals and organizations.
Philanthropy is a major driver of the nonprofit sector of the economy, as these
organizations rely on the time, money, and talents of both individuals and orga-
nizations to operate and fund their programs. Consider the partnership between
Pampers and UNICEF. These two organizations have had a successful decade-long
partnership, in which Pampers donated a portion of their profits to UNICEF to
Figure 10.4 Motivations for Philanthropy
Why Are You Giving?
Family Legacy Experience Faith Values

Heritage Analysis Financial Recognition

provide tetanus shots for babies around the world. This partnership fits well with
the company’s core product and target market.35
Strategic Philanthropy Defined

Our concept of corporate philanthropy extends beyond financial contributions
and explicitly links company missions, organizational competencies, and various
stakeholders. Thus, we define strategic philanthropy as the synergistic use of strategic philanthropy
an organization’s core competencies and resources to address key stakehold- the synergistic use of an
organization’s core competencies
ers’ interests and to achieve both organizational and social benefits. Strategic
and resources to address key
philanthropy goes well beyond the traditional benevolent philanthropy of stakeholders’ interests and to
donating a percentage of sales to social causes by involving employees (utilizing achieve both organizational and
their core skills), organizational resources and expertise (equipment, knowledge, social benefits
and money), and the ability to link employees, customers, suppliers, and social
needs with these key assets. Strategic philanthropy involves both financial and
nonfinancial contributions to stakeholders (employee time, goods and services,
and company technology and equipment as well as facilities), but it also benefits
the company.
Organizations are best suited to deal with social or stakeholder issues in areas
with which they have some experience, knowledge, or expertise. From a business
perspective, companies want to refine their intellectual capital, reinforce their core
competencies, and develop synergies between business and philanthropic activities.
The process of addressing stakeholder concerns through philanthropy should be
strategic to a company’s ongoing development and improvement. For example,
SAP, a global software company, has made financial and product investments
in developing economies such as Mexico and Swaziland. These investments are
beneficial to both parties, as the technology aids economic, educational, and
health advancements for the communities. However, it also allows the company to
identify emerging talent and become established in these economies for their own
growth.36
Some critics would argue that this is not true philanthropy because SAP will
receive business benefits. However, social responsibility takes place on many levels,
and effective philanthropy depends on the synergy between stakeholder needs and
business competencies and goals. Thus, the fact that each partner receives unique
benefits does not diminish the overall good that results from a project. As global
competition escalates, companies are increasingly responsible to stakeholders in
justifying their philanthropic endeavors. This ultimately requires greater planning
and alignment of philanthropic efforts with overall strategic goals. Table 10.5
provides additional examples of philanthropic activities.
Table 10.5 Examples of Strategic Philanthropy

Target donates 5 percent of its pretax income to charity.
Patagonia donates 1 percent of profits to 1 Percent for the Planet, a global movement that
donates the proceeds to environmental organizations.
Salesforce.com donates 1 percent of its technology, 1 percent of its resources, and 1 percent of its
people (employees can take off six days a year to volunteer) to nonprofits and to their communities.
Home Depot has a strong partnership with the nonprofit Habitat for Humanity, spending
significant time and resources in its mission to build homes for those in need.
New Belgium Brewing engages in extensive philanthropy grants, product donations, and
sponsorships to support the community.
Whole Foods holds a number of community giving days in which 5 percent of the day’s net
revenue goes toward nonprofits or education.

Strategic Philanthropy and Social

Responsibility
It is important to place strategic philanthropy in the context of organizational
responsibilities at the economic, legal, ethical, and philanthropic levels. Most
companies understand the need to be economically successful for the benefit of
all stakeholders and to comply with the laws required within our society and
others in which they do business. Additionally, through the establishment of core
values and ethical cultures, most firms are recognizing the many benefits of good
ethics. As we saw in Chapter 1, evidence is accumulating that there is a positive
relationship between social responsibility and performance, especially with regard
to customer satisfaction, investor loyalty, and employee commitment. Strategic
social responsibility can reduce the cost of business transactions, establish trust
among stakeholders, improve teamwork, and preserve the social capital necessary
for an infrastructure for doing business. In sum, these efforts improve the context
and environment for corporate operations and performance.37
When Daniel Lubetzky founded KIND Healthy Snacks, he had transparency
and kindness in mind. Transparency is demonstrated in the fact that the company’s
bars and snacks contain ingredients that are easily pronounced (meaning that they
are natural) and come in clear packaging where those ingredients can be seen. The
company initiated a charitable campaign in which it donated $10,000 per month
to a different charity through a program called “Do the Kind Thing.” Each charity
was crowdsourced, meaning that people would visit the company’s website to vote
for the charity they thought should get that month’s donation. The self-described
“not-only-for-profit” company has become the fastest-growing energy and nutrition
bar in the United States.38 In this way, KIND Healthy Snacks has linked philan-
thropic contributions to revenue generation.
Many companies consider philanthropy only after they have met their finan-
cial, legal, and ethical obligations. As companies strive for social responsibility,
their ability to meet each obligation lays the foundation for success with other
responsibilities. In addition, there is synergy in corporate efforts directed at the
four levels of responsibility. As one of the most voluntary dimensions of social
responsibility, philanthropy has not always been linked to profits or business
ethics. In fact, the traditional approach to philanthropy disconnects giving from
business performance and its impact on stakeholders. Before the evolution of
strategic philanthropy, most corporate gift programs separated the company from
the organizations, causes, and individuals that its donations most benefited.39
Research has begun to highlight organizations’ formalization of philanthropic
activities and their efforts to integrate philanthropic goals with other business
strategies and implementation. U.S. companies are adopting a more businesslike
approach to philanthropy and experiencing a better image, increased employee
loyalty, and improved customer ties.40 Philanthropy involves using organizational
resources, and specific methods are used to measure its impact on key stakehold-
ers. In this case, philanthropy is an investment from which a company can gain
some type of value. For instance, JPMorgan Chase and other wealthy entities and
impact investing individuals engage in impact investing. Impact investing is the investment of a
investments made with the significant amount of money toward finding solutions for a social problem, with
intention of generating positive the promise of financial returns that depend upon the achievement of a stated goal.
and measurable social and
This measured activity is becoming increasingly popular because not only is it
environmental impact, as well
as financial returns drawing in millions of dollars to be invested, but many hurdles are being overcome
in environmental and social issues. The Esmée Fairbairn Foundation (EFF) is one of
the largest grant-making organizations in the United Kingdom. Founded in 1961,
EFF works to improve quality of life and has traditionally made grants to support
the arts, education and learning, environment, social change, and sustainable food
initiatives. Recently, EFF provided a £12 million impact investment in the Bridges

Social Entrepreneurs Fund, which was developed to provide bridge funding for
fast-growing social enterprises ready to scale their operations. Other examples
of initiatives include sustainable farming in East Africa and banking options to
low-income communities in Mexico. J. P. Morgan has spent $68 million in impact
investing across 11 funds.41 Indeed, there are numerous examples of companies
supporting community involvement. Although these actions are noble, they are not
always considered in tandem with organizational goals and strengths.
In some cases, corporate contributions may be made to nonprofit organiza-
tions in which top managers have a personal interest. When Unilever acquired
the Ben and Jerry’s Homemade ice cream company, they agreed to support the
causes and initiatives that are extremely important to founders Ben Cohen and
Jerry Greenfield. Unilever agreed to maintain the Vermont-based employment and
manufacturing, pay workers a livable wage with complete benefits, buy milk from
Vermont dairy farmers who do not use bovine growth hormones, contribute over
$1.1 million annually to the Ben and Jerry’s Foundation, open more Partner Shops
owned by nonprofit organizations providing employment opportunities for disad-
vantaged persons, and maintain relationships with alternative suppliers.42 Finally,
many companies will match employees’ personal gifts to educational institutions.
Although gift-matching programs instill employee pride and assist education, they
are rarely linked to company operations and competencies.43 In the traditional
approach to corporate philanthropy, then, companies have good intentions, but
there is no solid integration with organizational resources and objectives.
In the social responsibility model that we propose, philanthropy is only one focal
point for a corporate vision that includes both the welfare of the firm and benefits
to stakeholders. This requires support from top management, as well as a strategic
planning structure that incorporates stakeholder concerns and benefits. Corporate
giving, volunteer efforts, and other contributions should be considered and aligned
not only with corporate strategy, but also with financial, legal, and ethical obliga-
tions. The shift from traditional benevolent philanthropy to strategic philanthropy
has come about as companies struggled to redefine their missions, alliances, and
scope, while becoming increasingly accountable to stakeholders and society.
Strategic Philanthropy Versus Cause-Related Marketing

The first attempts by organizations to coordinate organizational goals with philan-
thropic giving emerged with cause-related marketing in the early 1980s. Whereas
strategic philanthropy links corporate resources and knowledge to address broader
social, customer, employee, and supplier problems and needs, cause-related cause-related marketing
marketing ties an organization’s products directly to a social concern. Table 10.6 ties an organization’s products
directly to a social concern
compares cause-related marketing and strategic philanthropy.
Table 10.6 Strategic Philanthropy Contrasted with Cause-Related Marketing

Attribute Strategic Philanthropy Cause-Related Marketing
Focus Organizational A company’s product or product
line
Goals Improvement of organizational Increase of product sales
competence or tying organizational
competence to a social need or
charitable cause; builds brand equity
Time frame Ongoing Traditionally of limited duration
Organizational Potentially all organizational Marketing department and
members involved employees related personnel
Cost Moderate—alignment with Minimal—alliance development
organizational strategies and mission and promotion expenditures

Cause-related marketing donates a percentage of a product’s sales to a cause

appealing to the relevant target market. The Avon Breast Cancer Crusade, for
example, generates proceeds for the breast cancer cause through several fundraising
efforts, including the sale of special “pink ribbon” products by Avon independent
sales representatives nationwide. Gifts are awarded by the Avon Products Foundation,
Inc., a nonprofit 501(c)(3) accredited public charity, to support six vital areas of the
breast cancer cause. Both the cause and Avon Crusade “pink ribbon” products appeal
to Avon’s primary target market: women. The Avon Breast Cancer Crusade generated
more than $800 million net in total funds raised worldwide to fund access to care
and in finding a cure for breast cancer.44
American Express was the first company to use cause-related marketing widely,
when it began advertising in 1983 that it would give a percentage of credit card
charges to the Statue of Liberty and Ellis Island Restoration Fund.45 As is the
case with Avon, American Express companies generally prefer to support causes
that are of interest to their target markets. In a single year, organizations raised
roughly $1.92 billion for causes through marketing efforts.46 Thus, a key feature
of cause-related marketing is the promise of donations to a particular social cause
based on customer sales or involvement. Whereas strategic philanthropy is tied to
the entire organization, cause-related marketing is linked to a specific product and
marketing program. The program may involve in-store promotions, messages on
packages and labels, and other marketing communications.47
Although cause-related marketing has its roots in the United States, the
marketing tool is gaining widespread usage in other parts of the world. Population
Services International (PSI) was created with marketing for social issues as its
base strategy. After traveling to Africa and witnessing the devastating effects of
HIV/AIDS on the population, founder Kate Roberts decided to use her marketing
expertise to address the problem. She established YouthAIDS as an education and
prevention program for young people using media, celebrity partnerships, and
music to relay messages to the target group. YouthAIDS has partnered with many
well-known global brands, including ALDO, H&M, Roberto Coin, Levi-Strauss,
and Cartier. Over the years, YouthAIDS became a recognizable brand. This success
led to the organization’s involvement with other social issues such as malaria,
sanitary water, and tuberculosis in over 50 countries. In a recent annual report, PSI
estimated that its programs prevented 5 million unintended pregnancies, 135,800
deaths due malaria and pneumonia, and 278,000 HIV infections in one year.48
Cause-related marketing activities have real potential to affect buying patterns.
For cause-related marketing to be successful, consumers must have awareness and
affinity for the cause, the brand and cause must be associated and perceived as a
good fit, and consumers should be able to transfer feelings toward the cause to
their brand perceptions and purchase intentions. Studies have found that a major-
ity of consumers said that, given equal price and product quality, they would be
more likely to buy the product associated with a charitable cause. More than 80
percent of customers say they have more positive perceptions of firms that support
causes about which they personally care. These surveys have also noted that most
marketing directors felt that cause-related marketing would increase in importance
over the coming years.49 Through cause-related marketing, companies first become
aware that supporting social causes, such as environmental awareness, health
and human services, education, and the arts, can support business goals and help
bolster a firm’s reputation, especially if the firm has an ethically neutral image.
However, firms that are perceived as unethical may be suspected of ulterior motives
in developing cause-related campaigns.50
One of the main weaknesses of cause-related marketing is that some consumers
cannot link specific philanthropic efforts with companies.51 Consumers may have
difficulty recalling exact philanthropic relationships because many cause-related
marketing campaigns have tended to be of short duration and have not always
had a direct correlation to the sponsoring firm’s core business. Because strategic

philanthropy is more pervasive and relates to company attributes, values, and

skills, such alliances should have greater stakeholder recognition and appreciation.
Social Entrepreneurship and Social

Responsibility
While social philanthropy and cause-related marketing are important ways for
businesses to demonstrate social responsibility, some entrepreneurs are taking this
a step further by designing their entire business model for creating positive social
change. Traditionally, organizations that structured themselves around the creation
of social value chose to become nonprofit organizations. Nonprofits are organiza-
tions that are formed to meet some public purpose rather than making profits.
Unlike for-profit companies, nonprofits must reinvest any additional earnings into
their operations.52 While some nonprofits sell their goods or perform services to
raise funds, many depend upon stakeholder donations to support their causes.
However, a new type of organizational structure is emerging that spans across
or within nonprofit, business, and government industries. The social enterprise is
an organization that uses entrepreneurial principles to create positive social change.
Because it is an emerging field, researchers have not yet come up with a consensus
on how to define it. For our purposes, we define social entrepreneurship as an social entrepreneurship
entrepreneur creating a business with the purpose of creating social value rather when an entrepreneur founds
a business with the purpose of
than making money. This means that unlike a traditional for-profit business,
creating social value rather than
the primary goal of a social entrepreneur is not to earn profits but to provide a making money
solution to a social problem.53
As mentioned earlier, because the overarching purpose of social entrepreneur-
ship is creating social value, social enterprises can be organized as a nonprofit, busi-
ness, or government form of an organization—as well as a combination of any of
these. Many social enterprises are set up with a nonprofit organizational structure.
However, social enterprises differ from more traditional nonprofits as they pursue
business-led strategies to achieve social objectives.54 While a social enterprise might
be a nonprofit, it operates more like an entrepreneurial business venture in its
strategy, structure, norms, values, and its approach to finding innovative solutions
to social problems.55 Like a business entrepreneur, social entrepreneurs seek to
be change agents by seizing upon opportunities and finding solutions that others
missed to solve challenges in society. Because a social entrepreneur needs funds to
support the venture, economic considerations and the social mission go hand-in-
hand. Strong leadership is fundamental for these hybrid organizations, as they differ
from a strictly for-profit or nonprofit orientation. More case studies and research
are needed to ensure that social entrepreneurship is understood as something more
than a tradeoff between economic and social priorities.56 We go into further detail
about nonprofit and for-profit types of social enterprises in the following sections.
History and Development of Social Entrepreneurship

Social entrepreneurship as a term and concept is relatively new, but its precursors
go back hundreds of years. Examples of using entrepreneurial practices as a means
to support a social mission are found in history. For instance, monasteries sold
surplus wine and cheese and used the money to further their mission. The York
Female Friendly Society (YFFS), established in England in 1788, prospered and
survived until the late twentieth century. Among other successful projects, YFFS
operated the Grey Coat School for Girls until 1984. Donations from families and
religious groups were a key source of funds while women in the YFFS provided
extensive administrative and management support the school and other projects.
Because women were not legally allowed to sign contracts during the society’s

early history, they relied on supportive male friends and family members to learn
how to operate.57 Early social entrepreneurs included historical figures such as
Florence Nightingale, John Muir, Susan B. Anthony, and Maria Montessori.58 The
concept itself was first widely used in the 1960s and 1970s. In 1980, entrepreneur
Bill Drayton made major inroads in popularizing the concept when he founded
Ashoka as an enterprise to encourage and support social entrepreneurs throughout
the world.59
Probably the most famous social entrepreneurship success story is the
establishment of the microlending organization Grameen Bank in Bangladesh by
microlending Muhammad Yunus. Microlending occurs when investors provide small loans to
small loans provided to individuals local entrepreneurs to start their own businesses, cutting out intermediaries and
and businesses, typically in avoiding the predatory lending rates that are often common in developing coun-
impoverished areas, that are
unable to obtain loans from
tries. The inspiration for Grameen Bank occurred in 1974 during a famine, when
traditional lending institutions Yunus lent $27 to a woman and her neighbors to help them earn a living. After
he was paid back in full, Yunus realized the difference that these small amounts
of money could have in the lives of poor people. The Grameen Bank Project was
founded in 1976, and in 1983, a government ordinance allowed Yunus to turn his
microlending project into an independent bank.60
Grameen Bank adopted an innovative approach to lending. It would have
borrowers take out loans in groups of five, and each borrower would guarantee
the other’s debts.61 Interest rates are around 16 percent, which is lower than bank
rates in many other countries. Grameen’s model places pressure upon the borrow-
ers to repay their loans or risk being shamed in front of their community members.
Grameen Bank has had a high repayment rate, with 95 percent of borrowers
paying back their loans.62
Grameen Bank has successfully changed the business environment in
Bangladesh. Not only did it develop an innovative model to help villagers get out
of poverty, but because 97 percent of loans are made to women, its microlending
model promoted respect for women entrepreneurs.63 Grameen also established
training programs to replicate its microlending model in other countries.
Approximately 95 percent of the bank is owned by the borrowers themselves,
giving them the incentive to see the bank succeed.64 In 2006, Yunus and Grameen
Bank won the Nobel Peace Prize.65 The bank’s emphasis on joint accountability
and ownership has led to a successful lending model to address a major economic
problem. Grameen Bank has also been sustainable; with the exception of a couple
of years, the bank has earned a profit. Unlike traditional banks in Bangladesh,
Grameen has developed a compliance program to shield itself from corruption,
which is considered acceptable to many citizens.66 Today, similar microfinance
organizations include Kiva, BRAC (whose acronym stands for “Building Resources
Across Communities”), Accion, and FINCA International.
Social entrepreneurs typically follow a four-stage process. In the first stage of
envisioning, a clear need, gap, and opportunity are identified. The second stage
involves engaging in the opportunity and doing something about it. Enabling
something to happen is the third stage. The final stage includes enacting and
leading the project to completion. Today, social entrepreneurs are present all over
the world. One example is SEKEM, located just north of Cairo, SEKEM was
founded in 1977 by Dr. Ibrahim Abouleish. Since 1977, the organization has grown
from one person to several business firms. SEKEM produces organic products on
its farms, ships organic textiles from Egypt around the world, and manufactures
natural food, medicines, and spices. SEKEM’s activities are grounded in the fol-
lowing principles:
• Sustained commitment to the benefits of biodynamic agriculture
• Commitment to the highest product quality and its continuous
improvement

• Provision of required capital and its optimal use

• Assurance of continuous measures in organizational development
• Investment in education and training for all employees
• Dedication toward customers’ real needs
• A marketing strategy sensitive to human values, truthfulness, sensibility, and
in alignment with SEKEM’s long-standing vision and values
• The promotion of the principles of associative economics
SEKEM developed an alternative method for using pesticides to protect cotton

crops. This new system led to a ban on crop dusting in Egypt. Among numerous
awards, SEKEM won the IMPACT Business Award in recognition of innovative
contributions to preventing climate change. In 2013, Dr. Abouleish won the Award
for Excellence in Positive Change by the Global Thinker Forum. Even after the
death of Dr. Aboulesih in 2017, SEKEM continues in its mission.67
Types of Social Entrepreneurship

Many social enterprises tend to organize themselves as nonprofits. For instance,
the Delancey Street Foundation is a nonprofit based in San Francisco. Founded
by Mimi Silbert in 1971, the Delancey Foundation was created to help homeless
people, drug addicts, felons, and others change their lives. The Delancey Street
Foundation acts as a residential education center that trains people in skills and
expertise so they can become productive members of society. Approximately 65
percent of the foundation’s operating costs are paid for by operating more than 20
small businesses, including the Delancey Street Restaurant, which are staffed by the
people using Delancey’s services. Thus far, Delancey Street has helped more than
18,000 people change their lives.68
Other social entrepreneurs decide to organize as a for-profit organization or
as a hybrid of for-profit and nonprofit. Blake Mycoskie’s TOMS, for instance,
was created with the mission to provide a pair of shoes to children in need
throughout the world. However, the model was incorporated into a for-profit
business that builds the cost of the free pair of shoes into their shoe sales. After
distributing its 1-millionth pair of shoes in 2010, TOMS began to consider other
products that could be used in the one-to-one model. Because 80 percent of vision
impairment in developing countries is preventable or curable, TOMS decided that
for every pair of sunglasses it sold, the company would provide treatment or
prescription glasses for those in need.69 Another for-profit firm, Sseko Designs,
provides internships to women in Uganda. The women make leather bags and
ribbon sandals to sell in the United States. The intention of the internships is to
help these Ugandan women save enough to go to college. A certain amount of the
women’s earnings go toward a college fund. Sseko Designs matches the savings at
the end of the women’s internships so that the women will have enough to attend
college.70
It is clear that social entrepreneurship does not encompass any particular type
of business structure. Rather, it is distinguished from traditional organizations—
both for-profit and nonprofit—by its emphasis on innovative solutions and
entrepreneurial principles to solve social problems.
Social Entrepreneurship and Strategic Philanthropy

There are many distinct similarities among social entrepreneurship, cause-related
marketing, and strategic philanthropy. All of these concepts emphasize social
responsibility and a desire to support positive change. The delineation occurs
more in how they achieve their goals. Businesses with cause-related marketing

initiatives have not incorporated philan-

thropy into their business models. Rather,
they use programs to strongly support
initiatives to benefit society, such as
Yoplait’s support of the Susan G. Komen
Foundation or Avon’s support for breast
cancer research. Strategic philanthropy
uses organizational core competencies
to achieve both organizational and
social benefits. Strategic philanthropy
in business occurs when organizations
incorporate these causes into their overall
strategies. As part of its strategy to sup-
port environmental awareness, Patagonia
donates 1 percent of its profits to a global
Shutterstock/MindStorm
movement of companies called 1 Percent

for the Planet, which in turn donates to
environmental organizations.
Like social entrepreneurship, strate-
gic philanthropy implements strategies to
support solutions for societal challenges.
Companies incorporating strategic phi-
lanthropy, however, usually outsource the execution of their program and its
goals to other organizations, often nonprofits. Home Depot, for instance, strongly
supports Habitat for Humanity, but its operations are not centered around
building houses for people in need. In contrast, the social entrepreneur executes
the organization’s program for change directly.71 The business objectives of these
organizations are to create social value; Grameen is in the business of microlend-
ing, while Sseko Designs was founded to increase Ugandan women’s access to
a college education. Cause-related marketing, strategic philanthropy, and social
entrepreneurship are all innovative and socially responsible ways to meet the
organization’s obligations to society.
Benefits of Strategic Philanthropy

To pursue strategic philanthropy successfully, organizations must weigh both the
costs and benefits associated with planning and implementing it as a corporate
priority. Companies that assume a strategic approach to philanthropy are using
an investment model with respect to their charitable acts and donations. In other
words, these firms are not just writing checks; they are investing in solutions
to stakeholder problems and corporate needs. Such an investment requires the
commitment of company time, money, and human talent to succeed. Companies
often need to hire staff to manage projects, communicate goals and opportunities
throughout the firm, develop long-term priorities and programs, handle requests
for funds, and represent the firm on other aspects of philanthropy. In addition,
philanthropy consumes the time and energy of all types of employees within the
organization. Thus, strategic philanthropy involves real corporate costs that must
be justified and managed.
Most scholars and practitioners agree that the benefits of strategic philanthropy
ultimately outweigh its costs. The positive return on strategic philanthropy is closely
aligned with benefits obtained from strong social responsibility. First, in the United
States, businesses can declare up to 10 percent of pretax profits as tax-deductible
contributions. Most firms do not take full advantage of this benefit, as 10 percent
Where There’s Beer, There’s Smoke?

Years of research has illuminated the environmental toll bars created and donated to “smoke pots,” which helped
of the tobacco industry. Beyond the clear health concerns business owners pay fines after government inspections.
about smoking and inhaling secondhand smoke, the World One bar owner asked each customer to donate 1 euro
Health Organization asserts that tobacco farming and use toward such a fund. Other bar owners took part in protests
lead to deforestation, dump chemicals into water sources, and quit their industry trade association because it did not
damage air quality, and result in postconsumption waste do enough to protect their small businesses and their com-
via discarded cigarette butts, lighters, and packaging. munity’s way of life. As one owner concluded, “[T]he bar
The European Union (EU) has enacted strict laws and should be an extension of your living room.” Two years after
regulations in a long-term campaign to create a smoke- the total ban, the government reported that approximately
free EU. Powered by statistics and a profound interest in 60 percent of small bars were complying with the nonsmok-
public health, the EU leadership made earlier and more ing law. A recent research study concluded that community
significant strides regarding tobacco and smoking than relations and the cohesive nature of small bars and their
most other developed nation-states. customers provided the power to resist the government.
Anti-smoking regulations have been in force in the Meanwhile, supporters of stricter tobacco control policies
Netherlands since 2002, when a general ban on smoking are framing the debate as a measure of child protection, which
in workplaces and public transportation went into effect. is another concern for communities. Arguments include the
Special provisions of the regulations focused on the need to prevent youth access to tobacco products, as well
hospitality industry, which includes bars that serve as com- as the need to prevent their exposure to tobacco smoke and
munity hubs for socializing, networking, and relaxing after other by-products. A recent survey of Dutch citizens age 18
work. Due to extensive lobbying efforts by the hospitality and older indicated that beliefs about child protection were
industry, the regulations were phased in over time. In positively associated with support for tobacco control. This
2008, the Dutch government enacted rules that meant approach is even palatable to some pro-tobacco citizens
that all industries, including hospitality, were smoke-free. because it does not restrict the free will of adults or infringe
The Dutch equivalent of a food and consumer product their civil liberties. Taken one step further, some citizens are
safety administration enforced the law and made regular concerned with any government encroachment on adult
inspections to ensure compliance. Fines of up to 2,400 liberties, regardless of whether it involves tobacco, firearms,
euros were levied against bar owners, with repeat viola- or seatbelt protection. Child protection is viewed quite differ-
tions met by criminal prosecution and the potential for ently and, as the opening vignette of this chapter described,
a business to lose its license to operate. In response, is also a fervent theme in community relations.
many owner-operators of small bars in the Netherlands The fight for smokers’ rights is not over in the EU.
developed a coalition to fight the strict nonsmoking laws. Despite a ban on smoking indoors, bar owners in Greece
In a resistance campaign called “Save the Small Bars,” continue to insist that their livelihoods would be destroyed
these owners asserted that a ban on smoking would if they turned smokers away. Coupled with the fears
directly and negatively affect their ability to attract and evoked by the country’s recent economic crisis, critics
retain customers, who largely come from the immediate wonder if the Greek government will ever begin to enforce
neighborhood. In effect, the bar owners believed that its laws. Like their Dutch counterparts, Greek bar owners
smoking and drinking beer go hand-in-hand and that are bolstered by customers and communities that want to
their livelihoods would be destroyed by the government’s smoke and drink at the same time in the same place. One
attempt to decouple these two activities. bar owner in Athens believes that for many smokers, “the
In resisting the new law, bars typically had the support habit is part of their DNA,” and “If they are not allowed to
of their customers and local communities. Customers of light up while having a drink, they’ll stay at home.”
Sources: Joanna E. Cohen, Nancy Milio, R. Gary Rozier, Roberta Ferrence, Mary Jane Ashley, and Adam O. Goldstein, “Political Ideology and Tobacco
Control,” Tobacco Control 9 (September 2000): 263–267; “Tobacco,” European Commission, https://ec.europa.eu/health/tobacco/overview_en (accessed
June 29, 2019); Filipppos T. Filippidis, “Tobacco Control: A Victim of Political Instability in Greece.” Lancet 387 (January 23, 2016): 338–339; Thomas G.
Kuijpers, Marc C. Willemsen, and Anton E. Kunst, “Public Support for Tobacco Control Policies: The Role of the Protection of Children Against Tobacco,”
Health Policy 122 (August 2018): 929–935; Tal Simons, Patrick A. M. Vermeulen, and Joris Knoben, “There’s No Beer Without a Smoke: Community
Cohesion and Neighboring Communities’ Effects on Organizational Resistance to Antismoking Regulations in the Dutch Hospitality Industry,” Academy of
Management Journal 59 (April 2016): 545–578; Nektaria Stamouli, “Greece’s Anti-Smoking Effort Has One Major Problem: Greeks,” Wall Street Journal,
July 11, 2018, https://www.wsj.com/articles/greeces-anti-smoking-effort-has-one-major-problem-greeks-1499714738 (accessed July 1, 2019), “Tobacco-Free
Initiative,” World Health Organization, https://www.who.int/tobacco/research/economics/rationale/environment/en/ (accessed June 15, 2019).

is viewed as a very generous contribution level. In fact, corporate giving has dipped
as low as 0.7 percent of pretax profits in 2013 but typically has hovered close to
1 percent of pretax profits over the past 15 years.72 Second, companies with a
strategic approach to philanthropy experience rewards in the workplace. Employees
involved in volunteer projects and related ventures not only have the opportunity
to refine their professional skills but also develop a stronger sense of loyalty and
commitment to their employer. A national survey of employees demonstrated that
corporate philanthropy is an important driver in employee engagement, a key term
discussed in Chapter 8. Those who perceive their employer as strong in philanthropy
were four times as likely to be very loyal as those who believed their employer was
less philanthropic. Employees in firms with favorable ratings on philanthropy are
also more likely to recommend the company and its products to others and have
intentions to stay with the employer. Positive impressions of the executives’ role in
corporate philanthropy also influenced employees’ affirmative attitudes toward their
employer.73 Results such as these lead to improved productivity, enhanced employee
recruitment practices, and reduced employee turnover, each contributing to the over-
all effectiveness and efficiency of the company. When philanthropy is combined with
employee volunteerism, companies may experience enhanced hiring pools for job
openings. While hiring is often the result of contacts with the LinkedIn and Glassdoor
websites, a company’s active community engagement makes a positive impression
on a broader group of people, some of whom may become employees in the
future.74
As a third benefit, companies should experience enhanced customer loyalty
as a result of their strategic philanthropy. By choosing projects and causes with
links to its core business, a firm can create synergies with its core competencies
and customers. Consider the Pampers partnership with UNICEF described earlier.
Pampers has developed a partnership to donate a portion of proceeds to help
improve the health of babies throughout the world. This resonates well with the
target market for Pampers: parents of infants and newborns. Another example
is Home Depot’s partnership with Habitat for Humanity. Research has revealed
that consumer perceptions of corporate philanthropy are also influenced by the
relative cost of a donation. Large companies like Netflix are expected to make
large donations, so a small donation may be viewed as disingenuous. This research
also shows that small and midsize companies, who may be afraid that modest
donations will seem inconsequential, may be pleasantly surprised by consumers’
favorable reactions.75
Finally, strategic philanthropy should improve a company’s overall reputation
in the community and ease government and community relations. Research
indicates a strong negative relationship between illegal activity and reputation,
whereas firms that contribute to charitable causes enjoy enhanced reputations.
Moreover, companies that contribute to social causes, especially to problems
that arise as a result of their actions, may be able to improve their reputations,
even after committing a crime.76 If a business is engaged in a strategic approach
to contributions, volunteerism, and related activities, a clear purpose
Table 10.7 Benefits of Socially
is to enhance and benefit the community. By properly implementing
Responsible Strategic Corporate and communicating these achievements, the company will “do well
Philanthropy by doing good.” Essentially, community members and others use cues
from a strategic philanthropy initiative, along with other social respon-
• Consumer trust
sibility programs, to form a lasting impression—or reputation—of the
• Stakeholder loyalty
firm. These benefits, together with others discussed in this section, are
• Employee engagement
consistent with research conducted on European firms. Table 10.7
• Reputation
highlights the perceived benefits of corporate philanthropy, which
• Enhanced brand image
suggests that companies believe that their charitable activities generally
• Increased share value have a positive effect on goodwill, public relations, community rela-
• Positive publicity tions, employee motivation, and customer loyalty.77

Implementation of Strategic Philanthropy

Attaining the benefits of strategic philanthropy depends on the integration of
corporate competencies, business stakeholders, and social responsibility objectives
to be fully effective. However, fruitfully implementing a strategic philanthropy
approach is not simple; it requires organizational resources and strategic attention.
In this section, we examine some of the key factors associated with implementing
strategic philanthropy.
Although some organizations and leaders see beyond economic concerns,
other firms are far less progressive and collaborative in nature. To the extent that
corporate leaders and others advocate for strategic philanthropy, planning and
evaluation practices must be developed, just as with any other business process.
Almost all effective actions taken by a company are well-thought-out business
plans. However, although most large organizations have solid plans for philan-
thropy and other community involvement, these activities typically do not receive
the same attention that other business forays garner. A study by the American
Productivity & Quality Center found that many organizations are not yet taking
a systematic or comprehensive approach in evaluating the impact of philanthropy
on their business and their stakeholders.78
Top Management Support

The implementation of strategic philanthropy would be impossible without the
endorsement and support of the chief executive officer (CEO) and other members
of top management. Although most executives care about their communities and
social issues, there may be debate or confusion over how their firms should meet
stakeholder concerns and social responsibility. Under CEO Jean-Laurent Bonnafé,
BNP Paribas has partnered with the Chair of Philanthropy at ESSEC Business
School in order to collaborate and contribute to the development of philanthropy
itself. This is in addition to the Individual Philanthropy Offering program and the
social activities of the BNP Paribas Foundation.79
Top managers often have unique concerns with respect to strategic philan-
thropy. For example, CEOs may worry about having to defend the company’s
commitment to charity. Some investors may see these contributions as damaging
to their portfolios. A related concern involves the resources required to manage a
philanthropy effort. Top managers must be well versed in the performance benefits
of social responsibility discussed in Chapter 1. Additionally, some executives may
believe that less philanthropic-minded competitors have a profit advantage. If
these competitors have any advantage at all, it is probably just a short-term situ-
ation. The tax benefits and other gains that philanthropy provides should prevail
over the long run.80 In today’s environment, there are many positive incentives for
strategic philanthropy and social responsibility and reasons that they make good
business sense.
Planning and Evaluating Strategic Philanthropy

As with any initiative, strategic philanthropy must prove its relevance and
importance. For philanthropy and other stakeholder collaborations to be fully
diffused and accepted within the business community, a performance benefit must
be evident. In addition, philanthropy should be treated as a corporate program
that deserves the same professionalism and resources as other strategic initiatives.
Thus, the process for planning and evaluating strategic philanthropy is integral to
its success.

To make the best decisions when dealing with stakeholder concerns and issues,
there should be a defensible, workable strategy to ensure that every donation is
wisely spent. Curt Weeden, president of Business and Nonprofit Strategies, Inc.,
has developed a multistep process for ensuring effective planning and implementa-
tion of strategic philanthropy:
1. Research. If a company has too little or inaccurate information, it will
suffer when making philanthropic decisions. Research should cover the
internal organization and programs, organizations, sponsorship options,
and events that might intersect with the interests and competencies of the
corporation.
2. Organize and design. The information collected by research should be
classified into relevant categories. For example, funding opportunities can
be categorized according to the level of need and alignment with organiza-
tional competencies. The process of organizing and designing is probably
the most crucial step in which management should be thoroughly involved.
3. Engage. This step consists of engaging management early on so as to ease
the approval process in the future. Top managers need to be co-owners of
the corporate philanthropy plan. They will have interest in seeing the plan
receive authorization, and they will enrich the program by sharing their
ideas and thoughts.
4. Spend. Deciding what resources and dollars should be spent and where is a
very important task. A skilled manager who has spent some time with the
philanthropy program should preferably handle this. If the previous steps
were handled appropriately, this step should go rather smoothly.81
Evaluating corporate philanthropy should begin with a clear understanding of
how these efforts are linked to the company’s vision, mission, and resources. As
our definition suggests, philanthropy can be strategic only if it is fully aligned with
the values, core competencies, and long-term plans of an organization. Thus, the
development of philanthropic programs should be part of the strategic planning
process.
Assuming that key stakeholders have been identified, organizations need to
conduct research to understand stakeholder expectations and their willingness to
collaborate for mutual benefit. Although many companies have invested time and
resources to understand the needs of employees, customers, and investors, fewer
have examined other stakeholders or the potential for aligning stakeholders and
company resources for philanthropic reasons. Philanthropic efforts should be
evaluated for their effects on and benefits to various constituents.82 Philanthropists
have always been concerned with results, which includes maintaining trust within
the communities they support. The aftermath of the terrorist attacks in the United
States on September 11, 2001, brought not only widespread contributions, but also
a heightened sensitivity to accountability. For example, the American Red Cross
suffered intense scrutiny after its leaders initially decided to set aside a portion of
donations received in response to the terrorist attacks. The rationale for setting
aside $200 million was that a long-term program on terrorism response needed
to be developed and funded. Many donors rejected this plan, though, and the
Red Cross reversed its decision. A survey in late 2002 indicated that 42 percent
of Americans had less confidence in charities than they did before the September
11, 2001, attacks. Unfortunately, technological advances have also resulted in
fake charities, many developed in the aftermath of a disaster, significant news, or
a community event. While these scams are often short lived and regional in scope,
ongoing fraud or misrepresentation is occurring on an international scale. In some
cases, the names of fraudulent charities are easily confused with the names of well-
known and respected charities. Experts advise companies and individuals to use
Charity Navigator, Guide Star, and other services to research charitable entities,

including the percentage of revenue that supports direct services. Give. Table 10.8 Principles for Sound
org, a service of the Better Business Bureau (BBB), provides evaluations Practice for Charities and Foundations
of charities. The 20 Standards for Charity Accountability include an
1. Legal compliance and public disclosure
assessment of tax status, governance, complaints, financial stability,
and other elements.83 Major philanthropists are also stepping up 2. Effective governance
their expectations for accountability, widespread impact, strategic 3. Strong financial oversight
thinking, global implications, and results. A recent report by the 4. Responsible fundraising
Panel on the Nonprofit Sector discusses four major areas that all Source: “Principles for Good Governance and Ethical
nonprofit organizations need to address in order to demonstrate solid Practice: A Guide for Charities and Foundations,”
governance and ethical practices. Those areas are legal, governance, Independent Sector, https://www.independentsector.
org/principles (accessed July 1, 2019).
finance, and fundraising. Table 10.8 lists specific recommendations on
how charitable organizations can go about preserving the soundness
and integrity of the nonprofit community.84 Table 10.9 lists A Donor Bill of Rights
which offers 10 guidelines that potential donors should use in evaluating and
choosing organizations with which to partner or provide funding. Both types of
input are important to individuals and companies in the process of deciding where
to donate time and money.
Methods to evaluate strategic philanthropy should include an assessment of
how these initiatives are communicated to stakeholders. It is recommended that
organizations develop an overall evaluation framework to be used to measure the
initiative’s success. This evaluation framework provides guidelines for how the
organization will view the evaluation, as well as descriptions of the evaluation
type, standards to demonstrate successful implementation, and methods for com-
municating results.85 Such reporting mechanisms not only improve stakeholder
knowledge, but also lead to improvements and refinements. Although critics may
deride organizations for communicating their philanthropic efforts, the strategic
philanthropy model depends on feedback and learning to create greater value for
the organization and its stakeholders.
Table 10.9 A Donor Bill of Rights

Philanthropy is based on voluntary action for the common good. It is a tradition of giving and
sharing that is primary to the quality of life. To assure that philanthropy merits the respect and
trust of the general public and that donors and prospective donors can have full confidence in
the not-for-profit organizations and causes they are asked to support, we declare that all donors
have these rights:
1. To be informed of the organization’s mission, of the way the organization intends to use
donated resources, and of its capacity to use donations effectively for their intended purposes
2.
To be informed of the identity of those serving on the organization’s governing board, and
to expect the board to exercise prudent judgment in its stewardship responsibilities
3.
To have access to the organization’s most recent financial statements
4.
To be assured their gifts will be used for the purposes for which they were given
5.
To receive appropriate acknowledgment and recognition
6.
To be assured that information about their donations is handled with respect and with
confidentiality to the extent provided by law
7. To expect that all relationships with individuals representing organizations of interest to the
donor will be professional in nature
8.
To be informed whether those seeking donations are volunteers, employees of the
organization, or hired solicitors
9. To have the opportunity for their names to be deleted from mailing lists that an organization may
intend to share
10. To feel free to ask questions when making a donation and to receive prompt, truthful, and
forthright answers
Source: Association of Fundraising Professionals (AFP), all rights reserved. Reprinted with permission from the
Association of Fundraising Professionals.

Summary
More firms are investigating ways to link their philanthropic efforts with consumer
interests. From a strategic perspective, a firm’s ability to link consumer interests
to philanthropy should lead to stronger economic relationships. Community
relations are the organizational functions dedicated to building and maintaining
relationships and trust with the community. To determine the key areas that
require support and to refine the mission statement, a company should periodically
conduct a community needs assessment.
Companies play a major role in a community’s quality of life and economic
development by bringing jobs to the community, interacting with other businesses,
and making contributions to local health, education, and recreation projects that
benefit residents and employees. When a company leaves an area, the financial
repercussions may be devastating. Because they have such a profound impact on
the economic viability of their communities, firms that value social responsibility
consider both the short- and long-term effects of changes in their workforce on
the community.
For many firms, a series of legal and regulatory matters must be resolved
before launching a business. On a basic level, society has the ability to dictate what
types of organizations are allowed to operate. As more companies view themselves
as responsible to the community, they consider their role and the impact of their
decisions on communities from an ethical perspective.
The success of a business can be enhanced by the publicity generated from and
through stakeholder acceptance of community activities. One way that organiza-
tions are exercising their philanthropic responsibilities is through volunteerism, the
donation of employee time by companies in support of social causes. In structuring
volunteer programs, attention must be paid to employee values and beliefs.
Generally, philanthropy involves any acts of benevolence and goodwill.
Strategic philanthropy is defined as the synergistic use of organizational core
competencies and resources to address key stakeholders’ interests and to achieve
organizational and social benefits. Strategic philanthropy involves both financial
and nonfinancial contributions to stakeholders, but it also benefits the company.
As such, strategic philanthropy is part of a broader philosophy that recognizes how
social responsibility can help an organization improve its overall performance.
Research suggests that companies that adopt a more businesslike approach to
philanthropy will experience a better image, increased employee loyalty, and
improved customer ties.
Corporate giving, volunteer efforts, and other philanthropic activities should
be considered and aligned with corporate strategy and financial, legal, and ethical
obligations. The concept of strategic philanthropy has evolved since the middle of
the twentieth century, when contributions were prohibited by law, to emerge as
a management practice to support social responsibility beginning in the 1990s.
Whereas strategic philanthropy links corporate resources and knowledge to address
broader social, customer, employee, and supplier problems and needs, cause-
related marketing ties an organization’s product(s) directly to a social concern. By
linking products with charities and social causes, organizations acknowledge the
opportunity to align philanthropy to economic goals and to recognize stakeholder
interests in organizational benevolence.
Social entrepreneurship occurs when an entrepreneur founds a business with
the purpose of creating social value. There are many distinct similarities among
social entrepreneurship, cause-related marketing, and strategic philanthropy.
All of these concepts emphasize social responsibility and a desire to support
positive change. The delineation occurs more in how they achieve their goals. Like
social entrepreneurship, strategic philanthropy implements strategies to support

solutions for societal challenges. Companies incorporating strategic philanthropy,

however, usually outsource the execution of their program and its goals to other
organizations, often nonprofits. The social entrepreneur executes the organiza-
tion’s program for change directly. The business objectives of these organizations
are to create social value.
Many organizations have skillfully used their resources and core competencies
to address the needs of employees, customers, business partners, the community
and society, and the natural environment. To pursue strategic philanthropy suc-
cessfully, organizations must weigh the costs and benefits associated with planning
and implementing it as a corporate priority. The benefits of strategic philanthropy
are closely aligned with benefits obtained from social responsibility. Businesses
that engage in strategic philanthropy often gain a tax advantage. Research suggests
that they may also enjoy improved productivity, stronger employee commitment
and morale, reduced turnover, and greater customer loyalty and satisfaction. In the
future, many companies will devote more resources to understanding how strategic
philanthropy can be developed and integrated to support their core competencies.
The implementation of strategic philanthropy is impossible without the sup-
port of top management. To integrate strategic philanthropy into the organization
successfully, the efforts must fit with the company’s mission, values, and resources.
Organizations must also understand stakeholder expectations and the propensity
to support such activities for mutual benefit. This process relies on the feedback
of stakeholders in improving and learning how to better integrate the strategic
philanthropy objectives with other organizational goals. Finally, companies will
need to evaluate philanthropic efforts and assess how these results should be
communicated to stakeholders.

The Giving Pledge

Issue: Should billionaires be expected to give away on all of us to pay this inheritance forward. (Robert
some of their fortunes? Frederick Smith, CEO of Vista Equity Partners)
Recently, media reports have surfaced about the num-

In 2010, 40 billionaires from the United States decided
ber of billionaires who have yet to sign the Giving Pledge.
to commit more than half of their wealth to charitable or
While the initial results of the initiative were strong, only
philanthropic causes. Led by Warren Buffett and Bill and
1 in 6 billionaires in the United States have committed to
Melinda Gates, Michael Bloomberg, Mark Zuckerberg, and
it. That means that well-known businesspeople such as
executives and entrepreneurs from Microsoft, eBay, Intel,
Oprah Winfrey, Jeff Bezos, Michael Dell, and the families
Citigroup, and Cisco Systems signed the Giving Pledge.
of Walmart are not part of the effort. Of course, uncovering
At the time, news reports heralded the approach as a
their reasons is difficult.
catalyst to increase rates of giving, create more significant
Some critics of the initiative point to the fact that there
monetary donations, and tackle some of the world’s most
is no formal accountability built into the pledge. One
pressing challenges and needs. Today, more than 200
journalist wondered if the pledgers were more focused on
billionaires from 23 countries have signed the pledge,
feeling good or gaining publicity. In other words, are some
including the founders of WhatsApp, Airbnb, Spanx, Home
billionaires pledging without real plans or timely actions to
Depot, and the Virgin Group. Pledgers range in age from
meet the promise? Others may be signing on as a result of
their 30s to their 90s and are devoted to all kinds of
peer pressure, even if it’s subtle. The Gateses and Buffett
charitable causes, including poverty alleviation, autism,
have hosted intimate dinner parties aimed at bringing
disaster relief, global health, homelessness, education,
together billionaires, including pledgers and would-be
medical research, and much more.
pledgers. When another journalist at Fortune magazine
In making the pledge, individuals and couples pen a
suggested that Bezos, one of the wealthiest people in the
personal letter explaining their values, goals, and reasons
world, should sign the Giving Pledge, readers shot back.
for joining the effort. Phrases from these letters provide
One proclaimed, “Wanting to take you to task a little for
a glimpse into the hearts and minds of these billionaires:
the criticisms of Jeff’s philanthropy.” While few people
• There is a saying that a great trip can set you down doubt the noble intentions of its founding and current
a path that doesn’t end when you return. With this members, the Giving Pledge may not be the salve for
pledge, I want to help more kids realize the kind of soothing world problems after all.
journey I have had. (Brian Chesky, CEO of Airbnb)
• Cancer terrifies us and often takes our lives, irrespec- There Are Two Sides to Every Issue
tive of age, gender, or walk of life. As I have publicly 1. The wealth of billionaires is largely the result of busi-
stated countless times, my duty is to make sure cancer ness success and the work of countless others. They
is vanquished. (Jon and Karen Huntsman, Jon and should be expected to make significant philanthropic
Karen Huntsman Foundation) contributions.
• I will never forget that my path was paved by my 2. Like other people, billionaires are entitled to spend
parents, grandparents, and generations of African their wealth as they wish. Neither their peers nor soci-
Americans whose names I will never know. My story ety should expect them make significant philanthropic
would only be possible in America, and it is incumbent contributions.
Sources: Marc Gunther, “5 in 6 U.S. Billionaires Haven’t Signed the Giving Pledge. Why Not?” Chronicle of Philanthropy 31 (June 2019): 9–16; the Giving
Pledge, https://givingpledge.org/#enter (accessed June 30, 2019); Nicole Lewis and Maria Di Mento, “Giving Pledge Signers Gave Big in 2013 but Not
Much for Today’s Needs,” Chronicle of Philanthropy 26 (February 2014): 6; Alan Murray and David Meyer, “Call for Jeff Bezos to Join Giving Pledge
Causes a Stir: CEO Daily.” Fortune.com, May 31, 2019, https://fortune.com/2019/05/31/jeff-bezos-ceo-daily-may-31/ (accessed July 2, 2019); Scott Walter,
“Gates and Buffett Take the Pledge,” Philanthropy Daily, June 22, 2010, https://www.philanthropydaily.com/gates-and-buffett-take-the-pledge/ (accessed
July 2, 2019); Christopher Zara, “Mackenzie Bezos Joins the Giving Pledge. Still No Sign of Jeff,” Fast Company, May 28, 2019, https://www.fastcompany.
com/90355929/mackenzie-bezos-joins-the-giving-pledge-still-no-sign-of-jeff (accessed July 2, 2019).

Key Terms
cause-related marketing (p. 291) intrinsic motivation (p. 288) social entrepreneurship (p. 293)
community (p. 277) microlending (p. 294) strategic philanthropy (p. 289)
community relations (p. 278) neighbor of choice (p. 278) volunteerism (p. 285)
extrinsic motivation (p. 288) philanthropy (p. 286)
impact investing (p. 290) quality of life (p. 277)
1. What are some of the issues that you might include 4. Compare and contrast cause-related marketing with
in a defense of strategic philanthropy to company strategic philanthropy. What are the unique benefits
stockholders? of each approach?
2. Describe your personal experiences with philanthropy. 5. Compare social entrepreneurship to cause-related
In what types of activities have you participated? marketing and strategic philanthropy.
Which companies that you do business with have a 6. What role does top management play in develop-
philanthropic focus? How did this focus influence your ing and implementing a strategic philanthropy
decision to buy from those companies? approach?
3. How have changes in the business environment 7. Describe the four-stage process for planning and
contributed to the growing trend of strategic implementing strategic philanthropy.
philanthropy?
Choose one major corporation and investigate how closely the company’s core competencies are linked to various
their philanthropic efforts are strategically aligned with philanthropic projects and stakeholder groups. Finally,
their core competencies. Visit the company’s website, provide an analysis of how these efforts have affected the
read their annual reports, and use other sources to justify company’s performance.
your conclusions. Develop a chart or table to depict how
Creating “Buy-in” for Volunteerism: What Would You Do?

As a new vice president of corporate philanthropy, Jack
?
who openly questioned how important philanthropy was
Birke was looking forward to the great initiatives and part- to the business. After all, the economy was slowing, and it
nerships that the company could create through his office. seemed that customers were more concerned about price
During his 18-year career, Jack worked for several large and value than any “touchy-feely” program. About half of
nonprofit organizations and earned an excellent reputation the company’s employees worked on the manufacturing
for his ability to raise funds, develop advisory boards, and line, and the other half was employed in administrative or
in general, work well with the business community. professional positions. Both groups seemed to be equally
About a year ago, Jack decided to investigate other suspicious of Jack and his office. The company developed
opportunities within the fundraising industry and started an employee volunteer program two years ago, but it was
looking at companies that were formalizing their philan- never very successful. A program to gather food, gifts, and
thropy efforts. He was hired as vice president less than a money to support needy families at Christmas, however,
month ago and was in the process of developing an office drew strong support. The firm had fairly good relation-
structure, getting to know the organization, and creating a ships in the community, but these were primarily the top
strategic plan. His charge over the next year was to develop a executives’ connections through the chamber of commerce,
stronger reputation for philanthropy and social responsibility industry associations, nonprofit boards, and so forth. In
with the company’s stakeholders, including employees, cus- sum, while Jack had the support of top management, many
tomers, and the community. An executive assistant, director employees were unsure about philanthropy and its impor-
of volunteerism, and director of community relations were tance to the company. Jack was starting to think about
already on board, and Jack was looking for additional staff. short-term policies and long-term strategy for marketing
The position and office were new to the company, his office and its goals to the rest of the organization. What
and Jack had already heard dissent from other employees, would you do?

CHAPTER
11 Technology Issues

Sustainability Goes High-Tech
Businesses have great influence on the environ- technology on cars to locate high levels of pollution
ment, as waste, pollution, and the use of resources in the city. With this data, policies and plans can be
contribute to the changing climate. Modern technol- developed to reduce air pollution and improve both
ogy is improving how businesses contribute to the environment and the local community.
the sustainability of the environment. In the past, Deforestation, water availability, and cata-
consumers and businesses often had a throwaway strophic natural event predictions are all areas where
mentality when creating and using products. In some technology is used to benefit society. Cartographers
cases, it was lack of information about the condition and geologists create custom maps—even in three
of the planet and the effects of consumerism that dimensions—that aid experts in managing water
led to subpar sustainability efforts. Technology can supplies, finding oil, and pinpointing future earth-
be used to reduce waste and pollution, encour- quakes. Planet, a firm that takes daily snapshots
age recycling, and save energy by providing data of the Earth using satellites, offers their data to
regarding the impact of consumer and business services like Global Forest Watch, which monitors
practices. deforestation and makes their findings available
For example, Amazon is known for shipping to the public. These snapshots help bust illegal
items in a way that uses less packaging. This cuts loggers or discover areas susceptible to forest fires.
down on resource use and waste production, and Additionally, businesses in the financial and insur-
promotes more mindful supply chain management. ance industries value this information because it
Technology has allowed the collection of digital data helps them become aware of weather and climate
on the use of materials, and it has helped businesses risks that could affect their businesses. Google is
and consumers adopt more ecofriendly practices in another firm that plays a role in the use of technol-
their day-to-day lives. For instance, drones are used ogy for sustainability endeavors. Google gathered
to snapshot areas of pollution in the Los Angeles 30 years of measurements from ancient magnetic
River to see where trash is entering the marine tapes around the globe and created a digital tool to
ecosystem. Cities can use this data to detect areas help developing countries identify areas that need
where intervention is needed, whether the solution additional water protection.
Shutterstock/Sergey Kamshylin
is more frequent trash pickup or adding more trash Values and accountability are paramount in the
cans in the surrounding areas. use of technology for sustainability. It has been seen
Along with water pollution, air pollution is a that technology can be used to help both the human
major issue in cities today. Air quality can vary in population and the environment. However, without
different parts of a city. Continued research into this ethical controls and social responsibility, machines
phenomenon could provide sustainable solutions. could be relied on more than human beings, jobs
The Environmental Defense Fund (EDF) is working could be lost, and sensitivity to the planet could be
in tandem with Geotab and cities such as Houston overlooked in the race to innovate. Therefore, ethi-
to monitor pollution through the use of telemat- cal guidelines and programs need to be developed
ics. Telematics is a method of monitoring that among businesses to meet these new advances.
uses global positioning system (GPS) and onboard Technology has been and will continue to be a
diagnostics. The EDF is using Geotab’s telematics major force that can continue to improve society.1
Chapter Objectives
●● Examine the nature and characteristics of technology
●● Explore the economic impact of technology
●● Examine technology’s influence on society
●● Provide a framework for the strategic management of technology issues
307
I n this chapter, we explore the nature of technology and its positive and
negative effects on society. Technology’s influence on the economy is
very powerful, especially with regard to growth, employment, and
working environments. This influence on society includes issues related to the
internet, privacy, intellectual property, artificial intelligence (AI), health, and the
general quality of life. The strategic direction for technology depends on govern-
ment, as well as on business’s ability to plan, implement, and audit the influence of
technology on society.
The Nature of Technology

technology Technology relates to the application of knowledge, including the processes and
the application of knowledge, applications to solve problems, perform tasks, and create new methods to obtain
including the processes and desired outcomes. It includes intellectual knowledge, as well as the physical systems
applications to solve problems,
perform tasks, and create new devised to achieve business and personal objectives. The evolution of civilization
methods to obtain desired is tied to developments in technology. Through technological advances, humans
outcomes have moved from a hunter-gatherer existence to a stable agricultural economy to
the Industrial Revolution. Today, our economy is based more on IT and services
than on manufacturing. This technology is changing the way we take vacations,
shop for groceries, do homework, track criminals, navigate to places, and maintain
friendships. Technology has made it possible to go to work or attend meetings
without leaving home. Our new economy is based on these dynamic technological
changes in our society.
Characteristics of Technology
Some of the characteristics of technology include the dynamics, reach, and self-
sustaining nature of technological progress. The dynamics of technology relate
to the constant change that often challenges the structure of social institutions.
The automobile, airplane, and personal computer all created major changes and
influenced government, the family, social relationships, education, the military,
and leisure. These changes can happen so fast that they require significant
adjustments in the political, religious, and economic structures of society. Some
societies have difficulty adjusting to this rate of change to the point that they
even attempt to legislate against new technologies to isolate themselves. China
tried to isolate its citizens from the internet and the social trends resulting from
the application of new technology to music, movies, and other carriers of culture.
But eventually they eased restrictions, allowing for limited and monitored use.
Since then, internet use in China has grown, with the number of regular users
totaling more than 800 million, usually on mobile devices. However, the govern-
ment still utilizes a number of strategies for reminding Chinese citizens that
their internet activity is being monitored. Often, the Chinese government will
completely shut down the use of instant messaging or social media applications
to limit the potential of groups to organize protests or other antigovernment
activities.2
The dynamics of technology are not only changing many traditional prod-
smart devices ucts, such as books and music, but also the way in which we conduct everyday
devices connected to other activities. Smart devices are connected to other devices on networks and are
devices on networks that are capable of communication and computation for different wireless protocols,
capable of communication and
computation for different wireless
such as Wi-Fi and Bluetooth, operating interactively. According to Amazon,
protocols, such as Wi-Fi and more than 100 million devices with its Alexa virtual assistant have been sold to
Bluetooth, operating interactively date.3 These devices changed the way that people accomplish both work-related

Chapter 11 Technology Issues 309
and personal tasks, as well as the way we store data. As the capacity for cloud
storage of data increases, other storage devices such as universal serial bus (USB)
drives will likely become a thing of the past. Today, we can conduct banking
transactions without going to a bank, draft a document while riding the bus to
work and save it to the cloud, and share information with others with a tap of a
screen.
Each advance in technology seems to lead to new developments across
industries, sometimes making things more convenient, while at other times raising
serious concerns about privacy, protection of digital property, and other issues.
Reach relates to the broad nature of technology as it moves through society. For
instance, every community in both developed and developing countries has been
influenced by cellular phones and smartphones. The ability to make a call from
almost any location has many positive effects, but negative side effects include
increases in traffic accidents and noise pollution as well as fears about potential
health risks. Through telecommunications, businesses, families, and governments
have been linked from far distances. Satellites allow instant visual and voice
electronic connections almost anywhere in the world. These technologies have
reduced the need for in-person meetings via business travel. Web conferencing
and video conferencing are becoming more popular alternatives, although it may
be difficult for technology to fully replace the nature of face-to-face encounters.
Even though collaboration technology continues to grow in lieu of business travel,
companies recognize that some occasions demand face-to-face interaction, such as
meeting a new client for the first time, dealing with certain cultures, and discussing
significant financial and legal transactions.
The self-sustaining nature of technology relates to the fact that technology
acts as a catalyst to spur even faster development. As innovations are introduced,
they stimulate the need for more technology to facilitate further development.
For example, the internet created the need for broadband transmission of electric
signals through digital subscriber lines (DSL), satellites, and cable. Broadband
allows connections to the internet to be 50 times faster than through a traditional
telephone modem. It also allows users to download large files and creates the
opportunity for a rich multimedia experience. Today, most people refer to it
as Wi-Fi, and many restaurants and coffee shops offer it as a feature to attract
customers. The latest discussion in the advancement of internet transmission is
through fiber-optic cables. Many developed countries are heavily investing in
building and utilizing fiber-optic infrastructure for faster internet connections, and
we are seeing adoption among consumers rapidly increase.4
Effects of Technology
Civilizations must harness and adapt to changes in technology to maintain a
desired quality of life. The mobile phone, for example, has dramatically altered
communication patterns, particularly in developing countries where there are few
telephone lines. Innovations can also change entire industries. Companies and
governments are creating supercomputers that are millions of times more powerful
than personal computers. The computers are making use of big data, which consists big data
of large structured and unstructured sets of data that can be analyzed to reveal large structured and unstructured
sets of data that can be analyzed
information and associations. The concept of big data is a result of the continual
to reveal information and
use of the internet via computers and mobile devices.5 Big data is complex and associations
calls for advanced software that can glean insights from these massive amounts
of data. These insights can inform knowledge of the impact of business strategies
on society. For example, Instagram uses big data to fuel its explore and search
functions, while Johnson & Johnson uses it to evaluate the likelihood of success
for new drugs.6 Such examples illustrate how technology can provide new methods
to accomplish tasks that were once thought impossible. These advancements

create new processes, new products, and economic progress and ultimately have
profound effects on society.
The global economy experienced the greatest acceleration of technological
advancement that ever occurred, propelling increased productivity, output,
corporate profits, and stock prices, over the last decade.7 Among the positive
contributions of these advances were reductions in the number of worker-hours
required to generate the nation’s output. At the same time, the economic condi-
tions that accompanied this period of technical innovation resulted in increased
job opportunities. But in the early 2000s, with the fall of the dot-coms and the
integrity meltdown of major U.S. corporations, the economy had taken a down-
turn, along with the falling stock market. Many IT firms expanded too rapidly and
misreported revenue and earnings to hold onto stock prices and please executives
and investors. The result was incidences of massive accounting fraud that damaged
confidence and the economy. Earlier chapters dealt with many of these cases and
their effect on social responsibility expectations. The traditional work environment
has changed because telecommunications (e.g., email and video conferencing)
reduce the need for face-to-face interaction. GoToMeeting, a video conference
software, facilitates 80 million online meetings per year.8 Through online shop-
ping, the internet can also reduce the need for trips to a shopping center and has
increased the amount of business done by the U.S. Postal Service (USPS), UPS, and
FedEx. In addition, the ease and number of business-to-business transactions have
expanded.
However, there are concerns that dramatic shifts in the acceleration and
innovations derived from technology may be spurring imbalances not only in the
economy but also in our social existence. The flow of technology into developing
countries can serve as a method to jump-start economic development. In Kenya,
many residents use the mobile phone payment service M-Pesa to quickly and
securely transfer funds to merchants and family members, reducing the need to
travel long distances to banks. The service has also allowed many to start their own
businesses, contributing to the growth of the local economy.9 However, a failure
to share technology or provide methods to disseminate technology could cause a
major divide in the quality of life. Limited resources in underdeveloped countries
and the lack of a technology infrastructure may lead to many social, political, and
economic problems in the future.
In the United States, the federal government implemented plans to subsidize
computers, mobile phones, and internet access for low-income households and
individuals across the nation. Although this initiative was somewhat controversial,
proponents argued that it had the potential to raise the standard of living for low-
income families.10 Some companies are also trying to help bridge the technology
gap that exists between those who can afford technology and those who are on the
other side of the so-called digital divide. For instance, Comcast established a pro-
gram called Internet Essentials, where people can sign up to see if they qualify for
low-cost internet service, computers for $150, and free internet training.11 Other
internet providers offer programs similar to Comcast’s and serve as examples of a
corporate attempt to keep the positive effects of the reach of technology available
to all segments of society.
There are concerns about the way that information technology (IT) can improve
the quality of life for society. In addition, there are concerns about the negative
consequences of the reduction of privacy and the emergence of cybercrime. It is
becoming common for hackers to install malware into company and government
computer systems to steal secrets or consumer data. If higher-security measures
are not taken, significant changes in our economy and individual lifestyles could
occur, causing the roles of business, government, and technology to be questioned.
Public advocacy organizations are helping by participating in charting the future
of computer networks to integrate these technological innovations into the way
we live.12

Technology’s Influence on the Economy

Technology has had an enormous influence on the global economy. In many ways,
technology has contributed to significant economic growth through new business
opportunities, better ways to connect across long distances, and more efficient
processes. For example, the growing gig economy has flourished with advance-
ments in technology. In the burgeoning gig economy independent contractors gig economy
offer their services to large and small companies or individuals for an agreed level a labor market in which
independent contractors offer
of compensation. Typical freelance work includes writing and editing, consulting,
their services to large and small
accounting, and creative work. Additionally, the widespread growth of companies companies or individuals for an
like Uber and Airbnb have led to an economic system called the sharing economy, agreed level of compensation
in which independent contractors can “rent out” underutilized resources such as
their cars or lodging to earn extra income. Companies like Uber act as agents. sharing economy
a labor market in which
Their technology links the buyer and seller, but they do not engage in the distribu- independent contractors “rent out”
tion process directly. These economies have led to a number of opportunities. underutilized resources such as
However, technology has also given rise to concerns as well. The following their cars or lodging to earn extra
sections document technology’s overall impact on the economy. income
Economic Growth and Employment

Technological advancements have had a profound impact on economic growth and
employment. Over the past several decades, technology has been a major factor in
the economic growth of the United States. Investments in educational technologies,
increased support for basic government research, and continued commitment to
the mission of research and development (R&D) in both the public and private
sectors have become major drivers of economic growth. Through lower interest
rates, tax credits, and liberalization of export controls, the government established
the economic infrastructure for using technology to drive economic development.
The expansion of industry-led technology partnerships among corporations, gov-
ernments, and nonprofit organizations has also been a key component of growth.
Table 11.1 shows some leading technology firms and their number of employees.
Investments in R&D are among the highest return investments a nation can
make. Technological innovation has been a key contributor to the nation’s growth
in productivity.13 For example, the ability to access information in real time through
the electronic data interface among retailers, wholesalers, and manufacturers has
reduced the time that it takes to produce and deliver products. Likewise, product
design times and costs have declined because computer modeling has minimized
the need for architectural drafters and some engineers required for building
projects. New software can provide multiple iterations of a design based on inputs
and parameters set by an architect. Medical diagnoses have become faster, more
thorough, and more accurate thanks to the accessibility of information
and records over the internet, which has hastened treatment and
eliminated unnecessary procedures.14 Table 11.1 Leading Technology Firms
The relationship between businesses and consumers has been Company Number of Employees
transformed through e-commerce, as more people turn to the internet Alphabet 100,000
to make all type of purchases from one-time purchases to everyday
Amazon 647,500
purchases. The sharing of information has led to greater transparency,
and social media has facilitated closer communication and greater Apple Inc. 132,000
customer loyalty. Business-to-business (B2B) e-commerce involving IBM 350,600
companies buying from and selling to each other online is also growing Intel 107,400
in popularity, as it is the preferred method of purchase for more than Microsoft 134,944
half of all businesses. Certain aspects of internet transactions are par-
Samsung 320,671
ticularly important in B2B relationships, where the improved quantity,
reliability, and timeliness of information have reduced uncertainties. Sony 117,300

supply chain management It has also facilitated supply chain management as more companies outsource
the coordination of all the activities purchasing over the internet.15
involved with the flow of supplies
Walmart and Amazon are two companies that have not only mastered the man-
and products from raw materials
through to the end customer agement and integration of their supply chains over the years, but have also used the
internet to establish further efficiencies within the supply chain. Walmart’s technology
infrastructure is among the largest in the world and informs operations regarding
accurate forecasting of demand and inventory, the most efficient transportation routes,
and management of customer relationships and service response logistics. Amazon
has fulfillment centers strategically located in areas where customers can be reached
quickly. In some markets, Amazon even offers same-day delivery. A technology known
as sortation allows Amazon to determine how different items can be combined to
efficiently fit into boxes. The software instructs employees on where to store the item
in the warehouse and how large a package will be needed when it comes time to ship.
Amazon’s expertise at supply chain management has earned it strong accolades and
saved it billions of dollars in costs.16 Amazon is becoming a growing competitor to
USPS, UPS, and FedEx as it increases delivery of its own packages.
Science and technology are powerful drivers of economic growth and improve-
ments in the quality of life in the United States. Advancements in technology have
created millions of new jobs, better health and longer lives, new opportunities, and
more. Public and private investment in R&D contributes to these advancements and
continues to produce more jobs and improve living standards. Industries that have
grown as a result of innovations in technology include biotechnology, computers,
communications, software, aerospace, and semiconductors. Retailing, wholesaling,
and other commercial institutions have also been transformed by technology.
Economic Concerns about the Use of Technology

Despite the staggering economic growth fostered by technological advancements,
there are some economic downsides to technology. For instance, some people have
lost their jobs because of technology.
AI has created many new jobs. However, there are also concerns that AI used
in business will lead to widespread unemployment. As this technology is used for
routine, manual, or cognitive tasks, some traditional jobs will be eliminated. These
ethical and social responsibility issues require the attention of businesses. There
will be tremendous demand for workers skilled in developing and implementing
AI technologies. Business has a responsibility to help reskill workers to fit into this
new AI work environment. Workers may need to develop more soft skills in the
application of AI technologies. Educational institutions and business need to work
together to keep employment dynamic.17 Although technology also creates numer-
ous job opportunities, this is little consolation for those who lose their jobs and do
not have the technological skills to get new jobs in the growing technological field.
Small businesses in particular may have difficulty taking advantage of certain
opportunities, such as digital supply chain management systems or other large-
scale IT applications. The ability to purchase technology may affect the nature
of competition and the success of various types of businesses. Limited resources
and tough economic times may cause small businesses to cancel, modify, or delay
IT projects, decrease IT budgets, and reduce staffing and training levels. Experts
recommend several solutions to IT problems in small business:
• Focus on core competencies while seeking to explore outsourcing options.
• Take advantage of free software and other offerings.
• Explore the benefits of “cloud computing” where applications are utilized
and maintained on a subscription basis.
• Consider IT infrastructure alternatives to capital expenditures through
hosted hardware, software, and services.18

As mentioned earlier, a key concern today with advancing technology is the

digital divide that occurs when certain groups have limited access to the latest
technology. Also, part of the debate involves access issues for certain populations,
such as persons with disabilities, people who are barely literate, the distribution
of technology among low- and high-income households, and accommodations for
senior citizens.19
There are several ways to address these inevitable consequences of accelerat-
ing change in the technology drivers of the new economy. One way to address
the negative consequences of accelerating new technology is to assess problems
related to its impact on competition. Restraining competition (whether domestic
or international) to suppress competitive turmoil is a major concern of govern-
ments. Allowing anticompetitive practices, price fixing, or other unfair methods of
competition would be counterproductive to rising standards of living.20
Technology’s Influence on Society

IT and telecommunications technology minimize the borders between countries,
businesses, and people and allow people to overcome the physical limitations of
time and space. Technological advances also enable people to acquire customized
goods and services that cost less and are of higher quality than ever imagined.21
For example, airline passengers can purchase tickets online and either print out
boarding passes on their home or office printers or download them to their mobile
devices so that they can go straight to their plane on arrival at the airport after
clearing security.22 Cartographers and geologists can create custom maps—even
in three dimensions—that aid experts in managing water supplies, finding oil,
and pinpointing future earthquakes.23 In this section, we explore five broad issues
related to technology and its impact on society, including the internet, privacy,
intellectual property, AI, and health and biotechnology. Although there are many
other pressing issues related to technology, these seem to be the most widely
debated at this time.
The Internet
The internet, the global information system that links many computer networks, has
profoundly altered the way that people communicate, learn, do business, and find
entertainment. Although many people
believe the internet began in the early
1990s, its origins can be traced to the late
1950s (see Table 11.2). Over five decades,
the network evolved from a system for
government and university researchers
into an information and entertainment
tool used by billions around the globe.
With the development of the World Wide
Web, which organizes the information on
the internet into interconnected “pages”
of text, graphics, audio, and video, use of
the internet exploded in the 1990s.
Today, more than 4.3 billion people
around the world utilize the internet. In
Shutterstock/Rido
the United States alone, nearly 292 mil-

lion access the internet via computers or
mobile devices. Internet use by consumers

Table 11.2 History of the Internet

Year Event
1969 The first node is connected to Advanced Research Projects Agency Network
(ARPANET), the initial version of the internet. ARPANET was a government project
created to serve as a communications network during the Cold War.
1972 Email is invented by adapting an internal messaging program and extending it to
use the ARPANET to send messages between sites. Within a year, three-quarters of
ARPANET traffic is email.
1989 The World Wide Web is invented to make information easier to publish and access on
the internet.
1993 The first web-browser, Mosaic, is launched. It introduced proprietary Hypertext Markup
Language (HTML) tags and more sophisticated image capabilities. The browser is a
massive success and businesses start to notice the web’s potential.
1994 Internet Magazine launches, reporting on London’s first internet café and reviewing
100 websites. It was known as the “most extensive” list of websites ever to appear in a
magazine. A 28.8-Kbps modem costs £399 (plus value-added tax).
Jerry and David’s Guide to the World Wide Web is renamed Yahoo! and receives
100,000 visitors. In 1995, it begins displaying advertisements.
1995 The search engine Alta Vista is introduced, which can store and index the HTML from
every internet page. It also introduces the first multilingual search.
Amazon, an online bookseller that pioneers ecommerce, is launched.
eBay is launched to enable internet users to trade with each other.
1998 Google launches and pioneers a ranking system that uses links to assess a website’s
popularity. The site’s simple design is soothing, while existing search engines cram their
pages with animated advertisements.
2000 The infamous dotcom bust occurs, after several years of venture capitalists investing in
internet business proposals that do not have a viable business model.
2004 Media companies start selling music and video online. Napster and iTunes are the major
players.
Facebook launches at Harvard University. The social networking site gained 30 million
members by 2007 and over 200 million active users in 2009.
The photo-sharing website Flickr begins, coinciding with the rise in digital photography.
(Kodak discontinues selling reloadable film cameras in western Europe and North
America later this year.)
2005 YouTube and Reddit are launched.
2006 Twitter is introduced.
2010 The industry of big data is estimated to be worth more than $100 billion.
2013 Media reports reveal the extent to which national security agencies monitor the online
activities of citizens without search warrants.
2014 Google pushes for a safer internet by boosting the rankings of Hypertext Transfer
Protocol Secure (HTTPS) and Secure Sockets Layer (SSL) sites.
Amazon introduces the Echo virtual assistant.
2015 The Internet of Things (IoT), in which consumer or industrial devices are connected
to the internet for management and monitoring, became a popular concept in our
connected environment.
The Federal Communications Commission (FCC) passed net neutrality rules preventing
the blocking, throttling, or prioritizing of any internet traffic. (In 2017, the FCC votes to
remove these rules.)
2017 By 2017, ICANN releases more than 1,200 new TLDs for domains including .chat, .cloud,
.jewelry, and .tours.
2019 Facebook reaches 2.3 billion active users, YouTube reaches 1.9 billion active users,
Instagram reaches 1 billion active users, and Twitter reaches 335 million active users.
Sources: Adapted from “A Short History of the Internet,” http://www.sean.co.uk/a/science/history_of_the_internet.shtm
(accessed June 22, 2015); Economist staff, “Data, Data Everywhere,” The Economist, February 25, 2010, http://www.
economist.com/node/15557443 (accessed June 22, 2016); Irfan Ahmad, “A Timeline of the Internet: 1969–2018
(Infographic),” Digital Information World, August 29, 2018, https://www.digitalinformationworld.com/2018/08/history-of-the-
internet-infographic.html (accessed June 25, 2019); Alfred Lua, “21 Top Social Media Sites to Consider for Your Brand,”
Buffer, January 24, 2019, https://buffer.com/library/social-media-sites (accessed June 25, 2019).

Figure 11.1 Internet Users in the World
1%
4%
8%
Asia
Europe
10%
Africa
50% Latin America / Caribbean

11%
North America
Middle East
Oceania / Australia
16%
Source: “World Internet User Statistics and 2019 World Population Stats,” Internet World Stats, https://www.
internetworldstats.com/stats.htm (accessed June 25, 2019).
in other countries, especially Japan (118 million users), the United Kingdom (63
million), Germany (79 million), Brazil (149 million), and France (60 million), has
escalated rapidly.24 Figure 11.1 shows the pattern of active internet usage around
the world. To keep up with the growing demand for new email and website
addresses, the Internet Corporation for Assigned Names and Numbers (ICANN) Internet Corporation for
now has more than 1,500 top-level domains (TLDs), such as .com, .org, .info, or Assigned Names and Numbers
(ICANN)
.chat to allow for the creation of millions of new addresses.25 a nonprofit organization overseen
The interactive nature of the internet has created tremendous opportunities by the U.S. Department of
for businesses to forge relationships with consumers and business customers, Commerce and charged with
target markets more precisely, and even reach previously inaccessible markets. overseeing basic technical matters
The internet also facilitates supply chain management, allowing companies to related to addresses on the
internet
network with manufacturers, wholesalers, retailers, suppliers, and outsource firms
to serve customers more efficiently.26 However, widespread use of the internet has
also led to the storing of mass amounts of information and hackers and other
cybercriminals can take advantage.
Online fraud has become a major issue for businesses and consumers, with U.S.
business losing more than $57 billion each year.27 Interestingly, the rate of online
fraud targeting businesses is decreasing, while the rate for consumer online fraud is
increasing. This is largely because companies are using more sophisticated methods
of tracking abnormal credit and debit transactions. Many are using data by
analyzing trends such as the average amount spent per month and locations where
the money is spent. Automated systems quickly keep track of these behaviors and
notify customers when there are any abnormalities from the trends.28 However, the
methods by which cybercriminals and other hackers infiltrate payment and infor-
mation systems all across the internet are also becoming increasingly sophisticated.
It is often hard for the average consumer to spot malware or other viruses created
by hackers, which can lead to unknowing participation in scams and significant
monetary losses. As detailed in the media almost daily, consumers, companies,
and governments alike are having difficulty keeping up with the fast pace of
cybercriminal technology. Sometimes consumers and companies can become
victims of online fraud without making a purchase from a personal computer or
mobile device. Credit card transactions occur by means of the internet, even when
a purchase is made in a physical location. Online fraud can include information as
well as money. A flaw in the popular online video game Fortnite put its 200 million
users at risk. Personal account information could be accessed, in-game currency
could be purchased, and game chatter could be listened to by hackers because of

the data breach.29 Consumers, government agencies, and merchants are exploring
options, including regulation, to protect the security of online transactions.30
It is estimated that by the end of this decade, up to 500 billion items, including
cars, household appliances such as refrigerators, and medical devices, will be
Internet of Things (IoT) connected to the internet.31 The Internet of Things (IoT) extends connectivity to
the connectivity of devices such devices such as security systems and electric appliances to provide the ability
as security systems and electric
to send and receive information over the internet. Connecting devices such as
appliances to provide the ability to
send and receive information over smartphones, tablets, and watches to the internet provides embedded technology
the internet to communicate and enhance the service experience. The IoT has the potential to
greatly enhance our ability to perform activities and make devices more efficient,
providing a disruptive transformation of how services were delivered over many
decades. For instance, a doctor with smart medical devices can monitor patients
from far away. SAS, an analytics company, has developed Visual Analytics
software, which allows anyone approved to explore data and find answers through
collaboration to examine service dilemmas. The IoT allows voice assistants to
answer questions and perform tasks and services. Wi-Fi providing connections
to a variety of devices, including wearables, will have a tremendous impact on
business.32
On the other hand, with cybersecurity risks increasing, many are worried
that criminals will use these connections to sabotage or hack into devices. Just as
a hacker hacks into a computer. For example, a criminal might be able to hack
into a smart car. The risks are even worse than accessing personal information (as
bad as that is) because hacking into a smart car or smart medical device could
endanger lives. Technology firms such as Cisco and IBM are setting up consortiums
to identify innovative ways to prevent these attacks. They believe that the sharing
of information will help alert both people and companies to risks, prompting them
to take action to prevent cybercrimes before they strike.33
Privacy
The extraordinary growth of the internet has generated issues related to privacy.
As instances of hacking become more commonplace and severe, consumers are
realizing the responsibility that they have to protect their own privacy. However,
while a large percentage of online shoppers are concerned about their privacy,
many are not taking appropriate measures to protect their information. This is
largely a result of consumers feeling like the problem is beyond their control.
Figure 11.2 illustrates the top privacy concerns for consumers.
Figure 11.2 Top Privacy Concerns for Consumers
60%
52%
50%
43% 41%
40%
33% 33%
30%
20%
10%
0%
Are unsure of Feel they lack Do not change Are unsure that Don’t know enough
how to secure control over the default they can control about risks to
connected devices their personal password on how companies explain the
and apps information devices right collect their personal dangers to
away information their kids
Source: Adapted from Gary Davis, “Key Findings from Our Survey on Identity Theft, Family Safety, and Home Network
Security,” McAfee, January 2, 2018, https://securingtomorrow.mcafee.com/consumer/key-findings-from-our-survey-on-
identity-theft-family-safety-and-home-network-security/ (accessed June 28, 2019).

Because of the ease of access to personal information, however, unauthorized

use of this information may occur.34 Information can be collected on the internet
with or without a person’s knowledge. Many websites track users’ actions by
storing “cookies,” or identifying strings of text, on their computers, which permit
website operators to track how often a user visits the site, what he or she looks at
while there, and in what sequence. Cookies also allow website visitors to customize
services, such as virtual shopping carts, as well as the particular content they see
when they log on to a webpage. There are benefits to cookies, such as making
shopping more convenient and customizable. However, if a website operator can
exploit cookies to link a visitor’s interests to a name and address, that information
could be sold to advertisers and other parties without the visitor’s consent or
knowledge. The potential for misuse has left many consumers uncomfortable with
this technology.35
Identity theft, the access and theft of personal information, is a top crime in the identity theft
nation, with more than 400,000 identity theft complaints submitted to the Federal the access and theft of personal
information, leading to identity
Trade Commission (FTC) annually. Fraud is another major type of misconduct.
fraud
The most common types of theft include credit card fraud, tax fraud, phone or
utility fraud, and bank fraud.36 Identity fraud is defined as the use of someone’s identity fraud
personal information to access money online. More than 16 million individuals the use of someone’s personal
information to access money
are affected by identity theft, resulting in more than $16 billion stolen each year. online
Nearly 60 million Americans have been affected.37 Data breaches, like the one that
Fortnite experienced, are the most common source of identity theft and identity
fraud. Internal data breaches are also becoming a problem. It is estimated that 28
percent of attacks on organizations come from within the organization.38 New
tools are being developed that can be used to analyze the language in employee
emails and flag anything that seems suspicious or indicates that the employee is
unhappy. However, this too generates privacy concerns, as employees may not
realize that the language in their emails is being examined.
Nearly all internet websites and services require users to register and provide
information about themselves to access some or all of their content. How this
information is used is generating concern. The Chinese telecommunications
company Huawei, which holds 16 percent of the smartphone market, has been a
target of growing concern around privacy. Many countries worry that Huawei’s
products and services could be used to spy on their citizens and enable cyberat-
tacks. Its smartphones were banned by networks including AT&T and Verizon,
and the United States and Australia have blacklisted the company from providing
equipment for 5G networks. The ban has negatively affected U.S. companies (like
Intel) that are suppliers for Huawei.39 A variety of organizations have been collect-
ing and storing information on consumers for years and are now able to see trends
and behaviors. This information is valuable to companies that want to better target
people’s buying behaviors and interests, and it is becoming a multibillion-dollar
industry. For example, Facebook generates revenue by selling access to its users by
using data to better target advertising efforts, while Barclays sells anonymized cus-
tomer data to third parties. Because there are no current regulations regarding the
selling of customer information, many people are concerned about the practice.40
Privacy issues related to children are generating even more debate, as well as
laws to protect children’s interests. The Children’s Online Privacy Protection Act Children’s Online Privacy and
(COPPA) in the United States prohibits websites and internet providers from seek- Protection Act (COPPA)
a U.S. law which prohibits websites
ing personal information from children under age 13 without parental consent.41 and internet providers from
The law was recently amended to protect children’s privacy in using social media seeking personal information
sites and mobile devices. However, issues still exist. Instagram received criticism for from children under the age of 13
not verifying the age of its users, effectively allowing children under the age of 13 without parental consent
to join the site. Facebook and Instagram announced they would more proactively
lock the accounts of users suspected to be under the age requirement. They will
require users to provide proof of age to regain access, though they still do not
require proof of age up front.42 Instagram is an incredibly popular app among

Table 11.3 Six Tips to Improve Child teens, and this concerns parents because their children are posting
Safety on the Internet pictures of themselves and their friends, along with the locations they
1. Know what your children are doing frequent. This can make them vulnerable to predators or create other
online. dangerous situations. Parents are calling for tighter company controls
2. Get to know the technologies that your and monitoring of user ages.43 Table 11.3 provides recommendations
children are using. for improving child safety on the internet.
3. Discuss the risks with your children and
Some measure of protection for personal privacy is already pro-
agree on rules for internet use. vided by the U.S. Constitution, as well as Supreme Court rulings and
4. Install an internet content filter.
federal laws (see Table 11.4). The FTC also regulates, enforces privacy
standards, and monitors websites to ensure compliance. Similar laws
5. Make sure that your children know not
are coming into existence to address privacy issues resulting from
to share personal information or photos
online. mobile device use. The Location Privacy Protection Act addresses the
use of GPS devices in the following areas: Companies are required to
6. Report inappropriate, harmful, or
criminal activities that occur online or
obtain users’ permission before collecting location information, mobile
on a mobile device. apps created explicitly for stalking are prohibited, and companies that
Source: “Protect Your Children,” Stay Smart Online,
collect location information of more than 1,000 devices must post on
http://www.staysmartonline.gov.au/home_users/ their company website, the details of what is collected and how the
protect_your_children (accessed July 14, 2014). data are used. These are just a few provisions of the law.44
Unsurprisingly, many other issues regarding mobile and internet
privacy exist. For example, company privacy statements are often
lengthy and filled with legal jargon that average consumers will not understand
even if they take the time to read them (which they often don’t). The FTC has
set out some best practices for mobile companies to be more transparent. Some
of these principles include creating “just-in-time” permission requests for the
company to collect location, personal information, photos, and other information,
and instituting a “Do Not Track” feature on devices and websites so the user has
a choice as to the data being collected.45 The commission has also addressed best
practices for mobile payment security and children’s use of mobile applications.46
These best practices are important guidelines for companies to follow to avoid
litigation and protect the privacy of customers.
International Initiatives on Privacy The European Union (EU) has made great
General Data Protection strides in protecting the privacy of its citizens. The EU adopted the General Data
Regulation (GDPR) Protection Regulation (GDPR), a law that requires businesses to protect personal
a European Union (EU) law that
requires businesses to protect the
data of EU citizens. Its goal is to standardize data protection laws and increase
personal data of EU citizens by privacy. The regulations require companies to ask consumers for permission
standardizing laws and increasing to collect data and respond to consumer inquiries about data usage within
privacy; U.S. organizations 72 hours, placing the burden on companies to protect information about their
processing the data of individuals users. This widely affected sites worldwide that service European consumers,
in the EU must comply with the
regulation causing companies to revise privacy policies and clean up cookie tracking. News
sites decreased their third-party cookies by 22 percent, and consent banners
increased by 16 percent. Fines for noncompliance could reach up to 4 percent
of a company’s revenue.46 Google was fined €50 million by France for failure
to comply. France’s data protection regulator said that Google did not provide
users with sufficient information regarding data consent policies, nor did it give
users enough control over the company’s use of their information.47 Holding
companies accountable will be critical in enforcing GDPR. Microsoft, a critic
of U.S. privacy legislation, says that the United States should follow in the EU’s
footsteps. Many countries, including Brazil, China, India, Japan, South Korea,
and Thailand, already have.48
In Canada, private industry has taken the lead in creating and developing pri-
vacy policies through the Direct Marketing Association of Canada (DMAC). The
DMAC’s policies resulted in the proposal of legislation to protect personal privacy.
The Personal Information Protection and Electronic Documents Act (PIPEDA)
established a right of personal privacy for information collected by Canadian

Table 11.4 Privacy Laws

Privacy Act (1974) Requires federal agencies to adopt minimum standards for
collecting and processing personal information; limits the
disclosure of such records to other public or private parties;
requires agencies to make records on individuals available to
them on request, subject to certain conditions.
Right to Financial Privacy Protects the rights of financial institution customers to keep
Act (1978) their financial records private and free from unjust government
investigation.
Computer Security Act Brought greater confidentiality and integrity to the regulation of
(1987) information in the public realm by assigning responsibility for the
standardization of communication protocols, data structures, and
interfaces in telecommunications and computer systems to the
National Institute of Standards and Technology (NIST), which also
announced security and privacy guidelines for federal computer
systems.
Computer Matching and Amended the Privacy Act by adding provisions regulating the use
Privacy Protection Act (1988) of computer matching, the computerized comparison of individual
information for purposes of determining eligibility for federal
benefits programs.
Video Privacy Protection Specifies the circumstances under which a business that rents or
Act (1988) sells videos can disclose personally identifiable information about
a consumer or reveal an individual’s video rental or sales records.
Telephone Consumer Regulates the activities of telemarketers by limiting the hours
Protection Act (1991) during which they can solicit residential subscribers, outlawing
the use of artificial or prerecorded voice messages to residences
without prior consent, prohibiting unsolicited advertisements by
telephone facsimile machines, and requiring telemarketers to
maintain a “do not call list” of any consumers who request not to
receive further solicitations from them.
Driver Privacy Protection Restricts the circumstances under which state departments of
Act (1993) motor vehicles may disclose personal information about any
individual obtained by the department in connection with a motor
vehicle record.
Fair Credit Reporting Act Promotes accuracy, fairness, and privacy of information in the
(amended in 1997) files of consumer reporting agencies (e.g., credit bureaus); grants
consumers the right to see their personal credit reports, to find
out who has requested access to their reports, to dispute any
inaccurate information with the consumer reporting agency, and to
have inaccurate information corrected or deleted.
Children’s Online Privacy Regulates the online collection of personally identifiable
Protection Act (COPPA) information (name, address, email address, hobbies, interests, or
(amended in 2013) information collected through cookies) from children under age 13
by specifying what a website operator must include in a privacy
policy, when and how to seek consent from a parent, and what
responsibilities an operator has to protect children’s privacy and
safety online.
General Data Protection Regulates the collection and use of private data of individuals in
Regulation (GDPR)* (2016) the EU regardless of a company’s location; provides guidelines
around how companies can process, store, and protect personal
data; requires companies to report data breaches to affected
individuals within 72 hours of detection and obtain consent of
subjects of data processing.
*Note: Though GDPR is a European regulation, U.S. organizations processing data of individuals in the EU must comply.
Sources: “Computer Matching and Privacy Protection Act,” Internal Revenue Service, http://www.irs.gov/irm/part11/irm_11-
003-039.html (accessed July 1, 2019); “United States Privacy Laws,” Information Shield, http://www.informationshield.com/
usprivacylaws.html (accessed July 14, 2014).

Ethical Responsibilities in TECHNOLOGY
Block Party: Blockchain Technology Expands

Advances in technology lead to new developments across Another area where blockchain could be beneficial is
industries. While some developments create convenience voting. The data that blockchain stores are not kept in one
for businesses and consumers, others raise serious con- place, but rather many places, which all support each other.
cerns about privacy and protection of digital property. This allows any transaction to be virtually free of corruption
Technology has made it possible to collect, share, and or alteration. This new technology could benefit the voting
sell vast quantities of personal information, often without process by providing more security. The process could be
consumers’ knowledge, leading to major privacy concerns. transitioned online, and officials would be able to identify
Blockchain has been proposed as a solution to digital each vote, effectively cutting down on lost votes or fake
fraud and privacy breaches in various industries. votes. Along with increasing the privacy and security of
The innovative uses of blockchain are becoming so votes, blockchain would reduce corruption and errors.
significant to society that Congress has received a bill, the It would streamline the voting process, helping increase
Blockchain Promotion Act of 2018, requesting the develop- voter turnout and providing a faster way to do a recount
ment of a federal definition of what constitutes blockchain when fraud is suspected. All of these aspects of blockchain
and its technology. While this is still in progress, a working would benefit society and corporate social responsibility
definition of blockchain could be that it is a decentralized (CSR) by increasing the transparency, accountability, and
technology that stores an immutable record of data blocks productivity of the voting process. In the highly charged
over time. The storage of information allows for record political environment in the United States and worldwide,
keeping while respecting the privacy of the individual particularly on election days, the use of blockchain could
users. No personally identifying data are recorded. Instead, provide greater unity of the citizenry.
a “digital signature” is used for each participant in the Another popular area to use blockchain is in food
blockchain. The fact that the system is not centralized safety. For example, Walmart has said that it will use
affords less chance of cyberattacks and more equitable blockchain to track lettuce and spinach products from farm
treatment of users involved in the blockchain. This is impor- to store in order to assist in disease detection during food
tant as society works together to increase technological contamination incidents. The Walmart China Traceability
innovation and create responsible boundaries for its use. Platform uses blockchain to provide product information
One industry using blockchain is the medical field. Medical relating to food safety to customers. The goal is to have
fraud is costly and highly detrimental to society. The source half of the packaged meats and vegetables sold by
of medical fraud stems from individuals who destroy or Walmart on the platform within a year.
manipulate medical records. With blockchain, that manipula- Blockchain offers many opportunities for businesses
tion of data cannot easily occur due to the inability of hackers and society to utilize technology in improving consumer
to alter data after they have been recorded. Medical records, goods and services. According to Michael Casey, coauthor
therefore, remain in their original form. Although there is of The Truth Machine, blockchain is significant because
a slight chance that hacking of the documents could still “record keeping is at the heart of how societies go through
occur, it would be a very labor-intensive cyberattack, which the process of figuring out how to trust each other to
companies believe will strongly deter fraudsters. Blockchain enter into economic exchange.” As trust and transparency
also tracks when data is recorded, who recorded the data, continue to be major issues in society, incorporating
and each place that the medical record has gone. This blockchain into business transactions could benefit all
information allows investigators to target the source of fraud. stakeholders.
Sources: Tyler Wetzel, “What Is a Blockchain? A Consensus-Based Definition of ‘Blockchain’ to Be Used by the U.S. Congress,” Medium, October 10,
2018, https://medium.com/@twwetzel76/a-blockchain-is-a-digital-mechanism-capable-of-not-only-storing-data-and-information-but-also-2458403252a5
(accessed July 22, 2019); Adrian Zmudzinski, “US Senate Committee Approves the Blockchain Promotion Act,” Cointelegraph, https://cointelegraph.
com/news/us-senate-committee-approves-the-blockchain-promotion-act (accessed July 22, 2019); Kayla Matthews, “How Blockchain Technology Could
Help Prevent Medical Fraud,” HIT Consultant, July 10, 2018, https://hitconsultant.net/2018/07/10/blockchain-technology-medical-fraud/#.XRp0MOhKiUk
(accessed July 23, 2019); Joe Liebkind, “How Blockchain Technology Can Prevent Voter Fraud,” Investopedia, June 25, 2019 (updated), https://www.
investopedia.com/news/how-blockchain-technology-can-prevent-voter-fraud/ (accessed July 23, 2019); Blockgeeks, “What Is Blockchain Technology?”
YouTube, November 5, 2018, https://www.youtube.com/watch?v=27nS3p2i_3g (accessed July 22, 2019); Luke Fortney, “Blockchain Explained,”
Investopedia, June 25, 2019 (updated), https://www.investopedia.com/terms/b/blockchain.asp (accessed July 22, 2019); Michael Corkery and Nathaniel
Popper, “From Farm to Blockchain: Walmart Tracks Its Lettuce,” The New York Times, September 24, 2018, https://www.nytimes.com/2018/09/24/
business/walmart-blockchain-lettuce.html (accessed July 22, 2019); Chris Duckett, “Walmart China Turns to Blockchain for Food Safety,” CBS Interactive,
June 26, 2019, https://www.zdnet.com/article/walmart-china-turns-to-blockchain-for-food-safety/ (accessed July 23, 2019).

businesses and organizations. The law instituted rules governing the collection,
use, and disclosure of personal information in the private sector. It also works in
conjunction with other legislation that protects personal information collected
by federal and/or provincial governments. The Canadian Standards Association
(CSA) was also instrumental in bringing about privacy protection guidelines in
Canada. The CSA Model Code for the Protection of Personal Information requires
organizations to protect personal information and to allow individuals access to
their own personal information, allowing for correction if necessary.49
In Japan, the Ministry of International Trade and Industry established the
Electronic Network Consortium (ENC) to resolve issues associated with the
internet. The ENC (which comprises 93 organizations) has prepared guidelines
for protecting personal data gathered by Japanese online service providers. These
guidelines require websites to obtain an individual’s consent before collecting per-
sonal data or using or transferring such data to a third party. The guidelines also
call for organizations to appoint managers who understand the ENC guidelines to
oversee the collection and use of personal data and to utilize privacy information
management systems.50 In 2003, Japan adopted the Act on the Protection of Act on the Protection of
Personal Information (APPI), one of Asia’s first data protection regulations, which Personal Information (APPI)
Japanese data regulation
is still in place today. APPI applies to all businesses that service individuals in Japan, stipulating that all businesses
whether the company is based in Japan or not. Businesses are required to disclose servicing individuals in Japan,
how personal data is being used and correct, suspend, or delete personal data if whether based in Japan or not,
requested to do so by a user.51 The act is reviewed every three years to ensure are required to disclose how
personal data is being used and
that the rules are sufficient as technology evolves. In the wake of the EU’s GDPR
correct, suspend, or delete data if
regulations, Japan put additional safeguards in place to protect data transferred requested by a user
from the EU. The EU and Japan officially and publicly recognized each other’s
systems as adequate, allowing personal data to be shared between the two.52
Protection of citizens’ privacy on the internet is not a major public concern in
Russia. For many years, internet activity was largely left unmonitored, and citizens
and companies were able to do what they wanted with data. However, the Russian
parliament passed legislation requiring internet companies to store Russian users’
data within the country’s borders. The country will put restrictions on how the
companies can use the data if they do not comply with these storage measures, and
will most likely ask them to stop doing business in the country. In addition, the
government granted itself the authority to block websites. In conjunction with this
law, another one, deemed the “bloggers law,” requires influential bloggers (defined
as those whose sites are visited more than 3,000 times per day) to register with
the state. This limits the number of outspoken writers who previously were able
to voice their opinions anonymously, without fear. While the government claims
to be doing this for the sake of protecting people’s privacy, ensuring national
security, and protecting against piracy, many conclude that it is for the purpose of
controlling and censoring free speech.53 Russia implemented what is widely called
the “Big Brother” data law, which requires telecom providers to store details of text
messages, phone calls, and chat activity on behalf of Russian intelligence services
for at least six months. The law greatly limits the privacy of Russian citizens and
chief privacy officer (CPO)
places a financial burden on the companies which have to foot the bill to house high-level executives who are
these large amounts of data.54 given broad powers to establish
policies to protect consumer
Privacy Officers and Certification Businesses are beginning to recognize that the privacy and, in so doing, protect
their companies from negative
only way to circumvent further government regulation with respect to privacy is publicity and legal scrutiny
to develop systems and policies to protect consumers’ interests.
In addition to creating and posting policies regarding the gathering and use of International Association of
personal information, more companies—including American Express, AT&T, and Privacy Professionals (IAPP)
U.S. group responsible for
Citigroup—employ a chief privacy officer (CPO). The International Association developing and launching the
of Privacy Professionals (IAPP) was established as a result of this movement and first broad-based credentialing
is responsible for developing and launching the first broad-based credentialing program in information privacy

Certified Information Privacy program in information privacy. This program is known as the Certified Information
Professional (CIPP) Privacy Professional (CIPP). Most healthcare-related businesses must appoint a
an information privacy credential
from the International Association
privacy official to safeguard patient data. High-level executives are typically given
of Privacy Professionals (IAPP) broad powers to establish policies to protect consumer privacy and, in so doing, to
protect their companies from negative publicity and legal scrutiny. Table 11.5 lists
the major provisions of the FTC’s Fair Information Practices, which can be used
as a starting point in developing a corporate privacy policy.
Data privacy management platforms, like TrustArc, have stepped in to help
companies develop privacy policies. TrustArc is a for-profit organization devoted
to promoting global trust in internet technology by providing a standardized,
third-party oversight program that addresses the privacy concerns of consumers,
website operators, and government regulators. Companies that agree to abide by
TrustArc’s privacy standards may display a TRUSTe certification badge on their
websites. These firms must disclose their personal information collection and
privacy policies in a straightforward privacy statement. TrustArc is supported by a
network of corporate, industry, and nonprofit sponsors.55
Intellectual Property
In addition to protecting personal privacy, many are concerned about protecting their
rights to property they create, including songs, movies, books, and software. Such
intellectual property intellectual property consists of the ideas and creative materials developed to solve
the ideas and creative materials problems, carry out applications, educate, and entertain others. It is the result, or end
developed to solve problems,
product, of the creative process. Intellectual property is most commonly protected
carry out applications, educate,
and entertain others by patents and copyrights; however, technological advancements are increasingly
challenging the ownership of such property. Online advertising is one of these
challenging areas, as Google has experienced. The company has been sued by several
companies regarding the selling of trademarked keywords in Google AdWords. For
instance, Rosetta Stone filed a lawsuit against Google for allowing other compa-
nies—including competitors—to purchase Rosetta Stone’s trademarked names to
use as key search words. These keyword searches would generate “sponsored links”
advertisements on search results webpages. The two companies eventually reached a
settlement.56 While this may be considered a general competitive practice, intellectual
property protections complicate the matter and require clear guidelines that internet
firms can follow when dealing with this issue.
Intellectual property losses in the United States total more than $300 billion
a year in lost revenue from the illegal copying of computer programs, movies,
Table 11.5 Fair Information Practice Principles

Notice Websites would be required to provide consumers clear and conspicuous notice of
their information practices, including what information they collect, how they collect
it, how they use it, how they provide Choice, Access, and Security to consumers,
whether they disclose the information collected to other entities, and whether other
entities are collecting information through the site.
Choice Websites would be required to offer consumers choices as to how their personal
identifying information is used beyond the purpose for which the information was
provided. Such choice would encompass both internal secondary uses and external
secondary uses.
Access Websites would be required to offer consumers reasonable access to the information
that a Web site has collected about them, including a reasonable opportunity to
review information and to correct inaccuracies or delete information.
Security Websites would be required to take reasonable steps to protect the security of the
information they collect from consumers.
Source: Federal Trade Commission, “Privacy Online: Fair Information Practices in the Electronic Marketplace,” May 2000,
https://www.ftc.gov/reports/privacy-online-fair-information-practices-electronic-marketplace-federal-trade-commission

TV shows, and books. Such losses also relate to stolen business plans, customer-
related information, basic research reports, manufacturing process plans, product
specifications, and many other proprietary documents. Intellectual property and
other intangible assets typically represent about 70 percent of a company’s value
and source of revenue creation. Some experts estimate that companies lose several
billions of dollars in proprietary information and intellectual property each year
through a variety of channels. Most cases involve one of the following scenarios:
1. Inadvertent actions by current or former employees, such as oral seminar

presentations, discussions at an exhibit booth, and electronically misdirected
fax and/or email.
2. Deliberate actions by current or former employees, such as unauthorized
physical access to information and deliberate disclosure to unauthorized
parties.
3. Deliberate actions by individuals/entities in trusted relationships other than
employee relationships, such as the exploitation of vendor-client relation-
ships, subcontractor knowledge, joint ventures, and other relationships.
4. Deliberate actions or activities by outsiders—those without a trusted relation-
ship, such as data mining of open-source data and public information and the
practice of hiring away employees and placing them in a position where they
must use trade secrets from a former employer.57
This issue has become a global concern because of disparities in enforcement
of laws throughout the world. For example, a report by the Commission on the
Theft of American Intellectual Property (IP Commission) revealed an instance
wherein an American software company’s software was downloaded illegally
onto 30 million Chinese computers—a multibillion-dollar infraction.58 The
Business Software Alliance says that 37 percent of software installed on computers
worldwide is unlicensed. This is particularly concerning because malware attacks
occur more frequently with unlicensed software. It is estimated that malware from
unlicensed software cost companies $359 million annually.59 Russia and China
are the two worst countries in terms of piracy violations. It is predicted that the
trade-related aspects of intellectual property rights disputes will make countries
more accountable for adhering to copyright standards.60
Microsoft has been particularly aggressive in battling software piracy. In one
year alone, the company settled 3,265 cases related to copyright infringement
worldwide. Only 35 of these cases took place in the United States, while 3,230
were international cases encompassing 42 other countries. The company’s efforts
to stamp out piracy have been facilitated by customers reporting the illegal activ-
ity. Microsoft is working to transform the economics of the software business,
allowing cheaper, more innovative software to be available for legitimate, paying
customers, as well as some free online software options. Microsoft has even
opened up a howtotell.com website for people to consult when loading software
onto their computers. The website helps educate customers on how to tell if their
software is genuine.61
U.S. copyright laws protect original works in text form, pictures, movies,
computer software, musical multimedia, and audiovisual works. Owners of
copyrights have the right to reproduce, derive from, distribute, and publicly display
and perform the copyrighted works. Copyright infringement is the unauthorized copyright infringement
execution of the rights reserved by a copyright holder. Congress passed the Digital the unauthorized execution of
the rights reserved by a copyright
Millennium Copyright Act (DMCA) in 1998 to protect copyrighted materials
holder
on the internet and to limit the liability of online service providers. The DMCA
provides a “safe harbor” provision that limits judgments that can be levied
against these providers for copyright infringement by their customers. To limit
their liability, service providers must pay a nominal fee and comply with the Act’s
reporting requirements.62

Digital copyright violations are not always clear cut and often involve lengthy
lawsuits that can progress all the way to the higher courts. A Supreme Court ruling
declared that copyright holders can file a lawsuit only when the U.S. Copyright
Office registers a copyright, which could make it more difficult to fight piracy. On
average it takes the office six to nine months to process a copyright claim.63 Table
11.6 provides additional facts about copyrights.
The internet has created other copyright issues for some organizations that
have found that the web addresses or Uniform Resource Locators (URLs) of
other online firms either match or are very similar to their own trademarks.
cybersquatter In some cases, cybersquatters have deliberately registered domain names that
an individual who deliberately match or relate to other firms’ trademarks and then have attempted to sell the
registers web addresses that
registration to the trademark owners. A number of companies, including Taco Bell,
match or relate to other firms’
trademarks and then attempts Management and Training Corporation, and KFC, have paid thousands of dollars
to sell the registration to the to gain control of names that match or parallel company trademarks.64 Registering
trademark owners a domain name involves filling out an online form to automatically reserve a
domain name. This process makes it easy for cybersquatters or other scammers to
defraud businesses and consumers. The Federal Trademark Dilution Act of 1995
and the Anti-Cybersquatting Consumer Protection Act of 1999 were enacted to
help companies resolve this conflict. The laws give trademark owners the right to
protect their trademarks, prevent the use of trademark-protected entities by others,
and require cybersquatters to relinquish trademarked names.65 However, this does
not always hold up in foreign countries that do not have strict intellectual property
laws. More than 3,400 cases of cybersquatting are reported annually from 109
countries.66
ICANN, the nonprofit organization charged with overseeing basic technical
matters related to addresses on the internet, has had success, including the intro-
duction of a competitive domain registrar and registration market and the Uniform
Dispute Resolution Policy (UDRP).67 Many trademark holders immediately turn to
the UDRP as a vehicle for combatting cybersquatters. However, remedies available
in federal court under the Anti-Cybersquatting Consumer Protection Act may
better protect the rights of trademark holders. All ICANN-authorized registrars of
TLDs must agree to abide by the UDRP. Under the terms of the UDRP, a domain
Table 11.6 Facts About Copyrights

• No registration is required to acquire copyright ownership of original works. No registration
is required to place copyright notice on works (i.e., © Year Name of Owner). (No “innocent
infringers” if there is notice on the work.) Copyright registration is required before a lawsuit
may be brought.
• Works in public domain are free to use. The copyright duration may have expired, the creator
of works may have relinquished his or her rights, or it may not be copyright protectable.
• An exception for seeking copyright permission to use a work, called the “fair use doctrine,”
involves weighing four factors (see US Copyright Office Publication) and the use of a work
for criticism, comment, news reporting, teaching, scholarship, research, or parody.
• The “right of first sale” occurs when an owner of a copyrighted work sells a copy of it; the
new owner does not now possess the copyright but can sell the copy or give it away without
the copyright owner’s permission.
• Derivative works are works that are derived from other copyrighted sources or works. With
the exception of works that fall under the “fair use doctrine,” derivative works cannot be sold
without permission from the original copyright holders.
• Courts consider remedies for copyright infringement of one work in the range of $750 (for
innocent infringers) up to $150,000 for intentional, willful violations. Remedies can go up or
down, depending upon whether the copyright violation was intentional or not.
Source: Derived and paraphrased with permission from Willow Misty Parks, © Copyrights and Businesses, Microsoft
PowerPoint presentation on UNM Daniels Fund Ethics Initiative website, http://danielsethics.mgt.unm.edu/teaching-
resources/presentations.asp (accessed June 22, 2016); “U.S. Copyright Office,” http://copyright.gov.

name will be transferred between parties only by agreement between them or by

order of a court of competent jurisdiction or a UDRP-authorized dispute resolu-
tion provider.68
Because ICANN is overseen by the U.S. Department of Commerce, leaders
in other countries have begun to question whether the United States has too
much control over the internet. Under the philosophy that the internet is out of
the domain of any one government, these leaders present several concerns. First,
ICANN controls the master root file that provides users with access to the internet.
Some countries have threatened to develop a competing master root file, which
would create parallel internets. China has already developed a competing file and
is encouraging other countries to join its effort. Second, ICANN has the power
to affect selective parts of the internet. For example, the organization temporarily
delayed the adoption of the .xxx TLD for adult content because of pressure
from U.S. government agencies.69 Third, because ICANN is a private corporation
performing a significant public service, critics point to lack of transparency and
effectiveness in its operations and decisions. Finally, some leaders worry that
ICANN will serve as a social and cultural gatekeeper because all new TLD names
and other requests must be approved by ICANN. The debate over governance of
the internet is related to a number of significant issues, including intellectual prop-
erty, privacy, security, and other top-level concerns of the public and government.70
Artificial Intelligence
Artificial Intelligence (AI) is a rapidly changing area. As discussed in Chapter 1,
AI is the concept of machines learning and performing tasks that typically require
human intelligence by using algorithms. An algorithm is a set of rules providing algorithm
a procedure or formula for problem solving. For example, algorithms are behind a set of rules providing a
procedure or formula for problem
search engines like Google, which take inputs of information and provide an
solving
output for a task or decision. In computing, it is step-by-step directions for an
outcome. AI’s enablers include blockchain, drones, robotics, and other technology.
Big data enabled by AI provides massive files of structured and unstructured data
that can be used with sophisticated software for decision-making. See Figure 11.3
to understand AI’s relationship to its enablers.
While AI offers many benefits, there are many ethical concerns about how
the technology is used. Ethics relates to decisions about challenging issues in any
organization. AI must be programmed with ethical decision-making abilities and
parameters. Ethics in AI is different because machines cannot internalize human
principles and values at this point of development. For example, there is growing
concerns about the accuracy of facial recognition software. Axion Enterprise,
which supplies body cameras to law enforcement agencies, announced that it
would not use that type of software on its devices. Many fear the technology
could falsely identify minorities and women and be used for the intrusive surveil-
lance of citizens.71 Businesses must consider public safety, security, and cultural
Figure 11.3 Distinguishing AI from Its Associated Enablers
Big Data
Artificial Blockchain
Intelligence Drones
Robotics

human decisions and be careful not to cause harm to society by using technology
inappropriately.72
machine learning Machine learning, a subset of AI, explains the application of AI using algorithms
a subset of AI that explains the and data in order to allow the computer to learn without being programmed for a
application of AI using algorithms
and data in order to allow the
specific task. For example, Spotify uses machine learning to curate a user’s music
computer to learn without being discovery experience based on music the user has listened to on the site. Deep learn-
programmed for a specific task ing, a subset of machine learning, simulates how humans learn from experience
by using algorithms that relate to the structure and function of the brain. While
deep learning
machine learning models require guidance, deep learning models can determine the
a subset of AI that simulates how
humans learn from experience by accuracy of its work. For example, Google’s AlphaGo computer program learned
using algorithms that relate to the to play an abstract board game called Go by playing against professional players
structure and function of the brain without being told what moves to make.73 Exploring the ethical impact becomes
increasingly important as AI systems become more complex.
Big Data Big data, introduced earlier in this chapter, refers to massive amounts
of data transmitted at fast speeds. It includes consumer shopping behavior, prefer-
ences, liked content on social media, web browsing history, and much more. It
is estimated that each person generates 1.7 MB of data every second. Businesses
must use advanced software to interpret the data and effectively respond to the
insights. Parsing data can be a difficult, labor-intensive task that requires highly
skilled workers, creating a burden for companies with limited resources. AI
algorithms can rapidly and efficiently process data in a way that humans cannot,
enabling businesses to analyze larger data sets in a more meaningful way and
make better, more informed decisions.74 Instagram uses big data and AI to power
its explore page and search function, improve targeted advertising, filter spam,
and more.75
Blockchain Blockchain is an important enabler for AI because blockchain

information systems can overcome biased or inaccurate data. Blockchain is a
decentralized record-keeping technology that stores an immutable record of data
“blocks” (or ledgers) over time. The distinguishing feature is a limited block
of ordered transactions with rules about how the data goes into the database.
Most important, the data is locked into the system without a central control.
Businesses are looking to this technology to create information that is open yet
secure, protecting the interest of both businesses and consumers. There is almost
no opportunity for biased, inaccurate, or altered data to get into the systems.
Blockchain enables AI to access high-integrity data, improving business systems.76
Walmart is using blockchain to trace
products from their source to the retail
store. Produce from farms can be accu-
rately traced through the supply chain
to consumers.77 For example, if a food
safety issue occurred with a produce item,
blockchain could potentially track indi-
vidual items not only to specific farms,
but also the exact location where the item
was planted. This quality and speed of
traceability should be used for the benefit
Shutterstock/Sundry Photography
of society.
Blockchain information systems that
provide an audit trail will protect both
consumers and businesses from fraud and
provide accurate, accessible records of
transactions. Blockchain works extremely
well for medical records because
healthcare providers have a low risk tolerance when it comes to the management
of electronic medical records. It could potentially be the best solution to help make
sure that healthcare providers’ medical records are accurate, tamperproof, and
anonymous. The result is that healthcare service providers can trust data used for
medical treatment.78 Blockchain technology should be used for the common good.
Congress is seeking to define blockchain in order to guide government regulations
on the technology. Corporate governance will be critical as blockchain applications
becomes more complex.79 By addressing concerns about the impact of technology
on society, firms positively contribute to society through socially responsible
activities, as well as increase its financial performance.
Drones Drones, unmanned aerial devices that can be programmed with AI, can
be used to observe physical conditions, as well as human or even wildlife activities.
From a societal perspective, drones can observe conditions that pose risks such
as traffic patterns, wildfires, flooding conditions, and environmental conditions
related to sustainability. For example, Miami-Dade Fire Rescue uses drone
technology to help first responders during hurricanes.80 In a retail environment,
knowing in advance how many customers are in the store, when they entered the
store, and the items being purchased could alert store management to the number
of employees needed to assist in checkout to provide a smooth guest experience.
Providing inspections in processing insurance claims could take a fraction of the
time that it did in the past.81 Any service that involves obtaining visual information
to carry out service tasks can be enabled by drones. Caution will be needed to
protect consumers’ privacy in making visual observation of their behavior.
AI-enabled drones can reduce delivery time and costs by providing quick
on-site delivery of products, saving businesses both time and money. Drone use will
advance rapidly in areas like insurance, delivery services, outdoor entertainment
events, and retail. Drones are also assisting in work that is being done in maritime
and offshore services. In the United Kingdom, the Royal Navy uses drones to help
identify any defects that its ships may have, allowing them to diagnose and repair
these issues while at sea. This service is much faster and safer than if someone
had to move around the ship to try and find any problems manually. Other
examples include a drone checking an aircraft warning light tower for potential
repairs or maintenance that must be completed. Currently, drones cannot do any
of the repairs necessary, but the routine checkup portion is finished more quickly
and safely. A great example of this is a drone called the Naviator. This drone
was specifically designed to be able to fly or swim in all kinds of rough weather
conditions. If a boat is experiencing a terrible storm but needs to gather critical
information on its status, the Naviator can provide a safer alternative to sending a
person to make a check.82 As drone technology combined with AI develops, there
will be many more applications.
Robotics Robots that carry out actions, movements, or tasks can perform human-
like activities. They can be taught to perform custom tasks, to have interactive
communication, and to provide interactions with customers.83 In Canada, robots
are used to help off-site doctors assess patients in remote northern communities
to deliver care to vulnerable populations who lack access to robust medical facili-
ties.84 This could also be a sustainable and efficient way to support developing
countries. AI-enabled robotics offer elements of intellectual ability and advance
the creation of the human thought process with the ability to learn, reason, use
language, and formulate original ideas through machine learning.
Retailers are developing robots to provide a personal experience. For example,
Lowes has been developing a customer service robot, OSHbot, that can speak
multiple languages and help customers locate items that they are looking for in
their stores. Additionally, Best Buy has launched Chloe, a robot that will replace

store workers by retrieving a requested item for customers. These “social robots”
can provide consistent and higher-quality engagement.85 While robots will
undoubtedly eliminate jobs, they will also increase the need for workers skilled
in the application of AI technologies. For example, Walmart uses autonomous
robots to clean the floors using employee-created maps. Robotic automation
used in this capacity also protects employee well-being by limiting exposure to
dangerous chemicals. Employees are needed to set up the machines and perform
basic maintenance tasks.86
AI has the ability to make decisions and take action. It is important to consider
the values and decision parameters that go into drones, robots, and driverless cars.
Does a driverless Uber vehicle prioritize the safety of the driver and passengers over
a pedestrian? Businesses will need to implement processes to monitor and audit
the technology in order to create accountability for decision-making.87 Additional
considerations include accidental or intentional discrimination, corporate intel-
ligence, privacy, and intellectual property. Data used in AI should be unbiased.88
For example, Facebook uses predictive analytics to predict the future browsing
and shopping behavior of its users in its advertising program. Concerns around
data privacy are high. This will require ethics components to be established both
internally (i.e., programmed into the AI) and externally to guide decision-making
and create checks and balances.89 All of the risk areas associated with AI decisions
have to be monitored and compared to the ethical expectations of the organiza-
tion. This will require custom ethics codes that identify the risks associated with
AI. Most organizations are governed by ethical values, codes, and compliance. The
same will be required by AI and its enablers.
Health and Biotechnology

The advance of life-supporting technologies has raised a number of medical and
bioethics health issues related to technology. Bioethics refers to the study of ethical issues in
the study of ethical issues in the the fields of medical treatment and research, including medicine, nursing, law, phi-
fields of medical treatment and
losophy, and theology, though medical ethics is also recognized today as a separate
research, including medicine,
nursing, law, philosophy, and discipline.90 All these fields have been influenced by rapid changes in technology that
theology require new approaches to solving issues. Genetic technologies have shown promise
in giving medical ethics an even greater role in social decision-making. For example,
the Human Genome Project, a program to decode the entire human genetic map,
identified a number of genes that may contribute to particular diseases or traits.
Because so many of our resources are spent on healthcare, the role of the pri-
vate sector in determining the quality of healthcare is an important consideration
to society. The pharmaceutical industry, for example, has been sharply criticized
by politicians, healthcare organizations, and consumers because of escalating
drug costs. Investigators from federal and state agencies all over the nation have
initiated legal action over allegations that Medicare and Medicaid overpaid for
drugs by $1 billion or more a year.91 On the other hand, pharmaceutical compa-
nies claim that the development of new lifesaving drugs and tests requires huge
expenditures in R&D. It is projected that the annual cost for popular name-brand
bioethics drugs will double every seven to eight years.92 The pharmaceutical
industry is among the most profitable in the United States; it spends billions
each year in marketing, including drug samples provided to doctors, advertising
in medical journals, and other strategies. More than $6 billion is spent by the
pharmaceutical industry on direct-to-consumer (DTC) advertising.93 The visibility
of pharmaceutical advertising and promotion prompted the Pharmaceutical
Research and Manufacturers of America (PhRMA), an industry association, to
develop its Guiding Principles on Direct-to-Consumer Advertising. The voluntary
guidelines are designed to ensure that DTC advertising is accurate, accessible, and
useful. Table 11.7 shows the preamble that accompanies the association’s booklet
on the guiding principles.

Table 11.7 Preamble to PhRMA Guiding Principles for Direct-to-Consumer Advertisements

Given the progress that continues to be made in society’s battle against disease, patients
are seeking more information about medical problems and potential treatments so they can
better understand their healthcare options and communicate effectively with their physicians.
An important benefit of direct-to-consumer (DTC) advertising is that it fosters an informed
conversation about health, disease and treatments between patients and their healthcare
practitioners.
A strong empirical record demonstrates that DTC communications about prescription medicines
serve the public health by:
Increasing awareness about diseases;
Educating patients about treatment options;
Motivating patients to contact their physicians and engage in a dialogue about health
concerns;
Increasing the likelihood that patients will receive appropriate care for conditions that are
frequently under-diagnosed and under-treated; and
Encouraging compliance with prescription drug treatment regimens.
Source: Pharmaceutical Research and Manufacturers of America, “PhRMA Guiding Principles: Direct to Consumer
Advertisements About Prescription Medicines,” http://phrma-docs.phrma.org/files/dmfile/PhRMA_Guiding_
Principles_2018.pdf (accessed June 30, 2019).
Biotechnology The biotechnology industry emerged over 40 years ago when

Stanley Cohen and Herbert Boyer published a new recombinant deoxyribonucleic
acid (DNA) technique, a method of making proteins, such as human insulin,
in cultured cells under controlled manufacturing conditions. Boyer went on to
cofound Genentech, which is one of the best-known biotechnology companies.
From these insights, other scientists set out to map the human genome, a 13-year
project to discover all of the estimated 20,000–25,000 human genes and make
them accessible for further biological study. The ability to map the human genome
has spurred over 250 new vaccines and medicines, and many more are being tested
in product trials. These innovations are changing the way that cancer, diabetes,
AIDS, arthritis, and multiple sclerosis are treated. Biotech innovations in other
fields, such as manufacturing, have led to cleaner processes that produce less waste
and use less energy and water. Most laundry detergents marketed in the United
States contain biotechnology-based enzymes that combine better with bleach, are
biodegradable, and reduce the need for hot water. Law enforcement officials use
DNA fingerprinting, a biotech process, to catch criminals, increase conviction
rates, and perform stronger investigations and forensic science.94 There are over
1,300 biotechnology companies in the United States in a variety of sectors includ-
ing health, agriculture, and industrial.95 Finally, the biotechnology industry invests
approximately $70 billion per year in R&D activities.96
The government and the private sector often partner with academic researchers
and nonprofit institutes to develop new technologies in health and biotechnology.
Research ranges from mapping the human genetic code to finding drugs that cure
cancer to genetically modifying food products. Many of these collaborative efforts
to improve health involve scientists, funded globally by a variety of sources. For
example, the nonprofit Oro Valley Innovation Labs operates an incubator to sup-
port biotech start-ups by providing equipment and a sterile working environment.
Using cell-engineering techniques, scientists may have found a way to generate
unlimited supplies of brain cells for transplanting into patients with amyotrophic
lateral sclerosis (ALS), Parkinson’s disease, epilepsy, and stroke. Other advances
have revealed ways to slow the progression of Alzheimer’s disease and provide
treatments for blindness.97 These examples illustrate technology advances that
could result in commercially viable products that save and/or prolong life.
Cloning, the replication of organisms that are genetically identical to the
parent, has become a highly controversial topic in biotechnology and bioethics.

Human cloning has raised unanswered questions about the future of human
reproduction. Since Scottish scientists first cloned Dolly the sheep, scientists have
also successfully cloned mice, cows, pigs, goats, and cats but with mixed reports
about the health of the cloned progeny. ViaGen Pets, which began as a livestock
cloning company, now clones household pets for clients such as Barbra Streisand.98
While cloning humans would appear to be the final step of scientific reproduction,
indisputable proof of the first human clone will actually serve as a starting point
for many years of research. Like in vitro fertilization, human clones will need to
grow up before scientists know the effects that this process will have on a person’s
physical, mental, and emotional states.99 Cloning has the potential to revolutionize
the treatment of diseases and conditions such as Parkinson’s disease and cancer.
Stem cell technology has allowed doctors to create replacement organs, thereby
restoring infected organs and lengthening human lives.100 The ability to create and
modify life processes is often generated through collaborative research involving
businesses, universities, and government. The results of such research have already
contributed to life-altering products of the future, and more progress is expected
for years to come.
Despite the potential of this technology, many people have negative views
about cloning. Some contend that it is unethical to “meddle with nature,” whereas
others believe that cloning is wrong because every time it is used to treat a patient, a
cloned human embryo is destroyed. New processes in cloning and stem cell research
have reduced the need for embryos because cells can be taken from consenting
adults without invasive procedures. Nevertheless, ethical concerns continue.101
The cloning of a miniature pig, Goldie, lacking both copies of a gene involved
in immediate immune rejection has brought the prospect of transplanting pig
organs into people a little closer. The small pig’s organs are similar in size to those
of humans, and the missing genes make the organs less likely to be rejected. But
although Goldie’s creation may have solved the problem of immediate transplant
rejection, a slower rejection is still possible, in which the transplant is attacked
by the recipient’s white blood cells.102 Some people argue that cloning of human
beings should be banned, and several bills have been introduced in Congress and
various state legislatures to do just that. Additionally, 19 European nations have
signed an agreement prohibiting the genetic replication of humans. Harvesting stem
cells from surplus in vitro fertilization (IVF) embryos is allowed by the Australian
government, and the United Kingdom allows researchers to harvest stem cells from
surplus IVF embryos and to conduct therapeutic cloning. In the past, the United
States restricted federally funded researchers from pursuing therapeutic cloning or
harvesting stem cells from discarded embryos. However, today the ban is lifted,
allowing both public and private entities to conduct research.103
Genetic research holds the promise to revolutionize how many diseases are
diagnosed and treated. However, consumer advocates urged the World Trade
Organization (WTO) to place limits on gene patents, which they claim are tanta-
mount to “ownership of life.” As patents dealing with human DNA increased, wor-
ries about the limitations on ownership also increased. These worries came to the
forefront of a Supreme Court decision that stated natural DNA cannot be patented
as it does not fit within the characteristics of things that can be patented (“novel,
useful, and non-obvious”), but complementary DNA (a copy of the original), also
known as cDNA, can be patented. While this may seem a straightforward solution
to the advocates’ concerns, these definitions are not as distinct as they sound. There
are times when cDNA contains components that are both natural and synthetic.
Many other issues arise from patents relating to genetics, whether the genes in
question belong to humans, animals, or even plants. For example, Monsanto has
been involved in many lawsuits regarding the patents of their genetically modified
(GM) seeds. As more discoveries are made in the field, more complexities in the
realm of laws and ethics will be made manifest.104

A final concern with genetics is the increasing availability of DTC testing kits.
With these kits, consumers can proactively manage their health, including gaining
access to knowledge about predispositions to cancer, diseases, and illnesses. Most
specialists agree that the results of such tests are best delivered in a professional
medical setting, not via the internet or mail. A consumer could receive a positive
finding on a DNA-based prostate cancer screening test through a mail-order kit
and take measures to self-treat rather than consult a doctor. Other dangerous
situations may ensue, as receiving the news of potentially having cancer is hard to
hear. In addition, the result of the test may not be straightforward. For instance,
the consumer may have cancerous growths that can be removed, cancer that has
spread, or neither because the test is a false positive. Medical advice is warranted
at this point because the consumer has no way of determining the appropriate
course of action.
Genetically Modified Organisms More than 800 million people around the
world don’t have enough to eat. Increasing food production to satisfy the growing
demand for food without increasing land use will require farmers to achieve
significant increases in productivity. Genetically modified (GM) organisms offer genetically modified (GM)
a way to quickly improve crop characteristics such as yield, pest resistance, or organisms
organisms created through
herbicide tolerance, often to a degree not possible with traditional methods. GM manipulating plant and animal
crops can be manipulated to produce completely artificial substances, from the DNA so as to produce a desired
precursors of plastics to consumable vaccines.105 GM, or transgenic, crops are effect like resistance to pests and
created when scientists introduce a gene from one organism to another. Scientists viruses, drought resistance, or
high crop yield
believe that GM crops could raise overall crop production in developing countries
by as much as 25 percent.106
But the idea that GM crops can significantly reduce world hunger is hotly
debated. Some say it will make all the difference, while others point out issues
with these claims. For example, a large population of the developing world suffers
from hunger and malnourishment. A new development called “golden rice” is said
to be high in vitamin A and can serve as a food source for these people. However,
it has been noted that the “golden rice” will require fertilizer, pesticides, significant
amounts of water, and corresponding irrigation systems that are too expensive for
these areas. Further, because of the severe state of the populations’ malnutrition,
the vitamin A cannot be absorbed into their bodies.107
Others are concerned about potential health and environmental risks of GM
foods. The European public has been known to call GM products “Frankenfood”
out of the fear that it could pose a health threat or create an environmental
disaster. It is presumed that genes may jump from GM crops to wild plants and
reduce biodiversity or create superweeds. For a time, Europe held up approvals
of U.S. exports of GM foods, until the European Parliament voted to require
extensive labeling and traceability of food containing GM organisms. Only those
foods that meet these standards are accepted into the EU. However, regulations still
restrict the growing of GM crops. Over 20 years have passed since countries have
begun growing GM crops all over the world, and there has not been significant
evidence showing that these foods or the presence of crops are actually harmful.
For this reason, many advocates, scientists, and others in the EU are pressing the
regulatory agencies to rethink and update the GM crop and food laws to better
reflect evidence-based research.108
Many people do not realize that some of the foods they eat are made from
GM crops. Consumer groups are increasingly concerned that these foods could
be unhealthy and harmful to the environment. The power of genetic modification
techniques raises the possibility of human health, environmental, and economic
problems, including unanticipated allergic responses to novel substances in foods,
the spread of pest resistance or herbicide tolerance to wild plants, inadvertent
toxicity to benign wildlife, and increasing control of agriculture by biotechnology

Table 11.8 Commercial Cultivation of GM Crops corporations.109 Many consumers are boycotting products
Year Hectares (Million) Acres (Million)
made from GM materials, and several countries have opposed
trade in GM foods through the WTO. In addition, Japan has
1998 27.8 69.5
asked U.S. corn producers not to include GM corn in animal
1999 39.9 98.6 feed exported to Japan.110 Insects and birds transport seeds from
2000 44.2 109.2 one field to the next, allowing cross-pollination that geneticists
2001 52.6 130.0 never intended. Unlike chemical or nuclear contamination, gene
2002 58.7 145.0
pollution can never be cleaned up. Advocates in the United
States are urging regulators to mandate that GM foods be
2003 67.7 167.2
labeled. Vermont had already signed such a law into action.
2004 81.0 200.0 Under pressure from states, Congress passed a requirement
2005 90.0 222.0 for labeling products containing GM ingredients. However,
2006 102.0 250.0 in a blow to Vermont the new requirement, which supersedes
2007 114.3 282.0
its law, gives manufacturers years to comply and allows them
the option to use straightforward language, digital codes, or
2008 125.0 308.8
symbols to indicate the presence of GM ingredients.111 Table
2009 134.0 335.0 11.8 demonstrates the millions of hectares that are being used
2010 148.0 365.0 to cultivate GM crops across the world.112
2011 160.0 395.0 A number of companies have responded to public concerns
2012 170.3 420.8
about GM food products by limiting or avoiding their use
altogether, while others have responded on the basis of
2013 175.2 433.2
transparency. Unilever and General Mills, for example, state
2014 181.5 448.0 on their websites that they are committed to following
2015 179.7 444.0 regulations regarding GM labeling, while at the same time
2016 185.1 457.4 maintaining their belief in the benefits of GM products to
2017 189.8 469.0
alleviate hunger and reduce the amounts of energy and water
needed to maintain traditional crops. They also state that their
TOTAL 2,339.5 5,780.0
organic product lines will be packaged with non-GM labels as
Source: “Pocket K No. 16: Biotech Crop Highlights in 2017,” appropriate. Whole Foods Market and Allegro Coffee, on the
International Service for the Acquisition of Agri-Biotech
Applications, October 2018, http:// www.isaaa.org/resources/ other hand, are committed to mandatory GM labeling. Whole
publications/pocketk/16/ (accessed June 30, 2019). Foods ensures all GM products are labeled in their Canada and
U.S. stores, while Allegro Coffee has many products approved
by the Non-GMO Project, and several others in the process of
being approved.113
Ethical questions about the use of some types of GM products have also
been raised. For example, Monsanto and other companies had begun developing
so-called terminator technology to create plants that are genetically engineered
to produce sterile seeds. Other plants in development will require spraying with
chemicals supplied by the seed companies to produce desired traits, such as
resistance to certain pests or disease. Farmers say the issue isn’t the technology
itself but, rather, who controls the technology—in most cases, the multinational
seed companies. In response to global concerns about this issue, Monsanto halted
their commercial development of the terminator technology.114
Control over who owns the seeds after purchase continues to be an issue
with GM crops. In one case, Indiana soybean farmer Vernon Hugh Bowman
purchased seeds from Monsanto and continued to use them for eight seasons.
When Monsanto discovered this, they sued Bowman for patent infringement. The
court ruled in favor of Monsanto, and some worry that the incident would renew
interest in terminator technology so companies can further protect their patents.115
Defenders of biotechnology say consumer health fears about GM foods have
not been substantiated by research.116 As the U.S. agriculture industry is eager to
point out, the technology has been a big success: it has reduced the amount of pes-
ticides that farmers have had to spray on their cornfields, with happy consequences
for the environment and human health. U.S. health regulators have not been able
to find anything wrong with eating Bacillus thuringiensis (Bwt) corn. It is now

found in roughly 90 percent of all corn, beet, and soybean products on U.S. store
shelves.117 One disturbing trend that is occurring, however, is growing resistance
to certain GM crops. Rootworms once vulnerable to GM crops containing a gene
called Bt are now developing a resistance against it, making the gene ineffective.
As resistance grows, some farmers are beginning to turn to older pesticides.118 The
issue of resistance to herbicides and pesticides is a significant issue that Monsanto
and other biotechnology companies are working to address.
Strategic Implementation of Responsibility

for Technology
To accrue the maximum benefits from the technologies driving the new economy,
many parties within society have important roles to play. While many continue to
debate the issues associated with technology, the government must take steps to
provide support for continued technological advancements and to ensure the ben-
efits of technology apply to as many people as possible. The challenge is to establish
regulations as needed in order to minimize any potential for harm to competition,
the environment, and human welfare while not stifling innovation. Stakeholders,
including employees, customers, special-interest groups, and the general public,
can influence the use and control of technology through the public policy process.
Businesses also have a significant role to play in supporting technology. New tech-
nologies are developed, refined, and introduced to the market through the R&D
and marketing activities of business. Businesses that aspire to be socially responsible
must monitor the impact of technology and harness it for the good of all.
The Role of Government

An economy that is increasingly driven by technology requires a government that
maintains the basic infrastructure and support for technology in our society. The
U.S. Department of Defense, for example, explores ways that technology can
improve the quality of life. The government also serves as a watchdog to ensure
that technology benefits society, not criminals. However, as the pace of technology
continues to escalate, law enforcement agencies ranging from the Federal Bureau
of Investigation (FBI) to local police forces are struggling to recruit and retain
officers and prosecutors who are knowledgeable about the latest technology and
the ways that criminals can exploit it. High-caliber forensic computer experts
are often lured away to technology firms and private security outfits by salaries
more than twice their government paychecks.119 Computer crimes currently share
sentencing guidelines with larceny, embezzlement, and theft, where the most
significant sentencing factor is the amount of financial loss inflicted, and additional
points are awarded for using false IDs or ripping off more than ten victims.
“Cyberterrorism,” in which a foreign power sabotages another country’s com-
puter system, has been declared a potential act of war by the U.S. government. The
government believes that cyberattacks represent a significant threat toward U.S.
security and therefore requires serious action in response. This decision came after
a major cyberattack was launched against Google and its computer servers—which
included the accounts of some government officials.120 More recently, the Russian
government interfered with the U.S. election system during the 2016 presidential
election. This type of cyberterrorism is a significant, ongoing challenge for federal
and state government because it cannot be prevented entirely.121
Digital copyright lawsuits illustrate a significant difference in opinion in the
interpretation of existing laws when exploiting the evolving multimedia potential
of the internet. Although the government’s strategy thus far has been not to

interfere with the commercial use of technology, disputes and differing interpreta-
tions of current laws increasingly bring technology into the domain of the legal
system. New laws related to breakthrough technologies that change the nature
of competition are constantly being considered. Usually, the issues of privacy,
ownership of intellectual property, health and safety, environmental impact,
competition, or consumer welfare are the legislative platforms for changing the
legal and regulatory system.
The Role of Business

Business, like government, is involved in both reactive and proactive attempts to
market and make effective use of technology. Reactive concerns relate to issues
that have legal and/or ethical implications, as well as issues of productivity,
customer welfare, and other stakeholder concerns. Many large firms have suffered
public embarrassment, legal bills, compensation claims, and clean-up costs when
employees seek inappropriate material online, send email to people they shouldn’t,
accidentally circulate confidential information outside a business, or spread a
computer virus. As a result, some companies are purchasing software that assists
employees in managing the internet time they spend on personal activities.
On the other hand, a strategic, proactive approach to technology will consider
its impact on social responsibility. Proactive management of technology requires
developing a plan for utilizing resources to take advantage of competitive oppor-
tunities. For instance, many companies address the proper use of computers and
other technology in their codes of ethics. Addressing these risk areas beforehand
allows employees to understand what is and is not acceptable. These policies
inform employees about corporate expectations regarding company technology
and the potential penalties for misuse.
With competition increasing, companies are spending more time and resources
to establish technology-based competitive advantages. The strategic approach to
technology requires an overall mission, strategy, and coordination of all functional
activities, including a concern for social responsibility, in order to have an effective
program. To promote the responsible use of technology, a firm’s policies, rules,
and standards must be integrated into its corporate culture. Reducing undesirable
behavior in this area must be a goal that is no different from reducing costs,
increasing profits, or improving quality; it must be aggressively enforced and
integrated into the corporate culture to be effective in improving behavior within
the organization.
Top managers must consider the social consequences of technology in the
strategic planning process. When all stakeholders are involved in the process,
everyone can better understand the need for and requirements of responsible
development and use of technology. There will always be conflicts in making the
right choices, but through participation in decision-making, the best solutions can
be found. Individual participants in this process should not abdicate their personal
responsibility as concerned members of society. Organizations that are concerned
about the consequences of their decisions create an environment for different
opinions on important issues.
technology assessment
a procedure used by companies
to calculate the effects of new
technologies by foreseeing Strategic Technology Assessment
the effects new products and To calculate the effects of new technologies, companies can employ a procedure
processes will have on their firm’s
operations, on other business
known as a technology assessment to foresee the effects new products and
organizations, and on society in processes will have on their firm’s operations, on other business organizations, and
general on society in general. This assessment is a tool that managers can use to evaluate

their firm’s performance and to chart strategic courses of action to respond to

new technologies. With information obtained through a technology assessment or
audit, managers can estimate whether the benefits of adopting a specific technol-
ogy outweigh costs to the firm and to society at large. The assessment process can
also help companies ensure compliance with government regulations related to
technology. Remember that one of the four components of social responsibility is
legal compliance. A strategic technology assessment or audit can help organiza-
tions understand these issues and develop appropriate and responsible responses
to them (see Table 11.9).122
If the assessment process indicates that the company has not been effective at
utilizing technologies or is using them in a way that raises questions, changes may
be necessary. Companies may need to consider setting higher standards, improving
reporting processes, and improving communication of standards and training pro-
grams, as well as participating in aboveboard discussions with other organizations.
If performance has not been satisfactory, management may want to reorganize the
way certain kinds of decisions are made. Table 11.9 includes some issues to assess
for proactive and reactive technology responsibility issues. Some social concerns
might relate to a technology’s impact on the environment, employee health and
working conditions, consumer safety, and community values.
Finally, the organization should focus on the positive aspects of technology
to determine how it can be used to improve the work environment, its products,
and the general welfare of society. Technology can be used to reduce pollution,
encourage recycling, and save energy. Also, information can be made available to
customers to help them maximize the benefits of products. Technology has been
and will continue to be a major force that can improve society.
Table 11.9 Strategic Technology Assessment Issues

Yes No Checklist
O O Are top managers in your organization aware of the federal, state, and
local laws related to technology decisions?
O O Does your organization have an effective system for monitoring changes
in the federal, state, and local laws related to technology?
O O Is there an individual, committee, or department in your organization
responsible for overseeing government technology issues?
O O Does your organization do checks on technology brought into the
organization by employees?
O O Are there communications and training programs in your organization
to create an effective culture to protect employees and organizational
interests related to technology?
O O Does your organization have monitoring and auditing systems to
determine the impact of technology on key stakeholders?
O O Does your organization have a method for reporting concerns about the
use or impact of technology?
O O Is there a system to determine ethical risks and appropriate ethical
conduct to deal with technology issues?
O O Do top managers in your organization understand the ramifications of
using technology to communicate with employees and customers?
O O Is there an individual or department in your organization responsible for
maintaining compliance standards to protect the organization in the areas
of privacy and intellectual property?
CBP_Ferrell_Ch11.indd 33503/18/2020 - tp-70a028a4-6922-11ea-a484-024 (temp temp) - Business and Society 12/9/2019 6:32:01 PM
Summary
Technology relates to the application of knowledge, including the processes and
applications to solve problems, perform tasks, and create new methods to obtain
desired outcomes. The dynamics of technology relate to the constant change that
requires significant adjustments in the political, religious, and economic structures
of society. Reach relates to the far-reaching nature of technology as it moves
through society. The self-sustaining nature of technology relates to the fact that
technology acts as a catalyst to spur even faster development. Civilizations must
harness and adapt to changes in technology to maintain a desired quality of life.
Although technological advances have improved our quality of life, they have also
raised ethical, legal, and social concerns.
Advances in technology have created millions of new jobs, better health and
longer lives, new opportunities, and the enrichment of lives. Without greater
access to the latest technology, however, economic development could suffer in
underserved areas. The ability to purchase technology may affect the nature of
competition and business success. Information and telecommunications technol-
ogy minimizes borders, allows people to overcome the physical limitations of time
and space, and enables people to acquire customized goods and services that cost
less and are of higher quality.
The internet, a global information system that links many computer networks
together, has altered the way people communicate, learn, do business, and find
entertainment. The growth of the internet has generated issues never before
encountered and that social institutions, including the legal system, have been slow
to address.
Because current technology has made it possible to collect, share, and sell vast
quantities of personal information, often without consumers’ knowledge, privacy
has become a major concern associated with technology. Many websites follow
users’ tracks through their site by storing a cookie, or identifying string of text, on
the users’ computers. What companies do with the information about consumers
they collect through cookies and other technologies is generating concern. Privacy
issues related to children are generating even more debate and laws to protect
children’s interests. Identity theft and fraud occur when criminals obtain personal
information that allows them to impersonate someone else to use that individual’s
credit to obtain financial accounts and to make purchases. Some measure of protec-
tion of personal privacy is provided by the U.S. Constitution, as well as by Supreme
Court rulings and federal laws. Europe and other regions of the world are also
addressing privacy concerns. In addition to creating and posting policies regarding
the gathering and use of personal information, more companies are beginning to
hire chief privacy officers (CPOs). Intellectual property consists of the ideas and
creative materials developed to solve problems, carry out applications, educate,
and entertain others. Copyright infringement is the unauthorized execution of the
rights reserved by a copyright holder. Technological advancements are challenging
the ownership of intellectual property. Other issues relate to “cybersquatters” who
deliberately register Web addresses that match or relate to other firms’ trademarks
and then attempt to sell the registration to the trademark owners.
Artificial intelligence (AI) and its enablers, including blockchain, drones, and
robotics, are rapidly changing the business environment as we know it. Machines
that perform tasks that previously required human intelligence have created effi-
ciencies for business and improved the customer experience. However, AI-enabled
technology has also raised ethical concerns as AI systems become more complex.
Bioethics refers to the study of ethical issues in the fields of medical treatment
and research, including medicine, nursing, law, philosophy, and theology. Genetic
research, including cloning, may revolutionize how diseases are diagnosed and

treated. Genetically modified (GM) crops are created when scientists introduce
a gene from one organism to another. However, these technologies are contro-
versial because some people believe they are immoral, unsafe, or harmful to the
environment.
To accrue the maximum benefits from the technology driving the new
economy, many parties within society have important roles to play. With an
economy that is increasingly driven by technology, the government must maintain
the basic infrastructure and support for technology in our society. The government
also serves as a watchdog to ensure that technology benefits society, not criminals.
Business is involved in both reactive and proactive attempts to make effective
use of technology. Reactive concerns relate to issues that have legal or ethical
implications as well as to productivity, customer welfare, or other stakeholder
issues. Proactive management of technology requires developing a plan for
utilizing resources to take advantage of competitive opportunities. The strategic
approach to technology requires an overall mission, strategy, and coordination of
all functional activities, including a concern for social responsibility, to produce
an effective program. To calculate the effects of new technologies, companies can
employ a procedure known as technology assessment to foresee the effects of new
products and processes on their firm’s operation, on other business organizations,
and on society in general.
Ctrl-Alt-Delete: Exploring the Downside of Technology

Issue: What are the benefits and drawbacks of for a brief conversation; and handwriting has become so
technology to social interaction? passé that a handwritten envelope will be opened much
sooner than any other piece of mail.
While technology has brought advancements, conve- Nonverbal communication is crucial to positive human
niences, and efficiencies to our lives, some critics wonder relationships and building social skills. In the business
if the costs outweigh the benefits, especially those that world, not having face-to-face communication can hurt
are transforming the ways we communicate, connect with the relationship by creating misunderstandings and
other people, solve problems, and generally interact as preventing empathic exchanges between colleagues.
human beings. In other words, are we losing the relation- Additionally, research has shown that when someone asks
ships that have made the United States a great place to for something in a face-to-face interaction, it is 34 times
live and work? more likely to be well received than if the request came
In 1831, Alexis de Tocqueville visited the United States in an email.
on behalf of the French government. He wrote a grand On the other hand, technology has opened up new
treatise, Democracy in America, noting how Americans avenues for daily responsibilities, research, and business
were dedicated to social cohesion, equality, common activities. Ordering groceries, buying clothing, and refilling
purpose, and concern for both individuals and the com- medications are as easy and convenient as pushing a few
munity. Now, recent studies indicate civic engagement buttons. This frees up more time for busy adults to engage
is declining. Is technology part of the problem? Consider in other activities. Because of the internet, researchers
these daily occurrences: Students text on their phones literally have libraries of knowledge at their fingertips.
instead of interacting with classmates; people rely on E-commerce and global reach are possible in the modern
autocorrect features rather than their own knowledge; age in contrast to a few decades ago. Marketers use
people on public transportation rarely acknowledge other social media and other digital channels to connect more
riders because they are busy checking their smartphones; on a one-on-one basis with customers. Many companies,
many children spend more time on the internet or playing including Southwest Airlines, have social media teams to
video games than they do playing outside with other answer customer concerns quickly, creating a smoother
children; coworkers send each other emails and instant customer service process. Small business owners now
messages, rather than walk 30 steps to the next office have the ability to use technology to sell their products

across the world without the infrastructure that is required There Are Two Sides to Every Issue
to set up a large company. Online chat forums can help 1. Defend the changes that technology has brought to
people connect from different parts of the country who society’s communication patterns, such as the expedi-
never would have met otherwise. Many people have used ency of email and texting, reduced costs, and access to
social networks like Facebook to reconnect with friends people around the world.
they knew long ago. Additionally, video chats enable 2. Defend the need for society to rely less on technology
long-distance friends and family to connect, while also and more on traditional communication patterns, such
providing some of the nonverbal communication that is as face-to-face meetings, verbal conversations, and
missing from other media like email. hand-written correspondence.
Sources: Carol Kinsey Goman, “Has Technology Killed Face-to-Face Communication?” Forbes, November 14, 2018, https://www.forbes.com/sites/
carolkinseygoman/2018/11/14/has-technology-killed-face-to-face-communication/#4aee7be4a8cc (accessed July 29, 2019); Molly Schleisinger and
Kathy Hirsh-Pasek, “The Power of Human: Re-inventing Technology to Prompt More Social Connection,” Centers for Scholars and Storytellers, https://
www.scholarsandstorytellers.com/character-blogs-technology/2018/12/29/the-power-of-human-re-inventing-technology-to-prompt-more-social-
connection (accessed July 29, 2019).
Key Terms
Act on the Protection of Personal cybersquatter (p. 324) Internet Corporation for Assigned
Information (APPI) (p. 321) deep learning (p. 326) Names and Numbers (ICANN)
algorithm (p. 325) General Data Protection Regulation (p. 315)
big data (p. 309) (GDPR) (p. 318) Internet of Things (IoT) (p. 316)
bioethics (p. 328) genetically modified (GM) machine learning (p. 326)
Certified Information Privacy organisms (p. 331) sharing economy (p. 311)
Professional (CIPP) (p. 322) gig economy (p. 311) smart devices (p. 308)
chief privacy officer (CPO) (p. 321) identity fraud (p. 317) supply chain management (p. 312)
Children’s Online Privacy and identity theft (p. 317) technology (p. 308)
Protection Act (COPPA) intellectual property (p. 322) technology assessment (p. 334)
(p. 317) International Association of Privacy
copyright infringement (p. 323) Professionals (IAPP) (p. 321)
1. Define technology and describe three characteristics 4. What is intellectual property? How can owners of
that can be used to assess it. intellectual property protect their rights?
2. What effect has technology had on the United States 5. What is AI? What are some ethical concerns about
and global economies? Have these effects been AI-enabled technology?
positive or negative? 6. What is bioethics? What are some of the conse-
3. Many people believe that the government should quences of biomedical research?
regulate business with respect to privacy online, but 7. Should GM foods be labeled as such? Why or why
companies say self-regulation is more appropriate. not?
Which approach would benefit consumers most? 8. How can a strategic technology assessment help a
Businesses? company?
Visit three websites that are primarily designed for children What type of language and persuasion is used? Is there a
or that focus on products of interest to children under age privacy statement on the site that can be understood by
13. For example, visit the websites for new movies, games, children? Are there any parts of the site that might be offen-
action figures, candy, cereal, or beverages. While visiting sive or worrisome to parents? Provide a brief evaluation of
these sites, put yourself in the role and mindset of a child. how well these sites attend to the provisions of the COPPA.

The Email Police: What Would You Do?

James Kitling thought about his conversation with Ira
?
nonwork documents from the internet. These documents
Romero earlier that day. He was not really surprised that were designed to help the employee’s spouse in a new
the human resources (HR) department was concerned business venture. Although the employee did most of the
about the time that employees were spending on personal searching and downloading during lunch, the supervisor
issues during the workday. Several departments were felt that this was an improper use of company resources.
known for their rather loose management approach. Other employees had been informally spoken with about
Internet access for personal tasks, like shopping, using their use of the internet for personal matters. Ira believed
Instant Messaging services, and answering nonwork emails, that this was a growing problem that definitely affected
had been a concern for several months. Recent news reports productivity. He had read the news reports and believed
indicated that over 50 percent of large companies now that monitoring software was becoming a necessary tool in
filter or monitor email. Companies are also monitoring today’s workplace.
Web browsing, file downloads, chat-room use, and group So far, James had been hesitant to purchase and
postings. A survey published in the media reported that implement one of these systems. The employee internet
workers spend an average of eight hours a week looking at management software was somewhat expensive, running
nonwork internet sites. approximately $25 per computer. He felt that the software
As the director of IT, James was very dedicated to the could cause employee trust to decline sharply, resulting in
effective use of technology to enhance business productivity. even greater problems than currently existed. After all, most
Although he was knowledgeable about technology, James (if not all) employees engage in some personal tasks during
was equally attuned to the ways in which technology can be work hours, including making personal telephone calls,
abused in a work setting. He knew that some employees were getting coffee, chatting with coworkers, and so forth. James
probably using too much internet time on personal tasks. wondered if the internet was that much different from
On the other hand, his company mainly employed these other personal activities. He recalled a discussion in a
professionals, administrative staff, and customer service management class in his master’s of business administration
personnel. All 310 employees were expected to use the (MBA) program, where it was revealed that employees in
computer a great deal throughout the day. At present, the early 1900s were allowed to use the telephone only to
the company had a skeleton code of ethics and policy on call the police. Thus, the telephone was once thought of as
the use of company resources, including the internet. A a great distracter, much as the internet is today.
couple of managers, and now HR, had spoken with James Ira and a few other managers were pretty firm in their
about the prospects of monitoring employee computer beliefs about the internet monitoring system. James was
and internet use. Ira’s inquiry about the software, how- still not convinced that it was the best route to curbing the
ever, was a bit more serious. An employee had recently problem. In his role, however, he was expected to provide
been formally reprimanded for downloading and printing leadership in developing a solution. What would you do?

CHAPTER
12 Sustainability
Issues

Purpose and Profit: The Rise of the B Corporation
Sustainability in business has become increasingly has taken it upon themselves to adopt ecofriendly
important as society becomes more aware of the business practices.
detrimental impacts of pollution, water shortages, The company has adopted the triple-bottom
and climate change. One company that exemplifies line approach of people, planet, and profits. This
care and concern for the environment is Cascade approach views success based not only on financial
Engineering. Cascade Engineering’s leaders and standards like profit, but also on how the firm
managers make decisions that differentiate the com- positively affects society and the environment. For
pany from the competition. One major decision was to instance, the firm started its “Welfare to Career”
become a B corporation. The B stands for beneficial, program as a way to reach out to their community.
and it is a certification awarded by the nonprofit B Lab Keller hired low-income individuals on welfare within
to signal that member-companies will conform to a set his community to help them get out of poverty. This
of transparent and comprehensive social and envi- training and career program has helped hundreds of
ronmental performance standards. These businesses people get off of welfare. Interestingly, the program
are purpose-driven and are designed to give back to has also helped Cascade financially; the company
communities, the environment, and employees. has saved an estimated half-million dollars over a
Cascade Engineering makes an unlikely B five-year period through tax credits, wage subsidies,
corporation, in that it manufactures plastic products, and lower contracting costs.
operating in an industry that tends to be seen as Not only has Cascade made decisions to benefit
environmentally unfriendly. It has made the proac- the community, but it also has benefited other stake-
tive decision to make sustainability the focus of its holders. The company has spent more than a decade
strategy in product and business development. To helping customers reduce oil use and eliminate
further this goal, the company produces its own waste. It has developed a cradle-to-cradle certified
alternative energy products. By using thermoplastics product line based on a design concept that stresses
and multiple types of molding that cut down on reusable and safe materials, renewable energy, water
waste, the company is able to produce goods that quality, social fairness, and continuous improvement.
Shutterstock/Bannafarsai_Stock
do not negatively affect the environment. Unlike many manufacturers, Cascade supports a
Most manufacturers would feel constrained by switch to renewable energy. While this might be
the performance standards of a B corporation. Fred perceived as a risky move, Cascade is aware that this
Keller, Cascade Engineering’s founder, welcomed type of energy is at the forefront of innovation.
regulation, using it as a motivation to improve Cascade Engineering has worked to develop a
processes. Cascade Engineering looks at decisions culture of positive decision-making when addressing
based on how they can benefit the community, which the impact of the industry. Keller believes that busi-
often requires managers to make nonprogrammed nesses should be analyzed not only by how much
decisions to develop unique solutions. Rather than money they make, but also by how they benefit
waiting for legislation and ethical guidelines to be society. His efforts have netted him multiple awards,
imposed by the government, Cascade Engineering respect, and the business of like-minded companies.1
Chapter Objectives
●● Define sustainability
●● Examine the nature of sustainability as it relates to social responsibility
●● Explore a variety of global environmental issues faced by business and society
●● Examine the impact of environmental policy and regulations
●● Gain an understanding of different types of alternative energy
●● Examine business responses to sustainability
●● Discuss a strategic approach to respond to environmental responsibility
341
A s concerns over fracking, global warming, erratic weather patterns,

and diminished quality of life continue to rise, public and business sup-
port for environmental causes has increased a great deal since the first
Earth Day was held in 1970. Most Americans claim that they have made changes
in their lifestyles, like switching to energy-efficient light bulbs or recycling, to help
the environment. One survey indicated that 68 percent of consumers consider
sustainability to be an important factor when making a purchase, regardless of age
or gender, with Gen Z shoppers more likely to pay more for green products than
other age groups.2 Many businesses have adopted environmental policies in their
operations, and 74 Fortune 500 corporations are using nearly 32 billion kilowatt-
hours of green power each year.3
In this chapter, we explore the concept of sustainability in the context of
corporate social responsibility in today’s complex business environment. First, we
define sustainability and explore some of the significant environmental issues that
businesses and society face. Next, we consider the impact of government environ-
mental policy and regulation on business and examine how some companies are
going beyond the scope of these laws to address environmental issues and act in an
environmentally responsible manner. We also examine different types of alternative
energy. Finally, we highlight a strategic approach to environmental issues, includ-
ing risk management and strategic audits.
Defining Sustainability
Most people probably associate the term environment with nature, including
wildlife, trees, oceans, rivers, mountains, and prairies. Until the twentieth century,
people generally thought of the environment solely in terms of how these resources
could be harnessed to satisfy their needs for food, shelter, transportation, and
recreation. As Earth’s population swelled and technology advanced, however,
humans began to use more of these resources with greater efficiency. Although
these conditions have resulted in an improved standard of living, they come at
a cost. Plant and animal species, along with wildlife habitats, are disappearing
at an accelerated rate; water use has become a critical issue in many parts of
the globe; and pollution has rendered the skies of some cities a gloomy haze.
How to deal with these issues has become a major concern for business and
society in the twenty-first century. Although the scope of the word sustainability
sustainability
is broad—including plants, animals, human beings, oceans and other waterways,
the potential for long-term well- land, and the atmosphere—in this book, we discuss the term from a strategic
being of the natural environment, business perspective. Thus, we define sustainability as the potential for long-term
including all biological entities, well-being of the natural environment, including all biological entities, as well as
as well as the interaction the interaction among nature and individuals, organizations, and business strate-
among nature and individuals,
organizations, and business gies. Sustainability includes the assessment and improvement of business strategies,
strategies economic sectors, work practices, technologies, and lifestyles while maintaining the
natural environment. It meets the needs of the present without compromising the
ability of future generations to meet their own needs.4
However, it is important to realize that sustainability means different things to
different cultures. Europeans use both environmental and economic variables when
considering the sustainability of an organization. In the United States, the term
sustainability is used more often in relation to environmental concerns. Others still
believe that the term is too broad; some researchers want the term sustainability in
business to only emphasize human sustainability with a customer focus.5 This lack
of a clear consensus complicates the matter for businesses, especially when trying
to evaluate ways to broaden the sustainable footprint of their operations.6 For the
purposes of this chapter, we use the U.S. concept of sustainability to describe how
organizations interact with the natural environment.

Chapter 12 Sustainability Issues 343
How Sustainability Relates to Social

Responsibility
Sustainability does not mean the same thing as social responsibility.7 Rather, it is a
domain of social responsibility. Social responsibility is an attempt to maximize an
organization’s positive impact and minimize its negative impact on stakeholders.
Sustainability, according to our definition, seeks to minimize a business’s negative
impact on the natural environment while maximizing its positive impact. Like any
social concern, organizations should respond to consumer concerns over sustain-
ability by addressing the issue in their strategies, policies, and objectives. This
involves the process of assessing risks, monitoring ethical and legal compliance,
and developing policies to minimize unethical conduct.
Although social responsibility and sustainability are not the same, many
socially responsible organizations display sustainable behaviors. Social responsibil-
ity meets the needs of stakeholders, including both environmental stakeholders
and consumers concerned about the impact of business operations on the Earth.
Sustainability requires the organization to make ethical decisions on how it will
implement, monitor, and improve upon sustainability initiatives. Figure 12.1
reillustrates the major emphases of social responsibility featured in Chapter 1 to
demonstrate sustainability’s role.
Stakeholders are demanding that businesses become more sustainable. At the
very least, organizations are expected to minimize their negative effects on the
environment through such activities as the proper disposal of chemicals, recycling,
or keeping greenhouse gas emissions to a minimum. Organizations such as
Kimberly-Clark have been responding by including sustainability as a key factor in
annual corporate social responsibility (CSR) reports. While this is a new practice
for many organizations, companies such as Ford Motor Company have published
annual sustainability reports for more than 20 years.8 These reports are mandatory
for publicly held corporations in Europe.
Sustainability has become a major issue for organizations for different
reasons. First, sustainable business practices can result in competitive advantages. sustainable business practices
Sustainable practices are beneficial to stakeholder relationships and even can actions a company takes to
reduce their environmental impact
lower costs in areas such as energy in the long term. Second, as consumers become
and that may lower costs and
more aware of environmental issues, their power over organizations in this area is improve competitive advantage,
increasing.9 For example, as consumers became increasingly aware of the environ- stakeholder relationships, and
ment impact of single-use plastics, plastic straws rapidly fell out of favor, and the company’s reputation and
bans became widespread. As a result, the soda giants Coca-Cola and PepsiCo are branding
single-use plastics
also known as disposable plastics,
these materials are used only
Figure 12.1 Major Emphases of Social Responsibility once before they are discarded or
recycled
Issues
Recognition Outcomes
Social Issues
Issue Awareness Sustainability Decisions
Consumer Protection
Corporate Governance
Philanthropy
Legal Responsibilities
Employee Well-Being
Stakeholder Evaluations
Source: © O.C. and Linda Ferrell, 2019.

preparing for potential bans on single-use plastic bottles by testing new dispensers
that require customers to supply their own bottles.10 Third, sustainable organiza-
tions are more likely to have their brand associated with positive concepts such as
social value and product quality. Fourth, organizations are using sustainability to
differentiate themselves from competitors and to market their goods and services.
Patagonia has adopted the unique campaign of encouraging consumers not to buy
products from the company that they do not need. They also want customers to
return used products that the customer no longer wants so that the organization
can reuse them. This positions Patagonia as a sustainable company, truly desiring
to live its mission.
Sustainability not only involves best practices, but is also increasingly becom-
ing an issue of concern to lawmakers. Many firms are becoming proactive in
addressing sustainability. For example, as many states roll out aggressive climate
strategies, AB InBev, the maker of Budweiser, is tackling its energy usage proac-
tively with plans to use only renewable sources for electricity by 2025.11 Many
stakeholders respond positively to these changes.
Global Environmental Issues

biodiversity The protection of air, water, land, biodiversity, and renewable natural resources
the variety of living organisms emerged as a major issue in the twentieth century in the face of increasing evidence
found in a given area on Earth
or on Earth as a whole and the
that pollution, uncontrolled use of natural resources, and population growth were
ecological systems in which they putting increasing pressure on the long-term sustainability of these resources. As
live the environmental movement sounded the alarm over these issues, governments
around the globe responded with environmental protection laws during the 1970s.
In recent years, companies have been increasingly incorporating these issues into
their overall business strategies. Most have been the focus of concerned citizens,
as well as government and corporate efforts. Some nonprofit organizations have
stepped forward to provide leadership in gaining the cooperation of diverse
Coalition for Environmentally groups in responsible environmental activities. For example, the Coalition for
Responsible Economies (CERES) Environmentally Responsible Economies (CERES), a union of businesses, consumer
a union of businesses, consumer
groups, environmentalists, and
groups, environmentalists, and other stakeholders, has established a set of goals
other stakeholders, who have for environmental performance.
established a set of goals for In the following section, we examine some of the most significant environmen-
environmental performance tal issues facing business and society today, including air pollution, acid rain, global
warming, water pollution and water quantity, land pollution, waste management,
deforestation, urban sprawl, biodiversity, and genetically modified (GM) foods.
Atmospheric Issues
Among the most far-reaching and controversial environmental issues are those that
relate to the air we breathe. These include air pollution, acid rain, global warming,
and pollution emitted by coal.
Air Pollution Air pollution typically arises from three sources: stationary sources
such as factories and power plants; mobile sources such as cars, trucks, planes,
and trains; and natural sources such as windblown dust and volcanic eruptions.12
These sources discharge gases, as well as particulates, that can be carried long
distances by surface winds or linger on the surface for days if there is a lack of
wind or if other geographical conditions permit. The World Health Organization
particulate matter (PM) (WHO) has issued standardized safe levels of particulate matter (PM), which are
a mixture of solid particles and used to determine whether a city’s pollution is considered dangerous. Particulates
liquid droplets found in the air;
measuring 2.5 microns or less are the most dangerous to public health, as these
also known as particle pollution
particles are small enough to enter the bloodstream and cause ailments such as

cancer and emphysema. It is estimated that 91 percent of the world’s population

lives in a place where air quality exceeds WHO guideline limits, with China and
India having the most air-polluted cities.13 It is estimated that 1.2 million people in
India die premature deaths annually as a result of pollution.14 Such conditions can
cause markedly shorter life spans, along with chronic respiratory problems (e.g.,
asthma, bronchitis, and allergies) in humans and animals, especially in the elderly
and the very young. Projections show the market for asthma products and services
will reach $31.4 billion by 2026.15 Additionally, some of the chemicals associated
with air pollution may contribute to birth defects, cancer, and brain, nerve, and
respiratory system damage. Air pollution can also harm plants, animals, and water
bodies. Haze caused by air pollution can reduce visibility, interfering with avia-
tion, driving, and recreation.16 As a result of experiencing the detrimental effects of
pollution on the population and the economy, China declared war on pollution by
reducing energy levels, closing factories, and minimizing the number of cars on the
roads. Between 2013–2017, China made significant progress, reducing particulates
measuring 2.5 microns or less by 32 percent. China has continued its war on air
pollution by introducing the Three-Year Action Plan for Winning the Blue Sky
Defense Battle in 2018.17
Acid Rain In addition to the health risks posed by air pollution, when nitrous
oxides and sulfur dioxides emitted from manufacturing facilities react with air
and rain, the result is acid rain. This phenomenon has contributed to the deaths acid rain
of many valuable forests and lakes in North America and Europe. It also corrodes a phenomenon when nitrous
oxides and sulfur dioxides emitted
paint and deteriorates stone, leaving automobiles, buildings, and cultural resources
from manufacturing facilities react
such as architecture and outside art vulnerable unless they are protected from with air and rain
its effects.18 While we have made great strides since the passing of the Clean Air
Act in 1963, some of our forests and lakes are still recovering from the damage
caused by acid rain.19 In addition, we have not yet been able to eliminate this
phenomenon, although implementing more environmentally conscious practices
has been successful in reducing emissions that cause acid rain. In the United States,
the concentration of sulfur dioxide in the air has decreased by 68 percent and emis-
greenhouse effect
sions of sulfur dioxide have decreased by 65 percent over the past eight years.20 when Earth’s atmosphere
Cleaning up emissions from factories and cars is one way to help reduce acid rain. becomes thick with carbon
dioxide, other gasses, and
Global Warming When carbon dioxide and other gases collect in the Earth’s substances which trap the Sun’s
atmosphere, they trap the Sun’s heat like a greenhouse and prevent Earth’s surface heat making Earth’s surface
warmer
from cooling. Without this natural process, the planet becomes too cold to sustain
life. However, during the twentieth century, the burning of fossil fuels—gasoline, ozone
natural gas, oil, and coal—accelerated dramatically, increasing the concentration a highly reactive form of oxygen
of so-called greenhouse gases like carbon dioxide and methane in the Earth’s that is a critical component of the
stratosphere where it encircles
atmosphere to levels that are too high, which disrupted Earth’s natural temperate the Earth in a deep layer that
regulation. This is known as the greenhouse effect. Chlorofluorocarbons—from protects the planet from the Sun’s
refrigerants, coolants, and aerosol cans—also harm the Earth’s ozone layer. A ultraviolet radiation
hole, measuring nine miles high and several hundred miles wide, was discovered in
the lowest layer of the atmosphere and is believed to be caused by the presence of
chlorofluorocarbons. The protective layer of the ozone, which protects the Earth
from the Sun’s harmful ultraviolet rays, is said to be stripped away. These harmful
rays not only damage the environment but also humans’ eyesight and skin health.21
World carbon dioxide emissions are currently around 37.1 billion metric tons
and are expected to rise to 45 billion metric tons by 2040.22 Figure 12.2 shows that
world carbon dioxide emissions are on the rise. The United States and China are the
two largest greenhouse gas emitters in the world.23 Developing countries, are going
to make up an increasing percentage of overall emissions because they are most
likely to use coal—the dirtiest of all fossil fuels in terms of emissions. After years
of decline, coal generation has now increased by 3 percent in recent years.24 To cut

Figure 12.2 World Carbon Dioxide Emissions
38
37
37.1
36 36.2
35.6 35.7
35.3 35.5
35
35
Gigatons
34.4
34
33
33.1
32
31
30
2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: Kelly Levin, “New Global CO2 Emissions Numbers Are In. They’re Not Good,” World Resources Institute,
December 5, 2018, https://www.wri.org/blog/2018/12/new-global-co2-emissions-numbers-are-they-re-not-good (accessed
August 2, 2019).
greenhouse gas emissions, the Environmental Protection Agency (EPA) has written
rules providing stricter standards for new cars to cut the amount of greenhouse
gases emitted from new cars by 25 percent. According to the rule, the standards
would increase every year.25 The EPA has considered freezing its escalating
standards to avoid scaring off consumers with more expensive vehicles.26
Most scientists believe that concentrations of greenhouse gases like methane
and carbon dioxide in the atmosphere are accelerating a warming of the planet. The
past five years have been the hottest on record.27 If no changes are made to curb
global warming, many cities will experience an entire month each year with heat
index temperatures above 100 degrees by 2050.28 Accumulations of greenhouse
gases have increased dramatically in the past century. The accumulation of gases
appears to have increased average temperatures by 1.4°F over the last century.
Although this does not sound like much of a change, it is enough to increase the
climate change rate of polar ice sheet melting, which is occurring at unprecedented rates.29 Climate
the alteration of weather patterns change has caused such dramatic melting of glaciers along the Italian/Swiss border
and temperature in an area or in the Alps that mapmakers were forced to redraw the border between the two
across the entire Earth due to countries to follow the new glacial boundaries.30 Climate change has also affected
global warming
weather in this region—making Switzerland to the north more prone to flooding
and Italy to the south more drought-ridden.
As the polar ice caps melt, scientists fear that rising sea levels will flood many
coastal areas and even submerge low-lying island nations. With less snow and ice
cover to reflect the Sun’s rays, the Earth absorbs even more of the Sun’s heat, accel-
erating the warming process. Global warming has caused more than 3 trillion tons
of ice melt over the last 25 years.31 Some scientists also think that global warming
may alter long-term weather patterns, causing drought in some parts of the world,
while bringing floods to others—something that many believe we are already
witnessing in the form of extreme weather patterns. Insurers are building models
to better estimate the impact of climate change and expanding in-house resources
by hiring climatologists. These new models consider the effect of global warming
on wildfires, flooding, hurricanes, and hailstorms.32 Additionally, record-breaking

heat waves, droughts, and winter storms are also said to be a result of the changing
atmospheric conditions caused by global warming.33
The concept of global warming has been controversial among some groups,
especially in the United States. Critics of global warming argue that apparent
temperature increases are part of a natural cycle of temperature variation that the
planet has experienced over millions of years. Some people even like the sound of
global warming, as it brings to mind warmer temperatures and longer growing sea-
sons. Many companies and organizations have also maligned the theory because
reducing emissions and tightening environmental laws means greater expenses at
the outset. Nevertheless, most nations, scientists, and businesses now agree that
something must be done about climate change. Failure to act may create extreme
climate conditions that could have negative consequences.
Hydraulic fracturing (fracking) is controversial due to its effects on global
warming. While supporters claim that fracking is better for the environment and
is leading to energy independence for the United States, critics disagree. They claim
the burning of natural gas releases harmful methane into the atmosphere. They
estimate methane to be 21 times more potent than carbon dioxide over a period
of 100 years. The Intergovernmental Panel on Climate Change claims that the
estimate is closer to 34 times. Since the rise of fracking, the EPA has issued rules
for production and consumption and will continue to do so as more information
on its effects on the climate become known.34 Several states such as Maryland,
Washington, and New York have banned fracking outright.35
The Kyoto Protocol is a treaty among industrialized nations aimed at slowing Kyoto Protocol
global warming. The United States did not ratify the treaty and therefore was not a treaty among industrialized
nations aimed at slowing global
bound to it. Since its creation in 1997, the protocol has been highly unpopular among
warming
global corporations that engage in operations that damage the environment. At the
time, signing the treaty required a commitment to reducing levels of greenhouse gas
emissions by 5 percent that of 1990 levels. However, only 37 countries, as well as
the European Union (EU), signed the protocol, leaving out the largest polluters such
U.S. Global Climate Change
as Canada, the United States, Australia, and developing countries including China Initiative
and India. The United States has adopted a voluntary U.S. Global Climate Change a voluntary protocol for reporting
Initiative for reporting greenhouse gases, as outlined in Table 12.1. Many leaders greenhouse gases
Table 12.1 Elements of the U.S. Global Climate Change Initiative

Enhancement of the 1605(b) Voluntary Reporting of Greenhouse Gases Program
Significantly expanded funding for basic scientific research and advanced technology
development
Tax incentives, such as credits for renewable energy, cogeneration, and new technology
Challenges for business to undertake voluntary initiatives and commit to greenhouse gas
intensity goals, such as through recent agreements with the semiconductor and aluminum
industries
Transportation programs, including technology research and development and fuel economy
standards
Carbon sequestration programs, which include increased funding for U.S. Department of
Agriculture conservation programs in the Farm Bill
Investments in climate observation systems in developing countries
Funding for “debt-for-nature” forest conservation programs
Use of economic incentives to encourage developing countries to participate in climate change
initiatives
Expanding technology transfer and capacity building in the developing world
Joint research with Japan, Italy, and Central America
Sources: Energy Information Administration, U.S. Department of Energy, “Voluntary Reporting of Greenhouse Gases—
Summary,” http://www.eia.doe.gov/oiaf/1605/vrrpt/summary/special_topic.html (accessed June 22, 2016); USAID, “U.S.
Global Climate Change Initiative,” https://www.usaid.gov/ climate (accessed July 17, 2019).

worried that compliance would jeopardize businesses and the economy.36 The Kyoto
Protocol, which went into effect in 2005, now has 192 signatory nations.37 In 2012,
another attempt to develop a legally binding international agreement to reduce
greenhouse gas emissions was discussed. The Doha Gateway Agreement calls for
both developed and developing countries to decrease greenhouse gas emissions. As
of 2019, 134 countries have signed the amendment.38
Many U.S. businesses are responding to stakeholder pressure and are com-
mitting to self-regulatory standards with respect to global warming and related
areas, even in the absence of federal mandates. States such as California have
worked hard to gain the right to issue their own environmental legislation. After
many years of making arguments to the federal government, the EPA granted
California the right to impose tough emissions standards on cars and trucks. For
example, California signed an emissions reduction deal with Canada in 2019 that
sidestepped the U.S. federal government as it was discussing relaxing emissions
standards.39 This change in ruling opened the door for other states to pass similar
emissions legislation and demonstrated a willingness on the part of the EPA to let
states decide how strict they want to be on polluters.40 A host of energy-efficient
designations now exist to help consumers make more environmentally friendly
choices. For example, Energy Star, a joint program between the EPA and the U.S.
Department of Energy, helped Americans and businesses reduce greenhouse gas
emissions by 3 billion metric tons—all while saving them more than $400 billion
on utility bills.41 Table 12.2 describes some ways that companies and governments
are adopting climate change strategies.
Coal and Carbon Emissions As already mentioned, coal is an area of debate

among different countries and is considered to be one of the dirtiest forms of
energy.42 The consumption of coal pollutes the air by releasing large amounts
of gaseous and PM into the atmosphere. Many governments believe that their
intervention is needed to bring down levels of greenhouse gas emissions. Some
cap and trade programs countries are intervening with cap-and-trade programs, which set emissions limits
programs that set carbon (caps) for businesses, countries, or individuals. A company is given a certain
emissions limits (caps) for
businesses, countries, or
amount of carbon that they are allowed to emit, and to legally emit anything
individuals. To legally emit beyond beyond that limit, they must purchase carbon credits from another company that
that limit, carbon credits must be did not pollute as much. The EU has been at the forefront of mandated emissions
purchased from another entity that reductions and has implemented a cap-and-trade program on carbon emissions
did not pollute to its own limit known as the European Union Emission Trading Scheme.
When the EU signed the Kyoto Protocol, it committed to collectively reduce
its greenhouse gas emissions by 8 percent. The EU does this by issuing a fixed
Table 12.2 Climate Change Strategy

Climate Change Description Example
Strategy
Greenhouse gas A commitment to reduce To reduce greenhouse gas emissions,
reduction carbon emissions by a certain the U.S. government required cars and
percentage light trucks to get 36.9 miles per gallon
by 2020
Cap-and-trade Set emissions limits (caps) The United States used a cap-and-
program for businesses, countries, or trade program for acid rain, requiring
individuals fossil-fueled power plants to reduce
levels of sulfur oxide and nitrogen oxide
emissions
Proactive Occurs when businesses Walmart has worked on adopting a
business practices proactively adopt business sustainability index that will allow
practices to address sustainability customers to determine how ecofriendly
before they need to do so a product is

number of permits to businesses and other parties that limits the amount of
emissions their companies can give off. A carbon emissions cap can strain many
businesses, especially manufacturing companies, which emit large amounts of
carbon in the process of operating. Opponents of this scheme argue that a single
cap puts certain companies at a financial disadvantage, as they can only reduce
their carbon footprint by so much before they begin sacrificing productivity.
To solve this problem, a cap-and-trade system allows for businesses to sell the
carbon permits they do not use. In other words, companies that do not release as
much carbon emissions can sell their permits to companies that do. Companies
that pollute less are therefore rewarded with extra income, while companies that
produce more are allowed to continue working. To give companies time to adapt
more efficient technologies, governments impose progressively smaller caps over
the years.43
The cap-and-trade program has gained some support in the United States.
Twenty-three states have actively been involved in three regional cap-and-trade
programs to reduce emissions: the Regional Greenhouse Gas Initiative (RGGI),
the Midwestern Greenhouse Gas Reduction Accord (Midwestern Accord), and the
Western Climate Initiative (WCI).44 Cap-and-trade has also been used to reduce
acid rain by restricting the amount of sulfur dioxide and nitrogen oxides released
by fossil-fueled power plants.45 However, opposition has been fierce, and federal
legislation has not focused on mandating cap-and-trade programs. Instead, the
government is more concerned with providing collective goals that must be met.
The EPA works with companies and states on implementing rules to meet these
goals. The EPA has suggested market-based programs, investment in existing or
new energy efficiency programs, or expansion of renewable energy initiatives to
state legislators, who will decide what methods work best for their states.46 The
Clean Power Plan (CPP), first proposed by the EPA in 2014, was the first time that
the United States set mandatory guidelines on power plant emissions. Though it
was projected to reduce emissions from the power sector by 32 percent by 2030,
opposition to this proposed rule was high, particularly as it would have signifi-
cantly affected the nation’s 600 coal-fired plants. In 2019, CPP was replaced by
the Affordable Clean Energy (ACE) rule after it was decided that the CPP exceeded Affordable Clean Energy (ACE)
the EPA’s statutory authority. ACE, which gives more power at the state level, is rule
a rule (replacing the EPA’s Clean
projected to have an annual net benefit of $120 to $730 million.47 Power Plan that set mandatory
New companies are emerging with smaller carbon footprints than their guidelines on power plant
predecessors. As the meat industry is increasingly criticized for its negative envi- emissions) giving more power at
ronmental impact, new alternative protein products have become available. For the state level to reduce emissions
example, Impossible Foods, the company behind the Impossible Burger, positions
its plant-based product as being more ethical and more sustainable than traditional
beef products. According to one study, the Impossible Burger results in use of 87
percent less water, 96 percent less land, and 89 percent fewer greenhouse gas emis-
sions than burgers made from beef.48 Many existing businesses are partnering with
these new companies to improve emissions. For example, start-ups are working to
address the carbon dioxide emissions created by concrete production, one of the
world’s biggest sources of emissions. CarbonCure uses liquefied carbon dioxide
captured from industry sites in the concrete-mixing process to eliminate it, while
making the concrete stronger. This technology could have a widespread impact
across the construction industry.49
Proactive businesses do not have to wait for legislation to be passed to reduce
their carbon footprint. Many companies have created best practices programs that
utilize cleaner energy over dirty forms of energy like gasoline or coal, as well as more
efficient building codes. These codes have been shown to cut energy consumption
by a significant amount. As these codes are implemented and reevaluated, drafters
are able to revise the codes, making them all the more effective.50 However, most
companies have a long way to go. According to a report compiled by the EPA,
nearly half of all U.S. emissions are produced by businesses across all industries.51

Figure 12.3 U.S. Carbon Dioxide Emissions by Source
Other (Non-Fossil
Fuel Combustion)
7%
Residential &
Commercial
10%
Transportation
34%
Industry
15%
Electricity
33%
Source: U.S. Environmental Protection Agency, “Overview of Greenhouse Gases,” https://www.epa.gov/ghgemissions/

overview-greenhouse-gases (accessed July 17, 2019).
Figure 12.3 breaks down carbon dioxide emissions by source. A business needs to
know the size of its carbon footprint before it can effectively reduce emissions and
other environmental pollutants. Companies including Walmart, Coca-Cola, and
3M have actively monitored their carbon output and have set ambitious goals,
such as eventually becoming net zero when it comes to emissions.
Water Issues
Water is emerging as the most important and contested resource of the twenty-first
century. Nothing is more important to human survival, yet water is being polluted
and consumed at an unprecedented rate. According to the United Nations, more
than 2 billion people currently live in countries with high water stress, and 1.8
billion people will be living in conditions of absolute water scarcity by 2025. There
are many reasons for this—including industrial waste, 70 percent of which pollutes
water supplies in developing countries; human waste, which accounts for 2 million
tons per day; and agricultural waste, which pollutes 40 percent of water in high
income areas and 54 percent in low income areas.52 In order to remain viable, all
businesses must think about water conservation, purification, and allocation.
Water Pollution Water pollution results from the dumping of sewage and toxic
chemicals from manufacturing into rivers and oceans; from oil and gasoline spills;
and from the burial of trash and industrial waste in the ground where it can
contaminate underground water supplies. Fertilizers and pesticides used in farming
and grounds maintenance also drain into water supplies with each rainfall. These
chemicals are harmful to all life that depends on oceans and streams. Fertilizers
upset algae balances in rivers causing fish to die. Mercury contaminates the oceans,
and therefore human food supplies. Overuse of water can lead to shortages;
deforestation and climate change are contributing to the desertification of sections
of China and even the United States; and various chemical and methane leaks
associated with fracking are seeping into water supplies.53 Additionally, one in
nine people lack access to safe water, and every two minutes, a child dies from
water-related disease.54
From the passage of the Clean Water Act in 1972 to 2001 the United States
made significant strides to clean up and protect water sources. However, the water
preservation movement lost federal backing in the early 2000s. According to

the Natural Resources Defense Council (NRDC), 10 percent of U.S. beaches are
highly polluted, causing them to be closed or on advisory for most of the year.55 A
large percentage of streams, lakes, and other American waterways are not fit for
fishing or swimming, and pollution from agriculture and organic decomposition is
significant enough to have created dead zones in large bodies of water that have a dead zone
reduced level of oxygen. The Gulf of Mexico is known to have a dead zone the size an area in a large body of water
that has a reduced level of oxygen
of the state of New Jersey, the second-largest dead zone in the world.56 In recent
and increased algae blooms due
years, the United States has considered changes to the Clean Water Act that would to excessive nutrient pollution
cut back on important water protections, creating a narrower regulatory scope.57 from human activities, which
While the United States has one of the safest drinking water supplies in the negatively affects marine life and
world, pollution remains a problem. The city of Flint, Michigan, experienced a can be toxic to humans as well
state of emergency after it switched its water supply from Lake Huron to the Flint
River, which was known for being filthy. Soon iron and lead was leaking into the
water, creating a toxic water supply that could cause long-term effects to residents
who drank from it. However, the problem of lead is not limited to Flint. Reports
show that only 15 states and Washington, D.C., have laws for testing lead in school
drinking water, and less than half of districts regularly test. The Government
Accountability Office reported 37 percent of the school districts who did test have
detected elevated lead levels in students.58
Many of the side effects on people and wildlife are unknown. The EPA
released a study on the quality of water coming from 50 wastewater treatment
plants all over the nation and found 56 active pharmaceutical ingredients present
in the water supply. Pharmaceutical companies have released the drugs into the
water supply, but consumers who take the drugs are the largest contributor to the
problem. Pharmaceuticals have also been found in water sources in Europe, Asia,
and Australia. Although the concentrations found have been small, scientists worry
about the long-term health effects that they could have upon humans. Effects have
already been found in male frogs that have ingested small amounts of estrogen and
developed eggs.59 A chemical plant manager in Georgia was sentenced to house
arrest and a $2,000 fine for violating the Clean Water Act by telling his employees
to wash a toxic chemical into the Chattahoochee River.60 Tougher regulations are
needed globally to address pollution from activities such as dumping waste into
the ocean, large animal-feeding operations, logging sites, public roads, parking lots,
and industrial waste created by production operations.
Water Quantity In addition to concerns about the quality of water, some parts of
the globe are increasingly worried about its quantity. Over the last two decades,
water use has soared, resulting in serious consequences for the global water supply.
This creates issues for businesses in various industries that consume large amounts
of water in their operations. For example, it takes approximately 20 gallons of
water to brew a pint of beer, 132 gallons to make a two-liter bottle of soda, and
500 gallons to make a pair of jeans. In light of the decreasing amount of water on
the planet, companies are taking a responsible approach by measuring their water
footprints. Levi Strauss & Co. partnered with several organizations to develop
assessments for the lifecycle impact of their jeans. As a result, the company has
been able to determine ways to use up to 96 percent less water to make their jeans
without compromising the quality, a process called Water<Less. Additionally, the
company has invested in designing products made from 100 percent recyclable
materials.61 New technology has made it possible to reduce the use of water and
wasteful chemicals in jean production, and companies are taking advantage. For
example, AYR sells a sustainable jean made from recycled materials at a facility
that recycles 90 percent of its water.62
Record-breaking years of heat and below-average precipitation result in costly
and dangerous droughts across the nation. Drought has affected many parts of the
United States. Droughts are predicted to become hotter and longer due to climate
change.63 These conditions put added pressure on facility managers to conserve

water. The nation’s supply of accessible fresh water is decreasing drastically, in no

small part because of consumption rates. The average American uses 100 gallons
of water per day, and it is estimated that up to 10 percent of American homes are
fitted with leaking water pipes, faucets, and toilets that waste 90 gallons of water
each day. As a result, at least 40 states expect to see water shortages within the
next decade. There are many small things that companies and individuals can do
to slow down water consumption rates. For example, switching to low-flow toilets
could save as much as 520 billion gallons of water each year.64
Land Issues
Land sustainability is diverse and encompasses some of the issues already discussed,
such as pollution and waste, as well as loss of biodiversity and GM foods. Experts
also believe climate change is driven by land-use changes such as cutting down
trees and paving over the Earth. Unchecked, global climate change could cause
hundreds of billions of dollars in loss in the U.S. alone by the end of the century.65
Our land is becoming less viable for human and animal habitation due to the
impact of these activities. Because businesses generate waste and require natural
resources, stakeholders believe that they have the responsibility to minimize their
harmful impact on the environment.66
Land Pollution Land pollution results from the dumping of residential and
industrial waste, strip mining, and poor forest conservation. Such pollution
causes health problems in humans, jeopardizes wildlife habitats, causes erosion,
alters watercourses (leading to flooding), and can eventually poison groundwater
supplies. China is at the epicenter of a debate over pollution. The country’s rapid
development as manufacturer to the world has exposed hundreds of millions of
people to the ill effects of pollution. After a report indicated 16 percent of China’s
land was polluted with heavy metals, including cadmium, nickel, and arsenic,
China ramped up cleanup efforts. The government announced an investment
of $4.8 billion to clean polluted land and prevent these levels from recurring.
Continued efforts will take time and significant damage has already been done. To
date, only 20 percent of the polluted land has been cleaned.67 In order to reduce
pollution around the planet, businesses are all going to have to be aware of and
accept responsibility for the problem of pollution.
Determining responsibility for environmental degradation is not always easy,
especially on a global scale involving different countries. China introduced its
first soil pollution law to create new standards for pollution control and increase
monitoring of soil pollution and polluters. Under the new law, businesses are
required to monitor their own soil pollution and report incidents as they occur to
increase transparency and accountability.68 Ecuador sued Chevron for environ-
mental damage that occurred years earlier with oil and gas firm Texaco. Chevron
later acquired Texaco, and the country claimed that Chevron was responsible for
the environmental damage. After many court battles, a U.S. court ruled in favor
of Chevron, citing an agreement that Texaco had signed with Ecuador, absolving
Chevron of liability.69
Fracking has also led to concerns over land pollution. Fracking often occurs in
rural areas where trees are cut down to make way for roads, well pads, and other
infrastructure specific to fracking. Wyoming, for example, has experienced habitat
fragmentation, a reduction in hunting, and a depopulation of wildlife; sections of
forests in Pennsylvania have been cut down; and Alberta, Canada, has reported
serious detrimental effects to land and other natural resources in the area believed
to be caused by fracking. Studies have shown that fracking in Texas has resulted in
habitat fragmentation, but because 95 percent of land in Texas is privately owned,
it’s extremely difficult to determine the full impact of fracking on vegetative
resources, agriculture, and wildlife.70

Waste Management Improper or irresponsible

disposal of waste is another aspect of the land
pollution problem. American consumers are by
far the world’s biggest wasters. In one year, they
contributed more than 262 million tons of waste,
which strains declining landfill space. The United
States has over 3,000 active landfills and more than
10,000 abandoned landfills. Often left untreated,
these abandoned landfills result in hazardous leak-
age. Methane gas makes up the largest emissions
given off from landfills, which is 20 times more
powerful than carbon dioxide in terms of atmo-
spheric heating. Some organizations have learned to
Shutterstock/Kwangmoozaa
convert that gas into power.71 The EPA established
the Landfill Methane Outreach Program (LMOP),
with partners consisting of landfill owners and
operators, industry organizations, energy providers
and marketers, state agencies, communities, end
users, and other stakeholders to convert landfill
methane gas into power. Waste-to-energy, also
called bioenergy, is used in many European plants bioenergy
to treat household waste and create energy from it. Approximately 28 percent of renewable energy made from
biological waste
municipal waste is treated at these plants, resulting in 50 million tons of carbon
dioxide emissions being avoided annually.72
Plastics in landfills are a major concern, as they can take up to 1,000 years
to biodegrade. A large contributor is plastic bags, of which Americans use 100
billion per year. Many cities, such as Boston and Chicago, and several states, such
as California and Hawaii, have passed legislation either prohibiting the use of
plastic bags in stores or charging a fee for their use. Many countries have passed
similar legislation in various regions.73 Stores like Whole Foods ban plastic bags
voluntarily and offer incentives for consumers to use more recyclable materials,
such as canvas grocery bags. Whole Foods became the first national grocery store
in the United States to eliminate plastic straws. The United States recycles less than
26 percent of waste produced, while other countries such as Germany, Austria, and
Belgium recycle at least half of their waste.74
Electronic waste (e-waste) in landfills has been proven to release harmful
toxins into the air and water. It is estimated that the United States generates more
than 11 million tons of e-waste annually, and only 16 percent of the world’s
e-waste is recycled.75 Increasingly, electronics firms are pressured to take back
used electronics for recycling. Large chains such as Best Buy offer electronics and
appliances recycling. Many computer companies such as Apple offer trade-in
or buyback programs. Dell partnered with Goodwill to offer a free recycling
program.76 The EPA established its own electronics recycling program, and a host
of state governments have passed laws to encourage the recycling of electronic
devices. Many stakeholders, including environmental groups and some politicians,
believe that companies that produce the goods should be responsible for their
proper disposal and recycling.77
Improper waste practices greatly affect countries with insufficient waste
facilities. In India, for example, trash that would be sent to controlled landfills
in countries such as the United States is instead sent to open dumps or buried
underground. This poses a significant health risk, particularly to India’s network of
waste pickers who search trash for recyclables. Procter & Gamble (P&G) has been
urged by the waste pickers and the government in India to address waste created
by its diapers and sanitary pads. With sanitary pad sales projected to double in the
next five years, India is among P&G’s fastest-growing markets. P&G is being held
accountable for the growth because its Whisper brand is the dominant disposable

pad brand in India. Sanitary waste disposal facilities will need to be established to
make this business sustainable.78
Deforestation Rainforests serve to regulate temperatures and weather patterns,

absorb carbon dioxide, and maintain water supplies. Before deforestation
became a common occurrence, there was approximately 6 million square miles
of rainforest, whereas today rainforest covers a little over 2 million square miles.
It is estimated that the global tree count has fallen to 46 percent of what it was
at the dawn of human civilization.79 Although tree cover has increased in recent
years, many new areas of tree growth were previously considered too cold to
support trees, suggesting that global warming has affected these landscapes.80 The
reasons for deforestation are varied. The boom in biofuels in Southeast Asia and
the Pacific regions have resulted in the cutting down of trees to make room for
palm oil plantations. Brazil cuts down the Amazon rainforests for farming or for
raising sugarcane. Its deforestation rate is the highest it has been in 10 years. The
amount of deforestation that occurred in Brazil’s rain forests last year covered an
area approximately five times the size of London.81
A competitive global economy drives the need for money in economically
challenged tropical countries. In the short term, logging and converting forestlands
to other uses seem to be the profitable thing to do. However, the profits from
deforestation are generally short lived due to the poor quality of rainforest soil.
While initially, it can create a boom of prosperity, farming and other activities
are only sustainable by moving and cutting down more trees.82 Deforestation
began largely out of need that sprang from poverty in these areas. However, those
involved in the activity are more commonly large corporations. Many see this
as an advantage because it is easier to put pressure on these entities to be more
responsible. In addition, this pressure can come from many stakeholder groups,
which can increase the response time.83
Companies are obtaining certifications like the one granted by the Forest
Stewardship Council (FSC), a nonprofit organization comprised of loggers, envi-
ronmentalists, and sociologists. The FSC seeks to coordinate forest management
around the world and to develop a uniform set of standards. FSC-certification
helps companies indicate to consumers and stakeholders that they are committed
to preserving forest resources, are focused on social responsibility, and hold a
long-term perspective of environmental management. Table 12.3 lists some facts
about global deforestation.
Table 12.3 Global Deforestation Facts

Since people began cutting down trees, approximately 46 percent of trees have been felled.
In the past 50 years, approximately 17 percent of the Amazon has been destroyed.
A total of 80 percent of Earth’s land mammals and plants live in forests.
If tropical deforestation were a country, it would be the third highest in carbon dioxide–equivalent
emissions.
Approximately 6–12 percent of forests fall annually.
About 15 percent of greenhouse gas emissions come from deforestation.
It takes 27,000 trees each day to manufacture toilet paper.
Source: Christina Nunez, “Deforestation Explained,” National Geographic, February 7, 2019, https://www.
nationalgeographic.com/environment/global-warming/deforestation/ (accessed July 19, 2019); Kiri Rowan, “Interesting
Deforestation Facts and Impact on Human Health,” Monq, April 9, 2019, https://monq.com/eo/forest-bathing/interesting-
deforestation-facts/ (accessed July 19, 2019); “10 Facts About Deforestation,” Pure Planet, November 11, 2018, https://
pureplanetclub.com/blogs/roll-with-us/10-facts-about-deforestation (accessed July 19, 2019).

Urban Sprawl Urban sprawl began in the United States with the post–World War
II building boom that transformed the nation from primarily low-density com-
munities designed to accommodate one-car households, bicyclists, and pedestrians
to large-scale suburban developments at the edges of established towns and
cities. Downtowns and inner cities deteriorated as shopping malls, office parks,
corporate campuses, and residential developments sprang up on what was once
forest, prairie, or farmland. As the places where people live, work, and shop
grew further apart, people began spending more time in automobiles, driving
ever-greater distances. Urban sprawl consumed wildlife habitat, wetlands, and
farmland, and has also contributed to land, water, and air pollution. Land that
is paved over contributes to flash flooding, making big storms more deadly. Lack
of urban planning means that these places grow without reason, contributing to
uneven development of services. In an age of erratic gas prices, traffic congestion,
and obesity, it has become increasingly expensive, in both dollars and health, to
live in sprawling cities. Large companies with many locations, such as Walmart
and Starbucks, have been criticized for contributing to urban sprawl.
Some urban areas fight to limit sprawl. Portland, Oregon, for example,
established an urban growth boundary to restrict growth and preserve open space
and rural land around the city. The California legislature passed a bill that limits
urban sprawl through better transportation and more efficient land use. Adding
to the appeal of returning to cities is a movement to increase urban parks. Rather
than allowing loggers to profit from forests, more cities are buying forested land
to convert to park space. Stemming sprawl also preserves natural spaces outside
of the city. Additionally, people realize that living near their place of employment
is more convenient, cheaper, and better for their health. Although limiting urban
sprawl creates disadvantages for car and oil companies, many businesses can
benefit from urban renewal movements that reduce sprawl.
Biodiversity
Deforestation, pollution, development, and urban sprawl put increasing pressure
on wildlife, plants, and their habitats. Many plants and animals have become
extinct, and thousands more are threatened. It is estimated that 200 to 2,000
animal species become extinct each year.84 Experts’ fears that overutilization of
natural resources will cause catastrophic imbalance to the environment are becom-
ing realized. Because each biological species plays a unique role in its ecosystem
and is part of a complex chain of events, the loss of any one of them may threaten
the entire ecosystem.
Decrease in Bees, Bats, and Frogs An alarming rate of decline in the popula-
tions of bees, bats, and frogs are at the forefront of this issue. Pollinators play
a significant role in that they help fruits and vegetables grow by spreading
pollen from plant to plant. Increasing development and widespread use of
pesticides have reduced populations of bees, insects, and bats needed for plant
reproduction. The population of domestic honeybees, the primary pollinators
of food-producing plants, has declined by at least one-third, and many wild
honeybees have become virtually extinct in many places around the world. This
decline has become so widespread that the phenomenon has been termed Colony
Collapse Disorder (CCD), and organizations are working to stop the decline
before complete extinction occurs. Declines in pollinating species not only
threaten the success of their relevant ecosystems but also may harm long-term
global food production because significant portions of all food products require
pollinators to reproduce.85
Bat populations are also on the decline, due mainly to a fungus disease called
White Nose Syndrome. More than 6 million bats have died as a result of the

outbreak. Many believe that this epidemic is due to environmental and habitat
changes resulting from human-related activities. Bats aid the environment in a
number of ways, such as feeding on insects, which reduces the need for pesticide
use.86 The same is true for amphibians such as toads, salamanders, and frogs,
which are declining at an annual rate of 3.7 percent. Scientists found the root of
the decline was a fungus that was inadvertently spread by humans. Frogs are espe-
cially vulnerable to environmental changes including habitat modification, urban
sprawl, pollution, and depletion of the ozone layer because their skin is made to
absorb the water wherein they live. Any changes in frog populations immediately
inform us of negative changes in the environment.87
Genetically Modified Organisms

Depending on whom you ask, genetically modified (GM) foods are either going to
save impoverished areas from starvation and revolutionize agriculture, or they will
destroy biodiversity and make us all sick. Genetically modified (GM) organisms
are created through manipulating plant and animal DNA so as to produce a
desired effect like resistance to pests and viruses, drought resistance, or high crop
yield. This process generally involves transferring genes from one organism to
another in a way that would never occur naturally, in order to create a new life
form that has unique traits. Companies like Monsanto and DuPont develop GM
corn, soybeans, potatoes, canola oil seeds, and cotton plants they claim are more
resistant to weeds and insects, sometimes require fewer chemicals to produce, and
produce higher yields. However, studies show that certain GM crops are losing
their effectiveness as insects become increasingly resistant. More farmers have
reverted to using pesticides, which also damages the environment.88
Many people also fear that these unnatural genes will have negative effects
on nature, somewhat like how invader species of plants and animals can wipe out
native ones, or even have negative effects on humans. Other concerns result from
the fact that these seeds are patented, restricting farmers from keeping and replant-
ing the seeds and requiring them to purchase new seeds each year. Nevertheless,
considerable interest in GM products remains. In countries where malnutrition
is a problem, the prospect of higher yields is very appealing, even if the seed
itself is more expensive. Monsanto, the world’s largest agricultural biotechnology
company, has released GM seeds that can withstand drought, which could make a
major difference in many regions.89
GM foods may be controversial, but some researchers and scientists see the
technology as a valuable way to develop drugs in the future. The U.S. Food and
Drug Administration (FDA) approved the first drug made from genetically engi-
neered animals, ATryn, created to treat people who suffer from the blood-clotting
condition antithrombin deficiency. The drug comes from goats that were genetically
engineered to produce human antithrombin in their milk.90 As with GM plants,
the problem with the genetic engineering of animals or animal products is that
the long-run effects are unknown. Large numbers of genetically altered animals
could upset the balance in relationships among various species with undetermined
effects, such as the ability to reproduce or fight diseases and pests. Additionally, if
GM plant seeds are carried by wind or pollinators to areas with native plants, it
is possible that genetic contamination could take place among native plants, thus
reducing biological diversity. Further research is needed to address public concerns
about the safety and long-term environmental effects of these technologies.
The long-term impact of this genetic tinkering is a question that concerns
many, despite the fact that the FDA has deemed GM food safe to consume and
many scientific research studies have shown no dangers to human health. Today,
more than 75 percent of all processed food contains GM ingredients.91 The United
States does not require labeling. Because many consumers demand to know what
is in their food, organic and all-natural grocery chains like Whole Foods have

Drones Take Sustainability Sky-High

The applications of unmanned aerial vehicles (UAVs), also significant crop failure by preventing the disease from
known as drones, have multiplied dramatically. Although passing to other plants.
the use of drones is controversial due to privacy and Drones are used to study air quality and pollen count.
air-traffic concerns, they are a growing resource for some This data could be used to inform the public or for scien-
of society’s most important challenges. For example, tific research. Solar-power businesses and wind farms are
drones can be used to assist police departments and using drones to check on technical problems involving
first responders by providing the exact location of car material loss or malfunctioning equipment without having
accidents, decreasing response times. They also can be to move staff to each area of the business. Wind turbine
used to deter poaching of wildlife, lessen food shortages, maintenance is one of the most dangerous jobs in the
and more effectively prevent and contain forest fires. energy sector. The use of drones in this application greatly
As sustainability and social responsibility become improves efficiency, productivity, and safety.
higher priorities to businesses and the general public, the While environmental preservation is vital to a socially
protection of natural resources and endangered species responsible society, the aftermath of natural disasters has
becomes more important, and UAVs can be useful. To help largely been outside of society’s control. Natural disasters
prevent poaching, for instance, drones can be dispatched can result in loss of life and severe damages to indus-
to cover large areas of land with limited lighting by utilizing try. Each year, California experiences severe wildfires.
infrared cameras, which is highly beneficial at night. These Knowing that this happens annually, technology can be
cameras then can be used by conservationists to spot used to reduce the injury wildfires cause. The White House
groups of poachers before they are able to cause any has asked federal organizations to utilize UAVs in conjunc-
harm. This has the potential to help in the preservation tion with the Federal Aviation Administration (FAA) to help
of at-risk species, thus contributing to a more socially increase the effectiveness of dealing with wildfires. Drones
conscious society. can locate “hot spots” and transport water to those areas
Additionally, crop health is significant to the rising to put out fires. This decreases the number of firefighters
human population. Many areas of the world experi- needed and improves the ability to fight fires at night.
ence food shortages, and with the population growing Traditionally, ground and air control has been used
to an estimated 9 billion by 2050, smarter and more to combat natural disasters. However, unlike ground
cost-effective farming is necessary. Drones help farmers and air control, using UAVs reduces energy use and
increase plant health by analyzing soil and fields, leading greenhouse gas emissions. The advantages of drones
to greater awareness about the most productive areas in to society are strong and increasing every year. Drone
which to plant. When crops are planted, drones assist with technology has proven itself to be a viable, ecofriendly
watering them, which frees up time for farmers. Drones alternative in many applications. The abilities of drones
also monitor plants for disease. When disease is found, will continue to develop with technological advancements
farmers are able to act quickly and may be able to avoid and discoveries.
Sources: Frances Beldia, “Impact of Drones on Society—Business, Connections, Privacy,” Bold Business, 2019, https://www.boldbusiness.com/society/
impact-of-drones-on-society/ (accessed July 25, 2019); Sebastien Long, “Drones and Precision Agriculture: The Future of Farming,” Microdrones,
November 16, 2017, https://www.microdrones.com/en/content/drones-and-precision-agriculture-the-future-of-farming/ (accessed July 25, 2019); Michal
Mazur, “Six Ways Drones Are Revolutionizing Agriculture,” MIT Technology Review, July 20, 2016, https://www.technologyreview.com/s/601935/six-ways-
drones-are-revolutionizing-agriculture/ (accessed July 25, 2019); Dee Ann Divis, “Feds Directed to Use Drones to Fight Wildfires,” Autonomous Media,
February 5, 2019, http://insideunmannedsystems.com/feds-directed-to-use-drones-to-fight-wildfires/ (accessed July 25, 2019); “What Are the Most
Dangerous Jobs in the Energy Sector?” Power Technology, September 6, 2018, https://www.power-technology.com/features/most-dangerous-jobs-in-
the-energy-sector/ (accessed August 2, 2019).
taken advantage of this marketing opportunity by implementing their own policies

regarding labeling or the elimination of GM ingredients.
Another example of the backlash against GM organisms is in the dairy
industry. Many large dairy producers use hormones, called recombinant bovine
growth hormone (rBGH) to increase milk production in cows. Many cows get
sick from the hormones and are also given antibiotics. Even in the United States,

where government bans are not in place and GM food is more accepted, many
Americans refuse to buy milk that has come from cows given these drugs because
it is perceived as less healthy. Companies such as Walmart, Starbucks, Kroger, and
Safeway grocery store chains stopped carrying rBGH milk after strong consumer
backlash.92 This has also created great opportunities for organic milk and produc-
ers of milk alternatives such as almond milk and oat milk.93
Countries Against GM Food All of these concerns have prompted consumers

around the world, particularly in Europe and Japan, to boycott products made
from GM crops. Moreover, 64 countries—including all of the members of the
EU, Australia, and Japan—have imposed bans or restrictions on GM products.94
Farmers in France and Germany destroyed crops after traces of GM seeds were
discovered by suppliers. The cultivation of GM crops is outlawed in France.95
However, as more GM crops are grown and more GM foods are consumed
without detrimental effects, some countries are becoming open to the technology.
However slowly it may be occurring, countries in Africa are adopting the crops in
order to combat hunger and ecological changes. Additionally, Nigeria approved its
first GM food crop, pest-resistant cowpeas.96
GM Fish and Other Living Organisms Researchers have created GM rainbow

trout with up to 20 percent more muscle mass that non-GM trout. By injecting
20,000 eggs with a protein that controls muscle growth, 300 eggs were found to
carry the gene, resulting in muscular trout. These fish carry the potential benefit
of increasing food supply, although concerns about them being released into water
streams are high. The effects of them breeding with native fish are unknown, as
their new genes will be transferred to offspring. In addition, their size will require
them to consume more food, which may cause shortages, and birds that typically
feed on small fish may eventually find their food supply lacking. In effect, releasing
these muscular fish into the wild could upset the entire ecosystem.97
There are many types of GM animals under development for the purpose of
selling commercially as food. AquaBounty Technologies is the leading company
that has fully developed GM Atlantic salmon for the dinner table. These salmon
require less feed to grow to the same size as conventional Atlantic salmon because
they grow twice as fast. After new labeling regulations were published, the FDA
cleared AquaBounty to begin selling food derived from its AquAdvantage salmon.
Despite this progress, the company will undoubtedly continue to face criticism and
pushback from fishing and environmental groups, and it will be an uphill battle
for AquaBounty to convince retailers, many of which have indicated they have no
plans to carry GM salmon, to stock AquAdvantage.98
Seed Contamination Seed contamination is described as the cross-pollination of

natural seeds with GM seeds. The crops of farmers who are committed to producing
natural and/or organic foods have been compromised when GM seeds are blown into
their fields. Because the GM seeds are patent protected, there is little recourse farmers
can take in this regard. In fact, they are likely to be charged with patent infringement
if GM seeds are found in their fields without them purchasing them. Monsanto has
been known for enforcing their patents on farmers whose fields are found with their
seeds, as well as farmers who have purchased their seeds and reused them in succeed-
ing years. In a Supreme Court ruling regarding seed contamination, the verdict was
in favor of Monsanto, mainly because of the patented nature of the seeds. Monsanto
has said that it will not sue farmers whose fields end up with the protected seeds by
accidental means, but farmers whose livelihood depends on the organic or all-natural
quality of food could be compromised by the presence of these seeds. On the other
hand, the Oregon legislature may pass a bill that would allow farmers to sue compa-
nies such as Monsanto that hold patents on GM seeds if GM crops contaminate other
crops. Contamination can cause certain crops to be unsellable.99

Environmental Policy and Regulation

The United States, like most other nations, has passed numerous laws and
established regulatory agencies to address environmental issues. Most of these
efforts have focused on the activities of businesses, government agencies, and other
organizations that use natural resources in providing goods and services.
Environmental Protection Agency

The most influential regulatory agency that deals with environmental issues
and enforces environmental legislation in the United States is the Environmental Environmental Protection
Protection Agency (EPA). The agency’s founding in 1970 was the culmination of a Agency (EPA)
the most influential regulatory
decade of growing protests over the deterioration of environmental quality. This agency that deals with
movement reached a significant climax with the publication of Rachel Carson’s environmental issues and enforces
Silent Spring, an attack on the indiscriminate use of pesticides, which rallied environmental legislation in the
scientists, activists, and citizens from around the country to crusade to protect the United States
environment from abuses of the time. Twenty million Americans joined together
on April 22, 1970, for the first Earth Day, a nationwide demonstration for
environmental reforms. The EPA was formed in response to these events. The EPA
is an independent agency that establishes and enforces environmental protection
standards, conducts environmental research, provides assistance in fighting pollu-
tion, and assists in developing and recommending new policies for environmental
protection. The agency is also charged with the following:
• Protecting Americans from significant risks to their health and to the
environment.
• Managing environmental risks based on the best scientific information
available.
• Enforcing federal laws protecting human health and the environment fairly
and effectively.
• Ensuring environmental protection is an integral consideration in U.S.
policies.
• Ensuring access to accurate information sufficient to all parts of society.
• Ensuring environmental protection contributes to diverse, sustainable, and
economically productive communities and ecosystems.100
To fulfill its primary mission to protect human health and sustainability
into the twenty-second century, the EPA established six priority goals to define
its planning, budgeting, analysis, and accountability processes (see Table 12.4).
To support its efforts, the Office of Inspector General conducts investigations
to protect “the integrity of programs and operations” within these goals.101 The
EPA is empowered to file civil charges against companies that violate the law. For
years, many companies involved in the mining and extraction industries were not
Table 12.4 Priority Goals of the Environmental Protection Agency

1. Improve air quality by implementing pollution control measures to reduce the number of
nonattainment areas.
2. Empower communities to leverage EPA water infrastructure investments.
3. Accelerate the pace of cleanups and return sites to beneficial use in their communities.
4. Meet new statutory requirements to improve the safety of chemicals in commerce.
5. Increase environmental law compliance rate.
6. Accelerate permitting-related decisions.
Source: Environmental Protection Agency, “Strategic Plan 2019–2023,” https://www.epa.gov/sites/production/files/2019-
03/documents/_epaoig_epaoig_strategicplan2019-2023_3-12-2019.pdf (accessed July 19, 2019).

forced to pay for cleanup of environmental damage. However, the EPA has taken
steps to ensure that companies are financially responsible for future environmental
damage, rather than taxpayers and other stakeholders.102
Environmental Legislation
A number of laws have been passed to address both general and specific environ-
mental issues, including public health, threatened species, toxic substances, clean
air and water, and natural resources. For instance, leaded gasoline was phased
out during the 1990s because catalytic converters, which are used to reduce
pollution and required by law on most vehicles, do not work properly with leaded
gasoline. In addition, lead exposure is harmful to people. The automobile industry
is responding to increased Corporate Average Fuel Economy (CAFE) standards
by determining methods to increase gas mileage. Federal regulation required
automobiles to get 35.5 miles per gallon (mpg) by 2016 and 54.5 mpg by 2025,
and car makers have devised alternative ways of building their cars to achieve
these goals.103 Strategies include incorporating lighter materials like aluminum,
increased production and sales of hybrid vehicles, and improving electric cars and
hydrogen fuel-cell technology.104 Table 12.5 summarizes some significant laws
related to environmental protection.
Clean Air Act The Clean Air Act (CAA) is a comprehensive federal law that
regulates atmospheric emissions from a variety of sources.105 The law established
national air quality standards as well as standards for significant new pollution
sources emitting hazardous substances. These maximum pollutant standards,
called National Ambient Air Quality Standards (NAAQS), are federally mandated
to protect public health and the environment. States have the responsibility of
developing implementation plans to meet the NAAQS by restricting emissions of
criteria pollutants from stationary sources (industries) within the state.
The Clean Air Act mandates that states are responsible for their air quality. The
majority of people appear to overwhelmingly agree with the purpose of the CAA.
For instance, a survey conducted by the American Lung Association indicated
that 75 percent of respondents view clean air as very or extremely important.106
This means that clean air should be a primary concern for businesses in order
to maintain good relationships with stakeholders.107 Though air quality has
improved significantly since the passage of the CAA, the rollback of CAA rules,
such as greenhouse gas standards for cars and light trucks, has been a focus in
recent years.108
Endangered Species Act The Endangered Species Act established a program to

protect threatened and endangered species, as well as the habitats in which they
live.109 An endangered species is one that is in danger of extinction, whereas a
threatened species is one that may become endangered without protection. The
U.S. Fish and Wildlife Service of the Department of the Interior maintains the list
of endangered and threatened species, which currently includes 1,275 endangered
species (772 are plants) and 388 threatened species (172 are plants).110 The
Endangered Species Act prohibits any action that results in the harm to or death
of a listed species or that adversely affects endangered species habitat. It also
makes the import, export, and interstate and foreign commerce of listed species
illegal. For example, a man was charged $6,800 for purchasing a tiger-skin rug.111
Protected species may include birds, insects, fish, reptiles, mammals, crustaceans,
flowers, grasses, cacti, and trees. Approximately 2 percent of endangered animals,
including the bald eagle, have recovered.112
The Endangered Species Act is highly controversial because some threatened
or endangered species are a nuisance to ranchers and farmers and have been
harmed or killed by landowners seeking to avoid the hassle or expense of

Table 12.5 Major Environmental Laws

National Environmental Established a national environmental policy and a Council on
Policy Act (1969) Environmental Quality, set goals, and provided a means for
implementing the policy; promotes efforts to prevent damage to the
biosphere and to stimulate human health and welfare.
Occupational Safety and Ensures worker and workplace safety by requiring employers to
Health Act (1970) provide a place of employment free from health and safety hazards.
Clean Air Act (1970) Regulates emissions from natural, stationary, and mobile sources;
authorized the EPA to establish National Ambient Air Quality Standards
(NAAQS) to protect public health and the environment.
Federal Insecticide, Provides for federal control of pesticide distribution, sale, and use;
Fungicide, and requires users to register when purchasing pesticides.
Rodenticide Act (1972)
Endangered Species Established a conservation program for threatened and endangered
Act (1973) plants and animals and their habitats; prohibits any import, export,
interstate, and foreign commerce/action that results in a “taking” of a
listed species or that adversely affects habitat.
Safe Drinking Water Act Protects the quality of drinking water in the United States; authorized
(1974) the EPA to establish water purity standards and required public water
systems to comply with health-related standards.
Toxic Substances Empowered the EPA to track industrial chemicals currently produced
Control Act (1976) or imported into the United States; authorized the EPA to require
reporting or testing of chemicals and to ban the manufacture and
import of chemicals that pose an unreasonable risk.
Resource Conservation Empowered the EPA to control the generation, transportation,
Recovery Act (1976) treatment, storage, and disposal of hazardous waste.
Clean Water Act (1977) Authorized the EPA to set effluent standards on an industry-wide basis
and to continue to set water quality standards for all contaminants
in surface waters; made it unlawful for any person to discharge any
pollutant from a point source into navigable waters without a permit.
Comprehensive Established prohibitions and requirements concerning closed and
Environmental abandoned hazardous waste sites; authorized a tax on the chemical
Response, and petroleum industries to establish a “superfund” to provide for
Compensation, and cleanup when no responsible party could be identified.
Liability Act (1980)
Superfund Amendments Amended the Comprehensive Environmental Response,
Reauthorization Act Compensation, and Liability Act to increase the size of the
(1986) superfund; required superfund actions to consider the standards and
requirements found in other state and federal environmental laws and
regulations; provided new enforcement authorities and tools.
Emergency Planning Enacted to help local communities protect public health and safety
and Community Right- and the environment from chemical hazards; requires each state to
to-Know Act (1986) appoint a State Emergency Response Commission (SERC) and to
establish Emergency Planning Districts.
Oil Pollution Act (1990) Requires oil storage facilities and vessels to submit plans detailing
how they will respond to large spills; requires the development of area
contingency plans to prepare and plan for responses to oil spills on a
regional scale.
Pollution Prevention Act Promotes pollution reduction through cost-effective changes in
(1990) production, operation, and use of raw materials and practices that
increase efficiency and conserve natural resources, such as recycling,
source reduction, and sustainable agriculture.
Food Quality Protection Amended the Federal Insecticide, Fungicide, and Rodenticide Act
Act (1996) and the Federal Food, Drug, and Cosmetic Act to change the way the
EPA regulates pesticides; applies a new safety standard—reasonable
certainty of no harm—to all pesticides used on foods.
(continued on next page)

Table 12.5 (Continued)

Beaches Environmental Amended the Clean Water Act to include provisions decreasing the
Assessment and Coastal risks of illness due to using the nation’s recreational waters.
Health Act (2000)
Energy Policy Act Addresses the way energy is produced in the United States in terms of
(2005) energy efficiency, renewable energy, oil and gas, coal, Tribal energy,
nuclear matters and security, vehicles and motor fuels, hydrogen,
electricity, energy tax incentives, hydropower and geothermal energy,
and climate change technology.
Energy Independence Established corporate average fuel economy standards, renewable
and Security Act (2007) fuel standards, and the appliance/lighting efficiency standards.
American Clean Energy Seeks to create clean energy jobs; more energy independence;
Act (2009) reduce greenhouse gas emissions; and lay the groundwork for a clean
energy economy.
Sources: Environmental Protection Agency, “Major Environmental Laws,” http://www.epa.gov/pahome/laws.htm (accessed
June 22, 2016); Environmental Protection Agency, “Summary of the Energy Policy Act,” http://www2.epa.gov/laws-
regulations/summary-energy-policy-act (accessed June 22, 2016); Environmental Protection Agency, “About the BEACH
Act,” beach-act (accessed June 22, 2016); Environmental Protection Agency, “Laws and Executive Orders,” https://www.
epa.gov/laws-regulations/laws-and-executive-orders (accessed July 22, 2019).
complying with the law. Concerns about the restrictions and costs associated
with the law are not entirely unfounded. For example, a man was charged with
unlawfully killing a mama grizzly bear (a species listed as threatened under the
Endangered Species Act) when she and her two cubs showed up on his property.
Several of the man’s children were playing outside when the bears appeared, and
he shot at them in order to protect his family. At the time of trial, the man was
facing two years in prison, a $50,000 fine, and one-year probation. In the end,
the man was not convicted, but this example shows the kind of issues that can
arise from this law.113
Toxic Substances Control Act Congress passed the Toxic Substances Control
Act to empower the EPA with the ability to track the 75,000 industrial chemicals
currently produced in or imported into the United States. The agency repeatedly
screens these chemicals and requires reporting or testing of those that may pose
an environmental or human health hazard. It can also ban the manufacture and
import of chemicals that pose an unreasonable risk. The EPA tracks the thousands
of new chemicals developed by industry each year with either unknown or danger-
ous characteristics. It also controls these chemicals as necessary to protect human
health and the environment.114 Ten states and the District of Columbia have sued
the EPA for failure to create sufficient rules over the use of asbestos, a carcinogen
that kills tens of thousands of people each year. Though it is known to cause
cancer, federal law allows limited use of the substance.115
Clean Water Act The Federal Water Pollution Control Act was renamed as
the Clean Water Act in 1977. The law grants the EPA the authority to establish
effluent standards on an industry basis and continue the earlier law’s requirements
to set water quality limits for all contaminants in surface waters. The Clean Water
Act makes it illegal for anyone to discharge any pollutant from a point source into
navigable waters without a permit.116 This includes the pouring of contaminates
down the drain. Formosa Plastics will pay a $50 million settlement after violating
the Clean Water Act. For years, the company illegally discharged plastic pellets
and other pollutants into Lavaca Bay in Texas.117
Food Quality Protection Act The Food Quality Protection Act amended the
Federal Insecticide, Fungicide, and Rodenticide Act and the Federal Food, Drug,
and Cosmetic Act to fundamentally change the way the EPA regulates pesticides.
The law included a new safety standard—reasonable certainty of no harm—that

must be applied to all pesticides used on foods.118 The legislation establishes a

more consistent, science-based regulatory environment and mandates a single
health-based standard for all pesticides in all foods. The law also provides special
protections for infants and children, expedites approval of safer pesticides,
provides incentives for the development and maintenance of effective crop
protection tools for farmers, and requires periodic reevaluation of pesticide
registrations and tolerances to ensure that they are up-to-date and based on good
science.
Energy Policy Act The Energy Policy Act focuses the nation’s priorities on
alternative forms of energy in the hopes to lessen U.S. dependence on foreign oil.
The bill offered tax breaks and loan guarantees to alternative energy companies,
like nuclear power plants, solar companies, and wind energy farms, and also
requires utilities to comply with federal reliability standards for the electricity grid.
Consumers who purchased hybrid gasoline-electric cars and other energy-saving
measures were rewarded with tax benefits. Tax credits were also provided for
plug-in electric drive conversion kits.119 The bill also extended daylight savings
time by one month to save energy.120
Alternative Energy
Ongoing plans to reduce global carbon emissions are spurring countries and
companies alike toward alternative energy sources. Traditional fossil fuels are
problematic because of their contribution to climate change and global warming,
as well as because of the increasing depletion of resources. Foreign fossil fuels are
often imported from politically and economically unstable regions, often making
it unsafe or unseemly to conduct business there. About 11 percent of petroleum
consumed in the United States came from foreign sources. This is the lowest
level since 1957.121 This decrease is largely due to the recognition by the U.S.
government of the need to look toward alternative forms of energy as a source of
fuel and electricity. These sources include wind power, solar power, nuclear power,
biofuels, and hydro and geothermal power. Table 12.6 provides some examples of
companies and/or countries that use these alternative power sources.
Table 12.6 Alternative Energy

Energy Source Examples
Wind SC Johnson uses wind power to power its largest manufacturing facility
Geothermal The largest complex of geothermal plants In the world, known as the Geysers
in Northern California, produces 60 percent of the average electricity demand
in the North Coast region of California
Solar IKEA uses solar power at 90 percent of its U.S. stores
Nuclear 75 percent of France’s electricity comes from nuclear power
Biofuels BP is partnering with Bunge Ltd. to produce ethanol and electricity from sugar
cane
Hydropower Yahoo! uses hydropower at its New York facilities
Sources: Calpine Corporation, “About Geyser Energy,” http://www.geysers.com/geothermal.aspx (accessed July 22,
2019); Yevgeniy Sverdlik, “Yahoo Launches Second ‘Computing Coop’ Data Center in New York State,” Data Center
Knowledge, April 27, 2015, in-new-york-state/ (accessed June 22, 2016); SC Johnson, “SC Johnson Powers Up Wind
Energy at Company’s Largest Manufacturing Facility,” December 18, 2012, http://www.scjohnson.com/en/press-room/
press-releases/12-18-2012/sc-johnson-powers-up-wind-energy-at-largest-mfg-facility.aspx (accessed June 22, 2016);
Alexa Chianis, “5 Major Retailers Utilizing Solar Power in the U.S. Right Now,” Solar Power Authority, https://www.
solarpowerauthority.com/major-retailers-utilizing-solar-power-right-now/ (accessed July 22, 2019); World Nuclear
Association, “Nuclear Power in France,” June 2019, https://www.world-nuclear.org/information-library/country-profiles/
countries-a-f/france.aspx (accessed July 22, 2019).

Wind Power
The Great Plains of the United States
is one of the greatest sources of wind
energy in the world, and many people
believe that harnessing this energy will go
a long way toward providing the United
States’ energy needs in the future. In fact,
wind power is the fastest-growing form
of renewable energy worldwide, and the
amount of electricity generated by wind
Shutterstock/Gareth Janzen
is set to surpass hydropower generation.

It consists of nearly 7 percent of total
electricity generation capacity in the
United States.122 However, there are a
number of roadblocks standing between
taking abundant wind and turning
it into affordable energy. First of all,
restructuring the nation’s power grids to
efficiently transmit wind, solar, and other forms of renewable energy will require
a large investment. Widespread adoption of wind power has been slowed by the
high cost of the turbines and limitations on an outdated national power grid.
The technology is more expensive and less efficient than fossil fuels currently,
but advances are being made continously. Many people believe that the United
States will be a wind power hot spot in the future, and more Americans than ever
are supporting the movement. The United States is a close second to China, the
largest producer of wind power.123
Wind energy has long been popular in other countries such as the Netherlands
and Denmark and is becoming a lucrative business for many companies. The
Danish company Vestas Wind Systems is the world’s largest producer of wind
turbines, with 35 percent of the U.S. wind energy market. It has even expanded
production to the United States in order to take advantage of the growing interest
in wind energy.124 Wind power is not without its faults. A Harvard study indicates
that expansion of wind power could warm the United States because of the way
the spinning blades affect the atmosphere. The researchers said that although
wind energy has this negative environmental impact, the climate change from
greenhouse gas emissions is a much greater threat.125
Geothermal Power
Geothermal energy comes from the natural heat inside the Earth, which is extracted
by drilling into steam beds. Procter & Gamble, Mars, General Motors (GM), and
Cargill have called for cost-effective, market-ready geothermal energy.126 Although
initial costs to build geothermal plants are high, savings in the long-term are well
worth the investment. Carbon dioxide emissions are less than those produced by
efficient natural gas power plants, and geothermal plants use less water than coal
power plants. Geothermal power also provides a steady flow of electricity every day
of the year, unlike wind or solar energy.
Despite these advantages, the extraction of fluids from the ground causes
pollution and can sometimes cause the land to subside if careful environmental
measures are not implemented. Additionally, geothermal drilling sites are not
readily available everywhere because of certain factors such as the permeability
of rock. This—along with the high cost—has resulted in slow adoption, as
geothermal power represents less than five percent of global energy. The United
States, Indonesia, and the Philippines, are the countries with the greatest capacity
for geothermal power generation.127 Research has shown that geothermal energy
could become cheaper than fossil fuels as research and development receive more
investment.
Solar Power
Solar power is a 100 percent renewable, passive energy source that can be
converted into electricity through the use of either photovoltaic cells (solar cells)
on homes and other structures or solar power plants. The major disadvantages of
solar power are that the technology remains expensive and inefficient compared
to traditional fossil fuel-generated energy and that the infrastructure for mass
production of solar panels is not in place in many locations. Cloudy days, a seem-
ing disadvantage, are not necessarily a problem as the ultraviolet rays required to
generate power filter through clouds. Germany, a country not exactly known for its
abundant sunshine, is number one in the world for solar power implementation.128
Given the strong sunshine in places like the U.S. Southwest and California,
solar power has gained a lot of support in the United States. California, which
is a decade ahead of its energy goals, produced so much solar energy that it was
forced to cut back.129 Additionally, the United States is adopting solar power at a
record-breaking rate. More than 1 percent of U.S. electricity demand is supplied
by solar power.130 Solar energy is becoming an increasingly viable alternative for
businesses to cut their pollution and emissions. Many Walmart facilities, with
their huge flat roofs perfect for solar panels, now use solar power to generate the
electricity of some stores. Walmart also subscribes to community solar gardens to
power its locations.131
Nuclear Power
Countries throughout Europe have managed to greatly reduce their emissions
through the implementation of nuclear power plants, yet this form of power
remains controversial. Because of the danger associated with nuclear meltdowns
and radioactive waste disposal, nuclear power has some significant disadvantages.
On the one hand, nuclear power is pollution-free and cost-competitive. Uranium
is abundant enough that generating as much as 60 times more energy than what is
produced today would not be a problem. The United States is the leader in nuclear
power generation. The nuclear power industry invests approximately $7.5 billion
each year in maintenance and upgrades.132
On the other hand, concerns over the safety of nuclear power plants and the
disposal of waste are prevalent. Radiation output of nuclear power can be harmful
to workers and the areas where transport of nuclear waste occurs. The Chernobyl
accident in Ukraine resulted in deaths, sickness, and birth defects. The crisis that
occurred in Fukushima, Japan, after nuclear reactors were damaged in the 2011
earthquake and tsunami was disturbing to many people as Japan is a developed
country that has significant infrastructure. The fact that a natural disaster could
lead to a nuclear emergency has led some to question our abilities to ensure the
complete safety of nuclear power.
Biofuels
Biofuels are derived from organic materials like corn, sugarcane, vegetable oil,
and even trash. Ethanol made from sugarcane has been widely used in Brazil for
decades, and the United States has adopted the use of ethanol made mostly from
corn. This has become especially popular with those who want to reduce their
car’s carbon output or who are concerned with the nation’s addiction to foreign
oil. Automobile makers have responded by creating flex fuel and hybrid vehicles
that can run on biofuels or gasoline. The Chevy Cruze, Audi A8, and Jeep Grand
Cherokee can all run on B20, the most common biodiesel blend (20 percent

biodiesel and 80 percent petroleum diesel). Panalpina Singapore launched new

biodiesel trucks to support L’Oréal’s sustainability program, Sharing Beauty with
All. The company collects waste cooking oil from restaurants across Singapore to
convert to biodiesel fuel.133
Legal mandates to incorporate biofuels have been passed in some countries.
This is a major reason for Brazil’s widespread use, as they made it a requirement
to blend gasoline with ethanol. There is some controversy over the use of biofuels
in the United States, however, because it is made from corn, which is highly energy
intensive to produce. Another point of criticism is that they currently use food
crops, which with widespread adoption, could lead to food shortages.
Researchers have been hard at work developing new technologies that could
produce biofuels without deforestation of land or compromising food supplies.
Cellulosic ethanol would be made from nonedible plants like grasses, sugarcane
waste, algae, and wood waste. All Nippon Airways, Japan’s top airline, will test
biofuel made from rabbit droppings which contain enzymes that are helpful in
ethanol production.134
Hydropower
Throughout history, people have used water as a power source and a means of trans-
portation. From the water-powered mills of centuries past to modern hydroelectric
dams, water is a powerful renewable energy source. Although in the United States,
hydroelectric power only provides 2.8 percent of total output, hydropower provides
17 percent of total electricity production worldwide, making it the largest form of
renewable energy. As with all other forms of energy production, hydropower has
benefits and downsides. One of the major downsides is the destruction of wildlife
habitats and sometimes even human habitations, when valleys are flooded due to
dams. Hydroelectricity also disrupts the life cycles of aquatic life. Damming the
Columbia River between Washington and Oregon states decimated the region’s
salmon industry, for example. Benefits of hydroelectric energy include little pollution
and inexpensive maintenance costs once the infrastructure is in place.135
Business Response to Sustainability Issues

Many businesses have adopted a triple-bottom line approach that takes into
consideration social and environmental performance in addition to economic per-
formance. Firms are learning that being environmentally friendly and sustainable
has numerous benefits—including increased goodwill from stakeholders and even
money savings from being more efficient and less wasteful. Positions such as vice
president of environmental affairs have been created to help companies achieve
their business goals in an environmentally responsible manner. Additionally, com-
panies such as Mars Inc. and Royal Dutch Shell are tying executive pay to sustain-
ability goals to give managers more incentive to hit company targets.136 Businesses
such as Procter & Gamble have also developed environmental scorecards for their
suppliers. Corporate efforts to respond to environmental issues focus on green
marketing, recycling, emissions reductions, and socially responsible buying.
Yet despite the importance of the environment, companies are in business to
make a profit. Economic performance is still a necessary bottom line for most
businesses. For example, LEGO committed to converting its building blocks to
sustainable materials by 2030. Although the company invested $150 million in
research and development, LEGO has struggled to find a plant-based plastic that
works as well as its existing materials.137 This begs the question: Is going green
cost-effective for companies? Studies suggest that improving a company’s envi-
ronmental performance can in fact increase revenues and reduce costs. Table 12.7

Table 12.7 Sustainability Opportunities for Economic Performance

Sustainability Example
Opportunity
Differentiation of Method, a company that makes cleaning products, successfully uses
products sustainability to differentiate its products from the competition.
Cost of energy Walmart lowers its energy costs through the use of solar power.
Relationship with Customers that purchase a Preserve Products recycled toothbrush are
customers given a mailer that they can use to mail the toothbrush back to the
company for recycling at the end of their use.
Employee loyalty New Belgium Brewing motivates employees to be sustainable by providing
them with a mountain bike after they have worked there for one year.
Community Patagonia has a Common Threads Initiative that encourages people to
relations reduce their consumption and help the environment by refraining from
buying items they do not need.
provides examples of how companies have used sustainability opportunities to

affect performance.
Better environmental performance can increase revenue in three ways: through
better access to certain markets, differentiation of products, and the sale of
pollution-control technology. A firm’s innovation in sustainability can be based
on applying existing knowledge and technology or creating a completely new
approach. Improving a firm’s reputation for environmental stewardship may help
companies capture this growing market niche.
Supply Chain Issues

An important aspect of building a corporate reputation is ensuring the sustainabil-
ity of the supply chain. Walmart, for instance, is requiring its green marketing sup-
pliers to be more environmentally friendly. Walmart has developed a Sustainability
Index that it uses to track the environmental impact of its products. Walmart
purchases more than 70 percent of its U.S. products from suppliers that participate
in the program. So far, the index has been applied to 125 product categories and
1,800 suppliers.138 These kinds of activities should go a long way toward helping
consumers make “greener” choices.139 Improving a supply chain’s environmental
performance may be key to attracting more business from the retail industry. Better
environmental performance can also reduce costs by improving risk management
and stakeholder relationships, reducing the amount of materials and energy used,
and reducing capital and labor costs. Improved environmental standards should
help prevent some major environmental disasters in the future. For those disasters
that cannot be avoided, the firm can at least show that it applied due diligence
with its environmental performance, which may reduce the company’s culpability
in the public’s eye. Companies can also decrease the costs of compliance with
governmental regulations and reduce fines if they become more energy efficient.
Green Marketing
Green marketing is a strategic process involving stakeholder assessment to create green marketing
meaningful, long-term relationships with customers, while maintaining, support- a strategic process involving
stakeholder assessment to
ing, and enhancing the natural environment. One company that is known for its create meaningful, long-term
commitment to being green is New Belgium Brewing in Fort Collins, Colorado. relationships with customers
From its conception, New Belgium has been a company committed to sustain- while maintaining, supporting, and
ability. Its facilities use natural lighting and evaporative coolers to save on energy enhancing the natural environment
costs, and the buildings themselves were constructed of pine trees that were killed
by invasive beetles (a growing problem in the Rockies). The brewery has been

Figure 12.4 The European wind-powered for over a decade and also uses waste from the brewing process to
Ecolabel produce on-site methane gas for energy. The company encourages its employees to
bike to work and actively engages in benchmarking and setting ambitious goals for
reducing energy and waste even further.140
Many products are certified as “green” by environmental organizations
such as Green Seal and carry a special logo identifying them as such. In Europe,
companies can voluntarily apply for an Ecolabel (see Figure 12.4) to indicate that
their product is less harmful to the environment than competing products based
on scientifically determined criteria. The EU supports the Ecolabel program, which
has been utilized in product categories as diverse as refrigerators, mattresses,
Source: “European Union Ecolabel
vacuum cleaners, footwear, and televisions. Certification does not include food
Logo,” Europa, European Union, http:// and medicine.141
ec.europa.eu/environment/ecolabel/
Greenwashing
Businesses must approach their green marketing tactics with caution so as not to
greenwashing mislead consumers.142 Greenwashing involves misleading a consumer into thinking
misleading a consumer into that a good or service is more environmentally friendly than it is. It occurs when
thinking that a product is more companies want to attract environmentally conscious consumers and can range
environmentally friendly than it is
from making environmental claims that are required by law and are therefore irrel-
evant (like “CFC-free”) to puffery (exaggerating environmental claims) to outright
fraud. Researchers compared claims on products sold in 10 countries, including the
United States, to labeling guidelines established by the International Organization
for Standardization (ISO), which prohibit vague and misleading claims, as well
as unverifiable ones such as “environmentally friendly” and “nonpolluting.” The
study found that many products’ claims are too vague or misleading to meet ISO
standards.143 For example, some products will be labeled as “chemical-free” when
in fact everything contains chemicals, including plants and animals. Products with
the highest number of misleading or unverifiable claims were laundry detergents,
household cleaners, and paints. Advocates agree there is still a long way to go to
ensure that shoppers are adequately informed about the environmental impact of
the products they buy.144
Often, consumers do not find out about these false claims until after the
purchase.145 So while greenwashing may increase sales in the short-term and
build the appearance of a company’s sustainability reputation, it will cause serious
repercussions when consumers learn they have been misled. This leads to poor
long-term financial performance, which negatively affects all stakeholders of the
company.146 The retailer Zara has been accused of greenwashing after publicly
committing to its sustainability efforts, promising sustainable fabrics over the next
few years. Zara and other fast fashion retailers such as H&M and Forever 21
produce billions of new clothing items annually and greatly contribute to fashion
industry waste.147 At the same time, the terms green and sustainability can be hard
to define, resulting in unintentional greenwashing. The FTC issued green guidelines
to help marketers determine the truthfulness of “green” claims in order to reduce
this confusion.148
Strategic Implementation of Environmental

Responsibility
Businesses have responded to the opportunities and threats created by environ-
mental issues with varying levels of commitment. Some companies, like New
Belgium Brewing, consider sustainability a core component of the business. Other
companies engage in greenwashing and do not actively seek to be more sustainable
at all. As Figure 12.5 indicates, a low-commitment business attempts to avoid

Figure 12.5 Strategic Approaches to Environmental Issues
Low Medium High

Commitment Commitment Commitment
Deals only with Attempts to comply Has strategic programs

existing problems with environmental to address
laws environmental issues
Makes only limited plans Deals with issues Views environment

for anticipated problems that could cause as an opportunity
public relations to advance the
problems business strategy
Fails to consider Views environmental Consults with

stakeholder issues from a tactical, stakeholders about
environmental issues not a strategic, their environmental
perspective concerns
Operates without Views environment Conducts an

concern for long-term as more of a threat environmental audit
environmental impact than an opportunity to assess performance
and adopts international
standards
dealing with environmental issues and hopes that nothing bad will happen or that
no one will ever find out about an environmental accident or abuse. Such firms
may try to protect themselves against lawsuits. Other firms are more proactive in
anticipating risks and environmental issues. Such firms develop strategic manage-
ment programs, which view the environment as an opportunity for advancing
organizational interests. These companies respond to stakeholder interests, assess
risks, and develop a comprehensive environmental strategy. Home Depot, for
example, has established a set of environmental principles that include selling
responsibly marketed products, eliminating unnecessary packaging, recycling and
encouraging the use of products with recycled content, and conserving natural
resources by using them wisely. The company also makes contributions to many
environmental organizations.
Recycling Initiatives
Many organizations engage in recycling, the reprocessing of materials, especially recycling
the reprocessing of materials,
steel, aluminum, paper, glass, rubber, and some plastics, for reuse. In fact, recycling especially steel, aluminum, paper,
is one of the country’s greatest sustainability success stories. Today, 67 percent of glass, rubber, and some plastics,
all newspaper and mechanical paper used in the United States is recycled. About for reuse
68 percent of paper and paperboard is recovered.149 Paper is not the only thing
that is recyclable, however. For example, MillerCoors reuses or recycles nearly 100
percent of its waste, including residual brewer’s grain and spent yeast.150
Sometimes companies join partnerships and become members of organizations
like WasteWise, which aims to reduce municipal solid waste and industrial waste.151
These collaborations help companies save money through reducing waste, receiv-
ing positive publicity, and tracking how they reduce waste over time. Local and
regional governments are also finding ways to recycle water to avoid discharging
chemicals into rivers and streams and to preserve diminishing water supplies. After
decades of siphoning water from surrounding regions, the city of Dallas, Texas,
had to change its behaviors due to dwindling resources. Many conservationists see
city-dwellers’ love of green lawns and golf courses in a drought-prone region as
simply wasteful and irresponsible. Part of the plan to address this thirst for water
is the installation of more and larger water-recycling facilities.152

Stakeholder Assessment
Stakeholder assessment is an important part of a high-commitment approach to
environmental issues. This process requires acknowledging and actively monitoring
the environmental concerns of all legitimate stakeholders. Thus, a company must
have a process in place for identifying and prioritizing the many claims and stakes
on its business and for dealing with trade-offs related to the impact on different
stakeholders. Although no company can satisfy every claim, all risk-related claims
should be evaluated before a firm decides to take action on or ignore a particular
issue. To make accurate assumptions about stakeholder interests, managers need
to conduct research, assess risks, and communicate with stakeholders about their
respective concerns.
However, not all stakeholders are equal. There are specific regulations and
legal requirements that govern some aspects of stakeholder relationships, such as
air and water quality. A business cannot knowingly harm the water quality of other
stakeholders in order to generate a profit. Additionally, some special-interest groups
take extreme positions that, if adopted, would undermine the economic base of
many other stakeholders (e.g., fishing rights, logging, and hunting). Regardless of
the final decision a company makes with regard to particular environmental issues,
information should be communicated consistently across all stakeholders. This is
especially important when a company faces a crisis or negative publicity about a
decision. Another aspect of strong relationships is the willingness to acknowledge
and openly address potential conflicts. Some degree of negotiation and conciliation
will be necessary to align a company’s decisions and strategies with stakeholder
interests.
Risk Analysis
The next step in a high-commitment response to environmental concerns is
assessing risk. Through industry and government research, an organization can
usually identify environmental issues that relate to manufacturing, marketing,
consumption, and use patterns associated with its products. Through risk analysis,
it is possible to assess the environmental risks associated with business decisions.
The difficulty is measuring the costs and benefits of environmental decisions,
especially in the eyes of interested stakeholders. Research often conflicts, adding
to the confusion and controversy over sustainability.
Debate surrounding environmental issues will force corporate decision-makers
to weigh the evidence and take some risks in final decisions. The important point
for high-commitment organizations is to continue to evaluate the latest informa-
tion and to maintain communication with all stakeholders. For example, if the
millions of sport utility vehicles (SUVs) on U.S. roads today were replaced with
fuel-efficient electric-powered cars and trucks, there would be a tremendous
reduction of greenhouse gas emissions. However, the cooperation and commitment
needed to gain the support of government, manufacturers, consumers, and other
stakeholders to accomplish this would be impossible to achieve. Although SUVs
may contribute to the detriment of the environment, many of their owners prefer
them because they provide greater protection in an accident than smaller vehicles.
The issue of environmental responsibility versus safety in SUVs illustrates that
many environmental decisions involve tradeoffs for various stakeholders’ risks.
Through risk management, it is possible to quantify these tradeoffs in determining
whether to accept or reject environmentally related activities and programs.
Usually, the key decision is between the amount of investment required to reduce
the risk of damage and the amount of risk acceptable in stakeholder relationships.
A company should assess these relationships on an ongoing basis. Both formal and
informal methods are needed to get feedback from stakeholders. For example, the
employees of a firm can use formal methods such as exit interviews, an open-door

policy, and toll-free telephone hotlines. Conversations among employees could

provide informal feedback. But it is ultimately the responsibility of the business
to make the best decisions possible after processing all available research and
information. Then, if it is later discovered that a mistake has been made, change
is still possible through open disclosure and thoughtful reasoning. Finally, a high-
commitment organization will incorporate new information and insights into the
strategic planning process.
The Strategic Environmental Audit

Organizations that are highly committed to environmental responsibility may
conduct an audit of their efforts and report the results to all interested stakehold-
ers. Table 12.8 provides a starting point for examining environmental sensitivity.
Such organizations may also wish to use globally accepted standards, such as
ISO 14000, as benchmarks in a strategic environmental audit. The International
Organization for Standardization developed ISO 14000 as a comprehensive set of ISO 14000
environmental standards that encourage a cleaner, safer, and healthier world. There a comprehensive set of
environmental standards that
is considerable variation among the environmental laws and regulations of nations encourage a cleaner, safer, and
and regions, making it difficult for high-commitment organizations to find accept- healthier world developed by
able solutions on a global scale. The goal of the ISO 14000 standards is to promote the International Organization for
a common approach to environmental management and to help companies attain Standardization
and measure improvements in environmental performance. Companies that choose
to abide by the ISO standards must review their environmental management
systems periodically and identify all aspects of their operations that could affect
the environment.153 Other performance benchmarks available for use in environ-
mental audits come from nonprofit organizations such as CERES, which has also
developed standards for reporting information about environmental performance
to interested stakeholders. The Green Globe program also offers environmental
auditing and benchmarking services along with worldwide environmental certifi-
cation for businesses.154
Table 12.8 Strategic Sustainability Audit

Yes No Checklist
O O Does the organization show a high commitment to a strategic environmental
policy?
O O Do employees know the environmental compliance policies of the
organization?
O O Do suppliers and customers recognize the organization’s stand on
environmental issues?
O O Are managers familiar with the environmental strategies of other organizations
in the industry?
O O Has the organization compared its environmental initiatives with those of other
firms?
O O Is the company aware of the best practices in environmental management
regardless of industry?
O O Has the organization developed measurable performance standards for
environmental compliance?
O O Does the firm reconcile the need for consistent responsible values with the
needs of various stakeholders?
O O Do the organization’s philanthropic efforts consider environmental issues?
O O Does the organization comply with all laws and regulations that relate to
environmental impact?
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As this chapter has demonstrated, social responsibility entails responding to

stakeholder concerns about the environment, and many firms are finding creative
ways to address environmental challenges. Although many of the companies
mentioned in this chapter have chosen to implement strategic environmental initia-
tives to capitalize on opportunities and achieve greater efficiency and cost savings,
most also believe that responding to stakeholders’ concerns about environmental
issues will both improve relationships with stakeholders and make the world a
better place.
Summary
Although the scope of sustainability is quite broad, we define it as the potential
for long-term well-being of the natural environment, including all biological
entities, as well as the interaction among nature and individuals, organizations,
and business strategies. Sustainability includes the assessment and improvement of
business strategies, economic sectors, work practices, technologies, and lifestyles
while maintaining the natural environment. Sustainability does not mean the same
thing as social responsibility. Rather, it is a domain of social responsibility.
A major part of achieving sustainability is reducing sources of pollution.
Air pollution arises from stationary sources such as factories and power plants;
mobile sources such as cars, trucks, planes, and trains; and natural sources such
as windblown dust and volcanic eruptions. Acid rain results when nitrous oxides
and sulfur dioxides emitted from manufacturing facilities react with air and
rain. Scientists believe that increasing concentrations of greenhouse gases in the
atmosphere are warming the planet, although this theory is still controversial. The
Kyoto Protocol is a treaty among industrialized nations to slow global warming.
However, major polluters such as the United States and China were not signatories
of the Kyoto Protocol. The second commitment phase is currently in place. Europe
has instituted a cap-and-trade program, which places a limit (cap) on carbon
emissions but allows businesses to purchase carbon permits from other companies.
The United States is avoiding a wide-scale cap-and-trade program but is placing
limits on carbon emissions that will affect coal plants.
Water pollution results from the dumping of raw sewage and toxic chemicals
into rivers and oceans; from oil and gasoline spills; from the burial of industrial
waste in the ground where it can reach underground water supplies; and from
the runoff of fertilizers and pesticides used in farming and grounds maintenance.
The amount of clean water available is also a concern and the topic of political
disputes.
Land pollution results from the dumping of residential and industrial waste,
strip mining, and poor forest conservation. How to dispose of waste in an
environmentally responsible manner is an important issue. Deforestation to make
way for agriculture and development threatens animal and plant species, as well
as humans. Urban sprawl, the result of changing human development patterns,
consumes wildlife habitat, wetlands, and farmland.
Deforestation, pollution, and urban sprawl threaten wildlife, plants, and their
habitats and have caused many species to become endangered or even extinct.
Biodiversity is threatened by all these activities and should be an important topic
of consideration for organizations and businesses.
GM organisms are created through manipulating plant and animal genes so as
to produce a desired effect like resistance to pests and viruses, drought resistance,
or high crop yield. Many farmers now plant GM crops that are more pest and
insecticide resistant, require fewer chemicals to produce, and have higher yields.
The long-term consequences of these scientific innovations are unknown. Some
fear that, because GM food is not naturally occurring, it could harm biodiversity

or cause health problems in humans. Even so, there is a continued interest in GM

products as a way to solve problems such as world hunger, drought, and pest
invasions.
The EPA is an independent regulatory agency that establishes and enforces
environmental protection standards, conducts environmental research, provides
assistance in fighting pollution, and assists in developing and recommending new
policies for environmental protection.
To reduce greenhouse gas emissions and dependence on fossil fuels, many
countries and businesses are investigating in alternative forms of renewable energy.
Wind power utilizes large turbines to convert wind into electricity. It has long been
popular in windy regions such as northern Europe and is catching on in places
like the United States and Mexico. Geothermal power harnesses the heat trapped
inside the Earth to generate power. While not feasible everywhere, it is an attractive
option because geothermal energy is available all of the time, unlike wind or solar
power. Solar power can also be converted to electricity. Sunny places like the
American Southwest are the sites of intensive solar power research. Nuclear power
is another possible, albeit controversial, form of alternative energy. Countries in
Europe and Asia continue to use nuclear power a great deal, but concerns remain
over possible meltdowns and how to dispose of the waste. Biofuels have gained
in popularity as a way to reduce the consumption of gasoline. However, adopting
corn ethanol in the United States has been more problematic as it involves using
a key food source. Hydropower is the most common alternative fuel used in the
world, but it is expensive to set up initially and can have detrimental effects on
river systems and surrounding areas.
Businesses are applying creativity, technology, and business resources to
respond to environmental issues. Some firms have a vice president of environmental
affairs to help them achieve their business goals in an environmentally responsible
manner. Green marketing is a strategic process involving stakeholder assessment
to create meaningful long-term relationships with customers, while maintaining,
supporting, and enhancing the natural environment. While green marketing has
become more popular, companies must be careful not to engage in greenwashing.
Greenwashing involves misleading a consumer into thinking that a product is more
environmentally friendly than it really is.
There is growing agreement among environmentalists and businesses that
companies should work to protect and preserve sustainability. Many organizations
engage in recycling, the reprocessing of materials—especially steel, aluminum,
paper, glass, rubber, and some plastics—for reuse. Businesses have responded
to the opportunities and threats created by environmental issues with varying
levels of commitment. A high-commitment business develops strategic manage-
ment programs, which view the environment as an opportunity for advancing
organizational interests. Stakeholder assessment requires a process for identifying
and prioritizing the many claims and stakes on its business and for dealing with
trade-offs related to the impact on different stakeholders. Risk analysis tries to
assess the environmental risks and trade-offs associated with business decisions.
Organizations that are highly committed to environmental responsibility may
conduct an audit of their efforts and report the results to all interested stakehold-
ers. Such organizations may use globally accepted standards, such as ISO 14000,
as benchmarks in a strategic environmental audit.

The Powers That Be: How Sustainable Is Nuclear Energy?

Issue: Is nuclear power worth the risk? it. Another key difference between fission and fusion is
that fusion does not leak outward, but rather inward. With
When it comes to energy sources, businesses and soci- fusion, reactors cannot undergo a meltdown, thus creating
ety can hold opposing views. Nuclear power has been a safer, more stable energy source. From a sustainability
beneficial to businesses because it is abundant and cost- perspective, nuclear energy is one of the few scalable,
effective. However, it also has traditionally been frowned zero-carbon energy sources. While fusion is more stable
upon by social groups due to the potential danger of than fission, it is less easily controlled. Companies are
nuclear meltdowns and radioactive waste disposal. In light studying ways to use fusion over fission and continue to
of both the advantages and disadvantages of this energy make strides.
source, government regulations have been created to One company that is pioneering fusion energy is TAE
encourage greener energy. The Energy Policy Act offers Technologies. TAE’s goal has been to make a reactor that
incentives in the form of reduced taxes and loan guar- will fuse hydrogen and boron atoms at intense tempera-
antees to companies who invested in alternative energy. tures. Its mission started more than 20 years ago. Michl
The Nuclear Regulatory Commission provides oversight Binderbauer, chief executive officer (CEO) of TAE, stated
for nuclear power plants to ensure safety precautions are that this technology will be commercialized in the near
taken by plants in the production of nuclear power. future. As a privately held company, TAE is able to do more
While nuclear energy is highly regulated in the United research more quickly than its competitors. In addition,
States, there is still controversy around the danger of using the company has backing from wealthy investors such as
fission in the production of nuclear power. Supporters of Charles Schwab, the Rockefeller family, and actor Harry
nuclear energy point out that nuclear power has the Hamlin. TAE is also in the process of funding and develop-
lowest number of direct fatalities per kilowatt of energy ing a project with the U.S. government. Binderbauer said
produced compared to other major energy sources. that TAE has been in talks with the Department of Energy
Additionally, nuclear accidents, though widely feared and and that the department will contribute to a public-private
publicized, are actually quite rare. Nuclear power plants relationship. The partnership between the two could
also keep the air clean, unlike gas or coal. drastically move along the research process toward a
Fission is the separation of a nucleus into two nuclei. safer solution.
By contrast, fusion is the unification of two nuclei. Fusion
produces a greater energy output than fission, with much There Are Two Sides to Every Issue
less radioactive waste. The by-products of fission are 1. Nuclear power is affordable and cost effective, and
environmentally detrimental, and although the actual therefore worth the risk.
nuclear reactors do not emit carbon dioxide, utilizing fossil 2. The risks associated with nuclear power make it too
fuels for the production of uranium ore does produce risky, despite its benefits.
Sources: Christopher Helman, “The New Nuclear: How A $600 Million Fusion Energy Unicorn Plans to Beat Solar,” Forbes, May 21, 2019, https://
www.forbes.com/sites/christopherhelman/2019/05/21/the-new-nuclear-how-a-600-million-fusion-energy-unicorn-plans-to-beat-solar/#15aa0a0a629e
(accessed July 28, 2019); Jeff McMahon, “Energy from Fusion in ‘a Couple Years,’ CEO Says, Commercialization in Five,” Forbes, January 14, 2019,
https://www.forbes.com/sites/jeffmcmahon/2019/01/14/private-firm-will-bring-fusion-reactor-to-market-within-five-years-ceo-says/#183007731d4a
(accessed July 28, 2019); U.S. Energy Information Administration, “Nuclear Explained: Nuclear Power and the Environment,” January 16, 2019,
https://www.eia.gov/energyexplained/index.php?page=nuclear_environment (accessed July 28, 2019); Duke Energy, “Fission vs. Fusion—What’s
the Difference?” January 30, 2013, https://nuclear.duke-energy.com/2013/01/30/fission-vs-fusion-whats-the-difference (accessed July 28, 2019); U.S.
Environmental Protection Agency, “Summary of the Energy Policy Act,” 2005, https://www.epa.gov/laws-regulations/summary-energy-policy-act
(accessed July 28, 2019); U.S. Environmental Protection Agency, “Radiation Protection: How Is the EPA Involved with the Regulation and Safety of
Nuclear Power Plants?” https://www.epa.gov/radiation/how-epa-involved-regulation-and-safety-nuclear-power-plants (accessed July 28, 2019); World
Nuclear Association, “The Nuclear Debate,” April 2018, https://www.world-nuclear.org/information-library/current-and-future-generation/the-nuclear-
debate.aspx (accessed July 29, 2019).

Key Terms
acid rain (p. 345) dead zone (p. 351) recycling (p. 369)
Affordable Clean Energy (ACE) rule Environmental Protection Agency single-use plastics (p. 343)
(p. 349) (EPA) (p. 359) sustainability (p. 342)
biodiversity (p. 344) green marketing (p. 367) sustainable business practices
bioenergy (p. 353) greenhouse effect (p. 345) (p. 343)
cap and trade programs (p. 348) greenwashing (p. 368) U.S. Global Climate Change
climate change (p. 346) ISO 14000 (p. 371) Initiative (p. 347)
Coalition for Environmentally Kyoto Protocol (p. 347)
Responsible Economies ozone (p. 345)
(CERES) (p. 344) particulate matter (PM) (p. 344)
1. Define sustainability in the context of social responsi- 7. What role do stakeholders play in a strategic
bility. How does adopting this concept affect the way approach to environmental issues? How can busi-
businesses operate? nesses satisfy the interests of diverse stakeholders?
2. Describe the controversy surrounding GM foods. 8. What is environmental risk analysis? Why is
3. Discuss renewable energy initiatives such as wind, it important for an environmentally conscious
solar, and geothermal. Which do you think are most company?
feasible and most important for businesses to focus on? 9. What is ISO 14000? What is its potential impact
4. Think of instances of greenwashing that you have on key stakeholders, community, businesses, and
encountered. What is the harm of greenwashing? global organizations concerned about environmental
5. What is the role of the EPA in U.S. environmental issues?
policy? What impact does this agency have on 10. How can businesses become more sustainable? What
businesses? are the advantages and disadvantages of striving to
6. What federal laws seem to have the greatest become more sustainable?
impact on business efforts to be environmentally
responsible?
Visit the website of the EPA (http://www.epa.gov/news- themes, issues, regulations, and other areas is the EPA
room/). What topics and issues fall under the agency’s most concerned with today? How can this site be useful to
authority? Peruse its most recent news releases. What consumers and businesses?
?
The “Sustainability” of Sustainability:
What Would You Do?
The Sustainability Committee’s first meeting was scheduled As the committee’s meeting started, the chair reminded
for Thursday afternoon. Although it was only Tuesday, the group that the company’s CEO was very committed
several people had already dropped by committee members’ to sustainability, for several reasons. First, the company
offices to express their opinions and concerns about the was engaged in product development and manufacturing
company’s new focus on sustainability. Some colleagues processes that had environmental effects. Second, most
had trouble with the broad definition of sustainability—“to companies in their industry were starting initiatives on
balance the economic, environmental, and social needs of sustainable development. Third, recent scandals had nega-
today’s world while planning for future generations.” Others tively affected public opinion about business in general.
worried that the sustainability project was just another Finally, the company was exploring markets in Europe
passing fad. A small group of colleagues believed that the where environmental activism and rules were often more
company should be most concerned with performance stringent. With these reasons in mind, the committee set out
and should forget about trying to become a leader in the to develop plans for the next year.
social responsibility movement. In general, however, most For an hour, the committee discussed the general
employees were either supportive or neutral on the initiative. scope of sustainability in the company. They agreed that

sustainability was concerned with increasing positive results • Energy consumption • Philanthropy
while reducing negative effects on a variety of stakeholders. • Manufacturing • Product development
They also agreed that sustainability focused on the “triple emissions and waste • Technology
bottom line” of financial, social, and environmental perfor- • Workplace diversity • Supplier selection
mance. For example, a company dedicated to sustainability • Community relations • Employee health and
could design and build a new facility that used alternative • Corporate governance safety
energy sources, minimized the impact on environmentally • Regulations and • Volunteerism
sensitive surrounding areas, and encouraged recycling and compliance
composting. Another firm might implement its sustain-
ability objectives by requiring suppliers to meet certain After much discussion, the committee agreed that
standards for environmental impact, business ethics, eco- each member would take one of the projects and prepare
nomic efficiency, community involvement, and others. a brief report on its link to the environmental component
After this discussion, the committee made a list of of sustainability. This report should review the ways that
current and potential projects that were likely to be affected environmental issues can be discussed, changed, improved,
by the company’s new sustainability focus. These projects or implemented within that area to demonstrate a commit-
included the following: ment to sustainability. What would you do?

CHAPTER
13 Social
Responsibility
in a Global
Environment
Alibaba: The Gateway to Chinese Consumers
When Jack Ma founded Alibaba as an e-commerce adapt to the preferences of Chinese consumers,
business in 1999, he had never run a company and the company shut down its Chinese domestic
had no technology experience. After working as an e-commerce businesses. And Alibaba, with over
English teacher, Ma took a trip to California’s Silicon 58 percent share in China’s online retail market,
Valley and saw firsthand how the internet was trans- made it difficult for Amazon to compete on price,
forming the business world. He quickly realized preventing the U.S. online retail giant from gaining
the commercial potential of pioneering an online traction. China, with approximately 610 million online
marketing channel in China where small businesses shoppers, is overtaking the United States as the
could connect with local and international buyers of largest e-commerce market, and the opportunities
business goods and services. are too good for many investors to pass up. Alibaba
While Ma had a desire to increase the develop- has expanded into India, Australia, and Russia as
ment of China’s commerce, he faced a major hurdle well. As one of the largest e-commerce businesses
when it came to trust. China has a high level of uncer- in the world, Alibaba has few competitors other than
tainty avoidance, meaning that Chinese consumers Amazon. Alibaba opened its platform to welcome
tend to avoid risk if possible. This makes establishing U.S. companies to list and sell products. The com-
trust highly important. Entrepreneurs like Ma needed pany said it is not concerned with the competition
to find ways to establish trust between buyers and it faces in the United States and are focused on
sellers in order for e-commerce channels to work. He building a platform to support small businesses and
possessed a high level of cultural intelligence and entrepreneurs.
used this information to create culturally sensitive However, with growth comes ethical issues,
devices to build trust. For example, Alibaba uses and Alibaba is no exception. The company has
rating systems as well as real-time chatting to allow faced bribery allegations and charges related to
buyers and sellers to learn about one another before counterfeit goods in China, as well as a probe
they engage in transactions. These technologies into its accounting practices by the U.S. Securities
helped alleviate trust issues, and Alibaba became and Exchange Commission (SEC). As the company
Shutterstock/Christopher Penler
a business-to-business e-commerce powerhouse. expands, it has begun removing products that have
The initial business-to-business website did so well been flagged as counterfeit. The enormous number
that Alibaba opened a second online marketplace of counterfeit products available worldwide makes
for selling to consumers called Taobao. Today, the the pursuit of counterfeiters challenging. Despite
company’s many marketplaces and supporting busi- concerns of political risk and the sale of counterfeit
nesses, such as electronic payment systems, serve goods, investors have not been deterred.
more than 600 million customers in over 200 nations. Today, Alibaba is one of the top 10 companies
Alibaba has held tightly onto its top spot in in the world based on market value, and Ma, with a
China, where non-Chinese e-commerce sites have net worth of over $40 billion, is the richest man in
struggled. For instance, eBay’s move into the country China. Alibaba’s success comes from understanding
lasted only two years and ultimately concluded in the the global business environment. Managing with an
closure of its China web unit. Similarly, Amazon has understanding of the economic, legal, sociocultural,
found little success in China, even with the launch and political forces in the environment has been
of its Prime membership. As a result of its failure to essential to gaining a global competitive advantage.1
Chapter Objectives
●● Define cultural intelligence and its importance
●● Discuss the global nature of stakeholder relationships
●● Examine the importance of national competitiveness
●● Describe the role of business in global development
●● Explore global standards for social responsibility reporting
379
T he expanding global marketplace requires that executives and manag-

ers develop the ability to conduct business effectively and in a socially
responsible manner in different regions of the world. Values and
expectations can differ from country to country. In this chapter, we elaborate on
key topics and concepts that have been discussed in Chapters 1 through 12 by
examining the unique nature of issues in the global environment and trends around
the world. We also discuss the importance of cultural intelligence, delve into the
complexities of working with stakeholders, provide emerging trends with primary
stakeholders, and point to global standards of social reporting.
Cultural Intelligence
The movement of people across cities and continents means that ideas, values,
traditions, languages, and customs have also migrated. While managers in different
parts of the world may have unique (and even contrasting) perspectives, they also
identify with a number of similar problems and opportunities, such as employee
turnover, new business development, environmental protocols, and product
innovation plans. Therefore, any culturally diverse work group will have a set of
common experiences and another set of differences that must be recognized and
managed. The potential for the group to achieve positive outcomes is largely based
cultural intelligence (CQ) on each member’s level of cultural intelligence. Cultural intelligence (sometimes
the ability to interpret and adapt called CQ) is the ability to interpret and adapt successfully to different national,
successfully to different national,
organizational, and professional cultures.2 There are three components to the
organizational, and professional
cultures development and use of cultural intelligence:
1. Cognitive—Knowledge of economic, legal, ethical, and social systems
prevalent in different cultures and subcultures
2. Motivational—The intrinsic desire to learn about different cultures and
subcultures and the confidence to function effectively in situations where
differences are present
3. Behavioral—The ability to use appropriate verbal and nonverbal actions
when interacting with people from different cultures and subcultures3
Cultural intelligence is desired of all employees, but it is necessary for those
who work in different countries, manage diverse groups, and generally have respon-
sibilities that require the ability to interpret unfamiliar gestures, behaviors, and
situations. A start-up called Impact Route provides cultural intelligence training to
professionals in Rwanda who work with multicultural organizations.4 Employees
must be comfortable suspending the impulse to make immediate judgments and
practice thinking before acting. For example, when an American businesswoman
made multiple presentations to potential partners in Bangkok, she was surprised
there were so many side discussions while she talked. Because she did not speak
Thai, she did not know the content of the audience’s discussions and wondered if
they were bored, uninterested, or even disrespectful. She decided to relax, continue,
and accept the chatter. It occurred to her that these side discussions were likely a
cultural norm, or perhaps they were simply the act of translating key points to a
colleague with less familiarity with English. In this example, this businesswoman
demonstrated strong cultural intelligence, and in so doing ensured that her
company established a strong market presence in Thailand and Southeast Asia. If
she had shown anger or frustration, the potential partners may have decided to take
their business elsewhere. Figure 13.1 provides a short self-assessment of your CQ.
The effective practice of cultural intelligence requires a manager to parcel out
what actions are true of all people, those that are unique to a particular group or
culture, or whether the action lies somewhere along this continuum.5 A person with
high CQ will be skilled at recognizing how one individual or group is influenced by

Chapter 13 Social Responsibility in a Global Environment 381
Figure 13.1 Quick CQ Self-Assessment Tool
Think about your cultural intelligence in each of the following areas.

Select the answer (1–5) that BEST describes you as you really are.
1 – None of the description fits me.
2 – Only some of this fits me.
3 – Half of the description fits me.
4 – Most of the description fits me.
5 – The statements describe me perfectly.
CQ-Strategy 1 2 3 4 5
I plan carefully before I meet with someone who is from a different cultural
background. After one of these experiences, I reflect carefully and try to make
sense of the interaction.
CQ-Knowledge 1 2 3 4 5
I generally understand other cultures and cultural values. I know about the
basic ways in which cultural are similar and the ways they are different.
CQ-Motivation 1 2 3 4 5
I am very interested in other cultures, and I enjoy meeting people who have
different cultural backgrounds. I am confident that I can live in different
cultures and that I can adapt to different parts of the world.
CQ-Behavior 1 2 3 4 5
I modify my behavior to make others more comfortable when I interact with
people who are from different cultural backgrounds. I change the way I speak
and act when I am in cross-cultural settings. I mimic others to make sure that
I follow local conventions so that my speech patterns and body language are
not offensive.
Interpreting Your Quick CQ Self-Assessment Responses
Sum your answers to the four questions in the Quick CQ Assessment Tool. Your score
can range from 4 to 20.
4–7 points You see yourself as low in Cultural Intelligence. A CQ personal
development plan could help you to become more capable of functioning
effectively in culturally diverse situations.
8–16 points You see yourself as moderate in Cultural Intelligence. A CQ personal

development plan could help you to enhance your capabilities in areas where you
see yourself as less capable of functioning effectively in culturally diverse situations.
17–20 points You see yourself as high in Cultural Intelligence. A CQ personal
development plan could help you to build on your impressive CQ strengths and
become even more capable of functioning effectively in culturally diverse situations.
Copyright © 2006 Van Dyne and Ang
Source: Cultural Intelligence Center, “Self-Assessment of Your CQ,” http://www.culturalq.com/selfassess.html (accessed

July 28, 2014).
national, professional, and organizational cultures. For example, there are multiple
layers of cultural effects to manage when an Irish manufacturing process expert
from a consulting firm works with a Croatian engineer for a government agency
in Croatia. The Irish expert would have to interpret and act according to Croatia’s
national culture, laws and governmental system, the agency’s role and scope, the
engineering profession’s code of ethics, and the engineer’s personality and values.
Therefore, to achieve social responsibility in a global context, CQ is integral.
Cognitively, employees are obliged to learn the rules, values, and standards of
different cultures. This entails studying the history, laws, symbols, customs, and
related facets of a new culture. They should be willing and confident enough to
adapt to these standards, but also strong enough to resist adapting when a legal,

ethical, or other social responsibility expectation is in jeopardy. Opportunities to

travel abroad provided by many universities teach students how people of different
cultures work. For example, people in Japan don’t use first names, and business
cards need to be given and received with both hands. Germans tend to be direct
and say what they mean. Mexican businesspeople prefer to not discuss business
in front of family. Ethical cultures in firms vary globally.6 Finally, employees
must develop a keen capacity to mirror gestures, words, and other behaviors that
demonstrate they have “entered the world” of their cultural counterparts.7
Finally, it is important to remember that even one country is not entirely
homogeneous. The extent to which a country has experienced immigration, sup-
ported and encouraged diversity, and realized the “melting pot” effect determines
the internal homogeneity or heterogeneity of the country. For example, Japan,
Norway, Saudi Arabia, and Poland are relatively homogeneous compared to
India, Australia, Britain, the United States, and Canada. The world’s 195 countries
contain 5,000 different ethnic groups. Approximately two-thirds of all countries
have at least one minority group that comprises 10 percent of the total population
and therefore represents a distinct subculture.8 In more heterogeneous countries,
astute managers will need to recognize and respond to subcultures. This, of course,
requires a higher commitment to the cognitive, motivational, and behavioral
aspects of CQ amid an array of stakeholder interests and influences.
Global Stakeholders
In Chapter 1, we defined stakeholders as those people and groups to whom an
organization is responsible—including customers, investors, and shareholders,
employees, suppliers, governments, communities, and many others—because they
have a “stake” in (or a claim to) some aspect of a company’s products, opera-
tions, markets, industry, or outcomes. These groups not only are influenced by
businesses, but they also have the ability to affect businesses. Table 13.1 describes
stakeholder issues that are likely to exist when planning and conducting business
outside a company’s home country. Note that these issues include economic, legal,
ethical, and philanthropic considerations of other cultures and countries.
From an economic perspective, differences in the development of countries can
easily pose new challenges with stakeholders. As more companies move manufactur-
ing and customer service operations to less-developed nations, critics speak out about
job loss in the home country and the pay and working conditions in the offshore
operations. While overseas outsourcing adds another layer of complexity for manage-
ment, economic considerations for cost cutting typically trump social and political
concerns. Some firms report significant savings in salary costs due to the eagerness
and productivity of workers, allowing salaries to go further in developing nations.9
Clearly, the legal and regulatory environment varies from country to country.
Managers need to understand not only the written code, but also the nuances of
implementation and enforcement. One of the most widely discussed stakeholder
issues in the global economy is the extent to which bribery is a common and
expected practice. Some American multinational corporations claim that the
Foreign Corrupt Practices Act passage of the Foreign Corrupt Practices Act severely reduces their ability to
prohibits bribery of foreign compete in the global marketplace. Walmart paid $138 million to settle claims that
officials and requires accounting it had violated the Foreign Corrupt Practices Act. Walmart’s subsidiary in Brazil
transparency
intentionally led its parent corporation to falsify company records and paid more
than $500,000 in bribes to help stores open faster. Executives at Walmart that
were responsible for internal accounting and anticorruption practices knew of this
for years, and this corruption ultimately allowed unethical practices at Walmart
to flourish in other countries, such as Mexico, China, and India. This shows how
tolerance of unethical practices has a global impact for firms. The primary elements

Table 13.1 Examples of Stakeholder Issues in a Global Environment

Stakeholder Potential Issues
Groups
Employees • Wages and benefits relative to the home country’s standards
• Attitudes toward employees from different genders and ethnicities,
especially in executive positions
• Existence of collective bargaining efforts
• Laws and regulations for employee rights, health, and safety
• Norms of employee volunteering
• Availability of and comfort with open-door policies and other management
practices
Customers • Laws and regulations on product safety and liability
• Presence and power of consumer rights groups
• Respect for the product needs of subcultures and minority groups
• Attitudes and accommodations for customers with disabilities
Shareholders • Laws and regulations regarding ownership and corporate governance
• Stability and governance of stock exchanges
• Willingness and ability to participate in shareholder meetings
Suppliers • Ethical and social considerations in the supply chain
• Prices offered to suppliers in developed countries and developing countries
in comparison to other suppliers
• Availability and attitudes toward minority suppliers
Community • Norms of community relations and dialogue
• Expectations of community service and/or philanthropy
• Rights of indigenous people
• Availability and quality of infrastructure (such as roads, utilities, and schools)
Environmental • Environmental law and regulations
groups • Availability of “green” electricity, recycled materials, and other
environmentally friendly inputs
• Environmental expectations relative to those in the home country
• Use of natural resources to achieve business goals
of the Foreign Corrupt Practices Act are prohibiting bribery of foreign officials
and addressing accounting transparency, which relates to accurately and fairly
representing the books.10
Beyond the complexities of the law lay the ethical standards of stakeholders
around the world. As discussed in earlier chapters, there are several factors that
influence the ethical decision-making process, with top management setting the
tone and communicating their expectations for all employees, suppliers, and
business partners. For companies with operations in several countries, the code of
conduct originating from the home office may not provide sufficient guidance. For
example, UPS realized that an international version of its ethics code was needed.
Instead of imposing the American version, the company established advisory
panels in different regions and conducted 35 focus groups around the world. Using
the domestic code as a starting point, UPS ultimately produced 28 codes of conduct
for its overseas operations. The codes incorporated cultural differences that did not
override key corporate values. For example, UPS managers in France knew that
a policy prohibiting alcohol consumption during working hours would not work;
in France, it is customary to have a glass of wine at lunch. When language experts
started to translate antitrust law into other languages, the word antitrust translated
as “against trust” and needed to be revised. UPS understood that the culturally
intelligent approach is most effective.11
Finally, the philanthropic expectations of stakeholders are also widely varied.
The United States has a strong focus on building a culture of business philanthropy

and employee volunteerism. However, this is not true around the world. In Latin
America, for example, the roots of philanthropy extend to the Catholic Church,
which provided education, healthcare, and social services. Later, wealthy families
provided funds to “secular societies of social benefit” that implemented welfare
and social projects. Corporate interest in philanthropy is more recent, but it has
grown significantly as a way for business to become socially engaged. For more
than 60 years, the Inter-American Development Bank (IDB) has hosted an annual
meeting for Latin American business leaders to learn more about social responsi-
bility and philanthropy. Attendance has increased over the years, and activities in
corporate social investing, social reporting activities, and membership associations
for philanthropy executives are being implemented.12
Shareholder Relations and Corporate Governance

While the prospect for global agreement on economic, legal, ethical, and
philanthropic standards for business may seem beyond reach, existing efforts
hold great promise. Whatever form it takes, a successful initiative must begin and
end with the role of corporate governance and shareholder power in corporate
decision-making. The board of directors must be committed to a system of
oversight, accountability, and control that incorporates a social responsibility
perspective. Without this commitment, checks and balances are not in place to
limit opportunism and self-interest, advocate for stakeholder rights, or ensure that
a firm’s corporate culture establishes integrity in all relationships. As discussed in
Chapter 3, corporate governance reflects fundamental beliefs about the purpose
of business organizations—ranging from maximizing shareholder value to a more
collaborative and relational approach with multiple stakeholders.
The movement to write and implement widely accepted codes of conduct is
several decades old. It began with social activists who derided apartheid in South
Africa and urged companies to withdraw their investments and business interests
from the country. Led by Reverend Leon Sullivan, who sat on the board of General
Motors (GM), interested citizens and other groups developed requirements that
any company should demand for its employees and workplace conditions. These
standards covered nonsegregation, equal and fair compensation, programs
to move minorities into management ranks, and other measures that clearly
conflicted with South African law permitting racial segregation and unequal
rights. Eventually, the Sullivan Principles were adopted by over 100 companies in
the United States that also withdrew existing operations and investments out of
South Africa.13
The influence of the Sullivan Principles prompted several groups to develop
codes of conduct or similar documents in an effort to build multicultural consensus
on acceptable corporate governance and business practices. Perhaps the most suc-
Caux Round Table Principles cessful initiative resulted in the Caux Round Table Principles for Business, which
for Business was created by a group of business leaders from all regions of the world who have
principles for moral capitalism
created by business leaders from
a strong desire and interest in promoting socially responsible capitalism. Frederick
all regions of the world who have Phillips, former president of Phillips Electronics, and Olivier Giscard d’Estaing,
a strong desire and interest in former vice-chairman of INSEAD, a preeminent business school, founded the
promoting socially responsible group in 1986. Although the original intent was to reduce trade tensions, the round
capitalism
table quickly turned to global corporate social responsibility and established its
principles. Today, the group’s governing board includes executives from multina-
tional corporations and governments.14
In addition to this fundamental guidance, the Caux Round Table publishes
periodic opinions on a range of social responsibility issues, including executive
compensation, environmental protection, and corruption. Table 13.2 provides an
example of the type of principles often found in foundational statements such as
the Caux Round Table Principles.

Table 13.2 Global Principles for Ethical Business Conduct

Global principles are integrity statements about foundational beliefs that should remain
constant as businesses operate globally. These principles address issues such as accountability,
transparency, trust, natural environment, safety, treatment of employees, human rights,
importance of property rights, and adherence to all legal requirements. The principles are
designed to focus on areas that may present challenges to the ethical conduct of global
business.
1. Require accountability and transparency in all relationships. Accountability requires
accurate reporting to stakeholders, and transparency requires openness and truthfulness in
all transactions and operations.
2. Comply with the spirit and intent of all laws. Laws, standards, and regulations must be
respected in all countries, as well as global conventions and agreements developed among
nations.
3. Build trust in all stakeholder relationships through a commitment to ethical conduct. Trust
is required to build the foundation for high-integrity relationships. This requires organizational
members to avoid major international risks such as bribery and conflicts of interest. Laws
supporting this principle include the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act,
the OECD Convention, and the UN Convention Against Corruption.
4. Be mindful and responsible in relating to communities where there are operations. The
communities where businesses operate should be supported and improved as much as
possible to benefit employees, suppliers, customers, and the community overall.
5. Engage in sustainable practices to protect the natural environment. This requires the
protection of the long-term well-being of the natural environment including all biological
entities, as well as the interaction among nature, individuals, organizations, and business
strategies.
6. Provide equal opportunity, safety, and fair compensation for employees. Employees should
be treated fairly, not exploited or taken advantage of, especially in developing countries. Laws
supporting this principle include equal opportunity legislation throughout the world.
7. Provide safe products and create value for customers. Product safety is a global issue as
various governments and legal systems sometimes provide opportunities for firms to cut
corners on safety. All products should provide their represented value and performance.
8. Respect human rights, as defined in the UN Global Compact. Human rights are a major
concern of the UN Global Compact and most other respected principles statements of
international business.
9. Support the economic viability of all stakeholders. Economic viability supports all
participants in business operations. Concerns such as fair trade and payment of a living wage
are embedded in this principle.
10. Respect the property of others. Respect for property and those who own it is a broad
concept that is an ethical foundation for the operation of economic systems. Property includes
physical assets, as well as intellectual property.
Employee Relations
A critical consideration for companies conducting business around the world is
how to manage differences that exist in employment standards and expectations.
Modern corporations recognize the importance of tapping into global markets and
talent pools in order to remain competitive.
Even in the best cases, building a dedicated, engaged, and satisfied workforce
takes strategic planning and daily oversight by management. Executing this process
in a new culture or across cultures takes more than merely transferring the policies
and practices from the home country and home office. It must include consideration
of the economic, legal, ethical, and philanthropic expectations of employee
stakeholders in different countries. For example, Table 13.3 outlines key differences
between employment law in Canada and the United States. There are important
differences between these cultures, even though we often consider them to be similar.

Table 13.3 Differences in Employment Law: United States and Canada

Legal Issue Canada United States
Termination of Employers must give statutory Employment is “at will,” and notice
employment notice of termination. depends upon employment contracts
or policies.
Severance Severance plans are uncommon and Most severance plans require the
do not overrule statutory rights. employee to agree to a release of
claims before receiving severance pay.
Employment Lawsuits against employers are Lawsuits against employers usually
litigation generally settled quickly, and involve claims of discrimination, and
damage awards are predictable. damage awards are unpredictable.
Compensation Despite new rules on disclosure, Public companies must fully disclose
disclosure companies are not required the compensation of executives
to disclose the amounts of and board members in plain
compensation actually received by English, including the objectives
executive officers from their exercise and implementation of executive
of options. compensation programs.
Healthcare Single-payer universal healthcare Usually tied to employment as part of
benefits system. a benefits package; coverage is not
guaranteed.
Unions No “right-to-work” laws that prohibit Harder to get a union started; states
unions or for requiring employees beginning to pass “right-to-work”
covered by union contracts to legislation, which mandates that
pay; many provinces have bans workers do not have to support a
on temporary or permanent striker union even though they benefit from
replacement. collective bargaining.
Changes to Very difficult to decrease post- More flexibility in making changes to
postretirement retirement benefits without providing postretirement benefits.
benefits notice; almost impossible to reduce
benefits for existing retirees.
Sources: Adapted from “10 Key Differences Between Canadian and U.S. Employment Laws,” Torys LLP, August 20,
2018, https://www.torys.com/insights/publications/2018/08/10-key-differences-between-canadian-and-us-employment-
laws (accessed August 5, 2019); St. George’s University, “Comparing the U.S. and Canadian Health Care Systems: 4
Differences You Need to Know,” April 9, 2019, https://www.sgu.edu/blog/medical/comparing-us-and-canadian-health-care-
systems/ (accessed August 5, 2019); Stephen Shores, “What Manufacturers Need to Know About Employment Law in
Canada,” SHRM, March 7, 2019, https://www.shrm.org/resourcesandtools/legal-and-compliance/employment-law/pages/
global-canada-what-manufacturers-need-to-know.aspx (accessed August 5, 2019).
Longitudinal research has affirmed what many global managers already know:
employee attitudes and perceptions about work vary from country to country. As
discussed in Chapter 8, employees typically value high ethical standards and volunteer
activities and become more loyal and satisfied with their employer as a result. Thus,
variations in employee attitudes and perceptions are integral to the successful imple-
mentation of social responsibility programs. For example, workers in France value a
work-life balance more than any other national group. Japanese employees are often
pleased with incentive compensation but lament relatively low base pay. Australians
want a manager who acts as a coach and Chinese employees yearn for more training
opportunities. In its annual survey, Mercer, an international research firm, identifies
employee engagement the factors most important for employee engagement, the psychological state in
the psychological state in which which employees feel a vested interest in the company’s success and are motivated
employees feel a vested interest
in the company’s success and are
to perform at levels that exceed job requirements. Table 13.4 depicts the results of
motivated to perform at levels that Mercer’s 2019 study of employees in different countries. Despite national differences,
exceed job requirements employees in different parts of the world are fairly consistent in noting the importance
of work/life balance, recognition, and the work itself. This information is valuable to
managers, as it improves the cognitive nature of cultural intelligence and provides
direction on motivational and behavioral competencies that should be impactful

Table 13.4 Top Employee Engagement Factors in Six Countries

Brazil Canada
1. Recognition for contributions 1. Recognition for contributions
2. Opportunities to learn new skills and 2. Ability to manage work/life balance
technologies 3. Feeling a sense of belonging
3. Being empowered to make decisions
China United States
1. Ability to manage work/life balance 1. Ability to manage work/life balance
2. Opportunities to learn new skills and 2. Recognition for contributions
technologies 3. Feeling a sense of belonging
3. A fun work environment
Hong Kong Germany
1. Ability to manage work/life balance 1. Working on meaningful projects
2. Leaders who set a clear direction 2. A fun work environment
3. Opportunities to learn new skills and 3. Ability to manage work/life balance
technologies
Source: Mercer, “Global Talent Trends 2019,” https://www.mercer.com/content/dam/mercer/attachments/private/gl-2019-
global-talent-trends-study.pdf (accessed August 5, 2019).
across nations. Understanding these drivers enables human resource (HR) profession-
als to instill consistency across policies in a multinational firm.15
Employees in the United States, especially young professionals, have increased
expectations for the companies that they work for to reflect their moral, cultural,
and political values and are more vocal about their demands when an employer
falls short. A survey found nearly 50 percent of millennials said that they recently
spoke out in support or in criticism of their employer’s actions over a controversial
issue. The majority of outspoken employees of all ages stated the reason that they
spoke up was to raise concern about their employer’s reputation. College students
desire to work in the name of a greater purpose or cause. This demand on employ-
ers will bring challenges to satisfy employees and uphold company reputation.
These attitudes may not apply to all cultures and nations. In some countries,
socially active attitudes are not accepted in the workplace.16
As discussed earlier in this chapter, cultural intelligence is an integral part of
employees’ ability to manage and succeed in a global economy. In the context of
business ethics, CQ is especially vital. Applying the legal requirements of the host
or home country to the problem may be a starting point. However, as we discussed
in earlier chapters, legal standards are not sufficient for a firm dedicated to ethical
business practices. Some industries operate under a set of values or principles,
which may also serve a purpose in the international arena. For example, the
tourism industry established a global code of ethics that enumerates the industry’s
obligation to build respect between societies, assist in sustainable development,
maintain cultural heritage, treat employees well, and promote individual fulfill-
ment.17 In other cases, guidance from a broad set of guidelines, such as the Caux
Round Table Principles for Business, could be utilized. However, broad principles
are often less useful in day-to-day situations.
The ethical decision-making framework discussed in Chapter 6 is fully effec-
tive in the global environment, but cultural differences introduce new complexities
to the process. For this reason, companies know that training rubrics are pivotal to
an employee’s ability to assess an ethical issue and determine the most appropriate
decision and action. Organizations develop a fixed set of principles and values
globally. While decisions have to comply with national and local laws, codes of
conduct for the firm are implemented globally. There are usually adjustments in
training approaches, as well as certain ethical risks that may be more important to
address in a particular country.

Consumer Relations
International trade leaves some members of the economy, whether independent
or corporate, marginalized and vulnerable to economic exploitation. From some
consumer perspectives, conventional trade interferes with the ability of many
people, particularly those in poor nations, to secure basic, sustainable livelihoods.
fair trade By contrast, fair trade is a trading partnership based on dialogue, transparency,
a trading partnership based and respect that seeks greater equity in international trade and contributes to
on dialogue, transparency,
and respect that seeks greater
sustainable development. Fair trade benefits those who have limited opportunities
equity in international trade to begin with and are further stunted by market forces that identify them as
and contributes to sustainable negligible. Table 13.5 describes the five principles of fair trade organizations,
development including the rights and responsibilities of producers, intermediaries, business
partners, resellers, and consumers.
As previously discussed, consumers are increasingly concerned with the origins
of products they purchase, including the working conditions, ethical standards,
and related social responsibility practices of manufacturers. For example, low
wages and substandard working conditions have marked the reputation of cloth-
ing manufacturers. In an effort to minimize these costs, Fair Trade USA began
certifying apparel and other products. Products that meet fair trade standards
are licensed to display the Fair Trade Certified label, signifying a producer’s
Table 13.5 Charter of Fair Trade Principles

Principle Description
Market access for Fair Trade helps producers realize the social benefits of traditional
marginalized producers forms of production. It enables buyers to trade with producers who
otherwise would be excluded from the markets. It helps shorten trade
chains so that producers receive more from the final selling price
of their goods than is the norm in conventional trade via multiple
intermediaries.
Sustainable and The economic basis of transactions within Fair Trade relationships
equitable trading takes account of all costs of production, both direct and indirect. Fair
relationships Trade buyers offer trading terms that enable producers and workers
to maintain a sustainable livelihood. Prices and payment terms are
determined by assessment of economic, social, and environmental
factors, rather than just referring to current market conditions. The
commitment to long-term trading partnership found in Fair Trade
enables both sides to cooperate through information sharing and
planning.
Capacity building and Fair Trade relationships assist producer organizations to understand
empowerment more about market conditions and trends and to develop knowledge,
skills, and resources to exert more control and influence over their
lives.
Consumer awareness Fair Trade relationships provide the basis for connecting producers
raising and advocacy with consumers and for informing consumers about the need for
social justice and the opportunities for change. Consumer support
enables Fair Trade organizations to be advocates and campaigners for
wider reform of international trading rules and to achieve the ultimate
goal of a just and equitable global trading system.
Fair trade as a “social Fair Trade transactions exist within an implicit “social contract,” in
contract” which buyers agree to do more than is expected by the conventional
market. In return, producers use the benefits of Fair Trade to improve
their social and economic conditions, especially among the most
disadvantaged members of the organization. Fair Trade is not charity
but a partnership for change and development through trade.
Source: World Fair Trade Organization and Fairtrade Labelling Organizations International, A Charter of Fair Trade
Principles, January 2009, https://wfto.com/sites/default/files/Charter-of-Fair-Trade-Principles-Final%20(EN).PDF (accessed
August 2, 2019).

adherence to fair economic, social, and environmental practices in producing and

selling products. There are nearly 30,000 Fair Trade Certified products, coming
from approximately 1.6 million farmers and workers in 75 countries. Fair Trade
Certified products are available in most grocery stores, restaurants, and cafés
all over the United States, contributing to the record volume growth year after
year.18 J. Crew launched its first Fair Trade Certified collection for its J. Crew
and Madewell brands. The collection includes jeans made in a certified factory in
Vietnam.19
Rice farming is practiced all over the world and is responsible for billions of
jobs, making it an important aspect in the social well-being of numerous communi-
ties. Pesticides and chemicals used in rice farming initially increase production, but
they eventually reduce production and negatively affect workers’ health. A decline
in global rice prices puts farmers in difficult situations. When prices fall, some
farmers apply for loans that may carry high interest rates, while others might lose
their livelihood altogether. Areas particularly dense with rice farms are reported to
have high rates of suicide and child sex trafficking. Fair Trade rice seeks to improve
these conditions by providing stability in the market, seeking organic methods, and
regulating the use of chemicals in production.20
The Fair Trade Certified label is not only recognized by 63 percent of
American consumers, but it is also a trusted symbol among this group. There is a
high level of durability among fair trade certified products even during times of
economic downturn. This is due in large part to the system of standards of the Fair
Trade organization. In order to continue to remain relevant, they are committed to
revising these standards every five years. For example, Fair Trade USA announced
that it would revise the previously separate standards for farmers and independent
growers by combining them to apply to both groups. Such a move reduces com-
plexity and allows for consistency and relevance in the certification process. Table
13.6 shows some of the Fair Trade Certified brands currently on the market.21
Global Development
Companies are increasing their efforts to enhance the infrastructure, human rights,
and educational systems of a particular country, state, or city in order to further
global development. Experts have concluded that political, social, and economic
freedoms are fundamental to national competitiveness and development. Without
widespread trust and the effective operations of different institutions, a given society
will not be able to enhance and enrich the lives of its people. Political freedoms,
such as free speech and elections, lead to economic security, and social
freedoms such as education and healthcare lead to stronger economic
participation. Finally, economic security frees people to participate in Table 13.6 Fair Trade Certified Brands
social and political activities.22 Multinational corporations are increas-
Nespresso Endangered
ingly interested in mechanisms for promoting freedom and development.
Species Chocolate
Economic conflicts can have a negative effect on economic devel-
opment. An extended trade war between the United States and China Conscious Step Ben & Jerry’s
has resulted in U.S. manufacturers shifting production out of China Divine Chocolate Stonedance Wines
to avoid tariffs that were as high as 25 percent. With $300 billion Starbucks Travel Whyte
in U.S. imports from China per year, many businesses adjusted their Eco Bananas Belvas Chocolate
strategy. Apple began shifting assembly of some of its products out
Red Diamond Looma Home
of China to countries like Vietnam.23 With the middle class in China Coffee
growing and U.S. consumers enjoying lower-priced products, such as
Reflective Jewelry London Tea
furniture, clothing, and electronics, many U.S. firms are moving their Company
operations from China while other firms may keep their operations in
Source: Fair Trade America, “Explore Fair Trade
other countries because of the cost of investing in new facilities and Brands”’ http://fairtradeamerica.org/Fairtrade-Products/
supply chain arrangements. These changing trade relations can have All (accessed August 2, 2019).

an economic boost to some Asian countries, but they change quality of life and
employment opportunities in other countries.
development Development refers to improvement in the economic, environmental, educa-
improvement in the economic, tional, and health conditions of a country. Common issues in development include
environmental, educational, and poverty, quality of healthcare, access to education, voting rights, water quality,
health conditions of a country
governance and rule of law, domestic finance systems, and climate change. A major
goal of the United Nations (UN) is to realize improvements in the development of
countries around the world. While these improvements may be grounded in ethical
concerns, they are critical to the stability of the global economy. The UN operates
on the philosophy that it is in the world’s best interest to tackle problems that limit
the capacity of some people to live healthy and prosperous lives. The UN’s 2030
Agenda for Sustainable Development was designed to meet these challenges and
has established the goals related to the following: zero poverty, zero hunger, good
health, quality education, gender equality, clean water and sanitation, and afford-
able clean energy, rights to decent work and economic growth, innovation, reduced
inequalities, sustainable cities, responsible consumption, climate action, unpolluted
oceans and land, and partnerships to achieve all these goals.24 Meeting these goals
and finding solutions to these problems advance the economy and improve the lives
of individuals in areas heavily affected by these issues.
Global Compact The UN also established the Global Compact, which encourages organizations
an agreement which encourages to commit to common principles whereby effective and responsible business can be
organizations to commit to 10 conducted on a global scale. The Global Compact is a set of 10 universally accepted
common principles regarding
human rights, labor, environment,
principles (see Table 13.7) in the areas of human rights, labor, environment, and anti-
and anticorruption, whereby corruption, to which approximately 13,000 organizations have officially declared
effective and responsible business their commitment. Corporate signatories attest to their willingness to integrate these
can be conducted on a global principles into everyday business practices, publish examples of their commitment
scale
and projects on an annual basis, and commit to a stronger alignment between the
objectives of the international community and those of the business world.25
Although the UN has been most progressive in gaining corporate support for
global development and popularizing business partnerships, corporations have
aligned themselves with nonbusiness organizations to advance development for a
number of years.26 For example, a company interested in building an offshore call
center may realize that roadways and utilities need to be improved in the area.
In another situation, a firm may know that a natural resource is abundant in a
developing country, yet the people and government of the country do not have
Table 13.7 The 10 Principles of the Global Compact

Human Rights
1. Support and respect the protection of internationally proclaimed human rights.
2. Ensure nonparticipation in human rights abuses.
Labor
3. Uphold the freedom of association and the effective recognition of the right to collective
bargaining.
4. Eliminate all forms of forced and compulsory labour.
5. Abolition of child labor.
6. Eliminate discrimination with respect to employment and occupation.
Environment
7. Support a precautionary approach to environmental challenges.
8. Undertake initiatives to promote greater environmental responsibility.
9. Encourage the development and diffusion of environmentally friendly technologies.
Anticorruption
10. Work against corruption in all its forms, including extortion and bribery.
Source: “Ten Principles,” United Nations Global Compact, https://www.unglobalcompact.org/what-is-gc/mission/principles

Table 13.8 Partnerships for Development of Social Responsibility

Conventional business partnerships
These partnerships focus on efficient and effective decisions to carry out a business objective
when there is limited competition. Social responsibility is not a strategic concern. Example:
Tennessee Valley Authority, a federal corporation, provides flood control, electricity generation,
and more to the Tennessee Valley in partnership with more than 150 local power companies.
Corporate social responsibility partnerships
Businesses make a profit but also serve the public interest. Through voluntary cooperative
relationships, businesses and their partners arrive at a win-win authentic partnership. They thrive
and prosper for their stakeholders. Example: Starbucks supports coffee growers in receiving a
fair wage.
Corporate accountability partnerships
These partnerships focus on rules and structure with an emphasis on ethics, compliance, and
social responsibility. Example: ISO 19600, based on the Australian standard for compliance
management, is being adopted as an international benchmark. ISO 19600 standards provide an
accountability audit to social responsibility.
Social economy partnerships
These are based on partnerships between nonprofit organizations and businesses. Both parties
help to develop and institutionalize objectives to benefit society. Example: Home Depot partners
with Habitat for Humanity.
Sources: Ananya Mukherjee Reed and Darryl Reed, “Partnerships for Development: Four Models of Business
Development,” Journal of Business Ethics 90, supplement 1 (May 2009): 3–37; Maria May Seitanidi and Andrew Crane,
“Implementing CSR Through Partnerships: Understanding the Selection, Design, and Institutionalisation of Nonprofit-
Business Partnerships,” Journal of Business Ethics 85, supplement 2 (April 2008): 413–429; Scott James, “CSR Means
True Partnerships,” Forbes, July 30, 2011, http://www.forbes.com/sites/csr/2011/07/30/csr-means-true-partnerships/
(accessed August 2, 2019); “A New Global Standard for Compliance: ISO 19600,” CompliSpace, September 15, 2014, http://
complispace.wordpress.com/2014/09/15/a-new-global-standard-for-compliance-iso-19600/ (accessed August 2, 2019).
the economic and educational resources to market it worldwide. In both cases, the
company may choose to invest resources by partnering with the local government,
nonprofit agencies, and other nongovernmental organizations (NGOs). Critics
muse that while this approach certainly has a social component, the business case
for making a profit is the overriding concern. An extensive review of the outcomes
of development partnerships between large oil companies and local governments
in the Nigerian Delta region revealed that (1) the linkage between improvement in
social infrastructures and economic growth is nonexistent, (2) it is almost impossible
for business investments to make significant gains because these communities have
long been neglected, and (3) business-driven investment in social infrastructure has
been unevenly distributed and failed to prioritize community needs.27
There are many diverse types of partnerships for development. While the
partnership consists of at least one public entity and one private entity, the specific
kinds of public and private entities involved include a wide range of social and eco-
nomic players. However, each partnership must confront two elements: (1) the level
of social control via stakeholder influence they maintain and (2) the challenges they
pose to conventional business management and goals. In lieu of these two points,
partnerships for development may be categorized into four types: conventional
business partnerships (CBPs), corporate social responsibility partnerships (CSRPs),
corporate accountability partnerships (CAPs), and social economy partnerships
(SEPs). Table 13.8 provides a brief description of these four types.
conventional business
partnerships (CBPs)
Conventional Business Partnerships partnerships that promote
Conventional business partnerships (CBPs) for development may seem unlikely. efficiency in markets where
competition does not exist;
However, in the case of some public services, such as utilities, they do sometimes
assumes government is inefficient
emerge. The goal of these partnerships is to promote efficiency in markets where and that a business organization
competition does not exist. This assumes that states are inefficient and that a provides the best solution

business organization provides the best solution. The role of business is to increase
efficiency, while the role of government is to make sure that the benefits of
increased efficiency are delivered to consumers. Government also monitors access
to and affordability of the public service. CBPs do not have to prove a specific
effort toward social responsibility, but they are commonly recognized and sup-
ported by the United Nations, World Bank, and other supraregional organizations.
Specifically, these organizations have sought privatization through conventional
business partnerships.
privatization Privatization occurs when public operations are sold to private entities.
a process that occurs when public Public-private partnerships count as partial privatization. Full privatization further
operations are sold to private reduces the public element of the equation. Social services often attract privatiza-
entities. Public-private partnerships tion interest, particularly in developing nations, because privatization provides a
count as partial privatization
point of entry into new markets for investors. But long-standing public provision
of goods and services carries deeply embedded interests in keeping the goods and
services public.28
The World Bank began advocating the privatization of public utilities in
the early 1990s, and eventually this became a requirement for some countries
seeking substantial loans. While there have been successes, water privatization
in El Salvador has contributed to the country’s water crisis. Approximately 95
percent of El Salvador’s surface water is contaminated, making it one of Latin
America’s most water-stressed countries.29 The World Bank eventually softened its
position by becoming open to other options besides privatization, but the idea that
poor governments need to increase their reliance on private agents for political and
economic risks remains.
Corporate Social Responsibility Partnerships

corporate social responsibility Corporate social responsibility partnerships (CSRPs) are voluntary and business
partnerships (CSRPs) centered. Potential benefits compel individual businesses to enter into these
voluntary and business-centered partnerships, and success rests in the motivation causing corporate engagement.
partnership providing resources
for social initiatives, such as job
Such motivation may be philosophical or ethical, though it may be that pragmatic
training and entrepreneurial concerns are the major sources of motivation. CSRPs provide resources for social
development, that contribute to a initiatives, such as job training and entrepreneurial development, that contribute to
citizen’s livelihood and therefore a a citizen’s livelihood. While these initiatives benefit members of society, they also
stronger workforce and economic
contagion
provide for a stronger workforce and economic contagion. For example, micro-
credit programs are part of CSRP activity in resource provision, with the largest
such partnership being the Microcredit Summit Campaign, a nonprofit organiza-
tion dedicated to improving access to
credit and financial self-sufficiency for
the poorest people in the world.30
Microcredit activity began in
Bangladesh. The initiative enjoyed remark-
able success, to the extent that two promi-
nent participants in the endeavor, Grameen
Bank and its founder Muhammad
Yunus, received the Nobel Peace Prize.
Microcredit works toward moving large
populations out of poverty through finan-
cial assistance. To further its impact, the
Shutterstock/ISMAT JAHAN
Microcredit Summit Campaign partnered

with the nonprofit Freedom from Hunger
to benefit 3.7 million people by combining
microfinancing and health.31 Grameen
Bank remains an influential model for
microcredit institutions and partnerships
all over the world. While microcredit allows borrowers to take action that directly
improves their income, indirect improvements such as quality of life also result.
Borrowers have access to better housing, food, sanitation, and education and are
better able to take advantage of the improved options.32
Corporate Accountability Partnerships

The final two categories of partnerships for development take a distrust of CSR
models as a starting point for defining their framework. Corporate accountability
partnerships (CAPs) spring from the idea that CSRPs are neither accountable nor
effective and are only really interested in public relations. As the name implies,
corporate accountability partnerships (CAPs) focus on accountability and the corporate accountability
setting of requirements and standards based on what society expects. partnerships (CAPs)
focus on accountability and the
For CAPs to be successful, they must gain and direct public support, maximize setting of requirements and
the limited resources they tend to have, plan for the long term, and convince standards based on what society
public institutions of the necessity and importance of enforcing socially demanded expects
standards. CAPs use legal and social means, ranging from policy and certification
initiatives to protests and activism. Certification CAPs focus mainly on labor rights
and the environment and try to achieve answerability, enforcement, and universal-
ity. CAPs seek to achieve corporate recognition of standards deemed appropriate
by society and utilize third-party audits and checks on the partnership.
A widely known certification CAP is the Fair Labor Association (FLA), which Fair Labor Association (FLA)
was organized after numerous media reports exposed child labor, poor working works to end sweatshop
conditions for factory workers;
conditions, and low wages. Today, the FLA works to end sweatshop conditions for organizes universities, social
factory workers and organizes universities, social groups, and socially responsible groups, and socially responsible
organizations to protect workers’ rights and insist on better working conditions organizations to protect workers’
all over the globe. FLA-affiliated companies source from factories and farms in 84 rights
countries, representing more than 4.6 million workers. Participating companies
include PUMA, Hugo Boss, PopSockets, and others.33
The accreditation given by the FLA has become increasingly important as
investors use environmental, social, and governance (ESG) metrics to determine
which companies to invest in.34 Nestlé is an example of a corporation working
with the FLA to ensure fair labor conditions. The cocoa industry is notorious for
forced and child labor conditions, and as one of the world’s largest food compa-
nies, Nestlé allowed the FLA to conduct a review of labor conditions throughout
the entire supply chain. The findings concluded that, despite implementation
of industry standards, many violations were still occurring. In the Ivory Coast,
especially, both child and forced labor are culturally normal behaviors. Nestlé is
able to trace only 49 percent of its global cocoa supply, making it difficult for the
company to remove the risk of child labor from its supply chain. Nestlé knows that
better communication of labor practices and stronger oversight are needed in order
to come closer to eliminating these undesirable labor practices.35
Social Economy Partnerships

Social economy partnerships (SEPs) pursue alternatives to conventional corpora- social economy partnerships
tions and profit maximization. SEPs have a distinctly social purpose, use demo- (SEPs)
partnerships that pursue
cratic governance, and cooperate with other social economy partnerships. Social alternatives to conventional
economy organizations include nonprofits, community economic development corporations and profit
corporations, cooperatives, and cooperative development organizations. maximization and have a distinctly
The SEP philosophy emphasizes cooperation and assistance rather than social purpose, use democratic
governance, and cooperate with
traditional business logic. These partnerships provide resources and support
other social economy partnerships
mostly for informal sectors of the urban poor. SEPs bring people together for
recycling, street vending, and other work that many other citizens will not perform.
Entrepreneurship is viewed collectively, and the group stays connected to social

and political movements. Social economy partnerships in these informal sectors

provide economic profits, as well as social benefits that are usually reserved
for those with full-time jobs in the formal sector. The Self-Employed Women’s
Association (SEWA) is a trade union in India for poor, self-employed women.
These women compose the majority of the labor force but they are part of the
unorganized sector and are not provided with regular salaries and benefits. SEWA
organizes cooperative arrangements to help women find regular employment,
increase their incomes, become literate, access better healthcare, obtain child
care, and increase their financial assets. Through various cooperatives, women
obtain insurance, get assistance in marketing their goods worldwide, participate
in leadership training, and access significant loans and banking products. Without
SEWA and its extended partnerships, these women would be destined for a life
of poverty.36
Ethical Responsibilities in TECHNOLOGY
Privacy in the Age of Transparency: GDPR Goes Global

When engaging in global business, it is the responsibility to comply with GDPR. These requirements are making
of corporate executives and governing parties to know the privacy protection a globalized issue.
written code of laws and regulations of the countries with The regulatory barriers from GDPR could have a
which they do business, as well as to work to implement profound impact on large companies like Facebook,
and enforce these laws satisfactorily. Although Facebook which collect data on consumer internet use to engage in
and Google have headquarters in the United States, targeted advertising to their users. In light of GDPR, there
they engage in international business with Europe and is concern about the type of data collection required for
therefore must comply with the laws of the European companies like Facebook and Google to do business with
Union (EU). General Data Protection Regulation (GDPR), consumers. While Facebook has complied with GDPR in
discussed in Chapter 11, protects the personal data of allowing users to refuse targeted advertising, it is continu-
EU citizens. The law affects sites worldwide that service ing to collect data. The company requires EU consumers
European consumers. The regulations require companies to accept its privacy terms or forgo using the service. Mark
to ask consumers for permission to collect their personal Zuckerberg has expressed his support for greater privacy
data and inform consumers of a data breach within laws in the United States, while also pointing out that
72 hours of the occurrence. If companies do not comply GDPR is ambiguous.
with this regulation, they could face hefty fines. The United States has traditionally opposed strict
Not only has this regulation had a major impact on privacy regulations on internet data collection. With the
companies doing business in Europe, but Brazil, Japan, passage of GDPR, however, that may change. Even CEOs
and South Korea are in the process of creating similar laws from companies like Apple and Google are encouraging
for internet privacy. The EU is encouraging other countries the federal government to implement similar privacy
to develop tougher online privacy regulations by making restrictions as the EU. Meanwhile, the state of California
data protection a part of trade deals. Companies based passed a law with some similarities to GDPR. The battle
outside the EU are subject to fines if they do business that between business data collection and consumer privacy
involves the personal data of EU citizens. For example, will continue as countries implement and fine-tune their
Google was fined €50 million by France for failure regulations, both for their nations and globally.
Sources: Sam Schechner, “Agree to Facebook’s Terms or Don’t Use It,” Wall Street Journal, May 11, 2018, https://www.wsj.com/articles/stage-is-set-
for-battle-over-data-privacy-in-europe-1526031104 (accessed July 29, 2019); Adam Santariano, “G.D.P.R., a New Privacy Law, Makes Europe World’s
Leading Tech Watchdog,” The New York Times, May 24, 2018, https://www.nytimes.com/2018/05/24/technology/europe-gdpr-privacy.html (accessed
July 29, 2019); Elizabeth Schulze, “The US Wants to Copy Europe’s Strict Data Privacy Law—But Only Some of It,” CNBC, May 23, 2019, https://www.
cnbc.com/2019/05/23/gdpr-one-year-on-ceos-politicians-push-for-us-federal-privacy-law.html (accessed July 29, 2019); “GDPR Key Changes,” EUGDPR.
org, https://www.eugdpr.org/the-regulation.html (accessed July 29, 2019); Deepa Seetharaman, “Facebook Provides a Preview of Its Privacy Makeover,”
Wall Street Journal, April 18, 2018, https://www.wsj.com/articles/facebook-provides-a-preview-of-its-privacy-makeover-1524027600?mod=article_inline
(accessed July 29, 2019); Jon Porter, “Google Fined €50 Million for GDPR Violations in France,” The Verge, January 21, 2019, https://www.theverge.
com/2019/1/21/18191591/google-gdpr-fine-50-million-euros-data-consent-cnil (accessed July 2, 2019).

The four models of business involvement in development allow almost any

firm the opportunity to engage in partnerships that improve health, education,
economic, and other prospects for people around the world. In addition to corpo-
rate efforts, individual countries are engaged in development efforts. The Center
for Global Development produces a Commitment to Development Index (CDI) that Center for Global Development
a nonprofit think tank in
ranks 27 developed nations by their contributions to and support of development Washington, D.C., and London
in poorer, developing countries. At the top of the rankings are Sweden, Denmark, that works to reduce global
Finland, and Germany. poverty and improve lives through
While these contributions are considered the right thing to do and usually innovative economic research that
drives better policy and practice
reflect national ideals and values, there are also benefits to global security and eco-
by the world’s top decision-makers
nomic health. Countries included in the index are assessed based on governmental
policy efforts in areas including aid, trade, investment, migration, the environment, Commitment to Development
security, and technology. Policy efforts are used as indicators, partly to control for Index (CDI)
the varying sizes of economies among the countries ranked. For the CDI, policies a ranking, produced by the
Center for Global Development,
of rich countries, particularly the coherence of those policies, are important to of 27 developed nations by their
development. The index also shows evidence that development involves more contributions to and support
than monetary aid and that partnerships can provide greater benefits than the of development in poorer,
individual partners can produce alone.37 developing countries
Global Reporting Initiative

Regardless of the social responsibility activities that a company pursues, it must
also consider the best mechanisms for communicating its values and plans,
highlighting successes, and gaining feedback for the future. In some cases, a firm
may be a signatory to a set of standards, a member of a particular association, or
an entity otherwise obligated to formally assess and document social responsibility
outcomes. As stated earlier, companies that commit to the Global Compact are
required to present an annual account of how they implement the 10 principles and
support the UN’s development goals. This document, entitled the Communication Communication on Progress
on Progress, may be part of the company’s annual report, sustainability report, or a required annual report of how
some other social reporting mechanism. a company that has committed to
the Global Compact implements
The Global Reporting Initiative (GRI), an independent international organiza- the 10 principles and supports the
tion headquartered in Amsterdam, provides standards for businesses and other UN’s developmental goals
organizations to assess their performance across an array of social responsibility
indicators. Of the world’s largest 250 corporations, 74 percent use GRI’s
framework to report on their sustainability performance.38 More than 600 U.S. Global Reporting Initiative (GRI)
an independent international
companies voluntarily use these standards.39 A firm may use this as a self-audit,
organization that provides
but others choose to share the audit results formally with stakeholders. One of the standards for businesses and
greatest benefits of the GRI is that it makes comparisons possible because it uses other organizations to assess their
a globally applicable and well-vetted framework. The GRI emphasizes consensus performance across an array of
and continuous improvement in developing and maintaining the GRI Standards, social responsibility indicators and
seeks to provide transparency
which seek to provide transparency and accountability in sustainability reporting and accountability in sustainability
akin to that found in financial reporting. Diverse representatives contribute busi- reporting akin to that found in
ness, civil, academic, labor, and other professional perspectives in deciding which financial reporting
areas of sustainability are to be included in the framework and the appropriate
measures to be used for determining performance in those areas. The framework
is in perpetual draft form, with innovation in technologies and shifts in cultural
attitudes accommodated by the GRI’s continuous improvement approach.
The GRI Standards includes three categories of core indicators: economic,
environmental, and social performance. The social category of core indicators
is further divided into labor practice, human rights, product responsibility, and
society. Quantitative or qualitative performance indicators are used to evaluate
various aspects of each category.
The economic category examines an organization’s interaction with the
economic system in which it operates by measuring economic performance, market

presence, and indirect economic impact indicators. The environmental category

covers an organization’s energy use, both direct and indirect, as well as pollution.
The category assumes a link between energy consumption and emissions that
contribute to climate change, and thus emphasizes efficient energy use and an
increasing reliance on renewable energy sources over fossil fuel.
The society category examines the organization as it functions in relation to
market structures and social institutions. Measures include the impact on local
communities, bribery and corruption, and public policymaking. The human rights
indicators consider the operation of an organization as it provides for basic human
rights. Measures include incidents regarding human rights and provisions made
for such rights in an organization’s internal and external business relationships.
The labor practices category is an extension of the human rights category that
focuses specifically on the environment and practices to which workers are
subject. An examination of workforce demographics, communications between the
organization and its employees, and opportunities extended to workers for personal
development comprise the category’s measurements. Finally, the product responsi-
bility category focuses on the products of an organization as they affect consumers.
Considerations such as safety, product information, and privacy rights of customers
are evaluated. Indicators appear in pairs, with one addressing the relevant processes
of the organization and the other addressing the compliance of the organization.40
Summary
In this chapter, we discussed a variety of social responsibility issues and stakehold-
ers from a global perspective. The expanding global marketplace requires that
executives and managers develop the ability to conduct business effectively and in
a socially responsible way the world over. The movement of people across cities
and continents means that ideas, values, traditions, languages, and customs have
also migrated, and global employees need many skills. Cultural intelligence (CQ) is
the ability to interpret and adapt successfully to different national, organizational,
and professional cultures. There are three components to the development and use
of cultural intelligence, including cognitive, motivational and behavioral. Cultural
intelligence is desired of all employees but is mandatory for those who work in
different countries, manage diverse groups, and have responsibilities that require
them to interpret unfamiliar behaviors and situations.
Cultural intelligence is critical for dealing effectively with stakeholders, includ-
ing customers, investors and shareholders, employees, suppliers, governments,
and communities. Stakeholders in other countries and cultures will bring unique
insights and attitudes to bear on the business relationship, including differences
in economic, legal, ethical, and philanthropic expectations. In addition, we delved
into a few trends related to stakeholders in the global economy, including the Caux
Round Table Principles for Business, fair trade, employee engagement, and others.
The reflexive nature of the global economy means that the success of a
particular company is a function of many factors, including the extent to which
the firm’s home country is comprised of trust-based institutions. Some nations
have well-developed systems for ensuring economic, legal, and ethical standards in
business activities. In other cases, corporations are interested in a particular market
but know that fundamental institutions and standards are sorely underdeveloped
and negatively affect market potential. The four models of business involvement
in development allow almost any firm the opportunity to engage in partnerships
that improve health, education, economic, and other prospects for people around
the world. In addition to corporate efforts, individual countries are engaged in
development efforts.

Finally, the GRI provides standards for businesses and other organizations to
assess their performance across an array of social responsibility indicators. A firm
may use this as a self-audit, but others choose to share the audit results formally
with stakeholders. One of the greatest benefits of the GRI is that it makes com-
parisons possible because it uses a globally applicable and well-vetted framework.
The Gloves Are Off: The U.S.-China Trade War Escalates

Issue: What are the benefits and drawbacks to spy on the United States, as well as other countries, and
the global economy of the trade war between the it has affected Huawei suppliers such as Google and Intel.
United States and China? The trade war has had a major influence on the global
market because of the amount of control that the United
When two powerhouse nations are heavily engaged in States and China have over the economy. Tariffs can be
trade, there are bound to be some things that don’t go beneficial to the country that imposes them. By imposing
smoothly. Trade between the United States and China is tariffs on Chinese goods, U.S. businesses are more likely
a major factor in the world economy. The United States to use American sources, and consumers are more
accounts for about 24 percent of the global economy (the likely to buy American products. This increases domestic
highest in the world), followed by China, at 15 percent. business while deterring business outside the country
Given that these countries make up such a large part of (in theory, at least). Tariffs can also be used as a tactic
the economic system, their relationship with each other to pressure the other country into meeting demands. On
is vital to the world economy. The United States has the other hand, trade wars can be negative for business,
experienced an increasing demand for cheaper goods, investors, and consumers. China depends on American
and China has been able to provide these discount prices. exports for much of their business, while the United States
In one year, about $700 billion was transferred between imports hundreds of billions of dollars worth of Chinese
the two nations. products each year. The trade war resulted in auto com-
The trade war officially began when the United States panies and agricultural commodities like soybeans losing
placed tariffs on products from China. According to U.S. sales. Sellers also raised the prices of goods to offset the
government sources, China backtracked on its pledges costs of doing business with countries with high tariffs,
to rewrite laws dealing with everything from competition thus making goods more expensive for consumers to buy.
policy to intellectual property. China, by contrast, believed
that the United States was becoming inflexible, which There Are Two Sides to Every Issue
contributed to the breakdown of talks between the two 1. Trade wars tend to be more beneficial than they are
nations. This impasse led to increases in tariffs on both detrimental to the country that imposes them, so they
sides. China requested that the United States remove a are worth the risk.
ban on the Chinese telecommunications giant Huawei 2. Trade wars tend to be more detrimental than they are
prior to resuming talks. The ban on Huawei was due to beneficial to the country that imposes them, so they are
suspicions that the company was using its technology to not worth the risk.
Sources: Jeff Desjardins, “The World’s $80 Trillion Economy—in One Chart,” World Economic Forum, October 15, 2018, www.weforum.org/
agenda/2018/10/the-80-trillion-world-economy-in-one-chart/ (accessed July 30, 2019); Matt Egan, “Why the US-China Trade War Won’t Last,” CNN, May
14, 2019, https://www.cnn.com/2019/05/14/business/china-united-states-economy-trade-war/index.html (accessed July 30, 2019); “A Quick Guide to the
US-China Trade War,” BBC News, June 29, 2019, https://www.bbc.com/news/business-45899310 (accessed July 30, 2019); Ana Nicolaci da Costa, “The
Early Victims of Trump’s Trade War,” BBC News, August 5, 2018, https://www.bbc.com/news/business-45028014 (accessed July 30, 2019); Sean Keane,
“Huawei Ban: Full Timeline on How and Why Its Phones Are Under Fire,” CNET, July 30, 2019, www.cnet.com/news/huawei-ban-full-timeline-on-how-
and-why-its-phones-are-under-fire/ (accessed July 30, 2019).

Key Terms
Caux Round Table Principles for corporate accountability Foreign Corrupt Practices Act
Business (p. 384) partnerships (CAPs) (p. 393) (p. 382)
Center for Global Development corporate social responsibility Global Compact (p. 390)
(p. 395) partnerships (CSRPs) (p. 392) Global Reporting Initiative (GRI)
Commitment to Development Index cultural intelligence (CQ) (p. 380) (p. 395)
(CDI) (p. 395) development (p. 390) privatization (p. 392)
Communication on Progress employee engagement (p. 386) social economy partnerships (SEPs)
(p. 395) Fair Labor Association (FLA) (p. 393)
conventional business partnerships (p. 393)
(CBPs) (p. 391) fair trade (p. 388)
1. Define cultural intelligence (CQ) in your own terms. 5. Define fair trade in your own terms. In what ways
Compare your definition with the definition used in should consumers consider fair trade issues when
this chapter. making purchases and investments?
2. How are stakeholder relationships in a global context 6 Review the Global Compact principles presented
different from those in a domestic context? In what in Table 13.7. In what ways are these principles
ways are they alike? and issues related to a successful global economy?
3. What is the likelihood that corporate leaders agree What benefits and/or challenges do they present to
on a global set of social responsibility standards? multinational corporations?
What evidence do you have? 7. What are some ways that a company can measure its
4. How can organizations create stronger engagement progress to comply with global reporting initiative
with employees? What would be the effects on social guidelines? Propose both quantitative and qualitative
responsibility? How would social responsibility affect measures.
engagement?
Choose two multinational companies, each based in a the site and indicate how the information might be used
different home country, and visit their respective websites. and perceived by these three groups. What differences and
Peruse these sites for information that is directed at three similarities did you find between the two companies? How
company stakeholders: employees, customers, and the are the differences attributable to cultural nuances?
community. Make a list of the types of information on
Manufacturing Misconduct: What Would You Do?

Jaime and Catherine looked at each other. Each was
?
roles. Although no employee had come forward, or used
thinking, “How do we handle this?” but offered no imme- the firm’s ethics hotline, the site’s regional manager (RM)
diate suggestions. Both were midlevel executives with was concerned about management practices and workplace
a multinational corporation that manufactured clothing, conditions. Each time the RM visited the site, he sensed that
handbags, and accessories in developing countries, including he was not experiencing the daily reality of the manufactur-
Guatemala and Honduras. The company is a member of the ing site. So far, he had little proof, but he decided to share
FLA and takes pride in its commitment to a safe, healthy, his concerns with other executives. Specifically, he was
and equitable work environment for all employees. Jaime, a worried about (1) possible intimidation of union members
native of Mexico, had professional experience in Peru, Chile, and leaders, (2) discriminatory management tactics, and (3)
and Mexico. Catherine, a native of the United States, spoke forced overtime that was not properly compensated.
fluent Spanish and was being groomed to take international Two weeks later, Jaime and Catherine arrived at
assignments. Two weeks ago, the vice president of Latin the site, tasked with determining whether management
American operations called Jaime and Catherine, asking practices and workplace conditions were compatible with
them to take on an internal consulting project. corporate standards and FLA principles. First, they need to
The vice president was concerned about rumors sur- develop a plan for gathering information from employees,
rounding the company’s largest manufacturing site in including those who were either scared of retaliation or
Honduras. This site employed over 1,000 people, the generally mistrusting of corporate management. What
majority of whom worked in low-skilled manufacturing would you do?

CASE 1
Uber Fuels Controversy

Introduction offer many of the same services as professionally licensed
taxi drivers. Governments have responded by banning
Uber Technologies Inc. is a multinational transporta- Uber—and the services provided via Uber—due to the
tion company that provides ride-sharing services, food company’s nonenforcement of professional licenses for
delivery, freight shipping, and electric bike rentals. Uber their drivers. For instance, in Spain, Uber was forced to
was founded in San Francisco in 2009 and has since shut down ride-sharing services after a judge ruled that
expanded their operations to more than 700 cities in 85 Uber drivers were not legally authorized to transport
countries around the world. The company has become passengers, claiming that Uber created unfair competi-
a key player in the sharing economy, a new economic tion for professionally licensed taxi drivers. Because the
model in which independent contractors rent out their taxi industry is important in many cities, governments
underutilized resources, such as vehicles or lodging, like Spain’s are not looking favorably at what they view
to other consumers. The company has experienced as an unfair competitive advantage that could poten-
resounding success and is looking to expand both within tially bankrupt the industry. Uber returned to Spain in
the United States and internationally. March 2018 with UberX, a tier of Uber service that uses
Due to their utilization of technology, Uber does professionally licensed drivers, placing it more on par
not have as many constraints as taxi cab companies with licensed taxi drivers. However, in 2019, Uber and
do. A major reason Uber is so popular is because their their Spanish competitor Cabify announced that they
app allows users to request a ride from drivers in the were suspending services in Barcelona after a new law
near vicinity. Uber’s business model, which is based on was passed requiring all vehicles to be booked with at
independent contractors instead of employees, takes least 15 minutes advance notice.
advantage of smartphone technology by linking consum- Uber faced similar problems in France. In 2011,
ers with independent drivers as their cabs, but they do Paris became the first city outside of the United States
not employ drivers or own the vehicles. Drivers receive where Uber set up operations. However, local authorities
a commission from Uber, but they do not report to attempted to ban one of Uber’s services because drivers
Uber and are their own boss. This provides a potentially did not need to be professionally licensed. French police
more efficient and less expensive way for consumers even raided Uber’s Paris office. French law mandates
to purchase transportation. This business model has that operating a service that connects passengers to
contributed to the rise of the sharing economy in which nonprofessional drivers is punishable with fines of over
independent contractors, drivers in this case, can rent $300,000 and up to two years in prison. Hundreds of
out underutilized resources to earn money. Uber drivers in France were issued fines for operating
illegally, which Uber paid.
Global Expansion Challenges Uber challenged that law, claiming that it was uncon-
stitutional because it hindered free enterprise. A French
International expansion is a major part of Uber’s market- court decided against banning Uber’s service and sent the
ing strategy. Adopting the motto “think local to expand case to a higher court. This generated strong criticism
global,” Uber believes that consumers from other countries from taxicab officials in France as they maintained that
will appreciate their low cost, convenience, and freedom. they had to have professionally licensed drivers while
As it expands into different countries, Uber is engaging Uber was free from this restriction. French courts later
in strategic partnerships with local companies. These ruled against Uber, and the company is no longer allowed
alliances with local firms are especially important because to use nonprofessional drivers in the country. However,
they allow Uber to utilize the resources and knowledge of their past use of nonprofessional drivers continues
domestic firms familiar with the country’s culture. to haunt Uber. The European Union determined that
Despite Uber’s international success, many countries France could file criminal charges against Uber for their
have regulatory hurdles that have caused trouble for the UberPOP service as it had used nonprofessional drivers
company. Perhaps the biggest hurdle is Uber’s failure to to operate an illegal taxi service. In another landmark
mandate that their drivers obtain the same license types ruling, French courts sided with an Uber driver who
as professional taxi drivers even though Uber drivers claimed he should be recognized as an employee, not
This case was prepared by Jennifer Sawayda for and under the direction of O.C. Ferrell and Linda Ferrell © 2019. It was prepared for classroom discus-
sion rather than to illustrate either effective or ineffective handling of an administrative, ethical, or legal decision by management. All sources used for
this case were obtained through publicly available material and the Uber website.

CBP_Ferrell_Case_Studies.indd 399 12/9/2019 6:23:03 PM
400 Case 1 Uber Fuels Controversy
an independent contractor. A similar ruling had been apps has called worker classification into question.
made in the United Kingdom. Uber has stated they will This has been a widespread concern because employees
challenge these rulings. receive workplace protections such as minimum wage
India is Uber’s second largest market after the United and overtime pay that independent contractors do not.
States. In New Delhi, a woman’s rape allegation led to Some consider the independent relationships between
a ban against app-based services without radio-taxi per- Uber and their drivers to be beneficial because of the
mits in the capital. In response to the alleged rape, Uber flexibility and personal control for the drivers. However,
began updating their app to include panic button and lawmakers fear companies are evading U.S. labor laws
tracking features. Uber also began offering their service to the detriment of the contractors. California legislators
in New Delhi without charging booking or service fees. passed Assembly Bill 5 in 2019 which classifies contract
The company came under fire for how they compensate workers for companies such as Uber as employees.
Indian drivers. As Uber came closer to releasing their The bill expands the 2018 California Supreme Court
initial public offering (IPO), which was filed in May decision known as Dynamex. Together, they established
2019, they began to reduce driver incentives to build up a three-point test, often referred to as the ABC test, to
financial performance. As a result, reduced incentives determine if a worker is an employee: (1) the company
and higher diesel prices negatively impacted Indian driv- controls the employee’s work; (2) the employee’s work
ers’ financial earnings, causing growing discontent. Uber is a core part of the company’s business; (3) the workers
must tread carefully to seize upon opportunities in India don’t typically engage in providing their service to other
without violating regulatory requirements or damaging companies. This poses a major threat to Uber who
relationships with their drivers. relies on low-cost, flexible labor. Not only will labor
In 2015, a German court banned Uber services if costs increase, but Uber is also concerned they may
they used nonprofessional drivers. Uber argued that the have to limit the number of drivers or schedule drivers
company itself is only an agent to connect driver and in advance in the long term, eliminating the ability for
rider. Rules that apply to taxi services do not apply, drivers to work as often or as little as they desire.
and all services are deemed to be legal, according to This landmark California bill has the potential to
Uber. The court ruled that Uber’s business model clearly influence legislation in other states. Labor groups in
infringes the Personal Transportation Law, because driv- states such as New York support similar legislation.
ers transport riders without a personal transportation Uber unsuccessfully lobbied to be exempt from the bill
license. The injunction includes a fine of more than in exchange for establishing minimum pay rates for
$260,000 per ride for non-compliance. If the injunction drivers, paid time off, and an association to protect the
is breached, drivers could go to jail for up to half a year, interests of drivers. Uber, Lyft, and DoorDash pledged
in addition to an imposition of fines. The German Taxi $90 million to support lobbying efforts to support
Association (Taxi Deutschland) was pleased with the exemption. It is estimated by officials in the industry that
outcome and claimed that taxi services will remain in switching to an employee model could increase costs 20
the hands of qualified people and keep everyone safer. to 30 percent, which would have a significant impact on
Uber can operate UberX, Uber Green, and UberTaxi in Uber’s bottom line.
Germany, but drivers need a professional chauffeur’s
license to do so. Ongoing Controversies
Uber faces many regulatory and legal issues outside
of the United States. The company attempted to take While the company continues to be widely successful,
a global approach to expansion by applying the same the year 2017 was a hard one for Uber. Multiple
practices in other countries as they do in the United controversies cast a negative light on the organization.
States. However, they are quickly realizing that they To start off the year, Uber had to pay over $20 million
must take a more customized approach. Laws differ from in a settlement for misleading drivers on how much they
country to country. Although Uber defines themselves would earn. In February, a former Uber female engineer
as an “agent” of their “individual contractors,” many published a blog post alleging that there was widespread
courts do not view their services in the same way. They sexual harassment and gender discrimination at the
are forcing Uber to comply with licensing laws or stop company, which prompted an investigation into Uber’s
business in certain areas. corporate culture. This investigation later resulted in
20 employees being fired for various sexual harassment
Threats to the Sharing Economy and discrimination violations. In March, five executives
left the company, including the senior vice president of
There is an ongoing threat to the sharing economy in engineering.
which Uber operates: worker classification. Under cur- In April, Uber faced controversy with Apple, Inc.
rent U.S. law, a worker either depends on an organization Uber had been secretly identifying and tagging iPhones
as an employee or is self-employed as an independent even after the app and their data had been deleted from
contractor. The rise of Uber and other digital matching the iPhones. Uber tagged these phones to see if users

were using the same phone to download the app and reporting serious driver offenses, driver medical and
then repeatedly wiping it so they could use promo codes safety checks, and the use of previously mentioned
multiple times. Although Uber was trying to detect fraud “Greyball” software. The mayor of London stated
and prevent customer abuse, this action violated Apple’s that all companies must play by the rules and adhere
privacy policy. Tim Cook confronted the chief executive to standards that involve customer safety—innovation
of Uber, threatening to remove the app from Apple’s should not come at the expense of customer safety and
app store if Uber did not stop breaking the policy. The security. Uber appealed the decision soon after. Several
impact would have caused millions of iPhone consumers months later, Uber was given a 15-month probationary
to lose access to the Uber app. The CEO at the time, license to operate in London. Uber acknowledged the
Travis Kalanick, had developed a reputation for bending past events and made changes to address them. The firm
or sometimes breaking the rules in order to drive the said they changed their senior leadership, updated and
company toward desired goals. Since their founding in improved various policies, strengthened their corporate
2009, Uber has gained a negative reputation for chal- governance, and was taking initiatives to transform their
lenging the rules and causing disruption. corporate culture overall.
In May, the U.S. Department of Justice launched In November, it was revealed that Uber faced a data
a criminal investigation for the company’s use of breach in 2016. During the breach, email addresses,
“Greyball.” This secret software identified users who names, and phone numbers of 50 million global Uber
were violating the terms of services and denied ride riders were stolen. The personal information of drivers
requests to them. The users simply never got paired with was also compromised, including driver’s license num-
a driver on the app. This software even targeted govern- bers. Uber had an obligation to report hacking incidents
ment officials who were using the app to investigate to regulators and drivers whose information was taken.
Uber and their drivers. There was controversy over the However, at the time Uber kept the data breach quiet
use of this software as to whether it was in violation of by paying the hackers to delete the data. They were
the Foreign Corrupt Practices Act, which bans the use of in the process of negotiating with the Federal Trade
bribes to foreign officials to get or keep business. Commission about the proper handling of consumer
In June, Uber fired top executive Eric Alexander for data. Uber reported that they believed none of the data
obtaining medical records of an Uber passenger who was used by the hackers and offered free identity theft
was raped by her driver for the purpose of casting doubt protection and monitoring to victims of the hacking. The
upon her case. Uber held an all-staff meeting to discuss data breach was not made public until almost a year
reforming company culture, which was immediately fol- after it occurred. As a result of this incident, the chief
lowed by CEO Travis Kalanick taking a leave of absence. security officer and the legal director of security and law
This ultimately led to Dara Khosrowshahi becoming his enforcement were fired.
successor as CEO in August. Uber also faced difficulties with accidents and
In September, the FBI investigated Uber’s software tragedies outside the inner-company operations. In
for allegedly illegally interfering with competitors. The 2018, a self-driving Uber car struck and killed a
internal program, known by Uber as “Hell,” could track pedestrian in one of the first video recorded accidents
drivers working for the competitor Lyft. The investiga- involving the death of a pedestrian. It was found that
tion revealed that Uber created fake Lyft customer the vehicle feature that carries out emergency brakes for
accounts to “request” rides around different cities in dangerous situations was disabled by Uber to prevent
order to see how many Lyft drivers were nearby and erratic vehicle behavior. Uber settled a civil case with
what prices they were being offered for various routes the pedestrian’s family, and Arizona prosecutors decided
around the cities. The program was also able to identify not to criminally charge Uber. It seemed unclear whether
drivers who worked for both Lyft and Uber in order to the car or the victim was at fault. Uber responded by
give these drivers incentives to leave Lyft. The program suspending their self-driving program for a few months
was presumably used from 2014 to 2016. The ability to and resuming the program after changing their approach
recruit and maintain drivers is a critical component of to self-driving vehicles.
how these ride-share companies operate. Every major Another tragedy brought Uber attention in 2019
city has users who engage with both apps to determine when University of South Carolina student Samantha
the most cost-effective option for their trips. Having Josephson was murdered after getting into a car she
inside knowledge of the competition and being able to mistook for an Uber. Following her death Uber promoted
dominate the market in this way was invaluable toward awareness, reminding riders to verify their drivers through
gaining more customers on a more consistent basis. On notifications and ads. The university encouraged students
the other hand, these activities can also violate laws on and riders everywhere to ask their driver “What is my
fair competition. name?” to confirm they were in the correct vehicle. Uber
In September, Uber lost their license to operate stated they had been working with college campuses since
in London due to a lack of corporate responsibil- 2017 to educate students on detecting fake ride-share
ity. There were questions about Uber’s approach to drivers and will continue to do so to help prevent future

incidents. Additionally, the South Carolina House of Uber is working with teams in Detroit, Pittsburgh, San
Representatives passed a bill requiring ride-sharing driv- Francisco, Tempe, and Toronto on both self-driving
ers to display illuminated company signs in their vehicle cars and self-driving freight trucks. Even in the face of
to further prove their validity to riders. safety concerns, Uber believes self-driving vehicles to
be safer and more sustainable than traditional vehicles.
Other Business Segments Additionally, Uber has a team called Uber Elevate that
is working to develop aerial ridesharing by 2023 in
Rather than a ride-sharing company, Uber views itself as a Dallas, Los Angeles, and Melbourne. Uber will face
technology and transportation company. Uber has greatly many regulation challenges and ethical concerns with
expanded their offerings by exploring food delivery, bike this uncharted territory. They will need to work closely
rentals, business transportation solutions, and more. with local and national governments to establish safety
standards for urban aviation.
Food Delivery
In 2014, Uber launched Uber Eats. The app gives Uber Becomes a Public Company
users the ability to order food from participating local
restaurants. Now, Uber had partnered with more than Uber filed for an initial public offering in 2019 soon
100,000 restaurants around the globe. While Uber Eats after competitor Lyft was listed on NASDAQ in March
does not hold the highest market share in the industry, 2019. The Uber IPO was one of the biggest of all time
falling behind Grubhub and DoorDash, it still provides with a value of $82.2 billion, just behind Facebook at
Uber with a large revenue source and holds 25 percent a valuation of $115 billion and Alibaba at $179 billion
of the market for on-demand food delivery services. at the date of their IPOs. All 180 million shares of Uber
Uber has also invested at least $2 billion to research stock were sold out within three days of the IPO. Uber’s
autonomous vehicles and test different fleets of these initial stock price was $45 a share, raising a total of
vehicles. Uber entered the autonomous vehicle field in $8.1 billion at a valuation of $82.2 billion in total.
2015 by partnering with Carnegie Mellon University. The valuation makes it the largest U.S.-listed IPO since
Alibaba Group Holding Ltd. went public in 2014.
Uber took a conservative pricing approach for
Freight their stock after observing that their competitor Lyft
In 2017, Uber launched Uber Freight, a service that experienced a 20 percent decrease in stock prices in
connects shipping companies with drivers. The service, the weeks following the Lyft IPO. Although there was
which operates similarly to Uber’s core ride-sharing app, demand for the shares at higher prices, Uber put them in
has seen triple-digit revenue growth, expanding both the hands of as many institutional investors as possible,
nationally and internationally. Freight transportation aiming for more long-term-oriented investments rather
represents a huge opportunity for Uber, especially as the than hedge-fund and retail investors. Though the stock
United States faces a shortage of truck drivers. Now that price at the time of this writing was down to $31 per
Uber has established themselves as a pillar of the sharing share, Uber believes they hold a promising future and
economy, Uber stands to be a big player in this segment. that their business will become increasingly necessary
as people around the world move toward hiring self-
Bike Rentals driving vehicles and using electric bikes and scooters
instead of owning cars.
Uber expanded their offerings by introducing JUMP,
an electric bike rental system through their app. The
bikes, first introduced in 2018, create an easy solution Conclusion
for commuters in highly populated cities. Many fear for
the long-term success of e-bike and scooter rentals. In Despite Uber’s challenges, the company has become
the beginning, scooter rentals hit the streets at incredibly widely popular among consumers and independent con-
low prices due to subsidized pricing. This resulted in tractors. Supporters claim that Uber is revolutionizing
many rental services such as Bird operating at a financial the transportation service industry. Investors clearly
loss. Now, services like Uber and Lyft have increased believe Uber is going to be strong in the market in the
prices at the risk of turning off customers. long run. One lesson that Uber will hopefully take to
heart is the need to ensure that independent contrac-
tors using their app obey relevant country laws. The
The Future company also must revamp their corporate culture to
As Uber looks to the future, they are investing in prevent more legal repercussions. Uber has to address
advanced transportation technology to stay ahead of the these issues to uphold the trust of customers and achieve
curve. Despite setbacks with their autonomous vehicles, long-term market success in different countries.

Questions for Discussion George Harrison, “What is Greyball and Why Is the Uber
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protect competitors and consumers? court-follows-uk-ruling-against-uber-employment-contract/
Jefferson Graham, “App Greases the Wheels,” USA Today,
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Case 2 Fixer Upper: Home Depot Works on Stakeholder R
elationships 405
CASE 2
Fixer Upper: Home Depot Works on Stakeholder

Relationships
Introduction integrating mass marketing and direct marketing with
in-store experience. The new philosophy was expressed
When Bernie Marcus and Arthur Blank opened the by the new Home Depot mantra: “You can do it. We
first Home Depot store in Atlanta in 1979, they can help.” Teams from merchandising, marketing, visual
forever changed the hardware and home improvement merchandising, and operations attempted to provide
retailing industry. Marcus and Blank envisioned huge the very best shopping experience. The idea was simple.
warehouse-style stores stocked with an extensive selec- Home Depot believed that customers should be able to
tion of products offered at the lowest prices. Today, this read and understand how one ceiling fan is different
vision defines the business model of the popular home from another, and associates (employees) should be able
improvement chain. Do-it-yourselfers and building to offer installation and design advice.
contractors can browse tens of thousands of products In 2008, Frank Bifulco took over as new chief
for the home and yard, from kitchen and bathroom marketing officer and senior vice president. It was a
fixtures to carpeting, lumber, paint, tools, and plant and tough time for Home Depot. Because of the Great
landscaping items. If a product is not provided in one Recession, consumers were spending less on their homes.
of the stores, Home Depot offers customers the option Home Depot’s new marketing strategy was to emphasize
to have it special ordered. Some Home Depot stores the store’s everyday low prices, high product value, and
are open 24 hours a day, and customers can also order quality energy-saving products. At the same time, the
products online. Additionally, the company offers free company cut back on special offers like discounts and
home improvement clinics to teach customers how to promotions. Now, Home Depot’s chief marketing officer,
tackle everyday projects like tiling a bathroom. For those Adolfo Villagomez, is also the senior vice president of the
customers who don’t prefer the “do it yourself” method, company’s online business, showing how e-commerce
most stores offer installation services. Knowledgeable has become a big focus for Home Depot. Home Depot
employees, recognizable by their orange aprons, are on does an impressive amount of sales online, earning
hand to help customers find items or to demonstrate the nearly $8 billion annually.
proper use of a particular tool. Despite Home Depot’s proactive approach to cus-
Home Depot employs 400,000 associates and oper- tomer issues, the company has dealt with negative
ates more than 2,200 stores in the United States, Mexico, publicity related to poor customer satisfaction. Some
and Canada. Home Depot is the largest home improve- former managers at Home Depot have blamed the com-
ment retailer in the world, with more than $108 billion pany’s service issues on a culture that operated under
in revenue. Home Depot continues to do things on a principles reminiscent of the military. Under former
grand scale, including putting their corporate muscle CEO Robert Nardelli, some employees feared being
behind a tightly focused social responsibility agenda. terminated unless they followed directions to a T. Harris
Interactive’s 2005 Reputation Quotient Survey ranked
Managing Customer Relationships Home Depot number 12 among major companies and
said that customers appreciated Home Depot’s quality
Home Depot’s former chief marketing officer, John services. However, shortly after the company slipped in
Costello, consolidated marketing and merchandising the rankings, and Nardelli was ousted and replaced by
functions to help consumers achieve their home improve- Frank Blake in January 2007. The start of 2008 seemed
ment goals more effectively and efficiently. According to more auspicious for Home Depot as it was listed as
Costello, “Above all else, a brand is a promise. It says number six on Fortune’s Most Admired Companies
here’s what you can expect if you do business with us. (still trailing behind Lowe’s), up from 13 in 2006. Home
Our mission is to empower our customers to achieve the Depot also bounced back up on the American Customer
home or condo of their dreams.” When Costello arrived Satisfaction Index.
in 2002 Home Depot’s reputation was faltering. His plan The increase of customer satisfaction was due to
called for overhauling the company’s website as well as several efforts on the part of Frank Blake. The company’s
This case was developed by Jennifer Sawayda, Michelle Urban, and Melanie Drever for and under the direction of O. C. Ferrell and Linda Ferrell
© 2019. We appreciate the previous editorial assistance of Jennifer Jackson. This case was prepared for classroom discussion rather than to illustrate
either effective or ineffective handling of an administrative, ethical, or legal decision by management. All sources used for this case were obtained
through publicly available material.

406 Case 2 Fixer Upper: Home Depot Works on Stakeholder Relationships
Twitter feed was inundated with comments from dissatis- environment. Home Depot began their environmental
fied customers about the customer service they encoun- program on the twentieth anniversary of Earth Day in
tered in the stores. Blake quickly admitted to the 1990 by adopting a set of Environmental Principles (see
customer service problems the company was facing, Table 1).
apologized for the inconvenience it caused the customers, Guided by these principles, Home Depot has initi-
and encouraged them to continue to leave their feedback ated several programs to minimize the firm’s—and their
so that they could make improvements. Each one of customers’—impact on the environment. In 1991, the
the complaints was addressed; some angry followers retailer began using store and office supplies, advertising,
were appeased by phone calls from store managers and signs, and shopping bags made with recycled content.
personal emails responding to their specific issues. The They also established a process for evaluating the
responsiveness of Blake and his Senior Manager of Social environmental claims made by suppliers. The following
Media, Sarah Molinari, not only transformed angry year, the firm launched a program to recycle wallboard
protesters into enthusiastic fans but also resulted in a shipping packaging, which became the industry’s first
strategic advantage for the company in terms of how they “reverse distribution” program. In addition, they were
deal with customer feedback. the first retailer in the world to combine a drive-through
Inside the stores, self-checkout lanes were installed recycling center with one of their Georgia stores in
so that customers could spend less time waiting in 1993. One year later Home Depot became the first
line. However, at peak hours, waiting in line cannot be home improvement retailer to offer wood products from
avoided. During such situations, Home Depot associates tropical and temperate forests that were certified as
can scan items in customers’ baskets while they are in “well-managed” by the Scientific Certification System’s
line and hand them a card that holds all their purchases. Forest Conservation Program. The company also began
When the customer reaches the cashier, they simply to replace their hardwood wooden shipping pallets with
scan the card and pay the total they owe. Home Depot reusable “slip sheets” to minimize waste and energy
was also the first company to partner with PayPal, usage and to decrease pressure on hardwood resources.
making it easier for customers who do not want to carry In 1999, Home Depot joined the Certified Forest
their wallet or cash with them to be able to pay more Products Council, a nonprofit organization that pro-
conveniently. Many of the Home Depot associates are motes responsible forest product buying practices and
given devices called “First Phone,” which is a phone/ the sale of wood from Certified Well-Managed Forests.
walkie-talkie/scanner. This device allows associates to Yet, the company continued to sell products made from
quickly help customers by being able to call or page wood harvested from old growth forests. Protesters led
fellow associates who can answer customers’ questions by the Rainforest Action Network, an environmental
and have immediate access to the price of an item by group, had picketed Home Depot and other home center
scanning it right where they stand. stores for years in an effort to stop the destruction of
Another way in which Home Depot attempts to old growth forests, of which less than 20 percent still
practice good customer service and simultaneously act in survive. Later that year, during Home Depot’s twentieth
a socially responsible manner is through their program
designed to teach children basic carpentry skills. Home
Depot provides a free program called the Kids Workshop
Table 1 Home Depot’s Environmental Principles
available at all of their stores. During the workshops,
children learn to create objects that can be used Conserve natural resources by using energy and water
around their homes or neighborhoods. Projects include wisely, and seek further opportunities to reduce resource
toolboxes, mail organizers, and window birdhouses and consumption and improve the efficiency of our stores, offices
and distribution network.
bughouses. Home Depot also offers free workshops
specifically designed for women, do-it-yourselfers, and Minimize environmental health and safety risks for our
new homeowners. associates and our customers.
These efforts have paid off for Home Depot. Continue our journey to reward suppliers that manufacture,
Boosted by the rising housing market, Home Depot is package and label in an environmentally responsible manner
to minimize impact to the workers who manufacture them and
outperforming the retail market at a time when retail
the consumers who use them, and to preserve raw materials
sales are slipping. Home Depot has successfully trans- and eliminate unnecessary waste.
formed itself into a firm with strong service, offering
Recycle and encourage the use of materials and products with
great value to consumers.
recycled content.
Encourage our customers to become environmentally
Environmental Initiatives conscious shoppers.
Cofounders Marcus and Blank nurtured a corporate Source: Home Depot, “The Home Depot and the Environment,” http://
corporate.homedepot.com/sites/default/files/image_gallery/The%20Home%
culture that emphasizes social responsibility, espe- 20Depot%20and%20the%20Environment%202018.pdf (accessed August 2,
cially regarding the company’s impact on the natural 2019).

elationships 407
anniversary celebration, Arthur Blank announced that that are working to increase awareness and successfully
Home Depot would stop selling products made from demonstrate the connection between housing, the urban
wood harvested in environmentally sensitive areas. forest, and the overall health and economic success of
To be certified by the Forest Stewardship Council their communities. The nonprofit is a strong supporter
(FSC), a supplier’s wood products must be tracked from of Habitat for Humanity International and the American
the forest, through manufacturing and distribution, to the Red Cross. Another group The Home Depot Foundation
customer. Harvesting, manufacturing, and distribution focuses on is veterans. They have improved 14,000
practices must ensure a balance of social, economic, and facilities for veterans since 2011. The company is also
environmental factors. Blank challenged competitors taking an active stance to ensure the industry has skilled
to follow Home Depot’s lead, and within two years workers for the future. The Home Depot Foundation
several had met that challenge, including Lowe’s, the announced they were investing $50 million to train
number two home improvement retailer; Wickes, a 20,000 tradespeople for job skills in the home improve-
lumber company; and Andersen Corporation, a window ment industry.
manufacturer. By 2003, Home Depot reported that they Additionally, Home Depot addresses the growing
had reduced their purchases of Indonesian lauan, a needs for relief from disasters such as hurricanes, torna-
tropical rainforest hardwood used in door components, does, and earthquakes. After the 9/11 terrorist attacks
by 70 percent, and they continued to increase their in 2001, the company set up three command centers
purchases of certified sustainable wood products. with more than 200 associates to help coordinate relief
In 2007, Home Depot adopted the Eco Options supplies such as dust masks, gloves, batteries, and tools
program to help customers identify more sustainable to victims and rescue workers. After the 2010 Haitian
product offerings. In order for their products to qualify earthquake, Home Depot Mexico donated $30,000
as Eco Option, suppliers must show that their products to Habitat for Humanity to assist in Haiti’s recovery
meet certain criteria that demonstrate less of an envi- efforts, in addition to launching a fundraising program
ronmental impact than comparable products. In 2017, for their Mexican associates. Home Depot pledged to
Home Depot released their Chemical Strategy. This double the resources that their Mexican associates raised
strategy describes how the company will work with to aid in the relief effort. When Hurricane Sandy hit the
suppliers to decrease the negative impact of chemicals American East Coast in 2012, Home Depot responded
in the store’s product offerings on indoor air quality. with $1 million in donations in gift cards, supplies, and
They have also committed to a 2020 goal of reducing contributions to organizations that provided food, cloth-
customers’ water usage by 250 billion gallons with their ing, shelter, and volunteer efforts. Members of their own
sale of more water-efficient WaterSense products. volunteer team, Team Depot, helped with rebuilding
These efforts have yielded many rewards in addition efforts. In 2018, Home Depot increased their financial
to improved relations with environmental stakeholders. disaster relief contributions to $4 million in the wake of
Between 2010 and 2019, Home Depot’s stores in the Hurricane Michael and other natural disasters.
United States decreased energy usage by 26 percent.
The company set a goal in 2019 to reduce emissions Employee and Supplier Relations
by 50 percent by 2035. Home Depot’s environmental
programs have earned the company an A on the Council Home Depot encourages employees to become involved
on Economic Priorities Corporate Report Card, a Vision in the community through volunteer and civic activities.
of America Award from Keep America Beautiful, and a Home Depot also strives to apply social responsibility to
President’s Council for Sustainable Development Award. their employment practices, with the goal of assembling
The company has also been recognized by the U.S. a diverse workforce that reflects the population of the
Environmental Protection Agency with its Energy Star markets they serve. However, in 1997 the company
Award for Excellence. settled a class-action lawsuit brought by female employ-
ees who alleged that they were paid less than male
Corporate Philanthropy employees, awarded fewer pay raises, and promoted less
often. The $87.5 million settlement represented one of
In addition to their environmental initiatives, Home the largest settlements in a gender discrimination lawsuit
Depot focuses corporate social responsibility efforts in U.S. history at the time. In announcing the settlement,
on affordable housing and disaster relief. For instance, the company emphasized that they were not admitting to
Home Depot believes that it has a philanthropic respon- wrongdoing and defended their record, saying that they
sibility to improve the communities in which they provide equal opportunities for all and have a reputation
operate. In 2002, the company founded the Home of supporting women in professional positions.
Depot Foundation, which provides additional resources Since the lawsuit, Home Depot has worked to show
to assist nonprofits in the United States and Canada. that they appreciate workforce diversity and seeks to give
The foundation awards grants to eligible nonprofits and all their associates an equal chance to be employed and
partners with innovative nonprofits across the country advance. In 2005, Home Depot formed partnerships with

the ASPIRA Association, Inc., the Hispanic Association functions. According to then-CEO Frank Blake, the
of Colleges and Universities, and the National Council purpose of First Phone is to help associates spend less
of La Raza to recruit Hispanic candidates for part-time time on routine tasks and more on customer service.
and full-time positions. Also in 2005, Home Depot Home Depot also redesigned their website to improve
became a major member of the American Association of navigation and communication channels. The company
Retired Persons’ (AARP) Featured Retirement Program, provided upgrades such as live chat and developed a
which helps connect employees 50 years or older with buy online pickup option. Home Depot has managed to
companies that value their experience. Diversity is also reduce response time to customer emails from 24 hours
incorporated into Home Depot’s board. The 14-member to one hour or less.
board includes three women members and regularly In 2011, a special component of the Home Depot
engages in board refreshment practices where board website was launched for “Pros” (Professional and
members from different backgrounds and genders are Contractor Services). This website is intended to decrease
included in executive roles. the time it takes for professionals and contractors to
Home Depot also has a strong diversity sup- get in and out of the store, allow them to order online
plier program. As a member of the Women’s Business and pick up their goods within a couple of hours, and
Enterprise National Council and the National Minority enable delivery for certain products when ordered in
Suppliers Development Council, Home Depot has come bulk. Home Depot recognizes that professionals should
into contact and done business with a diverse range of spend less time in the store and more on the job. After
suppliers, including many minority- and women-owned this website was implemented, the speed with which this
businesses. In 2005, the company became a founding target market was able to get in and out of the store was
member of The Resource Institute, whose mission increased by 27 percent from the previous year. Three
is to help small minority- and women-owned busi- percent of the customers identified as Pros make up 30
nesses by providing them with resources and training. percent of Home Depot’s annual revenue, making this
Home Depot’s supplier diversity program has won them a very important market for the retailer. Home Depot
numerous recognitions. They ranked number 27 for has also improved their logistics. Whereas before the
the Top 50 American Organizations for Multicultural company had their suppliers send trucks of merchandise
Business Opportunities in 2018. directly to the stores, where associates would then
unload them, Home Depot has created distribution
New Technology Initiatives centers to make operations run more smoothly. This
change also enables their associates to devote more time
Home Depot is turning toward technology to improve to customer service.
customer service and become more efficient. Compared These are just a few of the steps that Home Depot is
to their rivals, Home Depot has traditionally lagged taking to adopt a more proactive stance toward techno-
behind technologically. For a time, employees were logical innovation. By concentrating on innovations that
using computers powered by motorboard batteries and will increase customer service, the retailer is attempting
stocking shelves in the same way as they had done for to advance their stakeholder orientation into all aspects
the past 15 years. Unlike their rival Lowe’s, Home Depot of their operations. Home Depot’s focus on growing
was slow to allow customers to order products online ecommerce has driven the company’s growth. Nearly
and then pick them up at the stores. As more and more half of Home Depot’s online orders are for in-store
consumers chose to complete their transactions on the pickup, an integration that helps the stores to operate
internet, this represented a weakness for Home Depot. more efficiently. These efforts to integrate channels have
In 2010, Home Depot’s online sales constituted only 1.5 improved their revenue per square foot.
percent of overall sales. Although rapid expansion had As competition from online retailers like Amazon
increased their reach, Home Depot was not adapting as grows, Home Depot executives continue to focus on
quickly to the fast-paced world of technology. ways the company can compete technologically. After
After recognizing their limitations in this field, Home seven years with the company, Blake stepped down as
Depot embarked upon several technology initiatives. CEO and was replaced by Craig Menear. The succession
These initiatives were intended to improve customer was smooth, so well planned that it had a minimal effect
service and daily operations. One small victory that on Home Depot’s stock price. Much like Blake, Menear
Home Depot achieved was beating Lowe’s in releasing proved that he would continue to focus on Home Depot’s
a mobile app that enables consumers to order Home core culture. This is being put to the test as brick-and-
Depot products. In addition, Home Depot distributed mortar retailers like Home Depot are experiencing
30,000 of their First Phone devices in more than 1,900 huge changes in how they do business. Executives have
of their stores to replace old computers in associates’ accepted the challenge to lead Home Depot through the
carts. The device allows associates to communicate with “Amazon-era.” While many companies have struggled
other associates, print labels, process credit and debit because of online retailing, Home Depot has continued
card transactions, and manage inventory, among other to be successful with increases in revenue, profits,

elationships 409
and customer spending, partly because of their strong all-time high at more than $200 per share. To maintain
e-commerce strategy. With online sales increasing 21.5 their strategic advantage, the company is investing heav-
percent since Menear became CEO, Home Depot seems ily in their employee training and success.
to be surviving the “Amazon-era” with the help of their Home Depot continues to engage their employees
committed managers. and communities in volunteer efforts. The company
responds quickly to aid employees and consumers in
A Strategic Commitment to Social disaster situations such as floods, earthquakes, and
hurricanes. Team Depot, Home Depot’s associate-led
Responsibility volunteer force, takes great strides to meet the needs
Home Depot strives to secure a socially responsible of the communities in need. Home Depot has approxi-
reputation with stakeholders. Although they have mately 400,000 dedicated Team Depot volunteers to
received low scores in the past on customer surveys and improve the communities where they operate. Veterans
the American Customer Satisfaction Index, the firm has and those in the military are also crucial stakeholders in
worked hard to bring those scores back up. They have Home Depot’s corporate social responsibility program.
responded to concerns about their environmental impact While any large company faces ethical challenges,
by creating new standards and principles to govern their Home Depot has established strong principles and
relationship with suppliers. values to be a responsible corporate citizen. Home Depot
In the past few years, the firm has taken their stra- has rebounded from having low customer satisfaction
tegic commitment to stakeholders to a new level. Home into a company that is respected because of their strong
Depot places their stakeholders into a pyramid shape performance and commitment to employees, customers,
with executives at the bottom of the pyramid, and with and communities.
customers at the top. Front-line associates are on the
second tier. Home Depot strives to treat their associates Questions for Discussion
well through compensation, coupled with opportunities
1. Assess the company’s strategy and performance with
for learning and career development. Carol Tome, Home
environmental and employee stakeholders.
Depot’s CFO, explained in an interview how manage-
2. As a publicly traded corporation, how can Home Depot
ment at the bottom of the pyramid takes on the most justify budgeting so much money for philanthropy?
responsibility in the business to provide employees with What areas other than the environment, disaster relief,
the resources they need to focus on the customers. The and affordable housing might be appropriate for
board of directors continues to provide leadership to strategic philanthropy by Home Depot?
support executives in developing and implementing the 3. How does Home Depot’s desire to be passionate about
employee- and market-focused culture. customer service relate to their social responsibility?
Knowing that all stakeholders, especially customers,
feel good about a company that actively commits their
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412 Case 3 Big-Box Retailer Walmart Manages Big Responsibility
CASE 3
Big-Box Retailer Walmart Manages Big Responsibility

Introduction the customer in the eye, greet him or her, and ask if he or
she needed assistance. Walton’s famous mantra, known
Walmart is an icon of American business. With annual as the “sundown rule,” was: “Why put off until tomor-
revenue of more than $514 billion and more than 2.2 mil- row what you can do today?” Due to this staunch work
lion employees, the world’s largest retailer must carefully ethic and dedication to customer care, Walmart claimed
manage many stakeholder relationships. The company’s early on that a formal ethics program was unnecessary
stated mission is to help people save money and live because the company had Mr. Walton’s ethics to follow.
better. Despite past controversies, Walmart has attempted In 2002, Walmart officially became the largest gro-
to restore their image with an emphasis on diversity, cery chain, topping the Fortune 500 list. Fortune named
charitable giving, support for nutrition, and sustainability. Walmart the “most admired company in America” in
The company, along with the Walmart Foundation, has 2003 and 2004. Since 2002, Walmart has maintained
donated more than $1.4 billion in cash and in-kind their position as the largest retailer in the world. In
contributions. Walmart often tops the list of U.S. donors addition to being the largest, the company is the only
to charities. In 2019, for example, the company spent brick-and-mortar store of the three top retailers. Amazon
$42 million on charitable grants to help with community and Alibaba are the second and third largest retailers,
projects and organizations. Walmart also makes use of respectively, and are predominantly online stores.
in-store cause marketing, such as the “Fight Hunger. While customers still flock to the physical Walmart
Spark Change.” campaign, which has successfully given locations to buy groceries, clothing, and a variety of
millions of dollars to Americans struggling with hunger. household items, establishing a greater online presence to
However, issues such as bribery accusations in Mexico, compete with digital retailers has been a major goal for
Brazil, China, and India have created significant ethics Walmart over the past several years. Walmart and Amazon
and compliance challenges that Walmart is addressing in compete not only on online shopping but also on same-
their quest to become a socially responsible retailer. day delivery. To become more competitive with the online
This analysis begins by briefly examining the growth retailers, Walmart bought Jet.com in 2016. Walmart is
of Walmart. Next, it discusses the company’s various using Jet to expanded grocery delivery into New York
relationships with stakeholders, including competitors, City, the company’s first venture in the city. In addition to
suppliers, and employees. The ethical issues concerning Jet, Walmart also has their home site, Walmart.com. Both
these stakeholders include accusations of discrimination, websites have achieved some success, particularly with
leadership misconduct, bribery, and unsafe working online grocery shopping. Walmart has partnered with
conditions. We discuss how Walmart has dealt with these Microsoft to boost their digital transformation, using a
concerns, as well as some of the company’s endeavors in range of Microsoft cloud solutions and collaborating on
sustainability and social responsibility. The analysis con- innovative projects. However, Walmart’s current financial
cludes by examining what Walmart is doing to increase losses from digital investments are estimated to be as high
their competitive advantage and repair their reputation. as $1 billion. Walmart has achieved so much success as
a brick-and-mortar retail chain that it will take time to
History: The Growth of Walmart adjust to the increasingly digital shopping experience that
consumers have come to expect. To prevent future losses
The story of Walmart begins in 1962 when founder and continue to hold the number one spot in global retail,
Sam Walton opened the first Walmart Discount Store in Walmart will have to make sound business decisions
Rogers, Arkansas. Although their growth was initially regarding their online retail.
slow, the company now serves almost 265 million
customers weekly at more than 10,000 locations in 27 Competitive Stakeholders
countries. Much of Walmart’s success can be attributed
to the company’s founder. A shrewd businessman, Possibly the greatest complaint against Walmart is that
Walton believed in customer satisfaction and hard work. they put other companies out of business. With their
He convinced many of his associates to abide by the “10- low prices, Walmart makes it harder for local stores to
foot rule,” whereby employees pledged that whenever a compete. Walmart is often accused of being responsible
customer came within 10 feet of them, they would look for the downward pressure on wages and benefits in
This case was prepared by Kelsey Reddick, Jennifer Sawayda, Sarah Sawayda, and Michelle Urban under the direction of O.C. Ferrell and Linda Ferrell,
© 2019. It was prepared for classroom discussion rather than to illustrate either effective or ineffective handling of an administrative, ethical, or legal
decision by management. All sources used for this case were obtained through publicly available material and the Walmart website.

towns where the company locates. Some businesses have continually improve their systems as well. Walmart
filed lawsuits against Walmart, claiming the company uses typically works with suppliers to reduce packaging and
unfair predatory pricing to put competing stores out of shipping costs, which lowers prices for consumers. The
business. Walmart has countered by defending their pric- company employs thousands of Walmart trucks to go
ing, asserting that they are competing fairly and that the to the suppliers rather than the suppliers coming to the
company’s purpose is to provide quality, low-cost products store, cutting down on cost. Walmart takes supply chain
to the average consumer. Yet, while Walmart has saved management very seriously, as evidenced by their constant
consumers millions of dollars and is a popular shopping evaluation of how suppliers’ products are doing in stores.
spot for many, there is no denying that many competing Walmart holds suppliers to high standards, especially
stores go out of business once Walmart comes to town. when it comes to the delivery of products customers
To compete against the retail giant, other stores must order online. In 2019, Walmart revamped their rules to
reduce wages. Studies show that overall payroll wages, require suppliers to obtain an 87 percent success rate
including Walmart wages, decline by 5 percent after of delivering full trucks of products over two days. For
Walmart enters a new market. The impact of Walmart partially full trucks, the success rate of on-time delivery
moving into the neighborhood has been coined the went from 50 percent to 70 percent in 2019, indicating
“Walmart Effect,” a negative connotation that represents the more stringent standards for suppliers are working.
all the hardship incurred on smaller businesses. As a Since 2009 the company has worked with The
result, some activist groups and citizens have refused to Sustainability Consortium, an association of businesses
allow Walmart to take up residence in their areas. This, that helps its members achieve sustainability goals, to
in turn, brings up another social responsibility issue: develop a measurement and reporting system known as
What methods of protest may stakeholders reasonably the Walmart Sustainability Index (discussed in further
use, and how should Walmart respond to such actions? detail later in this case). Among their many goals,
While it is acceptable for stakeholder activists to Walmart desires to use the Sustainability Index to
protest the building of a Walmart store in their area, increase the sustainability of their products and create
other actions may be questionable, especially when the a more efficient, sustainable supply chain. In 2008,
government gets involved. When Walmart announced Walmart introduced their “Global Responsible Sourcing
plans to open stores in Washington, D.C., for instance, a Initiative,” a list providing details of the policies and
chairman of the D.C. City Council introduced a law that requirements included in new supplier agreements. In
required non-unionized retail companies with more than 2017, Walmart and the Sustainability Consortium cre-
$1 billion in total sales and stores that occupy more than ated Project Gigaton, a sustainability effort to eliminate
75,000 square feet to pay their employees a minimum of 1 billion tons of greenhouse gas from Walmart’s global
$12.50 per hour—in contrast to the city’s $8.25 an hour supply chain before 2030. With the help of vendors,
minimum wage at the time. The terms of the law made Walmart has made great progress toward their goal.
it essentially apply only to Walmart and a few other Suppliers also receive better ratings from Walmart for
large chains such as Home Depot and Costco. While providing environmentally-friendly products, an incen-
supporters of the law argued that it is difficult to live on tive that has paid off so far.
a wage of $8.25 an hour, critics stated that the proposal Some critics of Walmart’s approach note that pressure
gave employees at large retailers an unjustified benefit to achieve their standards will shift more of the cost
over those working comparable jobs at small retailers. burden onto suppliers. When a supplier does not meet
Perhaps the most scathing criticism was that Walmart Walmart’s demands, the company may cease to carry that
and other big-box retailers were being unfairly targeted supplier’s product or, often, will be able to find another
by a governmental entity. Walmart also responded willing supplier of the product at the desired price.
directly, threatening to cancel their expansion into D.C. Walmart’s power over their suppliers stems from
if the law passed and emphasizing the economic and their size and the volume of products they require. Many
development benefits the city would lose out on. The companies depend on Walmart for much of their business.
D.C. City Council eventually passed the law, but it was This type of relationship allows Walmart to significantly
vetoed by the city mayor, and there are now several influence terms with their vendors. For example, Walmart
Walmart stores in D.C. As with most issues, determining generally refuses to sign long-term supply contracts, giv-
the most socially responsible decision that benefits the ing them the power to easily and quickly change suppliers
most stakeholders is a complex issue not easily resolved. at their own discretion. Despite this, suppliers will invest
significantly in long-term strategic and business com-
Relationships with Suppliers mitments to meet Walmart demands, even without any
guarantee that Walmart will continue to buy from them.
Walmart achieves their “everyday low prices” (also called There are corresponding benefits to being a Walmart
EDLPs) by streamlining the company. Well known for supplier; by having to become more efficient and
operational excellence in their ability to handle, move, streamlined for Walmart, companies develop competitive
and track merchandise, Walmart expects suppliers to advantages and are able to serve their other customers

better as well. For example, as Walmart worked with offering minimal benefits. For example, Walmart has
IBM to develop a blockchain solution to food safety, been accused of failing to provide health insurance for
Walmart began requiring all suppliers of green leafy more than 60 percent of their employees.
vegetables to use the blockchain database. Though
blockchain technology makes Walmart’s supply chain
Employee Benefits
more traceable and transparent, this requirement is a
financial and technical burden for many companies. A 2014 Walmart policy eliminated healthcare coverage
However, as these companies adapt with the help of for new hires working less than 30 hours a week.
IBM’s onboarding system, they will be better prepared Walmart also stated that they reserve the right to cut
to use blockchain technology in their own businesses. healthcare coverage of workers whose workweek falls
However, many others find the amount of power Walmart below 30 hours. Some analysts claim that Walmart
wields to be disconcerting. Suppliers in Mexico have said might be attempting to shift the burden of healthcare
that they have been penalized by Walmart for working coverage onto the federal government, as some employ-
with Amazon, Walmart’s biggest rival. While Walmart ees make so little that they qualify for Medicaid under
denied explicitly telling suppliers to stop partnering the Affordable Care Act. It is important to note that
with Amazon, there are suspicions that the retailer used Walmart is not alone in this practice; many firms are
coercion to win suppliers’ loyalty from Amazon. moving more of their workforces to part time, and
The constant drive by Walmart for lower prices can cutting benefits to part-time workers, to avoid having to
negatively affect suppliers. Many have been forced to pay healthcare costs. However, as such a large employer,
move production from the United States to less expensive Walmart’s actions are expected to have more of a ripple
locations in Asia. In fact, Walmart is considered to have effect on the economy.
been one of the major driving forces behind the “offshor- Another criticism levied against Walmart is that they
ing” trend of the past several decades. Companies such are decreasing their workforce. For example, Walmart
as Master Lock, Fruit of the Loom, and Levi’s, as well is testing staffing fewer midlevel, in-store managers to
as many other Walmart suppliers, moved production improve labor costs, increase wages, and attract higher
overseas at the expense of U.S. jobs. The challenges and quality employees. Walmart has insisted this is not a
ethical issues associated with managing a vast network cost-saving measure but rather another way to compete
of overseas suppliers will be discussed later in this case. with online retailers. Arguably, with fewer employees,
This offshoring trend was not founder Sam Walton’s it is harder to provide quality customer service. In the
original intention. In the 1980s, after learning his stores 2018 American Customer Satisfaction Index, Walmart
were putting other American companies out of business, was one of the lowest among department and discount
Walton started his “Buy American” campaign. In 2013, stores, ranked only above Sears. Walmart claims the
Walmart launched a “Made in America” initiative, dissatisfaction expressed by some customers is not
pledging to increase the number of U.S.-made goods reflective of the shopping experience of customers as a
they buy by $50 billion over 10 years and developing whole. Additionally, many fear robots and artificial intel-
agreements with many suppliers to move their produc- ligence (AI) will eliminate jobs. Walmart has invested
tion back to the states. Critics argue that Walmart is in robots to clean the store and scan inventory, among
merely putting a public relations spin on the fact that other functions. Despite this move toward robotics,
rising wages in Asian countries and other international Walmart says their employees are the key to their success
economic changes have actually made local production and that they will work to re-skill associates to work
more cost-efficient than outsourcing for many industries. alongside new technology.
They also point out that $50 billion is a veritable “drop Though the company has received criticism over their
in the bucket” considering Walmart’s size. Still, the employee wages, Walmart pays greater than minimum
symbolic effect of Walmart throwing their considerable wage in 47 states, and 75 percent of their managers
influence behind “Made in America” is likely to spur are promoted from within. In addition to fair wages,
many suppliers to freshly consider or speed up plans to Walmart incentivizes employees to stay with the company
bring production back to the United States. longer by rewarding them based on years of employment.
Bonuses range from $200 to $1,000 depending on
how long the employee has worked for Walmart. Also,
Ethical Issues Involving Employee Walmart extended their maternity and parental leave to a
Stakeholders combined 16 weeks for full-time hourly workers.
Much of the Walmart controversy over the years has

Walmart’s Stance on Unions
focused on the way the company treats their employees
or “associates” as Walmart refers to them. Although Some critics believe Walmart workers’ benefits could
Walmart is the largest retail employer in the world, they improve if workers unionized. Unions have been
have been roundly criticized for paying low wages and discouraged since Walmart’s foundation; Sam Walton

believed they were a divisive force and might render the own unionization demands. Since then, Walmart has
company uncompetitive. Walmart maintains that they permitted or negotiated with unions in several other
are not against unions in general, but they see no need countries, including Brazil, Chile, Mexico, Argentina, the
for unions to come between workers and managers. United Kingdom, and South Africa. When workers in
The company says they support an “open-door policy” Mexico threatened to strike in 2019, Walmart reached
in which associates can bring problems to managers a deal with the union Revolutionary Confederation of
without resorting to third parties. Walmart associates Laborers and Farmworkers to improve wages by an
have voted against unions in the past. average of 5.5 percent.
Although the company’s official position is that
they are not opposed to unions, Walmart often seems
Workplace Conditions and Discrimination
to fight against them. Critics claim that when the word
“union” surfaces at a Walmart location, the top dogs Walmart remains the largest nongovernment employer
in Bentonville are called in. For example, in 2000, in the United States, Mexico, and Canada. The retailer
seven of ten Walmart butchers in Jacksonville, Texas, provides jobs to millions of people and has been a main-
voted to join the United Food Workers Union. Walmart stay of Fortune’s “Most Admired Companies” list since
responded by announcing that they would only sell the start of the twenty-first century. However, in 2019,
precut meat in their Supercenters, getting rid of their a class-action lawsuit involving nearly 100 women was
meat-cutting departments entirely. In 2004, employees filed against the company for gender pay discrimination.
at a Canada Walmart location voted to unionize; six The women say they were either paid less than their male
months later, Walmart closed the store. In 2014, two counterparts or they were pushed into lower paying posi-
internal Walmart PowerPoint presentations were leaked. tions. Along with gender discrimination, Walmart has
The slides provided reasons why unions would nega- been accused of disability discrimination. For example, in
tively impact associates and directed managers to call 2018, the Equal Employment Opportunity Commission
the Labor Relations Hotline if they spot warning signs of (EEOC) sued Walmart when the retailer would not hire
union activity. Although Walmart offers justifications for an employment candidate based on the fact that she
actions such as these, many see the company as aggres- was an amputee. Despite the disability, the candidate
sively working to prevent unionization in their stores. was able to perform the job, and, therefore, the EEOC
The U.S. National Labor Relations Board (NLRB) has sued Walmart for violation of Americans with Disability
cited Walmart on multiple occasions for violating labor Act (ADA) standards. In Illinois, there was suspicion of
laws. Past employees of Walmart have said that watching racial discrimination in one of Walmart’s warehouses.
anti-union videos is part of the training. More than 100 black workers were refused employment
However, Walmart’s stance against unions has not when Walmart took command of a warehouse, which
always held up to the practical realities of doing business had been previously run by an outside company, and ran
in some foreign countries. In China, for example, Walmart background checks on the existing employees, resulting
found it necessary to accept a union in order to grow. in legal action from the workers.
Only one union is legally permitted to operate in China, In 2010, dissatisfied Walmart employees started the
the All-China Federation of Trade Unions (ACFTU), nonprofit United for Respect. Although not a labor union,
which is run by the ruling Communist Party. The Chinese United for Respect receives much of its funding from the
government promotes the ACFTU (although the union United Food and Commercial Workers International
has been criticized as pro-business and not necessarily Union (UFCW), which has been trying to unionize U.S.
looking out for the best interests of workers) and Walmart employees for years. Eventually realizing it
especially seeks to have foreign companies unionized. needed a different approach, UFCW backed the idea of a
The Chinese Labor Federation pushed Walmart to allow non-union advocacy group and hired a market research
employees to unionize in 2006. Walmart initially resisted, company to develop United for Respect’s message and
and although they eventually complied, critics claimed the activism strategy. Its demands include lowering the
company then began making unionization progressively number of hours needed for part-time workers to qualify
more difficult in practice for their Chinese workers. The for benefits, removing caps on the wages of some long-
ACFTU was able to establish union branches at five term workers, and ending the practice of using work-
separate China Walmart locations. Walmart reacted by scheduling systems to decrease hours for employees so
stating they would not renew the contracts of unionized they will not qualify for benefits. In 2011, 100 United
workers. However, the pressure mounted, and later that for Respect members traveled to Walmart’s headquarters
year Walmart signed a memorandum with the ACFTU, and presented a 12-point declaration of their demands
allowing unions in stores. Some analysts believe Walmart to the company’s senior vice president for global labor
fought so hard against unionization in China, despite relations. Since then, United for Respect has arranged a
the clear unlikelihood of prevailing against the Chinese variety of protests and pickets. It has especially targeted
government itself, because they feared workers in other the busy holiday season, organizing demonstrations and
countries would use the precedent to redouble their walkouts at many Walmart stores on every Black Friday

since 2012. In 2019, Walmart responded to a shooting at board chairman Robson Walton—Sam Walton’s eldest
a location in El Paso, Texas, by removing violent video son. While these board members still received enough
game displays. United for Respect released a statement support to be reelected, the votes signaled serious investor
that the decision was “irresponsible and weak.” disappointment and lack of confidence in the leadership
Walmart’s position is that United for Respect is a for not preventing the misconduct. Since the scandal,
small, fringe movement that does not represent the views Walmart has invested heavily in demonstrating a renewed
of the average associate, most of whom are satisfied with commitment toward ensuring the company adheres to
their jobs. The company has repeatedly complained to ethics and compliance standards to reassure investors,
the National Labor Relations Board, claiming, among governmental investigators, and the public at large.
other things, that United for Respect uses illegal methods Because of past scandals, Walmart’s board of directors is
and that it is actually a union in disguise. Walmart has undoubtedly under close scrutiny. The company has filled
also accused the UFCW of anti-labor practices and filed their board with reputable leaders such as Sarah Friar,
at least one lawsuit against the UFCW and others who CEO of Nextdoor, Carla A. Harris, senior client advisor at
protested around their stores for illegal trespassing and Morgan Stanley, and Timothy P. Flynn, retired chairman
disrupting customers. Walmart may have made a tactical and CEO of KPMG International.
error by choosing to acknowledge United for Respect as a
threat. The number of United for Respect members is very Bribery Scandal
small compared to the number of U.S. Walmart employees
as a whole, and not as many Walmart employees have The biggest blow to Walmart’s reputation in recent
participated in protests as anticipated. Although Walmart years has been the uncovering of a large-scale bribery
claims this demonstrates that the movement is not as scandal within their Mexican arm, Walmex. Walmex
popular as it tries to appear, the company may have executives allegedly paid millions in bribes to obtain
unintentionally granted it legitimacy and a large amount licensing and zoning permits for store locations. The
of free publicity by responding so directly and forcefully. Mexican approval process for zoning licenses often takes
longer than it would in the United States; therefore,
Ethical Leadership Issues paying bribes to speed up the process is advantageous
for Walmart but places competing retailers who do not
Walmart has not been immune from scandal at the top. In offer bribes at a disadvantage. Walmex apparently even
March 2005, board vice chairman Thomas Coughlin was used bribes to have zoning maps changed or certain
forced to resign because he stole as much as $500,000 areas re-zoned in order to build stores in more ideal
from Walmart in the form of bogus expenses, reimburse- locations, as well as to overcome environmental or other
ments, and the unauthorized use of gift cards. Coughlin, concerns. The Walmex executives covered their tracks
a protégé and hunting buddy of Sam Walton, was a with fraudulent reporting methods.
legend at Walmart. He often spent time on the road with In recent years, bribery has become a hot button
Walton expanding the Sam’s Club aspect of the business. issue for the U.S. government, which has levied sub-
At one time, he was the second-highest-ranking Walmart stantial fines and penalties against firms found guilty of
executive and a candidate for CEO. In January 2006, bribery. It is not unusual for large firms with operations
Coughlin agreed to plead guilty to federal wire-fraud in many countries to face bribery allegations at some
and tax-evasion charges. Coughlin secretly used Walmart point considering the size of their operations and the
funds to pay for a range of personal expenses, including diversity of cultures of the locations in which they do
hunting vacations, a $2,590 dog enclosure at his home, business. However, Walmart’s bribery scandal in Mexico
and a pair of handmade alligator boots. Coughlin’s deceit was exacerbated by two major considerations. First, the
was discovered when he asked a subordinate to approve evidence indicated that the top executives at Walmart,
$2,000 in expense payments without receipts. Walmart not just Walmex, knew about the bribery and turned
rescinded Coughlin’s retirement agreement, worth more a blind eye to it. Second, the evidence gave weight to
than $10 million. For his crimes, he was sentenced to concerns that bribery by Walmart in foreign countries
27 months of home confinement, $440,000 in fines, and was widespread and acceptable in the company’s culture.
1,500 hours of community service. Walmart first reported to the U.S. Justice Department
Confidence in Walmart’s governance suffered another that they were launching an internal investigation of sus-
serious blow in 2012 when a bribery scandal in Walmart’s pected bribery at their Mexico stores in December 2011.
Mexico branch was uncovered that directly implicated However, that report to the U.S. Justice Department was
much of the company’s top management (the scandal is not submitted until after Walmart learned The New York
explored in detail later in this case). That same year, a sig- Times was conducting an independent investigation. The
nificant percentage of Walmart’s non-family shareholders New York Times’ final report revealed that top leaders
voted against the reelection of then-CEO Mike Duke to at Walmart had been alerted to the possibility of bribery
the board. They also voted against the reelection of other as early as 2005. That year, Walmart received an email
board members, including former CEO Lee Scott and warning of the bribery from a former Walmex executive

who claimed he had been involved. The email included In Brazil, permits were obtained illegally, and land
cold, hard facts, such as names, dates, bribery amounts, was obtained illegally in China by bribing landlords and
and other information. Walmart sent investigators to officials. An unidentified individual in Brazil charged
Mexico City, who corroborated much of the informant’s about $400,000 to facilitate the process of getting build-
allegations and discovered evidence that approximately ing permits. Walmart took minimal action to address
$24 million in bribes had been paid to public officials to employee tips about bribery occurring in new stores. The
get necessary building permits. Walmex’s top executives, Securities and Exchange Commission (SEC) charged the
including the subsidiary’s CEO and general counsel, were retailer with “…[allowing] subsidiaries in Brazil, China,
implicated in the scheme. However, when the investiga- India, and Mexico to employ third-party intermediaries
tors reported their preliminary findings to Walmart’s top who made payments to foreign government officials
executives, including then-CEO Lee Scott, the executives without reasonable assurances that they complied with
were reluctant to report the bribery because they knew it the FCPA [(Foreign Corruption Practices Act)]”.
would be a serious blow to the firm’s reputation, which In the wake of the scandals, many Walmart share-
was already suffering due to other issues. The prospect holders demanded, among other things, disciplinary
of revealing the scandal was especially bitter because action and compensation cuts against those involved.
Walmart had been drawing media and investor attention Shareholders are also demanding that the leaders of
for their explosive growth in Mexico as a shining success Walmart continue to improve transparency and compli-
story. Admitting that this growth had been significantly ance standards. As part of their compliance overhaul,
fueled by bribery would look very bad for the company. Walmart announced they would begin tying some
The scandal’s impact on Walmart was significant. executive compensation to compliance efforts.
Shortly after the New York Times’ investigation was Through federal prosecutors and regulators initially
published, the stock lost $1 billion in value, and share- sought $600 million in fines, Walmart will pay just $282
holders began filing lawsuits against the company and the million to settle the charges. In addition, Walmart will
company’s executives. In addition, Walmart had to pay for be monitored and subject to compliance guidelines of
their own internal probe, not to mention hire a number of both the Department of Justice and the SEC for the next
lawyers to represent the company and the company’s top couple of years. One major reason Walmart may have
management as well as advisors and consultants to help not faced higher fines and more serious consequences is
restructure their internal ethics and compliance systems. because of the company’s attempts to reform, spending
Walmart spent approximately $900 million in legal fees nearly $1 billion to improve prior to the settlement.
and investigations, plus the company will pay millions in
fines. Walmart’s internal probe revealed the likelihood of Safety Issues
bribery going on in other countries as well. The company,
therefore, expanded the investigation to include their Using overseas suppliers has also caused trouble for
operations in China, India, and Brazil. For example, at Walmart. Many of their suppliers, both inside the United
their Indian branch, Walmart suspended some key execu- States and in other countries, employ subcontractors to
tives who were believed to have engaged in bribery. This manufacture certain products. This makes the supply
investigation halted Walmart’s expansion in the country. chain complex, and retailers like Walmart are forced to
Indian authorities began investigating Walmart and their exert more oversight to ensure their suppliers meet compli-
joint venture partner at the time, Bharti Enterprises, to ance standards. Citing safety concerns or telling a supplier
determine if they attempted to circumvent Indian laws not to work with a certain subcontractor is not enough
on foreign investment. Foreign retailers like Walmart are without enforcement. Walmart learned this the hard way
allowed to partner with local businesses and open stores after a Bangladeshi factory fire killed 112 workers.
in the country so long as they do not own a majority The factory, Tazreen Fashions Ltd., had several
stake in the venture (less than 51 percent ownership). assembly lines devoted to Walmart apparel because
It is alleged that Walmart offered Bharti an interest-free at least one of Walmart’s suppliers used the factory
$100 million loan that would later enable them to gain a to subcontract work for Walmart. However, Walmart
majority stake in the company. Both companies deny they claims the supplier was unauthorized to do so, as
tried to violate foreign investment rules and have since Walmart had removed Tazreen Fashions from their
broken off their partnership. Such accusations not only list of approved factories months before the incident.
have serious consequences for Walmart but also for other Walmart subsequently terminated their relationship with
foreign retailers in India. Many Indian political officials that supplier. Previous inspections at Tazreen showed
were against allowing foreign retailers to open stores in many fire hazards, including blocked stairwells and a
the country at all. This alleged misconduct has added fuel lack of firefighting equipment. The fire burned down
for their opposition. Hence, the operation of other foreign the building and killed 112 employees, some of whom
retailers may be threatened. This situation demonstrates jumped to their deaths.
how the misconduct of one or two companies can impact Many were outraged that Walmart did not do a
entire industries. better job of ensuring the safety of factory workers that

produce merchandise for them. While Walmart does legally binding workplace safety agreement to improve
have auditing and approval mechanisms for subcon- worker safety in Bangladesh. The agreement required
tracted facilities, third parties usually perform the audits. retailers to pay suppliers more so that factories could
Suppliers often pay for the inspection processes as well. afford to make safety improvements, and it also pushed
This limits the amount of information that actually for the development of a standardized worker complaint
gets to the parent company. Critics have also accused and risk reporting process. Walmart declined to sign the
Walmart of advocating against equipping factories with agreement, however, and instead devised their own safety
better fire protection due to the costs involved. Walmart plan. The plan primarily involved hiring an independent
claims they take fire hazards and worker safety seriously. auditor to inspect the more than 200 Bangladeshi facto-
Walmart has also faced criticism on the home front, ries that produced goods for Walmart and publishing the
with safety violations being a common complaint. results publicly, including which factories failed the audit
Workers at warehouses in the United States that do and were no longer allowed to produce for Walmart.
business with Walmart have complained about harsh The plan also required factories that did not fail but still
working conditions and violations of labor laws. For had some unsafe conditions to improve safety standards.
example, in 2012, a group of delivery packing workers Critics argue that Walmart’s independent plan was
at a warehouse in Mira Loma, California, went on strike insufficient and much less ambitious than the workplace
and walked for six days to Los Angeles to draw attention safety agreement they declined to join. A recent survey
to allegedly miserable and unsafe working conditions revealed more than 36 percent of Walmart employees
and to deliver a petition to the Los Angeles Walmart believe Walmart should improve working conditions.
office. The situation is complex because such warehouse Another concern that has been raised is gun safety.
workers are hired and employed by staffing agencies or In 2019, there were multiple shootings in Walmart
third-party contractors, making it harder for Walmart stores that resulted in more than 24 deaths. CEO Doug
to assess working conditions. Walmart has argued that McMillon addressed Walmart workers by expressing
these third-party contractors are responsible for work- his condolences at the loss of life, highlighting heroic
ing conditions. Yet, as the firm hiring the contractors, acts during the shootings, and briefly outlining steps
Walmart has the responsibility and generally the power that would be taken, such as providing counseling to
to ensure their contractors and subcontractors obey employees who need it. While Walmart has engaged

proper labor laws. employees in computer-based active shooter trainings
The Bangladeshi fire and ongoing worker complaints since 2015, employees have expressed fears about their
have increased the pressure on Walmart to improve safety. Walmart’s current security efforts are intended to
their oversight and auditing mechanisms. Previously, prevent shoplifting, not shootings. Some have even pro-
Walmart employed a three-strike policy for suppliers tested Walmart selling guns due to the belief that selling
and subcontractors who violated their ethical standards. guns is adding to the gun violence in the country. Walmart
However, after the Bangladeshi fire, Walmart changed agreed to limit sales of guns, including discontinuing
their policy to adopt a zero-tolerance approach in which select types of rifle ammunition. Despite this change, the
Walmart exerts the right to terminate relationships with company may continue to face pressure from concerned
suppliers immediately after discovering a violation. employees, as well as the larger public, for stricter policies.
Walmart also requires all suppliers to have an independent
agency assess the electrical and building safety conditions Responding to Stakeholder Concerns
of their factories. To address domestic complaints,
Walmart applies the same monitoring system to U.S. Walmart has suffered significantly from scandals over-
suppliers. Walmart, furthermore, has begun sending seas. Consumer interest, customer loyalty, and other
independent auditors to make unannounced visits to U.S. factors important to a brand’s value have diminished
third-party-operated warehouses to check whether they for Walmart’s brand among college-educated adults. The
adhere to the firm’s ethical standards. Walmart hopes brand has struggled in their battle to gain e-commerce
these stricter measures improve compliance by their business due to increased competition from online
suppliers as well as reiterate the company’s commitment retailers like Amazon. Plus, Walmart has saturated many
to ethical sourcing practices. Yet these measures have markets at this point. As discussed, being a large multi-
failed to appease some critics who believe that Walmart national corporation brings many global risks, including
cannot truly be held accountable until the results of their bribery and supplier issues. In response to the allegations
factory audits are made public. of bribery, Walmart quietly replaced many top-level
The controversy of worker safety in Bangladesh executives in both Mexico and the United States.
intensified after yet another factory collapsed in 2013, At a pep rally held in May 2012, former CEO Mike
killing 1,127 workers. The tragedy caused Walmart and Duke emphasized integrity in operations and employee
other retailers to consider new safety plans. A group behavior at all levels and rewarded 11 employees for
of European retailers, worker safety groups, and labor “leading with integrity.” In highlighting the actions of
unions came together to develop and sign a five-year these select employees, he reiterated the firm’s ethics

hotline and open-door policy. He assured employees and including micro-wind installations in parking lots and
other stakeholders that the company was cooperating biodiesel generator sets. Their solar installations provided
with the U.S. Department of Justice in order to get to the 105 megawatts of solar capacity, the most of any company
bottom of the bribery allegations. Mike Duke acknowl- in the world by far and greater than the total solar capac-
edged that there were ethical issues in some Walmart ity of at least 35 U.S. states. Walmart efficiently manages
stores and stated that he planned to slow expansion so heating and cooling energy consumption by centrally
the company could focus on improving these issues. controlling the temperature of Walmart stores worldwide
As a form of damage control, Walmart ran an from the Bentonville headquarters. The company is
advertising campaign to frame the company as an also opening new stores and retrofitting existing ones
“American success story.” After market research revealed with high-efficiency LED and low-mercury fluorescent
Walmart’s brand image had lost traction among college- lighting and is in the process of replacing open freezers
educated adults, Walmart developed a multi-million- with secondary loop refrigeration systems. Walmart is
dollar advertising campaign called “The Real Walmart.” furthermore attempting to reduce fossil fuel use and sell
The advertisements featured customers, truck drivers, more “green” products. The company has doubled their
and employees sharing their happy experiences with the fuel efficiency for their 6,000 trucks that cross the United
company. Walmart particularly wanted to target opinion States. Since 2007, Walmart has been able to deliver more
leaders who could then convince others of the company’s products while reducing mileage by 300 million.
value and positive brand image. The ads were first released One of the most unique and well-regarded of
during the Kentucky Derby and were also featured on Walmart’s sustainability efforts is their Sustainability
Sunday news shows. This advertising campaign was Index, which it developed with the help of a nonprofit
similar to those released by other companies attempting coalition known as The Sustainability Consortium. The
to restore their image, such as Toyota during their recall Sustainability Index is essentially an attempt to rate and
crisis and BP after the Deepwater Horizon disaster. categorize all of Walmart’s products and suppliers on
a variety of sustainability-related issues. Between 2009
Sustainability Leadership and 2012, Walmart worked with researchers to develop
the basic categories and determine what information
Among Walmart’s long-term sustainability goals are would be required for the Index to work. Then, starting
to be supplied entirely by renewable energy, create in 2012, Walmart began sending out requests for this
no waste, and sell products that sustain people and information to their suppliers. For example, suppliers
the environment. In the short term, Walmart aims to of products that contain wheat, such as cakes, cookies,
be powered by 50 percent renewable energy, reduce and bread, were asked to provide detailed information
emissions by 18 percent, and achieve zero waste to landfill about the sourcing of that wheat, from fertilizer use
in the United States, U.K., Japan, and Canada all by tracking to soil fertility monitoring to biodiversity
2025. In order to achieve these ambitious goals, Walmart management. Computer and jewelry suppliers were
has built relationships with influential people in supplier asked about the mining practices used to extract their
companies, government, NGOs, and academia. Together materials; toy makers about the chemicals used in their
they have organized Walmart’s environmental goals into manufacturing processes; and so on. Walmart uses this
14 Sustainable Value Networks (SVN), from “Global information to rank their suppliers from best to worst
Greenhouse Gas Strategy” to “Packaging” to “Forest & on the Sustainability Index, and then gives that informa-
Paper,” which allow the company to efficiently integrate, tion to those in charge of making Walmart purchasing
implement, and evaluate their sustainability efforts. This decisions to use in determining which suppliers to buy
approach has served them well. By 2012, Walmart had from. Presumably, the end result is that more sustainable
115 onsite rooftop solar installations in seven countries products end up on Walmart shelves, and suppliers are
providing 71 million annual kilowatt hours of electricity. incentivized to improve their practices to better compete
They had completed 26 fuel cell installations in the United with others on the Index. The initiative is exciting
States, providing 65 million kilowatt hours of annual because Walmart’s industry power is so great that a
electricity, and were also testing micro-wind and solar successful implementation could truly drive change
water heating projects in various locations. Walmart’s throughout entire supplier industries and chains. By
company value of everyday low costs translates to their 2018, Walmart met their goal of purchasing at least 70
renewable energy endeavors through the signing of long- percent of goods from suppliers participating in their
term contracts with renewable energy providers. These Sustainability Index. The index covers more than 125
contracts finance utility-scale projects in renewable categories of products and more than 300 buyers.
sources, allowing these options to be offered at lower Although Walmart’s environmental overhaul is a
cost not only to Walmart but also to other clients of step in the right direction, some are skeptical as to
these providers. whether it can accomplish their goals. Many claim that
By late 2014, Walmart had well over 335 renewable Walmart’s apparent sustainability gains are overstated,
energy projects in operation or under development, lacking in critical information, or downright misleading;

in other words, “greenwashing” advertising rather than Walmart acquired a majority stake in a massive Indian
actual change. Some suppliers are worried about the e-commerce company, Flipkart, to better compete in
Sustainability Index, including the amount of increased the country. Flipkart is introducing a streaming service
time and expense it will take to provide the required to compete with Amazon Prime and Netflix. The more
information and the business implications of products Walmart expands internationally, the more the company
that receive higher “sustainability” rankings being given must decide what concessions they are willing to make
preferential treatment. Also, the concept of “being to enter certain markets.
green” is subjective, since not everyone agrees on how it Despite the difficulties of operating globally,
is defined or whether one environmentally friendly prac- Walmart has a significant presence in many countries
tice is necessarily more beneficial than another. Despite such as the U.K., Canada, and Mexico. The company’s
these obstacles, Walmart seems to have achieved some focus on expanding their operations in India and further
substantial successes in this area through their dedica- developing their presence in China could also pay off for
tion to their goals and the strength of their partnerships. the retailer. Though the company will likely experience
several bumps in the road, several of their international
markets appear to offer strong growth potential.
Walmart Today
Walmart remains the preferred shopping destination for
many consumers. Although Walmart prospered during The Future of Walmart
the recession while other retailers suffered, the company
has faced stagnating sales in many established markets. Walmart can be viewed through two very different
Walmart acknowledged that they strayed from Sam lenses. Some think the company represents all that is
Walton’s original vision of “everyday low prices” in order wrong with America, while others love the retailer.
to court higher-income customers. Several initiatives, In response to criticism, and in an attempt to initiate
such as Walmart’s adoption of organic food and trendy goodwill with consumers, the company has continued
clothes, did not achieve much success with discount to improve stakeholder relationships and made efforts
shoppers. Walmart also underwent a renovation effort to demonstrate that they are an ethically responsible
that cut certain products, such as fishing tackle, from company. Although they have faced controversy regarding
their stores. These actions alienated Walmart’s original competition, suppliers, employees, and global corruption,
customer base. Households earning less than $70,000 among other things, they have also demonstrated concern
annually defected to discounters like Dollar Tree and for sustainability initiatives and social responsibility.
Family Dollar. Analysts believe Walmart’s mistake was Walmart’s goals of decreasing waste and carbon emissions
trying to be everything to everyone, along with copying and their Sustainability Index extend to all facets of their
their more “chic” rivals like Target. Because of these operations, including suppliers. These efforts demonstrate
blunders, in addition to external pressures such as market Walmart’s desire (whether through genuine concern for
saturation and strong competition from other retail the environment or for their own bottom-line profits) to
giants, Walmart faced a sales slump. As a result, Walmart become a more sustainable company.
is returning to Sam Walton’s original vision and their Similarly, Walmart’s creation of a sophisticated
previous “everyday low prices” mantra. Walmart is also global ethics and compliance program shows that
investing significantly in e-commerce as an untapped area they have come a long way since their beginning,
of growth in the hopes of competing more directly with when formal ethics programs were deemed unnecessary.
Amazon and other e-commerce retailers that have drawn However, without strong monitoring systems and a com-
away some of their customer base. In fact, Walmart mitment from top management to enforce the company’s
outpaced Amazon’s growth in 2019, with shares increas- ethics policies, such efforts will prove fruitless. Overseas
ing by 21 percent. Though Amazon has attracted many bribery scandals and employee discontent have tarnished
investors as a fast-growing stock, Walmart surprised Walmart’s reputation. As a result, the company is
many with their growth after years of declining sales. working to improve internal control mechanisms and
Walmart is known for their ability to adapt quickly to supplier auditing. Both critics and supporters of Walmart
different environments, but even this large-scale retailer alike are waiting to see whether Walmart’s efforts will
has experienced trouble. For instance, they were forced position the company as a large retailer truly dedicated
to withdraw completely from Germany and South Korea to social responsibility.
after failing to interest the local populations. In addition,
Walmart sold 80 percent of their Brazilian operations Questions for Discussion
in an effort to pull away focus from poorly performing 1. Do you think Walmart is doing enough to become
markets. Walmart has also struggled in India, one of the more sustainable?
world’s largest markets, after failing to find a way to 2. What are the ethical issues Walmart has faced?
navigate the country’s complex regulatory environment 3. How is Walmart attempting to answer concerns
for foreign retailers in order to sell directly to the public. regarding misconduct?

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CASE 4
Google Searches for Solutions to Privacy Issues

Introduction This case analyzes Google’s efforts to be a good
corporate citizen and the privacy issues the company has
Google’s ease of use and superior search results have faced. The analysis starts by providing background on
propelled the search engine to its number one sta- Google, their technology, and their initiatives. Google’s
tus, ousting former competitors such as AltaVista and efforts to be a socially responsible company is dis-
WebCrawler. Even later offerings by other large tech cussed. We then discuss the criticisms levied against
companies using comparable algorithms, such as Bing Google, including their initial attempts to break into
by Microsoft, have failed to make significant inroads the censored Chinese market, their tracking of users,
with internet users, with Google retaining an impressive and more recent changes to their privacy policies. We
90 percent of the global market share of mobile, web, examine how Google has sometimes clashed with gov-
and in-app searches. Each day, more than 3.5 billion ernment authorities. Finally, we review some of the legal
searches are processed by Google. As the search engine methods that have been proposed to regulate internet
gained popularity, it began expanding into several dif- data collection practices and Google’s response to the
ferent ventures, including web analytics, advertising, and proposals.
digital book publishing. It has spent billions to acquire
hundreds of companies in a variety of industries, from
robotics to smart home devices to intangibles such as Company Culture
voice recognition technologies.
As may happen with any large company, Google has Google adopted a decentralized approach to empower
experienced their share of ethical issues. Their mantra their employees. Their corporate headquarters in
“Don’t Be Evil” was called into question after they Mountain View, California, is known as the “Googleplex”
worked with the Chinese government on a secret project and consists of a campus containing such amenities as
called Dragonfly to censor aspects of some of their sites on-site gymnasiums, swimming pools, a bowling alley, an
to enter the market. Though Dragonfly was ultimately outdoor volleyball court, and even high-tech “nap pods”
terminated, Google’s vice president of public policy for optimized downtime. When Sergey Brin and Larry
would not commit to the U.S. Senate to not engage in Page founded the company, they recognized employees
censorship in China in the future. Google has also been had to put in long hours to make the company not only
investigated and sued by multiple governments based on successful but flexible enough to adapt to the changing
concerns that their widespread reach and market power environment. Thus, Google employees are provided
violate antitrust laws. with fringe benefits to make the campus seem like their
The hot ethical topic for many internet users, how- second home. They built a sense of community with
ever, is the company’s approach to internet privacy and break-out zones and micro-kitchens around the campus
collection of user information. To improve their services— in addition to their peer-to-peer coaching program,
including customized search results, targeted ads, and Googler to Googler. The company strives to make their
more precise integration of their various offerings— corporate culture fun and innovative.
Google tracks and leverages user information without At the same time, Google works to ensure they have
explicit permission (although Google’s privacy statement top talent. While they reinvent the office experience, they
informs users about the recordkeeping, and Google does also take different tactics in recruiting to ensure they
allow users to opt out of some forms of tracking). Such hires the most creative, talented individuals. For instance,
tracking is common practice for internet companies, but Google recruiters take a bottom-up approach when
Google’s deep access to so many different types of user reading résumés. Recognizing that top items such as
information has led people to question whether Google education and work experience do not always guarantee
violates user privacy. Considering the increasing amount the applicant is innovative, some Google recruiters start
of cyberattacks and the U.S. government’s determination at the bottom of the résumé where applicants put more
to crack down on these illegal attacks, consumers also creative information. Google’s innovative approach to
worry their private information, tracked and stored by company culture is one of the reasons why they have
Google’s algorithms, might be compromised. become successful in so many different market niches.
This material was developed by Kelsey Reddick, Jennifer Sawayda, Michelle Urban, and Isaac Emmanuel under the direction of O.C. Ferrell and
Linda Ferrell, © 2019. This case is intended for classroom discussion rather than to illustrate effective or ineffective handling of administrative, ethical,
or legal decisions by management. All sources for this case were obtained through publicly available material.

426 Case 4 Google Searches for Solutions to Privacy Issues
Products making an online purchase (pay-per-conversion). This

model is attractive to advertisers because they only pay
Although Google started out as a search engine, they when their ad is effective, as determined by the metric
have since branched out into a variety of fields, including of their choice. The twist, however, is that Google does
consumer electronics and productivity tools. While it not set ad prices, but rather puts their limited advertising
would be too long to list all of Google’s products, some space up for auction; companies submit “bids” for how
of the more popular offerings are described below. much they will pay per customer action, and higher
bids generally get more ad time (other factors are also
Search Engine considered, such as how popular an ad has been so far).
Since Google makes no money from even a very high bid
According to Larry Page, a good search engine “under- if customers do not engage with the ad, advertisers are
stands exactly what you mean and gives you back incentivized to bid high, which benefits Google’s bottom
exactly what you want.” This philosophy was the line. Google promotes the model as a win-win; the
founding principle behind the creation of Google and company makes a profit and customers get more bang
is a fundamental reason why the Google search engine for their advertising buck.
surpassed competitors. Google leverages their various product offerings
Google could not have gained such prominence to provide a variety of attractive advertising options.
without an in-depth search index of the web’s content. Companies can choose to have their ads displayed as
The company creates this index using programs called “sponsored links” alongside search results for certain
“Googlebots”—automated web crawlers that visit web- keywords, or as banners on any of the more than two
pages, add their content to the index, and then follow the million websites that display Google ads in return
links on those pages to other parts of the internet. This for a cut of the profits (known as the Google Display
process is ongoing, with every indexed page periodically Network). Google continuously expands placement
revisited to ensure the index contains the most updated options to improve ad performance. YouTube is another
material. Google’s index is one of the most extensive in option, offering video ads before, during, or after
the world, with well over 100 million gigabytes worth videos, as well as traditional banner space on the site.
of information. Mobile is also becoming a critical advertising space,
A good search engine’s index must not only be through searches on both mobile devices and apps that
comprehensive but also easily accessible. To achieve allow advertising. Improving the effectiveness of their
easy access, Google uses algorithms to organize search AdWords service is a key driver of Google’s collection
results according to their perceived relevancy. Google of user information—the more they know about their
constantly searches for new pages in a process called users, the more targeting options they can provide
crawling. When a new page is crawled, Google analyzes to advertisers and the more precisely they can serve
its contents and catalogs it, a process called indexing. targeted ads to desired consumer segments.
When a user types a search term into Google’s search
box, Google’s index matches the term with what is
deemed the most relevant materials and creates a list of
Web Browser
these materials for the user, a process called serving. The Google Chrome is the most popular web browser in the
order in which the results are served to users is called world with about two-thirds market share. When Google
ranking. Factors considered in ranking include user’s Chrome was released, it was praised for its unparalleled
location, language, device, site load speed, and more. speed, support, and security. The Chrome browser is
Each search result is followed by a few sentences describ- known for loading within seconds and maintaining a
ing the webpage (called a “snippet”). To maintain a simplistic design to make it easier for users to navigate.
competitive edge, Google responds quickly to their users’ Chrome is also updated more frequently than most of
queries, with a typical response time of approximately the other browsers, allowing Google to quickly push
one-fourth of a second. out new features and security improvements. With more
than 1 billion monthly active users, the web browser has
Advertising a vast audience. The Chrome Web Store contains a wide
selection of apps and extensions, providing additional
Google’s main source of revenue is advertising. The flexibility and functionality for users.
company earns approximately $116 billion in advertis-
ing revenue. Google’s signature advertising platform
is Google AdWords, first introduced in 2000. Google
Email Account
AdWords differs from traditional advertising in that Google’s email account service, called Gmail, has
advertisers do not pay Google anything upfront, but more than 1.5 billion monthly active users and is
only pay when customers take action—either by viewing the world’s largest email service provider. Gmail was
the ad (pay-per-impression), clicking on the ad (pay-per- initially revolutionary for the huge amount of space
click), or performing a certain predefined action such as it offered—1 gigabyte per user when rivals were only

offering 100 mega bytes or less—and the integration the source code is available for outside users to view
of Google search, which gave users a robust way to and use. However, Google has copyrighted the Android
search within their stored emails. Since then, Gmail has name and logo, as well as some proprietary features of
continued to offer popular features such as snoozing, Google’s version of the software. Companies that wish
email “nudge” reminders, email scheduling, clickable to claim they make “Android” devices must enter into a
attachments, two-factor authentication, predictive Smart licensing agreement with Google. The Android operating
Compose, a variety of add-ons, and deep integration system is most often used in mobile devices and tablets
with other Google products such as Hangouts, YouTube, but can also be found on other devices, including full
Maps, Drive, and Calendar. computers, game consoles, and digital cameras.
Android has become the most popular mobile
operating system in the world, making up over 86
YouTube percent of the market. In many countries, Android has
In 2006, Google acquired video sharing site YouTube for more than 90 percent market share. Apple’s iOS, while
$1.65 billion. YouTube allows users to upload and share undeniably a strong competitor with a loyal customer
original videos and has become the second most visited base, trails far behind with 15 percent of the smartphone
of all websites (Google.com is the most visited site in the market. One reason for Android’s larger market share is
world). Everyone from global corporations to consumers that, unlike Apple and their iPhone and iPad, Google is
uses YouTube to share videos ranging from video blogs not the only company that makes Android phones and
to parodies, to corporate messages to news events. By tablets; Samsung, HTC, Motorola, T-Mobile, Sony, and
selling video advertising slots before, during, and after many other manufacturers develop Android devices.
videos, as well as placing banner ads in free space on the However, there are disadvantages to this approach. For
site, Google has made billions in advertising revenue. example, Amazon built their mobile offerings, the Fire
Additionally, YouTube content creators can share in Phone and Kindle Fire tablets, off the Android open
advertising profits from their videos through YouTube’s source code, and now competes directly with Google
Partner Program, allowing popular “YouTubers” to make in the mobile sphere. In Europe, Google’s partners can
careers out of their channels. now offer Android-powered phones without Google
Although YouTube opened up new opportunities apps pre-installed on the devices. Google is also a direct
in marketing and entertainment, it has had its share of player in the mobile device market with their Nexus line
controversy. YouTube has been sued by organizations of phones and tablets, placing them in the uncomfortable
such as Viacom for copyright infringement after find- position of competing with their business partners. Still,
ing copyrighted content on YouTube’s site. YouTube’s Android has been a great success for Google, vastly
Community Guidelines specifically directs users to increasing the company’s reach into electronics. One top
respect copyright. However, not all users heed the Google executive called the initial Android Inc. acquisi-
warning. To detect and eliminate copyrighted material, tion the company’s “best deal ever.”
YouTube enables users to “flag” videos for copyright
infringement. If, upon review, the flag is found to be valid,
the offending video is removed. YouTube has invested Web Analytics
$100 million in automated system called Content ID In November 2015, shortly after acquiring Urchin
which automatically compares newly uploaded videos Software Corporation, Google released the free web
to a database of copyrighted material and notifies the analytics service Google Analytics which has grown
copyright holder if a match is found. To date, Content to become the most popular web analytics service on
ID has paid more than $3 billion to rights holders. the web with approximately 30 million active sites.
Google believes providing tools to enable self-interested Google Analytics tracks and freely reports website traffic
copyright owners to protect their property is the best statistics, giving businesses a market research tool to
way to police YouTube, arguing it is simply not feasible understand how customers are interacting with their
for the company to screen the more than 500 hours of websites. The dashboard is broken out into five reports:
video uploaded to the site every minute. Realtime, Audience, Acquisition, Behavior, Conversions.
Google Analytics 360, a premium version, is designed
to help companies target potential customers with even
Android more in-depth analytics, tying in data from other Google
In 2005, Google acquired the startup firm Android Inc., products such as Tag Manager and Data Studio. The
which worked on mobile phone software technology. tool identifies the habits of individuals from web and
In 2008, the Android operating system was released by television to mobile, competing with companies like
the Open Handset Alliance, a team of organizations led Salesforce and Oracle. Services like Google Analytics
by Google whose mission is to promote development helps website owners measure and interpret the effec-
of open standards for mobile devices. The Android tiveness of business activities. Google tracks visits via a
operating system is an open source platform, meaning user’s IP address, raising some privacy concerns.

Expanding the Product Mix in assets of its own. They invest this money in startup
companies at the forefront of technological innovation.
Google offers several other popular products to businesses The money goes not only to firms that market internet-
and consumers. Google Translate and Google Maps based technologies or consumer electronics, but also to
offer automated translation and mapping/directional green technology firms, biotechnology and life-sciences
services. Google Flights provides flight information companies, and more. Their best-known investments
including price data from many airlines. Google Drive include Uber, Lime, and Slack. GV’s goal is to invest
allows users to store files in the cloud and share them in entrepreneurs that can change the world through
with others. The service offers 15 gigabytes of free technology by having “a healthy disregard for the impos-
storage per user, and more can be purchased if desired. sible,” mirroring what the Google X department is trying
The company is also investing in artificial intelligence to do within Google itself.
(AI) processing and has developed a new chip called
the Tensor Processing Unit. This is a breakthrough in
the more sophisticated systems needed to run artificial Google Sustainability
intelligence applications. Google aims to push AI Google has recognized the business opportunities
processing into devices like phones and virtual assistants. that come from adopting sustainable operations and
Google is also known for their forays into exciting technologies. Greener technology not only saves Google
and cutting-edge technologies, especially through their money in the long run with decreased energy costs, it
semi-secretive Google X department, whose mission is to also enables the company to create greener products
develop “moonshots”—science fiction-like technologies for consumers. Google, which reached their goal of 100
that have a slim chance of succeeding but could change percent renewable energy for their global operations
the world if they do. Research projects underway at in 2017, claims their data centers use 50 percent less
Google X include using machine learning to teach robots energy than typical data centers. Now, 100 percent
new skills and using space optics to transmit high-speed of shipments to and from Google are carbon neutral.
data. One of their retired initiatives involved developing Google has committed to include recycled materials in
a real-time heads-up display for the average consumer. every single product they make. For employees, Google
The end result was Google Glass, a wearable computer offers a shuttle system run on biodiesel, an on-campus car
in the form of glasses worn on the face that can display sharing program, company bicycles to commute between
information in front of the wearer’s eyes, respond to ver- buildings and departments, and the largest electric vehicle
bal and movement commands, and more. Google Glass charging station in the country. Other sustainability
was publicly released in 2014 and has been applied to a successes for Google include a large solar installation on
wide variety of commercial applications, from providing their campus and LEED-certified buildings.
doctors with hands-free information during surgery to
helping autistic children interact with their environ-
ment. However, the device never achieved mainstream Google.org
popularity. The style of the glasses was unappealing and Google.org is the charitable arm of the organization.
the technology created privacy concerns since wearers According to their website, the organization provides
could use them to record others without permission or assistance to “nonprofits using technology and innova-
cheat on exams. Though Glass was retired, the product tion to tackle complex global challenges” by giving more
lives on in its enterprise edition for businesses. The than $100 million in grants and 200,000 volunteer hours
technology highlighted the need for rules to protect each year. Google.org also develops tools for nonprofits
people from being recorded. and provides disaster relief. Google for Nonprofits
provides resources such as discounts on Google products
and free AdWords advertising to nonprofit organiza-
Google’s Initiatives tions. Google.org has also partnered with nonprofits to
Like all successful major corporations, Google is expected offer them use of Google’s considerable resources. For
to act with integrity and give back to the communities example, they provided tools to the National Center for
where they do business. Google has invested in a number Missing and Exploited Children to help the nonprofit
of initiatives that support economic development, envi- in their fight against global child exploitation. Google
ronmental awareness, and charitable endeavors. extended their community service outreach efforts with
the introduction of the Google.org Fellowship that allows
their employees to work full-time for their nonprofit
GV partners for up to six months. Collectively, Google aims
In 2009, Google formed Google Ventures, later shortened for 50,000 hours of pro bono work annually through
to GV, as a separate entity to provide funding for startup the program.
firms. The venture capital fund began with $100 million In addition to the company’s work through Google.
in seed money and now manages more than $4.5 billion org, Google contributes hundreds of millions of dollars

directly to various charities and socially responsible four times per year could possibly understand the full
organizations. Just before the company’s initial public scope of Google’s AI development. When debate about
offering in 2004, Google’s cofounder Larry Page prom- their board members continued, it became clear that the
ised Google would continually contribute 1 percent of board was a liability for Google. Google dissolved the
their profits, 1 percent of their equity, and a significant ethics board after just one week and resolved to find
amount of employee time to philanthropic endeavors. better ways to add outside perspective on AI topics.
In terms of giving employee time, Google encourages Google also faces intense antitrust scrutiny from
employees to get involved in giving back to their com- the European community. Competitors in Europe claim
munities. For instance, Google matches up to $6,000 of Google uses their dominant market position to promote
each employee’s contributions to nonprofits annually. their own offerings and demote rival results in search
They have donated more than $50 million to thousands listings. In 2010, the European Union (EU) investigated
of nonprofits. Google also encourages employees to take Google’s practices. Google proposed concessions and
time to volunteer in their communities, especially during business changes it was willing to make to satisfy
their annual GoogleServe event, which sets aside one to competitors and investigators, but none were accepted,
two weeks each June for Google staff worldwide to get and the EU announced formal charges against Google
involved in their communities and donate time to good in 2015. The initial charge was that Google favors their
causes. comparison-shopping service over competitors. The
EU later filed another antitrust charge against Google
Privacy targeting their AdSense advertising platform. These
accusations are similar to the EU’s investigation into
Being a large company, Google has many risks and Microsoft, which eventually led to $2.3 billion in fines
ethical issues they must constantly address. In many and significant changes in how Microsoft conducted
ways Google has helped advance ethical conduct in the business worldwide. Google was fined a third time in
web and technology industries. Google has been named 2019 for hindering competition. The $1.7 billion fine
multiple times among Ethisphere Institute’s “World’s was in response to Google allegedly blocking their
Most Ethical Companies” due to their contributions rivals from placing ads on third-party websites. In total,
to the community and the environment. The company Google has been fined more than $9 billion by the EU in
also consistently ranks among Fortune magazine’s “100 the past few years alone. Additional changes need to be
Best Companies to Work for” because of their fun and made by Google to avoid further investigations.
innovative work environment. For the sake of brevity, this case will focus on one
One of the greatest risks faced by digital companies major ethical issue Google has continually wrestled with
involves hacking attacks and online scams. Google is as they seek to expand their reach: privacy. The advent
attempting to address these risks head on. For example, of the internet and mobile technology provides so many
Google was hit with a massive phishing attack. Gmail opportunities for stakeholders that many do not realize
users were sent an email that supposedly came from the cost for this information might be significant portions
someone they knew inviting them to open up a document of their privacy. Many consumers are shocked to find
in Google Docs. Those that clicked on the link were that web companies such as Google and Facebook track
directed to a real Google page, where they were asked their online activity and use this information to tailor
to input their passwords to download a fraudulent app. advertisements or sell to marketers. Other consumers
Once the fraudsters had the users’ credentials, they used feel that Google’s use of their personal information
them to access the users’ contact lists to send out more is a small price to pay in exchange for access to the
phishing emails. Google immediately reacted to disable company’s superior services. For Google—which offers
the accounts and notify their Gmail users. Though so much free content and gets most of their revenue from
phishers are becoming more sophisticated, Google advertising—this information is extremely valuable to
successfully blocks approximately 100 million phishing their continued business success. Google’s privacy policy
emails per day. In addition to their preventative efforts, details what information they collect and how they use
when Google can’t positively identify a phishing attempt, that information. For instance, Google claims they may
they display a safety warning above questionable emails share non-personal information with their partners.
in a user’s inbox. Despite Google’s attempts to be transparent, there
Despite their contributions to ethics, Google’s are ethical gray areas regarding the collection and use
actions have been called into question. For instance, of data. Because there is still little legislation regulat-
when Google created an ethics board to guide “respon- ing how internet companies gather and employ user
sible development of AI” at the organization, thousands information, it is tempting for firms to push the limits
petitioned for the removal of a board member who made on privacy. Going too far, however, creates reputational
concerning comments about trans people and whose and legal problems. Google was fined $57 million under
company was skeptical of climate change. Many ques- the EU’s General Data Protection Regulation (GDPR) in
tioned whether the eight members who would meet only France. The French data protection authority claimed

Google did not disclose how data is collected across their tracking features were found on the Apple iPhone.
services properly. Such concerns are not exclusive to the The revelations spurred legislators to write letters to
GDPR. Although Google is the most popular search Google asking for clarification on how they track users
engine, one recent poll found that 52 percent of Google and use this information. It was later discovered by an
users have concerns about their privacy when using AP investigation that even when users have turned off
it. This could be a potential obstacle for Google since location history, Google still saves their location.
consumer trust plays a big role in how they interact with Google also tracks users on the internet. For Google,
a company. The following sections discuss some of the offering advertisers the ability to specifically target their
major privacy issues Google has experienced. ads to desired users based on their interests is invaluable
to remaining competitive in the advertising market.
Additionally, Google uses this information to customize
Search Queries
their services to individual users. For example, users will
One of the major privacy criticisms levied against see different results for the same Google search terms
Google is that the company keeps track of users’ search based on what Google believes they most likely want,
terms. Keeping a longer history allows Google to create a based on what they know about them. Many privacy
custom user experience. Consider all the things you have advocates do not like this pervasive use of tracking, and
ever searched for using Google’s search engine. Now there is ongoing concern by regulators and others over
consider how comfortable you feel knowing the com- how Google uses the information they collect. Google’s
pany has recorded and stored all those search terms… privacy policy does allow users to opt out of many
forever. This tracking cannot be turned off—users can tracking functions, but users must actively do so—the
disable their Google web history to remove any external default is to be tracked. This is especially problematic
record of searches and prevent the information from for the many users that do not realize they are being
being used in certain ways, but Google will continue tracked and/or do not know how to use Google’s settings
to record and store search terms for internal purposes. to opt out. All of the popular web browsers, including
To address privacy concerns, users can automatically Google Chrome, now include a “Do Not Track” option,
set their Google history to be deleted on a 3-month or which indicates to websites that the user does not wish
18-month schedule, so it’s no longer a manual process. to be tracked. However, the designation has no legal or
To be fair, the practice of retaining search data is not regulatory authority and has so far remained mostly
limited to Google—many other internet firms do the symbolic, with many websites simply ignoring it.
same. Because Google is the most popular search engine On the other hand, supporters of Google maintain
in the world, they are more heavily scrutinized. that tracking is necessary to provide the best services
The big question users ask is whether their search to users. These services are often free because Google is
terms can be traced back to them personally. Google able to generate revenue through advertising. Tracking
claims that although they store users’ search terms, after also allows Google to customize their services to
18 months the data becomes “anonymized” and theo- individual user needs. Consumers must therefore be
retically untraceable. However, critics debate this claim proactive in deciding whether they place greater value
because supposedly anonymized data from other search on their privacy or Google’s free services.
engines was later matched to specific users. Google Although some people do not appear to mind having
claims they treat this information with respect, using it their web activity tracked in exchange for Google’s free
to refine their search engine. Yet under the Third Party services, Google has repeatedly violated public trust. In
Doctrine and the Patriot Act, the U.S. government could 2012, security analysts revealed that Google was using
subpoena the data if deemed necessary for national loopholes in Apple’s Safari browser to ignore their default
security. Needless to say, Google’s storage of users’ privacy settings while simultaneously telling Safari users
search terms is a controversial topic. In fact, several they were protected. Google eventually paid $22.5
smaller search engines such as DuckDuckGo use the million to settle the FTC charges and an additional $17
fact that they do not track user activity as a competitive million to settle similar charges brought by 37 states and
differentiator from Google. the District of Columbia. Google has also been accused
of failing to respect user privacy in the real world. In
2010, Google announced they had accidentally scanned
Tracking Users
data from some users’ personal wireless networks in
Tracking users has become a major issue for Google. the United Kingdom with their vans that collect data
A storm of criticism was unleashed when government and photos for their location-based services. The vans
regulators and consumers learned the company’s phones scanned wireless networks of nearby residences and
tracked users’ locations. It was revealed that Android collected activity data from unsecured, open networks,
phones contained location-logging features enabling the including emails, text messages, video and audio files,
firm to collect GPS coordinates of their users as well and more. Though Google promised they would destroy
as the coordinates of nearby Wi-Fi networks. Similar the data collected, a later investigation revealed Google

still retained some of this user data. The violation Gmail would be made publicly available on the internet
exacerbated their image of being a firm that disregards through Google Buzz. Although users could opt out of
privacy. Soon after the incident, it was discovered having this information released, they claimed the opt-
Google had been collecting the same type of information out features were difficult to locate. Other accusations
from unsecured residential wireless networks in other claimed that even those users who opted out of joining
countries as well. In the United States, Google was fined Google Buzz were still enrolled in certain features of the
$25,000 by the Federal Communications Commission social network, and that those who requested to leave
(FCC) for deliberately delaying and impeding its inves- the network were not fully removed. Although Google
tigation. The investigation led to a $7 million settlement worked to fix these problems, the FTC’s investigation
among Google, the FCC, and 38 states and the District found Google had acted deceptively and violated their
of Columbia. At least seven other countries also found own privacy policies. Google agreed to settle with the
Google guilty of similar activity in their jurisdictions. FTC by agreeing to never again misrepresent their pri-
Yet another privacy-related incident for Google vacy practices and allowing approved third-party firms
involved the Google Play App Store. A developer who to conduct privacy audits every other year regarding
started selling a mobile application through Google’s how the company uses information. These audits will
app store was shocked by the amount of information he take place for 20 years from the date of the settlement.
was given about his customers, including their names, That same year, Facebook agreed to a similar deal after
locations, and email addresses, even though nowhere allegedly violating their users’ rights to privacy, and
in the app buying process were customers asked to give other companies have since become subject to privacy
consent to release that information. The developer argued audits as well. If Google’s audits reveal problems, the
that this practice violated Google’s privacy policy, which FTC may impose fines of $16,000 for each violation
at the time stated that identifiable information would per day.
never be given to third parties without user consent. These audits are a blow to Google’s operations. As
Some privacy experts agreed with the developer; others one of the first internet companies to have this kind of
did not, stating that the information shared was minimal audit imposed on it, the company will have to tread
and of the type commonly expected to be given out in carefully regarding how it collects and uses information.
making any purchase. Still, Google’s approach to privacy On the other hand, Google might choose to see this as
continues to be a subject of controversy and debate. an opportunity to improve their internal controls and
As technology evolves, the definition of personally privacy practices to ensure user information is respected.
identifiable data changes. In 2019, Google and the Doing so could gain more trust from users and prevent
University of Chicago were sued in a lawsuit that future legislative action against the company. So far,
accused the company and the university of failing Google’s record in honoring the settlement is mixed.
to strip identifiable data from medical records in a Its 2012 privacy audit found no issues, but that same
collaboration designed to use AI to improve diagnosing year the FTC found Google’s bypassing of the Safari
medical problems. The artificial intelligence that Google browser’s default privacy controls to be a violation of
is developing reads health records to assist doctors. To the agreement and fined the company for it. As one
learn and produce accurate results, the machines must of the world’s largest internet companies, the actions
analyze large quantities of old health records. Though Google takes in this area will significantly impact the
patient data was largely “de-identified,” dates of services future activities of other companies.
were left intact, raising concerns. The lawsuit claims the
retention of dates violates HIPAA, the legislation that
From Many Privacy Policies to One
provides data privacy for medical information, because
dates could potentially be cross-referenced against other For most of their history, Google has had separate
data Google collects, such as location history from privacy policies for most of their products, each detailing
Google Maps, to identify individuals. how Google collects and uses information for that
product. Google’s rapid growth and expansion from just
search into an internet behemoth had resulted in over 70
Privacy Audits separate Google privacy policies across their offerings.
Although Google has faced lawsuits from consumers This was beneficial in one sense, as consumers who took
claiming the company violated their privacy rights, a the time to read the policies could understand in great
lack of internet legislation enables Google to continue detail how Google was operating each product. On the
many of their practices. However, Google found them- other hand, the overwhelming amount of policies was
selves in trouble with governmental authorities after confusing, tedious, and time-consuming to sift through,
allegedly violating their own privacy policies. In 2010, and the average consumer would have been hard-pressed
Google launched the failed social networking platform to decipher them.
Google Buzz. Most of those who chose to join were Google announced they was unifying their myriad
unaware that the identities of their frequent contacts on privacy policies into just one, which would govern

Google’s practices across their entire organization. At if Google does not comply with its desired changes.
first glance, this seemed like an efficient change. However, The company narrowly avoided yet another fine in the
it had many subtler implications that sparked wide- U.K. by agreeing to change their privacy policy for U.K.
spread concern. Could consumers still opt out of specific users, and there are signs it may make such a change
information-sharing in individual products? Did the new Europe-wide in an attempt to allay the concerns of the
policy adequately explain all the different ways Google EU and its member nations. Google has learned that
gathered and shared information so consumers could be activities which are legal in one country might not be
properly informed? Did the new policy expand Google’s legal in another.
information-gathering power under the guise of making The public’s reaction to Google’s unified privacy
things simpler? policy once again brings to light the more general debate
One especially concerning aspect of Google’s new over the company’s gathering and use of user informa-
policy was that it allowed the company to take all the tion. Supporters argue that Google uses this information
information they gathered on their users across all their to create improved services for users. It helps the firm
products and combine them together. Coupled with remain competitive with strong rivals such as Apple
the new unified login system, the new privacy policy and Facebook. Critics are concerned that Google is
allowed Google to use information on a much larger constantly overreaching and seems to have little actual
and more encompassing scale. Users’ Google searches concern for user privacy, only slowing or backtracking
might affect the ads they see on their Android phones, when they are forced to by consumer backlash or
YouTube browsing histories could be combined with governmental regulators. Critics are also worried by the
Gmail activity to better understand user interests, and ease with which Google appears to change their policies,
more. Was this “all-seeing eye” approach acceptable, which could spell trouble for users and their privacy
especially for such a large company with so many widely rights. Google keeps a log of changes made to their
used services? policies to improve transparency with a comparison
Understandably, the announcement of a unified tool that allows users to see what changes were made
privacy policy led to considerable backlash. Google between versions.
received letters from Congress members and U.S. attor-
neys general expressing concern about the new policy.
“Right to Be Forgotten”
Competitors such as Microsoft took advantage of the
situation to run ads drawing consumer attention to In 2014, the European Union’s highest court ruled that
Google’s potentially unsettling approach to user privacy. EU citizens have a “right to be forgotten.” In other
The EU asked Google to delay implementation of the words, consumers have the right to prevent certain
policy until it could study and better understand its types of content from showing up in online search
implications. In defending itself, Google emphasized results. Such content includes results that are inadequate,
that they were not gathering any more information than irrelevant, no longer relevant, or excessive. The court
before, nor were they making any changes to existing decision allows individuals to petition search engines to
user ability to opt out of information-sharing or use remove such content from search results, and if refused,
product-specific privacy settings. They were merely to take the matter to a local data protection authority
making their existing practices simpler and clearer for for adjudication.
customers to understand, as well as improving their The court decision sent shockwaves through the
own ability to serve users by unifying the information internet search community. Was this censorship, or the
it gathered across offerings. They argued the new policy beginning of an acknowledgment that search engines
was in legal compliance and refused to delay the transi- have a duty to at least somewhat curate their results?
tion. On March 1, 2012, the unified policy took effect. Was this a victory for privacy, or a defeat for freedom of
The new privacy policy was poorly received in speech? How will search companies be able to properly
Europe. The EU Justice Commissioner questioned the decide whether removal requests are legitimate or stretch
legality of Google’s new policy according to EU law. beyond the boundaries of the court decision?
French data regulators launched an investigation con- In response to the ruling, Google set up a process
cerning the new policy, believing the policy might not by which they process “right to be forgotten” requests.
adhere to EU Internet transparency and privacy laws. The claimant fills out an online form, which is reviewed
Google maintained their new policy met EU regulations. and processed by a team of Google lawyers, paralegals,
However, in 2013 six European countries banded and engineers. “Easy” cases, where the correct decision
together to take legal action against Google for not is relatively clear, are made by that team. Difficult cases
complying with the requests of the government. Google are forwarded to a senior panel of Google experts and
has since been fined by several European countries for executives to decide. For instance, a published U.S.
breaking their privacy or data protection laws, including record of the name of a 16-year-old German individual
nearly $1 million by Spain and $204,000 by France. convicted in the United States of a sex crime could be
The Netherlands threatened a fine of up to $15 million controversial because in Germany the record would

not be published due to his minor status. Google also in accordance with Chinese law. Such an agreement went
releases periodic “Transparency Reports” providing against the essence of what Google stood for—providing
information on right to be forgotten requests. So far, free and open access to information. Could Google agree
Google has received over 650,000 requests to remove to censor themselves and still hold true to their “Don’t
2.43 million URLs, mostly from individuals who want Be Evil” mantra?
to protect their private information. Google removes Despite criticism, Google applied the principles of
approximately 43 percent of these URLs. utilitarianism to the situation and concluded that the
Google and other internet search companies continue benefits of setting up a search engine inside China out-
to express their opposition to the “right to be forgotten” weighed the costs. They refused to offer localized email
concept, and many others agree. Some are opposed to or blogging, finding the Chinese censorship and report-
it outright, citing freedom of speech concerns; others ing requirements for these services to be too egregious.
believe it may be a good idea but that private companies However, for search Google decided the greater good
such as Google should not be the ones deciding which would be to provide Chinese citizens with “the greatest
links to keep and which to take down. Simultaneously, amount of information” possible, even if some of that
EU regulators are dissatisfied with how Google has information was censored. In 2006, Google opened their
chosen to interpret the court decision. For example, localized, self-censored Chinese search engine. Whenever
Google is only removing links from their Europe-specific a search term led to censored results, Google added a
search engines such as Google.fr or Google.co.uk, message to the results page notifying the user that some
meaning anyone can simply move to Google.com to find entries were missing. They also left up their original,
the hidden content. Simultaneously, other areas of the uncensored Chinese search engine hosted outside of
world are considering the right to be forgotten idea, with China, so users could try to use it if they wanted.
varying success. In Mexico courts have ruled for some Despite these precautions, Google’s plan ran into
individuals petitioning Google to remove content, but problems almost from the onset. Google gained signifi-
critics worry the right is being used largely by politically cant market share and became a serious competitor to
powerful individuals to remove unsightly aspects of their Baidu, but the company’s relationship with the Chinese
past. California has passed a law requiring websites to government was continually tense, with Google accusing
provide a mechanism by which minors can have content the government of interfering with the search engine
they post removed, believing children should not be beyond expectations. Google also faced intense backlash
punished for online missteps. Hong Kong’s top privacy in the United States, including their leadership being
regulator has embraced the concept wholeheartedly, called to testify at Congressional hearings about how
suggesting Google should apply the EU ruling to their they could justify self-censoring in China considering
operations globally. the principles they claimed to stand for everywhere else
“Right to be forgotten” adds another wrinkle in in the world. In 2010, Google announced they had been
Google’s privacy concerns. Now, at least in some parts targeted by a sophisticated cyberattack that appeared
of the world, Google must not only worry about the to originate from China and, among other things, had
information they collect itself, but also about what attempted to access the Gmail accounts of known
information posted by third parties might be showing in Chinese human rights activists. Google stated that the
its search results. implications of the cyberattack required them to reevalu-
ate their approach toward the Chinese market, and
they could no longer justify self-censorship. They shut
Google in China
down their China-hosted site and forwarded visitors to
Google has had a tough time in China. When Google their external, uncensored but often-blocked Chinese
decided to enter the world’s most populous country, they search engine. As a result, Google saw their market
faced an ethical dilemma. On the one hand, Google did share in China plunge and Baidu retaking its dominant
not want to miss the opportunity to tap into a market position. The Chinese government was also not happy
consisting of more than one billion potential consumers. with Google’s handling of the situation and immediately
On the other hand, Google could not enter China with- began blocking and/or censoring large portions of
out censorship. If it created a Chinese version of Google Google’s services.
and hosted it outside of China, it would be subject to Google did not give up on the largest market in the
China’s “Great Firewall,” which the government uses world. Google began a secret project in 2017 with the
to censor foreign sites. Google tried this method first, Chinese government called Dragonfly. The plan was to
but their Chinese search engine was intermittently again launch a censored search engine in China. The
blocked and was otherwise slow and inconsistent for project was kept under wraps until it was exposed by
users, causing Google to steadily lose market share to The Intercept, an online news publication. A previ-
domestic Chinese competitors such as Baidu. Google’s ous Google employee called the project disturbing. In
other option, to host a search engine from within China, 2019, Google officially terminated Dragonfly, and the
would require agreeing to self-censor their search results company stated they had no active plans to launch in

China. The company will have to remember the lessons on their operations. Google’s lobbyists are having a
they learned from both of their failed attempts and the profound impact on laws safeguarding internet security.
sensitive ethical issues involved with censorship if they
make any future moves into the Chinese market. Conclusion
Google’s success story is unparalleled among search
Government Response to Privacy engine providers. The company started off as a small
Issues search engine and ranking system, and has become one
of the most profitable internet companies in the world.
Consumer concerns over privacy issues prompted Today the company is the owner and provider of prod-
Congress to consider new legislation regulating what ucts that go above and beyond simply a search engine.
information internet companies such as Google can col- While there might be a risk of Google overextending
lect and how they can use it. Internet companies, in turn, itself, the company has a talent for making highly profit-
are attempting to make such legislation unnecessary by able acquisitions that increase its global reach.
developing their own industry standards, such as the As a way to manage its various businesses, in 2015
“Do Not Track” feature now found on all major web Google created a new publicly traded holding company
browsers. Such self-regulation is an attempt to ward off called Alphabet run by Google founders Larry Page and
federal legislation that could seriously limit the tracking Sergey Brin. Google was made a subsidiary of Alphabet
activities of companies like Google. with its own CEO. The founders believe that developing
Some of the ideas that federal regulators have been a holding company and “slimming down” Google to
discussing include a User’s Bill of Rights and a manda- focus more on its internet businesses will be beneficial
tory Do Not Track feature. The Bill of Rights would, for the firm in the long run.
among other things, require companies to adhere to Google has made itself into the epitome of a “best
certain privacy practices. Its intent in this area would company to work for.” The benefits Google offers
be to make internet privacy policies easier for users to employees are extensive, and Google empowers them
understand. A mandatory Do Not Track mechanism to make decisions to improve the company’s opera-
would be comparable to Do Not Call legislation, which tions. The company has taken a strong stand on green
makes it illegal for companies to sell to consumers over initiatives and supports technologies to address global
the telephone if those consumers are on the national challenges. Google’s “Don’t Be Evil” mantra became
Do Not Call registry. A similar law regulating internet a popular yardstick to guide Google’s actions. After
tracking could seriously impact how internet companies Google became part of the holding company Alphabet,
collect information. their popular motto was modified to “Do the Right
Many states are dissatisfied with the lack of federal Thing.”
action on this topic and have passed their own internet On the other hand, Google has faced challenges in
privacy laws. California law, for example, provides privacy, many of which continue to this day. Google is
special privacy protection to minors online and requires forced to draw a fine line between using user information
websites to disclose whether they are respecting the to generate revenue and violating user privacy. Because
“Do Not Track” requests they receive from user brows- Google can offer targeted advertising to advertisers
ers. However, more recent government decisions have through their collection of information, the company
overturned privacy regulations that would have required can provide quality internet services to their users for
internet providers to get users’ permission before being free. At the same time, Google has committed question-
able to sell their data. Critics claim that the government able actions that seem to infringe on user rights and has
is failing to address the privacy gap, giving online encountered resistance from governmental authorities
companies like Google free rein in collecting, storing, on many privacy-related initiatives.
and using user information. With the threat of new regulation, Google lobbies
Because legislation could be a serious threat to to prevent legislation from being passed that proves
Google, the company spends millions on lobbying and unfavorable to the company. Because Google depends on
employs lobbyists on their staff. Google hopes to stave tracking and similar activities to maintain profitability,
off regulation they feel restricts their ability to coordinate it has a large stake in the privacy issue. However, rather
targeted advertising or offer customized services to users. than seeing this solely as a liability, Google might
However, with privacy issues and internet breaches instead choose to improve its privacy practices and
becoming a growing concern, the chance of increased increase transparency in its operations. Google has the
regulation in the future is high. Although Google might responsibility to ensure stakeholder rights are respected.
not be able to prevent legislation restricting some of the Although Google has made great strides in social
activities of internet firms, they can work with regulators responsibility, both the company and society know there
to push for legislation with less of a negative effect is room for improvement. Google’s size, reputation, and

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Case 5 CVS Smokes the Competition in Corporate Social R
esponsibility 439
CASE 5
CVS Smokes the Competition in Corporate Social

Responsibility
Introduction marked with increasing westward expansion, 44 million
loyalty card holders, and more than 4,000 stores in
In 1963, brothers Stanley and Sidney Goldstein founded approximately 30 states. In the following five years, the
the first Consumer Value Store (CVS) with partner company’s acquisitions allowed CVS to gain leadership
Ralph Hoagland in Lowell, Massachusetts. The original in key markets, begin a mail order business, and open
CVS store sold health and beauty supplies. The company its 7,000th retail location. The company would later be
became widely successful and grew to include 17 stores rebranded as CVS Health.
during its second year of business. By 1967, CVS began The three most important acquisitions in the history
offering in-store pharmacy departments, and in less of CVS include MinuteClinic walk-in health clinics (in
than a decade, the company was acquired by the retail 2005), Caremark Rx, Inc. (in 2007), a PBM company,
holding corporation Melville Corporation. This marked and healthcare company Aetna (in 2018). To make refills
the beginning of CVS’s expansion across the East Coast simpler for customers and to compete more effectively
through new store openings or mergers and acquisitions. against rivals, CVS began introducing new services such
In 1974, CVS reached a major milestone of exceeding as online prescription refills. The company makes more
$100 million in sales. than $194 billion in revenue and has over 9,900 retail
As the company grew, they faced intense competi- locations.
tion, which they responded to through a differentiation CVS sells products that meet the highest quality
strategy. CVS focused on their core offerings of health standards as well as their own line of products whose
and beauty products and began placing stores in shopping specifications and performance are annually tested and
malls to generate more foot traffic. This strategy worked reviewed to ensure compliance with applicable consumer
well for the company, allowing them to hit $1 billion in safety laws. In addition, the company has instituted a
sales by 1985. The company celebrated its 25th anniver- Cosmetic Safety Policy that applies to all of the cosmetic
sary in 1988 with 750 stores and $1.6 billion in sales. The products they sell. CVS employs 295,000 people across
acquisition of Peoples Drug, a chain of drugstores based 49 states, the District of Columbia, Puerto Rico, and
in Alexandria, Virginia, allowed CVS to establish their Brazil, and the corporate headquarters are located in
presence more widely along the East Coast and spurred Woonsocket, Rhode Island. In a one year period, CVS
the launch of PharmaCare, a pharmacy benefit manage- filled and managed 1.9 billion prescriptions through
ment (PBM) company providing services to employers their PBM and provided services to 92 million PBM
and insurers. PBMs aid employers in managing healthcare members. The company is proud to note its eighth spot
benefit plans and in processing prescriptions. PBMs also on the Fortune 500 list. Today, CVS is one of the largest
have strong negotiating power with drug companies. In pharmacies and pharmacy healthcare providers in the
1996, the Melville Corporation restructured, and CVS United States and is composed of four business functions:
became independent as a publicly traded company on the CVS Pharmacy, CVS Caremark, CVS MinuteClinic, and
New York Stock Exchange (NYSE). CVS Specialty.
This new surge of investment allowed the company The following case will explain some of the legal
to expand widely across the nation into regions such as and ethical challenges CVS has encountered, including
the Midwest and Southeast. CVS acquired 2,500 Revco a settlement with the Federal Trade Commission (FTC)
stores, a drug store chain, in 1997. It became the largest and the U.S. Department of Health & Human Services
acquisition in U.S. retail pharmacy history. With the (HHS) regarding violations of the Health Insurance
rise of the internet, CVS seized upon the opportunity to Portability and Accountability Act (HIPAA) Privacy
launch CVS.com in 1999 (and Caremark.com after the Rule, deceptive business practices, and failure to report
2007 acquisition). This became the first fully integrated missing medications. Our examination will also include
online pharmacy in the United States. In another first how CVS responded to such allegations, and how they
for the U.S. pharmacy retail industry, the company have worked to redefine the company as a healthcare
introduced the ExtraCare Card loyalty program in provider. We will analyze the company’s ethical structure,
2001. The company’s 40th anniversary in 2003 was including its decision to stop selling cigarettes, as well as
This case was prepared by Jennifer Sawayda, Yixing Chen, Christine Shields, and Michelle Urban for and under the direction of O.C. Ferrell and
Linda Ferrell © 2019. It was prepared for classroom discussion rather than to illustrate either effective or ineffective handling of an administrative,
ethical, or legal decision by management. All sources used for this case were obtained through publicly available material and the CVS website.

440 Case 5 CVS Smokes the Competition in Corporate Social Responsibility
provide an overview of some criticisms the company The company also settled with the FTC by signing a
has received during its transition. The conclusion offers consent order requiring the company to develop a com-
some insights into the future challenges CVS will likely prehensive program that would ensure the security and
experience. confidentiality of information collected from customers.
In so doing, the company agreed to a biennial audit from
an independent third party. This audit was meant to
Ethical Challenges ensure that CVS’s program continued to meet the FTC’s
Like most large companies, CVS must frequently address security program standards.
ethical risk areas and maintain socially responsible rela-
tionships with stakeholders. Although CVS has at times Deceptive Business Practices
excelled in social responsibility, they have suffered from
ethical lapses in the past. The next section addresses In addition to privacy challenges, CVS has been
some of CVS’s most notable ethical challenges, some of accused of deceptive business practices. A 2008 civil
which resulted in legal repercussions. lawsuit involving 28 states was filed against the PBM
division of CVS, which acts as the prescription drug
claim intermediary between employers and employees.
HIPAA Privacy Case It also maintains relationships with drugstores and
As a company grows and achieves widespread influence, manufacturers. One of the main allegations of the
they also inherit a responsibility to act ethically and lawsuit claimed that doctors were urged to switch
within the law. In 2009, CVS was accused of improperly patients to name brand prescriptions under the notion
disposing of patients’ health information. It was alleged that it would save them money. Furthermore, these
that company employees threw prescription bottle labels switches were encouraged without informing doctors
and old prescriptions into the trash without destroying of the financial burden it would impose on patients,
sensitive patient information, making it possible for the and employer health care plans were not informed that
information to fall into public hands. This is a violation this activity would benefit CVS. This could be seen as a
of the HIPAA Privacy Rule, which requires companies conflict of interest at the expense of customers. Due to
operating in the health industry to properly safeguard the these allegations, the suit called for a revision in how
information of their patients. The allegations prompted the division gives information to consumers. In the end,
investigations by the Office of Civil Rights (OCR) CVS signed a consent decree without admitting fault
and the FTC, marking the first such instance of a and paid a settlement of $38.5 million to reimburse
collaborative investigation into a company’s practices. states for the legal costs and patients overcharged due
These investigations revealed other issues as well, to the switch in prescriptions. In a similar matter, a
including a failure of company policies and procedures multi-year-long FTC investigation concluded in 2009
to completely address the safe handling of sensitive that the company had misled consumers regarding prices
patient information, lack of proper employee training on certain prescriptions in one of its Medicare plans. The
on the disposal of sensitive information, and negligence switch harmed elderly customers who were billed up to
in establishing repercussions for violations of proper 10 times the amount they anticipated. CVS settled with
disposal methods. This was in spite of the fact that CVS the FTC for $5 million to reimburse customers for the
materials reassured clients that their privacy was a top change in price.
priority for the pharmacy. This claim, in addition to the
investigative findings, prompted the FTC to allege that
Misuse of Prescription Pills
CVS was making deceptive claims and had unfair security
practices, both of which are violations of the FTC Act. In 2012, CVS faced challenges with another federal
CVS settled the case with the U.S. Department of agency—the Drug Enforcement Administration (DEA).
HHS, which oversees the enforcement of the HIPAA The DEA suspended the company’s license to sell
Privacy Rule, for $2.25 million. The settlement also man- controlled substances at two Florida locations, only a
dated that the company implement a corrective action few miles apart from one another. These locations were
plan with the following seven guidelines: (1) revise and found to have ordered a total of three million oxycodone
distribute policies regarding disposal of protected health tablets in 2011. The average order for a U.S. pharmacy
information; (2) discipline employees who violate them; in the same year was 69,000 pills. Intensifying the
(3) train its workforce on new requirements; (4) conduct matter, abuse of narcotics pain medications, especially
internal monitoring; (5) involve a qualified, independent oxycodone tablets, was prevalent in the area. In fact,
third party to assess the company’s compliance with the some local clinics had become known as “pill mills” for
new requirements and submit reports to HHS; (6) estab- their liberal distribution of prescriptions for pain pills.
lish internal reporting procedures requiring employees to This prompted the state of Florida to implement legisla-
report all violations of these new privacy policies; and tion responding and attempting to control the rampant
(7) submit compliance reports to HHS for three years. misuse and diversion of pain medications.

esponsibility 441
CVS responded to the DEA’s investigation by Two years later, CVS agreed to settle an $8 million
notifying some of the area doctors that they would claim with the DEA for violation of the Controlled
not fill prescriptions written for oxycodone (Schedule Substances Act in its Maryland pharmacies. CVS faced
II narcotics). However, the company also requested a allegations of dispensing controlled substances pursuant
temporary restraining order against the DEA, which to prescriptions that did not have a legitimate medical
would disable the temporary suspension of selling purpose. CVS acknowledged that between 2008 and
oxycodone. The DEA suspension decreased the amount 2012 they dispensed controlled substances, including
of such narcotics being distributed to the two CVS oxycodone, fentanyl, and hydrocodone, in a manner not
locations by 80 percent in a period of three months, compliant with its obligations or with regulations. The
limiting their ability to make a profit. When the matter District Attorney in the case emphasized that pharmacies
came before a federal judge, he ruled that the company have a duty to ensure prescriptions filled are issued for
was at fault for lack of proper oversight in distributing a legitimate medical purpose. He also reminded doctors
oxycodone and other narcotics. The ruling further and pharmacists of the charge to protect against abuse of
implied company negligence since such a large number pharmaceutical drugs for non-medical purposes.
of dispensed pills should have been noticed as a blatant
abnormality.
Later that year, the DEA completely revoked the Moving Toward a Healthcare
licenses of the two locations to sell controlled sub- Company
stances—the first time this has occurred with a national
retail pharmacy chain. CVS claims that they have Despite the ethical challenges CVS has experienced, they
improved procedures regarding distribution of con- are trying to reposition themselves as a socially respon-
trolled substances; however, the DEA’s claims explicitly sible organization that places priority on consumer
assigned negligence on the part of pharmacists in health. Being a quality healthcare company not only
light of obvious “questionable circumstances.” These offers reputational benefits but also financial advantages
circumstances included the fact that several customers as well. Changes in both the economic and healthcare
were coming to Florida from out of state to fill prescrip- landscape are creating new opportunities for CVS to
tions. Many lacked insurance and paid in cash, red flags provide different programs and redefine themselves.
that can suggest drug abuse. This was in addition to the Trends including the declining number of primary
heavy prescription drug abuse problem in the area that care physicians, the 16 million baby boomers who are
had already prompted state legislation. becoming eligible for Medicare benefits, and the millions
Testimonies from employees indicated company of newly insured Americans under the Affordable Care
negligence as many had knowledge of the top prescribing Act (ACA) offer CVS an attractive market in which to
doctors in the area and awareness that daily oxycodone expand. For example, CVS has refocused their efforts on
quotas were being depleted—sometimes within 30 supplying the growing need for chronic disease manage-
minutes of the pharmacy opening. Pharmacists also ment that consumes costly resources when patients do
indicated that they set aside pills for those patients they not adhere to physician-recommended medications and
considered to have a real need for them because they had monitoring methods to maintain health. PBM services
strong suspicions that most of the people purchasing the are being successfully implemented, including mail
pills were abusers. They did not feel at liberty to refuse order, specialty pharmacy, plan design and administra-
prescriptions to customers, however, because they are not tion, formulary management, discounted drug purchase
trained to diagnose illnesses. In 2013, CVS announced a arrangements, and disease management services.
review of their database of healthcare providers to find Innovative programs such as Pharmacy Advisor and
abnormalities in narcotic prescriptions. They found and Maintenance Choice, developed in collaboration with
notified at least 36 providers to whom they would no researchers from Harvard University and Brigham and
longer fill orders due to high prescription rates. Women’s Hospital, help patients stay on their medica-
In 2014, another incident involving the disap- tions. Research shows that regular interaction between
pearance of 37,000 pain pills in four California stores patients and pharmacists increases the likelihood that
brought the DEA and CVS together again. These four patients will adhere to their medication regimen. Many
stores had a history of not being able to account for patients who take regular prescriptions often think that
several pain prescription drugs. The investigations into they are well enough to cease taking their medication at
missing pills was prompted after the DEA found that a certain point. However, when the symptoms of their
an employee had stolen approximately 20,000 pills a ailments reappear, the costs are great, both financially
few years earlier. This was not the first or last time that and medically. CVS’s programs allow the company to
CVS stores would be investigated for missing pills. The inform patients about the benefits and risks of these
company paid $1.5 million in fines after some of its effects through education and awareness. The entire
Long Island stores did not report missing painkillers in industry also benefits from this knowledge so that it
a timely manner. can be better prepared to help prevent costly medical

procedures due to medication non-adherence, which would provide it with an advantage over rivals such as
occurs when patients skip or incorrectly take their Walgreens.
dosage requirements. This is estimated to cost between Despite CVS’s strides in becoming a healthcare
$5 and $10 for every $1 spent on adherence programs. company, competition from Walgreens has been
These services are key components of CVS’s competitive gaining. In 2017, Walgreens obtained an advantage in
advantage, allowing the company to provide the best prescription management contracts after the Tricare
possible patient care. CVS was also proactive in prepar- plan from the Department of Defense signed a deal with
ing patients for Health Care Reform. For instance, CVS Walgreens. This deal did not include CVS pharmacies.
partnered with the Centers for Medicare and Medicaid Walgreens Boots Alliance also made a deal with PBM
Services to raise awareness about new services available Prime Therapeutics to launch a specialty pharmacy and
to Medicare patients under the ACA. mail services company called AllianceRx Walgreens
To help people keep up with these and other changes Prime, further increasing the competitive threat to CVS.
in healthcare, CVS has established their presence on social However, CEO Larry Merlo claims that CVS is about to
media and mobile devices. The company introduced a implement new drug management programs. Combined
mobile application that allows customers to conveniently with the acquisition of Target’s pharmacies, Merlo
refill prescriptions, and the company’s Facebook and believes CVS will gain an advantage over Walgreens and
Twitter pages provide helpful health tips. Customers become more attractive to patients and pharmacies.
benefit from using CVS’s digital tools through increased Additionally, CVS is moving beyond MinuteClinic
savings and easier access to many of CVS’s services. For and entering the territory of home healthcare. The
instance, the CVS iPad app allows individuals to have a company began a clinical trial for a home dialysis
3D digital pharmacy experience reminiscent of shopping HemoCare device in 2019 following a White House
in-store. Customers who are unable to physically visit announcement of an initiative that encourages at-home
the store, or prefer the convenience of shopping from dialysis treatment that is less costly. The goal of the
home, are able to partake in the CVS experience through initiative is to decrease end-stage kidney disease by 25
the company’s technology. As a result, many are saving percent before 2030 by improving prevention, detection,
money and time filling and refilling prescriptions, as well and treatment of the disease. If the CVS clinical trial
as having instant access to essential drug information. shows the device is safe and effective, CVS hopes to
MinuteClinics are one of the major contributors to win the approval of the Food and Drug Administration
CVS’s rebranding efforts. These clinics are the first in (FDA) and become a healthcare provider for people
healthcare retail history to be accredited by the Joint with chronic conditions. This bold step sets CVS apart
Commission, the national evaluation and certifying from other drugstores. This move has the potential
agency for healthcare organizations and programs in to influence the markets for at-home medical devices
the United States. This accreditation signifies the clinics’ and kidney care and goes hand in hand with CVS’s
commitment to and execution in providing safe, quality acquisition of Aetna in 2018.
healthcare that meets nationally set standards. In addition
to healthcare services, MinuteClinics provide smoking Aetna Merger
cessation and weight loss programs that contribute
positively to people’s health. These clinics are also the In November 2018, CVS merged with Aetna, a health
first retail clinic provider to launch a partnership with insurance company, for nearly $69 billion. The belief
the National Patient Safety Foundation for its health behind the merger was that a combined company could
literacy program to help improve patient education and provide better patient care and tighten cost controls
community health. through cooperation. CVS Health described their inten-
In 2015, CVS announced that it was purchasing tions stating, “As a combined company, we are working
Target’s 1,672 in-store pharmacies for $1.9 billion. to transform the consumer health experience and build
These pharmacies were branded as CVS/pharmacy and healthier communities by offering care that is local,
remained located in Target stores. This increased CVS’s easier to use, less expensive and puts consumers at the
reach, particularly in areas like the Northwest where the center of their care.”
company did not have a strong presence. Another benefit The acquisition had many benefits. It provides CVS
of the purchase is that it will increase convenience for with more business as the company gains customers on
consumers who use CVS for their prescriptions as both an individual level and through employers purchas-
they can now choose from a CVS drugstore or a CVS/ ing plans for their employees. The benefit of this merger
pharmacy within a Target location. Target pharmacies also allows Aetna customers with chronic illnesses to
have generally received higher customer satisfaction be referred to walk-in CVS clinics for check-ups rather
ratings compared to CVS. If CVS can tap into the than expensive and frequent doctor visits. Others believe
same practices that Target pharmacies have used to CVS went forward with the merger because of Amazon’s
keep their customers satisfied, CVS could use what it continual threat to the industry. They believe it was
learns to adopt a more customer-centric culture that a strategic move to prepare for Amazon’s increasing

esponsibility 443
involvement in the pharmaceutical industry, such as the tobacco products. The revenues generated from selling
possibility that Amazon could begin shipping medica- tobacco products were about $2 billion annually, so
tions. Overall, CVS’s moves indicate that the company this bold decision sent a strong message to stakeholders
wants to ensure that they continue to remain relevant to regarding the values of the company. A company that is
consumers and grow market share. consistent in their actions will gain a good reputation,
However, not everyone saw the positive benefits of which will attract more customers and generate revenue.
the merger. Critics who openly opposed this decision This decision also gave CVS an advantage in terms of
voiced concern that the merger could limit consumers’ the ACA. As the ACA changes the healthcare landscape,
options and control of medical care as well as result in companies are racing to get a stronghold in the new
higher expenses. Critics worried that since the market system to be listed as a preferred pharmacy. CVS’s align-
was already dominated by a few key players, the addi- ment in defining themselves as a healthcare provider will
tional reduced competition would present consumers likely result in stronger relationships with doctors and
with limited choices and quality. An advocacy group, hospitals, creating an advantage of preference. The goal
Consumers Union, opposed the merger of the two com- is that referrals for medication will be done through CVS
panies and argued that people enrolled at Aetna health and serve to boost reputation within all CVS segments.
clinics could be forced to seek care at CVS retail clinics. This puts CVS in a competitive position to attract newly
Conversely, they believed CVS consumers not insured insured Americans.
by Aetna could pay higher prices for their medications. The decision to become tobacco-free spurred 24
CVS’s stock price steadily declined after it closed the state attorneys general to send letters to other pharmacy
Aetna deal due to skepticism among investors. However, retailers, including Walmart and Walgreens, highlighting
CVS believes the “breadth and depth” of the consumer the contradiction of selling deadly products and health-
data they now have will be an important component of care services simultaneously. The letter also noted that
its success. The company also believes it will be a driving drug store sales make it easier for younger age groups
force for change in the U.S. health care system. to begin smoking and more difficult for those trying to
The Justice Department ultimately approved the quit smoking. Walmart and Walgreens acknowledged
acquisition on the condition that Aetna sell off its the letter, but made no indication that they would stop
private Medicare drug plans business referred to as selling tobacco products. While this letter does not seem
“Part D.” The premise of the condition was to ensure to have much of an influence on retailers, some speculate
that the combined companies did not control too much that it increases the pressure on the $100 billion tobacco
of the market. Some critics still argued that the merger industry, which is already facing decreasing sales, rising
would make it difficult for small competitors to enter taxes, and smoking bans. For CVS, the decision affected
the market in either sector. Other concerns were raised its short-term profits and reduced each share by $0.06
that CVS’s affiliation with the insurer would reduce the to $0.09 each. One year after the decision, CVS released
transparency necessary to the industry. a report of results from studying states where it had
Despite the companies operating and identifying as greater than 15 percent of the retail pharmacy market
one since November 2018, U.S. District Judge Richard share. In the eight months following the elimination
Leon spent months thoroughly reviewing and scrutiniz- of tobacco products, the stores in these states reported
ing the merger beginning in June 2019. He wanted to approximately 95 million fewer packs purchased and a
identify and further explore any potential harm the deal 4 percent increase in nicotine patches, indicating that
could cause for the public and therefore refused to sign CVS’s decision was positively impacting smokers.
off on the merger until further review. This attention
aligns with the scrutiny that has been placed on the Criticism Against CVS
PBM market as a whole. Leon wished to determine if
the consolidation in the highly concentrated market CVS’s new programs are encroaching on the medical
would raise premiums and negatively impact the market. industry by providing services to patients. As customers
Finally, in September 2019 Judge Leon signed off on the increasingly choose to visit local pharmacy clinics for
proposed settlement and said it was “within the reaches aches, pains, or common illnesses, primary physicians
of public interest” in his opinion. are feeling the losses, especially since this sectors’
healthcare professionals are dwindling. Choosing a
Tobacco-Free CVS retail pharmacy clinic over a physician’s office benefits
the patient with lower costs and savings, which is a
In order to be consistent with its transition from threat to traditional doctors’ offices. Some groups are
pharmacy to healthcare company, CVS has made some publicizing negative feedback on pharmacy care. For
landmark decisions aimed toward helping individuals instance, the American Academy of Pediatrics issued
lead healthier lives. In 2014, CVS announced that it a statement warning patients not to visit such clinics
would no longer sell tobacco products. The company because they cannot offer the specialized care children
became the first national retail pharmacy to stop selling need. Some groups argue that programs such as CVS’s

MinuteClinics do not offer the same caliber of service So far we have addressed how CVS meets the needs
and care as a doctor. However, as stated above, CVS of its customer stakeholders. However, CVS tries to main-
holds itself to a very high standard for care in trying to tain a stakeholder orientation in which all stakeholder
help patients be healthy. They continue to be accredited needs are addressed. The following sections will describe
by the Joint Commission. how the company meets the needs of other stakeholders.
CVS’s MinuteClinics do recognize their limitations,
however. Their website offers information to visitors
Employees
regarding when they should and should not visit the clin-
ics. For example, the website recommends that patients CVS implemented the Values in Action program for
with severe symptoms such as chest pain, shortness of employees, giving them a chance to recognize colleagues
breath and difficulty breathing, poisoning, temperatures through online reward systems. Peers can nominate each
above 103 degrees Fahrenheit (for adults) and 104 (for other across the company for leadership traits and other
children), and ailments requiring controlled substances commendable accomplishments. Each nomination grants
should seek care elsewhere. MinuteClinics’ staff nurse points, which can be redeemed for merchandise, travel,
practitioners and physician assistants generally provide and more. Programs like these let employees know they
services for minor wounds, common illnesses, wellness are valued and empower them in their commitment to
tests, and physicals, etc. Other information regarding CVS. The Values in Action Breakthrough Awards is an
insurance and pricing are also available on the website. annual company-wide broadcast that honors specific
individuals exemplifying the company’s values in innova-
Stakeholder Orientation tion, collaboration, caring, integrity, and accountability.
CVS focuses strongly on compliance and integrity
CVS’s mission to be a pharmacy innovation company is training for employees. The compliance and integrity
guided by five values: innovation, collaboration, caring, training for employees is led by a compliance officer.
integrity, and accountability. CVS uses these values to Regular compliance education and training programs,
determine their actions and decisions, which offer a a confidential 24/7 ethics hotline, and an efficient audit,
glimpse into their ethical culture. The company’s goal is response, and prevention process are components that
to use their assets to reinvent the pharmacy experience make this program comprehensive. The company also
and offer innovative solutions that help people follow a supports the development of employees through profes-
better path toward health. This goal relays to stakehold- sional development training sessions. The purpose of
ers that the company cares about healthcare. CVS’s busi- such training is not only to keep employees current on
ness is committed to fostering a culture that encourages new technologies and processes but also to help them
creativity and innovation, recognizing that contributions advance in their careers within the company.
from all members are a high priority. This commit-
ment highlights the value placed on collaboration with
Shareholders
partners and stakeholders, which also serves to hold the
company accountable for its operating activities—thus CVS seeks to protect shareholder interests while main-
strengthening its integrity. Another important factor in taining broad stakeholder engagement. As a result,
the company’s ethical culture is to address enhanced CVS carefully designed a comprehensive corporate
access to care while also lowering its cost. governance system ranging from board independence
CEO Larry J. Merlo emphasizes the long-term to executive compensation. Following a corporate gov-
perspective the company is committed to with each ernance framework, a variety of specialized committees
decision and how it will affect each stakeholder group. have been established with different functions for share-
He states that CVS’s priorities remain in customer holders. From an information governance standpoint,
health, the sustainability of healthcare systems, good the oversight committee makes recommendations to
stewardship, positive contributions to communities, and enhance the ability of information security. On behalf of
a meaningful workplace for employees. Such a statement the board of directors, the audit committee is in charge
from the top leader of the company sets the tone that of the risk oversight and is responsible for protecting the
fosters the ethical culture behind CVS. The company’s reputation and core interests of the company.
Code of Conduct includes ethical behavior expectations: In order to balance the interests of different groups,
CVS employs a Chief Compliance Officer, offers regular senior management created a reformative executive
compliance education and training, provides an ethics compensation system. This system is based on financial
hotline for confidential reporting, and has developed a performance as well as service quality and customer
response and prevention guideline for addressing viola- satisfaction. While a pay-for-performance compensation
tions of CVS’s policies or federal, state, or local laws. system is still utilized at CVS, a significant portion
CVS’s corporate governance includes a privacy program, of annual executive compensation is delivered into
information security, and a corporate framework that long-term equity rather than short-term. In a move to
focuses on the company’s values. further align the commitment of CVS to link pay with

esponsibility 445
performance, total shareholder return is added on a The Supplier Audit Program is a risk-based assess-
three-year incentive plan. Each three-year period is ment conducted by multiple third parties to evaluate
known as a cycle that has a predetermined set of goals for workplace conditions, including labor, wages and hours,
the company/executive to accomplish. At the end of each health and safety, management system and environment,
term, performance is evaluated and the executive receives as well as operational, financial, and legal risks, to
compensation based on these results. For example, if the ensure that employees’ rights are not being violated. This
results surpass the goal by 25 percent, the executive pay program was fully expanded to factories in countries
will increase by a certain predetermined amount. The considered to be at high risk for such violations, and
details will vary for each cycle, but the purpose of the CVS is in the process of implementing full social audits
plan is to pay only when the company and its sharehold- for subcontractors in these areas. In addition, CVS
ers are benefited from the performance of the executive. works with globally recognized organizations including
Worldwide Responsible Accredited Production and Social
Communities Accountability International to ensure its measurements
are relevant and effective. Finally, CVS became the first
CVS has grown its ethical culture not only to include the healthcare firm to partner with the Responsible Factory
company’s functions but also the communities around Initiative. The partnership will provide tools for CVS’s
them. Community engagement and philanthropic factories and suppliers in identifying risk areas from
endeavors, for example, are long-standing commitments audits and implementing better compliance systems.
CVS has devoted time and resources toward developing.
Community partnerships have supported veteran hiring,
Environmental Impact
scholarships to future pharmacists, and high school,
college, and post-graduate students’ interest in science, Environmental impact is also important to CVS. The
technology, engineering, and math (STEM) careers. company records their progress on this front in its
CVS believes that by helping to further advancement in annual Corporate Social Responsibility Report. For
providing the best health outcomes, they are investing in instance, CVS has reduced their carbon intensity by
their current and future workforce. 34 percent based on a baseline set in 2010. CVS has
CVS donates millions of dollars to various organiza- opened Leadership in Energy and Environmental Design
tions and builds strategic partnerships with them to (LEED) facilities, including a more-than-760,000-square-
create an awareness of healthy behaviors and educate foot distribution center. The information CVS gains
the community on ways to become insured under the from these facilities will be used to set best practices
ACA. For instance, CVS embarked upon a five-year, before constructing other stores.
$50 million initiative to fight against tobacco use. The CVS expanded its Energy Management System
company also offers free health screenings and flu shots (EMS), which is designed to International Organization
for the uninsured, prescription discount card programs, for Standardization (ISO) specifications. This digital
and other community programs to supply individuals system tracks and manages energy use, so that each store
with the medications they need to maintain health. The can be continually monitored and adjusted according
discount card program saves customers over 70 percent to each location’s needs. CVS is also in the process of
on medications, resulting in millions of dollars in savings upgrading lighting in the stores by including more energy
every year. Volunteerism is also supported by CVS, as efficient bulbs. Increasing water use was identified as a
employees are encouraged to form groups and obtain significant inefficiency, and CVS has responded by
sponsorship from the company to address needs within eliminating irrigation at retail locations and opting for
the communities. less water-intensive landscapes. Finally, CVS offers cus-
tomers ways to recycle and properly dispose of expired,
Suppliers unused, or unwanted medications, which benefit both
human and environmental well-being.
CVS has developed a commitment called Prescription for
a Better World, which encompasses its Code of Conduct,
Supplier Ethics Policy, Supplier Diversity, and Supplier Conclusion
Audit Program to promote integrity, accountability, and
diversity. These programs work to ensure that human CVS is implementing strategies and allocating resources
rights are respected throughout the entire supply chain. in the hope of achieving an ethical culture that benefits
In developing these policies, CVS used principles initiated all stakeholder groups. This helps CVS maximize ethical
by the International Labor Organization and the United decision-making and remain sustainable. It seems the
Nations’ Universal Declaration of Human Rights. The company has learned from previous ethical lapses by
human rights framework guides all suppliers of CVS being aware of addiction problems within their com-
to avoid unethical and illegal practices such as child munities. As the first national retail pharmacy chain to
labor, human trafficking, discrimination, and dangerous eliminate cigarettes and other tobacco products, CVS
workplace conditions. boosted their transition from a pharmacy to a healthcare

company, helping their customers lead healthier lives. kpparx.com/cvs-being-investigated-after-37000-pain-pills-

Also, the merger with Aetna has the potential to go-missing/ (accessed July 20, 2019).
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use, affordable care options, including home healthcare com/aetna (accessed July 14, 2019).
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www.cvshealth.com/social-responsibility/our-giving/local-
is one of the next big challenges they will have to
community-support/colleague-volunteerism-and-support
overcome. As one of the largest pharmacies in the United (accessed July 20, 2019).
States, CVS has a long way to go to reduce their overall CVS Health, “Company History,” https://www.cvshealth.com/
footprint. However, the company is on the right track, about/company-history (accessed July 20, 2019).
having set goals and action steps to achieve these goals. CVS Health, “CVS Caremark Maintenance Choice Program
With the mission of helping people live healthier lives Improves Medication Adherence for US Airways Employees
and innovating the pharmacy industry, CVS has a great and Dependents,” September 15, 2010, https://cvshealth.com/
responsibility in developing a business model, allowing newsroom/press-releases/cvs-caremark-maintenance-choice-
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Questions for Discussion 2019).
1. How has CVS handled ethical challenges? CVS Health, “CVS Health Completes Acquisition of Aetna,
2. Evaluate CVS’s decision to no longer sell tobacco Marking the Start of Transforming the Consumer Health Care
products. Experience,” November 28, 2018, https://news.aetna.com/
news-releases/2018/11/cvs-health-completes-acquisition-of-
3. What is the future of CVS in positioning themselves as
aetna-marking-the-start-of-transforming-the-consumer-health-
a health care company based on their decision to be
experience/ (accessed July 20, 2019).
socially responsible?
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cvshealth.com/sites/default/files/2016-csr-report.pdf (accessed
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448 Case 6 Volkswagen Charts a New Course: The Road to Sustainability
CASE 6
Volkswagen Charts a New Course: The Road to

Sustainability
Introduction began to decline in the 1970s, VW began introducing new
generations of cars. They also started making a series of
Volkswagen (VW) Group is the world’s largest auto- acquisitions, most notably the Bentley and Lamborghini
maker in car production with twelve European brands: brands in 1998 and the Porsche brand in 2012. VW
Volkswagen Passenger Cars, Audi, SEAT, ŠKODA, Bentley, would continue to sell versions of its iconic Beetle until it
Bugatti, Lamborghini, Porsche, Ducati, Volkswagen was discontinued in 2019.
Commercial Vehicles, Scania, and MAN. In 2018, VW set In the decades since their founding, Volkswagen
an all-time record of delivering more than 10.8 million became a formidable competitor to global carmakers such
vehicles, resulting in €235.8 billion (about $262.7 billion) as Toyota, Ford, and General Motors (GM). Their cars
in sales revenue. This placed VW as the ninth largest com- have been widely successful, winning a number of global
pany in the world. Nearly 40 percent of deliveries were awards. In 1999, the Volkswagen Beetle was selected as
in China, where VW is steadily increasing their share of the fourth runner-up for the “Car of the Century,” after
the passenger car market. The automaker has continued the Model T, the Mini, and the Citroen DS. In 2015, VW
to grow globally despite the diesel emissions scandal that was elected to 43rd place among Fortune magazine’s
tarnished their image in the United States. “World’s Most Admired Companies.” Earlier that year,
In early 2017, the automaker pled guilty to three the VW Golf had been named the “North American Car
criminal felony charges related to defrauding the U.S. gov- of the Year.”
ernment, violating environmental regulations, obstructing Until recently, VW was highly valued for their
justice, engaging in wire fraud, and violating import sustainability goals. They became the first car manu-
regulations. The company agreed to pay $2.8 billion in facturer to adopt ISO 14001 principles, international
criminal charges—only a small portion of the total costs environmental principles that act as standards for global
they will have to pay to resolve this scheme. Other costs firms. The company adopted a number of sustainability
include product fixes, legal fees, buy back costs, and more. goals in 2002—a time before sustainability became a hot
Worse still, VW’s reputation has been dealt such a blow topic. VW also began investing in vehicles that would
that it will likely take years to recover. As a global firm, reduce carbon emissions early, including electric and
VW has lost the trust of regulators, which will be a major diesel vehicles. In 2014, VW introduced the VW XL1,
obstacle in building future global relationships. which they claimed to be the most fuel-efficient car in
the world at the time. The company’s reputation for sus-
Volkswagen’s History tainability was so great that they won an international
sustainability award. However, this reputation would
Volkswagen was founded in 1937 by the German soon be sullied by a scandal of large proportions.
government, which was at the time controlled by Adolf
Hitler. As his “pet project,” he desired to develop an The Emissions Scandal
affordable and practical car. In fact, Volkswagen trans-
lates to “the people’s car.” Headquartered in Wolfsburg, VW’s downfall stemmed from the same thing that enabled
Germany, the automaker’s existence was precarious after them to commit such wide-scale misconduct in the first
Germany was defeated in the war. However, a British place: technology. Although the impact of technology has
major opted to keep Volkswagen open, and the firm created benefits for businesses and consumers alike, it has
continued to grow. also provided a greater opportunity to cheat ethical and
Sales of Volkswagen Beetles were slower in the United legal requirements. Volkswagen, once lauded for their
States than in other areas because of the company’s origin. eco-consciousness, saw their reputation crumble after
However, the vehicle’s small size and odd shape, which European testers noticed that VW vehicles did not
was originally a turnoff for U.S. consumers, became the perform as well on emissions testing on the road as
main selling points in a 1959 campaign. Volkswagen they did in the lab. The testers commissioned a team
Beetle sales skyrocketed. Soon the Beetle had become the in West Virginia to conduct research on VW vehicles
best-selling car import in the United States. When sales made for Americans because the United States has some
This case was prepared by Jennifer Sawayda for and under the direction of O.C. Ferrell and Linda Ferrell, © 2019. It was prepared for classroom
discussion rather than to illustrate either effective or ineffective handling of an administrative, ethical, or legal decision by management. All sources
used for this case were obtained through publicly available material.

of the toughest emissions standards in the world. The The investigation found that Winterkorn was aware
team in West Virginia used a portable emission system of the conspiracy as early as 2014 and failed to report it
measurement to measure emissions on the road. They to regulators or consumers. Prosecutors believe that he
found that the measurements did not match up with played a substantial role in the scandal. The indictment
what was shown in lab tests. The results were reported to revealed that, in 2014, engineers at Volkswagen realized
the Environmental Protection Agency, which confronted their illegal emission levels would be exposed through
Volkswagen with the evidence. Volkswagen eventually a study report issued by the International Council on
admitted that they had designed and installed a defeat Clean Transport. When senior managers were made
device that could detect when the vehicle was being tested aware that the report could uncover their deception,
and modify its performance levels so that it would meet they set up a task force to handle official inquiries. Their
emissions requirements. During testing, the software objective was to be strategic in their responses by con-
made the vehicles run below performance, which released cealing their defeat devices while seemingly cooperating
fewer emissions and met requirements. However, on the with regulators.
road, the cars ran at maximum performance and gave off The most incriminating evidence leading to the
up to 40 times the allowable limit for emissions in the indictment of Winterkorn was proof of documents given
United States. to him before the timeline of his initial statement. In late
Volkswagen estimates that 11 million vehicles in the July 2015, Winterkorn received an internal PowerPoint
United States and Europe were affected by this defeat explaining how the deception was occurring in the U.S.
device. Until the scandal broke, VW had promoted them- and what consequences VW could face as a result. They
selves as an eco-friendly company. Their commercials held meetings where management would discuss the
featured Volkswagen rally driver and host of Top Gear possibilities of being uncovered and the impact it would
USA Tanner Foust driving elderly women around town have on them—one slide was even titled “Indictment?”
in a TDI Volkswagen to dispel the myth that diesel is The investigation revealed that Winterkorn agreed to
slow. As a result of their marketing, Volkswagen made continue the concealment plan of action outlined in
large in-roads in gaining acceptance for their clean diesel the documents. This occurred over a month before the
vehicles, even though many car buyers had a negative deception was publicized, proving Winterkorn’s claim of
view of diesel previously. This green image, which was ignorance to be false. The U.S. Securities and Exchange
highly beneficial for Volkswagen as consumers have Commission (SEC) also charged him with defrauding
started to value greener products, was threatened by the investors, but it is unlikely he will be extradited by
scandal. German authorities because of his German citizenship.
The recent charges aimed at these individuals will
likely initiate more allegations against the company as a
The Impact whole. For example, in 2019, the SEC filed a claim that
As a result of the scandal, Volkswagen’s CEO resigned Volkswagen and Winterkorn defrauded investors spe-
and governments demanded answers. Such a fraud not cifically through selling corporate bonds and asset-backed
only violates ethical standards but also laws and regula- securities while knowingly making false and misleading
tions in Europe and the United States. The company statements to government regulators, underwriters, and
agreed to pay more than $25 billion to compensate consumers about the quality of their automobiles and their
consumers affected by their defeat devices, which environmental compliance. The company made these false
included retrofitting and buying back impacted vehicles. and misleading claims about their financial position to sell
Those who knew about or were responsible for the to investors at inflated prices. Volkswagen’s concealment
defeat device’s installation could face jail time. One of and deceit allowed them to benefit from hundreds of
the executives arrested was VW’s emissions compli- millions of dollars through issuing securities at attractive
ance manager. Germany also launched a probe into rates. A Volkswagen spokesman contested the SEC claim,
whether former CEO Martin Winterkorn knew about stating that the investments were sold to sophisticated
the misconduct beforehand. Winterkorn claimed he did investors who were not harmed and who had received
not become aware of the misconduct until the scandal all interest and principal payments in full and on time.
erupted in September 2015. However, the investigation On the other hand, this recent attention by the SEC is
on Winterkorn proved his knowledge of the scandal was expected to fuel the fire in the class action lawsuit in
much sooner. In April 2019, Winterkorn, along with Germany where Volkswagen investors are seeking $9.2
four others, were indicted on charges of conspiracy, billion in damages from the fall in share prices when the
unfair competition, embezzlement, tax evasion, and U.S. sector went public in 2015.
giving false witness. If convicted, Winterkorn could face Perhaps the worst impact the scandal has caused is
up to 10 years in prison and substantial fines, as well to VW’s reputation. Many VW customers claim they pur-
as the obligation to return his salaries and bonuses of chased the cars because they believed them to be better for
nearly $12.5 million. His indictment is the largest of any the environment and felt utterly betrayed by the company.
executive in Germany. Consumer rights were violated because consumers did not

have accurate information, meaning they were not able to next ten years at affordable prices. These vehicles will
make informed purchasing decisions. VW’s reputation for be based on the modular electric drive matrix (MEB),
sustainability has been shattered, and two awards they VW’s technology platform for EVs. VW plans to sell
had been given for “Green Car of the Year” were pulled. its MEB platform to other automakers and is investing
VW is not the only company implicated in the $800 million to build an EV plant next to their current
conspiracy. U.S. lawyers accuse German parts supplier plant in Chattanooga, Tennessee. VW’s investment in
Robert Bosch GmbH of designing the defeat devices and and promotion of EVs to curb the release of harmful
knowing that they were being installed in VW vehicles greenhouse gases demonstrates a renewed commitment
to cheat emissions standards. A 2008 email was used as toward sustainability.
evidence in which Robert Bosch allegedly demanded that
VW indemnify the firm for any future legal repercus-
sions, suggesting that the company knew full well that Conclusion
they were violating laws. Germany fined Robert Bosch
VW hopes their settlement with U.S. regulators will be
$100 billion for its participation in the scandal.
the first step toward putting the scandal behind them. As
VW agreed to plead guilty and pay a criminal fine
part of their plea, VW agreed to a three-year probation,
of $2.8 billion in the United States, as well as additional
a ban on selling diesel vehicles in the United States, and
fines for breaking civil, environmental, customs, and
an independent compliance monitor who will oversee
financial regulations. The penalty could have been as
VW’s operations over a three-year period. However,
high as $34 billion under U.S. laws but was reduced
truly restoring their reputation will require VW to
because of VW’s cooperation with the investigation.
incorporate ethical practices into the organization from
This included a settlement with the Federal Trade
Commission (FTC) to allegations that the company the inside-out—something that was severely lacking in
had engaged in false advertising by marketing their the firm’s corporate culture prior to the scandal.
automobiles as “clean vehicles.” Because VW operates in an oligopoly, other global
Even after pleading guilty to U.S. charges, VW’s car companies may benefit from the scandal and gain
troubles are far from over. The EU is conducting its market share from Volkswagen. At the same time,
own criminal investigation, and class action lawsuits while they might benefit from a competitive standpoint,
have been filed against VW in the United Kingdom VW’s conduct has caused problems for the industry
and Germany. The problem could be even more serious as a whole. Consumers are now questioning the envi-
ronmental claims of other car brands, and automakers
than in the United States because VW vehicles are more
will have to work harder to prove that their claims
common in Europe.
are accurate. Consumer trust is easily lost and is not
restored overnight. However, if VW’s continued interest
Rebuilding their Reputation in EVs proves successful, the company could be well on
their way to rebuilding the trust they had spent years
VW has begun to take steps to restore consumer trust.
cultivating among customers. VW’s efforts to become
For instance, they recalled vehicles and offered a $1,000
a market leader in energy-efficient vehicles, particularly
goodwill package to their American car owners. They
their investment in affordable EVs, could transform the
agreed to curb executive compensation as a result of the
passenger car market and create the next generation
scandal. Yet even with incentives, VW will have to face
“people’s car.”
this loss of goodwill for years to come. VW is also taking
a different tactic in Europe. Because of less consumer-
friendly laws, VW has not been as willing to compensate Questions for Discussion
European drivers for damages. One major reason is that 1. Explain how the culture of Volkswagen created this
if the company is forced to pay out to the same extent in ethical scandal?
Europe as it has in the United States, the company may 2. Since Volkswagen claimed to support ethics and
very well go bankrupt. VW is also claiming that under sustainability, how can they recover from this ethical
European definitions, their software does not qualify as disaster?
an illegal defeat device. How other countries in Europe 3. Do you believe this scandal will lead to tougher
will approach VW in terms of fines depends largely on scrutiny of companies’ environmental claims in the
the countries’ laws as well as how many consumers file future? Why or why not?
lawsuits against the firm.
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CASE 7
Wells Fargo Banks on Recovery

Introduction opened in San Francisco and Sacramento, California,
later that year. Wells Fargo became emblematic of the
Until 2016, Wells Fargo was the world’s largest bank. American West after they helped finance the Butterfield
In 2015, they surpassed the Industrial and Commercial Line and assumed control of the Pony Express. In 1866,
Bank of China with the highest market capitalization in Wells Fargo began acquiring stagecoach routes all across
the world. Wells Fargo topped the list of most valuable the West. The red-and-yellow stagecoach would become
banking brands. Their victory was short-lived, however, the iconic corporate logo recognizable by consumers
as JPMorgan Chase overtook Wells Fargo in 2016 in the worldwide.
wake of a large-scale cross-selling scandal that revealed One achievement Wells Fargo is particularly proud of
Wells Fargo employees faked 3.5 million customer is their early emphasis on diversity. Within decades of their
accounts to meet short-term sales goals. Approximately founding, Wells Fargo was printing financial information
5,300 employees were fired, and the bank was slapped in Spanish and Chinese to reach a diverse customer base.
with a $185 million fine by the Consumer Financial In 1888, the firm adopted rules that advocated for the
Protection Bureau (CFPB), which claimed the firm had equal treatment of all customers, no matter their race,
opened up or applied for 2.1 million customer bank or social status, or gender. This reputation for diversity
credit card accounts without permission from customers. would continue into the twenty-first century, with Wells
The misconduct allegations did not stop there. Less than Fargo securing 13th place on DiversityInc’s “Top 50”
two years later, the CFPB fined Wells Fargo $1 billion for diverse companies in 2019. More than 30 percent of all
charging customers for car insurance they did not need director nominees are women and 25 percent are racial
and levying unfair mortgage fees on borrowers. or ethnic minorities. Wells Fargo was the first large-scale
The issue was further compounded by a corporate bank to be chaired by a woman in the United States.
culture that seemed to know of and even encourage these Over the next century, Wells Fargo was an early
illicit activities. Wells Fargo quickly became the poster mover in adopting many innovative financial banking
boy for financial misconduct as their stock price dropped. tools, including credit cards, bundled checking, ATMs,
Customer and government trust in the firm hit an all-time and access to online account information. Their suc-
low. In addition to the millions of dollars Wells Fargo cess and innovative services allowed them to weather
will pay to clean up the scandal, new customer check- the Great Recession while other banks struggled or
ing accounts and credit card applications plummeted. went out of business. In 2008, Wells Fargo acquired
Executives were unsure whether the bank would ever Wachovia Corp. for more than $15 billion, increasing
achieve the growth they had attained prior to the scandal. their number of locations to 10,000. Wells Fargo’s
This case breaks down the Wells Fargo scandal to business, and their reputation, continued to grow. In
examine the decisions that contributed to the miscon- 2016, Wells Fargo was listed 25th among Fortune’s
duct and the participants in the fraud. It also looks at “Most Admired Companies,” scoring particularly high
Wells Fargo’s corporate culture and demonstrates how on financial soundness, social responsibility, and product
it led to a toxic unethical environment that encouraged quality. However, none of these positive achievements
illicit behavior. The immediate aftermath of the scandal were enough to prevent the massive loss of consumer
is also discussed, as well as what alternatives Wells Fargo confidence in Wells Fargo’s integrity after the massive
faces as they strive to restore their reputation. Whatever fake accounts scandal came to light.
course they choose, Wells Fargo must integrate ethical
practices and principles into their operations to avoid Fake Accounts Scandal
similar misconduct in the future.
September 2016 marked the unfolding of the Wells
The History of Wells Fargo Fargo entanglement in a widespread scandal that would
implicate several high-level executives and thousands of
Wells Fargo has a long and lucrative history spanning employees. On September 8, the CFPB, the Los Angeles
over 150 years. In 1852, Henry Wells and William Fargo City Attorney, and the Office of the Comptroller of
joined other investors to form the financial services Currency levied a massive $185 million fine against
company Wells Fargo & Co. The first two offices were Wells Fargo, claiming the firm had opened up or
This case was prepared by Kimberly Thuman and Jennifer Sawayda for and under the direction of O.C. Ferrell and Linda Ferrell © 2019. It was prepared
for classroom discussion rather than to illustrate either effective or ineffective handling of an administrative, ethical, or legal decision by management.
All sources used for this case were obtained through publicly available material and the Wells Fargo website.

454 Case 7 Wells Fargo Banks on Recovery
applied for more than 2 million customer bank or credit disclosed in regulatory filings that the U.S. Securities
card accounts without permission from the customers. and Exchange Commission (SEC) was investigating
Furthermore, a bank official acknowledged that the their sales practices. Additionally, the U.S. Department
company had terminated more than 5,300 employees of Justice, congressional committees, California state
in relation to the allegations. Wells Fargo released a prosecutors, and attorneys general were also making
statement taking responsibility for the debacle. formal inquiries into the bank’s practices. At the crux of
Five days following the initial outbreak, the bank the investigations was one question that still needed to
announced that it would be ending their employee sales be answered: what caused such a well-known, popular
goals program, effective January 1, 2017. Subsequent bank to engage in such blatant misconduct?
investigations revealed that controversial sales goals most Sloan’s tenure was rocky, as revelations of additional
likely encouraged employees to open accounts without misconduct led regulators to place restrictions on the
customers’ permission and knowledge. Employees had bank. Sloan was criticized by many for being an insider.
continually engaged in fraudulent activities such as Senator Warren said on Twitter that Sloan “enabled
opening up fake bank accounts and falsifying signatures Wells Fargo’s massive fake accounts scam” and profited
to satisfy sales goals and earn financial rewards under from it. Though Sloan and other Wells Fargo executives,
the bank’s incentive compensation program. The CFPB including Mary Mack, head of consumer banking,
claimed Wells Fargo imposed such goals on staff to claimed the company’s culture was improved, several
become the leader in “cross-selling” banking products. In employees told The New York Times that high perfor-
other words, employees were given incentives for selling mance goals still plagued the bank. Sloan announced
customers additional products. While offering incentives his retirement less than three years after assuming the
for additional selling is certainly not unusual, evidence position.
shows that Wells Fargo had unrealistic sales goals and did
not have systems in place to ensure employees were actu- The Decision-Makers
ally engaging in selling. Many Wells Fargo employees had
adopted the teleological perspective that the ends (higher Though Wells Fargo was accused of opening more than
incentives) justified the means (fraudulent activity). 2 million fake customer accounts beginning in 2011,
A day after the bank announced they would managers at Wells Fargo claim these same practices had
eliminate its incentive program, the Federal Bureau of occurred long before then. Susan Fischer, a former Wells
Investigation and federal prosecutors in New York and Fargo branch manager who worked at the bank for five
California began probing the bank over the alleged years starting in 2004, joined almost a dozen Wells Fargo
misconduct, which opened the door to possible criminal workers to confirm that these shocking sales tactics that
charges. By September 20, Wells Fargo’s Chief Executive, encouraged employees to open unauthorized accounts
John Stumpf, appeared in front of the Senate Banking had been around much longer than bank executives have
Committee, where Senator Elizabeth Warren called on acknowledged. A letter to the CEO was recovered from
him to resign and said he should face criminal charges. 2007 describing how employees were opening up fake
Furthermore, Senator Bob Corker claimed Stumpf would accounts and forging customer signatures. CEO Stumpf
be engaging in “malpractice” if the bank did not “claw claims he never received these letters. However, several
back” money that the company had paid to executives employees came forward to claim that they reported the
during the period the accounts were being opened misconduct and had their employment terminated as a
without customers’ permission. The rest of the month result. If true, the misconduct takes on a more sinister
would put Wells Fargo through investigations, numerous turn. Not only were executives aware of the misconduct,
lawsuits, employee and consumer backlash, and lengthy but anyone who protested was punished as a result.
lectures from both political parties. October 12, over a This would also directly violate laws that protect
month following the initial break of the scandal, marked whistleblowers from retaliation.
the retirement of the CEO and Chairman Stumpf, effec- Although the employees themselves were the ones
tive immediately. who made the ultimate decision to engage in fraudulent
Tim Sloan, an employee of the company for 29 years, behavior, it is worth examining the corporate culture to
took over as CEO in October 2016. Sloan was quoted determine why so many chose to do so. It soon became
as saying that Wells Fargo’s biggest priority would be clear that Wells Fargo had established aggressive cross-
reestablishing customer trust in the bank. The bank’s selling sales quotas that employees must meet or risk
attempt to reestablish trust occurred almost immediately. being fired. What started off as a legitimate sales strategy
Wells Fargo began running an advertisement campaign became increasingly coercive as employees began to take
on October 24 that was evocative of their long his- shortcuts to meet sales goals and keep their jobs.
tory in serving banking customers. The ads featured To reach their lofty sales goals, Wells Fargo also
the company’s signature horse-drawn carriage motif set up incentives to engage employees, which increased
and pledged to address customer concerns. However, commissions around the product being emphasized.
investigations continued. By November, Wells Fargo These products were cross-sold to customers with an

aggressive sales incentive program tied to employee Wells Fargo scandal. Ultimately, the acts undertaken by
compensation. This incentive program suggests that Wells Fargo were not only unethical, but they were also
Wells Fargo executives, managers, and employees forgot highly illegal, opening Wells Fargo up to the possibility
that a bank’s reputation is built on a basic cultural value of criminal charges. While setting goals is a legitimate
of trust. Rather, they falsely became a leader in the business practice, senior management failed to com-
banking industry through the utilization of unrealistic municate the appropriate sales practices expected. Even
sales goals. With the desire to become a leader in the worse, their failure to make sure employees were using
industry through achieving unrealistic sales goals, man- appropriate practices seems to indicate an attitude of
agement became the relevant decision-maker responsible ethical indifference on the part of top leadership. Senior
for setting up a system that encouraged misconduct. management’s lack of communication and their lack
Managers at many branches played a large role in the of action in making sure sales goals were reasonably
establishment of unauthorized accounts. achievable led branch employees to deal with company
Yet, the responsibility for the misconduct stemmed pressures in ways that would save jobs—even if it meant
even further up the organization. After all, if the engaging in illegal behavior. These activities clearly
managers’ branches did not meet these new goals, not compromised Wells Fargo’s value of honesty and the
only could employees be terminated, but the managers importance of their clients’ trust.
as well. Although employees opened the accounts and The facts point to a cultural failing on behalf of Wells
managers implemented procedures to ensure goals were Fargo’s senior management. It was senior management
met, it was the high-level executives who initially set the that fostered a culture in which lying was acceptable.
goals that are the most relevant decision-makers in this Over a long-term period, Wells Fargo issued credit cards
ethical dilemma. These executives were faced with the without customers’ authorization, misusing the concept
challenge of finding new ways to distinguish the bank of assumed consent. Assumed consent occurs when
as the leader in the banking industry. To do so, Wells customers imply consent through their actions or lack of
Fargo executives made the decision to establish the sales actions, even if they do not consent verbally. There was
of simple-to-understand, simple-to-use products such as no such consent in this case. In fact, customer signatures
credit and debit cards, coupled with traditional banking were often forged, making these activities an obvious
services such as car and home loans. These products example of fraudulent behavior.
were then cross-sold to customers with an aggressive Bank customers felt deceived. The bank reported
sales incentive program. Once Wells Fargo branch that checking account openings had fallen 43 percent
employees realized they could not reach the high-set and credit card applications 55 percent from the year
goals, many began opening unauthorized accounts so before. The situation worsened in 2017 when the bank
it would look like they were meeting these goals. In so discovered 1.4 million more fake accounts, bringing the
doing, they betrayed the trust of their customers. total number of fake accounts to 3.5 million. Since the
Great Recession, the financial services industry has been
struggling to recoup lost trust. The Wells Fargo scandal
Relevant Ethical Values
will likely not only affect their own business but could
The scandal had a far-reaching impact on Wells Fargo. also impact the level of trust for the entire industry.
The banking and financial services industry depends on a
public perception of trustworthiness for its success. Due
to public perception and weight on credibility, arguably Auto Insurance and Home Loan
the scandal could be more destructive to Wells Fargo Scandal
than a business in a different industry. While, ultimately,
the underlining goal for banks is to make a profit, the Wells Fargo’s woes were far from over after the fake
financial services industry has a duty to manage their accounts scandal. Further investigation revealed mis-
clients’ assets responsibly. Thus, when a bank puts the conduct in the firm’s auto insurance and mortgage
company’s interests above the interests of its depositors, businesses. The company charged many borrowers late
consumer trust rapidly shatters. fees for not meeting deadlines to lock in interest rates.
The scandal also cast significant doubt as to whether The problem is that the delays were caused by the
Wells Fargo believed in the vision and values they bank, not the customer. The company had also charged
claimed to hold so dear. The illicit activities directly customers for a type of car insurance called collateral
conflicted with Wells Fargo’s publicly expressed Vision protection insurance without their knowledge. Some
and Values, which states that Wells Fargo strives to set of these customers had their cars repossessed for not
“the standard among the world’s great companies for making their payments. A lawsuit filed against the firm
integrity and principled performance,” and goes as far alleged that executives, including those in the general
to express, “We value what’s right for our customers counsel, risk, and auditing areas, had known about the
in everything we do.” This underlying value of honest scheme and its negative impact for four years before
business practices comes into direct conflict with the Wells Fargo ended the program in 2016.

Wells Fargo agreed to refund mortgage customers though his priority is to address regulatory issues as
who paid unfair mortgage fees during the period of quickly as possible. He will need to find a way to tackle
September 2013 to February 2017. It also said it would revenue declines and cut costs with the ultimate goal
refund 570,000 customers who were charged auto of regaining market share from rivals such as Bank of
insurance they did not need. The CFPB charged Wells America and JPMorgan Chase. Sharf wrote to Wells
Fargo with a $1 billion fine, the largest penalty levied by Fargo employees, “We have the foundation to again be
the organization to date. the most respected bank in the U.S. and the world.” This
This additional scandal demonstrates that once foundation will require Sharf to build an ethical culture
unethical behavior is deemed acceptable within an orga- that avoids the misconduct that continues to damage the
nization, misconduct can easily snowball to encompass reputation of the Wells Fargo brand.
all areas of the company. In the case of Wells Fargo, the
seeming complacency of executives and results-oriented Resolution
incentives programs provided a culture that rewarded
employees for unethical behavior. The system caused With the above considered, it is no surprise that Wells
the misconduct to propagate until Wells Fargo ended up Fargo is struggling to keep customers. Despite taking
with more than $1 billion in fines, serious reputational credit for the scandal, having the CEO step down, and
damage, and a massive loss of confidence by regulators, implementing marketing campaigns targeted at rebuild-
customers, and employees. ing consumer trust, Wells Fargo’s business practices have
been compromised in the eyes of both the government
The Future for Wells Fargo and consumers. In 2018, the Federal Reserve barred
Wells Fargo from growing their asset size any further
For years, Wells Fargo enjoyed a reputation for sound than their 2017 level until the company remedies the
management. Their reputation was so intact that they issues that have plagued them over the past few years.
emerged from the 2008–2009 financial crisis with one In addition to government restrictions, former Wells
of the best reputations of any of the major retail banks. Fargo employees have filed lawsuits against the firm. In
Wells Fargo sidestepped many of the errors of other one lawsuit, Wells Fargo was forced to rehire an employee
banks and prospered on meaningful customer relations and pay $5.4 million. The whistleblower claimed he was
with a focus on sales. Yet, today, the bank finds their fired after calling the company’s ethics hotline to report
reputation tarnished thanks to unrealistic sales quotas suspected misconduct. Former CEO Stumpf was forced to
and a coercive corporate environment. Even worse, pay back millions in compensation for allegedly turning
sources claim that top executives were aware of these a “blind eye” to the misconduct. The level of misconduct
practices years ago, but instead of taking action, they was so great that the Federal Reserve Board accused Wells
retaliated against whistleblowers for speaking up. Fargo’s board of directors of failing in their duties to
Once Wells Fargo’s illegal practices had been dis- ensure effective oversight over the company.
covered internally, the company could have worked to Ultimately, the stakeholders injured in this situation
amend these practices, re-emphasize their corporate val- were the individuals who were victims of the creation of
ues, and begin restoring trust with customers. Reporting fake accounts, the stockholders, and the employees con-
the misconduct early might have actually enhanced Wells victed of fraud. Wells Fargo chose to adopt a short-term
Fargo’s reputation as it would have shown the bank had perspective and abandoned a deontological approach for
no tolerance for unethical behavior whenever it was the temporary gains that came with committing fraud.
discovered. Greater senior management involvement Deontology focuses on the means used to achieve an end
and alignment with the values and mission statement of rather than the end itself. According to deontological
the company would have allowed Wells Fargo to make moral theory, the means of attaining a certain outcome
necessary changes to avoid ensuring scandals. Instead, are just as important morally as the outcome itself. If
Wells Fargo embraced short-term gains such as increased Wells Fargo executives and managers had prioritized
revenues and incentives even when it resulted in illegal how employees were making their sales goals, then they
activity and customer harm. By adopting such stringent would have detected the fraud sooner and taken steps
and ambitious goals—and punishing employees who to correct it.
were unable to meet them in a legitimate manner—Wells Wells Fargo had a duty to their customers and
Fargo also destroyed relationships with their employees. employees to operate in an ethical manner, but the
Charles Sharf joined Wells Fargo as CEO in October company allowed lofty sales goals to get in the way
2019 to help the bank continue their recovery from of ethical business practices. The company also had a
the scandal. Sharf, who has experience in the banking duty to their depositors to manage accounts honestly
industry at Bank of New York Mellon Corp. and Visa rather than opening fake accounts without depositors’
Inc., is an outsider, unlike both Stumpf and Sloan who knowledge. Moreover, Wells Fargo had a duty to their
were promoted from within. Sharf plans to get to know employees to create an environment where sales goals
the bank’s strategies better before implementing changes, could be met without employees taking matters into

their own hands. Instead, whistleblowers are now on their stakeholders to repair the shattered trust and
coming forward to say they were punished for speaking rebuild their reputation.
up, which likely created a strong culture of distrust with
employees and kept the misconduct hidden. While the Questions for Discussion
company valued their position as a top retail bank in the
United States, deontology states that Wells Fargo’s duty 1. How did Wells Fargo’s focus on short-term gains
to their stakeholders carried significantly more weight violate the duties they owed to consumers, regulators,
and employees?
than meeting sales goals.
2. Describe how the Wells Fargo scandal demonstrates
that organizational leaders must not only establish
Bouncing Back from the Brink goals but ensure that those goals are being acted upon
appropriately.
Wells Fargo is determined to restore their reputation. 3. Why are ethical values useless unless they are continu-
After the scandals, the company went through a massive ally reinforced within the company?
restructuring program. They reduced management levels
and developed a strategic execution and operations unit Sources
to work with regulators. Wells Fargo reorganized their
“Wells Fargo (WFC) to Overhaul Commercial Banking Business,”
commercial banking division by combining their busi-
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460 Case 8 A Brew above the Rest: New Belgium Brewing
CASE 8
A Brew above the Rest: New Belgium Brewing

Introduction depot before settling into their present custom-built
facility in 1995. The brewery includes two brew houses,
Although large companies are frequently cited as four quality assurance labs, a wastewater treatment
examples of ethical and socially responsible firms, facility, a canning and bottling line, and numerous
it is often businesses that start small that stand to technological innovations for which New Belgium
have the greatest impact. Craft beer pioneer New has become nationally recognized as a “paradigm of
Belgium Brewing Company began as a microbrewery environmental efficiencies.”
in Fort Collins, Colorado. They have created jobs and NBB currently offers a variety of permanent and
contributed money, resources, and volunteer time to seasonal ales and pilsners. The company has their
local causes for 30 years, serving as community leaders. Year Round series, including Citradelic, Dayblazer,
Though New Belgium Brewing Company is no longer and Pilsener; their Voodoo Ranger series of IPAs; their
considered a craft brewery after its acquisition by Lion Vintage Sour series La Folie, Transatlantique Kriek, and
Little World Beverages in 2019, the company continues Le Terroir; their Belgian Collection of Abbey, Trippel,
to be a role model in both the world of brewing and the and 1554 ales; and their Fat Tire Collection, still the
local communities in which they operate. firm’s bestseller. Some customers even refer to the com-
pany as the Fat Tire Brewery. The firm also has a line of
“Glütiny,” or reduced gluten, beers. In 2018, the brewery
History of New Belgium Brewing introduced its Up Next series, unique beer flavors that
Company rotate quarterly throughout the year.
Additionally, New Belgium works in collaboration
The idea for the New Belgium Brewing Company began with other companies to come up with new products.
with a bicycling trip through Belgium. Belgium is argu- Through this, they hope to create improved efficiency
ably the home of some of the world’s finest ales, some and experimentation as they take collaborative strides
of which have been brewed for centuries in monasteries. toward the future of American craft beer making. One
As Jeff Lebesch, an American electrical engineer, cruised such collaboration resulted in the Grilled Pineapple
around Belgium on his mountain bike, he wondered Golden Ale, brewed in partnership with Red Robin to
whether he could produce such high-quality beers back complement the restaurant’s Banzai Burger. The new ale
home in Colorado. After acquiring a special strain of was unveiled at the Great American Beer Festival. NBB
yeast used to brew Belgian-style ales, Lebesch returned also partnered with Ben & Jerry’s to develop new flavors
home and began to experiment in his Colorado base- of beer such as Chocolate Chip Cookie Dough Ale. Fifty
ment. When his beers earned thumbs-up from friends, thousand dollars of the proceeds from the beer were
Lebesch decided to market them. used to raise awareness about climate change.
The New Belgium Brewing Company (NBB) NBB’s most effective form of advertising has always
opened for business in 1991 as a tiny basement opera- been their customers’ word of mouth, especially in the
tion in Lebesch’s home in Fort Collins. Lebesch’s wife early days. Indeed, before New Belgium beers were
at the time, Kim Jordan, became the firm’s marketing widely distributed throughout Colorado, one liquor-
director. They named their first brew Fat Tire Amber store owner in Telluride is purported to have offered
Ale in honor of Lebesch’s bike ride through Belgium. people gas money if they would stop by and pick up
Initially, getting New Belgium beer onto store shelves New Belgium beer on their way through Fort Collins.
was not easy. Jordan often delivered the beer to stores Today, New Belgium is sold in all 50 states, the District
in the back of her Toyota station wagon. However, of Columbia, Brazil, Finland, Canada, South Korea,
New Belgium beers quickly developed a small but Norway, Japan, Australia, and Sweden.
devoted customer base, first in Fort Collins and then NBB experienced strong growth, which led the firm
throughout Colorado. The brewery soon outgrew the to build a 76,000 square foot addition to their 100,000
couple’s basement and moved into an old railroad square foot plant in 2005, as well as a second brewery
This case was prepared by Jennifer Sawayda for and under the direction of O.C. Ferrell and Linda Ferrell, © 2019. We appreciate the input and
assistance of Greg Owsley, New Belgium Brewing, in developing this case. It was prepared for classroom discussion rather than to illustrate either
effective or ineffective handling of an administrative, ethical, or legal decision by management. All sources used for this case were obtained through
publicly available material and the New Belgium Brewing website.

in Asheville, North Carolina, in 2016. The organization environmental consciousness and 100 percent employee
sold more than 844,000 barrels of beer in 2018. In April ownership (see more on this below). The advertisement
2019, NBB opened a 125-seat restaurant at Denver was launched on four major networks in large cities
International Airport (DIA), a strategic move that stands across the United States. Because the primary purpose
to increase brand awareness as DIA is the fifth busiest of the campaign was to create awareness in areas not
airport in the United States. Although NBB is still a as familiar with the brand (such as Raleigh-Durham
small brewery when compared to many beer companies and Minneapolis), NBB did not air the commercial
like fellow Coloradan Coors, NBB’s place in U.S. in Colorado and states where the brand was already
brewing history was recognized by the Smithsonian’s well-known. The campaign also featured four 15-second
National Museum of American History in its “FOOD: online videos of how the company’s beer “pairs well
Transforming the American Table” exhibition in 2019. with people.” Bar patrons featured in the 15-second
The travel notebook Lebesch kept that helped inspire digital ads were NBB employees.
the brewery was included in a showcase about the craft In addition to the ad campaign, the company
brewing revolution. maintains their strategy of promotion through event
Beer connoisseurs who appreciate the high quality of sponsorships and digital media. To launch their Ranger
NBB’s products, as well as the company’s environmental IPA beer, New Belgium created a microsite and an
and ethical business practices, have driven growth. online video of their NBB sales force dressed as rangers
For example, when the company began distribution in performing a hip-hop dance number to promote the
Minnesota, the beers were so popular that a liquor store beer. The only difference was that instead of horses,
had to open early and make other accommodations for the NBB rangers rode bicycles. The purpose of the
the large number of customers. The store sold 400 cases video was to create a hip, fun brand image for their
of Fat Tire in the first hour it was open. With expanding new beer, with the campaign theme “To Protect. To
distribution, however, the brewery recognized a need Pour. To Partake.” The company’s Beer Mode mobile
to increase opportunities for reaching their far-flung app gives users who download it access to exclusive
customers. They consulted with Dr. Douglas Holt, an content, preselects messages to post on the users’ social
Oxford professor and cultural branding expert. After media sites when they are spending time enjoying
studying the company, Holt, together with former their beers, and provides users with the locations of
Marketing Director Greg Owsley, drafted a 70-page retailers that sell NBB products. NBB started a free
“manifesto” describing the brand’s attributes, character, digital loyalty program called Grand Cru that rewards
cultural relevancy, and promise. In particular, Holt members with exclusive experiences and merchandise
identified in New Belgium an ethos of pursuing creative for engaging with the company and offering insights
activities simply for the joy of doing them well and for new products. In so doing, NBB not only increases
harmony with the natural environment. customer loyalty but is able to obtain valuable customer
With the brand thus defined, NBB worked with New feedback on the firm and their products. NBB is highly
York advertising agency Amalgamated to create a $10 active on Facebook, seeing it as an effective way for
million advertising campaign. The campaign would tar- reaching their customers. After conducting one study,
get high-end beer drinkers, men aged from 25 to 44, and NBB found that their Facebook fans contribute $50.7
highlight the brewery’s down-to-earth image. The grainy million in sales annually.
ads focused on a man, Charles the Tinkerer, rebuilding
a cruiser bike out of used parts and then riding it along
pastoral country roads. The product appeared in just five New Belgium’s Ethical Culture
seconds of each ad between the tag line, “Follow Your
Folly … Ours Is Beer.” With nostalgic music playing in According to New Belgium, the company places great
the background, the ads helped position the growing importance on the ethical culture of the brand and
brand as whimsical, thoughtful, and reflective. NBB later their branding strategy is rooted in the core values of
re-released their Tinkerer commercial during the U.S. the company. They are aware that if NBB embraces
Pro Challenge. The re-released commercial featured on citizenship in the communities they serve, they can
NBC had an additional scene with the Tinkerer riding forge enduring bonds with customers. More than ever
part way next to a professional cyclist contestant, with before, what a brand says and what a company does
music from songwriter Sean Hayes. must be synchronized. NBB believes that as the mandate
It would be eight more years before NBB would for corporate social responsibility gains momentum,
develop their next television advertising campaign. business managers must realize that business ethics is
In 2013, NBB developed a campaign called “Pairs not so much about the installation of compliance codes
Well with People” that included a 30-second television and standards as it is about the spirit in which such
advertisement. The television ad described the unique codes and standards are integrated. The modern-day
qualities of NBB as an organization, including their brand steward—usually the most externally focused of

the business management team—must prepare to be 8. Trusting each other and committing ourselves to
the internal champion of the bottom-line necessity for authentic relationships, communications, and
ethical, values-driven company behavior. promises
At New Belgium, a synergy of brand and values 9. Continuous, innovative quality and efficiency
occurred naturally because the firm’s ethical culture improvements
(in the form of core values and beliefs) was in place 10. Having fun
long before NBB had a marketing department. Back Employees believe that these statements help com-
in early 1991, when New Belgium was just a fledgling municate to customers and other stakeholders what
home-brewed business, Jeff Lebesch and Kim Jordan New Belgium, as a company, is about. These simple
took a hike into Rocky Mountain National Park armed values—developed roughly 30 years ago—are just as
with a pen and a notebook. There they took the first stab meaningful to the company and their customers today,
at what the company’s core purpose would be. If they even though there has been much growth.
were going forward with this venture, what were their
aspirations beyond profitability? What was at the heart
of their dream? What they wrote down that spring day, Employees
give or take a little editing, are the core values and beliefs
you can read on the NBB website today. Recognizing employees’ role in the company’s success,
Since their inception, NBB adopted a triple bottom New Belgium provides many generous benefits for
line (TBL) approach to business. Whereas the traditional their employees. In addition to the usual paid health
bottom line approach for measuring business success and dental insurance and retirement plans, employees
is economic, TBL incorporates economic, social, and who stay with the company for five years earn an all-
environmental factors. In other words, rather than just expenses paid trip to Belgium to “study beer culture.”
looking at financial data to evaluate company success, Employees are also reimbursed for one hour of paid
NBB looks at their impact upon profits, people, and the time off for every two hours of volunteer work that they
planet. One way that the company is advancing the TBL perform. Open book management allows employees to
approach is through the creation of a high-involvement see the financial costs and performance of the company.
corporate culture. All employees at NBB are expected to Employees are provided with financial training so they
contribute to the company vision, and accountability is can understand the books and ask questions about the
spread throughout the organization. Just about any New numbers.
Belgium worker can list many, if not all, of these shared In their decision to open a second brewery, NBB
values. demonstrated how seriously they take their employees’
contributions. NBB had chosen 13 possible locations
on the East Coast for their new brewery. The company
New Belgium’s Purpose and Core Beliefs wanted to select an area that met 33 criteria NBB
developed as to what they were looking for in a town.
New Belgium’s dedication to quality, the environment,
NBB owners visited all 13 locations. They returned on
their employees, and their customers is expressed in its
a second visit accompanied by employees and other
mission statement: “To operate a profitable brewery
stakeholders. Employees were an integral part of the
which makes our love and talent manifest.” The com-
decision-making process. Although this process took
pany’s stated core values and beliefs about their role as
longer because it involved more stakeholders, NBB’s
an environmentally concerned and socially responsible
actions assured employees that the firm values their feed-
brewer include the following:
back and views them more like family than employees.
1. Remembering that we are incredibly lucky to create New Belgium also wishes to get their employees
something fine that enhances people’s lives while involved not only in the company but in their sustain-
surpassing our consumers’ expectations ability efforts as well. To help their own sustainability
2. Producing world-class beers efforts, employees are given a fat-tired cruiser bike after
3. Promoting beer culture and the responsible enjoyment one year’s employment so they can ride to work instead
of beer of drive. An on-site recycling center is also provided for
4. Kindling social, environmental, and cultural change
employees. In addition, each summer, New Belgium hosts
as a business role model
the Tour de Fat, where employees dress in costumes and
5. Environmental stewardship: minimizing resource
consumption, maximizing energy efficiency, and lead locals on a bike tour. Other company perks include
recycling inexpensive yoga classes, free beer at quitting time,
6. Cultivating potential through learning, participative and a Prius to run company errands. To ensure that
management, and the pursuit of opportunities workers’ voices are heard, NBB has a democratically
7. Balancing the myriad needs of the company, staff, elected group of coworkers called POSSE. POSSE acts as
and their families a liaison between the board, managers, and employees.

Sustainability In addition to voicing political support for

environmental protections, New Belgium also takes
New Belgium’s marketing strategy involves linking the pride in reducing waste through recycling and creative
quality of their products, as well as their brand, with reuse strategies. The company strives to recycle as many
the company’s philosophy of environmental friendliness. supplies as possible, including cardboard boxes, keg caps,
As co-chair of the sustainability subcommittee for their office materials, and the amber glass used in bottling. For
trade group the Brewers Association, NBB is at the example, NBB partnered with Original Grain in 2019, a
forefront in advancing eco-friendly business processes sustainable wood and steel watch company, supplying
among companies in their industry. Co-workers and wood foeder barrels for the creation of a collection of
managers from all areas of the organization meet limited edition watches. Foeder barrels are used for
monthly to discuss sustainability ideas as part of NBB’s many decades before they are retired. The brewery also
natural resource management team. From leading-edge stores spent barley and hop grains in an on-premise
environmental gadgets and high-tech industry advance- silo and invites local farmers to pick up the grains,
ments to a strong belief in giving back to the community, free of charge, to feed their pigs. Beyond the normal
New Belgium demonstrates their desire to create a living, products that are recycled back into the food chain,
learning community. NBB has also worked with partners to take the same
NBB strives for cost-efficient energy-saving alterna- bacteria that creates methane from NBB wastewater
tives for conducting their business and reducing their and convert it into a harvestable, high-protein fish food.
impact on the environment. In staying true to the NBB also buys recycled products when they can, and
company’s core values and beliefs, the brewery invested even encourages their employees to reduce air pollution
in a wind turbine, making New Belgium the first fully by using alternative transportation. Reduce, Reuse,
wind-powered brewery in the United States. NBB also Recycle—the three Rs of environmental stewardship—
charges itself a per-kilowatt-hour internal tax on their are taken seriously at NBB. The company has been a
purchased energy consumption that they use for energy proud member of the environmental group Business for
efficiency projects. NBB has also invested in the follow- Innovative Climate & Energy Policy (BICEP), and they
ing energy-saving technologies: signed BICEP’s Climate Declaration in 2013 which calls
•• A smart grid installation that allows NBB to com- for American businesses, stakeholders, and regulators to
municate with their electricity provider to conserve address climate change.
energy. For example, the smart grid will alert NBB Additionally, New Belgium has been a long-time
to non-essential operational functions, allowing the participant in green building techniques. With each
company to turn them off and save power. expansion of their facility, the company has incorporated
•• The installation of 1,235 solar photovoltaics panels new technologies and learned a few lessons along
on top of the packaging hall. The array produces 4.5 the way. In 2002, NBB agreed to participate in the
percent of the company’s electricity. United States Green Building Council’s Leadership in
•• A brew kettle, the second of its kind installed in the Energy and Environment Design for Existing Buildings
nation, which heats wort sheets instead of the whole (LEED-EB) pilot program. From sun tubes and
kettle at once. This kettle heating method conserves daylighting throughout the facility to reusing heat in the
energy more than standard kettles do. brew house, NBB continues to search for new ways to
•• Sun tubes, which provide natural daytime lighting close loops and conserve resources.
throughout the brew house all year long. New Belgium has made significant achievements in
•• A system to capture its wastewater and extract methane sustainability, particularly compared to other companies
from it. This can contribute up to 15 percent of the in the industry. For instance, New Belgium uses only 4
brewery’s power needs while reducing the strain on the gallons of water to make 1 gallon of beer, which is 20
local municipal water treatment facility. percent less than most other companies. The company
•• A steam condenser that captures and reuses the hot is attempting to create a closed-loop wastewater system
water that boils the barley and hops in the production with its own Process Water Treatment Plant, in which
process to start the next brew. The steam is redirected to microbes are used to clean the wastewater. NBB keeps
heat the floor tiles and de-ice the loading docks in cold 99.9 percent of their waste out of landfills, and today
weather.
100 percent of their electricity comes from renewable
In April 2014, New Belgium was featured in a half- energy sources. Despite these achievements, they have
page advertisement supporting the EPA clean water rule no intention of halting their sustainability efforts. The
that was introduced March 26, 2014. Andrew Lemley, company hopes to reduce the amount of water used to
New Belgium’s Government Relations Director, was make their beer through better production processes as
quoted in an EPA news release championing continued well as decrease their carbon footprint per barrel. To
support for the Clean Water Act while also associating encourage sustainability throughout the supply chain,
quality water with quality beer. NBB adopted Sustainable Purchasing Guidelines. The

Guidelines allow the company to pinpoint and work donates to causes with a particular emphasis on water
closely with eco-friendly suppliers to create sustain- conservation, sensible transportation and bike advo-
ability throughout the entire value chain. For their part, cacy, sustainable agriculture, and youth environmental
NBB conducts life-cycle analysis on their packaging education.
components while continually seeking more efficient NBB also sponsors a number of events, with a special
refrigeration and transportation technology that can be focus on those that involve “human-powered” sports
incorporated into their supply chain. that cause minimal damage to the natural environment.
In 2013, NBB achieved B corporation certification as Through event sponsorships, such as the Tour de Fat,
a way to further solidify their belief that business can be a NBB supports various environmental, social, and cycling
“force for good.” The B stands for benefit. B corporation nonprofit organizations. In the course of one year, New
certification, awarded by the nonprofit B Lab, is a type Belgium can be found at anywhere from 150 to 200
of certification for for-profit firms that certifies they festivals and events across the nation.
meet stringent environmental and social performance
goals, as well as practice transparency and accountability. Organizational Success
Companies that have received B corporation certification
are scored based upon their performance in ethical, social, New Belgium Brewing’s efforts to embody a
and environmental areas, including governance, worker sustainability-oriented business has paid off with a

relations, community relations, and the environment. NBB very loyal following—in fact, the company expanded
scored 143 out of 200, whereas the median B corporation the number of tours they offer of their facilities due to
score is 80. NBB demonstrates through certification that high demand. The company has also been the recipient
they go above and beyond what is expected to try and of numerous awards. Past awards for NBB include the
make the world a better place. Business Ethics Magazine’s Business Ethics Award for its
“dedication to environmental excellence in every part of
its innovative brewing process,” their inclusion in The
Wall Street Journal’s 15 best small workplaces, and the
Beyond their use of environmentally friendly tech- award for “best mid-sized brewing company of the year”
nologies and innovations, New Belgium also strives to and “best mid-sized brewmaster” at the Great American
improve communities and enhance people’s lives through Beer Festival. New Belgium has been awarded medals
corporate giving, event sponsorship, and philanthropic for three different brews: Abbey Belgian Style Ale, Blue
involvement. NBB has donated more than $10.5 million Paddle Pilsner, and La Folie specialty ale.
through their grants program to philanthropic causes. Many applaud New Belgium Brewing Company’s
For every barrel of beer sold the prior year, NBB donates sustainability and philanthropic initiatives. According
$1 to philanthropic causes within their distribution to David Edgar, former director of the Institute for
territories. The donations are divided between states in Brewing Studies at the Brewers Association in Boulder,
proportion to their percentage of overall sales. This is the Colorado, “They’ve created a very positive image for
company’s way of staying local and giving back to the their company in the beer-consuming public with smart
communities that support and purchase NBB products. decision-making.” Although some members of society do
NBB also participates in One Percent for the Planet, a not believe that a company whose major product is alco-
philanthropic network to which the company donates hol can be socially responsible, NBB has set out to prove
one percent of Fat Tire sales. that for those who make a choice to drink responsibly,
Funding decisions are made by NBB’s Philanthropy the company can do everything possible to contribute to
Committee, which is composed of employees through- society. NBB also promotes the responsible appreciation
out the brewery, including owners, area leaders, and of beer through their participation in and support of the
production workers. NBB looks for nonprofit organiza- culinary arts. For instance, they frequently host New
tions that demonstrate creativity, diversity, and an Belgium Beer Dinners, in which every course of the meal
innovative approach to their mission and objectives. is served with a complementary culinary treat.
The Philanthropy Committee also looks for groups that Although NBB has made great strides in creating
incorporate community involvement in their operations. a socially responsible brand image, their work is not
In addition, NBB maintains a community bulletin done. They must continually reexamine their ethical,
board in their facility and posts an array of community social, and environmental responsibilities. In 2004,
involvement activities and proposals. This community they received the Environmental Protection Agency’s
board allows tourists and employees to see the various regional Environmental Achievement Award. It was
opportunities to help out in the community, and it gives both an honor and a motivator for the company to
nonprofit organizations a chance to make their needs continue their socially responsible goals. After all, there
known. The NBB website also has a dedicated link are still many ways for NBB to improve as a corporate
where organizations can apply for grants. The company citizen. For example, although all electric power comes

from renewable sources, the NBB plant is still heated that NBB might be getting too big, thereby losing their
in part by using natural gas. Furthermore, continued “niche” feel. With sales slowing, NBB was forced to lay
expansion requires longer travel distances to distribute off 28 workers in 2018. Employees received severance
their products, which increases the use of fossil fuels. In packages and the company purchased their shares.
addition to addressing logistical challenges, NBB is part Every six-pack of New Belgium Beer displays the
of an industry where there is always a need for more phrase “In this box is our labor of love. We feel incred-
public dialogue on avoiding alcohol abuse. Practically ibly lucky to be creating something fine that enhances
speaking, the company has a never-ending to-do list. people’s lives.” Although Jeff Lebesch and Kim Jordan
NBB executives acknowledge that as their annual are divorced and Lebesch has left the company to
sales increase, the company will face increasing chal- focus on other interests, the founders of New Belgium
lenges to remain committed on a human level while hope this statement continues to capture the spirit of
also being culturally authentic. Indeed, how to boldly the company. In 2015, Kim Jordan announced she was
grow the brand while maintaining their perception of a turning the CEO position over to Chief Operations
humble feel has always been a challenge. Additionally, Officer and President Christine Perich so she could
reducing waste to an even greater extent will require transition into becoming the Executive Chair of NBB’s
more effort on behalf of managers and employees, creat- board of directors. This allowed Jordan to focus more on
ing the need for a collaborative process that will require the long-term strategy and vision of the firm. However,
the dedication of both parties toward sustainability. after only a year on the job, Christie Perich announced
Perhaps as a way to deal with the long transportation her resignation and was replaced by external hire Steve
distances necessary for national distribution as well Fechheimer. In 2019, Fechheimer and Jordan announced
as to expand production capacity, NBB opened their the sale of NBB to Australia-based Lion Little World
second brewery in Asheville, North Carolina in 2015. Its Beverage. NBB, which was previously 100 percent
grand opening in 2016 was marked with a celebration employee-owned, announced its 300 employee-owners
that coincided with NBB’s 25th anniversary. Like Sierra would receive $100,000 or more in retirement money
Nevada, who already operates a brewery in Asheville, from the deal. Current and former employees received
NBB is hoping to use its new $175 million facility as a nearly $190 million through NBB’s employee stock
hub for product distribution to eastern states—Asheville ownership plan (ESOP) over the life of the plan. Jordan
has legislation in place that makes regional distribution will maintain an active role at NBB, and Fechheimer will
easier. However, opening their second brewery is more remain as CEO. Additionally, the company will retain
than just about increasing production capacity; NBB, their B corporation certification, and their headquarters
along with hundreds of other craft brewers, are attracted will remain in Fort Collins, Colorado.
to Asheville for their local culture that values sustainabil- Despite the challenges the brewery has faced, NBB
ity and locally produced products. Asheville is surrounded leaders are optimistic about the future. Jordan indicated
by mountains, is near protected water sources, and is the purchase provides the opportunity to expand capac-
inhabited by many outdoor enthusiasts. Indeed, NBB is ity and continue to grow the company. Not to mention,
not the only craft brewery to recognize the potential of resources for research and development will be much
positive tourist exposure and local support by operating greater. NBB is the 11th-largest overall brewer in the
in the Asheville area. Sierra Nevada added tours of their U.S. and continues to be a role model for ethics and
brewery to emphasize their history and sustainable social responsibility for the entire brewing industry.
brewing practices. Additionally, other Asheville breweries
have spent millions expanding their current operations in Questions for Discussion
anticipation of NBB’s entrance to the area.
NBB also faces increased competition from larger 1. What environmental issues does the New Belgium
craft breweries. They still remain behind D. G. Yuengling Brewing Company work to address? How has NBB
& Son Inc., Boston Beer Co. (maker of Samuel Adams taken a strategic approach to addressing these issues?
beer), and Sierra Nevada in market share. Like NBB, Why do you think the company has taken such a
strong stance toward sustainability?
Boston Beer Co. and Sierra Nevada have plans to expand.
2. Do you agree that New Belgium’s focus on social
NBB must also compete against craft beer alternatives
responsibility provides a key competitive advantage for
released by traditional breweries, such as MillerCoor’s the company? Why or why not?
New Moon Belgian White. They must constantly engage 3. Some segments of society contend that companies
in environmental scanning and competitive analysis to that sell alcoholic beverages and tobacco products
compete in this increasingly competitive environment. cannot be socially responsible organizations because
Finally, New Belgium is facing a potential slowdown of the nature of their primary products. Do you
in craft beer consumption. Smaller local competitors, believe that New Belgium’s actions and initiatives are
called microbreweries, are increasing and have begun to indicative of a socially responsible corporation? Why
draw away some of NBB’s customers. There is concern or why not?

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468 Case 9 Starbucks Takes on Coffee Culture
CASE 9
Starbucks Takes on Coffee Culture

Introduction from each other were really needed. The Great Recession
brought a change in policy, however. Starbucks pulled
The first Starbucks store was opened in Seattle’s Pike back on expansion, closed hundreds of stores around
Place Market in 1971. Howard Schultz joined Starbucks the United States, and focused more on international
in 1982 as director of retail operations and marketing. markets. In the years following the recession, Starbucks
Returning from a trip to Milan, Italy, with its 1,500 cof- began increasing U.S. expansion once more. However, in
fee bars, Schultz recognized an opportunity to develop a response to criticism from consumers about their “clus-
similar retail coffee bar culture in Seattle. tering” strategy, the company closed stores that were
In 1985, the company tested their first downtown perhaps redundant. In June 2018, Starbucks announced
Seattle coffeehouse, served the first Starbucks Caffè the closing of 150 store locations, which is three times
Latte, and introduced their Christmas Blend. Since then, the number of stores the corporation typically closes in a
Starbucks has expanded across the United States and year. The affected stores were in densely populated urban
around the world, now operating over 30,600 stores areas that already had multiple Starbucks locations.
in 76 countries. Historically, Starbucks grew at a rate At the end of 2014, Starbucks opened a 15,000
of about three stores a day, although the company cut square-foot Starbucks Reserve Roastery and Tasting
back on expansion in recent years. The company serves Room in Seattle, a place where coffee is roasted, bagged,
approximately 85 million customers per week and has sold, and shipped internationally. Equipped with a
an annual revenue of over $24 billion. The firm is the Coffee Library and Coffee Experience Bar, the roastery
largest coffeehouse company in the world. is intended to redefine the coffee retail experience for
Starbucks locates their retail stores in high-traffic, customers. The roastery sells 28 to 30 different coffees
high-visibility locations. The stores are designed to and gets 1,000 to 2,000 customers daily. Starbucks
provide an inviting coffee bar environment that is an has also added local Mora ice cream to the product
important part of the Starbucks product and experience. line at the roastery so consumers can create Affogato-
It was the intention of Howard Schulz to make Starbucks style beverages (espresso poured over ice cream). The
into “the third place” for consumers to frequent, after Starbucks Reserve Roastery in Shanghai has been called
home and work. Because the company is flexible regard- the “biggest Starbucks in the world.” Starbucks also has
ing store size and format, many of their locations are in roasteries in Milan, Tokyo, Manhattan, and Chicago.
or near a variety of settings, including office buildings, While the roasteries have been extremely successful,
bookstores, and university campuses. Retail stores are CEO Kevin Johnson is slow to continue further expan-
also situated in select rural and off-highway locations to sion due to a desire to perfect the existing roasteries first.
serve a broader array of customers outside major metro-
politan markets and to further expand brand awareness. New Product Offerings
In addition to selling products through retail outlets,
Starbucks sells coffee and tea products and licenses Starbucks introduced a number of new products over the
their trademark through other channels and partners. years to remain competitive. In 2008, Starbucks decided
For instance, their Frappuccino coffee drinks, Starbucks to return to the essentials with the introduction of their
Doubleshot espresso drinks, iced espresso drinks, almond Pike Place Blend. The company hoped that the blend
milk Frappuccino coffee drinks, and VIA coffees can be would return Starbucks to their roots of distinctive,
purchased in grocery stores and through retailers like expertly blended coffee. In order to perfect the flavor,
Walmart and Target. Starbucks enlisted the inputs of 1,000 customers over
A common criticism of Starbucks is their strategy 1,500 hours. To kick off the new offering, Starbucks
for location and expansion. The company’s “clustering” held the largest nationwide coffee tasting in history.
strategy—placing a Starbucks on nearly every corner in To make the brew even more appealing, Starbucks
some areas of operation—forced many smaller coffee joined forces with Conservation International to ensure
shops out of business. This strategy dominated for most the beans were sustainably harvested. After feedback
of the 1990s and 2000s, and Starbucks became the source revealed many of their customers desired a lighter blend,
of parodies and pop culture jokes. Many people began to Starbucks introduced the Blonde Roast blend in 2011. In
wonder whether two Starbucks directly across the street 2015, the company commercialized the Flat White based
This case was prepared by Jennifer Sawayda, Michelle Urban, and Sarah Sawayda for and under the direction of O.C. Ferrell and Linda Ferrell, © 2019.
It was prepared for classroom discussion rather than to illustrate either effective or ineffective handling of an administrative, ethical, or legal decision by
management. All sources used for this case were obtained through publicly available material.

on a latte drink popular in Australia. Unlike previous Second, Starbucks continually relates company decisions
new offerings, the company did not perform limited- back to the guiding principle or principles they support.
market testing but instead introduced it nationwide in These principles focus on coffee, partners, customers,
an attempt to remain competitive with rivals. In 2018, stores, neighborhoods, and shareholders. And finally, the
Starbucks and Nestlé partnered under a global coffee company formed a “Mission Review” system so partners
alliance. This alliance has produced Starbucks Creamer can comment on a decision or action relative to its
as a new product with a variety of flavors. consistency with one of the six principles. These guiding
Not only does Starbucks have a variety of coffees, principles and values have become the cornerstone of
bakery items, and breakfast and lunch options, they also a strong ethical culture of predominately young and
have six different sizes of drinks for patrons to choose educated workers.
from: short (8 fl. oz.), tall (12 fl. oz.), grande (16 fl. oz.), Former Starbucks founder and CEO Howard Schultz
venti hot (20 fl. oz.), venti cold (24 fl. oz.), and trenta has long been a public advocate for increased awareness
(31 fl. oz.). Trenta, Starbucks’ largest drink size, was first of ethics in business. In a 2007 speech at Notre Dame,
introduced in 2011. Starbucks has developed multiple he spoke to students about the importance of balancing
ways to stay competitive, and in a society that values “profitability and social consciousness.” Schultz is a
choice, having six different size options is yet another true believer that ethical companies do better in the
way the company appeals to consumers. long run, something that has been backed by research.
The Starbucks Reserve Roasteries in Europe, Asia, According to the Ethisphere Institute, ethical companies
and the United States also sell alcoholic beverages such perform better and have higher shareholder returns.
as beer and wine. A unique aspect of the alcoholic drinks Schultz maintains that, while it can be difficult to do the
is that many of them are mixed with the company’s right thing at all times, in the long term, it is better for a
famous coffee. Starbucks aims to give customers an company to take short-term losses than to lose sight of
experience they cannot get anywhere else, and the their core values.
roasteries have proven to be valuable in this endeavor. The care a company shows their employees is a
Additionally, Starbucks fosters brand loyalty by large part of what sets them apart from other firms.
increasing repeat business. One of the ways they Starbucks offers all employees who work more than 20
accomplish this is through the Starbucks Card, a hours per week a comprehensive benefits package that
reloadable card introduced in 2001. For the tech-savvy includes stock options as well as medical, dental, and
visitor, Starbucks also introduced the Starbucks Reward vision benefits. In another effort to benefit employees,
Mobile app. With the app, customers are able to order Starbucks partners with Arizona State University (ASU)
or pre-order their coffee and merely scan their phone to offer tuition assistance to those who want to earn a
for payment. Today, the Starbucks Rewards mobile app degree from the university’s online program.
has 44 million active users—making it the fourth most Another key part of the Starbucks image involves
popular digital payment app in the country. Howard their commitment to ethics and sustainability. Social
Schultz believed that the future is digital, and, thus, responsibility, transparency, and sustainability are all
Starbucks is placing more emphasis on digital market- important values of Starbucks. In an effort to become
ing strategies. more transparent about ethical harvesting, as well as to
build trust in the company among consumers, Starbucks
Starbucks Culture partnered with Microsoft in 2019 to use blockchain
technology to allow customers to trace where and how
In 1990, the Starbucks’ senior executive team created a their coffee came to be.
mission statement that specified the guiding principles With an eye toward reducing the company’s nega-
for the company. They hoped the principles included in tive impact on climate change and waste, Starbucks has
the mission statement would assist partners in determin- also created plastic drinkable lids to replace their plastic
ing the appropriateness of later decisions and actions. straws. While the lids are still made of a type of plastic,
After drafting the mission statement, the executive team they are recyclable and, thus, safer for the environment.
asked all Starbucks partners to review and comment Considering that about half of Starbucks drink orders
on the document. Based on their feedback, the final are now cold drinks, this change could make a significant
statement put forth the mantra of “people first and impact on the company’s sustainability practices. Straws
profits last.” In fact, the number one guiding principle in will still be available, particularly for Frappuccinos;
the Starbucks’ mission statement is to create a great and however, these will be made out of a material that can
respectable work environment for its employees. be recycled. In addition to helping the environment,
Starbucks has done three things to keep the mission Starbucks is hoping that the move from plastic straws
and guiding principles alive over the decades. First, they to sustainable materials will drive more business from
distribute the mission statement and comment cards younger generations. According to a Nielsen poll, 73
for feedback during orientation to all new partners. percent of Millennials are willing to spend more money

for sustainable goods. Starbucks, a company already conserving energy, and educating partners through
popular with both generations, may be able to increase the company’s “Green Team” initiatives. Concerned
their sales even more among young people with a simple stakeholders can now track the company’s progress
change to their straws. through their website where there is a clear outline of
Despite these efforts to be more environmentally Starbucks’ environmental goals and how the company
conscious, there is some controversy among environ- fares in living up to those goals. Starbucks also began
mental groups about the positive results of the switch. offering a $1 plastic cup for purchase that is good for a
Questions remain about other ecological issues, such recommended 30 uses. In addition, the company has set
as the company’s cup waste. In order to stay ahead, a goal to reach 10,000 “greener stores” by 2025.
Starbucks will have to continue to innovate and meet the
demands of sustainability-minded consumers. Employees
Starbucks actively partners with nonprofits around
the globe and is one of the largest buyers of Fair Trade Growing up poor with a father whose life was nearly
Certified as well as certified organic coffee. Conservation ruined by an unsympathetic employer who did not offer
International joined with Starbucks in 1998 to promote health benefits, Howard Schultz always considered the
sustainable agricultural practices, namely shade-grown creation of a good work environment a top priority. He
coffee, and to help prevent deforestation in endangered believed companies should value their workers. When
regions around the globe. The results of the partnership forming Starbucks, he decided to build a company
proved to be positive for both the environment and the that provided opportunities his father did not have.
farmers. For example, in Chiapas, Mexico, shade-grown The result is one of the best healthcare programs in
coffee acreage (that reduces the need to cut down trees the coffee shop industry. Schultz’s key to maintaining a
for coffee plantations) increased well over 220 percent, strong business was developing a shared vision among
while farmers receive a price premium above the market employees as well as an environment to which they can
price. Starbucks and Oprah, two of the biggest global actively contribute. Understanding how vital employees
brands, also joined forces to create the limited edition are, Schultz is the first to admit his company centers on
Oprah Chai Tea in 2014. personal interactions: “We are not in the coffee business
Starbucks works with many other organizations serving people, but in the people business serving coffee.”
as well, including the African Wildlife Foundation and Starbucks is known for their diversity, and 46 percent of
Business for Social Responsibility. The company’s efforts their baristas are ethnic minorities.
at transparency, the treatment of their workers, and their However, being a great employer does take its toll
philanthropic commitments demonstrate how genuine on the company. In 2008, Starbucks closed 10 percent
Starbucks is in their mission to be an ethical and socially of stores in order to continue to provide employees with
responsible company. health insurance. This decision, based on their guiding
principle of “people first, profits last,” shows how much
the company values their employees.
Corporate Social Mission As a way to improve employee health, Starbucks
established a program for employees called “Thrive
Although Starbucks supported responsible business Wellness” that offers various resources aimed at assisting
practices virtually since their inception, as the company employees in incorporating wellness into their lives. The
has grown, so has the importance of defending their program offers resources to assist with smoking cessa-
image. At the end of 1999, Starbucks created a Corporate tion, weight loss, and exercise. Starbucks also estimates
Social Responsibility department, now known as the that 70 percent of employees are either currently in
Global Responsibility Department. Global Responsibility college or desire to earn a degree. The aforementioned
releases an annual report in order for shareholders to partnership with ASU provides this opportunity as
keep track of the company’s performance. students can choose from 80 online programs with
no obligation to remain a Starbucks employee while
receiving or achieving their degree. More than 2,000
Environment employees applied to the program when it was initially
In 1992, long before it became trendy to be “green,” launched. The rising cost of education is an important
Starbucks developed an environmental mission state- issue that former CEO Howard Schultz wanted to help
ment to articulate the company’s environmental priori- alleviate. By 2025, Starbucks hopes to have 25,000
ties and goals. This initiative created the Environmental graduates among their employees.
Starbucks Coffee Company Affairs team, the purpose Along with educational opportunities, employees
of which was to develop environmentally responsible have an opportunity to join Starbuck’s stock-sharing
policies and minimize the company’s “footprint.” As program called Bean Stock. Starbucks has generated over
part of this effort, Starbucks began using environmental $1 billion in financial gains through stock options. After
purchasing guidelines to reduce waste through recycling, receiving a tax cut in 2018, Starbucks used their saved

money to raise employee pay and provide $500 grants to dairy allergies, Starbucks also offers milk alternatives
workers. such as almond, soy, and coconut milk for the majority
of drinks.
Suppliers
Communities
Even though they are one of the largest coffee brands
in the world, Starbucks maintains a good reputation for Starbucks coffee shops have long sought to become an
social responsibility and business ethics throughout the “instant gathering spot” and a “place that draws people
international community of coffee growers. They build together.” The company established “community stores,”
positive relationships with small coffee suppliers while which not only serve as a meeting place for community
also working with governments and nonprofits wherever programs and trainings but also as a source of funding
they operate. Starbucks practices conservation as well as to solve issues specific to the local community. There
Starbucks Coffee and Farmer Equity Practices (C.A.F.E.), are currently twelve such locations, including one in
a set of socially responsible coffee buying guidelines that Thailand.
ensure preferential buying status for participants who Schultz used the advance and ongoing royalties
receive high scores in best practices. Starbucks pays from his book, Pour Your Heart Into It, to create
coffee farmers premium prices to help them make profits the Starbucks Foundation, which provides opportunity
and support their families. Starbucks is close to their goal grants to nonprofit literacy groups, sponsors young
of 100 percent of total coffee purchases being C.A.F.E. writers’ programs, and partners with Jumpstart, an
verified. The company is currently at 99 percent. organization helping children prepare developmentally
The company is also involved in social development for school. The company also announced their intention
programs, investing in programs to build schools and to hire 10,000 veterans by 2018. In 2018, Starbucks
health clinics, as well as other projects that benefit coffee- proudly confirmed that they had not only reached that
growing communities. Starbucks collaborates directly goal but had more than doubled it for a total of 21,000
with some of its growers through Farmer Support veteran hires.
Centers, located in Costa Rica, Rwanda, Tanzania, Additionally, Starbucks takes a proactive approach
South America, Ethiopia, Indonesia, Mexico, and China. to addressing employment opportunities and job train-
Farmer Support Centers provide technical support and ing. The company has joined other firms to support the
training to ensure high-quality coffee into the future. The “100,000 Opportunities Initiative,” with the goal of
company is a major purchaser of Fair Trade Certified, creating 100,000 employment and internship opportuni-
shade-grown, and certified organic beans that further ties for lower-income youth between 16 and 24 years
support environmental and economic efforts. In 2018, of age. Former CEO Howard Schultz helped spearhead
Starbucks welcomed the public into the coffee process the initiative and announced plans to hire 10,000
and experience through their new Visitor Center in young workers over a three-year period. Achieving this
Costa Rica. Again, the goal is transparency and educat- goal early, Starbucks now has 75,000 young workers.
ing the public on how coffee beans go from the fields to Starbucks also announced that they were building 15
the stores. new store locations in lower-income, predominately
minority neighborhoods in an attempt to improve com-
munities through employment, education, and training.
Customers For instance, their location in Ferguson, Missouri, acts as
Starbucks is focused more on quality coffee, the atmo- a coffee shop as well as a job training facility for com-
sphere of their stores, and the overall Starbucks experi- munity members. Starbucks also plans to partner with
ence rather than the rapid expansion of stores after the local organizations to sell their products in local stores.
company began missing same-store sales targets in 2016.
Additionally, strengthening their brand and customer Brand Evolution
satisfaction is more important than ever as Starbucks
seeks to regroup after the latest recession forced the Although Starbucks achieved massive success in the last
company to rethink their strategy. Starbucks refocused four decades, the company realized they had to modify
the brand by upgrading their coffee-brewing machines, their brand to appeal to changing consumer tastes. All
introducing new food and drink items for health and established companies, no matter how successful, must
budget-conscious consumers, and refocusing on their learn to adapt their products and image to appeal to the
core product. Recognizing the concern over the obesity shifting demands of their target markets. Starbucks is
epidemic, Starbucks ensures that their grab-and-go no exception. The company is associated with premium
lunch items are under 500 calories and is involved in coffee beverages, an association that has served them
two sodium reduction programs: the National Salt and well over the years. However, as competition in specialty
Sugar Reduction Initiative in New York and the UK coffee drinks increased, Starbucks recognized the need to
Food Standards Agency’s salt campaign. Conscious of expand their brand in the eyes of consumers.

With brand expansion in mind, the company has implemented a grab-and-go sandwich and salad line to
begun to adopt more products. In addition to coffee, reduce afternoon traffic in stores.
Starbucks stores sell coffee accessories, teas, muffins, In 2018, Starbucks and Alibaba, one of the world’s
water, grab-and-go products, upscale food items, hand- largest online retailers, formed a partnership to provide
crafted sodas called Fizzios, as well as wine and beer an online Starbucks store for customers in China. China
in select locations. Food sales make up 20 percent of is Starbucks’ largest growth market. Utilizing Alibaba’s
Starbucks’ revenue. CEO Kevin Johnson stated that the technology, Starbucks products are ordered online and
company plans to double that in the near future. The rise delivered to customers directly. While the delivery system
in coffee prices has created an opportunity for expan- benefits Starbucks company, Alibaba will also benefit by
sion into consumer packaged goods that will protect carrying Starbucks drinks in their popular supermarkets,
Starbucks against the risks of relying solely on coffee. In called Hema, via “Starbucks Delivery Kitchens.” Since
order to remain competitive, Starbucks made a series of partnering with Alibaba in China, Starbucks has formed
acquisitions to increase the value of its brand, including two additional partnerships in the United States, with
Bay Bread (a small artisan bakery), La Boulange (a Brightloom and Uber Eats, in 2019, with a focus again
bakery brand), Evolution Fresh (a juice brand), and on virtual deliveries and expansion of the company
Teavana (a tea brand). This allows Starbucks to offer through technology. The idea behind the partnership
high-quality breakfast sandwiches as well as Paninis and with Uber Eats came from the success of the Alibaba
wraps for lunch. delivery program in China, which caters to 2,000 stores
To symbolize this shift into the consumer packaged in over 30 cities. Starbucks’ goal was to reach a quarter
goods business, Starbucks gave their logo a new look. of their U.S. stores with delivery through Uber Eats by
Previously, the company’s circular logo featured a the end of the second quarter of 2019. Capitalizing
mermaid with the words “Starbucks Coffee” encircling on the fact that digital and mobile orders, especially
it. In 2011, Starbucks removed the words and enlarged through delivery services, often result in higher checks,
the mermaid to signal to consumers that Starbucks is Starbucks hopes to lure customers into spending more
more than just the average coffee retailer. money via their delivery system.
Additionally, in 2018, Starbucks noticed a 3 percent
Innovation decline in Frappuccino sales, a signature drink of their
brand. Starbucks attributed the decrease to customers
In September 2018, Starbucks announced their plans for becoming more health-conscious and moving away from
an organizational “shake-up.” This shake-up included sugary drinks. As a result, Starbucks will continue to
corporate layoffs at top levels. Starbucks explained the develop more health-conscious drinks, such as low-sugar
reasoning was to innovate the company as well as to iced tea, to cater to customers’ changing preferences.
combat stagnant sales and spark investor and customer In an effort to ramp up innovation, Starbucks
interest. In the years leading up to 2018, Starbucks created the Tryer Center in 2018 at their headquarters
faced lagging U.S. sales for several quarters, and sales in Seattle, a 20,000-square-foot facility where employees
growth was not up to investors’ expectations. Kevin test new beverages using rapid prototyping. Product
Johnson sent an email to employees stating his plan development can traditionally take companies months,
was “to make significant changes to how we work as and sometimes years, to perfect an idea, and this is a way
leaders in all areas of the company.” According to the that Starbucks is attempting to accelerate the process. At
CEO, approximately 5 percent of the company’s global the center, employees can quickly test new concepts. For
corporate workforce would be cut, including about 350 example, a new single-cup brewing prototype was able
employees in marketing, creative, product, technology, to go through 10 versions in a month’s time using the
and store development areas of the company. Johnson lab’s 3D printer. Another month later, the final product
said that while the decision was very difficult, the made it into Starbucks locations. From the more-than
positions affected were related to work that has been 130 projects that have been tested to date, approximately
eliminated or deprioritized as the company streamlined 30 percent are currently in Starbucks cafes. Starbucks
their business over time. partners from every level of the business are invited to
Starbucks’ goal is to speed the arrival of new menu submit ideas, helping foster a sense of community among
items at their cafes and push innovation. One way they team members. The creation of this innovation lab will
want to push innovation is through the automation make Starbucks more agile in developing, testing, and
of their back-of-store inventory system. They want to releasing new products and systems.
implement a waste reduction function which will allow Starbucks is also investing in innovation with
employees to spend more time and energy in customer technology. The company teamed up with Microsoft to
service. The company began to implement these orga- enhance the Starbucks app, using reinforcement learning
nizational changes just weeks after they were initially technology to provide users with a personalized ordering
announced. Starbucks even added new menu options, experience. This technology uses artificial intelligence
such as a non-dairy, plant-based cold-brew drink, and (AI) to give users custom food and drink suggestions

based on factors such as previous order history, weather, looking toward possibilities in international markets. This
time of day, and inventory at the user’s local Starbucks. represents both new opportunities and challenges. When
Starbucks believes this use of machine learning builds attempting to break into the U.K. market, for instance,
on the Starbucks experience of customer connection. Starbucks was met with serious resistance. Realizing the
Additionally, with the rise of connected internet of things homogenization of their stores did not work as well in
(IoT) devices, Starbucks, with the help of Microsoft, has the United Kingdom, Starbucks began to remodel their
put the right technology in place to accommodate cloud- stores so they took on a more local feel. At the end of
connected store equipment. This type of connectivity 2012, Starbucks came under public scrutiny for allegedly
provides Starbucks with data points on equipment per- not paying taxes for the last 14 of the 15 years they were
formance such as coffee temperature and water quality, established in the United Kingdom. A protest group called
so baristas can focus less on machine maintenance. The UK Uncut began “sitting in” at the stores, encouraging
company is able to send new coffee recipes directly to coffee drinkers to buy their coffee elsewhere. Starbucks
the machines instead of having store partners manually claims they did not pay taxes because they did not make a
loading them from flash drives, saving time and money. profit. However, the company said they would stop using
The data-driven system allows Starbucks to have a certain accounting techniques that showed their profits
predictive rather than reactive approach. overseas. Starbucks also agreed to pay 20 million pounds
over the next two years, whether or not they made a
Success and Challenges profit.
Starbucks is rapidly expanding in China and is the
Starbucks is the most prominent brand of high-end coffee number one market for the company. When Starbucks
in the world but also one of the defining brands of our first entered the country in 1999, coffee was not nearly
time. In most large cities, it is impossible to walk more as popular as tea. Starbucks positioned themselves in
than a few blocks without seeing the familiar mermaid highly trafficked areas to gain awareness and crafted
logo. In the past few decades, Starbucks achieved beverages using local ingredients, such as green tea, to
amazing levels of growth, creating financial success for create appealing drinks. Additionally, Starbucks strategi-
shareholders. Starbucks’ reputation is built on product cally partnered with various coffee companies around
quality, stakeholder concern, and a balanced approach China that provided local expertise to help Starbucks
to all of their business activities. Of course, Starbucks expand quickly. Starbucks effectively overcame obstacles
does receive criticism for putting other coffee shops out in tapping into the Chinese market and adapted their
of business and for creating a uniform retail culture in strategy to attract Chinese consumers. For example, after
many cities. Yet, the company excels in relationship- the 2007 closure of the retail operation in the Forbidden
building with their employees and is a role model for City, resulting from cultural concerns of the presence
the fast-food industry in employee benefits. In addition, of a Western staple in a sacred area, Starbucks became
in an age of shifts in supply chain power, Starbucks is as more sensitive to the specific needs and nuances of the
concerned about their suppliers and meeting their needs country.
as they are about any other primary stakeholder. Starbucks faced a major setback in customer trust
In spite of Starbucks’ efforts to support sustain- in 2018 after two black men were refused access to
ability and maintain high ethical standards, the company the bathroom at a Philadelphia location. A video that
garnered harsh criticism in the past on issues such as was recorded of the incident was shared to Twitter and
a lack of fair trade coffee, hormone-added milk, and viewed more than 11.5 million times. After the incident,
Howard Schultz’s alleged financial links to the Israeli Starbucks closed all of its stores for a one-day anti-bias
government. In an attempt to counter these criticisms, training for employees. Starbucks publicly apologized
in 2002, Starbucks began offering Fair Trade Certified and acknowledged the need to make changes to prevent
coffee, a menu item that was quickly made permanent. racial bias. This one-time training was costly due to mil-
As of 2015, approximately 99 percent of their coffee in lions in lost profits but showed the company was willing
the United States is ethically sourced. to right their wrong. Additionally, the two men received
Starting in late 2008, Starbucks had something new an apology along with a financial settlement.
to worry about. A global recession caused the market to Another challenge Starbucks must address
bottom out for expensive coffee drinks. The company is sustainability. Despite the company’s emphasis on
responded by slowing their global growth plans after becoming more environmentally conscious, billions
years of expanding at a nonstop pace and instead refo- of disposable Starbucks cups continue to be thrown
cused on strengthening their brand, satisfying customers, into landfills each year. Although Starbucks has taken
and building consumer loyalty. After Starbucks stock initiatives to make the cups more eco-friendly, such as
started to plummet, Howard Schultz returned as CEO to changing from polyethylene No. 1 to the more eco-friendly
bring the company back to their former glory. polypropylene No. 5, the cup represents a serious waste
Schultz was successful, and Starbucks rebounded problem for Starbucks. Starbucks encourages consumers
from the effects of the recession. The company is once again to bring in reusable cups (such as the Starbucks tumblers

they sell) for a 10-cent rebate, yet these account for less 03/11/3423-starbucks-to-enter-chinas-tea-drinks-market
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478 Case 10 If the Shoe Fits: TOMS and the One for One Movement
CASE 10
If the Shoe Fits: TOMS and the One for One Movement
Introduction person in need. When consumers buy a TOMS product,
they get the additional value of helping others.
TOMS Shoes is a for-profit business with a large In this case, we discuss Mycoskie’s revolutionary
philanthropic component. The company was started business model and how it has achieved such success.
after entrepreneur Blake Mycoskie witnessed the poverty We begin by analyzing the background and origins of the
among villagers in Argentina, poverty so extreme that TOMS Shoes business concept, and then discuss TOMS’
the villagers could not even afford a pair of shoes. operational approach, including how the organization
Mycoskie returned to the United States with 200 manages to carry out their central mission. Their unique
Argentinian shoes and a mission. He went from one corporate culture is a necessity for the successful opera-
retail store to another with a unique business proposal. tion of TOMS, which is examined along with the firm’s
He would start an organization that would provide a marketing strategy. Next, we analyze how this business
pair of shoes for an Argentinian child in need for every model has impacted today’s society, as well as other busi-
pair of shoes purchased from his business. After many ness organizations. Then, we evaluate changing attitudes
meetings and discussions, a few Los Angeles boutiques toward social issues and how TOMS has responded. We
agreed to sell the shoes. Mycoskie’s idea was eventually discuss various criticisms and risks that TOMS faces on
picked up by the Los Angeles Times, who ran an article a daily basis, as well as the company’s decision to evolve
on his extremely unique business idea. To his surprise, their famous One for One model. Last, we conclude by
the following weekend garnered $88,000 in orders. speculating about the future of TOMS as a business.
The orders didn’t slow down there, and two years after
officially establishing TOMS Shoes, the business had The History of TOMS
$9.6 million in revenue.
Most firms do not want other companies to copy Blake Mycoskie is the founder and Chief Shoe Giver of
their successful business model. However, the shoe TOMS Shoes. Before founding TOMS Shoes, Mycoskie
retailer TOMS is not your typical retailer, and the firm’s had started five companies that ranged from billboard
business model is unusual to say the least. While many advertising to laundry services. His foray into the
organizations try to incorporate social entrepreneurship shoe industry, however, was almost accidental. After
into their business operations, TOMS took the concept participating in the 2002 Amazing Race reality television
of philanthropy one step further by blending a for-profit show, Mycoskie decided to return to all the countries he
business with a philanthropic component in what they had visited during the show. When Mycoskie returned to
termed the One for One model. For every product Argentina in early 2006, he had no idea that the coun-
purchased, TOMS donates products or resources to try’s backwoods would be the inspiration for his new
help those in need. The cost of providing the products company. When interacting with the local villagers, he
to those in need is already built into the products’ sales immediately noticed that many of the families could not
price, turning the customer into the benefactor. The afford a pair of shoes for their children. He was shocked
philanthropic component is just as important as the and deeply saddened to see the number of children
for-profit business for TOMS. TOMS’ goal is to be able forced to live barefooted every day. This observation
to turn a profit, support themselves, make the world a stuck with him for the remainder of his trip, and when
better place, and educate consumers, all at the same time. he discovered the Alpargata (the comfortable and unique
TOMS has applied the One for One model to its farm shoe worn by some of the locals), his initial idea for
other products as well. For every product purchased, TOMS was born. He completed his trip in Argentina and
including TOMS Shoes, TOMS Eyewear, and coffee bags left the country determined to take action for all of those
from TOMS Roasting Co., TOMS will help a person in children he saw in need.
need. For every pair of glasses sold, for example, TOMS Upon coming back home, Mycoskie sold his online
provides a person in need with a full eye exam and treat- driver education company for $500,000 and used that
ment including prescription glasses, sight-saving surgery, money to finance the creation of TOMS Shoes. TOMS
or medical treatment to restore their sight. For each was derived from “tomorrow,” which was taken from the
bag of TOMS Roasting Co. Coffee purchased, TOMS original company concept: “the shoes for tomorrow proj-
gives an entire week’s supply of safe drinking water to a ect.” After a lot of hard work, TOMS Shoes opened for
This case was prepared by Lexie Olszewski, Jennifer Sawayda, and Sarah Sawayda for and under the direction of O.C. Ferrell and Linda Ferrell, © 2019.

business in May of 2006. In addition to their core shoe- certain time period if part of the revenues supported
selling business, the company also runs the non-profit charitable causes. Cause-related marketing is growing
subsidiary known as Friends of TOMS. The for-profit and and businesses like TOMS Shoes—where philanthropy
non-profit organizations work in conjunction to operate is embedded within the business model—are likely to
the TOMS enterprise. Since their founding, TOMS has attract the support of consumers who want to make a
been widely successful across the entire United States, difference. TOMS has developed successful collabora-
even drawing the attention of well-known celebrities. tions with recognizable brands such as Ralph Lauren
Scarlett Johansson and Keira Knightley were among the and Element Skateboard. Ralph Lauren worked with
first to publicly endorse TOMS Shoes. Internationally, TOMS to develop a co-branded Polo Rugby shoe,
the non-profit side of the business is also making a huge which maintained the One for One premise. Element
impact in communities, evidenced by the 88 million shoes Skateboard joined forces with TOMS to fashion a
that have been distributed to children in need. limited edition TOMS+ Element shoe, donating a pair
of shoes to a child in need for each pair sold. To further
The TOMS Movement the One for One movement, Element Skateboard also
promised that for every skateboard purchased, one
TOMS initially made the decision to develop their would be donated to a child participating in the Indigo
business model and, therefore, their product line around Skate Camp in Durban, South America.
shoes for several key reasons. Mycoskie knew from his In the beginning, TOMs did not have a marketing
travels that many children in impoverished countries live budget and relied on word-of-mouth, viral marketing,
in areas with unsafe terrains. He saw firsthand the lack and social networks to spread their marketing efforts.
of paved roads and other common hazards that could Word-of-mouth can be one of the most effective forms
cause injury for children walking around barefoot. In of marketing because many consumers believe it to
fact, children can contract a range of soil-transmitted be more trustworthy than corporate advertisements.
diseases from not wearing shoes. For example, soil- The challenge for any organization is to convince
transmitted Helminthiasis, an infection developed from customers to talk about their products. For TOMS
intestinal worms, is common in South Africa. Simply Shoes, many customers are excited that their purchase
wearing shoes can prevent many diseases, and Mycoskie is going toward a good cause and are eager to discuss
wanted to help. Mycoskie also understood the value of it with others. TOMS Shoes has taken proactive steps
education. In many nations, shoes are required in order to encourage word-of-mouth communication. Each pair
to attend school. Owning a pair of shoes provides a of TOMS Shoes comes with a blue-and-white TOMS
child with an opportunity to be educated, leading to flag and a small card asking customers to take pictures
higher school attendance. According to TOMS, this of themselves wearing their new shoes and holding up
combination of education and health provides children the flag. The customers are then asked to upload those
the opportunity for a better tomorrow. photos to the “HOW WE WEAR THEM” section on
As mentioned, Mycoskie’s organization consists of the company’s website, in addition to social networking
two parts: TOMS Shoes and Friends of TOMS. TOMS websites such as Facebook and Twitter. The photos of
Shoes is a for-profit company that manages the overall customers using TOMS’ products increase both product
operations and logistics. Friends of TOMS, the company’s awareness and the credibility of the brand.
non-profit subsidiary, is responsible for organizing vol-
unteer activities and all “shoe drops,” when shoes are TOMS’ Supply Chain
distributed to communities in need. This was critical to
the One for One business model that TOMS popularized. Due to their lack of knowledge about the shoe industry,
The model was simple: for every pair of shoes that TOMS Mycoskie and his team initially faced supply chain
sold, they donated a pair of shoes to a child in need on management problems. Mycoskie was unaware how fast
behalf of the customer. The One for One model enabled the demand for TOMS Shoes would escalate. Two weeks
Friends of TOMS to remain in operation because the shoes after Mycoskie began selling his products to retailers, a
sold covers the cost of the shoes for countries in need. fashion reporter wrote an article about Mycoskie’s busi-
Mycoskie dubbed this business system “Philanthropic ness and mission in the Los Angeles Times. The TOMS’
Capitalism” because the company makes a profit but website sold 2,200 pairs of shoes that same day—but
incorporates philanthropy into their business strategy. Mycoskie had only 40 pairs available. The situation
The company’s ultimate vision is to demonstrate the effect required him to hire interns to personally call customers
of how working together as a society can “create a better and ask them to wait eight weeks for delivery. Mycoskie
tomorrow by taking compassionate action today.” then flew back to Argentina where he had 40,000 shoes
The philanthropic component of TOMS contributed manufactured. Amazingly, all pairs in the batch were
to their widespread popularity among consumers. One sold within the next few weeks.
consumer survey revealed that nearly half of respondents Since then, TOMS has improved at managing their
had purchased or would purchase items during a increasingly complex supply chain. They have opened up

additional manufacturing factories in China, Argentina, Table 1 Criteria to Become a Giving Partner
and Ethiopia and plan to open another location in Brazil. Sustainable: Giving Partners work with communities to
These factories are audited by third parties to ensure address their needs in a way that will enable the community to
that workers are being treated fairly. TOMS has their meet its own needs in the future.
factory workers sign a code of conduct stating that they Local: We seek locally staffed and led organizations that have
will follow all the stipulations of TOMS Shoes. TOMS’ a long-term commitment to the regions where they work.
production staff visits each of the factories on a regular Need: TOMS’ support furthers our Giving Partners’ long-term
basis to verify that the factories are continuing to adhere goals and is integrated into their programs.
Evolving: TOMS is committed to improving our Giving by
to the code of conduct and other working standards. continually evolving. We look for partners who can report back
TOMS’ manufacturing standards are modeled after to us on how we can improve.
International Labor Organization compliance standards. Neutral: TOMS products and services are provided to help
Over 500 retailers around the world now carry people in need. Our partners do not distribute them with any
TOMS’ shoe collections. In their first couple of years in religious or political affiliations.
business, TOMS was able to secure distribution deals of Source: “The Qualities We Look For,” https://www.toms.com/thoughtful-partners
their shoes with Nordstrom, Bloomingdale’s, Neiman (accessed January 2, 2019).
Marcus, Whole Foods, and Urban Outfitters. TOMS has

also expanded to retailers that are independently owned
small businesses. TOMS continuously seeks retailers community will receive a pair of shoes approximately
that are passionate about their firm’s mission. Retailers four to six months after the initial date of purchase.
are able to purchase the bulk of their shoes at cost from Currently, TOMS distributes shoes to children in need in
TOMS, and thus are able to turn a profit as well as 24 different countries around the world.
support the One for One movement. All shoes that the Friends of TOMS helps coordinate shoe drops to
retailers purchase are directly shipped to the retailers— various communities. Every time a shoe drop occurs,
TOMS does not operate on a consignment basis. TOMS TOMS seeks volunteers and individuals affiliated with
Shoes are sold in retail stores in the United States, the TOMS to fly to the area for one week and work with their
United Kingdom, Australia, Canada, Germany, and partners to distribute the shoes. Those involved in the
France. Consumers can also purchase TOMS Shoes on shoe drop personally place the shoe on each child’s feet.
their website. Even after the shoes have been delivered, TOMS
Manufacturing the shoes and selling them to custom- continues to maintain relationships with their Giving
ers is only the first step of the process. Next, TOMS must Partners and communities. TOMS constantly monitors
distribute shoes to the children that need them. TOMS their partners for accountability. Additionally, the orga-
collaborates with nonprofits to identify children in need. nization recognizes that one pair of shoes is not going
These Giving Partners must be actively involved with the to last for the child’s entire lifetime. Therefore, as the
children in their communities and objectively evaluate children grow out of their shoes—approximately every
where TOMS Shoes can have the biggest impact on six months—TOMS provides replacement shoes to these
children’s lives. The organizations that TOMS chooses same children on a regular basis. A schedule is set up
are found in the humanitarian, health, and education with the identified community and local Giving Partner
fields. For instance, TOMS has worked with Partners to maintain a regular shoe drop for the children. TOMS
in Health to distribute shoes to children in Haiti and believes that repeat giving allows them to understand
the health organization SANA Guatemala to distribute the locale’s needs more thoroughly. TOMS also works to
shoes to Guatemalan children. In Argentina, TOMS adapt their products to account for the region’s terrain,
works with an organization that provides Podoconiosis weather, and education requirements.
treatment programs, assisting children who are at a high
risk of developing the disease. In Rwanda, TOMS is TOMS’ Product Line
currently partnering with a non-profit business to help
with over 100,000 genocide orphans. TOMS also works TOMS’ original product lines were derived from the
with a Zimbabwean organization to provide shoes to Argentinian Alpargata shoe design worn by farmers in
children who make extensive walks to school in various the region. The shoe is made from either canvas or a
weather conditions. fabric material with rubber soles. Since their inception,
In order to become a Giving Partner, organizations TOMS has introduced different styles of shoes, such as
must go through audits to ensure that they meet TOMS’ the Bota and the Cordones, along with wrap boots and
specific criteria. These five criteria are detailed in Table 1. wedges. The Bota resembles an ankle boot with soft
Through TOMS’ Giving Partnerships, locations are iden- materials, while the Cordones are more of a traditional
tified to show where providing a pair of shoes to children canvas-style sneaker with laces. In addition, the chil-
in need contributes the most toward improving the dren’s line includes Velcro Alpargatas.
standard of living for the community. When a customer TOMS has also created other varieties of shoes,
purchases a pair of TOMS’ shoes, a child in the chosen such as Vegan TOMS and the wedding collection. Vegan

TOMS are comprised of 70 percent recycled plastic safe drinking water to a person in need. More than 780
bottles and 30 percent hemp. Hemp is an extremely million people don’t have access to safe water systems.
sustainable product that outlasts organic cotton. TOMS TOMS works with Giving Partners that have expertise
is committed to creating more products that are better in water, sanitation, and hygiene to help create sustain-
for the environment. Additionally, TOMS introduced able water systems in seven countries, from the same
comfortable shoes meant for weddings. Wearing com- regions where coffee beans are sourced. Since launching
fortable slip-on shoes to a formal event may seem odd, in 2014, TOMS has helped provide 335,000 weeks of
but some young people have already worn TOMS for clean water in 6 countries. By supporting and working
prom. to provide sustainable water systems, TOMS is helping
Not all the shoes that are available for purchase are provide communities with access to safe water, which
actually donated to children. TOMS does not give the has a clear trickle-down effect. With safer water comes
wedge or the wraparound boot to children. Primarily the improved health, increased economic productivity, job
shoe that is bestowed on children is the canvas Alpargata creation, and better access to education.
with modifications to suit local residents. With each new TOMS has also invested in the health care of
community that TOMS enters, research is conducted to mothers and babies in need by distributing birthing
learn about the environment and terrain. TOMS alters kits. TOMS Bag Collection was founded in 2015 with a
their shoes to fit the children’s lives. For example, in mission to provide training for skilled birth attendants
some of the regions that experience monsoons, the and to distribute birth kits containing items that help a
shoes include more of a ridged thicker rubber sole. woman deliver her baby safely. As of 2018, TOMS has
The shoes are typically black because that is the required supported safe births for over 175,000 mothers. Each
shoe color to attend school in several countries. TOMS purchase supports one delivery of a safe birth kit, two
has also developed a wider shoe due to the fact that trainings for skilled birth attendants, and three healthy
children living barefoot for the majority of their lives deliveries for newborn babies and mothers. With proper
tend to have wider feet. training and materials to deliver babies, mothers are
Aside from selling shoes, TOMS has expanded into 80 percent less likely to develop an infection, which
selling apparel, including TOMS t-shirts, sweatshirts, means communities can prevent almost half of newborn
and caps. Any of the apparel purchased also comes with deaths. In 2015, TOMS also first introduced the High
the One for One movement guarantee, meaning that Road Backpack, which helps fund the training of school
for every t-shirt purchased a pair of shoes will still be staff and crisis counselors to prevent and respond to the
given to a child in need. TOMS has also started selling widespread problem of bullying in schools.
the TOMS flag, stickers, necklaces, and gift cards. After
distributing their one-millionth pair of shoes, Toms
began to consider other products that could be used in TOMS’ Corporate Culture
the One for One model. Mycoskie explained, “When When the business first started, TOMS did not have a
I thought about launching another product with the lot of money to pay individuals. The company instead
TOMS model, vision seemed the most obvious choice.” focused on hiring individuals who were passionate about
Because 80 percent of vision impairment in developing their mission instead of being passionate about money.
countries is preventable or curable, TOMS decided that Due to the lack of finances, Mycoskie hired recent col-
for every pair of eyewear they sold, the company would lege graduates and even high school graduates. Despite
provide treatment or prescription glasses for those in their youth and inexperience, the employees consistently
need. TOMS chose Nepal as the first country in which to rose to the occasion. Because TOMS did not initially
apply their One for One model for eyewear. engage in traditional advertising, it was important to
In 2011, TOMS launched TOMS Eyewear, which have enthusiastic employees willing to spread the word
has helped provide prescription eyewear to more than about the organization.
770,000 people in need. The company works in 13 TOMS soon realized that full-time employees were
countries to provide prescription glasses, medical treat- not the only ones willing to help the company achieve
ments, and even sight-saving surgery with each purchase their mission. The company also relies upon interns to
of eyewear. Along with restoring sight, TOMS Eyewear spread the word and support their endeavors. Employees
supports community-based eye care programs, creation and interns alike know that their work is supporting a
of professional jobs, and trainings to local health good cause, and many even get to participate in their
volunteers and teachers. TOMS Eyewear purchases own call-to-action by participating in shoe drops.
provide economic opportunities, gender equality, access
to education, and restored independence.
Internships
In 2014, TOMS made the decision to expand the
One for One model into the coffee industry and started The company started off with Mycoskie and two
TOMS Roasting Co. Each purchase of a bag of TOMS interns who managed to propel TOMS into a successful
Roasting Co. coffee provides an entire week’s supply of business. The success of those two initial interns has

prompted the company to hire interns each year through TOMS’ Impact
the nine-week, full-time TOMS Internship Program at
the TOMS headquarters. TOMS provides their interns During their first year in business, TOMS managed to
with a high degree of responsibility in the individual’s donate 10,000 shoes to children living in Argentina.
chosen discipline, whether it’s online marketing, retail Since then, TOMS has expanded to distribute shoes to
marketing, or operations. Intern classes include eight to other regions of the world. Now, TOMS has given more
ten college seniors and recent graduates. The number than 100 million pairs of new shoes worldwide. TOMS
one criterion that TOMS looks for in the applicants are gives in over 70 nations around the world including
that the individuals truly believe and are enthusiastic Argentina, Peru, Ethiopia, Rwanda, and South Africa.
about what TOMS stands for. According to TOMS, the TOMS was awarded and honored in 2007 with the
company would not be where they are today if it were People’s Design Award from the Cooper-Hewitt National
not for the hard work of their diverse team of interns. Design Museum, Smithsonian Institution. TOMS was
When an internship ends, a TOMS’ intern coordinator also awarded the 2009 ACE award given by Secretary
works with the intern to strengthen his or her resume of State Hillary Clinton. The Award for Corporate
with an updated work summary of the experience gained Excellence recognized TOMS for their “commitment to
at TOMS. The intern coordinator also provides guidance corporate social responsibility, innovation, exemplary
on future development of career goals. practices, and democratic values worldwide.”
Under Mycoskie’s inspirational leadership, the com-
pany’s One for One concept has inspired other firms—
One Day without Shoes such as eyeglass retailer Warby Parker—to adopt similar
Perhaps the most popular event promoting TOMS is models as a way to give back to society. Rather than feel
the One Day Without Shoes campaign. This campaign threatened, Mycoskie is funding social entrepreneur-
was started in 2008 to raise public awareness about the ship firms with similar missions. However, Mycoskie’s
impact that a pair of shoes can have on a child’s life. It revolutionary idea might be difficult to replicate in other
asks the average individual to go one day without shoes. fields. The One for One concept must be embedded
Going without shoes engages individuals to see how it into the business strategy. The business must also be
feels to be in these children’s situations. The premise is sustainable on its own, which is difficult to achieve for
to instill a sense of appreciation for what a difference a many nonprofits that depend upon fundraising. The
pair of shoes can make. Furthermore, the sight of a large product and mission must be something that people
group of barefoot individuals walking around makes will care about. For the movement to work effectively,
an impression on others. In both cases, TOMS’ mission the product should be tangible and identifiable. Product
and their brand are spread to those that otherwise may differentiation is an important component for success, as
not have known about it. The success of this campaign, consumers appear less able to identify with commodity
which continues to grow every year, is largely due products.
to college students and Campus Clubs nationwide. Mycoskie offers additional advice to entrepreneurs
Participants have included Kristen Bell, Charlize Theron, who want to create business that will make a difference
the Dallas Cowboys Cheerleaders, Nordstrom, and in the world. He advises businesses to look at their
Microsoft. strengths and comprehend how those strengths can be
used to help those who need them the most. For instance,
TOMS Shoes and their Giving Partners study the com-
Social Media munities before dropping off the shoes to ensure that the
TOMS has effectively used social media to spread the shoes will make a positive difference in children’s lives.
word about the company and their mission, a method They pick out the communities that appear to have the
that is less costly than traditional advertising and creates most need for their products. According to Mycoskie,
a unity among the individuals that promote TOMS. it is important that companies with a philanthropic
TOMS has used viral videos, blogs, Facebook, and focus allow their products to speak for themselves. The
Twitter to spread the message about their cause. Their products should be able to impress consumers, prompt-
approach has allowed TOMS to reach a vast audience ing them to spread the word to others without constant
worldwide. TOMS maintains their own blog to educate marketing from the company.
the public about current events in the company and Not many businesses have attempted to replicate the
their shoe drops. The company has also posted clips on One for One movement in terms of incorporating it into
YouTube. In addition, many consumers create their own their business models. Two companies that have created
digital content regarding their experiences with TOMS businesses around this concept include a bedding and
Shoes. By encouraging events and word-of-mouth com- mattress organization, which donates one bed to those
munication, TOMS is allowing consumers to do much of in need for every product bought, and an apparel store,
the marketing for the company. which will match customers’ purchases by giving clothes

to those in disadvantaged areas. Time will tell whether water, ending gun violence, homelessness, mental health,
these companies, and additional organizations, will or equality with their purchase.
succeed to the extent of TOMS Shoes. The new giving model was introduced under a
program called Stand for Tomorrow. This radical shift
Evolving the Mission empowers TOMS customers to make their own deci-
sions about how their dollar is best spent and allows
Social issues such as bullying, gender equality, inclusion, them to pick issues of personal importance. Customers
and homelessness have been key area of TOMS’ philan- are instructed to “pick your stand” when they shop
thropy. However, in 2018 Mycoskie boldly introduced the online. The move allows TOMS to capitalize on hot
End Gun Violence Together initiative as the company’s social issues that resonate with consumers. The company
primary focus. To kick off the initiative, consumers will monitor popular issues and continue to adapt their
could visit the TOMS website to deliver postcards sup- giving options. The continual evolution of TOMS’ giving
porting gun safety laws to government representatives. model stands to keep the brand relevant to existing
The postcard initiative attracted 700,000 participants. customers while attracting new ones.
Mycoskie appeared on The Tonight Show multiple
times to champion the cause and has hosted rallies in Criticisms and Ethical Issues
Washington, D.C., to support the Bipartisan Background
Checks Act of 2019, which was passed in February 2019. Most people might find it hard to understand why
In the face of slowing sales, Mycoskie said he anyone would criticize TOMS Shoes. As a successful
believes that the TOMS business formula only works “if philanthropic for-profit company, TOMS has been able
it’s fresh, provocative, radical and somewhat newswor- to help children in need all over the world. However,
thy.” Though TOMS has donated more than 100 million criticisms about the company’s model do exist, many
pairs of shoes, Mycoskie says their record-breaking of which come from philanthropists. Probably the
growth occurred during the firm’s first six years before biggest criticism is that TOMS Shoes makes people in
the brand became mainstream. The brand has struggled poor countries dependent upon the goodwill of others
with debt over the past five years and growth has stalled. rather than creating opportunities for them to better
TOMS attempted to stay relevant by creating new themselves. Though TOMS conducted their own studies
product lines. However, despite the introduction of that show the company has not had a negative impact
eyewear, coffee, and bags, footwear is still at the core on local economies from shoe donation, many social
of TOMS’ business, making up 90 percent of sales. entrepreneurs and philanthropists of today believe that
Product innovation held the company back instead the best way to create sustainable change is through
of moving them forward. Now, instead of evolving education and job creation. In response, TOMS began
their products, the company is evolving their mission. manufacturing shoes within some of the communities
Though gun violence is a divisive issue, Mycoskie chose that they support in order to aid and build up local
this social issue as the company’s new mission after a economies.
mass shooting at a bar in Thousand Oaks, California, Another criticism has been the fact that TOMS has
hit close to home. By measuring social media sentiment manufacturing locations in China—a country that has
around universal background checks, he discovered that received much scrutiny for factory abuse. One could
75 percent of people reacted extremely positively to successfully argue that as a business, it is advantageous
the concept, regardless of political beliefs. To date, the to manufacture products in countries where labor costs
firm’s gun violence platform has resulted in 59 billion are lower in order to keep prices reasonable. Supporters
media impressions and new account opening growth of also point out that TOMS’ factories are creating jobs
20 percent year over year. Mycoskie hopes this positive in disadvantaged countries like Ethiopia. As a for-
growth will continue. profit business, TOM Shoes will constantly have to
balance the financial aspects of their for-profit business
Changing the Business Model with the humanitarian elements of their philanthropic
organization.
Shortly after introducing the End Gun Violence Together Since TOMS is for-profit, the company faces the
initiative, TOMS made another change that would alter same risks as other for-profit companies. Ethical lapses
the company’s business model forever. In an effort to can occur just as easily in philanthropic organizations as
adapt to changing attitudes toward social issues, TOMS they can in large corporations, particularly as it relates
announced a bold decision to disrupt their own One for to the supply chain. It is necessary for TOMS to monitor
One business model. Customers now have more control business activities such as factory compliance, sustain-
over the causes they support with their purchase of a ability, finances, and even their shoe drop operations in
pair of TOMS shoes. As of May 2019, customers can order to maintain appropriate business conduct. TOMS
choose to support campaigns related to shoe giving, safe Shoes must never be complacent regarding these risks

simply because they have built philanthropy into their Sources

business. The company must also innovate constantly.
“One for One: TOMS + Element Collaboration,” Element, http://
Although consumers tend to like purchasing from a www.elementeden.com/TOMS/ (accessed June 3, 2011).
philanthropic organization, they appear to be more
“Our Social Action Initiatives,” Rugby Ralph Lauren, http://www.
financially supportive when they get something in rugby.com/social_action/default.aspx (accessed June 3, 2011).
return. In the case of TOMS, it is a pair of unique shoes. “Don’t Be an Intern at TOMS,” TOMS, http://www.toms.com/
However, with consumer tastes constantly changing, our-movement/intern (accessed June 9, 2011).
TOMS must remain vigilant regarding new designs and “Solid Ground,” APICS eXTRA, September 14, 2008, http://
products and find ways to stay current with their social www.apics.org/APICSXtra/img/sunday_solidground.html
missions. TOMS Shoes must remain proactive in manag- (accessed June 3, 2011).
ing these risks to maintain their current success rate. Adele Peters, “Toms Made Buy-One, Give-One Famous. Now It’s
Updating the Model,” Fast Company, May 7, 2019, https://
www.fastcompany.com/90344987/toms-made-buy-one-give-
The Future of TOMS Shoes one-famous-now-its-updating-the-model (accessed October
24, 2019).
Mycoskie revolutionized social entrepreneurship by Athima Chansanchai, “Happy Feet: Buy a Pair of TOMS Shoes
introducing his One for One Movement. An emphasis and a Pair Will Be Donated to a Poor Child Abroad,” Seattle
on social entrepreneurship has been sweeping the nation, Pi, June 11, 2007, http://www.seattlepi.com/default/article/
supported by high-profile individuals such as former Happy-feet-Buy-a-pair-of-TOMS-shoes-and-a-pair-1240201.
Presidents Barack Obama and Bill Clinton. Many ques- php (accessed June 3, 2011).
tioned whether or not TOMS’ One for One business Booth Moore, “Toms Shoes’ Model Is Sell a Pair, Give a Pair
Away,” Los Angeles Times, April 19, 2009, http://www.latimes.
model was sustainable, so the recent evolution of the
com/features/image/la-ig-greentoms19-2009apr19,0,3694310.
firm’s giving model indicates that there is an even bigger story (accessed June 9, 2011).
question at hand: “How can TOMs continue to adapt to Cathleen McGuigan, “Designed to Help: A Pair for You, A Pair
be sustainable for the future?” for the Needy,” Newsweek, October 19, 2007, http://www.
Moving forward, TOMS will need to keep an newsweek.com/2007/10/18/toms-shoes-wins-design-award.
eye on risks that affect both for-profit and non-profit html (accessed June 3, 2011).
organizations. Mycoskie’s combination of these two Craig Sharkton, “Toms Shoes – Philanthropy as a Business
business models has limited certain industry-specific Model,” sufac.com, August 23, 2008, http://sufac.com/2008/
risks. For instance, the for-profit business supports the 08/toms-shoesphilanthropy-as-a-business-model/ (accessed
non-profit component, which means TOMS does not June 3, 2011).
have to rely on donations. On the other hand, the model Emily Lerman, “PhiLAnthropist Interview: TOMS Shoes Founder
Blake Mycoskie Plans to Give Away 300,000 Pairs in 2009,”
has also introduced additional risks. Because TOMS
Laist, April 15, 2009, http://laist.com/2009/04/15/what_
sells a tangible product, they require a supply chain that happens_when_you_travel.php (accessed June 3, 2011).
must be constantly monitored for compliance. The com- Erin Alberts, “COLUMN: TOMS’ Business Model a Self-
pany also must manage criticism of their philanthropic Sustaining Charity,” The Volante, April 12, 2011, http://www.
endeavors, an issue not as common among corporations volanteonline.com/opinion/column-toms-business-model-a-
where philanthropy is a secondary activity. It’s also self-sustaining-charity-1.2540233 (accessed June 3, 2011).
apparent that continually monitoring and improving the Erin Kutz, “Consumers Like It When Their Purchases Help
company’s giving model could be critical to long-term Charities,” USA Today, December 23, 2010, http://
financial success as TOMS fights to stay relevant. www.usatoday.com/money/industries/retail/2010-12-23-
Despite these challenges, the future of TOMS retailcharity23_ST_N.htm (accessed June 2, 2011).
Shoes looks bright. The excitement over the Stand Gretchen Fogelstrom, “Another Business Giving One for One!”
Global Endeavors, April 13, 2011, http://globalendeavors.
for Tomorrow demonstrates that consumers remain
com/2011/04/13/another-business-going-one-for-one/ (accessed
enthusiastic about the brand. With careful risk manage- June 3, 2011).
ment, their strong mission and values, and successful Jeff Rosenthal, “Products With Purpose Will Change the World,”
promotional campaigns, TOMS will likely remain a Huffington Post, January 27, 2010, http://www.huffington-
sustainable business for years to come. post.com/jeffrosenthal/products-with-purpose-wil_b_437917.
html (accessed June 3, 2011).
Questions for Discussion Katie Abel, “Can Blake Mycoskie’s Bold New Social Agenda
Reboot Toms?” Footwear News, March 25, 2019, https://
1. Why was it necessary for TOMS to evolve their footwearnews.com/2019/business/retail/toms-blake-mycoskie-
business model? interview-business-sales-mission-1202764082/ (accessed
2. Who are TOMS most important stakeholders, and October 24, 2019).
why? Kelsey Timmerman, “The Problem with TOMS Shoes and Its
3. Is the One for One movement business model appropri- Critics,” Where Am I Wearing, http://whereamiwearing.
ate for any other businesses? com/2011/04/06/toms-shoes/ (accessed June 3, 2011).

Linda Miller, “Shoes Offer a Better Tomorrow,” NewsOK, April TOMS, “How We Wear Them,” http://www.toms.com/how-we-
5, 2009, http://newsok.com/shoes-offer-a-bettertomorrow/ wear-them/ (accessed June 3, 2011).
article/3358735 (accessed June 3, 2011). TOMS, “One for One,” http://www.toms.com/our-movement/
M.J. Prest, “The Other Shoe Drops,” Ethical Style, March 26, movement-one-for-one (accessed June 3, 2011).
2009, http://ethicalstyle.com/issue-12/the-other-shoe-drops/ TOMS, “Our Movement: Giving Partners,” http://www.toms.
(accessed June 3, 2011). com/our-movement-giving-partners (accessed June 3, 2011).
Michelle Prasad, “TOMS Shoes Always Feels Good,” KENTON TOMS, “Our Movement: Shoe Drops,” http://www.toms.com/
Magazine, March 19, 2011, http://kentonmagazine.com/toms- our-movement-shoe-drops (accessed June 3, 2011).
shoesalways-feel-good/ (accessed June 3, 2011). TOMS, “TOMS Company Overview,” http://www.toms.com/
Mike Zimmerman, “The Business of Giving: TOMS Shoes,” corporate-info/ (accessed June 3, 2011).
Success Magazine, September 30, 2009, http://www. TOMS, “TOMS Helps Haiti,” January 10, 2010, http://www.
successmagazine.com/the-business-of-giving/PARAMS/ tomsshoesblog.com/http:/www.tomsshoesblog.com/toms-
article/852 (accessed June 3, 2011). helps-haiti (accessed June 3, 2011).
Patricia Sellers, “Power Point: Be the change,” CNNMoney, TOMS, “End Gun Violence Together,” https://stories.toms.com/
October 11, 2008, http://postcards.blogs.fortune.cnn.com/2008/ EGV-Giving/index.html (accessed August 9, 2019).
10/11/power-point-be-the-change/ (accessed June 3, 2011).
TOMS, “Get to Know Our Giving Partners: Guatemala SANA,”
Patrick Cole, “Toms Free Shoe Plan, Boosted by Clinton, Reaches http://toms.com/blog/node/901 http://www.toms.com/blog/
Million Mark,” Bloomberg, September 15, 2010, http:// hqupdates (accessed June 3, 2011).
www.bloomberg.com/news/2010-09-16/toms-shoe-giveaway-
TOMS, “Have Your Own Style Your Sole Party with TOMS,”
for-kids-boosted-by-bill-clinton-reaches-millionmark.html
http://www.toms.com/style-your-sole (accessed June 2, 2011).
TOMS, “One Day Without Shoes,” http://www.onedaywithout-
Simon Mainwaring, “Purpose at Work: How TOMS Is Evolving
shoes.com/ (accessed June 3, 2011).
Its Brand To Scale Its Impact,” Forbes, June 12, 2019,
https://www.forbes.com/sites/simonmainwaring/2019/06/12/ TOMS, “TOMS Manufacturing Practices,” http://www.toms.com/
purpose-at-work-how-toms-is-evolving-its-brand-to-scale-its- manufacturing-practices (accessed June 3, 2011).
impact/#6006029a1485 (accessed August 9, 2019). TOMS, One for One Giving Report, http://images.toms.
Stacy Perman, “Making a Do-Gooder’s Business Model com/media/content/images/giving-report/TOMS-Giving-
Work,” Bloomberg Businessweek, January 23, 2009, Report-2010.pdf (accessed June 3, 2011).
http://www.businessweek.com/smallbiz/content/jan2009/ World Clothes Line, http://www.worldclothesline.com/ (accessed
sb20090123_264702.htm (accessed June 3, 2011). June 3, 2011).
TOMS, “How We Give,” http://www.toms.com/how-we-give World Health Organization and UNICE, Prevention and control
(accessed June 3, 2011). of schistosomiasis and soil-transmitted helminthiasis, 2004.

486 Case 11 Apple Bites into Ethics
CASE 11
Apple Bites into Ethics

Introduction employees were more open with the public about Apple
projects. After he returned, Jobs instituted a “closed
Headquartered in Cupertino, California, Apple Inc. has door” policy. Aside from efforts to protect intellectual
experienced many successes throughout their business property internally, Jobs was also a proponent of using
history. Apple’s journey to success has not been without litigation against rival companies suspected of pat-
ethical challenges along the way. Apple’s success can ent infringement later in his tenure. As competition
be seen from their stock price, up 43,000 percent since in the smart phone category heated up, Apple sued
their IPO in 1980. For the last 12 years, Apple earned Nokia, HTC, and Samsung in 2009, 2010, and 2011,
first place among Fortune’s “World’s Most Admired respectively. Perhaps the most notable lawsuits were
Companies.” To millions of consumers, the Apple brand made against Samsung, where both companies filed suits
embodies quality, prestige, and innovation. Although against each other across nine countries over a three-
companies try to copy the Apple business model, none year period. In total, Apple and Samsung filed more than
have been able to discover what it is that makes Apple 40 patent infringement lawsuits and countersuits related
so unique. Apple is a market leader in the development to intellectual property rights. The companies decided to
and sales of mobile devices. As a “tech giant,” Apple end litigation outside of the United States, choosing to
is monitored extensively due to their extremely large focus instead on cases that are still active in the United
market share and consequently the ability to abuse this States. Today, Apple continues to remain vigilant in
power. Consumers and regulators stay alert for instances protecting their technology and ensuring information
of abusive power, monopolies, and unfair practices that remains proprietary.
should be rectified. Jobs also created a flattened organizational struc-
ture; rather than go through layers of management to
Apple’s History address employees, he addressed them directly. Perhaps
one of the most noticeable changes, however, was Apple’s
Apple’s first product, the Apple I, was vastly different expansion into new product lines within the electronics
from the Apple products most are familiar with today. industry. In 2001, Apple launched the iPod—a portable
This first handmade computer kit was constructed by music player that forever changed the music industry.
Apple cofounder Steve Wozniak. It lacked a graphic The company also introduced iTunes, an application
user interface (GUI), and buyers had to add their own that allowed users to upload songs from CDs onto their
keyboard and monitor. Cofounder Steve Jobs convinced Macs and then organize and manage their personalized
Wozniak that it could be sold as a commercial product. song libraries. Two years later, Apple introduced the
In 1976, the Apple I was unveiled at the Home Brew iTunes Store, where users could download millions of
Computer Club and put on sale for $666.66. their favorite songs for $0.99 each online. The introduc-
Jobs and Wozniak continued to create innovative tion of the iPhone in 2007 was a turning point for Apple
products. Soon their new company, Apple Computer and the beginning of a paradigm shift for the entire
Inc., surpassed $1 million in sales. However, the mid- world. The iPhone was a revolutionary new smartphone
1980s brought difficult times for Apple. In 1983, the with the music capabilities of an iPod. As of this writing,
company introduced the Apple Lisa aimed at business the iPhone still has about 40 percent of the market share
users for $10,000. The product flopped. In 1985, Steve in North America.
Jobs was ousted after internal conflicts with Apple’s The same year that Apple introduced the iPhone,
then-CEO. The company’s products, such as the Mac Jobs announced Apple Computer, Inc. would be renamed
I and the Newton, an early personal digital assistant Apple Inc. This signified that Apple was no longer just
(PDA), were not successful, and the company underwent a computer manufacturer but also a driver in consumer
several CEO changes. With declining stock prices, the electronics. Some saw this as a shift away from comput-
future of Apple was in jeopardy. ers toward consumer electronics such as Apple TV,
Steve Jobs returned to Apple in 1997 to try and save iPods, iTunes, iPhones, and iPads. However, it may be
the struggling company. The return of Jobs introduced more accurate to say Apple is reinventing computers,
a new era for Apple. Jobs immediately began to change or at least what they look like and how they are used.
the company’s corporate culture. Before Jobs’s return, With the introduction of tablet computers such as the
This case was prepared by Kelsey Reddick, Jennifer Sawayda, Harper Baird, Danielle Jolley, and Julian Mathias for and under the direction of
O.C. Ferrell and Linda Ferrell © 2019. It was prepared for classroom discussion rather than to illustrate either effective or ineffective handling of an
administrative, ethical, or legal decision by management. All sources used for this case were obtained through publicly available material.

iPad, Apple began to take market share away from their leadership abilities, Apple’s highly skilled employees, and
top competitors in the computer industry. However, in their strong corporate culture.
the process, sales of their Mac computer line were also The concept of evangelism is an important component
cannibalized by consumers opting for a tablet. Sales of of Apple’s culture. Corporate evangelists refer to people
desktops, laptops, and netbooks began to decline after who extensively promote a corporation’s products. Apple
tablet computers were introduced. even had a chief evangelist whose job was to spread the
Although analysts believed tablet sales would con- message about Apple and gain support for their products.
tinue growing at a rapid rate, the tablet market eventually However, as the name evangelism implies, the role of
became saturated with fewer than expected customers evangelist takes on greater meaning. Evangelists believe
upgrading their current tablets to newer versions. Because strongly in the company and will spread that belief to
nearly half of all U.S. households now own at least others, who in turn convince other people. Therefore,
one tablet, this has translated into stagnating industry evangelists are not only employees but loyal customers as
growth. Consequently, just as Apple cannibalized their well. In this way, Apple was able to form what they refer
own line of Mac computers with the introduction of to as a “Mac cult”—customers who are loyal to Apple’s
the iPad, it appears that their newer iPhones, which Mac computers and who spread a positive message about
feature a larger screen, are eroding the iPad market. The Macs to their friends and families.
dynamic fluctuation in PC and Mac computer sales and Successful evangelism only occurs with dedicated,
the frequent introduction of new smartphones make it enthusiastic employees who are willing to spread the
difficult to predict future sales of Apple products. Only word. When Jobs returned to Apple, he instituted two
time will tell if Apple’s devices improve in market share or cultural changes: he encouraged debate on ideas and
are overtaken by a rival platform. he created a vision employees could believe in. By
In October 2011, Apple Inc. lost its iconic leader implementing these two changes, employees felt their
with the death of Steve Jobs. Apple’s current CEO Tim input was important and they were a part of something
Cook takes a more traditional approach in his manage- bigger than themselves. Such feelings created a sense of
ment style by prioritizing project and supply chain man- loyalty among those working at Apple.
agement over creative engineering, attending investor Apple prides themselves on this unique corporate
meetings, being accessible to the media, and paying out culture. On their job site for corporate employees, Apple
dividends to stockholders. He still maintains the secre- markets the company as a “demanding” but rewarding
tive nature of the company but is more approachable workplace where employees work among “the best of the
than Jobs. Yet, while Cook seems to possess the skills best.” Original thinking, innovation, inventing—all are
necessary for the CEO position, some fear he lacks the common daily activities for Apple employees. By offering
creative skills that made Jobs such a visionary. both challenges and benefits to applicants, Apple hopes
Apple is attempting to design products to continue to attract those who fit best with their corporate culture.
expanding their customer base and remain relevant in Apple also looks for retail employees who fit well in
the industry. In 2015, the Apple Watch was released, their culture. It wants to ensure that their retail employees
making waves in wearable technology. It is a wearable make each customer feel welcome. Inside Apple retailers
computing device that functions as an extension of are stations where customers can test and experiment
the iPhone. With its easy-to-use interface and broad with the latest Apple products. Employees are trained
selection of apps, Apple has dominated the smartwatch to speak with customers within two minutes of entering
category. Though many of Apple’s competitors, like the store. To ensure their retail employees feel motivated,
Samsung and companies targeting fitness enthusiasts, Apple provides extensive training, greater compensation
have extensive lines of wearable devices that sync with than employees might receive at similar stores, and
various operating systems and mobile platforms, Apple opportunities to move up to higher level positions, such as
holds 46 percent of the market share. It’s next closest manager, genius (an employee trained to answer the more
competitor, Samsung, only holds 16 percent of the difficult customer questions), or creative (an employee
market. Apple followed up this win with the introduc- who trains customers one-on-one or through workshops).
tion of Airpods, wireless Bluetooth earbuds, in 2016. Apple also offers young people the chance to intern with
Cook contends that wearables are a top contributor to the firm, become student representatives at their schools,
the company’s growth. or work remotely during college as home advisors.
Another benefit Apple offers combines employee
Apple’s Corporate Culture concerns with concerns of the environment. In an effort
to reduce their overall environmental impact, Apple
Apple’s transition from a computer to a consumer offers incentives such as transit subsidies for employees
electronics company is unprecedented—and hard to who opt to use public transportation. In addition, as part
replicate. Although many can only speculate about why of their long-term commitment to sustainability, Apple
Apple succeeded so well, they tend to credit Steve Jobs’s is spending $850 million for 25 years of solar power.

Their Cupertino facility runs on 100 percent renewable future success. Apple’s sterling reputation could easily be
energy and is equipped with shuttles for employees. damaged by serious misconduct or a failure to address
Apple’s free buses are powered by biodiesel. Apple also risks appropriately.
opened a new facility, named Apple Campus 2. With a
budget of $5 billion, the new facility include a fitness
Privacy
center, underground auditorium, and 300 electric vehicle
charging stations. The new buildings at the campus are Consumer tracking is a controversial issue. With the
Leadership in Energy and Environmental Design (LEED) increase in social networking, mobile devices, and
certified and incorporate solar technology. The campus internet use, the ability for companies to track customers
is also conveniently located so that many employees can is greater than ever before. For Apple, more customer
walk, ride, or carpool to work. These incentives reduce information can help the company better understand
fuel costs for employees while simultaneously lowering consumer trends and subsequently market their products
emissions released into the environment. Over the last more effectively. However, a perceived breach in privacy
few years, Apple has reduced their carbon emissions by is likely to result in backlash against the company.
35 percent, making significant progress toward their In 2011, Apple experienced just such a backlash.
goals related to renewable energy, low-carbon design, Apple and Google disclosed that certain smartphone
and energy efficiency. apps and software, often utilizing the phones’ internal
GPS devices, collected data on the phones’ locations.
Apple’s Ethics Consumers and government officials saw this as an
infringement on user privacy. The companies announced
Apple has tried to ensure their employees and those that users have the option to disable these features on
with whom they work display appropriate conduct their phones, yet this was not entirely true for Apple’s
in all situations. They base their success on “creating iPhone. Some smartphones continued to collect location
innovative, high-quality products and services and on information even after users disabled the “location”
demonstrating integrity in every business interaction.” feature. Apple attributed this to a glitch they remedied
According to Apple, four main principles contribute with new software. In subsequent iPhone releases, Apple
to integrity: honesty, respect, confidentiality, and com- improved the privacy features of iOS, the mobile operat-
pliance. To thoroughly detail these principles, Apple ing system found in the iPhone and iPad. The security
drafted a code of business conduct that applies to all upgrades have included enhanced Wi-Fi security and a
their operations, including those overseas. They also default policy that location features are turned. Once the
provide specific policies regarding corporate governance, smartphone is set up, users have the option of turning
director conflict of interest, and guidelines on reporting on the location feature if they desire. Both Google
questionable conduct on their website. Apple provides and Apple defend their data-collection mechanisms,
employees with a Business Conduct Helpline they can but many government officials question whether these
use to report misconduct to Apple’s Audit and Finance tracking techniques are ethical.
Committee. Another privacy controversy was related to Apple
Many of Apple’s product components are manufac- Pay, software that allows consumers to purchase items
tured in countries with low labor costs. The potential for both online and in-person through their iPhones. The
misconduct is high because of differing labor standards mobile payment system became a target for hackers,
and less direct oversight. As a result, Apple makes each who exploited vulnerabilities in the verification process
of their suppliers sign a “Supplier Code of Conduct” of adding a credit card to an Apple Pay account. The
and performs factory audits to ensure compliance. Apple issue with hackers gaining access to payment informa-
may refuse to do additional business with suppliers who tion is at least partially the responsibility of the banking
refuse to comply with their standards. To emphasize institutions, since they approve the addition of credit
their commitment toward responsible supplier conduct, cards to Apple Pay accounts. Banks did not ask enough
Apple releases an annual Apple Supplier Responsibility security verification questions, making it easier for
Report that explains their supplier expectations as well consumers to add credit cards to their accounts and also
as audit conclusions and corrective actions the company leaving the door open for increased fraud. Apple released
takes against factories where violations occur. a credit card in 2019 with advanced security features to
make credit card fraud significantly more difficult. The
Ethical Issues at Apple Apple Card, intended to replace a traditional credit card,
is built into the iPhone Wallet. Its enhanced security and
Although Apple has consistently won first place as privacy features mean Apple, unlike regular credit card
Fortune’s “World’s Most Admired Company,” they have companies, will not know purchase data for its custom-
experienced several ethical issues in recent years. These ers. Additionally, the card uses one-time unique dynamic
issues could have a profound effect on the company’s security codes, replacing the static three-digit CVV.

To improve the security of their devices, Apple that Apple does not tolerate, but the timing of the ban
launched a bug bounty program designed to reward on these particular apps brought suspicion. Shortly after
security researchers who discover and disclose to Apple the incident, Apple launched their own Screen Time tool,
vulnerabilities in Macs, MacBooks, Apple TV, and allowing users to limit and monitor their use of apps and
Apple Watch. Apple then resolves the security issues and overall phone usage. Such timing focused antitrust con-
rewards the finder with $1 million. Before the bug bounty cern and scrutiny on the issue of Apple’s dominance and
existed, security researchers could discover system flaws control over apps in their marketplace. Apple denies that
and abuse them or sell the knowledge to exploit brokers. the timing of these changes had to do with the launch
Additionally, under the new iOS Security Research of their Screen Time tool. Users have voiced discontent
Device Program, Apple gives development phones to with Apple’s Screen Time tool, stating it provides less
trusted security researchers to discover vulnerabilities in restrictions and is more complicated than the apps they
the underlying software and operating system. were previously using. Another issue raised is that the
In 2016, after a couple opened fire in an office in new tool included in Apple’s software requires all users
San Bernardino, California, killing 14 people, Apple within a family to have iPhones, whereas the apps used
faced a privacy issue that pitted them against the previously allowed parents with iPhones to control their
FBI. The FBI believed that the husband’s encrypted child’s Android devices.
iPhone could reveal important information about the
attack. Interestingly, only a few years earlier, Apple had
Price Fixing
developed encryption systems making it more difficult
for forensic investigators to get into the system. The FBI Another major ethical issue for Apple includes allega-
asked for Apple’s help, but Apple claimed that providing tions of price fixing. A judge ruled that Apple conspired
the government with a way to bypass their own security to fix prices on e-books in conjunction with five major
measures would set a dangerous precedent that could book publishers. A federal judge ruled that Apple
place the privacy of millions of customers who use was part of a deal that required publishers to give
Apple products at risk. The FBI issued a court order Apple’s iTunes store the best deals in the marketplace
mandating Apple to help the government in this matter. for e-books. According to allegations, Apple allowed
Apple refused, and the FBI dropped the case after they publishers to set the e-book prices for the iPad, and
were able to hack into the iPhone without Apple’s help. Apple received 30 percent of the proceeds (known as
The conflict elicited mixed feelings from the general the “agency model”). The agency model is thought to
populace. Some felt that this was a special case that be less competitive than the wholesale model, in which
could be used to fight terrorism while others believed retailers and publishers negotiate on the price. However,
it would allow the U.S. government, and possibly if a competitor was found to be selling the e-book for
other governments, to hack into the phones of private less, Apple was to be offered the same lower price. This
citizens whenever they felt a need. This is just one of scheme is more commonly referred to as a most-favored-
several cases where the government has asked for access nation clause and can be used by companies to dominate
to secured tech devices in their investigation. Privacy the market by keeping competitors out. After striking
advocates believe the conflict between the government the deal with Apple, publishers approached Amazon
and tech giants like Apple is far from over. about participating in the contract. In court, Apple
Another large complaint from consumers and devel- faced fines totaling $450 million as part of a settlement
opers occurred when Apple removed several screen-time agreement.
and parental control apps from the App Store. In Price-fixing allegations against Apple are not con-
some cases, Apple asked companies to remove parental fined to the United States. Russia’s Federal Antimonopoly
control features from their apps, and in other cases the Service found Apple guilty of forcing 16 retailers to fix
apps were simply removed from the store entirely. One prices on the iPhone. Allegedly, Apple even contacted
app, Freedom, which allowed users to temporarily block retailers who they felt were not adhering to the agreed-
certain sites and apps on their devices, had more than upon price. Apple has denied these charges and claims
770,000 downloads before it was removed. Apple stated resellers have always had the right to price their products
that the apps they removed violated their rules because as they choose.
they allowed one iPhone to control another. However,
these practices had been allowed for years and the apps
Antitrust
had approved hundreds of versions of their apps over
this time period. Apple responded that they made these Just months after the introduction of the iPhone, a class
changes because of the risk that these apps could gain too action lawsuit was filed against Apple claiming Apple
much information from the users’ devices, particularly a illegally formed a monopoly with AT&T. The claim
concern because the devices often belonged to children. was that Apple violated California’s antitrust law and
The threat against privacy and data security is something the Sherman Antitrust Act. At the time, customers who

purchased an Apple iPhone signed a two-year service and concerns of their dominance have grown causing a
contract with AT&T, the exclusive carrier of the iPhone. wide-spread antitrust of these large companies.
This locked in Apple customers with only one option.
The five-year exclusivity agreement between Apple and
Sustainability
AT&T was publicly reported. However, many argued
that the exclusivity was not disclosed in the contracts Apple has taken steps to become a greener company
customers signed, and customers were not aware they and reduce the environmental impact of their facilities.
were ultimately locked into five years of AT&T service. They also have restrictions addressing the manufactur-
This lawsuit resulted in many other similar lawsuits ing, use, and recycling of their products. However, the
being filed. The case went to the Supreme Court. company admits that most of their emissions come
The antitrust case against Apple turned its focus from their products. Since Apple’s success hinges on
to the App Store practices of Apple. Apple charges up constantly developing and launching new products, the
to a 30 percent commission to app developers, bans environmental impact of their products is a serious issue.
them from selling their apps elsewhere, and ultimately One practice for which some consumers have
drives the price of apps. The 30 percent commission criticized Apple is planned obsolescence—pushing
fee forces app developers to increase the price of their people to replace or upgrade their technology whenever
apps in order to maintain profits. App makers have Apple comes out with an updated version. Since Apple
complained for years that the practices are unfair, and constantly releases upgraded products, this could result
that Apple has used monopoly power to raise app prices in older technology being tossed aside. Apple has under-
and become a tech giant. The app store has more than taken different approaches to combat this problem. For
2 million apps and these apps drive the daily lives of one, the company strives to build quality, long-lasting
customers. Without the app store, iPhone users could products with materials suitable for recycling. The
not listen to music (Spotify), catch a ride (Uber), or share MacBook Air and Mac mini enclosures are made
photos (Instagram). Some competitors of Apple such from 100 percent recycled aluminum, one of the many
as Spotify, Netflix, and Amazon have sought to avoid ways Apple is improving their environmental impact.
these fees paid to Apple by encouraging their consumers In addition, in the past 10 years the average energy
to subscribe directly to their services, but small app consumption of their latest products has decreased by 70
developers do not have this option. percent. To encourage recycling, Apple implemented a
Apple’s questionable app store practices resulted program at their stores, Apple Trade, so old devices such
in more legal attention. In previous litigation against as iPods, iPhones, and Mac computers can be recycled.
Apple, the court noted that the 30 percent commission Apple securely wipes the data and resells or recycles it. In
fee is a cost that in the end falls on consumers because fact, more than two-thirds of the iPhones Apple receives
consumers pay the premium app price, a price that through Apple Trade are used by new owners. If a phone
developers have set to cover their fees. There was much is not in good enough shape to refurbish, Apple invented
controversy over whether consumers could sue Apple a disassembly robot, Daisy, that can take apart iPhones
for the practices they use to regulate the app store to recover the materials.
or not. In Apple v. Pepper, Apple argued they were Consumers that trade in their old iPods receive
simply re-selling the apps from third-party developers a discount on newer versions; those with old Mac
to consumers and therefore had no direct relationship computers that still have value can receive gift cards.
with the consumers. They argued that consumers had Apple partners with hundreds of regional recyclers and
no grounds to seek damages from them, as they were has established recycling programs in 99 percent of the
a marketplace from which developers could sell their countries where their products are sold. Despite the
products. They held the position that app developers recycling programs, many consumers still throw away
set their own prices therefore the apps were actually their old products out of convenience, particularly if
purchased from the developers, not from Apple. Apple’s they have no value. E-waste remains a significant issue
evidence supported that app developers were the only as consumers continue to improperly dispose of their old
party able to bring antitrust lawsuits against them. The electronic devices.
Supreme Court, however, did not agree, and the case
ruled that since consumers purchased apps directly
Intellectual Property
from Apple, the consumers did have the ability to
seek antitrust charges against Apple. This court case Intellectual property theft is a key concern at Apple
made clear that consumers may sue Apple for allegedly and is an issue the company aggressively pursues. As
monopolizing the market for the sale of iPhone apps. we’ve discussed, Apple is serious about keeping their
However, this case did not address whether Apple is proprietary information a secret to prevent other com-
guilty of violating antitrust laws. The ruling simply panies from acquiring their ideas. This has led to many
allowed antitrust cases to proceed forward. The lawsuit lawsuits between Apple and other technology firms. In
has raised anti-tech sentiment among the big tech giants 1982, Apple filed a lawsuit against Franklin Computer

Corporation that impacted intellectual property laws. multiple intellectual property rights, including patents,
Apple alleged Franklin was illegally formatting copies trademarks, user interface, style, false designation of
of Apple II’s operating system and ROM so they would origin, unfair competition, and trademark infringement.
run on Franklin computers. Franklin’s lawyers argued Specifically, Apple claimed Samsung used key features
that portions of computer programs were not subject to of their iPhone and iPad, including glass screens and
copyright law. At first, the courts sided with Franklin, but rounded corners, along with many performance features
the verdict was later overturned. The courts eventually and physical similarities. A jury found Samsung guilty of
determined that codes and programs are protected under willfully infringing on Apple’s design and utility patents.
copyright law. This law provided technology companies Apple was initially awarded more than $1 billion in
with more extensive intellectual property protections. damages, and Samsung’s allegations of infringement
Another notable case was Apple’s lawsuit against against Apple were dismissed within the United States.
Microsoft after Apple licensed technology to Microsoft. After years of litigation, Apple was ultimately awarded
When Microsoft released Windows 2.0, Apple claimed $539 million, only a fraction of the initial damages the
the licensing agreement was only for Windows 1.0 and company sought against Samsung.
that Microsoft’s Windows had the “look and feel” of One overarching ethical issue is the question of the
Apple’s Macintosh GUI. The courts ruled in favor of legitimacy of Apple’s claims. Is Apple pursuing com-
Microsoft, deciding the license did not cover the “look panies they honestly believe infringed on their patents,
and feel” of Apple’s Macintosh GUI. Although there or are they simply trying to cast their competitors in
were similarities between the two, the courts ruled that a bad light to gain market share? Although it might
Windows did not violate copyright law or the licensing seem Apple is too aggressive, companies that do not
agreement simply by resembling Macintosh systems. adequately protect their intellectual property can easily
Two other lawsuits involved more serious ethical have it copied by the competition, which uses it to gain
issues on Apple’s part. One involved Apple’s use of a competitive foothold.
the domain name iTunes.co.uk. The domain name had
already been registered by Ben Cohen in 2000, who
Supply Chain Management Issues
used the name to redirect users to other sites. Cohen
eventually used the domain name to redirect users to Also mentioned earlier, Apple makes each supplier sign
the Napster site, a direct competitor of Apple. Apple a supplier code of conduct and performs factory audits
attempted to purchase the domain name from Cohen, to ensure compliance. In addition, Apple says they have
but when negotiations failed the company appealed to empowered millions of workers by teaching them about
U.K. registry Nominet. Usually, whoever registers the their rights, increased the number of suppliers they
domain name first gets the rights to that name. However, audit each year, and allowed outside organizations to
the mediator in the case determined that Cohen abused evaluate their labor practices. These audits appear to
his registration rights and took unfair advantage of be an important component of controlling the supply
Apple. Apple won the right to use the domain name, chain. Apple discovered a correlation between improved
which led to complaints that Apple was being favored at compliance and the number of audits—facilities audited
the expense of smaller companies. twice, instead of once, showed a 25 percent gain in
Apple faced another trademark lawsuit from Cisco compliance rating, while three audits resulted in an
Systems in 2007. Cisco claimed Apple infringed on even greater 31 percent compliance score improvement.
their iPhone trademark, a name Cisco had owned since Serious supply chain issues have threatened to undermine
2000. Apple and Cisco negotiated to determine whether Apple’s status as a highly admired and ethical company.
to allow Apple to use the trademark. However, Apple This threat is likely the catalyst to Apple’s continuous
walked away from the discussions. According to Cisco, supply chain improvements.
the company then opened up a front organization, Ocean To meet the repeated demands of Apple consumers,
Telecom Services, and filed for the iPhone trademark in products from the company must be readily available.
the United States. Some stakeholders saw Apple’s actions Most of Apple’s products are manufactured throughout
as a deceptive way to get around negotiation procedures. Asia, with a majority produced within Foxconn and
The lawsuit ended with both parties agreeing to use the Pegatron factories in China. In the past, multiple accusa-
iPhone name. Apple’s actions in this situation remain tions pertaining to improper working conditions, under-
controversial. In a twist of events, iOS, the name given age labor disputes, and worker abuse have come into
to Apple’s mobile software, was also a trademark owned question. Apple has been labeled as an unfair sweatshop,
by Cisco. This time, Apple avoided controversy by and critics have launched multiple campaigns against the
acquiring the iOS trademark from Cisco before publicly company. This has resulted in negative publicity from
using the name. protestors, who asked current Apple consumers not to
As was mentioned in the introduction, a more recent support Apple’s unlawful practices by purchasing their
case came in the form of a lawsuit between Samsung products. A report by China Labor Watch, a New York-
and Apple. Apple claimed Samsung infringed on based non-profit, in September 2019 said that more than

50 percent of Apple’s workforce at Foxconn in August fell ill after using a poisonous chemical to clean iPhone
were temporary workers, violating China’s labor laws screens. In 2010, more than a dozen workers died by
which set a limit at 10 percent. Even as student workers suicide at Apple supplier factories. In 2011, aluminum
returned to school, the number of temporary workers dust and improper ventilation caused two explosions
still exceeded China’s labor laws. Other issues included that killed four people and injured 77. Much of the
violations related to overtime work, failed bonuses, media attention focused on the conditions at Foxconn,
internship laws, and safety. Some workers had more than one of Apple’s largest suppliers with a background of
100 overtime hours in one month, though Chinese law labor violations, but Foxconn asserts it is in compliance
sets a limit at 36 overtime hours. Some dispatch workers with all regulations. The death of an employee at a
were not paid their bonuses. Additionally, student Chinese iPhone factory in 2018 renewed concerns over
employees worked overtime which violates internship working conditions.
laws. Lastly, the safety of the workers was put at risk due Some blame factory conditions on Apple’s culture of
to the lack of protective equipment and occupational innovation—more specifically, the need to release new
health and safety training. The report also revealed that and improved products each year—which requires sup-
the factory in question does not report work injuries. pliers to work quickly at the expense of safety standards.
Though Apple denied most of the allegations and said Because the Foxconn and Pegatron factories are some of
workers are all receiving the appropriate compensation, only a handful of facilities in the world with the capacity
Apple would not disclose which allegations were true. to build iPads and iPhones, it is difficult for Apple to
Apple should work to be as transparent as possible in change suppliers. Inconsistent international labor stan-
the face of negative publicity. dards and fierce competition mean that virtually every
In addition to being scrutinized over improper major electronics producer faces similar manufacturing
working conditions, Apple has been criticized for its issues. As media and consumer scrutiny increase, Apple
tight profit margins. Suppliers claim Apple’s manufac- must continue to address their supply chain management
turing standards are hard to achieve because of the issues. As one current Apple executive told The New
slim profit margins afforded to suppliers. In contrast, York Times, customer expectations could also be part of
competitors like Hewlett-Packard allow suppliers to the problem since customers seem to care more about
keep more profits if they improve worker conditions. the newest product than the labor conditions of those
According to suppliers, Apple’s focus on the bottom line who made it.
forced them to find other ways to cut costs, usually by Apple has worked to improve supplier conditions
requiring employees to work longer hours and using less and transparency about their labor processes. CEO
expensive but more dangerous chemicals. Tim Cook personally visited Foxconn to see the labor
In this environment, mistakes and safety issues conditions firsthand. Apple has worked with Foxconn to
become more common. According to the company’s own improve worker safety, including testing more equipment
audits, 96 percent of Apple’s suppliers are in compliance and setting limits on workers’ hours. The Fair Labor
of working-hour limits (60 hours per week). Apple won Association (FLA) confirms that Apple has dramatically
the “Stop Slavery Award” from The Thomas Reuters improved the accountability of Foxconn. However,
Foundation for their efforts to create a more transparent continual monitoring of their suppliers and enforcement
supply chain. In addition, audits in 2018 discovered only of ethical standards are necessary to assure stakeholders
one underage worker. Apple acknowledges that the prob- that Apple takes the well-being of workers seriously.
lem of underage workers needs to be totally eliminated
from the supply chain, and each year the audits uncover
Taxes
fewer facilities out of compliance. Apple’s policy requires
suppliers to continue to pay wages to underage workers, Tax issues have become a substantial burden for Apple
even after they are sent home, and provide educational on an international scale. In 2016, the European Union
opportunity. After the worker reaches legal age, the ruled that Apple owed $13.9 billion in back taxes due
supplier is required to offer the individual employment to their business dealings with Ireland. The decision
once again. Apple claims suppliers who violate company created conflict among Apple, the EU, Ireland, and the
policies are re-audited every 30, 60, and 90 days or until United States. Before this controversial EU decision, the
the problem has been rectified. If a core violation is U.S. government had questioned Apple over their tax
discovered, such as employing underage labor, employee practices. In what is known as a tax inversion, Apple
retaliation, and falsified documents, the supplier is put moved their headquarters to Ireland. According to some
on immediate probation while senior officials from regulators, Apple funnels non-U.S. income through two
both companies address the problem. Apple will drop Ireland businesses to avoid paying the higher U.S. corpo-
suppliers who do not improve. rate tax. The United States has one of the world’s highest
In spite of these audits, several high-profile events corporate tax rates at 35 percent, while Ireland has one
at factories have generated criticism of Apple’s supply of the lowest corporate tax rates at 12.5 percent. By law,
chain practices. In January 2010, over 135 workers Apple’s profits that are kept offshore are not taxable in

the United States. Many multinational companies that knowingly slowing their devices, much of the criti-
started in the United States, including Caterpillar and cism stemmed from Apple’s lack of transparency. The
McDonald’s, have chosen to incorporate in countries company’s admission followed consumer speculation
that have lower tax rates. and data from an iPhone benchmark developer. Apple
This has generated criticism that Apple and other defended its decision, saying that slowing the devices
firms are using loopholes in tax law to avoid paying helped to prolong the life of the products. The throttling
the taxes they would normally owe. Many stakeholders mechanism was designed to prevent phones from unex-
have decried these tax arrangements as unfair, claiming pectedly shutting down when old iPhones tried to draw
that the business Apple does in the United States incurs too much power. Regardless of Apple’s intent, many
significant profits, and therefore Apple should reinvest declared the company was not trustworthy. Consumers
in the U.S. economy by paying their fair share of taxes. also speculated if Apple was bogging down old phones
Countries like Ireland have received serious pressure to to push new iPhone sales.
close loopholes that allowed large tax breaks. In 2013, In an attempt to win over the critics, Apple dis-
the U.S. Senate led a special probe to determine whether counted iPhone battery replacements for select models
Apple was using tax strategies simply to avoid paying in 2018 and released educational content about how
U.S. taxes. As part of their findings, the Senate claimed to maximize battery performance and preventing
Apple was using special loopholes to pay less than a 2 unexpected shutdowns. Apple iOS 11.3, released in
percent tax rate in Ireland. March 2018, included a new Battery Health feature
Much like the U.S. government, the EU believes that provides data on charge level over time, average
multinational firms are using European countries with screen on and off times, battery usage by app, and
lower tax rates and higher tax breaks to avoid taxes. maximum battery capacity. Despite Apple’s efforts to
In 2013, a special task force was created to investigate save face, the company faces more than 60 class-action
whether the tax breaks these companies received were lawsuits. Without a doubt, Apple could have protected
illegal according to European law. If Ireland provided its reputation by proactively disclosing to consumers the
Apple with special tax breaks it did not provide intention to slow down old phones. Instead, Apple risked
to similar companies, it could constitute as illegal damaging consumer trust by failing to speak up.
favoritism. CEO Tim Cook questioned the fairness of
the proceedings. Nevertheless, in 2016, the EU claimed The Future of Apple Inc.
Apple’s tax agreements with Ireland that provided them
with special tax breaks were illegal, and the firm owed In recent times, the headlines have more frequently cast a
Ireland $13.9 billion in back taxes. With interest, Apple negative light on Apple, some of which undoubtedly has
paid more than $16.7 billion to the Irish government in been caused by their practices. The U.S. and international
2018. Ireland was not pleased with the ruling, claiming governments face unprecedented challenges in determin-
the EU overstepped their bounds by prescribing Irish ing how to control the tech giants in the right way. These
tax law. Apple claims the EU does not understand how challenges have been a significant topic in politics, as
Apple operates and that the taxes they pay in Ireland governments debate how to manage the power of these
adhere to all applicable laws. However, the EU continues large companies that are continually undermining fair
to maintain that Ireland provided Apple with favorable competition in their markets. The government must
treatment, which clearly violates European law. decide where to draw the line to provide fair practices
In another push from Europe, Apple agreed to pay for both consumers and the competing companies.
more than 10 years in back taxes to France, totaling Despite continued conflicts with the EU government
approximately $558 million in 2019. Many believe the over their tax arrangements, Apple appears optimistic
EU is unfairly targeting Apple. France, in particular, has about their future. The company has created a cult
its eye on U.S. tech giants. It became the first country following of consumers who are intensely loyal to Apple
to introduce a digital tax targeting Google, Apple, products. Notable acquisitions include Shazam, Emagic,
Facebook, and Amazon, earning the tax the acronym Siri, Beats Electronics, NeXT, Inc., Anobit Technologies,
GAFA. The GAFA tax law is a 3 percent tax on digital and PrimeSense. Apple has made strategic acquisitions
advertising and other revenues of tech firms with total to improve their products and stay ahead of the pack.
revenue of more than $842 million. Only time will tell if For example, Apple acquired a British artist-services
other countries will follow suit. startup called Platoon in 2018. The service allows music
artists to distribute music without a record label. Many
theorize Platoon could be a key component in Apple
Batterygate becoming a music-rights owner, giving Apple Music
In December 2017, Apple admitted that it had been exclusive recordings.
intentionally throttling the performance of old iPhone Apple has their share of threats. They constantly face
models in order to prevent issues with older batteries. lawsuits from competitors over alleged intellectual prop-
While many people were upset to hear Apple was erty violations. In addition, although Apple’s aggressive

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498 Case 12 The Hershey Company’s Bittersweet Success
CASE 12
The Hershey Company’s Bittersweet Success

Introduction products was enough to make the chocolate department
its own separate entity.
Chocolate is enjoyed by millions, mainly in decadent Despite the company’s immediate success, Milton
desserts, candies, and drinks. Dark chocolate, chocolate Hershey still craved more chocolate, especially milk
with at least 70 percent cocoa, is known for its health chocolate. At the time, milk chocolate was perceived as
benefits, such as reducing blood pressure, improving a treat only the wealthy could afford to enjoy. Hershey
blood flow, and increasing good cholesterol. As society set out to find a less expensive way to produce milk
learns more about the health benefits of dark chocolate, chocolate while still maintaining its quality. In 1896,
demand for the product continues to grow. Developing Hershey bought a milk processing plant in Derry
countries are discovering that cocoa beans improve Township, Pennsylvania, and began working day and
their sweet treats and candies, thus creating even night until 1899 when he created the perfect milk
greater worldwide demand. Cocoa beans grow mostly in chocolate recipe—a recipe that could be manufactured
tropical climates, mainly in West Africa, Asia, and Latin cheaply and efficiently while maintaining a high level of
America, with the largest exporters being Ghana and the quality. The company soon opened a factory and began
Ivory Coast. introducing new chocolate treats. The most popular
With more than $7.7 billion in annual sales, the of these was the Hershey’s Kiss, a small dollop-shaped
Hershey Company is one of the world’s largest produc- chocolate candy wrapped in foil.
ers of chocolate and candy products. Hershey’s products The Hershey’s Kiss was only the beginning. Hershey
are sold in more than 70 countries and include Hershey’s soon came out with Mr. Goodbar and Krackel, both of
Kisses and Hershey’s Milk Chocolate Bars, as well as which remain popular today. In 1923, Hershey began
brands such as Reese’s, Whoppers, Almond Joy, and collaborating with another famous confectioner: H.B.
Twizzlers. Although Hershey strives to be a model Reese. H.B. Reese was a former employee at the Hershey
company and has several philanthropic, social, and Company who started his own candy company that
environmental programs, the company has struggled focused on a single product, the peanut butter cup. Due
with ethical problems related to labor issues in West to his ties with the Hershey Company, the chocolate
African cocoa communities. These issues have included coating for the Reese’s peanut butter cups was supplied
child labor. Hershey has developed several initiatives to by Hershey.
improve the lives of West African cocoa workers and Throughout the mid-twentieth century, the Hershey
is involved with a number of organizations that are Chocolate Company continued to expand. The com-
involved in cocoa communities. However, critics argue pany’s entrepreneurial spirit continued after Milton
that Hershey is not doing enough to stop labor exploita- Hershey’s death in 1945. The company acquired several
tion on cocoa plantations. This case examines some of other firms, including Reese’s, and was renamed the
the issues related to the Hershey Chocolate Company Hershey Foods Corporation in 1968. From 1969 to
and West African cocoa communities. 2004, the company grew from $334 million to $4.4
billion in net sales. The company changed its name to the
Hershey’s History Hershey Company in 2005.
Today, Hershey employs more than 14,930 people
The Hershey Chocolate Company was founded in 1894 worldwide, with the company headquarters in Hershey,
by candy manufacturer Milton Hershey in Lancaster, Pennsylvania. The company has a formal “Code of
Pennsylvania. As a candy entrepreneur, he had two Conduct” and was ranked number 252 on Forbes’ “Best
bankruptcies before his eureka moment while making Employer List.” In March 2017, Michele Buck was
candy caramels with fresh milk. Hershey’s chocolate named President & CEO, making her Hershey’s first
business started off as a side project, a way to create female chief executive. She was later named to Fortune’s
sweet chocolate coatings for his caramels; however, “50 Most Powerful Women” list. Hershey’s stock price
the company soon began producing baking chocolate has increased 40 percent since Buck joined the company.
and cocoa and then selling the extra product to other Hershey, which had $7.7 billion in sales in 2018,
confectioners. The successful sale of Hershey’s excess now includes the following brands: Hershey’s, Kisses,
This material was developed by Dianne Kroncke, Harper Baird, and Sarah Sawayda under the direction of O.C. Ferrell and Linda Ferrell, © 2019.
Shelby Wyatt provided updates. It is intended for classroom discussion rather than to illustrate effective or ineffective handling of administrative, ethical,
or legal decisions by management. Users of this material are prohibited from claiming this material as their own, emailing it to others, or placing it on
the Internet.

Reese’s, Kit Kat, 5th Avenue, Almond Joy, Brookside, 2. Growing Together: “We are growing together by
Cadbury, Heath, Mounds, Mr. Goodbar, Krackel, sharing knowledge and unwrapping human potential in
Whatchamacallit, Skor, Symphony, York, Whoppers, an environment of mutual respect.”
Allan, Good & Plenty, Jolly Rancher, Pelon Pelo Rico, 3. Making a Difference: “We are making a difference
Twizzlers, Breath Savers, Bubble Yum, ICE BREAKERS, by leading with integrity and determination to have a
Milk Duds, PAYDAY, Rolo, Zagnut and Zero. In positive impact on everything we do.”
4. One Hershey: “We are One Hershey, winning together
September 2018, Hershey acquired Pirate Brands, which
while accepting individual responsibility for our results.”
includes Pirates Booty, Smart Puffs, and the Original
Tings, for $42 million and Amplify, the parent company
of SkinnyPop, for nearly $1 billion. Corporate Social Responsibility Strategy
After 125 years of business, Hershey is still innovat-
Hershey’s corporate social responsibility (CSR) strategy,
ing. The company plans to make a larger dent in the $88
called Shared Goodness Promise, centers on engagement
billion snacking industry by introducing more snack
with their stakeholders and continually improving their
products, evidenced by their acquisition of SkinnyPop’s
CSR performance. The company also incorporates their
parent company, Amplify, Hershey’s largest acquisition
values into their programs and initiatives. The company
to date. Hershey is evolving to accommodate changing
believes that “The Hershey Company’s commitment to
consumer preferences, including changes in the way
CSR is a direct reflection of our founder’s life-affirming
people shop. In 2019 Hersey introduced stand-up pack-
spirit.” Hershey uses their value chain to categorize their
aging, which was designed to look good on the shelf in a
social responsibility activities into four groups: Shared
store as well as appear appealing on mobile devices. By
Futures, Shared Planet, Shared Business, and Shared
encouraging retailers to implement creative cross-selling
Communities.
solutions to their e-commerce platforms that encourage
shoppers to add candy to their carts, Hershey hopes to
appeal to online shoppers who purchase groceries online Shared Futures
and order in bulk.
Hershey’s Shared Futures pillar focuses on helping chil-
Thanks to Milton Hershey, the company has a long
dren succeed through education and nutrition. Hershey
history of philanthropy and stewardship. He supported
introduced The Heartwarming Project in 2018 aimed
education, building the Milton Hershey School, a private
at helping children build meaningful connections while
school for lower income children. He also built parks
promoting inclusivity and empathy. Hershey partnered
and a hospital, as he put his employees’ well-being
with organizations such as The Boys & Girls Club of
over his personal profits. At the time of his death, he
America and WE Charity to reach more than 6 million
bequeathed most of his estate to the Hershey School.
children in the program’s first year.
Additionally, Hershey aims to bring nourishment to
children around the world with a variety of nutrition
Ethics, Values, and Social programs. In 2015 Hershey introduced ViVi, a fortified
Responsibility nutritional supplement, to students in Ghana to improve
nutrition as well as increase school attendance. In 2018,
Hershey’s commitments to their stakeholders through a study by the University of Ghana showed that anemia
ethical behavior are outlined in the Code of Ethical rates decreased by 11 to 81 percent and attendance rates
Business Conduct. The code covers issues from conflicts improved by 84 to 95 percent in the 57,700 children
of interest and antitrust to fair trade, sustainable sup- that received ViVi daily. In 2018 Hershey partnered
ply chain management, and workplace diversity. The with Annamrita, a nonprofit in India, to provide school
company encourages ethics reporting through a variety lunches to more than 6,400 children. Additionally, they
of channels, including management, human resources, conducted an assessment of the nutrition of children in
executives, and third-party reporting. All employees go underserved areas of Mumbai with the purpose of creat-
through ethics training and certify their adherence to ing a snack to address any nutritional needs identified.
the code every year. Hershey’s Ethical Business Practices These efforts, among others, demonstrate Hershey’s
Committee provides oversight and guidance in all ethical commitment to improving access to food and nutrition
issues at the company. in its communities worldwide.
Values Shared Planet

Hershey’s four core values are centered on the idea of Maintaining the environment is important to Hershey,
“One Hershey”: and they are taking many steps to reduce their impact on
1. Open to Possibilities: “We are open to possibilities the environment, including sustainable product designs,
by embracing diversity, seeking new approaches and sustainable sourcing, and efficient business operations.
striving for continuous improvement.” Some specific programs include the following:

•• Sustainable palm oil sourcing: Palm oil comes from the facilities. However, this does not mean that Hershey
African oil palm tree and is used in a wide variety of never faces workplace issues. In 2011, over 400 foreign
products, including Hershey’s chocolate. However, the students working for Hershey went on strike after
production of palm oil is highly controversial because of Excel, one of the company’s subcontractors, misled and
its impact on ecosystems. To combat concerns, Hershey underpaid them. OSHA later fined the subcontractor
became a member of the Roundtable of Sustainable $283,000 for health and safety violations.
Palm Oil (RSPO) and purchases their palm oil only from
Hershey has continued to improve their workplace
suppliers that are also RSPO members.
practices. In 2015, the company was listed in Corporate
•• Sustainable paper: In 2011, Hershey began to purchase Responsibility magazine as one of America’s “Best
paper for their office from suppliers that use sustainable
Corporate Citizens.” The firm launched an initiative
forestry practices and are Forest Stewardship Council or
called the Manufacturing Apprenticeship Program to
Sustainable Forestry Initiative certified.
recruit, train, and retain employees with physical or intel-
•• Recyclable packaging: More than 80 percent of Hershey’s
lectual disabilities for their manufacturing plants. In 2019,
packaging is recyclable, including syrup bottles, foil,
Hershey was named one of the “Best Places to Work for
paper wrappers, and boxes. Additionally, Hershey aims
to reach a company-wide recycling rate of 95 percent LGBTQ Equality” by the Human Rights Campaign.
by 2025. Hershey’s biggest philanthropic contribution is
•• Zero waste-to-landfill facility: The Reese’s manufactur-
through their Milton Hershey School. Milton Hershey
ing plant is a zero-waste-to-landfill facility, meaning and his wife, Catherine, started the school in 1909 to
that none of the plant’s routine waste goes to a landfill. help orphan boys receive an education while living in a
Today, 15 Hershey manufacturing plants and facilities nurturing environment that included meals and clothes.
have achieved zero waste-to-landfill. The waste that is The school was a cause dear to the couple’s heart because
not recycled goes to an energy incinerator and is used as they were unable to have children of their own. After his
a source of fuel. wife’s death, Milton Hershey created the Hershey Trust
Fund, to which he donated most of his money to be
used for the support of the school. To this day, the fund
Shared Business remains the company’s biggest shareholder and largest
Hershey strives to conduct business fairly and ethically beneficiary. It holds a 30 percent stake in Hershey.
by focusing on the integrity of their supply, consumer Although the school is Hershey’s biggest philan-
well-being, and alignment with customers. For Hershey, thropic contribution, the company also donates to
the integrity of supply includes not only the ingredients and supports over 1,400 organizations, including the
but also the people and processes used to grow, process, American Red Cross, Habitat for Humanity, Junior
and acquire those ingredients (the entire supply chain). Achievement, Dress for Success, and the Children’s
Cocoa is of particular concern to Hershey, and the Miracle Network. The company has also designed a
company is involved in a number of cocoa-sector initia- way to get their employees involved in the community.
tives and partnerships to make progress in sustainable Hershey designed a program called “Dollars for Doers”
cocoa farming and fair labor. These issues are explored in which employees who participate in 50 hours of com-
in greater detail later in this case. munity service over one year are rewarded $250, by the
The company sponsors several consumer health company, to donate to an organization of their choice.
initiatives and programs, including Moderation Nation, a
national consumer education initiative that promotes bal-
Board Changes
anced lifestyles, which is sponsored by the Hershey Center
for Health & Nutrition (HCHN) and the American Despite their strong record of social responsibility, in 2016,
Dietetic Association (ADA). The company also hosts Hershey experienced a board upheaval when the Hershey
Hershey’s Track and Field Games across the U.S. to Trust Company settled with the Pennsylvania attorney
encourage children ages 9–14 to engage in sports and a general’s office. The attorney general’s office had begun
healthy lifestyle. investigating concerns that board members were overpaid,
received reimbursements for excessive travel expenses, and
exceeded 10-year term limits. There were also questions
Shared Communities about whether board members of the trust were acting in
Hershey’s idea of shared communities begins with the best interests of the Milton Hershey School. The board
employee engagement and volunteerism and extends to had rejected different offers by other firms to acquire
investing in the communities in which Hershey operates. Hershey. The local community of Hershey, Pennsylvania,
Hershey wants to provide value to their employees and encouraged Hershey to remain independent, but some
make the company a desirable place to work by focus- believed that selling the company would have been the
ing on safety, wellness, openness, and inclusion. The most beneficial option for the school. The Hershey Trust
company has strong diversity policies and focuses on holds 81 percent of the voting power, which gives it the
continuous safety improvements in their manufacturing power to control votes on mergers or acquisitions.

The allegations were serious enough that Hershey across African borders. Many cocoa farms do not
agreed to make corporate governance changes. Some own the cocoa plantation and pay the landowner 50
of the board members resigned. In addition, Hershey to 66 percent of each year’s crop. To keep costs low,
developed a legal document that caps board member farmers often use their own family members as a source
terms as well as compensation. This lapse in corporate of labor.
governance was a slight blow to Hershey’s reputation, Children who work on cocoa plantations are usually
but it also offered the firm an opportunity to learn from somewhere between 12 and 15 years old but can be as
their mistakes and develop more sound leadership for young as five years old. Many of them work in hazard-
the future. ous conditions on the plantations, with workdays often
lasting eight to twelve hours. Poverty in the Ivory Coast
and Ghana causes parents to rely on their children to
Labor Issues in the Cocoa Industry help provide for the family’s basic survival. The average
number of children in a household range from 5 to
Although The Hershey Company strives to engage in 17. Children work in all segments of cocoa production
ethical and responsible behavior, the realities of the including land preparation, planting, farm maintenance,
cocoa industry present several ethical challenges related harvesting, and post-harvest. They clear land; fell and
to the fair and safe treatment of workers, especially chop trees and brush; burn; spray insecticides; and apply
children. Chocolate is one of the world’s most popular fertilizers and fungicides.
confections, but few people consider the sources of the It is not uncommon for traffickers to abduct small
chocolate they consume. children from the neighboring African countries of
The process of making chocolate spans several coun- Burkina Faso and Mali, some of the poorest countries in
tries and companies even before the ingredients arrive the world. Boys are sent to the fields, often in hot, humid
at the manufacturing plant. It starts with the cocoa conditions with little food and water. They are taught
bean, which is found within the Theobroma cacao, also to use chainsaws to cut through the forest, while others
known as the cocoa pod (fruit). The harvest process is climb and work on trees higher than 9 feet. They use
labor-intensive and starts when the seeds (cocoa beans) machetes to cut the cocoa bean pods, and then put the
are extracted by splitting the pod with a machete. Each pods in sacks that weigh up to 100 pounds. The children
pod can contain anywhere from 20 to 50 beans, and are then required to either drag or carry the sacks out of
around 400 beans are needed to produce one pound of the forest. Other children receive the pods and use their
chocolate. After the beans have been extracted, they are machetes or cutlasses to open the pod’s hard shell to
laid out to dry in the sun for several days in order to harvest the cocoa beans.
acquire the flavor needed for chocolate. The beans are Once the cocoa seeds have been removed, young
then packed into bags and sent out for shipment. girls assist women in processing or grinding the beans by
The cocoa bean supply chain is extensive and hand. Some girls work on the farms for a few months,
elaborate; at times, the cocoa bean can go through up while others stay for the rest of their lives. This labor-
to 12 different stages before getting to the chocolate intensive operation has been done by hand for centuries.
manufacturers, and the price per pound of cocoa beans Along with the physical demands, workers experience
changes significantly throughout the supply chain. By the poor health services, little access to drinkable water, food
time the beans reach the chocolate manufacturers, they insecurity, and lack of education.
are a mix of beans from hundreds of cocoa plantations. Insect and pest control is a major problem for the
Although the process of manufacturing chocolate growers. To mitigate this issue, children are sent to spray
requires many steps before it can begin, most of the the pods with large amounts of industrial and toxic
major ethical and legal issues are related to the source chemicals and pesticides, without the benefit of protec-
of the cocoa bean. Cocoa plantations are found in areas tive clothing. Exposure to these poisons creates damage
with rainy, hot, tropical climates and high amounts of to their neurological and physical development.
vegetation. The global cocoa market is currently sup- Although governments and corporations are aware
plied by mostly poor nations, with 70 percent supplied of this problem, no accurate information, aside from
by Africa (Ivory Coast, Ghana, Nigeria, and Cameroon). estimates, exists regarding the true number of children
The Ivory Coast supplies 40 percent of the entire global working on cocoa plantations. The difficulty of obtain-
market, and Ghana supplies 20 percent. This is followed ing accurate data can be attributed to the immense
by 19 percent from Asia and Oceania (Indonesia, Papua quantity of cocoa plantations across Africa, totaling
New Guinea, Malaysia), and 11 percent from South well over 1,000,000 small plantations (average size 2 to
America (Ecuador, Brazil, Colombia). 4 hectares), with between 600,000 and 800,000 planta-
With the majority of the global cocoa supply com- tions located throughout the Ivory Coast.
ing from Africa, the need for workers on plantations Nonetheless, it is estimated that two-thirds of
never dwindles. This has brought about the booming African farms use child labor. Research conducted by
business of child labor, slavery, and human trafficking the International Labor Organization (ILO) stated that

in 2007 there were 284,000 children who worked in •• Harkin-Engel Protocol: An initiative enacted in 2001
hazardous conditions related to cocoa in the Ivory to commit the chocolate industry to fighting the worst
Coast. Furthermore, according to surveys conducted by cases of child labor. The agreement was signed by
both Tulane University and the Government of the Ivory eight chocolate manufacturers, including The Hershey
Coast, an estimated 819,921 children in the Ivory Coast Company.
alone are working in some area of the cocoa business. •• International Cocoa Initiative (ICI): An independent
According to an ILO investigation in 2002, an estimated foundation established in 2002 under the Harkin-Engel
12,000 child laborers in the Ivory Coast had no relatives Protocol to address the worst forms of child labor and
anywhere near the plantations, which suggests that they adult forced labor on cocoa farms in West Africa. The
organization works to inform and educate communities
may have been trafficked.
on child labor and how to create community-based
In addition to child labor, many cocoa plantations
solutions.
engage in the exploitation of other workers. While some
•• International Labor Organization (ILO): An organiza-
non-family workers are paid, others may be enslaved
tion working to combat the various child labor-related
or work in abusive conditions. They may have been
problems within West Africa. The different programs
trafficked from neighboring countries or tricked into initiated by the ILO have focused on creating sustainable
owing large amounts of money to their employers. The ways of removing children from child labor in the cocoa
workers are often threatened with physical punishment business, improving community initiatives to fight child
or death if they attempt to leave the plantation. Hershey labor, and increasing overall income for the adult sector
introduced a human rights policy in 2019 as a sign of its to prevent the need for child labor.
commitment to human rights issues in the supply chain
such as child labor, women’s rights and empowerment, The International Cocoa Organization was established
living wage and income, and forced labor. The goal of in 1973 by the United Nations. Membership is composed
the policy is to create awareness around human rights of cocoa producers and representatives from countries
issues across the company, identify training needs, and that import cocoa. It developed seven formal economic
improve the company’s supplier code conduct and social agreements that address funding of projects, sustainable
audit program. development, disputes, consultations, and research and
marketing. It also established a set of standards for a
“Sustainable World Cocoa Economy.”
Today, there are three main certifying organizations
Global Help and a Little Green Frog
for cocoa: Fair Trade USA, UTZ, and Rainforest. Their
The issues of child labor, human trafficking, and forced mission is to provide assurance that the product is
labor in West Africa have drawn the attention of many produced in a sustainable manner. They have a formal
organizations, as well as the companies that procure “Code of Conduct” and “Certifications” that address
products from that region. They have implemented farming methods, working conditions, and care of the
many different initiatives, laws, and other precautionary environment.
measures in order to reduce the use of children for cocoa
farming in terms of manual labor. In Africa, individuals
under the age of 14 are not allowed by law to work Fair Trade USA
within the business sector, which does not include family Fair Trade Certified is a non-profit organization that was
farms. This law seems to be effective, but in reality, it founded in 1981 by the Institute for Agricultural Trade
does almost nothing when considering the large number Policy and involves a network of producers, companies,
of family cocoa farms and the ease of hiding non-family consumers, and organizations that are concerned about
laborers. the environment and making people a priority. Fair
To help change labor practices without relying on Trade sets standards and criteria that protect ecosystems
governmental or legal support, several organizations and stipulate farmers work in safe conditions and receive
are working to encourage the ethical sourcing of cocoa. a harvest price while protecting the environment. Fair
Most of these organizations focus on the fair treatment Trade guarantees a minimum price to farmers and a
and education of cocoa producers and raising voluntary guaranteed premium payment per ton. While this is an
support from companies. The following are some of the improvement in financial remuneration to the farmers,
global organizations and programs that are working to it is still not enough to eliminate poverty for families.
combat the labor problem within the cocoa industry: Their certification provides child labor monitoring, as
•• World Cocoa Foundation (WCF): An organization well as remediation programs for those farmers who are
devoted to improving cocoa farmers’ lives through caught abusing child labor laws. Fair Trade USA was
sustainable and responsible cocoa farming practices. a member of Fairtrade International until September
•• Sustainable Tree Crops Program (STCP): Farmers learn 2011 when they resigned their membership because of
to improve their cocoa crop yields and earn more money disagreements as to the “best paths forward” in their
through nine-month field training courses. certification and expansion missions.

Today, more than two billion people live on less than being certified in one or both of the organizations, the
two dollars a day according to U.N. poverty statistics. new merger is the largest certification organization in
Fair Trade created Co-Op Link to provide cooperatives the world. This merger also reduced administrative costs
with funding for capital access and increased quality and duplications in the first year as each organization
standards. It also limits child labor, the use of pesticides, continued with their separate and standard certifications
herbicides, and genetically modified products (GMOs), and audits. In 2019, a new single program was instituted
and establishes standards for contracts and importers and marketed as a single certification brand. Currently,
that must be met before certification. It also allows a set neither UTZ nor Rainforest have a system that protects
of standards for democratic decision-making, so farmers farmers from market fluctuations or addresses fixed
will have an opportunity to have input into how the premiums for farmers.
Fairtrade premiums are invested.
Universal Trade Zone and Rainforest Hershey’s Efforts to Improve Labor

Alliance Conditions
Universal Trade Zone (UTZ) was founded in 2002 as Hershey has made several commitments to help reduce
UTZ Kapeh, or “good coffee,” by Nick Bocklandt, a labor issues in their own supply chain and in the choco-
Belgian-Guatemalan coffee grower, and Ward de Groote, late industry. Hershey is involved in West Africa and
a Dutch coffee roaster. Both men were committed to the organizations that fight child labor in West African
implementing sustainable farming practices. In October cocoa farming. The company is a member of the WCF,
2007, cocoa certifications were added. Today, more than ICI, and is one of the eight corporations that signed the
750,000 cocoa farmers from 21 countries producing Harkin-Engel Protocol. Involvement in these programs
1.5 million tons of cocoa are now UTZ certified. UTZ and organizations requires Hershey to commit to certain
has a “Certified Code of Conduct” and includes trace- standards and contribute to fighting child labor.
able growing practices that address farm management, The Hershey Company is dedicated to sustainably
farming practices, labor and living conditions, and the and ethically supplying the cocoa needed for their
environment. UTZ is also a full member of the ISEAL products, as well as educating their suppliers. One
Alliance, the global sustainability standards association. program that integrates these two concepts is Hershey’s
CocoaLink program. CocoaLink uses mobile technology
to share practical information with rural cocoa farmers.
Farmers receive free text or voice messages that cover
Rainforest Alliance topics such as improving farming practices, farm safety,
Rainforest Alliance ensures that agriculture, rain forests, child labor, health, crop disease prevention, post-harvest
and farm workers and their families meet standards that production, and crop marketing. Farmers can also share
protect against environmental and social hazards. Cocoa information and receive answers to specific cocoa-
certified by the Sustainable Agriculture Network (SAN)/ farming questions.
Rainforest Alliance makes up more than 13.4 percent of In 2012, Hershey launched the Hershey Learn to
the world’s cocoa supply. SAN is a non-profit conserva- Grow (LTG) farm program in Ghana, which provides
tion organization that has partnered with the Rainforest local farmers with information on best practices in
Alliance to help sustainable cocoa farming become sustainable cocoa farming. Specifically, the program
mainstream. The SAN/Rainforest Alliance certification seeks to encourage ethical farming practices as well as
program was created to protect natural ecosystems and leadership and empowerment. Both men and women are
teach farmers about sustainable agricultural principles. being trained on how to improve crop yields. Those who
This includes how to protect against insect infestations, meet acceptable certification standards receive extra
prevent disease of cocoa trees, and safe farming tech- money. Hershey estimates that this program influenced
niques that protect workers as well as the environment. over 31,000 farmers by 2015.
Rainforest Alliance addresses the use of child labor Hershey also produces some of their products using
by prohibiting minors under 15 years of age from ethical and sustainable cocoa. Hershey Bliss, one of
working on the farms as part of its certification process. the company’s specialty chocolates, is made with 100
Young people between 15 and 18 are allowed to work percent Rainforest Alliance Certified cocoa. In 2006,
but are restricted in the tasks they are allowed to Hershey acquired Dagoba from Knoppers, a German
perform. It also ensures that workers have access to chocolate wafer snacks company. In 2012, Hershey
education for their children along with access to medical purchased certified organic cocoa from the Rainforest
services for farmers, workers, and their families. Alliance for their Bliss and Dagoba premium brand
On January 9, 2018, the Rainforest Alliance officially chocolates.
merged with UTZ. The certification merger includes Hershey launched their Learn to Grow Farmer and
coffee, cocoa, tea, and hazelnuts. With 182,000 farmers Family Development Center in Assin Fosu in Ghana’s

central cocoa region in 2012. Source Trust, a non-profit public information about its cocoa sources… Hershey’s
organization in Ghana, was created for the education efforts to further cut costs in its cocoa production has led
of farmers to help improve their revenues by teaching to a reduction in good jobs in the United States.
better farming techniques. It also includes a supply The report, compiled by Global Exchange, Green
system that allows for the tracing of a product back to America, the International Labor Rights Forum, and
the farm of origination. Source Trust has an alliance with Oasis USA, accused Hershey of not embracing fair trade
the Cocoa Livelihoods Program and with the Bill and practices despite having a U.S. market share of over
Melinda Gates Foundation to address food security for 40 percent. It also accused Hershey of greenwashing,
farming communities. Hershey partnered with Source or creating a false public impression regarding their
Trust to expand the Learn to Grow program. eco-friendly behavior, by donating to various programs
In March 2013, the Hershey Company instituted without actually changing their policies to ensure that
their Raise the Bar campaign that included a timeline their cocoa is ethically produced. Green America even
to begin a transition to certified cocoa as part of their created a coalition called Raise the Bar, Hershey! to urge
21st Century Cocoa Plan. Hershey made a commitment the company to address child labor and trafficking in the
to source their cocoa through UTZ, Fairtrade USA, and supply chain.
Rainforest Alliance. The goal is to source 100 percent Since then, relations between Hershey and Green
sustainable cocoa in the near future. America seem to have improved somewhat. The orga-
In 2016, Hershey initiated the One for All Cocoa nization was pleased with Hershey’s pledge to source
Project, with its Dagoba brand organic chocolate. The 100 percent of its cocoa from sustainable sources (free
Project’s mission is to advance women and to assist in the from child labor) by 2020. However, the company
economic development of cocoa farming communities. has many obstacles to overcome, and Green America
Women are taught management skills and customized has ranked Hershey’s competitors higher than Hershey
farming techniques that enable a sustainable environment. in their approach to solving the child labor problem.
Hershey also supports Women in Cocoa and Green America developed a Big Chocolate Scorecard to
Chocolate Network, a program that supports women grade chocolate manufacturers on the sustainability of
farmers who now make up a quarter of the cocoa their supply chains. Hershey ranked behind their major
farm population in West Africa. This organization competitors Nestlé, Mars, Mondelez, and Ghirardelli
provides extension, business management, and certifica- (owned by Lindt); Hershey received a C- according to the
tion services. They work to improve the economic lives scorecard’s ranking criteria. However, even Nestlé—the
in the cocoa communities as well as empower women highest ranked among the top chocolate manufacturers—
throughout the cocoa supply chain. only scored a C+. A representative from Green America
One of Hershey’s latest endeavor, The Cocoa for maintains that Hershey scored lower because they rely
Good campaign, was introduced to West African farm- more on third-party certification rather than direct
ing communities in April 2018. Hershey pledged $500 engagement. The organization believes that while third-
million by 2030 to address the cocoa community’s issues party certification is a step in the right direction, it is only
of poverty, lack of nutrition, child labor, at-risk youth, part of the solution to combatting child labor.
and sustainable ecosystems. Through the years, Hershey has had to address
numerous litigations regarding child labor, human rights,
Criticism of Hershey’s Efforts and abuse of civil liberties in their supply chains, particu-
larly in developing countries. Two class action lawsuits
Some critics argue that Hershey is not doing enough to were files against Hershey in 2018. They alleged The
combat labor exploitation and improve communities in Hershey Company and Mars knowingly imported cocoa
West Africa. Over the past few years, Mars, Mondelez, beans from the Ivory Coast, a country that uses child
Nestlé, Cargill, and other competitors have worked to labor, slave labor, and child trafficking. The lawsuits
adopt fair trade certification and/or release information also contended that Hershey has failed to address these
regarding their suppliers. Despite many requests for issues with their suppliers. Though the lawsuits were
public disclosure of its cocoa suppliers, Hershey still dismissed in 2019, a similar lawsuit was filed by Perkins
declines to name them. It is well known that Hershey Coie, an international law firm, on behalf of three
acquires most of its cocoa from West Africa, but the California residents who alleged the Hershey Company,
specific sources are more difficult to identify. along with the Mars and Nestle Company, committed
According to a report titled “Time to Raise the false advertising by failing to disclose the use of child
Bar: The Real Corporate Social Responsibility for the slavery on their packaging. They also contended that
Hershey Company”: these companies deceived consumers into “unwittingly
Hershey has no policies in place to purchase cocoa that supporting child labor and violations of human rights.”
has been produced without the use of labor exploitation, The suit sought monetary damages for California resi-
and the company has consistently refused to provide dents who purchased the chocolate. They also petitioned

to revise the Hershey packaging to acknowledge that trafficking-and-abusive-childlabor102803859.html (accessed

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Sustainable Cocoa and Improving Cocoa Communities,”
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508 Case 13 Corporate Social Responsibility from the Outside In at Patagonia
CASE 13
Corporate Social Responsibility from the Outside In

at Patagonia
Introduction focus on the environment, resulted in a change in the
product material. The company switched to more expen-
How can businesses make a difference in a world sive and durable organic cotton in 1996, a risky business
of decreasing resources? Patagonia, a privately held move considering it increased the firm’s supply costs.
outdoor clothing company based out of Ventura, The more durable the product, the fewer customers need
California, is working toward finding an answer to that to purchase from the company. However, the change had
question. Patagonia’s clothing has been developed and a net positive effect; consumers were more willing to do
marketed toward a variety of outdoor sports, travel, business with Patagonia due to their environmental con-
and everyday wear. The company has integrated core sciousness and the fact that they could trust Patagonia’s
beliefs and values into every product they produce and is products to last a long time.
known for their innovative designs, exceptional quality, As the change to organic cotton shows, Patagonia
and environmental ingenuity. Their high integrity and puts the values of integrity, accountability, and trust
commitment to the environment has regularly placed into practice in their business by backing their mission
Patagonia on the Ethisphere Institute’s “World’s Most with action. As of late 2019, recycled materials account
Ethical Companies” list. for 69 percent of their clothing. The company plans to
hit 100 percent by 2025. Patagonia’s environmentally
History of Patagonia friendly fibers include hemp, organic cotton, recycled
nylon, 100% recycled down, recycled polyester, recycled
Like many successful companies, Patagonia stems from wool, Yulex, reclaimed cotton, denim made from organic
one entrepreneur’s passion. In 1953, Yvon Chouinard, cotton, sustainably source wool, and cellulose-based
founder of Patagonia, developed a passion for rock fibers REFIBRA lyocell and TENCEL lyocell. In addi-
climbing. His passion brought him West to the San tion to clothing, Patagonia has also spoken out about
Fernando Valley in California, where he became an sustainability practices in other areas. For example, the
expert at climbing and rappelling. Unfortunately, his company has produced films about the environmental
passion was limited by a lack of appropriate climbing impacts of common business practices. One of these
gear. The only available climbing gear were pitons, metal films, Artifishal, discusses the need for more natural
spikes that were driven into cracks or seams in rocks. salmon fishing rather than reliance on the controversial
These pitons were left in the rock, meaning that a long practices of fish hatcheries.
climb could require hundreds of these tools. Today Patagonia is debt-free and is still willing to
Recognizing a need for better, more environmentally bend the rules. For instance, the firm—which constantly
friendly equipment, Chouinard began to make his remarks that they place the environment over profits—
own reusable pitons that were stronger than what has embarked upon a “Buy Less” campaign, among
was currently on the market. Word of Chouinard’s other initiatives that seem like they might discourage
invention spread and he began selling his pitons out of revenue growth. On the contrary, annual revenue has hit
the back of his car for $1.50 each. By 1965, Chouinard $1 billion in recent years.
decided to partner with Tom Frost to create Chouinard
Equipment. For nearly a decade, Chouinard and Frost
made improvements on nearly every climbing tool. Soon Patagonia’s Purpose and Core
Chouinard and his wife Malinda were selling clothing Values
as a way to support the hardware business. By 1972,
the clothing line had expanded to become a business When Patagonia was first developed, Yvon and Malinda
venture. The name of the line was Patagonia and was agreed that the company would produce only products
intended to reflect the mysticism of far-off lands and of the highest quality and manufactured in the most
adventurous places located beyond the map. responsible way. They selected the following mission
The clothing line was successful for many years. statement for the company: “Build the best product,
Financial hardships, coupled with Chouinard’s strong cause no unnecessary harm, use business to inspire
This case was prepared by Mark Zekoff and Sarah Sawayda for and under the direction of O.C. Ferrell and Linda Ferrell, © 2019. It was prepared for
classroom discussion rather than to illustrate either effective or ineffective handling of an administrative, ethical, or legal decision by management. All
sources used for this case were obtained through publicly available material.

and implement solutions to the environmental crisis.” environmental organizations to support sustainability
Patagonia strives to live out their mission statement and the preservation of the environment. Since 1985,
every day. To make their mission into a reality, Patagonia Patagonia has committed to donate 1 percent of their sales
has adopted four core guiding principles for their to environmental organizations around the world that
operations: quality, integrity, environmentalism, and not work to conserve and restore the natural environment.
bound by convention. Since they started to support 1% for the Planet, Patagonia
For Patagonia, this means working with friends, has contributed $74 million in donations. In addition
hiring self-motivated, intelligent employees, and giving to 1% for the Planet, Patagonia regularly contributes
them flexible time to enjoy surfing, climbing, and spend- additional dollars to environmental groups. For example,
ing time with their families. Another important value in 2018, following corporate tax cuts, Patagonia took the
involves finding ways to be responsible by restoring money they saved and donated $10 million to non-profit
or reusing, which has prompted the company to open environmental organizations.
retail locations in old buildings that have been restored.
After the company nearly went out of business during Worn Wear Initiative
the 1990s, Yvon Chouinard vowed to never again stray
from the core values that he had adopted to develop After years of hosting Worn Wear pop-up events where
Patagonia. These values are strongly embedded into all customers could bring used clothing for either repair or
company operations and activities. exchange, Patagonia launched a permanent Worn Wear
store on their site in 2017. Now, customers can buy, sell,
and trade Patagonia gear second-hand. Patagonia also
Patagonia’s Leadership And educates their customers on how to repair their purchases.
Management Style This initiative embraces the concept of extending the life
Yvon Chouinard set out to create a company that of each product, allowing customers to reuse, recycle,
was proactive in their approach to how business is repair, resell, or recycle to keep products out of the landfill.
conducted by embracing a progressive corporate culture.
As stated, Patagonia believes that employees should be Conservation Alliance
out enjoying nature or tending their children when sick.
The Conservation Alliance was co-founded by Patagonia
Such a culture has made the company widely popular
in 1989. The purpose of the Conservation Alliance
with employees and has steered the company toward
is to encourage businesses in the outdoor industry to
innovation and success on a global platform.
contribute to environmental organizations. Throughout
Although Yvon Chouinard owns Patagonia, he sur-
the years, the Conservation Alliance has grown beyond
rounds himself with talented leaders to help advance the
their four founders to include 180 businesses. The
company’s goals. Patagonia’s leadership is well-known
Conservation Alliance has donated over $10 million and
for ethical conduct and for guiding the company accord-
Patagonia remains actively involved with the alliance,
ing to their corporate mission and values. Patagonia’s
maintaining a seat of the board.
CEO, Rose Marcario, is committed to Patagonia’s vision
of environmentalism and is one of Business Insider’s
100 “People Transforming Business.” Originally the The bluesign® System
company’s CFO in 2008, she earned the CEO position Patagonia has worked with bluesign technologies in
in 2014. She has been influential in driving the company their quest to reduce resource consumption since 2000
to continue pursuing their environmental and social and became the first official bluesign system partner
responsibility goals. in 2007. For those resources that cannot be reduced,
bluesign helps Patagonia use more sustainable resources
Environmental Initiatives that will have less of a negative impact on the environ-
ment. Patagonia’s goal is to have “bluesign approved
Over the years, Patagonia has teamed up with other fabrics” on 100 percent of their products in the future.
corporations to develop and create initiatives aimed at There are now more than 400 partners of the bluesign
reducing the environmental footprint businesses leave System including brands, manufacturers, and suppliers.
behind. They have pioneered revolutions in clothing
technology development and manufacturing. Patagonia
has also been an innovative force in creating programs Corporate Social Responsibility
that deal with the environmental crisis head-on.
In addition to their many environmental initiatives sat-
isfying stakeholder groups throughout the community,
1% for the Planet Patagonia also focuses on satisfying their employees.
The organization 1% for the Planet is an alliance As described earlier, Patagonia believes in a work/life
of businesses that donate part of their proceeds to balance philosophy. Because of this strong relationship

510 Case 13 Corporate Social Responsibility from the Outside In at Patagonia
with their workforce, the company has a 4 percent Chouinard continues to see himself as an innovator
turnover rate compared to the industry average of 13 rather than just an inventor. Under his influence and
percent. Patagonia averages 900 applications per job the influence of company leaders such as CEO Rose
opening, providing them with the opportunity to hire the Marcario, Patagonia seeks to make a difference and
best talent. Patagonia also works with factories to ensure create a revolution in how businesses view sustainability.
that their products are being produced in alignment Rather than taking from the environment, the goal for
with Patagonia’s corporate values and environmental Patagonia is to educate consumers and businesses about
integrity. In 1990, Patagonia developed the Contractor how they can help to preserve it. Patagonia demonstrates
Relationship Assessment, a scorecard used to rate a fac- how strong corporate values and ethical leadership can
tory’s performance. In 1996, Patagonia became a found- create a company that is both successful and a role
ing member of the FLA (Fair Labor Association), which model for those who desire to make a positive difference.
conducts audits and training on factory conditions. In
2007, the firm joined the Fair Factory Clearinghouse Questions for Discussion
(FLC), which is a database that helps Patagonia collect
and manage supplier data that deals with social and 1. How has Patagonia been able to promote sustainability
environmental issues. This information is shared with among other businesses?
other firms in Patagonia’s industry and can help establish 2. Do you think it is beneficial for Patagonia to branch
benchmarks for best practices. out into ventures other than apparel?
3. Does Patagonia—a privately held, debt-free c ompany—
Patagonia keeps a close eye on their supply chain
have an advantage over public companies with
with regular factory audits. They also score factories
shareholders by being socially responsible?
based on how they measure up to social responsibility
and environmental goals. For their materials suppliers
such as mills, Patagonia has Environmental Health Sources
and Safety requirements as well as a Raw Materials Ashley Lutz, “A Clothing Company Discourages Customers from
Social Responsibility program. Under this program, Buying Its Stuff—and Business Is Booming,” 14, Business
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factories, Patagonia is attempting to incorporate corpo-
Bradford Wieners, “Solving Climate Change with Beer from
rate social responsibility among all of their stakeholders.
Patagonia’s Food Startup,” Bloomberg Business Week,
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512 Case 14 Johnson & Johnson Experiences the Pain of Recalls
CASE 14
Johnson & Johnson Experiences the Pain of Recalls
Introduction In 1886, Robert and his two younger brothers,

Edward Mead and James Wood, began this journey to
When it comes to a corporate crisis, Johnson & Johnson improvement by beginning Johnson & Johnson. Opening
(J&J) and their subsidiary Tylenol have historically their first manufacturing plant in New Brunswick, New
demonstrated what a company should do in responding to Jersey, the company launched with 14 employees, eight
stakeholder concerns. With their handling of the Tylenol women, and six men. After manufacturing the world’s
tampering in the early 80s, J&J secured their status in the first mass-produced, sterile surgical supplies, J&J soon
history books for effective crisis management. Since then, discovered that a large part of the issue stemmed from
J&J has won numerous accolades for consumer safety and the lack of knowledge of various medical professionals.
for their social responsibility initiatives. In 2019, Fortune In 1888, J&J published Modern Methods of Antiseptic
named J&J one of the world’s most admired companies, Wound Treatment, teaching medical professionals how
their seventeenth year on the list. Targeted at top investors, to perform antiseptic surgery and best practices for medi-
the survey ranked winners according to their strength of cal safety. This publication became widely distributed
management, business strategy, ethical business practices, across the U.S. throughout the remainder of the year,
competitive edge, shareholder orientation, and consistent thus beginning J&J’s commitment to the development
revenue/profit growth. and innovation of products to serve consumers.
As with most major companies, however, J&J has Today, J&J is an international company, still head-
received their share of criticism regarding Tylenol and quartered in New Brunswick, with locations in more than
other medicinal products. The 2012 waves of Tylenol 60 countries with more than 265 operating companies.
recalls and other over-the-counter medications, result- The firm maintains 135,000 employees, $81.6 billion in
ing from bacterial contamination, nauseating smells, sales, and is ranked number 37 in the Fortune 500. In
and metallic flakes, cost the company financially and addition to developing a company code of ethics, J&J has
reputationally. The Food & Drug Administration (FDA) their Credo, penned by Robert Wood Johnson in 1943,
criticized J&J’s slow response time in addressing the etched in stone outside their headquarters building.
issue. The problems escalated so much that the House J&J has three main business segments:
Committee on Oversight, Government Reform, and the
1. Consumer – includes many everyday drugstore lines
Justice Department began investigating the company.
for skin and hair products, including Neutrogena and
Similarly, J&J experienced criticism over the AVEENO, as well as wound care such as the Band-Aids
allegations that ingredients in their products may brand and baby care.
cause ovarian cancer and mesothelioma. Although the 2. Pharmaceutical – drugstore line of products such
company had developed a reputation for baby-safe and as Tylenol, Motrin, and Benadryl. It also includes
natural products, they are taking a hit from a string controlled pharmaceutical drugs for hospitals and
of lawsuits and litigation proceedings. This case will prescribed use medicines for vaccines, infectious
analyze some of these crucial issues as well as how J&J diseases, and therapies for cardiovascular, arthritis,
attempts to maintain their industry-leading reputation oncology, and hypertension.
through their day-to-day operations and commitment to 3. Medical Devices and Diagnostics – specialized equip-
their Credo, a set of values and beliefs meant to inspire ment and surgical instruments; technology; and surgical
and guide the actions of all J&J employees. products used by hospitals, physicians, and healthcare
professionals.
Company Background
Johnson & Johnson Credo
Robert Wood Johnson began his career as a pharmaceutical
apprentice. During the Civil War, the world of healthcare While many organizations have developed ethics initia-
and innovative medicine piqued his interest because he saw tives only recently, J&J was a pioneer in developing a
huge room for improvement. After witnessing countless sound code of ethics. Robert Wood Johnson, the son of
infectious outbreaks and poor medicinal practices, he co-founder Robert Johnson who acted as chairman of
knew that he could make a difference. J&J from 1932 to 1963, developed the Credo of values
This case was prepared by Dianne Kroncke, Jennifer Sawayda, and Shelby Wyatt for and under the direction of O.C. Ferrell and Linda Ferrell, © 2019.

in 1943 before Johnson & Johnson became publicly including flexible schedules, compressed work weeks,
traded company. J&J recognized that a set of company telecommuting, and flextime.
morals would not only maintain an ethical corporate
culture but also help to ensure business success. The J&J
Credo emphasizes putting the consumer first—a concept Communities
that would make all the difference during the mass After addressing consumers and employees, J&J’s Credo
Tylenol recalls in the early 80s. The Credo identifies goes on to address itself within the community: “We are
four primary stakeholders and addresses the company’s responsible to the communities in which we live and work
duty to each group. These groups include consumers, and to the world community as well. We must help people
employees, communities, and stockholders. be healthier by supporting better access and care in more
places around the world. We must be good citizens…”
Consumers J&J defines good citizens as those who “support
good works/charities and who accept their fair share
The J&J Credo begins by addressing the groups they see
of taxes, with the belief that these will encourage civic
as their most important stakeholder: “We believe our
improvement and lead to better health and education
first responsibility is to the doctors, nurses and patients,
within each community.” To improve communities, J&J
to mothers and fathers and all others who use our
places a special emphasis on environmental and disaster
products and services. In meeting their needs everything
relief initiatives.
we do must be of high quality…”
Reviewed and updated every five years since
The Credo seeks to serve consumers by (1) keeping
1990, J&J’s environmental goals seek to reduce the
costs low so reasonable prices can be maintained and
company’s environmental footprint. J&J works with
(2) promptly and accurately servicing customer orders.
various stakeholders, including government officials,
Access to medicines and medical care is also an issue that
environmental groups, and academic leaders, to achieve
J&J is addressing. The company is conducting studies
their environmental goals, which are organized into
to research a universal prevention tool to prevent the
categories such as energy use, product stewardship, and
spread of tuberculosis and HIV. They are also partnering
external manufacturing. Thus far, the program has seen
with governments and organizations, including Rwanda,
positive results. For example, when the program first
to increase access to mental healthcare in Sub-Saharan
began in 1990, J&J set a goal of reducing their carbon
Africa where access to treatment is low. Because of these
dioxide emissions by 7 percent within the next 20 years.
initiatives, Johnson & Johnson was ranked third among
By 2007, the company had already surpassed their goal.
pharmaceutical companies on the “Access to Medicine”
In 2019, J&J earned the Energy Star Partner of the
index from the Access to Medicine Foundation.
Year Award for demonstrating best practices in energy
efficiency. Among their many goals, J&J has pledged to
Employees make 100 percent of their products reusable, recyclable,
The second section of the Credo addresses J&J employees: or compostable by 2025.
“We are responsible to our employees, the men and women As part of their Credo, J&J also works to provide
who work with us throughout the world. Everyone must disaster relief, both domestically and internationally.
be considered as an individual. We must respect their Within one month of Hurricane Katrina, J&J had
dignity and recognize their merit…” contributed $5 million in cash and $250,000 in disaster
To address the needs of their employees, the Credo relief products. After the 2010 earthquakes in Haiti and
maintains that J&J will provide (1) a sense of job security, Chile, J&J leveraged their international connections and
(2) fair and adequate compensation, and (3) clean and partnered with several nonprofit companies to quickly
safe working conditions. transport resources to victims. The company has pledged
Job security became more problematic during the to support long-term efforts to provide health care
recent global recession of 2008, but J&J believed their services for women and children within these countries.
bonus overhaul in 2010 would make the pay system The company also donated money to Japan after the 2011
more equitable by tying in bonuses to performance. To earthquake and tsunami. In addition, J&J maintains their
create a more open workplace environment, employee U.S. Matching Gifts Program, in which employee’s per-
suggestions and complaints are encouraged. Internally, sonal contributions are double matched by the company.
J&J operates numerous programs that seek to help the
physical and mental well-being of their employees. For
Stockholders
example, J&J offers employee assistance programs that
help employees in matters pertaining to mental health. The last section of the J&J Credo addresses stockhold-
Under this program, employees have access to resiliency ers: “Our final responsibility is to our stockholders.
training; employee assistance programs, which include Business must make a sound profit. We must experiment
counseling and intervention; and work-life programs with new ideas…”

J&J emphasizes the importance of innovation in from a headache, they found a bottle of Extra-Strength
generating a fair return for stockholders. To develop new Tylenol on the kitchen counter and took some capsules.
ideas, J&J is committed to (1) conducting research and They also collapsed soon afterward and died later at the
developing new programs, (2) purchasing new equip- hospital. Three more deaths were reported the next day.
ment and facilities to aid in launching new products, All these deaths occurred after the victims had consumed
and (3) creating reserves for protection in adverse times. Tylenol. The news of the incident spread quickly, causing
A small, but significant, section of the Credo states that a nationwide panic.
mistakes must be paid for. This was widely demonstrated Investigations revealed that the sudden deaths were
during the 1982 Tylenol recalls that will be discussed a result of cyanide poison discovered in the Tylenol
later in the case. capsules. The capsules had been opened and filled with
Despite J&J’s recent problems, the company’s long- 65 mg of cyanide—up to 10,000 times that which was
term and consistent returns have continued to maintain needed to kill a person. Since the tampered bottles came
the positive relationship they have with stockholders. from different factories and the seven deaths had all
Combined with their Credo and their actions during the occurred in the Chicago area, the possibility of sabotage
1982 product recalls, J&J has earned a stellar reputation during production was eliminated. Instead, the culprit
that is demonstrated through stockholder returns. was believed to have entered various supermarkets and
drug stores over a period of weeks, pilfered packages
of Tylenol from the shelves, poisoned their contents
Tylenol Products and Recalls with cyanide at another location, and then replaced
the bottles. In addition to the five bottles which led to
Tylenol sells a variety of self-healthcare products to the victims’ deaths, three other tampered bottles were
tackle some of the most common issues of a cold or flu, discovered. These poisoned bottles were discovered at
including relieving pain, reducing fevers, and relieving the different stores in the Chicago area.
symptoms of allergies and coughs. Tylenol’s goal has been
to become the leader in over-the-counter (OTC) products
worldwide. The Tylenol product line consists of hundreds Johnson & Johnson’s Reaction
of products that fit into categories such as Head & The crisis was every company’s worst nightmare. Some
Body (back pain, headaches, muscle aches, and cramps); predicted that Tylenol would never sell again. What fol-
Arthritis; Sinus and Allergy; Cold and Flu (coughs, sore lowed, however, is one of the most often used examples
throats, congestion, and multi-symptoms); Pain and of effective crisis management. J&J took the consumer
Sleeplessness; and Children (fever, aches, cold, cough, flu, responsibility outlined in their Credo seriously. They
and non-medicated). In addition to tablets, J&J has come immediately recalled 31 million bottles of Extra-Strength
out with Tylenol chewables, drops, and meltaways. Tylenol worth over $100 million from all retail stores
While it isn’t unusual for pharmaceutical companies across the United States. In addition, the company offered
to experience crisis situations, it is highly unusual and to exchange all Tylenol capsules already purchased by the
frightening for firms to experience the type of crisis public with solid tablets. J&J also distributed warnings
that J&J faced during the 1980s. Despite the fear that to hospitals and distributors that Tylenol production
gripped the nation, J&J tried to maintain a sense of calm and advertising would be halted until further notice.
and concern for consumer well-being that reassured According to an analyst, J&J suffered a loss of $1.24
their customers. While J&J certainly lost money in the billion due to the depreciation of the company’s brand
short run, their quick actions served to create a favorable value. Immediately after the crisis, Tylenol’s share fell
reputation as a firm that pursued the right course even from 37% of the U.S. over-the-counter pain reliever
when it cost them financially. Indeed, J&J’s effective market to just 7% by late 1982. Yet, rather than drop the
crisis management perhaps even increased their market brand as a lost cause, J&J President James Burke poured
share in the long term because customers could feel millions into reviving the struggling brand. Within six
confident that the company had their best interests at months, their share was back up to 30 percent.
heart. Tylenol managed the crisis in two steps: public rela-
tions (reacting to the crisis) and their comeback stage.
Even though the deaths were not a fault of the company,
Tylenol Poisonings they took responsibility and, unlike many companies in
The crisis started on September 29, 1982, in the Chicago similar predicaments, put consumer safety over profit.
area when 12-year-old Mary Kellerman was pronounced In addition to their countrywide recall, J&J partnered
dead at a hospital after her parents found her on the with the FBI, the Chicago Police, and the FDA to track
bathroom floor. Adam Janus was later found collapsed down the culprit, even offering a $100,000 reward for
on his living room floor in another part of town and died anyone who could volunteer information about the
in the hospital shortly thereafter. Adam’s brother Stanley killer. Perhaps most importantly, J&J did not deny the
and sister-in-law Theresa gathered at his house. Suffering link between the deaths and their products, a mistake

that many companies make immediately following a and Motrin in April 2010. The recall was issued because
product crisis. of possible safety violations in the medications, including
In Tylenol’s comeback stage, J&J needed to find too much of an active drug, metal specks, or ingredients
a way to restore consumers’ trust in the brand. The that had failed testing requirements. Due to the massive
company took several actions to demonstrate Tylenol’s amounts of recalls and seeming lack of oversight on
safety. Tylenol products were introduced with new the part of J&J’s subsidiary McNeil Healthcare, the
triple-seal tamper resistant packaging. They also offered issue was investigated by a Congressional committee.
a $2.50 off coupon on the purchase of their Tylenol Documents were recovered revealing that in 2009,
products, which could be found in newspapers or by McNeil Consumer Healthcare hired private companies
calling a toll-free number. A new pricing program was to buy defective Motrin products from stores, without
introduced that provided discounts of up to 25 percent. reporting it to the FDA. A McNeil spokeswoman said
In addition, more than 2,250 salespeople made that since the products did not prove to be a safety
presentations to members of the medical community. risk (they were defective in other ways), it was not
J&J’s actions effectively restored customer goodwill a recall and thus did not have to be reported to the
toward the company. In fact, in a survey taken shortly FDA. With accusations of rampant misconduct by
after the crisis, 90 percent of respondents stated that J&J governmental agencies, McNeil Laboratories and their
was not to blame for the situation. executives (VP of Quality and VP of Operations) were
Unfortunately, product tampering did not stop with charged with failure to comply with federally mandated
the 1982 Tylenol poisonings. In 1986, the company manufacturing practices. In March of 2011, the FDA
faced another crisis after a woman died after taking gave McNeil two options: to agree to a “consent decree”
Extra-Strength Tylenol capsules. Once more, cyanide or to succumb to a lawsuit. McNeill chose the consent
was to blame. This time Tylenol was not alone. The decree, which requires adherence to a strict timetable for
incidence of product tampering appeared to rise after the bringing their facilities into compliance.
1982 Tylenol murders, including incidents of poisoned Additionally, Tylenol Arthritis Pain was recalled due
chocolate milk, orange juice, Excedrin, and Sudafed. J&J to complaints of moldy odors, nausea, vomiting, and
responded with another recall and a promise to only diarrhea. The scent was found to be a result of 2,4,6-
release Tylenol in caplet or tablet form. tribromoanisole, a component of pesticides and flame
retardants that were used to treat wooden storage pallets
at McNeil’s plant in Las Piedras, Puerto Rico. These are
Additional Tylenol Recalls Cause only a few examples of 50 products that were recalled
More Pain in a matter of 50 weeks. In addition, it was found that
J&J had known of the odors for more than a year, but
Although J&J has been praised countless times for only recalled the product after an FDA investigation. The
their quick actions during the Tylenol poisoning crisis investigation also uncovered unsanitary conditions at the
of 1982, the company encountered criticism for not Fort Washington, Pennsylvania, facility. Thick dust and
reacting quickly enough to another crisis. In 2009, J&J grime were found covering certain equipment. There was
recalled many of their children’s Tylenol common cold also a hole in the ceiling and duct tape-covered pipes.
and allergy medications. Nearly two dozen varieties of J&J traced many of the problems to the Tylenol
their children’s Tylenol were voluntarily pulled off the plant in Fort Washington, Pennsylvania. The company
shelves because of a bacterial contamination in their responded by shutting down the plant and submitting a
Fort Washington, Pennsylvania facility. J&J took pre- plan to regulators addressing how they will fix the prob-
cautionary steps to voluntarily recall some of the Tylenol lems. Some of the proposed solutions included installing
product line after an internal lab test found bacteria in new equipment and revamping their operations to
the raw material that went unused in the making of their reduce the opportunity for product contamination. J&J
product. Although the bacteria Burkholderia cepacia was stressed their commitment to upgrading the plant, which
found in a portion of the raw material that went unused, would remain closed until after these renovations. Such
none of the bacteria was found in finished products. As changes caused an elimination of 300 jobs at the plant.
a precaution, however, all products were recalled that To prevent future recalls—and the resulting negative
had used any of the raw material manufactured at the publicity—J&J also made changes in their management,
same time as the raw material that tested positive for the hired an outside expert to help in redoing the plant,
bacteria. The effects of the bacteria can be dangerous for and improved their employee training and operational
those with weakened immune systems or chronic lung processes.
diseases, with symptoms ranging from none to serious
respiratory infections. Organizational Issues
Unfortunately, the bacterial contamination didn’t
stop there. In addition to the previous recalls, J&J also As the recalls demonstrate, despite J&J’s reputation of
recalled millions of bottles of Tylenol, Benadryl, Zyrtec, effective crisis handling over the last few decades, the

firm continues to be impacted by myriad costly issues. $72 million, ruling that J&J’s Baby Powder and Shower
Some analysts say the causes of these issues lie in three to Shower, J&J products she used for feminine hygiene
possible areas: heavy profit focus, decentralization, and for more than 35 years, caused her ovarian cancer. The
lapses in leadership oversight. Critics have suggested Fox family was awarded $10 million in actual damages
that each division of J&J has their own separate culture, and $62 million in punitive damages. J&J was found
indicating that there is no overall sense of coherence in guilty of negligence, conspiracy, and fraud.
leadership or operations. Analysts also proposed that In July 2018, a jury in St. Louis awarded $4.69
J&J is cutting too many costs to increase profits, thus billion to 22 women who sued J&J, alleging that their
sacrificing customer safety and increasing risk in this ovarian cancer was caused by the J&J Baby Powder
area. Then CEO of J&J William Weldon disagreed. after using the product as part of their daily health and
Weldon claimed that the company had not placed profits hygiene care. Compensatory damages of $550 million
over the customer, and he also discounted the idea and punitive damages of $4.14 billion were awarded,
that decentralization was the problem. He said that if making it the largest verdict against the 130-year-old
decentralization was the issue, all of the divisions would company. This award is currently under appeal. J&J
have experienced problems and not just McNeil. continues to state that clinical research does not show
Other accusations levied against J&J include pay- increased cancer rates by users of talcum powder.
ing kickbacks, using financial incentives to encourage They cite The Nurse’s Health Study, funded by the U.S.
unauthorized use of drugs and devices, and taking government, that investigated the risk factors for 78,630
actions to avoid a recall by sending employees into stores individuals who were studied for 24 years. About 40
to buy up tainted products. J&J also created a strain on percent (31,789) of nurses answered that they had used
their relationship with FDA regulators throughout their talc on their genital areas, and the results reported no
investigations by not being immediately compliant. J&J overall rate of ovarian cancer, regardless of how the
denied claims regarding a lack of oversight. However, product was used.
their annual report for 2010 outlined government Another study by the Women’s Health Initiative was
criminal and civil investigations as well as thousands of conducted in 1991 involving 61,576 women. Of these,
private lawsuits covering a wide range of drugs, devices, 32,219 (53 percent) of the women admitted to using
and business practices. powder on their genitals. Once again, no evidence of
an overall increase for ovarian cancer appeared. J&J
contends that other products or risk factors contributed
Talcum Powder Creates Painful to the ovarian cancers and a product recall was not
Litigation needed. The firm removed 50 percent of ingredients
from their baby care product line in 2018 and now refers
Since 1971 when scientists found talc particles in to these products as natural and safe. J&J stands by their
ovarian and cervical tumor tissue, talc has been a health products, continuing to deny that they cause ovarian
concern and talc content in consumer products has been cancer or mesothelioma.
closely monitored. Talc makes up talcum powder, which The fight is not over for Johnson & Johnson. The
is commonly used in cosmetic products such as baby company also faces lawsuits related to asbestos in the
powder and other products. Personal Care Products, Inc. baby powder. The lawsuits allege that J&J knew that
(formerly known as Cosmetic, Toiletry and Fragrance their baby powder could be contaminated by asbestos
Association) sets the purity standard for the amount of because it is found underground near talc, but did
talc ore in cosmetic products. This is the accepted testing not warn consumers. A lawsuit was filed by Stephen
level for personal care products (commonly known as Lanzo III and his wife. Mr. Lanzo claimed he had used
cosmetic grade), which is also the accepted standard J&J Talcum Baby powder since infancy, and it had
by the U.S. Food and Drug Administration. Although caused him to develop mesothelioma, a rare and often
J&J maintains that their products follow or even beat fatal cancer connected with asbestos. He was awarded
these standards, recent events have put the company’s $37 million in compensatory damages by a jury in New
credibility on the line. Jersey in 2018. Additionally, a California jury awarded
J&J has always touted that their products are safe a woman $29 million in March 2019 for her asbestos
enough, even for babies. Yet in 2015, Jacqueline Fox lawsuit against J&J. J&J plans to appeal the verdict. To
of Tarant, Alabama, a small town near Birmingham, make matters worse, in October 2019 Tylenol recalled
filed the first lawsuit alleging that J&J’s Baby Powder 33,000 bottles of baby powder due to concerns of
caused ovarian cancer. Beasley and Allen, a law firm in asbestos contamination. The FDA purchased a 22-ounce
Montgomery, Alabama, represented Mrs. Fox and con- bottle online, tested the powder, and found traces of
tended that J&J knew the hazards of their product for chrysotile asbestos in the sample. Stores such as Target,
decades and sought to cover up the health risks by get- CVS, and Walgreens removed products from the lot
ting female oncologists to help defend against potential number in question from store shelves. The asbestos
lawsuits. A St. Louis jury ultimately awarded Mrs. Fox that was found was no more than 0.00002 percent, and

it has not been confirmed that the test sample came the trust of consumers, government regulatory agencies,
from a sealed bottle. The FDA defended the quality of and other stakeholders. As the litigation continues and
the test and claimed that they were not aware of any the lawsuits are settled, the way in which J&J handles
adverse events that would have exposed the bottle to themselves and the situation will better show how com-
cross-contamination. Whether the product contained mitted the company is to their Credo and values.
asbestos or not, J&J faces an uphill battle to assure the
public that their baby power products are safe.
Questions for Discussion
There are 14,200 claims related to Johnson’s Baby
Powder, with approximately 12,000 pending in federal 1. Johnson & Johnson was a leader in recognizing key
courts. J&J has made a motion to exclude expert stakeholders and in developing a credo for appropriate
witness opinions, saying the biologists, physicians, and conduct. Why do you think that there have been a
epidemiologists used by the plaintiffs’ attorneys have number of failures in product safety even though the
made “unsupported leaps of logic.” If J&J succeeds with company has tried to be responsible?
2. Why do you think Johnson & Johnson has continued
their motion, it could result in many of the lawsuits
to receive awards for ethically and socially responsible
being dismissed.
conduct despite product recalls?
3. Johnson & Johnson’s over-the-counter drugs such as
Opioid Crisis Tylenol products have many risks associated with them
in product quality and safety. How would you suggest
In addition to the baby powder lawsuits, J&J also faces Johnson & Johnson gain more control and decrease the
2,000 lawsuits from both state and local governments possibility of misuse, safety defects, and other harmful
alleging that the company contributed to the opioid consequences?
crisis with their marketing of pain medications such
as Duragesic and Nucynta. Pharmaceutical companies
Sources
began to promote prescription opioid pain relievers
in the late 1990s, which many believe led to increased “Does Talc Contain Asbestos?” Bergman Draper Oslund, August
rates of opioid overdoses. This public health crisis has 7, 2018, https://www.bergmanlegal.com/talc-contain-asbestos/
attracted widespread attention and has been called the
“J&J Covered Talc Cancer Risk Decades,” Beasley Allen Law
worst drug crisis in U.S. history by The White House. In
Firm, August 9, 2018, http://www.beasleyallen.com/news/jj-
2017, President Donald Trump declared the opioid crisis covered-talc-cancer-risks-for-decades/ (accessed July 28, 2019).
was a public health emergency. Major drug distributors
“Johnson & Johnson Update on Hurricane Katrina Relief
such as McKesson Corp., AmerisourceBergen Corp., Efforts,” Medical News Today, September 5, 2006, http://
Cardinal Health, Teva, and J&J have attracted the www.medicalnewstoday.com/articles/30206.php (accessed July
attention of sweeping litigation. In October 2019, J&J 28, 2019).
offered $4 billion to settle all lawsuits in the United “Johnson and Johnson to Pay $57M in Compensatory Damages
States, potentially resolving all outstanding lawsuits. in Talc Mesothelioma Case,” Beasley Allen Law Firm, April
J&J will need to continue to protect their reputation as 6, 2018, https://www.beasleyallen.com/news/johnson-and-
the opioid lawsuits and baby powder lawsuits continue. johnson-to-pay-37m-in-compensatory-damages-in-talc-
mesothelioma-case/ (accessed July 28, 2019).
“Maximum Tylenol Dose Lowered to Prevent Overdoses,” The
Conclusion Huffington Post, July 28, 2011, http://www.huffingtonpost.
com/2011/07/28/tylenol-maximum-dose-lowered_n_912629.
After their successful handling of the 1982 Chicago html (accessed November 19, 2012).
Tylenol murder crises, J&J was largely acknowledged as “The Johnson & Johnson Tylenol Controversies,” IBS Center for
an industry leader in business and ethics. Until recently, Management Research, http://www.icmrindia.org/casestudies/
J&J’s management of their reputation has been effec- catalogue/Business%20Ethics/BECG015.htm (accessed July
tive. However, the company’s recent product recalls of 28, 2019).
Tylenol and other medications, along with the thousands “Tylenol Scandal and Crisis Management,” University of Florida
of allegations of harmful baby products, has brought Interactive Media Lab, http://iml.jou.ufl.edu/projects/Fall02/
into question the quality of their products. Susi/tylenol.htm (accessed March 12, 2010).
It would appear that J&J has slipped some in their Access to Medicine Foundation, “Johnson & Johnson,” 2018,
https://accesstomedicinefoundation.org/access-to-medicine-
careful handling of product development and consumer
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520 Case 15 Herbalife Nutrition: Managing Risks and Achieving Success
CASE 15
Herbalife Nutrition: Managing Risks and Achieving

Success
Introduction person-to-person sales presentations at non-retail loca-
tions such as consumer homes, the workplace, or online.
Herbalife Nutrition is a leading nutritional health The practice of direct selling should not be confused
company that has had a successful and sustainable with more traditional on-site selling, such as at car
business model over the last 40 years. In 2018, Herbalife dealerships, where customers come to the salesperson.
Ltd. changed their name to Herbalife Nutrition Ltd. In a direct selling model, salespeople seek out the
(“Herbalife”). The name change was a strategic decision consumer (at their home, work, socially, or online), to
that represented Herbalife’s commitment to making the sell the product, rather than the consumer coming to
world a healthier place and their strategic transformation them. Direct selling is not a new business model; in fact,
into a leader in the nutrition industry. However, despite it is one of the oldest ways to distribute products. In the
Herbalife’s long-term success, there have been concerns nineteenth century it was a widespread method because
over the company’s direct selling business model. The many consumers did not have access to retail stores. In
objective of this case is to provide insight into the addition, direct sellers are generally not employees of
opportunities for success and to examine the need to the companies they represent but rather autonomous
manage risks associated with direct selling using a individuals who enter into independent contractor
multilevel compensation system. The involvement of the agreements with a company to sell their products. In
regulatory and political system in addressing charges of return, companies do the research and development (also
misconduct and the efficacy of the direct selling business known as R&D), manufacturing, packaging, shipping,
model is examined in the context of William Ackman quality control, servicing of customers, website develop-
and Pershing Square Capital Management’s attack on ment, social media promotions, making for low-risk,
Herbalife. How Herbalife managed this conflict, includ- low-cost of entry and exit for the direct sellers. Thus, for
ing the negative publicity by news media, demonstrates the remainder of this case, think of companies such as
the importance of understanding, documenting, and Avon, Juice Plus+, and Herbalife Nutrition as examples
successfully defending the operations of a business. The of direct sellers.
investigation into the operations of Herbalife opens the
door to an improved understanding of how direct selling
Single and Multilevel Direct Selling
can be an effective business model that provides benefits
to all stakeholders. Direct selling has two compensation methods. There
Before presenting the Herbalife story, we first are single- and multilevel compensation models of
explore the direct selling business model that the firm direct selling. Single-level compensation occurs when
uses to distribute its products. This business model is direct sellers only earn commissions for sales they make
often misunderstood and questioned as being unsustain- themselves. Multilevel compensation is when direct
able. While there is misconduct in all business models, sellers earn income from their own sales of products as
direct selling misconduct is often associated with the well as commissions from sales made by those they have
entire industry rather than the firm that perpetrated the recruited to sell the product. Forms of multilevel direct
misconduct. selling operate in nearly all countries, but the practice
is often strictly regulated and/or closely scrutinized
The Direct Selling Business Model because pyramid schemes have given this form of
selling a negative connotation. In most cases, multilevel
Before discussing the direct sales model, it is important marketing companies are legitimate because they sell
to note that all products are “sold” to consumers. products to consumers and do not require direct sellers
Beyond direct selling, many products are sold at retail to recruit others in order to earn a profit. Thus, properly
stores or through online sources. Some are sold via monitored and managed multilevel direct selling models
salespeople, either at a retail location or directly to the are not pyramid schemes, as they offer companies a
consumer. Specific to this case, “direct selling” is defined sustainable way to directly sell their products through a
as the marketing of products to end consumers through hardworking salesforce of individuals who believe in the
This case was developed by O.C. Ferrell, Auburn University; Bryan Hochstein, University of Alabama; and Linda Ferrell, Auburn University, © 2019.
It was prepared for classroom discussion rather than to illustrate either effective or ineffective handling of an administrative, ethical, or legal decision
by management. All sources used for this case were obtained through publicly available material.

Case 15 Herbalife Nutrition: Managing Risks and Achieving S
uccess 521
products they sell. In fact, most direct selling representa- to determine whether a business is a pyramid scheme.
tives are champions for the products and often become These characteristics are: (1) people pay the company
independent contractors to get discounts and provide to participate; (2) in return, they gain the right to sell a
the products to friends and neighbors. The vast majority product or service; (3) they are compensated for recruit-
of representatives are involved part time and are not ing others; and (4) this compensation is unrelated to
trying to earn a living. Many well-established companies whether or not any of the product or service is actually
operate using a multilevel direct sales model (see Table 1 sold. In other words, participants in pyramid schemes
for the top ten global direct selling companies based on have little or no incentive to sell products, but rather
2018 sales revenue). have a much greater incentive to aggressively recruit
others into the scheme. Each person recruited pays an
Pyramid Schemes up-front fee (usually expensive), and these fees trickle
up the pyramid to be collected by leaders at the top.
Any business model can be used to conduct fraud. Some These schemes become problematic because newcomers
store retailers can engage in consumer fraud through are promised large profits for buying in and continuing
pricing, promotion, or inferior products. A major concern to recruit others. As the network grows, the ability to
that has plagued multilevel direct selling is that it can be deliver payment for recruitment becomes impossible
used by unethical actors to develop fraudulent pyramid and the scheme fails, leaving most in the network in a
schemes. A pyramid scheme is a fraudulent business position where they lose their initial investment. The
model that eventually collapses, with the vast majority of Federal Bureau of Investigation (FBI) warns of pyramid
participants losing their investments. Pyramid schemes schemes that come in the form of marketing and
can develop from multilevel sales models as well as investment opportunities where the individual is offered
other schemes that take money with the promise of large a contractorship or franchise to market a product. The
gains. However, in reality, there is no legitimate product. key is where the real profit is earned; if it is not earned
The only way to keep the scheme going is to find new by the actual sale of a legitimate product but by the sales
investors. The four defining characteristics of a pyramid of new contractorships, it is likely a pyramid scheme.
scheme are laid out by the Koscot Test, which is used Therefore, a pyramid scheme is not sustainable in the
long run. Multilevel direct selling companies that sell
quality products to consumers and have existed for
Table 1 Top Ten Direct Selling Companies decades are not pyramid schemes.
Pyramid schemes can be hard to identify clearly, but
Company Product Types 2018 Revenue
the FTC has warned consumers about two red flags.
Name (USD Billions)
The first is inventory loading, which is when a new
1 Amway Nutrition, Beauty, Bath $8.80 participant purchases a large amount of nonrefundable
and Body, Home,
Jewelry, Food and
inventory that they are unlikely to use or consume within
Beverage, Fragrances a reasonable period of time; this is a requirement and
not a choice like with internal consumption (sellers using
2 Avon Cosmetics, Skin Care, $5.57
Fragrance, Personal Care,
the products). If the product is low quality, it is clear
Hair Care, Jewelry, Gifts how this requirement invites fraud. As such, inventory
loading is prohibited by the Direct Selling Association’s
3 Herbalife Nutrition, Weight Loss $4.90
Management, Personal
(DSA) Code of Ethics (see Table 2). Legitimate firms
Care follow the DSA’s code by offering a refund policy and
buyback process for a contractor who no longer wants
4 Infinitus Health Products $4.50
to sell. The second warning sign of a pyramid scheme
5 Vorwerk Household Appliances $4.30 is a lack of sales external to the selling network. If the
and Cosmetics
only people buying the product are the ones selling it,
6 Natura Cosmetics $3.67 there is a clear problem with the business. Businesses
7 Nu Skin Cosmetics $2.68 that require inventory loading and don’t rely on external
8 Coway Air Filtration Systems $2.50 sales are likely to be pyramid schemes.
9 Tupperware Food Storage and $2.00
Preparation, Cookware, Self-Regulation of Direct Selling
Serving Items, Cosmetics,
Beauty Products To overcome the concerns of multilevel marketing,
some direct selling firms choose to self-regulate their
10 Young Living Cosmetics, Home Care, $1.90
Personal Care, Wellness
multilevel direct sales practices through membership
in self-regulatory organizations. For example, many
Source: “2019 DSN Global 100 List,” Direct Selling News, 2019, https://www.
directsellingnews.com/dsn-announces-the-2019-global-100/ (accessed firms follow the principles of the World Federation of
August 5, 2019). Direct Selling Association (WFDSA) and national-level

direct selling associations such as the United States (3) illuminates and enforces the need for a clear record
Direct Selling Association (DSA) in the United States. of the sales made by contractors; (4) necessitates that
The WFDSA promotes ethical practices in direct selling warranties be fully explained; (5) requires direct sellers
globally through advocacy and strong relationships with to clearly identify themselves to customers and main-
governments, consumers, and academia. The U.S. DSA tain the confidential information of their customers;
also emphasizes ethical business practices and consumer (6) prohibits pyramid scheme practices; and (7) provides
protection measures and requires that members adhere guidelines on inventory purchases, earnings reporting,
to the DSA’s Code of Ethics (See Table 2). This Code inventory loading, start-up fee payments, and training
of Ethics recognizes the importance of a fair and practices.
responsible approach to direct selling since direct selling The DSA and the Council for Better Business Bureaus
requires sensitive and personal one-on-one interaction (CBBB), the network hub for BBBs in the United States,
that can lead to undue pressure placed upon consumers. Canada, and Mexico, have created a third-party, self-
The Code (1) prohibits deceptive or unlawful practices regulatory program, the Direct Selling Self-Regulatory
regarding recruits and customers; (2) requires that Council (DSSRC), for the direct selling industry, which
direct sellers provide accurate and truthful information was launched in January 2019. The DSSRC monitors
about the price, quality, and promotion of the products; the entire direct selling channel—including DSA member
Table 2 Direct Selling Association Code of Ethics

As a consumer you should expect salespeople to:
Tell you who they are, why they’re approaching you, and what products they are selling.
Promptly end a demonstration or presentation at your request.
Provide a receipt with a clearly stated cooling off period permitting the consumer to withdraw from a purchase order within a
minimum of three days from the date of the purchase transaction and receive a full refund of the purchase price.
Explain how to return a product or cancel an order.
Provide you with promotional materials that contain the address and telephone number of the direct selling company.
Provide a written receipt that identifies the company and salesperson, including contact information for either.
Respect your privacy by calling at a time that is convenient for you.
Safeguard your private information.
Provide accurate and truthful information regarding the price, quality, quantity, performance, and availability of their product or service.
Offer a written receipt in language you can understand.
Offer a complete description of any warranty or guarantee.
As a salesperson, you should expect a DSA member company to:
Provide you with accurate information about the company’s compensation plan, products, and sales methods.
Describe the relationship between you and the company in writing.
Be accurate in any comparisons about products, services, or opportunities.
Refrain from any unlawful or unethical recruiting practice and exorbitant entrance or training fees.
Ensure that you are not just buying products solely to qualify for downline commissions.
Ensure that any materials marketed to you by others in the salesforce are consistent with the company’s policies, are reasonably
priced, and have the same return policy as the company’s.
Require you to abide by the requirements of the Code of Ethics.

Safeguard your private information.
Provide adequate training to help you operate ethically.
Base all actual and potential sales and earning claims on documented facts.
Encourage you to purchase only the inventory you can sell in a reasonable amount of time.
Repurchase marketable inventory and sales aids you have purchased within the past 12 months at 90 percent or more of your
original cost if you decide to leave the business.
Explain the repurchase option in writing.
Have reasonable startup fees and costs.
Source: Direct Selling Association, Consumer Protection Toolkit, http://www.dsef.org/wp-content/uploads/2015/03/DSEF-Consumer-Protection-Toolkit.pdf (accessed
May 25, 2017).

uccess 523
and non-member companies. The new, third-party, self- nutrition products include dietary and nutritional
regulatory organization monitors the entire U.S. direct supplements that contain herbs, vitamins, minerals, and
selling industry and embodies the following principles: other natural ingredients to strengthen specific areas of
the body that tend to be problematic for many people.
•• Clear industry standards on issues such as product and
earning representations; For example, Tri-Shield helps the heart stay healthy
by maintaining good cholesterol levels and providing
•• Identification of relevant best practices from other
self-regulatory models;
antioxidants, and Ocular Defense Formula and Joint
Support Advanced offer nutritional aid for the eyes and
•• Creation of a process that both monitors and enforces
joints of aging adults. The energy and fitness product
strict business principles;
options are designed for those engaged in sports and fit-
•• Enacts measures to raise the bar of excellence for DSA
ness activities. Customers can choose from drink mix-ins
members and the entire direct selling channel
such as the H3O Fitness Drink, which enhances clarity
Herbalife is a leading supporter of the DSSRC. This and rehydrates the body, or utilize supplements such as
demonstrates the company’s commitment and leader- N-R-G (Nature’s Raw Guarana Tablets), which also pro-
ship in supporting ethical conduct in the direct selling mote mental clarity. Herbalife’s personal care products
industry. include skin cleansers, moisturizers, lotions, shampoos,
and conditioners. In this product line, Herbalife offers
program sets called Herbalife SKIN, containing groups
Herbalife Nutrition of cleansers, moisturizers, and creams customized for
Herbalife Nutrition, Ltd. is the third-largest multilevel different types of skin, from dry to oily. Overall,
marketing company in the world. The story of Herbalife Herbalife follows a strategy of producing high quality
includes direct selling, but the company’s success has come products that enhance customer health and well-being.
through the acceptance of their products by consumers,
much like any other company. One difference between Herbalife’s Implementation of the Direct
Herbalife and most companies is that their products are Selling Model
not sold in retail stores; rather, consumers interact with
independent sellers to order products. Herbalife is a People are attracted to becoming direct sellers for many
publicly traded company headquartered in Los Angeles, reasons. Some are passionate about a product and want
California, that has loyal customers around the world. to promote the company. Others want to receive a
Herbalife focuses on the sale of products related discount on their personal orders, a common benefit of
to nutrition, weight management, and personal care, being a direct seller. Many find working as a direct seller
with independent contractors selling in more than 90 to be a flexible, part-time opportunity for extra income.
countries. Mark Hughes founded the company in 1980 There are 2.3 million independent contractor direct
out of a desire to create a safe alternative to other weight sellers of Herbalife products. Most, if not all, of them
loss products. Herbalife’s first sales were conducted personally use these products.
from the trunk of Hughes’s car in Los Angeles. Two Direct sellers are attracted to the low startup cost
years later, the company reached $2 million in sales. of selling Herbalife. For about $94 a kit, new sell-
Herbalife became a publicly traded company in 1986 ers receive a Herbalife Member Pack, which includes
when it joined the NASDAQ stock exchange. Since then, forms, applications, a tote bag, and samples of various
Herbalife has become a sustainable multibillion-dollar Herbalife products. The pack includes informational and
global company. Throughout their growth, Herbalife has training materials that educate the new seller on using
experienced many changes to leadership and ownership and retailing the products, business basics, and how to
structure. build a sales and marketing plan. The member kit is the
only purchase required to become an Herbalife network
member and seller. Herbalife does not require their
Foundational Products distributors to pay a “fee” to join, and the only up-front
Herbalife sells products for weight management, nutri- money spent represents the true value of the kit.
tion, energy, fitness, and personal care that support a As soon as a seller joins Herbalife, they receive
healthy lifestyle. The weight management line consists benefits. Sellers enjoy discounts on products ranging
of Formula 1 protein shakes, supplements, weight loss from 25 to 50 percent depending on the level of
enhancers, protein bars, and snacks, all serving the contractorship (contractors move up levels by achieving
purpose of helping customers to attain their weight certain sales goals). Contractors can sell products at any
goals. For instance, the Personalized Protein Powder and price they set and make decisions on how they want to
the Protein Drink Mix offerings provide an alternative position and sell the Herbalife products (within legal and
to traditional meals while supplying energy and curbing company guidelines). The more successful an Herbalife
hunger cravings, whether consumers want to lose or seller, the greater the discounts and commissions on
maintain their weight or build muscle mass. Targeted product sales.

In the event that a contractor no longer wants to an elaborate pyramid scheme. Ackman is known as an
sell Herbalife products, the company will buy back any “activist investor” and claimed it was his civic duty
remaining inventory of the seller. In fact, Herbalife goes to expose Herbalife as fraudulent. Of note, Ackman’s
beyond the Direct Selling Association’s ethical guidelines company also stood to profit heavily, having invested
for buying back products by reimbursing the distributor $1 billion in a short sale of Herbalife’s stock (a complex
for everything he or she initially purchased (100 percent investment strategy that earns money if the stock price
buyback policy). The company also limits the amount falls, rather than rises). Ackman’s target stock price for
of inventory a seller can initially purchase. Herbalife’s Herbalife was $0. In other words, he believed the company
membership structure is designed to clearly differenti- should and would fail. Ackman continued to campaign
ate their legitimate multilevel marketing model from and advocate against Herbalife, which plunged Herbalife
fraudulent schemes. into a controversy over the potential legitimacy of their
The Herbalife business model has succeeded due to business. The problem was, the investment community
the company’s products and support. Most Herbalife and mass media did not understand a sustainable direct
distributors do not have a physical store location, as selling business model. The investigation led by Ackman
they practice direct selling from home. However, there focused on the low earnings of independent contractors
are strict company policies and legal requirements that and was the result of months of research and analysis by
regulate product information, sales techniques, advertis- his team. The accusations against Herbalife included the
ing, lead generation, social media, and related issues. following: (1) the majority of contractors for Herbalife
Herbalife also created a centralized e-commerce section lose money, (2) Herbalife pays more to recruit new
for contractors on their GoHerbalife website that also contractors than sell actual products, and (3) only the
controls branding and product claims. Distributors each top one percent of contractors earn most of the money.
have their own page on the platform, which they can Ackman argued that Herbalife recruits contractors under
use to attract customers. Customers are only randomly false pretenses by unrealistically suggesting they can earn
connected through the platform if they don’t have a a large income. Furthermore, he alleged that the real
Distributor who can provide them service. Thus, direct money in Herbalife comes not from selling products but
sellers are independent, yet are required to represent from recruiting other contractors, as all the top earners
Herbalife through ethical business practices. make the vast majority of their income through downline
commissions from the sales of those in their recruiting
Herbalife Customer Base chain. Although Herbalife has published results showing
that the majority of their profit is made through product
Herbalife serves a broad external customer base. To sales, Ackman believed this information to be false and
illustrate, an independent survey conducted by Nielsen, a misleading, as he estimated sales to be only 3 percent of
global information and measurement company, sampled Herbalife’s revenue, with the rest made via recruiting.
10,525 consumers and indicated that 3.3 percent of the In reality, Herbalife does not charge a fee for becoming
general U.S. population made an Herbalife purchase an independent contractor and earns their profits from
sometime within a three-month period (approximately selling products.
7.9 million customers). The external sales volume is Herbalife has also been accused of issuing false
a good indicator of the strength and legitimacy of the accounting statements, although there has never been
company’s business. Additionally, the study showed that any official legal claim brought about their accounting
those who had made a purchase in the last three months records. According to allegations, all products sold to
were loyal and tended to make purchases approximately contractors are shown as retail sales, without tracking
every two months. A strength of Herbalife over their whether the contractor consumes the products (internal
long history as a company is a sustained customer base consumption) or to whom the contractor sold the
that uses and repurchases their products based on the products. Critics believe the company should not record
quality, usefulness, and value they provide. sales revenue for internal consumption but only from
sales made to end users. This argument falls into the
Challenges to Herbalife’s Multilevel larger backdrop of the defense and legitimacy of internal
Model consumption. Ackman and other critics have used these
arguments to emphasize that the majority of Herbalife
Herbalife, like many multilevel marketing companies, contractors are not successful in selling their products
has been accused of being a pyramid scheme. However, (other than to themselves). Herbalife’s records show
considering the firm’s long and successful history, that only one percent of their registered contractors
these claims were not taken seriously until 2012 when will make $100,000 or more from the business in
prominent hedge fund manager and billionaire investor their lifetime. This statistic shows that many who try
William Ackman announced that he and his company, direct selling are either not willing or lack the business
Pershing Square Capital Management, had spent a year knowledge to put in sufficient effort to make a living. In
studying Herbalife and concluded the firm was, in fact, most cases, those who sell Herbalife do so as a side job

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and only work part time, depending on how much extra financial success through involvement with Herbalife.
money they want to make. The settlement requires Herbalife to make truthful
Ackman’s allegations launched an unprecedented claims about how much people are likely to make and
storm of controversy for Herbalife. Four days after ensure the claims are backed by facts.
Ackman’s initial presentation, the company’s stock fell The company was able to comply with the FTC
43 percent. Ackman launched a well-financed mass order. In 2017, Herbalife exceeded the settlement
media and publicity campaign and engaged in political guidelines, proving 90 percent of sales were documented
lobbying to drive down the price of the stock. The debate sales by consumers outside the distribution network.
over the company became polarized, with prominent Additionally, Herbalife proved 400,000 discount buyers
investors, analysts, public interest groups, and loyalists or “preferred” members were not pursuing the business
presenting heated arguments both for and against opportunity and thus were simply customers of Herbalife
Herbalife’s legitimacy. Recognizing the seriousness of through retail sales. These successes counteract Ackman’s
the situation, Herbalife responded in force, including claims of Herbalife having no “real” consumers. Investor
hiring a lobbying team and launching one of the largest Carl Icahn, a supporter of Herbalife throughout the
marketing campaigns in the company’s history to bolster controversy, stated, “I think it’s ironic, but factual, that
and strengthen the Herbalife brand. Over the length of as a result of the propaganda against the company that
the dispute, both Ackman and Herbalife spent multiple it now has a much better idea of who their customers
millions of dollars supporting their positions and attack- are and it opens the door for Herbalife to greatly
ing each other. The media showcased the Ackman and benefit.” By 2019, Herbalife fully emerged from the
Herbalife conflict. FTC investigation. The company achieved a stock price
of $59 in January 2019, from a low of $15 in 2015.
Overall, Herbalife learned several lessons throughout
FTC Investigation and Settlement of Claims the investigation and has improved business practices
In March of 2014, the Federal Trade Commission as a result of the FTC settlement. The investigation
(FTC) opened a civil investigation of Herbalife. The confirmed that Herbalife has maintained a 40-year
investigation was prompted by Ackman’s reports to the sustainable business model.
public and lobbying efforts that brought the “pyramid
scheme” message to Congress. Ackman made political Impact of FTC Settlement on Pershing
contributions to legislators who advocated for his Capital
position. Ackman believed the FTC would rule against
the company and force the firm to cease operations. The end of Pershing Capital’s crusade against Herbalife
However, Herbalife welcomed the investigation and came to a “bruising defeat” as described by The Wall
was very cooperative with the FTC. At the onset of the Street Journal. Ackman’s hedge fund management com-
investigation, Herbalife stated they were confident in pany Pershing Square Capital lost hundreds of millions
their compliance with laws, their financial stability, and of dollars over his five-year bet against Herbalife. While
their success as a company over the past 34 years. In disappointed that the pyramid scheme accusation was
2016, the FTC settled its case with Herbalife, dismissing found to be false, Ackman contended that several of his
the accusation of Herbalife being a pyramid scheme. claims were confirmed in the FTC case. Since the settle-
Nevertheless, the settlement did result in major ment, Pershing Capital reported losses for four years
changes for Herbalife. The FTC mandated a restructure in a row. As such, a large number of Pershing Capital’s
of Herbalife’s business practices, affecting how the largest investors have left the fund and Ackman has
company reports sales of members (consumers) and reduced staff to return the firm to their roots as a smaller
independent contractors selling to retail consumers. organization. Ackman has publicly admitted to making
Changes were made to the level of involvement partici- mistakes in his bets with Herbalife but states confidence
pants were allowed to have in selling products. An aspect in his portfolio and the future of Pershing Capital.
of the settlement is a mandate that Herbalife must derive
80 percent of sales from legitimate end-user purchases
to maintain their distributor compensation program. In New Opportunities: Consumer
addition, Herbalife must now prohibit participants from Megatrends
leasing or purchasing physical business locations to sell
Herbalife products until they have completed a year as a Herbalife has overcome many challenges throughout
distributor and completed a business-training program. their history. In addition to the FTC settlement and
The FTC also required Herbalife to pay $200 general societal misconceptions about multilevel
million to individuals who had lost money through marketing, Herbalife has always had to adapt to
involvement in selling Herbalife products. It was deemed changes in consumer preferences. It is no secret that
that Herbalife’s use of advertising through testimonials today’s consumers spend more time shopping for and
had misled potential participants about the realities of researching products online and less time shopping in

stores or interacting with salespeople than in the past. In allows Herbalife to confirm quality raw materials for
addition, the digitization of society has led consumers to the manufacture of their products. Steven Newmaster,
have greater demands that infringe upon their personal PhD and trained ethnobotanist, speaks on behalf of
life. Fortunately, for Herbalife, solutions that address the DNA testing Herbalife uses to ensure the quality
many societal changes termed megatrends are well of plants they use. Newmaster states the natural supply
aligned with the company’s products. According to a chain they use has been tested from the producer to
recent investor’s presentation, Herbalife leadership views the manufacturer. Through DNA barcode technology,
the trends of (1) increasing obesity of the population, Herbalife can confirm the ingredients used in their prod-
(2) aging of the population, (3) increasing healthcare ucts are authentic, healing, and nutritious. DNA testing
costs, and (4) expanding interest in entrepreneurship is conducted by raw ingredients being matched to a
as opportunities that position the company for long- comprehensive library of thousands of botanical species
term success. In addition, as consumers become more around the globe to determine high DNA-level quality.
dependent on social recommendations, Herbalife expects Herbalife is undertaking these changes in their product
their model of individual and social exchange (i.e., direct development because consumers desire transparency of
selling consultation) to help consumers looking for product origins prior to purchase.
coaching and experience that helps them in making To support consistent product quality through
decisions related to personal well-being. technology, Herbalife has six research and development
Specifically, societal megatrends largely relate to facilities and seven labs that test for quality. The com-
a need for better nutrition, well-being, and fulfillment pany also has a global operations team of almost 2,000
across society. Concerns over obesity and healthcare people including more than 300 research scientists that
costs affect both older consumers and younger ones. In support their products. This team sets the uniform global
both cases, recovery and prevention are an important standard for quality and oversees all elements of product
ingredient to enjoying a fulfilling life. Older adults need development and production. Herbalife’s ISO 17025
options to help offset health problems, and younger accreditation indicates adherence to strict standards in
adults are increasingly interested in preventing the prob- technical competency of laboratory personnel, accuracy
lems that they see in older generations. Thus, Herbalife’s of testing methods, use of proper equipment, and it
strategy to rebrand themselves as a nutrition company assures consumers that the tests are trustworthy.
that develops, manufactures, and delivers products of To further ensure product quality, Herbalife closely
unquestioning quality fits closely to consumer segments controls their supply chain through their “Seed to Feed”
responding to alarming societal trends. These consumers strategy. Since 2009, Herbalife has invested $250 million
are also well informed and willing to invest time and in vertical manufacturing and infrastructure to increase
energy to make sure they are purchasing products that the in-house production of key product units from less
will actually deliver on claims. Herbalife is embracing than 5 to 70 percent, in essence managing products
these trends by building upon their direct sales model from raw seed to feed the manufacturing process. COO,
through social media and new initiatives that position David Pezzullo, elaborates on the strategy: “We use a
direct sellers as trusted consultants that connect people stage-gate product development process with hundreds
who learn from and support each other. In addition, of steps and more than 60 sign-offs along the way to
Herbalife’s well-established direct selling model fits well ensure that every aspect of the product, from quality
with consumer interest in entrepreneurship. Similar to assurance, safety, science and regulatory to sensory
Uber, Lyft, and other “gig” opportunities, direct selling and label design, conforms to our specifications.” This
allows an individual to work at their own schedule process can take up to 18 months to complete and
and with the intensity they desire. Pairing high quality involves the work of more than 300 technical employees.
products with flexible, self-driven earning opportunities All manufacturing facilities, whether in the United
positions Herbalife well to respond to changing con- States or abroad, must comply with FDA regulations for
sumer markets. The following sections outline selected manufacturing practices, which specify how production
specifics of Herbalife’s (1) product quality strategy, (2) facilities in food, dietary supplements, and acidified
engagement strategy termed “nutrition clubs,” which foods must operate. Herbalife undertakes all of these
started in Mexico in 2004, and (3) commitment to steps as they strive for “best in class” regarding product
social responsibility through their mission to encour- excellence.
age nutrition and well-being to external and internal
communities. Engagement Strategy
Herbalife has achieved success through direct and
Product Quality Strategy personal attention to consumer needs; nutrition clubs
To ensure quality, Herbalife invests in continuous build on this through support communities. The first
research and development of their product lines. For Herbalife Nutrition Club opened in Mexico in 2004.
example, recent use of genetic technology advances The Nutrition Club was formed to bring together people

uccess 527
interested in nutrition and the support of a like-minded interact with suppliers, competitors, business partners,
community. Originally, the club served as a physical and regulatory authorities. The company discourages
location where the community could meet and purchase conflicts of interest and offers three methods of reporting
the products they needed in cost-effective portions that unethical behavior: through the company hotline, through
were more convenient than bulk purchasing. In addition the company website, or by contacting the general
to convenience, the club also provides a connection to counsel. Those who violate these standards are disciplined,
enjoy and learn about the products in the company of suspended, or terminated, which demonstrates Herbalife’s
other people with similar goals in their weight loss jour- commitment to their ethics code and ethical conduct.
ney. Over time, Nutrition Clubs have also incorporated Herbalife is committed to their external and internal
fitness classes to address a healthy lifestyle. Herbalife community. To the external community, the Herbalife
has embraced the Nutrition Club concept as an answer Family Foundation (HFF) and the Casa Herbalife
to societal megatrends and to further differentiate the program provide funds and volunteerism to charities
company from others in their industry. Nutrition Clubs committed to supporting at-risk children. Herbalife
allow independent distributors to provide personal- Nutrition Foundation also provides support to nutrition
ized nutrition plans, motivation, and accountability to initiatives and disaster relief. For instance, Herbalife’s
customers. Since 2004, the concept has thrived, with partnership with the Global Alliance for Improved
Herbalife supporting over 17,500 Nutrition Clubs in the Nutrition (GAIN) focuses on providing essential
United States and nearly 118,000 worldwide. nutrients to improve the health of women and children
Research shows that healthy habits are best formed worldwide. To their internal community, Herbalife
in a social setting that offers support, advice, and proactively embraces employee wellness and eco-friendly
reinforcement of the habits. Members who attend initiatives. The company incentivizes employees to
the clubs can receive nutrition and fitness tips and be healthy and participate in fitness activities. Such
encouragement from the independent distributors running incentives include providing complementary products
the establishments. Herbalife Executive Vice President and reduction of individual health insurance costs.
explains, “The Nutrition Club owners typically charge As such, the company has been recognized by Men’s
an attendance fee on a daily, weekly or monthly basis. Fitness magazine as “One of the 15 Fittest Companies in
Invited members can enjoy shakes, teas and aloe and America.” In terms of being environmentally conscious,
participate in activities like group workouts, fitness Herbalife’s headquarters have received accolades for
walks and weight-loss challenges.” Nutrition Clubs are their LEED certification and environmentally friendly
the perfect solution to those seeking influence in their design. The firm also encourages distributors to increase
nutrition lifestyle while also giving them community their own sustainability activities.
support in a positive environment. To ensure quality
and consistency, Nutrition Club operators (independent Conclusions
Herbalife distributors) must undergo extensive training
before commencing operations. Herbalife’s training for Herbalife Nutrition has navigated many challenges and
operators provides them with the resources and education capitalized on many opportunities since their formation
to create a budget and business plan and learn the local in 1980. Important to this case is Herbalife’s direct
laws. Additionally, Herbalife compliance staff monitors sales, multilevel compensation model. This model is
and performs site visits regularly to ensure regulations are responsible for Herbalife’s exceptional growth and
upheld. Overall, the Nutrition Club strategy has enhanced success, as committed and engaged sellers have delivered
Herbalife’s direct selling model and has been instrumental value through products and expertise to the company’s
in gaining consumer trust in the company’s product line large customer base. However, the same model has led
and its informed and helpful resellers. to concerns over the stability and sustainability of the
company, as some have assumed their operations to be
a pyramid scheme destined to fail. Despite Herbalife’s
Social Responsibility investigation and resulting restructuring, the company
Herbalife takes their responsibility as a corporation has emerged well positioned to continue their success
seriously. The company summarizes their values through a by aligning the core competencies of their products and
commitment to doing “the right, honest and ethical thing.” business model with changing consumer preferences
More specifically, CEO Michael Johnson stated that the and needs. This case illustrates that referring to direct
“company’s reputation is its greatest asset,” so much selling firms as pyramid schemes is a misrepresentation
emphasis is placed on ethical business conduct. According of a highly effective sustainable business model that has
to Herbalife’s Corporate Code of Business Conduct existed for hundreds of years.
and Ethics, employees must engage in fair interaction Herbalife will face the same challenges other mem-
with everyone associated with the company, including bers of the retail industry must address in the future.
external stakeholders. The code has guidelines in place Internet sales are now 10 percent of retail sales and
as to how contractors and employees of Herbalife should Amazon has more than 50 percent of the online retail

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stock-price-20130506 (accessed May 25, 2017).

Glossary
acid rain a phenomenon when nitrous oxides and sulfur bribery the practice of offering something, such as money,
dioxides emitted from manufacturing facilities react entertainment, travel, or other gifts to gain an illicit
with air and rain advantage from someone in authority
Act on the Protection of Personal Information Bureau of Consumer Protection a bureau within the
(APPI) Japanese data regulation stipulating that all Federal Trade Commission (FTC) charged with protecting
businesses servicing individuals in Japan, whether based consumers against unfair, deceptive, or fraudulent practices
in Japan or not, are required to disclose how personal business ethics the principles and standards that guide
data is being used and correct, suspend, or delete data if behavior in the world of business
requested by a user business ethics the principles and standards that guide
Affordable Clean Energy (ACE) rule a rule (replacing the the behavior of individuals and groups when carrying
EPA’s Clean Power Plan that set mandatory guidelines out tasks to meet business objectives
on power plant emissions) giving more power at the
state level to reduce emissions cap and trade programs programs that set carbon
algorithm a set of rules providing a procedure or formula emissions limits (caps) for businesses, countries, or
for problem solving individuals. To legally emit beyond that limit, carbon
ambient advertising a form of advertising where credits must be purchased from another entity that did
unconventional or unexpected messages are placed in a not pollute to its own limit
target market’s social environment cause-related marketing ties an organization’s products
artificial intelligence machines learning and performing directly to a social concern
tasks that typically require human intelligence by using Caux Round Table Principles for Business principles
algorithms for moral capitalism created by business leaders from
all regions of the world who have a strong desire and
Better Business Bureau (BBB) a self-regulatory interest in promoting socially responsible capitalism
association supported by businesses Center for Global Development a nonprofit think tank
big data large structured and unstructured sets of in Washington, D.C., and London that works to reduce
data that can be analyzed to reveal information and global poverty and improve lives through innovative
associations economic research that drives better policy and practice
biodiversity the variety of living organisms found in a by the world’s top decision-makers
given area on Earth or on Earth as a whole and the Certified Information Privacy Professional (CIPP) an
ecological systems in which they live information privacy credential from the International
bioenergy renewable energy made from biological waste Association of Privacy Professionals (IAPP)
bioethics the study of ethical issues in the fields of chief diversity officer (CDO) the corporate executive
medical treatment and research, including medicine, responsible for diversity and inclusion initiatives and
nursing, law, philosophy, and theology results
biometric data digital data used for personal verification chief privacy officer (CPO) high-level executives who
or identification that includes fingerprints, facial scans, rotect
are given broad powers to establish policies to p
retina scans, voice, and DNA consumer privacy and, in so doing, protect their
blockchain decentralized record-keeping technology that companies from negative publicity and legal scrutiny
stores an immutable record of data blocks over time Children’s Online Privacy and Protection Act (COPPA)
board of directors a group of members who represent a U.S. law which prohibits websites and internet
shareholders and oversee the firm’s operations and legal providers from seeking personal information from
and ethical compliance children under the age of 13 without parental consent
boycott a form of consumer action in which consumers civil regulations pressures exerted in society to encourage
abstain from using, purchasing, or dealing with a and persuade organizations to address issues in the
company or other organization social and physical environment
531

CBP_Ferrell_Glossary.indd 531 12/9/2019 6:30:13 PM
532 Glossary
Clayton Antitrust Act created to clarify the Sherman that was established by the Dodd-Frank Act to regulate
Antitrust Act and limit mergers and acquisitions, banks and other financial institutions by monitoring
prohibit price discrimination, tying agreements, consumer financial products and services
exclusive agreements, and the acquisition of stock in consumer fraud intentional deception to derive an unfair
another corporation where the effect may be to hinder economic advantage over an organization
competition or create a monopoly Consumer Product Safety Commission the U.S.
climate change the alteration of weather patterns and government commission charged with protecting the
temperature in an area or across the entire Earth due to public from unreasonable risks of injury or death
global warming associated with the use of thousands of types of
Coalition for Environmentally Responsible Economies consumer products under the agency’s jurisdiction
(CERES) a union of businesses, consumer groups, consumer protection laws regulations enacted to protect
environmentalists, and other stakeholders, who have vulnerable members of society with formal safeguards
established a set of goals for environmental for consumers
performance consumer protest a form of consumer action that
code of conduct a written collection of the rules, involves the organized and public display of consumers’
principles, values, and expectations of employee behavior disapproval of a firm’s actions
codes of conduct formal statements that describe what consumer relations a firm’s process for creating and
an organization expects of its employees; also called maintaining a positive relationship with consumers by
codes of ethics meeting customer needs
collective bargaining a negotiating process where employ- consumerism the movement to protect consumers from
ees work through their unions to establish employment an imbalance of power on the side of business and to
contracts and conditions with their employers maximize consumer welfare in the marketplace
Commitment to Development Index (CDI) a ranking, consumers individuals who purchase, use, and dispose of
produced by the Center for Global Development, of products for themselves and their households
27 developed nations by their contributions to and sup- conventional business partnerships (CBPs)
port of development in poorer, developing countries partnerships that promote efficiency in markets where
Common Cause a nonprofit, nonpartisan organization competition does not exist; assumes government is
that fights corrupt government and special interests inefficient and that a business organization provides the
common good the development of social conditions that best solution
allow for societal welfare and fulfillment to be achieved copyright infringement the unauthorized execution of
Communication on Progress a required annual report the rights reserved by a copyright holder
of how a company that has committed to the Global core competencies unique advantages that differentiate a
Compact implements the 10 principles and supports the firm from its competitors
UN’s developmental goals core practices recognized best practices that are often
community relations the organizational function encouraged by regulatory forces and industry trade
dedicated to building and maintaining relationships and associations
trust with the community corporate accountability partnerships (CAPs) focus
community members of society who are aware of, on accountability and the setting of requirements and
concerned with, or in some way affected by the opera- standards based on what society expects
tions and output of an organization corporate culture shared values, attitudes, and beliefs
compliance officer one who develops and oversees corpo- that characterize members of an organization
rate compliance programs to ensure compliance with corporate governance a company’s formal system of
state and federal regulations accountability, oversight, and control
conflict of interest an issue that arises when an individual corporate governance formal system of oversight of,
has competing interests and must choose whether to accountability for, and control over organizational
advance his or her own interests, those of his or her decisions and resources
organization, or those of some other group corporate public affairs activities actions that build a
conflicts of interest using one’s position within an orga- relationship between a corporation and a governmental
nization to obtain personal gain, at the expense of the body or politician to mold and influence the decisions
organization that the government makes to be in the best interest of
consequentialism a class of moral philosophy that con- corporations
siders a decision right or acceptable if it accomplishes a corporate social responsibility partnerships
desired result, such as career growth, the realization of (CSRPs) voluntary and business-centered partnership
self-interest, or utility in a decision providing resources for social initiatives, such as
Consumer Bill of Rights a group of four consumers rights job training and entrepreneurial development, that
(to choose, to safety, to be informed, and to be heard) contribute to a citizen’s livelihood and therefore a
first introduced by U.S. President John F. Kennedy in stronger workforce and economic contagion
1962 crisis management the process of handling a high-impact
Consumer Financial Protection Bureau (CFPB) an event characterized by ambiguity and the need for swift
independent agency within the Federal Reserve System action

Glossary 533
cross-training the process of ensuring that employees egoism a philosophy that defines right or acceptable
have the knowledge and skills to perform more than a conduct in terms of the consequences for the individual
single set of job duties emotional intelligence an important characteristic
crowdfunding the practice of funding a project or by possessed by ethical leaders, referring to the skills to
securing relatively small donations from a large number manage themselves and their relationships with others
of people effectively
cultural intelligence (CQ) the ability to interpret and employee assistance program (EAP) workplace program
adapt successfully to different national, organizational, that provides employees with services to improve
and professional cultures mental health and well-being
cybersquatter an individual who deliberately registers employee engagement the connection that employees
web addresses that match or relate to other firms’ have with their employers that influences behavior,
trademarks and then attempts to sell the registration to effort, and commitment
the trademark owners employee engagement the psychological state in which
employees feel a vested interest in the company’s success
Data and Marketing Association (DMA) a self-regulatory and are motivated to perform at levels that exceed job
resource that assists its business members in becoming requirements
more efficient and up to date in marketing by relying on employee stock ownership plans (ESOPs) employment
accurate consumer data and adjusting to new technology benefits programs that confer stock ownership to
dead zone an area in a large body of water that has a employees providing the opportunity to contribute to
reduced level of oxygen and increased algae blooms due and benefit from organizational success
to excessive nutrient pollution from human activities, employee well-being the health and wellness of
which negatively affects marine life and can be toxic to employees, including how workers feel about their work
humans as well and their working environment
deep learning a subset of AI that simulates how humans employer of choice an organization of any size in any
learn from experience by using algorithms that relate to industry that is able to attract, optimize, and retain the
the structure and function of the brain best employee talent over the long term
Department of Labor the U.S. federal agency charged employment at will a common-law doctrine that allows
with fostering, promoting, and developing the welfare either the employer or the employee to terminate the
of wage earners, job seekers, and retirees in the United relationship at any time, so long as it does not violate
States; improving working conditions; advancing an employment contract so long as it does not violate
opportunities for profitable employment; and assuring an employment contract or law
work-related benefits and rights enlightened capitalism a theory of capitalism originally
deregulation changing or deleting existing laws or regula- proposed by Adam Smith as “promoting the happiness
tions to provide less oversight of business activities, of mankind” that emphasizes stakeholder concerns and
operation, and outcomes issues
development improvement in the economic, environmen- Environmental Protection Agency (EPA) the most
tal, educational, and health conditions of a country influential regulatory agency that deals with
disruptive technology new technology that displaces environmental issues and enforces environmental
an established technology and changes an industry or legislation in the United States
a unique new product that creates a completely new ergonomics the design, arrangement, and use of
industry equipment to maximize productivity and minimize
Dodd–Frank Wall Street Reform and Consumer fatigue and physical discomfort
Protection Act legislation created to prevent financial ethical climate the part of a firm’s culture that focuses
crisis by increased financial deregulation, additional specifically on issues of appropriate conduct and right
oversight of the industry, and preventative measures and wrong
against unhealthy risk-taking and deceptive practices ethical conflict a situation where individuals and groups
downsizing the process of making permanent reductions within a company do not embrace the same set of values
in an organization’s labor force ethical culture refers to the character of the decision-
duty of care (also known as duty of diligence) the making process that employees use to determine if their
obligation of directors and officers to avoid ethical responses to ethical issues are right or wrong
misconduct and provide leadership to prevent ethical ethical diversity refers to the fact that employee values
misconduct in the organization often differ from person to person
duty of loyalty the obligation of directors and officers to ethical formalism also known as deontology, class
make decisions in the interests of the corporation and of moral philosophy that focuses on the rights of
its stakeholders individuals and on the intentions associated with a
particular behavior rather than on its consequences
economic regulation protection of competition to ethical issue a problem, situation, or opportunity
provide opportunity for organizations and individuals requiring an individual, group, or organization to
to be financially successful in order to create a strong choose among several actions that must be evaluated as
economy right or wrong, ethical or unethical

534 Glossary
ethical misconduct disaster (EMD) an unexpected Foreign Corrupt Practices Act prohibits bribery of
organizational crisis that results from employee foreign officials and requires accounting transparency
misconduct, illegal activities such as fraud, or u
nethical fraud any false communication that deceives, manipu-
decisions and that significantly disrupts operations lates, or conceals facts to create a false impression when
and threatens or is perceived to threaten the firm’s others are damaged or denied a benefit
continuity of operations full employment occurs when the available labor force
Ethics & Compliance Initiative (ECI) a community is fully utilized and employers have difficulty finding
of organizations that educates about regulatory employees to fill available positions
compliance and best ethical practices
ethics codes guidelines that businesses create to maintain General Data Protection Regulation (GDPR) a European
their company’s values and hold employees and Union (EU) law that requires businesses to protect the
employers accountable to ethical standards personal data of EU citizens by standardizing laws and
ethics officer a high-ranking person known to respect increasing privacy; U.S. organizations processing the
and understand legal and ethical standards data of individuals in the EU must comply with the
extrinsic motivation wanting to take action based on regulation
external factors genetically modified (GM) organisms organisms created
through manipulating plant and animal DNA so as
Fair Labor Association (FLA) works to end sweatshop to produce a desired effect like resistance to pests and
conditions for factory workers; organizes universities, viruses, drought resistance, or high crop yield
social groups, and socially responsible organizations to gerrymandering the practice of manipulating district
protect workers’ rights boundaries for partisan political advantage which ulti-
fair trade a trading partnership based on dialogue, mately has the power to greatly influence legislation
transparency, and respect that seeks greater equity gig economy a labor market in which independent con-
in international trade and contributes to sustainable tractors offer their services to large and small companies
development or individuals for an agreed level of compensation
Federal Communications Commission (FCC) the U.S. Global Compact an agreement which encourages organi-
government commission charged with regulating zations to commit to 10 common principles regarding
interstate and international communications by radio, human rights, labor, environment, and anticorruption,
television, wire, satellite, and cable in all 50 states, the whereby effective and responsible business can be
District of Columbia and U.S. territories conducted on a global scale
Federal Sentencing Guidelines for Organizations Global Reporting Initiative (GRI) an independent
(FSGO) a set of standards developed by the U.S. international organization that provides standards for
Sentencing Commission and approved by Congress businesses and other organizations to assess their
in November 1991 to streamline sentencing and performance across an array of social responsibility
punishment for organizational crimes and holds indicators and seeks to provide transparency and
companies and employees responsible for misconduct accountability in sustainability reporting akin to that
Federal Trade Commission (FTC) the U.S. g overnment found in financial reporting
agency charged with protecting consumers and green marketing a strategic process involving stakeholder
competition by preventing anticompetitive, deceptive, assessment to create meaningful, long-term relationships
and unfair business practices through law enforcement, with customers while maintaining, supporting, and
advocacy, and education about unduly burdening enhancing the natural environment
legitimate business activities greenhouse effect when Earth’s atmosphere becomes
Federal Trade Commission Act a law enacted to further thick with carbon dioxide, other gasses, and substances
strengthen the antitrust provisions of the Sherman which trap the Sun’s heat making Earth’s surface
Antitrust Act and broadly prohibit unfair methods of warmer
competition greenwashing misleading a consumer into thinking that
fiduciaries persons placed in positions of trust who use a product is more environmentally friendly than it is
due care and loyalty in acting on behalf of the best group polarization the tendency for a team to decide on a
interests of the organization more extreme solution than an individual might choose
Food and Drug Administration (FDA) the U.S. govern- on their own
ment agency charged with protecting the public health groupthink a phenomenon whereby individuals go along
by ensuring the safety, efficacy, and security of foods, with group decisions even when those decisions run
drugs, cosmetics, biological products, medical devices, counter to one’s own values
tobacco, veterinary products, and electronic products
that give off radiation hostile work environment sexual harassment a type of
Foreign Corrupt Practices Act (FCPA) maintains that it is sexual harassment that involves epithets, slurs, negative
illegal for individuals, firms, or third parties doing stereotyping, intimidating acts, graphic materials that
business in U.S. markets to, in the words of the law, show hostility toward an individual or group, and
“make payments to foreign government officials to other types of conduct that affect the employment
assist in obtaining or retaining business” situation

Glossary 535
hostile work environment a kind of workplace license to operate permission to conduct a business
environment where the conduct is unwelcome; severe, activity, subject to regulation by the licensing authority
pervasive, and hostile such as to affect conditions of living wage an hourly wage on which it is possible to live
employment; and offensive to a reasonable person according to minimum standards
lobbying the process of working to persuade public and/
identity fraud the use of someone’s personal information or government officials to favor a particular position in
to access money online decision-making
identity theft the access and theft of personal information,
leading to identity fraud Machiavellianism the use of duplicity or cunning to
impact investing investments made with the intention of achieve business goals
generating positive and measurable social and environ- machine learning a subset of AI that explains the applica-
mental impact, as well as financial returns tion of AI using algorithms and data in order to allow
insider trading the act of purchasing or selling a public the computer to learn without being programmed for a
company’s security with access to nonpublic informa- specific task
tion about the company mandated boundaries externally imposed boundaries
intellectual property the ideas and creative materials of conduct, such as laws, rules, regulations, and other
developed to solve problems, carry out applications, requirements
educate, and entertain others marketplace of ideas the assumption that ideas compete
International Association of Privacy Professionals against one another for truth and acceptability
(IAPP) U.S. group responsible for developing and microlending small loans provided to individuals and busi-
launching the first broad-based credentialing program nesses, typically in impoverished areas, that are unable to
in information privacy obtain loans from traditional lending institutions
Internet Corporation for Assigned Names and Numbers minimum wage the lowest hourly wage that may be
(ICANN) a nonprofit organization overseen by the U.S. legally paid to employees
Department of Commerce and charged with oversee- mission statement a summary of a company’s aims and
ing basic technical matters related to addresses on the values
internet monopoly a market type in which just one business pro-
Internet of Things (IoT) the connectivity of devices such vides a good or service in a given market
as security systems and electric appliances to provide moral philosophies principles, or rules, which individuals
the ability to send and receive information over the apply in deciding what is right or wrong; morals refers
internet to individuals’ philosophies about what is right or
interorganizational networks a set of organizations that wrong
are associated through shared or mutual affiliations and
interests National Advertising Division (NAD) an investigatory
intersectionality theory a theory which focuses on the branch of the National Advertising Review Council
multidimensional nature of identity, including class, (NARC) that provides reviews of advertisements for
gender, and race, and its effects on social dimensions of accuracy and truthfulness and resolves disputes
differences neighbor of choice an organization that builds and
intrinsic motivation wanting to take action based on sustains trust with the community through employment
internal factors opportunities, economic development, and financial
ISO 14000 a comprehensive set of environmental contribution to education, health, artistic, and
standards that encourage a cleaner, safer, and healthier recreational activities of the community
world developed by the International Organization for nongovernmental organizations (NGOs) nonprofit,
Standardization citizen-based groups that function independent of
government
justice theory a class of moral philosophy that relates to normative approaches provide a vision and recommen-
evaluations of fairness, or the disposition to deal with dations for improving ethical decision-making; are con-
the perceived injustices of others cerned with how organizational decision-makers should
approach an ethical issue
Kyoto Protocol a treaty among industrialized nations
aimed at slowing global warming Occupational Safety and Health Administration
(OSHA) the U.S. government agency charged with
leader–follower congruence when leaders and their fol- ensuring safe and healthful working conditions for
lowers (i.e., employees) share the same organizational working men and women by setting and enforcing stan-
vision, ethical expectations, and objectives dards and by providing training, outreach, education,
legal responsibility the most basic expectation that a and assistance
company must comply with the law opportunity a set of conditions that limits barriers or
legitimacy the perception or belief that a stakeholder’s provides rewards
actions are proper, desirable, or appropriate in a given organizational ethics and compliance programs pro-
context grams developed by an organization to establish,

536 Glossary
communicate, and monitor ethical values and legal proxy access the ability of long-term shareholders to
requirements that characterize its history, culture, nominate alternative candidates for the board of direc-
industry, and operating environment tors on the company’s annual shareholder meeting
organizational values abstract ideals distinct from ballot
individual values proxy an agent legally authorized to act on behalf of
organizational, (corporate) culture a set of values, beliefs, another person/party. Used as a voting mechanism when
and artifacts shared by members or employees of an a shareholder is not present at a shareholder’s meeting
organization psychological contract largely unwritten, it includes
outsourcing the practice of hiring an outside individual beliefs, perceptions, expectations, and obligations that
or organization to perform tasks and functions make up the agreement between individuals and the
traditionally performed by company employees organizations that employ them
ozone a highly reactive form of oxygen that is a critical Public Company Accounting Oversight Board
component of the stratosphere where it encircles the (PCAOB) required by the Sarbanes-Oxley Act,
Earth in a deep layer that protects the planet from the a private, nonprofit company that provides oversight of
Sun’s ultraviolet radiation the accounting firms that audit public companies and
sets standards for the auditors in these firms.
particulate matter (PM) a mixture of solid particles and puffery exaggerated statements that no reasonable person
liquid droplets found in the air; also known as particle would believe to be fact
pollution
patent laws laws that grant the developer a period of time quality of life a measure of social, physical, economic, and
(usually 20 years) during which no other firm can use environmental health conditions affecting an individual
the same technology without the patent holder’s consent or group
philanthropic activities efforts made by a company to quid pro quo sexual harassment a type of sexual extor-
improve human welfare tion where there is a proposed or explicit exchange of
philanthropy acts such as donations to charitable orga- job benefits for sexual favors
nizations to improve quality of life, reduce government
involvement, develop employee leadership skills, and recycling the reprocessing of materials, especially steel,
create an ethical culture to act as buffer to organiza- aluminum, paper, glass, rubber, and some plastics, for
tional misconduct reuse
philanthropy the desire to improve the welfare of others regulation the act of creating and enforcing rules for a
through donations of money, resources, or effort specific purpose
political action committees (PACs) organizations that reputation management the process of building and sus-
solicit donations from individuals and then contribute taining a company’s good name and generating positive
these funds to candidates running for political office feedback from stakeholders
power the extent to which a stakeholder can gain access resource advantage theory a theory stating that the
to coercive, utilitarian, or symbolic means to impose or value of a resource is viewed relative to its potential to
communicate its views to an organization create competitive differentiation or customer value
primary stakeholders people or groups who are reverse mentoring organizational mentoring program
fundamental to a company’s operations and survival; where less experienced employees mentor more experi-
these include shareholders and investors, employees, enced employees
customers, suppliers, and public stakeholders, such as rightsizing the process of reorganizing or restructuring an
government and the community organization’s labor force
Principle of Equal Freedom asserts that all persons must risk management hedging uncertainty while ensuring
have equality under the law that leadership is taking the appropriate steps to move
principles specific and pervasive boundaries for behavior the organization and its strategy forward
that are universal and absolute and often form the basis
for rules Sarbanes-Oxley (SOX) Act legislation created to protect
privacy issues issues that businesses must address that investors by improving the accuracy and reliability of
include the monitoring of employees’ use of available corporate disclosures
technology, consumer privacy, and online marketing secondary stakeholders people or groups who do not
private interest groups people with a shared interest who typically engage in direct transactions with a company
work to influence public policy in their favor and thus are not essential for its survival; these include
privatization a process that occurs when public the media, trade associations, and special-interest
operations are sold to private entities. Public-private groups
partnerships count as partial privatization self-regulation when an industry-level organization, such
product liability a business’s legal responsibility for the as a trade association or professional society, creates a
performance of its products set of rules and enforces regulations within its industry
product placement a type of advertising in which a sexual harassment any repeated, unwanted behavior
company pays for its product to be viewed in a movie, of a sexual nature perpetrated upon one individual by
television show, or other form of media another; it may be verbal, visual, written, or physical

Glossary 537
and can occur between people of different genders or can also be referred to as corporate social responsibility
those of the same gender (CSR) when adopted by a business
sexual harassment unwelcome sexual advances, requests stakeholder engagement the organizational process
for sexual favors, and other verbal or physical conduct of involving stakeholders who may be affected by the
of a sexual nature which, when submitted to or rejected, decisions it makes or may influence the content and
explicitly or implicitly affects an individual’s employ- implementation of its decisions
ment, unreasonably interferes with an individual’s work stakeholder interaction model a model that conceptual-
performance, or creates an intimidating, hostile, or izes the two-way relationships between a firm and a
offensive work environment host of stakeholders
shareholder lawsuits lawsuits brought against a key stakeholder map a company-specific map that names
member of a company by a shareholder or group of its primary and secondary stakeholders, identifies
shareholders suing on behalf of the corporation key issues, and examines relationships and networks
shareholder model of corporate governance founded in between the organization and stakeholders
classic economic precepts, a model that focuses on making stakeholder model of corporate governance a model
decisions toward what is in the best interest of investors where the business is accountable to all its stakeholders,
shareholder resolutions nonbinding, yet important, not just shareholders
statements about shareholder concerns stakeholder orientation the aim to benefit all parties
shareholder any person or entity that owns at least one affected by the success or failure of an organization
share of a company’s stock stakeholder orientation the degree to which a firm
sharing economy a labor market in which independent understands and addresses stakeholder demands
contractors “rent out” underutilized resources such as stakeholders constituents who have an interest or stake in
their cars or lodging to earn extra income a company’s products, industry, markets, and outcomes
Sherman Antitrust Act the principal tool used to prevent stock option a financial tool that gives a shareholder the
businesses from restraining trade and monopolizing right to buy or sell a stock at a set price for a certain
markets amount of time
significant others superiors, peers, subordinates, and strategic philanthropy the synergistic use of an organiza-
others in an organization who influence the ethical tion’s core competencies and resources to address key
decision-making process stakeholders’ interests and to achieve both organiza-
single-use plastics also known as disposable plastics, tional and social benefits
these materials are used only once before they are subcontracting the practice of hiring an outside individual
discarded or recycled or organization to perform specific tasks and functions
smart devices devices connected to other devices on in partial fulfillment of a larger company contract
networks that are capable of communication and supply chain management the coordination of all the
computation for different wireless protocols, such as activities involved with the flow of supplies and prod-
Wi-Fi and Bluetooth, operating interactively ucts from raw materials through to the end customer
social audit the process of assessing and reporting a firm’s sustainability a company’s economic, environmental, and
performance in adopting a strategic focus for fulfilling social performance
the economic, legal, ethical, and philanthropic social sustainability the potential for long-term well-being
responsibilities expected of it by its stakeholders of the natural environment, including all biological
social capital an asset that resides in relationships and is entities, as well as the interaction among nature and
characterized by mutual goals and trust individuals, organizations, and business strategies
social contract an implicit agreement between members sustainable business practices actions a company takes
of society that establishes the rights and duties of each to reduce their environmental impact and that may
party to the agreement lower costs and improve competitive advantage, stake-
social economy partnerships (SEPs) partnerships that holder relationships, and the company’s reputation and
pursue alternatives to conventional corporations and branding
profit maximization and have a distinctly social pur-
pose, use democratic governance, and cooperate with technology assessment a procedure used by companies
other social economy partnerships to calculate the effects of new technologies by foresee-
social entrepreneurship when an entrepreneur founds a ing the effects new products and processes will have on
business with the purpose of creating social value rather their firm’s operations, on other business organizations,
than making money and on society in general
social exchange theory a theory stating that social technology the application of knowledge, including the
behavior is determined by social exchanges between processes and applications to solve problems, perform
different parties tasks, and create new methods to obtain desired out-
social regulation protection and support for consumers comes
providing safe work conditions, equal opportunity, and time theft a major form of observed misconduct includ-
healthcare ing late arrivals, long lunch breaks, leaving early, day
social responsibility a strategic focus for fulfilling eco- dreaming, excessive socializing, and use of social media
nomic, legal, ethical, and philanthropic responsibilities, that costs companies billions annually

538 Glossary
Title VII of the Civil Rights Act of 1964 prohibits values norms that are socially enforced, such as integrity,
employment discrimination on the basis of race, accountability, and trust
national origin, color, religion, and gender, and applies vesting the legal right to pension plan benefits
to employers with 15 or more employees, including virtue ethics adhering to general ideas, social values, and
state and local governments good character for appropriate ethical behavior
trade associations groups formed by members of indus- vision statement a description of a company’s current
tries to promote the interests of their industry through and future objectives to help align decisions with their
means such as lobbying, publishing, and advertising philosophy and goals
transactional leadership a leadership style that attempts voluntary practices the beliefs, values, and voluntary
to create employee satisfaction through negotiating for responsibilities of an organization
levels of performance or “bartering” for desired behav- volunteerism when employees spend company-supported
iors time in support of social causes
transformational leadership a leadership style that tries
to raise the level of commitment of employees and warranty a written guarantee issued at the time of pur-
creates greater trust and motivation chase that promises to repair or replace the purchased
Troubled Assets Recovery Program (TARP) a law autho- product within a certain time frame
rizing the U.S. Treasury to purchase up to $700 billion whistleblower a person who exposes an employer’s
of troubled assets such as mortgage-based securities wrongdoing to outsiders, such as the media or govern-
trusts organizations established to gain control of a ment regulatory agencies
product market or industry by eliminating competition work/life programs programs that assist employees
in balancing work responsibilities with personal and
U.S. Global Climate Change Initiative a voluntary proto- family responsibilities
col for reporting greenhouse gases Worker Adjustment and Retraining Notification (WARN)
U.S. Securities and Exchange Commission (SEC) the Act a federal law requiring that U.S. employers give
government agency that oversees the operations and at least 60 days’ advance notice if a layoff will affect
protection of securities markets and investors 500 or more employees or more than one-third of the
unconscious bias a lack of awareness of one’s own workforce
unconscious attitudes and associations workforce reduction the process of eliminating employ-
underemployment occurs when employees engage in ment positions
work that requires skills or education below their workplace diversity recruiting and retaining individuals
qualifications, or when employees want to work on a regardless of age, gender, ethnicity, physical or mental
full-time basis but can find only part-time positions ability, or other characteristics
unemployment rate the percentage of the available labor workplace inclusion organizational (corporate) culture
force that is currently unemployed that ensures that policies, procedures, and practices are
urgency the time sensitivity and the importance of the fair, transparent, supportive, and empowering for all
claim to the stakeholder employees
utilitarianism a consequentialist philosophy that is con-
cerned with seeking the greatest good for the greatest zero tolerance the practice of applying penalties to even
number of people minor infractions of policy

Notes
Chapter 1 10. Dima Jamali and Ramez Mirshak, “Corporate Social Responsibility
(CSR): Theory and Practice in a Developing Country Context,” Journal
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Fleet,” Fast Company, September 13, 2018, https://www.fastcompany. 11. E. R. Pedersen, “Modelling CSR: How Managers Understand the
com/90236539/ikea-is-quickly-shifting-to-a-zero-emissions-delivery- Responsibilities of Business Towards Society,” Journal of Business
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Clean Electricity to 1 Million People in India and East Africa,” 12. Milton Friedman, Capitalism and Freedom (Chicago: University of
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pressrelease/new-wri-project-to-bring-clean-electricity-to-1-million- 13. Clive Crook, “Why Good Corporate Citizens Are a Public Menace,”
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539

CBP_Ferrell_Notes.indd 539 12/9/2019 6:27:08 PM
540 Notes
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Toward a Marketing Conceptualization,” Journal of the Academy of and Society 41 (December 2002): 415–445.
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Theory,” Journal of Management Studies 39 (January 2002): 1–21; Emerging Construct.”
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Notes 543
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of Ideas,” New York University Law Review 90 (October 2015): 55. Barbara Gray, “Social Capital: The Secret Behind Airbnb and Uber,”
1160–1228; Ben Medeiros, “Evaluating the Reputation Management BrandyCap, June 4, 2014, http://bradycap.com/social-capital-the-
Industry through the Lens of Public Relations Ethics,” Journal of secret-behind-airbnb-and-uber/ (accessed July 7, 2016).
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2019). 66. Jörg Andriof, “Managing Social Risk Through Stakeholder Partnership
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Notes 551
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558 Notes
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Notes 559
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562 Notes
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564 Notes
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Notes 567
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568 Notes
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Index
Page numbers followed by f and t indicate figures and tables, respectively.
A AllianceRx Walgreens Prime, 442 American Tobacco Company, 131

All the Queen’s Horses, 179 Amyotrophic lateral sclerosis (ALS), 329
Aarons Inc., 230 Alphabet, Inc., 97, 311t Andersen, A., 170, 194
AB InBev, 344 AlphaGo computer program, 326 Android, 427
Abouleish, I., Dr., 294, 295 AltaVista, 314t, 425 Anthony, S. B., 294
Abusive child labor practices, 224 Alternative energy, 363–366, 363t Anti-Cybersquatting Consumer Protection
Abusive or intimidating behavior, 153–154 biofuels, 365–366 Act, 324
Accion, 294 examples, 363t Antimonopoly regulations, 101
Accountability, 67 geothermal power, 364–365 Antitrust,
Acid rain, defined, 345 hydropower, 366 activities, 99, 109–110, 263
ACORN acronym, 234, 235t nuclear power, 365 Apple Inc. (case study), 489–490
Activism, defined, 79 solar power, 365 Apple Inc., 53–54, 106, 131, 142, 311t, 353,
Act on Protection of Personal Information wind power, 364 486
(APPI), defined, 321 Alzheimer’s disease, 329 controversy with Uber, 400–401
Adidas Group, 50 Amazon corporate culture, 487–488
Aditya Birla group, 88 AI technologies, 16 ethical issues at, 488–493
Adopt-A-Pilot program, 199 antitrust investigation, 142 future perspectives, 493–494
Advanced Research Projects Agency Network in China, 379 history, 486–487
(ARPANET), 314t deforestation, 354 Apple Lisa, 486
Advertising, 256–258, 262 history of internet, 314t AquaBounty Technologies, 358
campaigns, 144 minimum wages for employees, 284 Aranda, T., 246
on Google, 426 misusing company computers, 155 Artificial intelligence (AI), 98, 209, 275, 308,
messages, 45 online marketplace, 33 312, 325–328
Advertising Self-Regulatory Council (ASRC), organizational culture, 165 defined, 16
144 Sherman Antitrust Act, 131 and ethics, 160–161
Advertising Standards Authority, 253 shipping items, 307 Asia-Pacific Economic Cooperation (APEC),
AECOM, 240 smart devices, 308 19
Aereo, 141–142 SquareTrade with, 258 Asia Pulp & Paper (APP), 277, 278
Aetna, CVS merger with, 442–443 supply chain management, 312 ASOS, 73
Affiliative leadership, 202 Whole Foods, 37, 38 Association for Talent Development, 232
Affordable Care Act (ACA), 122 Amazon Prime, 420 Association of Certified Fraud Examiners,
Affordable Clean Energy (ACE) rule, 349 Ambient advertising, defined, 262 138–139, 158
Affordable Health Care Act (ACA), 101 American Airlines, 102, 115 Athletes, illegal substances, 181
AFL-CIO, 85 American Association of Retired People Atmospheric issues
Agarwal, M., 33 (AARP), 40 acid rain, 345
Age Discrimination in Employment Act, 157, American Booksellers Association, 128 air pollution, 344–345
223t American College of Physicians (ACP), 130 coal and carbon emissions, 348–350,
Agilent Technologies, 239 American Customer Satisfaction Index, 405, 350f
AIG, 15, 72 409, 414 global warming, 345–347, 346f, 348t
Airband Initiative, 49 American Diabetes Association, 240 ATryn, 356
Airbnb, 54, 190, 238, 249, 304, 311 American Dream, 254 AT&T, 96, 131, 264, 282, 317, 321
Airline Deregulation Act, 114 American Eagle Outfitters, 31 Audit(s), 371–372, 371t
Air pollution, 344–345 American Express, 165, 292, 321 privacy (Google), 431
Alcoholic beverages, transportation of, 257 American Institute of Certified Public Authentic leadership, 202, 204
ALDO, 292 Accountants, 129, 203 Autism spectrum disorders (ASD), 235
Alexander, E., 401 American Marketing Association, 271 Auto insurance and home loan scandal, Wells
Alexa virtual assistant, 308 American Medical Association (AMA), 129, Fargo, 455–456
Algorithm, defined, 325 147 Automatic content recognition (ACR), 261
Alibaba, 379, 412, 472 American Recovery and Investment Act, 45 Automotive industry and AI, 16. see also
All-China Federation of Trade Unions American Red Cross, 300 Artificial intelligence
(ACFTU), 415 Americans with Disabilities Act (ADA), 112, Aventis, 58
Allegro Coffee, 332 157, 223t, 227 Avon, 22, 233, 292
573

CBP_Ferrell_Index.indd 573 12/9/2019 6:29:38 PM
574 Index
Avon Breast Cancer Crusade, 292, 296 Bonnafé, J.-L., 299 Capitalism and Freedom (Milton Friedman),
Axion Enterprise, 325 Boone, G., 213 7
Boot camps, 262 Capital One, 279t
Bosch, 50 CarbonCure, 349
B Bots, 16, 17 Carbon dioxide, global emissions, 345–346,
Baby boomers, 234–235 Bowie, N., 39 346f
Baird, 218t, 235 Bowman, V. H., 332 CAREERS & the disABLED Magazine, 233
Bangladesh, 46 Boyatzis, R., 203 Carnegie, A., 70, 99–100
Bank of America, 72 Boycott, 45, 47 Carrefour SA, 161
Bankruptcy Abuse Prevention and Consumer defined, 266 Carroll, A., 199
Protection Act, 256t Boyer, H., 329 Carson, R., 359
Barclays, 317 BP, 22 Cartier, 292
Bard, C. R., 259 BRAC (Building Resources Across Cartographers, 307, 313
Batterygate (Apple Inc.), 493 Communities), 294 Cascade Engineering, 341
Bayer, 151 Brand awareness, 8 Casey, M., 320
B corporation, 341 Brandless, 33–34 Catalyst, 233
Bear Stearns, 14, 112 Brand loyalty, 18 Caterpillar’s bulldozer, 5
Behavioral simulation/role-play exercise, 188 Branson, R., Sir, 22 Cause-related marketing
Beim, P. Y., Dr., 267 Brexit, projected impact on the UK, 109t defined, 291
Ben and Jerry’s Homemade ice cream, 291 Bribery, 155–156 strategic philanthropy vs., 291–293
Berkshire Hathaway, 151 defined, 155 Caux Round Table Principles for Business,
Bernard Madoff Ponzi scheme, 77 Bribery scandal, Walmart, 416–417 384, 385t
Best Buy, 61, 182, 327 Bridges Social Entrepreneurs Fund, 290–291 Celmatix, 267
Better Business Bureau (BBB), 7, 107–108, Brin, S., 425 Center for Food Safety (CFS), 102
143–144, 160, 180, 265, 301 Broadband, 309 Center for Global Development, 395
defined, 107 Broadcasting companies, 141 Certification, 321–322
Beverly Hills Hotel, 266 Broeksmit, W., 73 Certified information privacy professional
Bezos, J., 304 Brown, J., 65 (CIPP), defined, 322
Bharti Enterprises, 417 BSR (Business for Social Responsibility), 42 “Certified preowned” programs, 258
Bias, 18, 102, 236 Buck, M., 498 Certified public accountant (CPA), 129
Bifulco, F., 405 Buddy punching, 154 Changewalmart.org, 266
Big data, 160 Budweiser, 344 Charitable giving
AI algorithms and, 326 Buffett, W., 23, 151, 202, 304 recipients, 287, 288
defined, 309 Bureau of Consumer Protection, defined, sources, 287
Bike rental system, Uber, 402 253 Charity Navigator, 300
Bill of Rights Act, 262 Burke, D., 245–246 Charney, D., 170
Binary Capital, 182 Buscio, K., 93 Chernobyl accident (Ukraine), 365
Binderbauer, M., 374 Bush, G. H. W., President, 96, 98, 112, 137, Chesky, B., 304
Bing (Microsoft), 425 226 Chesnut, R., 190
Biodiversity Business Chicago Board of Trade, 130
bees, bats, and frogs, decrease in, decisions, defending, 5 Chief diversity officers (CDOs), defined, 233
355–356 ethical issues in, 153–161. see also Chief executive officers (CEOs), 299
defined, 344 Ethics, business CEO-to-employee pay ratios, 84
Bioenergy, 353 role in technology issues, 334 compensation, 86t. see also
Bioethics, defined, 328 Business and Nonprofit Strategies, Inc., 300 Compensation
Biofuels, 365–366 Business Ethics, 27 constructive leadership from, 182
Biometric data, defined, 159 Business ethics, defined, 149. see also Ethics, Chief privacy officer (CPO), defined, 321
Biometric Information Privacy Act, 159 business Child Protection and Toy Safety Act, 254,
Biotechnology, health and, 328–333 Business for Innovative Climate & Energy 255t
Bipartisan Campaign Reform Act (BRCA), Policy (BICEP), 463 Children’s Online Privacy Protection Act
123 Business Software Alliance, 323 (COPPA), 103
Birke, J., 305 Business-to-business (B2B), 311 consumer law, 254, 255t
Blake, F., 75, 405–406, 408 Butterball Farms, 244 defined, 317
Blanca, T., 65 “Buy American” sentiment, 45 privacy law, 319t
Blank, A., 75, 405 Child safety on internet, 318
Blockchain, 16, 17–20, 29, 161, 320, Child trafficking/pornography, 275
C China
326–327
defined, 17 Cablevision, 284 air pollution, measures for, 345
Blockchain Promotion Act, 320 Cadbury, A., Sir, 79 Google in, 433–434
Blogs, 56 Caldbeck, J., 182 as greenhouse gas emitters, 345, 346
Bloomberg, M., 304 Campaign contributions, 129 land pollution, 352
Bloomberg News, 162 Campbell v. Kansas State University, 229 Chloe, 327–328
Blue Cross Blue Shield companies, 239, 240 Canada, 386t Chlorofluorocarbons, 345
Bluesign® system, the, 509 Canadian Standards Association (CSA), 321 Chouinard, Y., 149–150, 508
Bluetooth, 308 Cannabidiol (CBD), 102–103 Chrysler, 71
BMW, 7 Cannabis legalization, 102 Cigarette Labeling and Advertising Act, 255t,
BNP Paribas Foundation, 299 Canon, 50, 182 257
Board of directors, defined, 66 Cap-and-trade programs, 348–349 Cisco Systems, 304, 316
Boeing, 47, 189 Capitalism, 39, 98–100 Citigroup, 76, 304, 321
Boeing 737 MAX 8 aircraft crash, 102 enlightened, 39 Citizens United, 123–124, 129
Boeing’s code of ethics, 155 Friedman, 99 Ciulla, J. B., 214
Boler, T., 267 state, 99 Civil regulations, defined, 110

Index 575
Civil Rights Act, Title VII, 223t Community Consumer Protection Act, 15, 72, 109, 231
Clark, T., Dr., 191 characteristics, 276 Consumer protection laws, 5–6
Clarkson, M., 57 defined, 277 defined, 5
Clayton Act, 133 mission statements, 279t, 280, 281 Consumer protests, defined, 266
Clayton Antitrust Act, 131–132 social responsibility philosophy, Consumer relations, 248–273, 388–389, 388t
defined, 131 276–277 defined, 250
Clean Air Act (CAA), 112, 345, 360 Community, responsibilities to, 281–286 economic issues, 251–253
Clean Power Plan (CPP), 349 economic issues, 282–283 ethical issues, 260, 261–267
Clean Water Act, 103, 350–351, 362 ethical issues, 284–285 legal and regulatory issues, 253–260
Clearance pricing, 271 legal issues, 283–284 overview, 250
CliftonLarsonAllen, 179 philanthropic issues, 285–286 philanthropic issues, 268–269
Climate change. see also Global warming Community relations, 274–305 responsibilities, 251–270
causes, 346 common myths, 281t stakeholders, 250
defined, 346 defined, 278 Consumer Reports (magazine), 261
strategy, 348t economic issues, 282–283 Consumer Review Fairness Act (CRFA), 249
Clinton, B., President, 98, 112, 226, 262 ethical issues, 284–285 Consumer rights, 262–266, 263t
Cloetta, 44 legal issues, 283–284 right to be heard, 264
Cloning, 329–330 overview, 276 right to be informed, 264
Clorox, 233 philanthropic contributions, 286–289 right to choose, 263
Cloud storage, of data, 309 philanthropic issues, 285–286 right to privacy, 265–266
Coaching leader, 203. see also Leadership responsibilities, 281–286 right to safety, 263
Coal and carbon emissions, 348–350, 350f social responsibility and, 290–293 right to seek redress, 264–265
Coalition for Environmentally Responsible stakeholders, 276–281 Consumers, responsibilities to, 251–269
Economies (CERES), defined, 344 strategic philanthropy defined, 289 economic issues, 251–253
Coca-Cola, 19, 57, 157, 185, 192, 201, 228, Compensation ethical issues, 260, 261–267
343 CEO, 86t legal and regulatory issues, 253–260
Cocoa industry, labor issues (Hershey executive, 84–86 philanthropic issues, 268–269
Company, case study), 501–505 performance-based, 92 strategic implementation, 269–270
criticism, 504–505 Compliance and ethics programs, 134t Consumers Union, 102, 261
efforts to improve, 503–504 Compliance Assistance Resources, 111 Consumer Value Store (CVS), 47
Fair Trade USA, 502–503 Compliance-based programs, 183 Aetna merger, 442–443
global help, 502 Compliance officers, defined, 186 background, 439–440
Rainforest Alliance, 503 Compliance orientation, 182 communities, 445
Universal Trade Zone (UTZ), 503 Compliance programs, 170 criticism against, 443–444
The Code, 108 Computech Corporation, 155 employees, 444
Code of Ethics and Business Conduct Computer Matching and Privacy Protection environmental impact, 445
program, 189 Act, 319t ethical challenges, 440–441
Codes of conduct/codes of ethics Computer science industry, 16 as healthcare company, 441–442
defined, 183 Computer Security Act, 319t stakeholders, 444–445
developing and implementing, 183, 185t Computer World (magazine), 237 suppliers, 445
elements, 184t ConAgra, 175 tobacco-free CVS, 443
six values, 185 Cone Communications, 22 The Container Store, 201, 213, 214, 218t
Coercive leader/power, 45, 197, 202 Cone survey, 22 Contract
Cognizant Technology Solutions The Conference Board, 219 employee-employer, 215–219
Corporation, 156 Conflicts of interest, defined, 68, 155 psychological, 216, 217, 218t, 220–221,
Cohen, B., 291 Congress, 123–124 222
Cohen, S., 329 Consequentialism, defined, 163 social, 221
Collective bargaining, defined, 225 Conservation Alliance, 509 Control, defined, 67
Colony Collapse Disorder (CCD), 355 Consumers Control systems, 82
Colorado Consumer Protection Law, 253 action, 266, 267 Conventional business partnerships (CBPs),
Comcast, 310 activism, 45 391–392
Commission on Theft of American attitudes, 22 Cook, T., 401, 487
Intellectual Property, 323 defined, 250 Cookies, 159, 317
Commitment to Development Index (CDI), privacy concerns for, 316 Co-op, 256
395 service industry and AI, 16 Copyright infringement, defined, 323
Committee Encouraging Corporate Consumer Advisory Council, 261 Copyright Office, 324
Philanthropy (CECP), 278 Consumer Bill of Rights, defined, 260 Copyrights, facts about, 322–324, 324t
Commodity Futures Trading Commission, Consumer Financial Protection Bureau Core practices, defined, 193
139 (CFPB), 72, 122, 133, 139–140, 154, Core-Tex, 93
Common cause 256 Corker, B., 454
accomplishments, 125t defined, 139 Coronation Street, 256
defined, 124 Consumer fraud. see also Fraud Corporate accountability and transparency,
Common good, 5, 7, 12 defined, 251 40
defined, 5 types, 252t Corporate accountability partnerships
Communication, 53 Consumer Goods Pricing Act, 255t (CAPs), 393
ethical leadership, 204–207 Consumerism, defined, 261 Corporate approaches to influencing
ethics program, 186–189 Consumer privacy, 159–160 government, 127–129
interpersonal, 205–206 Consumer Product Safety Act, 254, 255t Corporate Average Fuel Economy (CAFE)
listening, 207 Consumer Product Safety Commission, standards, 360
nonverbal, 207 defined, 253 Corporate boards, 71, 76–79, 81t, 85
small group, 206 Consumer protection, 140–141, 161 Corporate Challenge, 276
Communication on Progress, 395 regulations, 101 Corporate charters, 13

576 Index
Corporate culture, 69 Customer satisfaction, 4, 22 Discrimination, 156–157

Apple Inc., 487–488 Cybersquatters, defined, 324 employment, 227–228
assessment, 54–55 Cyberterrorism, 333 Disney, 284
TOMS Shoes, 481–482 Disposable plastics (single-use plastics),
Corporate Equality Index, 240 343–344
Corporate ethics programs, 15. see also
D Disruptive technology, defined, 98
Ethics, business Dairy industry, GM organisms in, 357–358 Distributive justice, 163
Corporate governance, 13, 27–28, 65–93 Daniels, B., 284 Diversity, workplace, 232–236
around the world, 86–88 Daniels Fund, 284 DNA fingerprinting, 329
Boards of Directors, 76–79 Data and Marketing Association (DMA) Dodd-Frank Wall Street Reform and
decisions, 67t defined, 107–108 Consumer Protection Act, 15, 72, 78,
defined, 6, 66–67 Data privacy, 160 84, 109, 113–114, 139–142
executive compensation, 84–86 issues, 103–104 defined, 139
finance reforms, 72 Data protection, 51 Titles X and XIV, 180, 231, 256t
framework, 67–70 Dead zones, 351 Dodge v. Ford Motor Co., 68
future, 88–90 Deceptive Trade Practices Act, 253 Doha Gateway Agreement, 347
history, 70–72 Deep learning, defined, 326 Dolly, 330
internal control and risk management, Deepwater Horizon oil spill, 22 Donor Bill of Rights, 301
80–84 Defense Industry Initiative on Business Ethics Do-Not-Call Registry Act, 255t
investor confidence, 80 and Conduct, 203 Doping, 181
issues, 70t, 75–86 Deforestation, 307, 354, 354t Dow Chemical Company, 278
shareholder activism, 79–80 Delancey Street Foundation, 295 Dow Jones Sustainability Index (DJSI), 30
and social responsibility, 28, 72–74 Dell, M., 304 Downsizing
Corporate Governance Scores, 86 Dell Computer, 192, 281, 353 defined, 220
Corporate leaders, 83–84. see also Deloitte & Touche, 236 workforce reduction, 221–222
Leadership Delta Airlines, 115 Dragonfly, 425, 433
Corporate public affairs activities, Deluxe Corp, 187 Drayton, B., 294
130–131 Democracy in America, 337 787 Dreamliner, 47
defined, 130 Democratic leader, 202 Driver Privacy Protection Act, 319t
Corporate Register Reporting Award, 242 Democratic Party, 96 Drones, 357
Corporate reputation, 47–50 Denton, Texas, 45 AI-enabled, 327
reputation management, 48–50 Department of Housing and Urban Drought, 351
reputation measures, 48t Development (HUD), 254 Drug Enforcement Administration (DEA),
Corporate responsibilities, 14, 32 Department of Justice, 254 440
Corporate Scandals, 15, 24t, 32 Department of Labor Drug pricing, ethics of, 147
Corporate social responsibility (CSR), 49, 74, defined, 222 Duke, M., 416, 418
203, 215, 320 two-person household, 224 Dunn-Edwards Paints, 241
annual reports, 343 worker complaints, 238 DuPont, E. I., 70
Patagonia (case study), 509–510 Deregulation, 111–115 Duty of care, defined, 68
strategy, Hershey Company (case study), benefits of, 114–115 Duty of loyalty, defined, 68
499 costs of, 115
Corporate Social Responsibility and defined, 111
Environment, Social, Governance
E
role of, 113–114
(CSR/ESG) Metrics scale, 148 Deregulation Act, 113 Earth Day, 342, 359
Corporations and banks involved in the D’Estaing, O. G., 384 EasyTone, 257
financial crisis, 16t De Tocqueville, A., 337 eBay, 155, 258, 304, 314t
Costa Coffee, 256 Deutsche Bank, 73 Ecomagination campaign, 170
Costco, 284 Development Economic Growth, Regulatory Relief,
Costello, J., 405 defined, 390 and Consumer Protection Act, 114,
Coughlin, T., 416 economic conflicts and, 389–390 256t
Countrywide Financial, 15, 77 global, 389–391 Economic issues
Covey, S. R., 21, 199 Global Compact, 390–391, 390t community relations, 282–283
Cox Communications, 284 Digital matching firms, 238–239 consumer relations, 251–253
Cox Enterprises, 40 Digital Millennium Copyright Act (DMCA), employee relations, 215–222
CPP, see Clean Power Plan (CPP) 103, 323 technology, 311–313
Credit, consumer relations, 254, 256 Digital subscriber lines (DSL), 309 Economic regulation, 99–100
Credit Card Accountability Responsibility Dimon, J., 77 defined, 101
and Disclosure Act, 256t Direct Action Everywhere, 44 Eco Option program, 407
Criminals, hiring convicted, 243–244 Direct Marketing Association of Canada Edelman Trust Barometer, 201, 209
Crisis management, defined, 51 (DMAC), 318 Edgar, D., 464
Critics, 29 Direct Relief, 278 Education Advisory Board (EAB), 279t
and AI, 18 Direct Selling Association (DSA), 10 Egoism, defined, 163
Cross-training, defined, 222 Direct selling business model, 520–523. see EKOCENTER, 57
Crowdfunding, defined, 260 also Herbalife Nutrition Electric vehicles (EVs), 450
Crundwell, R., 179 code of ethics, 522, 522t Electronic Network Consortium (ENC), 321
Cultural intelligence (CQ), 380–382 implementation of, 523–524 Electronic waste (e-waste), 353
components, 380 pyramid schemes, 521 Eli Lilly and Company, 279t, 281
defined, 380 self-regulation of, 521–523 Ellis Island Restoration Fund, 292
self-assessment tool, 381f single and multilevel direct selling, Elvie Pump, 267
Cummins Engine Company, 27 520–521 Email account (Gmail), 426–427
Customer loyalty, 298, 311 Direct-to-consumer (DTC) advertising, 328, Emergency Economic Stabilization Act,
and social responsibility, 22–23 329t, 331 112

Index 577
Emissions scandal, Volkswagen, 448–450 Environmental legislation, 360–363, 361t Ethical responsibilities
impact, 449–450 Environmental Protection Agency (EPA), 31, in banking, 195
reputation, rebuilding, 450 122, 346, 347, 359–360 in human resources, 42
Emotional intelligence, defined, 202 cap-and-trade programs, 348–349 Ethical standards
Employee assistance program (EAP), defined, goals, 359t observation and feedback, 190–191
237 Epilepsy, 329 systems to monitor and enforce,
Employee benefits, 223–225 Equal Credit Opportunity Act, 255t 189–190
Employee commitment, 20–23 Equal Employment Opportunity Commission whistleblowing, 191, 192t
and social responsibility, 22–23 (EEOC), 163, 227, 228, 415 Ethical theories, 162
Employee communication, 169 Equal opportunity, 227–228, 231t Ethics
Employee conduct, 172–173 Equal Pay Act, 223t in AI, 160–161, 325
variation in, 172t Equifax, 51, 188 and compliance programs, 136–137
Employee-employer contract, 215–219 data breach in, 5 training, 135. see also Ethical
Employee engagement, 386–387, 387t Ergonomics decision-making
defined, 217 defined, 225 Ethics, business, 10, 15, 17, 27–28, 39,
Employee loyalty, 14, 22–23 employer responsibility for, 225–226 54–57, 148–161. see also Ethics,
rewarding, 42 Ernst & Young, 235 business
Employee relations, 212–246 Esformes, P., 156 defined, 10
benefits at Walmart, 414 Esmée Fairbairn Foundation (EFF), 290–291 ethical issues, 153–161
CVS, 444 Estée Lauder, 67 foundations of, 150–152
economic issues, 215–222 Ethical auditing, 111 institutionalization of, 193–194
ethical issues, 231–239 Ethical climate, defined, 167 nature of, 149–150
Home Depot, 407–408 Ethical conflict, 151 and social responsibility, 28
J&J Credo, 513 defined, 150 Ethics, challenges/issues
legal issues, 222–231 Ethical culture, 10, 21, 97, 198–199 Apple Inc., 488–493
New Belgium Brewing Company, 462 creating, 209 CVS, 440–441
overview, 214 defined, 170 Hershey Company, 499–501
philanthropic issues, 239–240 developing, 149, 170–173 TOMS Shoes, 483–484
responsibilities, 214–242 management, 172–173 Walmart, 414–416
and social responsibility, 28–29 New Belgium Brewing Company, Wells Fargo, 455
stakeholders, 214 461–464 Ethics and Compliance Officer Association
Starbucks, 470–471 normative considerations of ethical (ECOA), 203, 210
Employee Retirement Income Security Act decision-making, 171–172 Ethics codes, defined, 182
(ERISA), 223t, 224 organizational values, 171 Ethics & Compliance Initiative (ECI), 21, 186
Employees, responsibilities to, 214–242 Ethical decision-making, 78, 162–170 defined, 110
economic issues, 215–222 communicating with employees and, 185 Ethics officers
ethical issues, 231–239 individual factors, 162–165 defined, 186
legal issues, 222–231 leaders and, 194, 196–197 training and communication, 187
overview, 214–215 opportunity, 169–170 Ethics programs, 179–211
strategic implementation, 240–242 organizational relationships, 165–169 codes of conduct, 183–185
Employee stock ownership plans (ESOPs), small group communication and, continuous improvement, 192
defined, 241 206–207 elements, 184t
Employer negligence, 101–102 training and, 188–189, 232 ethics officers, 186, 187
Employer of choice unethical corporate culture and, institutionalization, 193–194
defined, 240 181–182, 199–200 leadership, 194, 196–207
key principles, 242t Ethical diversity, 164–165 organizational, scope and purpose,
Employment, economic growth and, 311–312 defined, 164 180–183
Employment at will, defined, 222, 223 Ethical formalism, defined, 163 overview, 180
Employment law Ethical issues, 152–153 standards, 189–192
United States vs. Canada, 386t community relations, 284–285 training and communication, 186–189
Employment Trend Index (ETI), 219 defined, 152 Ethics Resource Center, 154, 169, 185, 191
Endangered Species Act, 360, 362 Ethical issues, consumer relations, 260, Ethisphere (magazine), 27, 209
End Gun Violence Together initiative 261–267 Ethisphere Institute, 39, 182
(TOMS), 483 consumer action, 266, 267 European Union (EU), 108–110, 133, 229,
Energy and Commerce Committee of the right to be heard, 264 259, 263, 266, 297, 318, 321, 331
House of Representatives, 128–129 right to be informed, 264 antitrust activity, 97
Energy Policy Act, 363 right to choose, 263 European Union Emission Trading Scheme,
Energy Star, 347 right to privacy, 265–266 348
Enlightened capitalism, defined, 39. see also right to safety, 263 Evrnu, 31
Capitalism right to seek redress, 264–265 Executive compensation, 84–86
Enron, 15, 24, 77, 137, 197, 241 Ethical issues, employee relations, 231–239 Exelon Energy, 286
Environmental Defense Fund (EDF), 307 diversity and inclusion, 232–236 Expert power, 198
Environmental issues training and development, 231–232 Explore Talent, 265
recycling initiatives, 369 work/life balance, 236–237, 239 Extrinsic motivation, defined, 288
risk analysis, 370–371 Ethical leadership, 106–107. see also ExxonMobil, 97
stakeholder assessment, 370 Leadership on fracking issue, 46
and stakeholders, 56 requirements, 199–207
strategic approaches, 368–372, 369t styles, 201–204
strategic sustainability audit, 371–372, Ethical misconduct, 50, 68. see also Unethical
F
371t corporate cultures Facebook
Environmental leadership, 8, 11. see also Ethical misconduct disaster (EMD), 50–51 AI and ethics, 160
Leadership defined, 50 Blue Cross Blue Shield, 240

578 Index
corporate scandal, 24t privacy standards, 318 Gender discrimination, 103, 157–158, 233
data privacy issues, 103, 105 recall process, 259 Genentech, 329
ethics programs, 180 right to be heard, 264 General Data Protection Regulation (GDPR),
GDPR and, 394 right to privacy, 265 159, 394
history of internet, 314t Federal Trade Commission Act, defined, 133 defined, 318
misusing company computers, 154, 155 Federal Trademark Dilution Act, 324 privacy law, 319t
predictive analytics, 328 FedEx, 199, 278, 310, 312 General Electric (GE), 75, 85, 130, 170
privacy concerns for consumers, 317 Feedback, 58, 152 General Mills, 233, 332
Sherman Antitrust Act, 131 ethical standards, 190–191 General Motors (GM), 23, 68, 127, 220,
technology issues, 259 stakeholder, 56–57 235, 384
workplace diversity, 235 Feingold, R., 123 Generations at Work, 234
Facial-recognition technology, 161 Femtech, 267 Generation X, Y, and Z, 234–235, 345–346
Fair and Accurate Credit Transactions Act, Feuerstein, A., 215 Genetically modified (GM) food, 356–358
256t Fiduciaries, defined, 68 countries against, 358
Fair Credit Reporting Act, 255t, 319t “Fight Hunger. Spark Change.” campaign, in dairy industry, 357–358
Fair Debt Collection Practices Act, 255t Walmart, 412. see also Walmart GM fish and other living organisms,
Fair Housing Month, 254 Financial controls, need for, 179 358
Fair Labor Association (FLA), 242, 393 Financial reforms, 72 seed contamination, 358
Fair Labor Standards Act (FLSA), 223, 223t, proposed, 134–135 Genetically modified (GM) organisms,
224 Financial Stability Oversight Council (FSOC), 331–333
Fair Minimum Wage Act, 223 133, 139 defined, 331
Fair Packaging and Labeling Act, 255t Financial viability, 10, 11, 93 Monsanto, 331–333
Fair trade FINCA International, 294 Geologists, 313
defined, 388 Fischer, S., 195, 454 Georgetown University, student protest,
principles, 388t Flatter organizations, 14 73–74
Fair Trade USA, 502–503 Flickr, 314t Georgia-Pacific, organization, 244
Fake accounts scandal, Wells Fargo, 453–454 Flipkart, 420 Geotab, 307
Family and Medical Leave Act (FMLA), 223t, Flynn, S., 31 Geothermal power, 364–365
224–225 Flynn, T. P., 416 Gerrymandering, 124
Family-owned businesses, 88 Focus groups, 43, 57 Ghosn, C., 68
Fargo, W., 453 Food and Drug Administration (FDA), 122, Gig economy, defined, 311
FBL Financial Group, 157 150 Gilbert, L., 70
FDA, see U.S. Food and Drug Administration consumer law, 255t Gildan Activewear Inc., 226
(FDA) dangerous product, 259 Giving Pledge, 304
Federal Aviation Administration (FAA), 357 defined, 253 Giving USA Foundation, 280
Federal Bureau of Investigation (FBI), 179, Food delivery, Uber, 402 Glassdoor, 298
333 Food Quality Protection Act, 362–363 Glassdoor.com, 237
Federal Communications Commission (FCC), Ford Motor Company, 43, 97, 343 Glass-Steagall Act, 112
111, 431 Foreign Corrupt Practices Act (FCPA), Global business, regulating trade for, 95
AT&T, 264 382–383, 401, 417 Global Change Research Act, 112
defined, 254 defined, 156 Global Compact, 19, 390–391, 390t
history of internet, 314t Forest Stewardship Council (FSC), 354 Global Compliance, 190
marketing, advertising, and packaging, Forklift Systems, 229 Global development, 389–395
256, 259, 264 Formal reporting, 205 Global environmental issues, 344–358
Telephone Consumer Protection Act Fortune (magazine), 93, 213, 227, 237, 241, acid rain, 345
by, 259 304, 405, 412, 415, 429, 439, 448, air pollution, 344–345
Federal Crop Insurance Act, 126 453, 488, 498, 512 atmospheric, 344–350
Federal Election Campaign Act, 123 Foundation for Accountability (FACCT), 268 biodiversity, 355–356
Federal Food, Drug, and Cosmetic Act, 362 Fracking, 352 coal and carbon emissions, 348–350,
Federal Insecticide, Fungicide, and Fraud, 158–159 350f
Rodenticide Act, 362 consumer, 251, 252t deforestation, 354, 354t
Federal Legislation Regulating Business, 132t defined, 158 genetically modified (GM) foods,
Federal Regulatory Agencies, 141t identity, 317 356–358
Federal Sentencing Commission, 136 medical, 320 global warming, 345–347, 346f, 348t
Federal Sentencing Guidelines for occupational, 159t land, 352–355
Organizations (FSGO), 67, 76, 82, online, 105, 315 waste management, 353–354
134–137, 135–136, 180, 186, 193, Freeman, R. E., 12 water, 350–352
230 Friar, S., 416 Global Forest Watch, 307
defined, 134 Friedman, M., 7, 39, 98 Global positioning system (GPS), 159, 307
institutionalization of ethics through, Friedman capitalism, 99. see also Capitalism Global Reporting Initiative (GRI), 395–396
136t FTC. see Federal Trade Commission (FTC) Global trust, 18
Federal Trade Commission (FTC), 5, 72, 99, FTC’s Bureau of Consumer Protection, 6 Global warming, 345–347, 346f, 348t
131 Full employment, defined, 215 climate change, 346
Consumer Laws, 255t critics of, 347
CRFA administered by, 249 greenhouse gases emission, 345–346,
deceptive advertising claims, 257
G 346f
defined, 253 Galleon Group, 77, 83, 206 hydraulic fracturing (fracking) and, 347
Fair Information Practices, 322 Garcia, E., 230, 231 Kyoto Protocol, 347
iBackPack 1.0 Power Pack, 260 Gates, B., 20, 194, 196, 304 ozone layer, 345
identity theft, 317 Gates, M., 194, 196, 304 U.S. Global Climate Change Initiative,
Lumosity, 253 GDPR, see General Data Protection 347, 348t
Magnuson-Moss Warranty Act, 255t Regulation (GDPR) Gmail, 426–427

Index 579
GM food, see Genetically modified (GM) influencing government, 124–125, history, 498–499
food 127–131 labor issues, in cocoa industry, 501–505
GM Motors, 71 laws and regulations, 131–142 shared business, 500
“Golden rice,” 331 nonregulatory influence on business, shared communities, 500
Goldie, 330 110–111 shared futures, 499
Gold Leaf Stationers, 284 regulatory influence on business, 96–110 shared planet, 499–500
Goldman, P., 186 Grameen Bank, 294 social responsibility, 499–501
Goldman Sachs, 140 “Gray Matters,” 188 values, 499
Goldstein, S., 439 Great Depression, 71, 98 Hershey Entertainment & Resorts, 8
Goleman, D., 202–203 Great Recession, 45, 66, 77, 106–107, 112, Hewlett-Packard (HP), 233–234
Goodnight, J., 237 139, 405, 468 High-Tech, 307
Google Greenfield, J., 291 Hillside Work-Scholarship Connection, 276
advertising, 426 Greenhouse gases, 345 Hiring convicted criminals, 243–244
AI technologies, 16 accumulation of, 346 HIV/AIDS in workplace, 228
algorithms, 325 global emissions, 345–346, 346f H&M, 292
AlphaGo computer program, 326 Green marketing, 367–368 Hoagland, R., 439
Android, 427 Greenpeace, 277 Hoechst, 58
antitrust violations, 95, 97, 131 Green Tech Automotive, 82 Holmes, E., 158
in China, 433–434 Greenwashing, 368 HomeAway, 238, 249
conflict of interest, 155 “Greyball” software, 401 Home Depot, 8, 75, 193, 235, 284, 296, 298,
consumer privacy, 159 Grey Coat School for Girls, 293 304, 405–407
culture, 425 Grossman Group, 181 corporate philanthropy, 407
cyberattack, 333 Gross v. FBL Financial Services, 157 customer relationships management,
data privacy issues, 103, 105 Group polarization, defined, 206 405–406
email account, 426–427 Groupthink, 206 employee and supplier relations,
employee volunteers, 275 defined, 168 407–408
fines for noncompliance, 318 Guide Star, 300 environmental initiatives, 406–407, 406t
GDPR and, 318, 394 Gupta, R., 202, 206 new technology initiatives, 408–409
Google.org, 428–429 “Pros,” 408
GV, 428 stakeholder relationships (case study),
history of internet, 314t
H 405–409
Huawei supplier, 397 Habitat for Humanity, 193, 296 strategic commitment to social
initiatives, 428–429 Hammergren, J. H., 69 responsibility, 409
online advertising, 322 Harassment, sexual, 228–230, 231t Home Ownership and Equity Protection Act,
overview, 425 Harkin-Engel Protocol, 502 254, 255t
privacy, 429–434 Harris, C. A., 416 Hostile work environment, defined, 158
products, 426–428 Harris, T., 229 Hostile work environment sexual harassment,
psychological contracts, 218t Harris Interactive Inc., 22 defined, 229
right to choose, 263 Harrison, L. E., 25 Hotlines, 136, 189–190
search engine, 426 Harris v. Forklift Systems, 229 House of Cards, 50
Sherman Antitrust Act, 131 Harvard University, 11 Huawei, 317
SOPA and PIPA, 103 Hasbro, 67, 182 Human Genome Project, 328
sustainability, 428 Hasenstab, G., 149 Human Rights Campaign Foundation, 240
use of technology for sustainability, 307 Hawaii Coffee Association, 128 Huntsman, J., 304
web analytics, 427 Health Huntsman, K., 304
web browser, 426 consumer relations, 254 Hurricane Harvey, 52
YouTube, 427 employees, 225–227 Hurricane Katrina, 52
Google AdWords, 426 Health Insurance Portability and Hydraulic fracturing (fracking), 347
Google Analytics, 427 Accountability Act (HIPAA) Privacy Hydropower, 366
Googlebots, 426 Rule, 439 Hypertext Markup Language (HTML) tags,
Google Buzz., 431 CVS, case study of, 440 314t
Google Chrome, 426 Healthymagination, 170 Hypertext Transfer Protocol Secure (HTTPS),
Google Docs, 429 Hemp legalization, 102–103, 126 314t
Google Drive, 428 Henley Business School in Reading, England,
Google Flights, 428 79
Google Glass, 428
I
Herbalife Nutrition
Google Maps, 428 challenges, 524–525 iBackPack, 260
Google.org, 428–429 consumer megatrends, 525–527 IBM, 239, 311t, 316
Google Play App Store, 431 customer base, 524 Identity fraud, defined, 317. see also Fraud
Googleplex, 425 direct selling business model, 520–523 Identity theft, 159–160
Google Translate, 428 foundational products, 523 defined, 317
Google Ventures (GV), 428 FTC investigation and settlement of Identity Theft Assumption and Deterrence
Google X, 428 claims, 525 Act, 255t
GoToMeeting, 310 FTC settlement impact on Pershing IKEA, 3, 254
Governance Metrics International (GMI), 27 Capital, 525 Immelt, J., 85
Government, role in technology issues, overview, 520 Impact investing, defined, 290
333–334 Hershey, M., 498, 499 Impossible Foods, 349
Government and the political environment, Hershey Company, 498 Independence, 77
impact of business on, 122–144 board changes, 500–501 Indianapolis Symphony Orchestra, 281
contemporary political environment, corporate social responsibility strategy, Indiegogo, 260
122–124 499 Individual Development Plan (IDP)
focus on deregulation, 111–115 ethics, 499–501 component, 232

580 Index
Individual Philanthropy Offering program, company background, 512 Lawsuits, 45

299 crisis management, 514–515 Leader-follower congruence, defined, 204
Individual proprietors, 97 J&J Credo, 512–514 Leader-follower relationships, 204
Indonesia, consumer protection laws, 251 opioid crisis, 517 Leadership
Industrial revolution, 308 organizational issues, 515–516 corporate, 83–84
Informal reporting, 205 talcum powder creates painful litigation, environmental, 8, 11
InMobi, 103 516–517 during organizational crisis, 52–53
Inquiry into the Nature and Causes of the tylenol poisonings, 514 skills, 20
Wealth of Nations, 98 tylenol products and recalls, 514–515 Leadership, ethical, 106–107, 194, 196–207
INSEAD, 384 Jon and Karen Huntsman Foundation, 304 benefits, 201
In Search of Excellence, 218 Jordan, K., 167, 204, 460, 462, 465 communication, 204–207
Insider trading, defined, 69 Journal of the American Medical Association, corporate culture, role, 198–199
Instagram, 259, 309, 314t, 317–318, 326 129 Ethisphere Institute award, 182
Institute of Business Ethics, 151 JPMorgan Chase & Co., 77, 191, 276, 290, leader-follower congruence, 204
Institutional investors, 86 291 overview, 194, 196
Institutionalization of business ethics, Jung, A., 233 power, 196–198
193–194. see also Ethics, business The Jungle, 217, 254 requirements, 199–207
Intel, 66, 304, 311t, 317 Justice theory, defined, 163 styles, 201–204
Intellectual property, 322–325, 490–491 Leadership power, 196–198
defined, 322 coercive, 197
in United States, 322, 323
K defined, 196
Interactional justice, 164 Kaiser Permanente, 233 expert, 198
The Intercept, 433 Kalanick, T., 401 legitimate, 197–198
Intergovernmental Panel on Climate Change, Kamar, R., 195 referent, 198
347 Kant, I., 163 reward, 197
Internal and external audits, 80–81 Karoshi, 237 Learning-management systems software, 188
Internal controls, 80–84, 136 Kay Jewelers, 230 Lebesch, J., 460, 462, 465
Internal Revenue Service (IRS), 97 Kelleher, H., 199 Lee Jae-yong, 192
International Association of Privacy Keller, F., 341 Leffler, I., 33
Professionals (IAPP), defined, 321 Kellogg Company, 162 Legal issues, community relations, 283–284
International Buy Nothing Day, 250 Kennedy, J. F., President, 260, 261, 262, 264 Legal issues, consumer relations, 253–260.
International Cocoa Initiative (ICI), 502 Kentucky Fried Chicken (KFC), 263, 324 see also Consumer relations
International Cocoa Organization, 502 Kessler International, 169 consumer laws, 255t–256t
International Data Corp, 154 Keynes, J. M., 98 credit and ownership, 254, 256
International issues, consumer relations, 260, Keynesian capitalism, 98–99 health and safety, 254
261t Khosrowshahi, D., 401 international issues, 260, 261t
International Labor Organization (ILO), 502 Kickstarter, 260 marketing, advertising, and packaging,
Internet, 313–316 Kimberly-Clark, 343 256–258
Internet corporation for assigned names and KIND Healthy Snacks, 290 product liability, 258–259
numbers (ICANN) Kingston, 272–273 sales and warranties, 258
defined, 315 Kitling, J., 339 technology issues, 259–260
history of internet, 314t Kiva, 280, 294 Legal issues, employee relations, 222–231
UDRP, 324, 325 Koch Industries, 244 equal opportunity, 227–228, 231t
Internet Crime Complaint Center, 105 Kodak, 220, 314t health and safety, 225–227
Internet Essentials, 310 Kozlowski, D., 203 labor unions, 225
Internet Magazine, 314t KPMG LLP, 17, 81 sexual harassment, 228–230, 231t
Internet of Things (IoT) Kraft General Foods, 44, 82 wages and benefits, 223–225
defined, 316 Kroger, 250 whistleblowing, 230, 231
history of internet, 314t Kutcher, A., 275 Legislative Reorganization Act, 123
Internet safety, 103 Kyoto Protocol, 347 Legitimacy, defined, 46
Internet searches, 43 Legitimate power, 197–198
Interorganizational networks, 12 LEGO, 50, 367
Interpersonal communication, 205–206
L Lehman Brothers, 15
Intersectionality theory, defined, 233 L. L. Bean, 215 Lemley, A., 463
Intrinsic motivation, defined, 288 Labor issues, in cocoa industry (Hershey Lenovo, 106
Investments, in R&D, 311 Company, case study), 501–505 Letter-writing campaigns, 45, 47
Investor confidence, 80 criticism, 504–505 Levi Strauss & Co., 181, 292, 351
In vitro fertilization (IVF) embryos, 330 efforts to improve, 503–504 Levitt, T., 39
ISO 14000, 371 Fair Trade USA, 502–503 License to operate, 13
iTunes, 314t global help, 502 defined, 4
Rainforest Alliance, 503 Lilly Pharmaceuticals, 281
Universal Trade Zone (UTZ), 503 LinkedIn, 298
J Living wages, defined, 224
Labor unions, 225
Jack Ma, 379 Landfill Methane Outreach Program LLC. Polartec, 215
Jack Wolfskin, 215 (LMOP), 353 LMOP (Landfill Methane Outreach
Jared the Galleria of Jewelry, 230 Land pollution, 352 Program), 353
Jobe, D., 243–244 Land sustainability, 352–355 Lobbying, 127–129
Job Preference Program (JPP), 235 deforestation and, 354, 354t defined, 127
Jobs, S., 486, 487 land pollution, 352 Location Privacy Protection Act, 318
Johnson, K., 9, 468, 472 urban sprawl, 355 Lochte, R., 181
Johnson, R. W., 512 waste management, 353–354 Lockheed Martin, 185, 188
Johnson & Johnson (J&J), 259, 309 “Latte Method,” 203 London Whale, 77

Index 581
Lord & Taylor, 51 Ministry of International Trade and Industry, history, 460–461
Los Angeles Times, 478, 479 321 organizational success, 464–465
Lube, J., 232 MinuteClinics (CVS), 439, 442, 444 New Century Financial Corporation, 81
Lubetzky, D., 290 Misconduct training, types, 181, 182f Newman, P., 200
Lyft, 238, 401, 402 Mitsubishi, 68, 260 Newsletters, 56
Lynch, P., 202 M&M Advertising, 145 New York City Council, 130
Molinari, S., 406 New York’s Consolidated Gas Company, 70
Mondelez International, 92 New York Stock Exchange (NYSE), 71,
M Monks, R., 90 130
Machiavellianism, defined, 164 Monopoly, defined, 100 The New York Times, 142, 416, 417, 454
Machine learning, defined, 326 Monsanto, 332, 333 Nicklaus, J., 20
Mack, M., 454 The Montana Department of Justice, 254 Nielsen survey, 20
Magellan Fund, 202 Monterey Peninsula Foundation, 282 Nightingale, F., 294
Magnuson-Moss Warranty Act, 255t, 258 Montessori, M., 294 Nike, 47, 55, 73–74, 88, 241, 242
Mahindra group, 88 Moonlight Slumber, LLC, 133 Nissan, 67, 68
Malden Mills Industries, 215 Moore, D., 275 NL Industries, 175
Management and Training Corporation, 324 Moral philosophies, defined, 162 Nokia, 239
Mandated boundaries, defined, 194 Morgan, J. P., 100, 139 Nonconsequentialism, 163
Manufacturing misconduct, 398b Morning Consult, 162 Non-GMO Project, 102
“March Madness,” 155 Motivations, for philanthropy, 288f Nongovernmental organizations (NGOs),
Marcus, B., 75, 405, 406 M-Pesa, 310 defined, 110
Marijuana legalization, 126 Muir, J., 294 Nonprofit organizations, 67, 82
Marketing, 256–258 Mycoskie, B., 295, 478 Nonverbal communication, 207
Marketplace of ideas, defined, 49 Normative approaches, defined, 171
Markle Foundation, 268 Novo Nordisk, 194
N Nuclear energy, 365
Marks & Spencer, 73
Marriott International, 10, 103–104, Nader, R., 261 sustainability issues, 374
159–160, 165, 171 NAFTA, 108, 112 Nutrition Labeling and Education Act, 255t,
Marvin Windows, 192 Napster, 314t 264
Mason, E., 12 Nardelli, R., 75, 405 Nvidia, 218t
Mattel, 277 NASDAQ, 71 Nylon (online publication), 51
McCain, J., 123 National Advertising Division (NAD), 144
McCullen, J., 246 National Advertising Review Council O
McDonald, 259, 263 (NARC), 144
McKee, A., 203 National Ambient Air Quality Standards Obama, B., President, 96, 98–99, 112–113,
McKesson Corp., 69 (NAAQS), 360 122–123, 219
McMillon, D., 418 National Association of Home Builders, 128 Obama administration, 134, 140–141
Media, 40, 53 National Bioengineered Food Disclosure Law, Obamacare, 101
Mediation, 265 102 Observation, 57
Medicaid, 101, 156, 328 National competitiveness, 89 ethical standards, 190–191
Medical fraud, 320 National Consumers League (NCL) website, Occupational fraud, 159t. see also Fraud
Medical Nutrition International Industry 262 Occupational Safety and Health Act (OSHA),
(MNI), 130 National economy and social responsibility, 225–227
Medicare, 156, 328 25–26 defined, 225
Medtronic, 152 National Federation of Independent employment law, 223t
Melamine, 251 Businesses, 128 Occupy Wall Street protests, 85
Mellon, A., 100 National Football League (NFL), 121 Oneida Airport Hotel Corporation, 244
Mendoza, T., 200 National Institute of Standards and 1-1-1 model, 49
Menear, C., 75, 408, 409 Technology (NIST), 319t 1% for the Planet, 509
Meritor Savings Bank v. Vinson, 229 National Journal, 74 Online Accredited Business certification, 107
Merlo, L. J., 442, 444 National Labor Relations Act (NLRA), 223t, Online fraud, 105, 315. see also Fraud
Methane, 346 225 Online marketing, 159
emission, 353 National Labor Relations Board, 416 Online security, 111
Method, 12 National Restaurant Association, 244 Opioid epidemic, 11
Miami-Dade Fire Rescue, 327 National Torch Award for Marketplace Opportunity, 169–170
Michelin, 50 Ethics, 265 defined, 169
Michigan Beer and Wine Wholesalers National Volunteer Week, 286 Oracle, 92
Association, 128 National Walk@Lunch Day, 239–240 Organisation for Economic Co-operation and
Michigan Supreme Court, 68 Natural Oxidant Relief (NOR), 145 Development (OECD), 86–87, 89
Microcredit Summit Campaign, 392 Natural Resources Defense Council (NRDC), Organizational, (corporate) culture, 97,
Microlending, defined, 294 350–351 165–166
Microsoft, 20, 49, 50, 97, 161, 235, 304, Navex Global, 188 defined, 165
311t, 318, 323, 425, 472, 473 Naviator, 327 Organizational control systems, types, 182
The Midwestern Greenhouse Gas Neighbor of choice, defined, 278 Organizational ethics and compliance
Reduction Accord (Midwestern Nestlé, 19, 282 programs, defined, 181
Accord), 349 NetApp, 200 Organizational ethics programs, 180–183
Millennials, 201, 234, 235, 245–246 Netflix, 50, 154, 155, 298, 420 Organizational misconduct in the U.S.
Miller, H., 8 Net Promoter Score (NPS), 249 workplace, 153t
Mills, C. W., 218 New Belgium Brewing (NBB), 167, 204, Organizational relationships, 165–168
Milstein, J., 20 460 Organization for United Respect at Walmart
Minami, C., 260 energy-saving technologies, 463 (OUR Walmart), 225
Minimum wage, defined, 223 ethical culture, 461–464 The Organization Man, 218

582 Index
Organization’s commitment to social Pillmore, E., 203, 204 PUMA, 269, 270
responsibility, 56. see also Social Pinnacol Assurance, 279t Pure Food and Drug Act, 254, 255t
responsibility Pinterest, 218t
Orlando hotel project, 283 PM, see Particulate matter (PM)
Oro Valley Innovation Labs, 329 Podcasts, 56
Q
OSHbot, 327 Polartec, 215 Quad/Graphics, 283
Outsourcing, defined, 219 Political action committees (PACs), 123–124 Quality, 77
Oversight, 67 defined, 123 water, 351
Ownership, consumer relations, 254, 256 Politician’s dilemma, 118 Quality of life, defined, 277
Ozone layer, 345 Pollution-reduction programs, 44 Quantity, water, 351–352
Population Services International (PSI), 292 Questionnaires, 190
POSSE, 462 Quid pro quo sexual harassment, defined,
P Pour Your Heart Into It (book), 471 229
Pacesetting leader, 202 Power, defined, 45 Quinn, M., Dr., 191
Pacific Gas and Electric Company (PG&E), Pregnancy Discrimination Act, 227, 228
134–135 Press reviews, 43
Packaging, 256–258 Price fixing, Apple Inc. (case study), 489
R
Page, L., 425, 426 Primary stakeholders, defined, 40 Racial discrimination, 157
Pampers, 288–289, 298 Principle of Equal Freedom, defined, 163 Rainforest Alliance, 503
Pandora, 155 Principles, defined, 149 Rajaratnam, R., 77, 83, 206
Paralanguage, 207 Privacy, 159–160, 316–322 Raju, R., 83–84
Parker, W., 11 in age of transparency, 394 Raytheon Company, 148
Parkinson’s disease, 329, 330 international initiatives on, 318, 321 Reactive-Defensive-Accommodative-Proactive
Particulate matter (PM) laws, 319t Scale, 58
defined, 344 officers and certification, 321–322 Reagan, R., President, 98, 111
WHO guideline limits, 344–345 policies, 84 “The Real Walmart,” 419
Partner Shops, 291 Privacy Act, 319t Reboot Digital Agency, 181
Partners in Crime, 277 Privacy issues, defined, 159 Recombinant bovine growth hormone
Patagonia, 20, 31, 149–150, 215, 240, 296, Privacy policy (rBGH), 357–358
344, 508 Apple, Inc., 488–489 Recycling
corporate social responsibility, 509–510 Google, 429–434 defined, 369
environmental initiatives, 509 Private companies, 82 initiatives, 369
ethical business practices at, 166 Private interest groups Reddit, 314t
future perspectives, 510 defined, 129 Redpoint Ventures, 33
history, 508 influence, 129–131 Reebok, 257
leadership and management style, 509 Procedural justice, 163–164 Referent power, 198
purpose and values, 508–509 Procter & Gamble (P&G), 80, 235, 250, 353 The Regional Greenhouse Gas Initiative
Patent laws, defined, 100 Product diversity, 14, 32 (RGGI), 349
Patient Protection and Affordable Care Act, Product liability, 258–259 Regulations
223t defined, 258 arguments against, 114t
Pebble Beach National Pro-Am golf Product placement, defined, 256 costs and benefits, 105–107
tournament, 282 Product quality, 344 defined, 96
Peoples Drug, 439 Professional codes of conduct, 170 global, 108–110
PepsiCo, 57, 280, 343 Profit-maximization strategy, 11 rationale for, 98–103, 105
Performance, 78 Prostate cancer screening test, 331 regulatory reform, 106–107
performance-based compensation, 92 Protecting Older Workers Against self-regulation, 107–108
performance-enhancing drugs, 181 Discrimination (POWAD) Act, 157 Regulatory issues, consumer relations,
Perich, C., 465 Protect Intellectual Property Act (PIPA), 103 253–260
Personal Information Protection and Protests, 45 consumer laws, 255t–256t
Electronic Documents Act (PIPEDA), consumer, 266, 267 credit and ownership, 254, 256
318 Georgetown University, student protest, health and safety, 254
Peters, T. J., 218 73–74 international issues, 260, 261t
Pet Food Institute, 128 Occupy Wall Street protests, 85 marketing, advertising, and packaging,
Pew Charitable Trusts, 107 Proxy 256–258
Pharmaceutical industry, 11, 18 access, defined, 80 product liability, 258–259
Pharmaceutical Research and Manufacturers defined, 79–80 sales and warranties, 258
of America (PhRMA), 328, 329t Psychological contract technology issues, 259–260
Pharmacy Advisor and Maintenance Choice, breach, 216 Regulatory reform, 106–107
441 companies use to fulfill, 218t REI, 218t, 252
Pharmacy benefit management (PBM) defined, 216 crafts, 55
company, 439 between employee and employer, 216t, Reichheld, F., 249
Philanthropic issues, 268–269 220–221, 222 Renault, 68
community relations, 285–286 expectations in employment, 217 Reporting, 205
employee relations, 239–240 Public Company Accounting Oversight Board Corporate Register Reporting Award,
Philanthropy (PCAOB), 15, 71, 111 242
benefits, 286 defined, 138 Fair Credit Reporting Act, 255t, 319t
contributions, 286–289 Public Health Cigarette Smoking Act, 257 Global Reporting Initiative (GRI),
defined, 286 Publicity, negative, 22, 47, 105, 187, 322, 395–396
motivations for, 288f 370 Republican Party, 96
strategic, 289–293 Public relations (PR) departments, 130 Reputation Institute, 22, 50
Phillips, F., 384 Publix Supermarkets, 241 Reputation management, defined, 48
Phillips Electronics, 384 Puffery, defined, 151 Resonant leaders, 203

Index 583
Resource allotment and urgency, 56 September 11, 2001, attacks, 300 benefits, 20–26
Reverse mentoring, defined, 235 Service Line Warranties of America (SLWA), business ethics, 28
Reward, 169 265 community and philanthropy, 29
power, 197 The 7 Habits of Highly Effective People consumer relations, 29
Rights-based ethics, 163 (Stephen R. Covey), 21, 199 corporate governance, 28
Rightsizing, defined, 220 Sexual harassment, 157–158 customer loyalty and, 22
“Right to be forgotten,” 432–433 defined, 158, 229 defined, 4
Right to be heard, 264 in workplace, 228–230, 231t emphases of, 343f
Right to be informed, 264 Shale, 45 employee commitment and, 22–23
Right to choose, 263 Shape-Up shoes, 257 employee relations, 28–29
Right to Financial Privacy Act, 319t Shareholders, 40 fulfillment of society’s expectations,
Right to privacy, 265–266 activism, 79–80 9–12
Right to safety, 263 defined, 67–68 future developments, 16–18
Right to seek redress, 264–265 discontent, 92 global nature, 18–20, 30
Risk analysis, sustainability issues, 370–371 loyalty, 149 Herbalife Nutrition, 527
Risk management, 82–84 Shareholder lawsuits, defined, 78 historical review, 13–15
Roberto Coin, 292 Shareholder model, 72 Home Depot, 409
Roberts, K., 292 Shareholder model of corporate governance, legal, regulatory, and political issues, 28
Robotics, AI-enabled, 327–328 73–74 national economy and, 25–26
Rockefeller, J. D., 70 defined, 73 need for strategic focus, 8–9
Rockefeller Philanthropy Advisors, 288 Shareholder resolutions, defined, 79 New Belgium Brewing Company, 464
Rockfeller, 99–100 Shareholder support, 23–24 profits and, 24–25
Rolex, 50 and social responsibility, 23–24 recent developments, 15
Romero, I., 339 Sharf, C., 456 requirements, 10t, 12–13
Roosevelt, F. D., President, 71, 98 Sharing economy, 238–239 shareholder support and, 23–24
Rotten Tomatoes, 249 defined, 311 social entrepreneurship and, 293–296
Round Rock Express, 281 Sharkey, T., 33–34 strategic, 240–242
Round Table Pizza, 241 Shell, 43 strategic management of stakeholder
RunTone, 257 Sherman Antitrust Act, 109–110 relationships, 28
Rutherford, L., 50 defined, 131 sustainability and, relationship of,
Ryanair, 281 Sherwin-Williams, 175 343–344, 343f
Shore to Please Vacations, 249 sustainability issues, 29–30
Sierra Club, 155 technology issues, 29
S Significant others, 167–169 trust and, 21–22
SABMiller, 58–59 defined, 167 Social responsibility, in global environment
Safety Sig Sauer, 282 conventional business partnerships
consumer relations, 254 Silbert, M., 295 (CBPs), 391–392
employees, 225–227 SilentRunner, 29 corporate accountability partnerships
Salary Finance, 269 Silent Spring, 359 (CAPs), 393
Sales, consumer relations, 258 Silicon Valley, 235 cultural intelligence, 380–382
Salesforce.com, 186, 218t Silk Road Survey, 239 development, 389–391
Samsung, 69, 106, 192, 311t Sinclair, U., 217, 254 Global Reporting Initiative (GRI),
SAP, 235, 289 Single-use plastics (disposable plastics), 395–396
Sarbanes-Oxley (SOX) Act, 15, 67, 71, 78, 343–344 social economy partnerships (SEPs),
81, 112, 137–139, 149, 180, 186, Skechers, 257 393–395
195, 231 Skreli, M., 101 stakeholders, 382–389
defined, 137 Sloan, T., 454 Social value, 344
SAS Institute, 218t, 237, 239, 316 Small group communication, 206 Society, technology on, 313–333
Satyam Computer, 83–84 Smart devices, defined, 308 artificial intelligence, 325–328
Schultz, H., 202, 468, 469, 473 Smith, A., 39, 98 health and biotechnology, 328–333
Science, technology, engineering, mathematics Smith, B., 200 intellectual property, 322–325
(STEM) education, 20 Smith, R. F., 304 internet, 313–316
Scott, L., 416, 417 Smoking, 297 privacy, 316–322
Search engine (Google), 426 Snapple, 151 Society and economy, 9
Sears, 220 Social audit, defined, 59 Society for Human Resource Management
Secondary stakeholders, defined, 40 Social capital, defined, 54 (SHRM), 227
Secure Sockets Layer (SSL) sites, 314t Social contract, defined, 221 Sodexo, 235
Securities and Exchange Commission (SEC), Social economy partnerships (SEPs), 393–395 Software, learning-management systems, 188
70–71, 84, 99, 133, 155–156, 158, Social entrepreneurship Solar power, 365
191, 417 defined, 293 Sony, 50, 97, 182, 311t
defined, 70 history and development, 293–295 Southwest Airlines, 50, 115, 199, 337
Seed contamination, GM food, 358 social responsibility and, 293–296 S&P, 69
SEKEM, 294–295 strategic philanthropy and, 293–296 Spacey, K., 50
Self-auditing programs, 136 types of, 295 Spanx, 304
Self-Employed Women’s Association (SEWA), Social exchange theory, defined, 163 Special-interest groups, 10, 44, 102, 122–124
394 Socially responsible companies, 49t Sport utility vehicles (SUVs), 370
Self-employment, 7 Social media, 44, 103, 131, 155, 259, 266, SquareTrade, 258
Self-regulation, 107–108 311, 317, 337–338 Sseko Designs, 295, 296
defined, 107 TOMS Shoes (case study), 482 Staffordshire Property Management, 249
Self-regulatory community, 130 Social regulation, defined, 101 Stakeholder(s)
Self-sustaining nature, of technology, 309 Social responsibility assessment, 370
SEPs, see Social economy partnerships (SEPs) applied to businesses, 7 communication and Best Buy, 61

584 Index
community, 276–281 social responsibility and, 290–293 Technology assessment, defined, 334
competitive, Walmart, 412–413 top management support, 299 Technology issues, 306–339
consumer, 250 Strategic sustainability audit, 371–372, 371t benefits and drawbacks, 337–338
consumer relations, 388–389, 388t Strategic technology assessment, 334–335 business, role, 334
CVS, 444–445 Streisand, B., 330 characteristics, 308–309
defined, 38, 382 Strict liability, 258 consumer relations, 259–260
employee, 214 Stroke, 329 dynamics, 308
employee relations, 385–387, 386t, 387t Stumpf, J., 454 economic growth and employment,
and environmental issues, 56 Subcontracting, defined, 219 311–312
feedback, 56–57 Sullivan, R. L., 384 on economy, 311–313
Foreign Corrupt Practices Act, 382–383 Sultan Hassanal Bolkiah of Brunei, 266 effects of, 309–310
global, 382–389 “Sundown rule,” Walmart, 412 government, role, 333–334
home Depot, 405–409 Supplier Audit Program, 445 internet, 313–316
issues, 41t, 383t Suppliers, relations with, 407–408, 413–414, nature of, 308–310
during organizational crisis, 52–53 445, 471 overview, 308
relations and corporate governance, Supply chain, 367 privacy, 316–322
384, 385t TOMS Shoes (case study), 479–480, responsibility, strategic implementation,
Walmart, 418–419 480t 333–335
Stakeholder Continuum, 74f Supply chain management and social responsibility, 29
Stakeholder engagement, defined, 40 Apple Inc. (case study), 491–492 on society, 313–333
Stakeholder interaction model defined, 312 strategic technology assessment,
defined, 42 Support indicators, 21t 334–335
for implementing social responsibilities, Surveillance, AI in, 17 use, economic concerns about, 312–313
43f SurveyMonkey Contribute, 20 Telemarketing and Consumer Fraud and
Stakeholder map, defined, 42 Surveys, 57 Abuse Prevention Act, 255t, 257
Stakeholder model of corporate governance, Susan G. Komen Foundation, 296 Telematics, 307
72–74 Sustainability Telephone Consumer Protection Act, 259,
defined, 73 alternative energy, 363–366, 363t 319t
Stakeholder orientation, defined, 42 annual reports, 343 Tennessee law, 258
Stakeholder relationship, strategic Apple Inc. (case study), 490 Tensor Processing Unit, 428
management of, 37–61 B corporation, rise of, 341 Tepper, B., 154
crisis management, 50–53 business response to issues-related, Teqqi, LLC, 133
identifying stakeholders, 40, 42 366–368, 367t Teva Pharmaceuticals, 150
link with social responsibility, 57–59 components, 342 Texas Instruments (TI), 181, 183, 184
overview, 37–39 defined, 342 Thai consumers, 266
perspective in social responsibility, of environment, 307 The Theory of Moral Sentiments, 98
54–57 environmental policy and regulation, Thompson, J., 272–273
relationship development, 53–54 359–363. see also specific entries Thompson, S., 149
reputation management, 47–50 environmental responsibility, strategic Thorn, 275
stakeholder attributes, 44–47 approaches, 368–372, 369t Time sensitivity, 46
stakeholder orientation, 42–44 global environmental issues, 344–358 Time theft, defined, 154
Stakeholder theory, 12 Google (case study), 428 Time Warner, 96
Standard Oil Company, 131 importance, 341 Tindell, K., 213
Standard & Poor’s (S&P), 86 issues and social responsibility, 29–30 Title VII of the Civil Rights Act, 227–228,
Starbucks, 54, 56, 181, 203, 218t, 232, 268, New Belgium Brewing Company (case 229, 231t, 232–233
282 study), 463–464 Title VII of the Civil Rights Act of 1964,
background, 468 nuclear energy, 374b defined, 157
brand evolution, 471–472 social responsibility, relationship of, Tobacco-free CVS, 443
culture, 469–470 343–344, 343f Tobacco industry, 297
Ethical Sourcing of Sustainable Products variables, 342 Toffler, B., 170
initiative, 9 The Sustainability Consortium, 413, 419 Tome, C., 409
innovation, 472–473 Sustainable business practices, 343 TOMS Eyewear, 478, 481
new product offerings, 468–469 Sustainable fashion, 31 TOMS Roasting Co., 478, 481
success and challenges, 473–474 Swanson, K., 179 TOMS Shoes, 295
State capitalism, 99. see also Capitalism Symbolic power, 45 business model, changing, 483
Stem cell, harvesting, 330 corporate culture, 481–482
Sterling Jewelers, 230 criticisms and ethical issues, 483–484
Steroids, 181
T future perspectives, 484
Stock option, defined, 85 Tachht, Inc., 133 history, 478–479
Stone, R., 322 Taco Bell, 324 impact of, 482–483
Stop Online Piracy Act (SOPA), 103 TAE Technologies, 374 mission, evolving, 483
Stop Trading on Congressional Knowledge Takeda Pharmaceutical Company Ltd., 281 movement, 479
(STOCK) Act, 129 Target, 23, 42, 103–104, 281, 284 overview, 478
Strategic philanthropy Taxes, Apple Inc. (case study), 492–493 product line, 480–481
benefits, 296, 298 Tazreen Fashions Ltd., 417 supply chain, 479–480, 480t
cause-related marketing vs., 291–293 Technology, defined, 308 Top-level domains (TLDs), 314t, 315, 324,
defined, 289 Technology, strategic implementation, 325
examples, 289t 333–335 Top management support, strategic
implementation of, 299–301 business, role, 334 philanthropy, 299
planning and evaluating, 299–301 government, role, 333–334 Total quality management (TQM) movement,
social entrepreneurship and social strategic technology assessment, 218
responsibility, 293–296 334–335 Toxic Substance Act of 1976, 103

Index 585
Toxic Substances Control Act, 362 Uniform Dispute Resolution Policy (UDRP), Video conferencing, 309
Toyota, 188 324, 325 Video Privacy Protection Act, 319t
Toy Safety Act, 255t Uniformed Services Employment and Villagomez, A., 405
Trade associations, 130–131 Reemployment Rights Act, 223t Vinson, B., 197–198
defined, 129 Uniform Resource Locators (URLs), 324 Violence, workplace, 227
and lobbying, 128 Unilever, 291, 332 Virgin Group, 22, 304
Training Unions Virtue ethics, defined, 172
development and, employee, 231–232 labor, 225 Vista Equity Partners, 304
ethics, 186–189 Walmart’s stance on, 414–415 Visual Analytics software, 316
on sexual harassment, 230 Uniqlo, 73 Voice Over Internet Protocol (VOIP), 259
Training Magazine, 232 United Airlines, 115 Volcker Rule, 78
Transactional leadership, defined, 203. see United Arab Emirates (UAE), 269 Volkswagen (VW), 66, 104, 196, 448
also Leadership United Food and Commercial Workers defeat devices’ installation, 4–5
Transformational leadership, defined, 203. International Union (UFCW), 225, emissions scandal, 448–450
see also Leadership 266, 415 history, 448
Transgender harassment training, 187 United for Respect, 415 Voluntary practices, defined, 193
Transparency, 108 UnitedHealth Group, 235, 279t Volunteerism
indicators, 21t United Nations Global Compact, 201 creating “buy-in” for, 305
Transparency International, 9, 26, 156 United States defined, 285
TripAdvisor, 131, 249 employment law, 386t opportunities, 286
Triple Bottom Line framework, 194 as greenhouse gas emitters, 345–346 rates, 285f
Troubled Asset Relief Program (TARP), 112 water issues, 350–351 Volvo Group, 5, 279t
Troubled Assets Recovery Program (TARP) United States-Mexico-Canada Agreement
defined, 122 (USMCA), 108
Trump, D., President, 96, 99, 113, 123 United Way, 286
W
Trust, 209 Universal serial bus (USB), 309 W. L. Gore and Associates, 218t
defined, 100 Universal Trade Zone (UTZ), 503 Wages, 223–225
employee, 201–202 Unmanned aerial vehicles (UAVs), see Drones Wall Street, 88, 221, 249
indicators, 21t Unsafe at Any Speed, 261 The Wall Street Journal, 89–90, 464
and social responsibility, 21–22 UPS, 11, 312 Walmart, 17, 42, 161, 165, 225, 266, 284,
of stakeholder, 57 Urban sprawl, 355 304, 312, 320, 326, 328, 412
TrustArc, 160, 322 Urchin Software Corporation, 427 bribery scandal, 416–417
TRUSTe certification, 160, 322 Urgency, defined, 46 competitive stakeholders, 412–413
Truth in Lending Act, 255t U.S. Anti-Doping Agency rules, 181 ethical issues, 414–416
The Truth Machine, 320 U.S. Chamber of Commerce, 128, 223, 244 ethical leadership issues, 416
Turing Pharmaceuticals, 101 U.S. Department of Commerce, 325 “Fight Hunger. Spark Change.”
Twin Metals, Minnesota, 42 U.S. Department of Defense, 333 campaign, 412
Twitter, 259, 314t, 406, 454 U.S. Department of Health, Education, and future perspectives, 420
Tyco, 203 Welfare, 218 “Global Responsible Sourcing
Tylenol poisonings (J&J), 514 U.S. Department of Health & Human Initiative,” 413
Tyson Foods, 68 Services (HHS), 439 growth of, 412
U.S. Department of Housing and Urban history, 412
Development (HUD), 254 relationships with suppliers, 413–414
U U.S. Equal Employment Opportunity safety issues, 417–418
Uber, 54, 85, 238, 244, 311, 328 Commission (EEOC), 158 stakeholders, 418–419
international expansion, 116–117 U.S. Food and Drug Administration (FDA), sustainability leadership, 419–420
Uber Eats, 402 356 today, 420
Uber Freight, 402 U.S. Global Climate Change Initiative, 347, Walt Disney Company, 50, 53
Uber fuels controversy, 399–402 348t Walton, R., 416
bike rentals, 402 U.S. National Labor Relations Board Walton, S., 412, 414, 416, 420
food delivery, 402 (NLRB), 415 Warranties, defined, 258
future perspectives, 402 U.S. News and World Report, 277 Warren, E., 454
global expansion challenges, 399–400 U.S. Postal Service (USPS), 310, 312 Waste management, 353–354
ongoing controversies, 400–402 U.S. Right to Know, 102 Water
threats to sharing economy, 400 Utilitarianism, defined, 163 issues-related, 350–352
Uber Freight, 402 Utilitarian power, 45 quality of, 351
UberPOP, 399 Utilization Review Accreditation Commission quantity of, 351–352
Uber Technologies Inc., 399 (URAC), 264 WaterLess, 351
controversy with Apple, Inc., 400–401 Waterman, R. H., Jr., 218
as public company, 402 V Water pollution, 350–351
UberX, 399 Web browser (Google), 426
Ulta Beauty, 162 Vacation rentals, 249 Web conferencing, 309
Unconscious bias, defined, 236 Values, 8t WebCrawler, 425
Underemployment, defined, 219 defined, 149 Websites, 45, 56–57
Unemployment rate orientation, 182 Weeden, C., 300
abusive child labor practices, 224 Values-based programs, 183 Wegman’s Market, 218t
defined, 215 Vegan TOMS, 480–481 Weight-loss product, 257f
in Hawaii, 219 Verdigris Group, 149 “Welfare to Career” program, 341
U.S., 215–216 Vericool, 243–244 Wells, H., 453
Unethical corporate cultures, 181–182, Verizon, 317 Wells Fargo, 66, 67, 140, 165, 195, 197, 453
199–200 Vesting, defined, 224 auto insurance and home loan scandal,
UNICEF, 288–289, 298 ViaGen Pets, 330 455–456

586 Index
decision-makers, 454–455 Workforce organization, 161 World Trade Center attacks, 215
ethical values, 455 Workforce reduction, 14, 219–222 World Trade Organization (WTO), 330
fake accounts scandal, 453–454 defined, 220 World Vision, 286
future perspectives, 456 The Working Life: The Promise and Betrayal World Wide Web, 313, 314t
history, 453 of Modern Work, 214 World Wildlife Fund, 31
resolution, 456–457 Work/life balance programs, 236–237, 239 Worn Wear, 31, 509
Western Climate Initiative (WCI), 349 defined, 236 Wozniak, S., 486
WhatsApp, 304 Workplace
Whistleblower Protection Act, 191, 231 diversity and inclusion, 232–236
Whistleblowers, 140 equality, 101 Y
defined, 138 HIV/AIDS in, 228
Yahoo, 103–104, 149
Whistleblowing, 191, 192t, 230, 231 sexual harassment, 228–230, 231t
Yelp, 57, 131, 249
Whole Foods, 37, 200, 250, 332, 353 violence, 227
Yoplait, 296
Wholesome Meat Act of 1967, 103 work/life balance, 236–237, 239
York Female Friendly Society (YFFS), 293
Whyte, W. H., 218 Workplace diversity, defined, 232
YouthAIDS, 292
Wi-Fi, 308, 309, 316 Workplace inclusion, defined, 234
YouTube, 314t, 426, 427
Wikipedia, 103 World Bank, 74
Yunus, M., 294, 392
Wind power, 364 World Cocoa Foundation (WCF), 502
Winfrey, O., 304 WorldCom, 15, 77, 137, 197–198
Winterkorn, M., 104, 196, 449 World Consumer Rights Day, 261, 263
Women on corporate boards, 65 World Economic Forum, 201
Z
Worker Adjustment and Retraining World Federation of Direct Selling Zappos, 251
Notification (WARN) Act, defined, Associations (WFDSA), 10 Zero tolerance, defined, 230
221 World Health Organization (WHO), 297, 344 Zuckerberg, M., 304, 394


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BUSINESS

© 2021 Chicago Business Press

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1 Social Responsibility Framework 2

2 Strategic Management of Stakeholder Relationships 36

4 Business, Government, and Regulation 94

5 The Impact of Business on Government and the

6 Business Ethics and Ethical Decision-Making 146

7 Strategic Approaches to Improving Ethical Behavior 178

8 Employee Relations 212

9 Consumer Relations 248

10 Community Relations and Strategic Philanthropy 274

11 Technology Issues 306

12 Sustainability Issues 340

13 Social Responsibility in a Global Environment 378

Case 1 Uber Fuels Controversy 399

Case 6 Volkswagen Charts a New Course: The Road to Sustainability 448

1 Social Responsibility Framework 2

Strategic Management of Stakeholder

4 Business, Government, and Regulation 94

5 The Impact of Business on Government and the

Business Ethics and Ethical

Ethical Issues in Business 152

7 Strategic Approaches to Improving Ethical

8 Employee Relations 212

9 Consumer Relations 248

10 Community Relations and Strategic

Top Management Support 299

11 Technology Issues 306

12 Sustainability Issues 340

13 Social Responsibility in a Global

Case 1 Uber Fuels Controversy 399

Case 2 Fixer Upper: Home Depot Works on Stakeholder Relationships 405

Case 3 Big-Box Retailer Walmart Manages Big Responsibility 412

Case 4 Google Searches for Solutions to Privacy Issues 425

Case 5 CVS Smokes the Competition in Corporate Social Responsibility 439

Case 6 Volkswagen Charts a New Course: The Road to Sustainability 448

Case 7 Wells Fargo Banks on Recovery 453

Case 8 A Brew above the Rest: New Belgium Brewing 460

Case 9 Starbucks Takes on Coffee Culture 468

Case 11 Apple Bites into Ethics 486

Case 12 The Hershey Company’s Bittersweet Success 498

Case 13 Corporate Social Responsibility from the Outside In at Patagonia 508

Case 14 Johnson & Johnson Experiences the Pain of Recalls 512

Case 15 Herbalife Nutrition: Managing Risks and Achieving Success 520

Important Changes to the Seventh Edition

Content and Organization

We define social responsibility in Chapter 1, “Social Responsibility

philanthropy involves both financial and nonfinancial contributions to stakehold-

objectives, student population, and other unique characteristics of a course. These

University, Vitaly Nishanov at University of Washington, Laura Rifkin at Pace

B usinesses today must cope with challenging decisions related to their

Social Responsibility Defined

Figure 1.1 Major Emphases of Social Responsibility

Source: © O.C. Ferrell, 2019.

Social Responsibility Applies to All Types of Businesses

Social Responsibility Needs a Strategic Focus

aspects of its operations. Years ago, for example,

gives preference to wood products certified as having been harvested responsibly

Case 1 Uber Fuels Controversy 399

Case 6 Volkswagen Charts a New Course: The Road to Sustainability 448

Case 2 Fixer Upper: Home Depot Works on Stakeholder Relationships 405

Case 3 Big-Box Retailer Walmart Manages Big Responsibility 412

Case 4 Google Searches for Solutions to Privacy Issues 425

Case 5 CVS Smokes the Competition in Corporate Social Responsibility 439

Case 6 Volkswagen Charts a New Course: The Road to Sustainability 448

Case 7 Wells Fargo Banks on Recovery 453

Case 8 A Brew above the Rest: New Belgium Brewing 460

Case 9 Starbucks Takes on Coffee Culture 468

Case 11 Apple Bites into Ethics 486

Case 12 The Hershey Company’s Bittersweet Success 498

Case 13 Corporate Social Responsibility from the Outside In at Patagonia 508

Case 14 Johnson & Johnson Experiences the Pain of Recalls 512

Case 15 Herbalife Nutrition: Managing Risks and Achieving Success 520