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Principles of Management Unit 3: Ethics and Social Responsibility

Managers constantly face choices about right and wrong and about what they owe society. This unit covers ethical decision frameworks, what shapes ethical behavior, and the debate over corporate social responsibility.

Covers: Views of ethics: utilitarian, rights, justice, Kohlberg's stages of moral development, Factors that influence ethical behavior, Classical and socioeconomic views of social responsibility, Carroll's pyramid and obligation, responsiveness, responsibility, Codes of ethics, whistleblowing and ethics programs, Sustainability and the triple bottom line

Study guide

Ethics are principles that define right and wrong conduct. Managers use several views of ethics. The utilitarian view judges a decision by its outcomes: the right choice gives the greatest good for the greatest number. It encourages efficiency but can ignore the rights of a minority. The rights view says decisions must respect basic rights such as privacy, free speech and due process. The justice view requires rules to be applied fairly and impartially, so people in similar situations are treated alike. A fourth approach, integrative social contracts theory, says decisions should reflect both general ethical norms and the accepted practices of a particular industry or community.

Lawrence Kohlberg described three levels of moral development. At the preconventional level, people decide based on personal consequences: avoiding punishment or getting rewards. At the conventional level, they follow what others expect, obey rules and laws, and meet obligations to the group. At the principled (postconventional) level, they follow self-chosen ethical principles even when these conflict with laws or group norms. Most adults operate at the conventional level. Other factors also matter: people with an internal locus of control and high ego strength are more likely to act on their beliefs, structure (clear rules, fair rewards, role models) and culture shape behavior, and issue intensity, such as how great and how likely the harm is, affects how seriously people treat a choice.

Social responsibility asks what businesses owe society beyond making money. The classical view, associated with economist Milton Friedman, says management's only social responsibility is to maximize profits for shareholders within the law; spending company money on social causes is spending owners' money without their consent. The socioeconomic view says business has obligations to the larger society, including protecting and improving social welfare, because society grants firms their right to exist. Supporters argue that responsible firms enjoy better public image, fewer regulations and long-run profits; critics warn of diluted purpose and costs passed to customers.

Textbooks distinguish three levels of social involvement. Social obligation means meeting economic and legal responsibilities only, which fits the classical view. Social responsiveness means adapting to changing social conditions, such as responding to public demand for recycling. Social responsibility goes further, pursuing long-term goals that are good for society because it is the right thing to do. Archie Carroll's pyramid ranks corporate responsibilities as economic (be profitable), legal (obey the law), ethical (do what is right and fair beyond the law) and philanthropic (be a good corporate citizen through giving). Sustainability and the triple bottom line extend this by measuring people, planet and profit.

Organizations encourage ethical behavior through hiring screens, a code of ethics, top management leadership and role modeling, realistic goals, ethics training, independent audits and protections for whistleblowers, employees who report unethical practices. In the United States, the Sarbanes-Oxley Act of 2002, passed after accounting scandals such as Enron, requires executives to certify financial statements and protects whistleblowers at public companies. A code works best when leaders follow it visibly and violations bring consequences; otherwise employees learn the real rules from what is rewarded.

Key ideas

• The utilitarian view focuses on outcomes, the rights view on individual liberties, and the justice view on fair and impartial rules.
• Kohlberg's levels move from self-interest (preconventional) to others' expectations (conventional) to self-chosen principles (principled).
• Ethical behavior depends on individual traits, organizational structure and culture, and the intensity of the issue.
• The classical view says firms owe society only profit within the law; the socioeconomic view says firms owe society more.
• Social obligation, social responsiveness and social responsibility represent increasing levels of social commitment.
• Carroll's pyramid ranks economic, legal, ethical and philanthropic responsibilities from base to top.
• Codes of ethics work only when leaders model them and violations have consequences.

Formulas and rules

Common mistakes

• Calling the classical view 'unethical'; Friedman argued firms should obey the law and ethical custom while maximizing profit.
• Confusing social responsiveness (reacting to social pressure) with social responsibility (acting from an ethical commitment).
• Placing philanthropy at the base of Carroll's pyramid; economic responsibility is the base and philanthropy is the top.
• Thinking a decision is ethical simply because it is legal; ethics often require more than the law.
• Saying most adults reach Kohlberg's principled level; most operate at the conventional level.

Before the test, make sure you can

• Apply the utilitarian, rights and justice views to the same business decision.
• Identify a person's Kohlberg level from their reasoning.
• Explain how locus of control, ego strength, structure, culture and issue intensity affect ethics.
• Contrast the classical and socioeconomic views of social responsibility.
• Distinguish social obligation, social responsiveness and social responsibility in examples.
• Order and explain the four levels of Carroll's pyramid.
• Describe tools that encourage ethical behavior, including codes of ethics and whistleblower protection.

Words to know

Ethics

Principles, values and beliefs that define right and wrong decisions and behavior.

Utilitarian view of ethics

Decisions are judged by their outcomes, aiming for the greatest good for the greatest number.

Rights view of ethics

Decisions should respect and protect individual liberties such as privacy and free speech.

Justice view of ethics

Decisions should apply rules fairly and impartially to everyone.

Integrative social contracts theory

Ethical decisions should combine general ethical norms with the accepted norms of an industry or community.

Preconventional level

Kohlberg's level where moral choices are based on personal consequences such as punishment or reward.

Conventional level

Kohlberg's level where people follow rules, laws and others' expectations.

Principled level

Kohlberg's highest level, where people follow self-chosen ethical principles even against rules.

Locus of control

The degree to which people believe they control their own fate (internal) or that outside forces do (external).

Ego strength

A measure of how strongly a person holds to their convictions.

Classical view of social responsibility

Management's only social responsibility is to maximize profits for shareholders within the law.

Socioeconomic view of social responsibility

Management's responsibility goes beyond profits to include protecting and improving society's welfare.

Social obligation

Engaging in social actions only because of economic and legal responsibilities.

Social responsiveness

Adapting to changing societal conditions and demands.

Social responsibility

A firm's intention to pursue long-term goals that are good for society, beyond legal and economic duties.

Carroll's CSR pyramid

Model ranking a firm's responsibilities: economic, legal, ethical and philanthropic.

Whistleblower

An employee who reports unethical or illegal practices by an employer to people inside or outside the organization.

Triple bottom line

Measuring performance by social (people), environmental (planet) and financial (profit) results.

Sample practice questions

30 more questions like these, from level 1 to 5, are in the practice set.