BUSINESS SOCIETY

A Strategic Approach to Social Responsibility & Ethics

Seventh Edition

O. C. Ferrell Auburn University

Debbie Thorne Texas State University

Linda Ferrell Auburn University

and

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BUSINESS & SOCIETY: A STRATEGIC APPROACH TO SOCIAL RESPONSIBILITY & ETHICS

© 2021 Chicago Business Press

ALL RIGHTS RESERVED. No part of this work covered by the copyright herein may be reproduced, transmitted, stored or used in any form or by any means graphic, electronic, or mechanical, including by not limited to photocopying, recording, scanning, digitizing, taping, web distribution, information networks, or information storage and retrieval systems, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without the prior written permission of the publisher.

For product information or assistance, contact us at www.chicagobusinesspress.com

ISBN: 978-1-948426-22-0

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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

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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

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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

Table of Contents

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vi Contents

2

3

Strategic Management of Stakeholder 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 Discussion Questions 62 Experiential Exercise 62 Thai Die…Environmental Exploitation or Economic Development: What Would You Do? 62

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 Discussion Questions 93 Experiential Exercise 93 Core-Tex Creates a Vortex Around Aggressive Accounting: What Would You Do? 93

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Contents vii

4

5

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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 Discussion Questions 117 Experiential Exercise 117 The Taxing Role of Being a Politician: What Would You Do? 118

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 Discussion Questions 145 Experiential Exercise 145 The Case of the Weight-Loss Radio Ads: What Would You Do? 145

Business Ethics and Ethical Decision-Making 146 The Nature of Business Ethics 149 Foundations of Business Ethics 150

Recognizing an Ethical Issue 151

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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 Discussion Questions 176 Experiential Exercise 176 Moonlighting Monica: What Would You Do? 176

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 Discussion Questions 210 Experiential Exercise 210 Upcharging the Government: What Would You Do? 210

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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 Discussion Questions 245 Experiential Exercise 245 X, Y, & Millennial: What Would You Do? 245

Consumer Relations 248 Consumer Stakeholders 250 Responsibilities to Consumers 251

Economic Issues 251

Legal and Regulatory Issues 253

Ethical Issues 260

Philanthropic Issues 268

Strategic Implementation of Responsibilities to Consumers 269 Summary 270 Responsible Business Debate: Clearance Pricing: Business Communication in Practice 271 Key Terms 272 Discussion Questions 272 Experiential Exercise 272 There’s a Ringing in My Ears: What Would You Do? 272

Community Relations and Strategic Philanthropy 274 Community Stakeholders 276 Responsibilities to the Community 281

Economic Issues 281

Legal Issues 283

Ethical Issues 284

Philanthropic Issues 285

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

Contents ix

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11

12

Top Management Support 299

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

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 Discussion Questions 338 Experiential Exercise 338 The Email Police: What Would You Do? 339

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

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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 Discussion Questions 375 Experiential Exercise 375 The “Sustainability” of Sustainability: What Would You Do? 375

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 Discussion Questions 398 Experiential Exercise 398 Manufacturing Misconduct: What Would You Do? 398

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

Contents xi

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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

xii Contents

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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.

Preface

xiii

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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.

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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

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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

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