Business Ethics and CSR

A kirana owner finds that his wholesaler has billed him ₹2,000 too little. Nobody will notice if he stays quiet. What he does next draws on three different things: ethics, morals and values.

The three words are often used as if they meant the same thing. They do not.

Business ethics applies moral principles to business decisions, balancing profit with social welfare. It does three things for a firm:

• Builds trust and reputation. A wholesaler who is told about the error has a reason to trust this shop with credit next time.
• Promotes fairness and accountability. People know the rules, and know they will answer for breaking them.
• Supports long-term sustainability. A shortcut that pays this month can cost customers, staff and licences later.

Don't confuse ethics with law. Law is the minimum that society enforces. Ethics asks what is right, including where the law is silent or out of date. Some acts are legal but unethical, such as hiding a known product defect that no rule yet covers. Keeping the wholesaler's ₹2,000 may never reach a court, but it is still wrong.

Where it breaks. A firm can print an ethics code and still reward the staff who cut corners. People also hold different values, so "right" is often argued over rather than looked up. Ethics gives the questions; it does not settle every case by itself.

For exams. Expect a matching question on the three terms: ethics are codes, morals are personal beliefs, values are what a person holds important. Remember the phrase "balancing profit with social welfare".

Ethics are codes, morals are beliefs, values are what matters.

A sales team must hit its Diwali target. A discount only for friends, a quiet word with a rival about prices, a hidden charge on the bill: each would help. The principles of business ethics are the checklist that rules them out.

There are eight principles. Each one names a standard and, by implication, a typical way of breaking it. The breaches below are illustrations.

How to use them. Run a decision past all eight before you act. Take the Diwali target. A friends-only discount fails impartiality. Agreeing prices with a rival fails fair practices, and may also fail legal compliance. A hidden charge fails trust and honesty. A plain store-wide offer passes all eight.

Don't confuse principles with a code of conduct. Principles are general standards that apply to any firm. A code of conduct is one firm's written rules that apply them to its own situations, such as how large a gift staff may accept.

Where it breaks. The principles can pull against each other. Stakeholder interest may call for keeping a loss-making plant open; duty to investors may call for closing it. The list tells you what to weigh, not how to weigh it. The decision approaches in this chapter help with that.

For exams. Learn the eight by name and match each to its meaning. "Assessing risks and consequences" is due diligence. "Ethical pricing, competition and anti-corruption" is fair practices. The four stakeholder groups named are employees, customers, investors and the community.

Sales at an auto-parts plant in Pune have fallen by a third. The owner can lay off 200 of its 1,000 workers, or keep them all and risk the whole firm failing. Neither choice is clean.

Three checks help to frame any hard case:

1. Who is affected? In Pune: the 200 workers and their families, the 800 who stay, lenders, suppliers and customers.
2. Which values conflict? Loyalty to long-serving workers against the duty to keep the firm alive for everyone else.
3. What is legal is not always ethical. A layoff may follow every rule and still be handled unfairly. How much notice, what support, and who is rehired first are ethical choices too.

Don't confuse a dilemma with a temptation. Falsifying data to meet a target can feel like a hard choice. But only one side is a moral value; the other is self-interest. That makes it an ethical issue. Rushworth Kidder called real dilemmas "right versus right" choices, and temptations "right versus wrong".

Where it breaks. The three checks set out the problem; they do not solve it. Two careful people can run the same checks and still disagree, because they weigh the values differently. The decision approaches in the next section give them ways to reason it through.

In practice. Kenneth Blanchard and Norman Vincent Peale offered three quick questions: Is it legal? Is it balanced, or fair to all concerned? How will it make me feel about myself? A plan that fails any one deserves a second look.

For exams. Expect to classify examples. Insider trading, bribery and falsified accounts are issues. Choices such as layoffs against closure, or a client's confidentiality against public safety, are dilemmas.

An issue breaks a principle; a dilemma sets two values against each other.

A drug company can price a new medicine high, to fund the next round of research, or low, so poor patients can afford it. Thoughtful people reach different answers because they ask different questions.

Five approaches to a decision. Each asks one question. The last column applies it to the medicine.

At the level of theory, the families are:

• Teleological ethics judges by consequences: ethical egoism (my own long-term good), utilitarianism (everyone's good, counted equally) and eudaimonism (human flourishing).
• Deontological ethics judges by duty and principle, regardless of outcome: rights theory, social contract and social justice.
• Virtue ethics looks at the decision-maker's moral character: prudence, courage, integrity and responsibility.
• Meta-ethics asks about the nature and meaning of ethical principles, such as what "good" means.
• Applied ethics addresses concrete problems in business, medicine and the environment.

Don't confuse utilitarianism with ethical egoism. Both judge by consequences. Egoism counts only the decision-maker's good; utilitarianism counts everyone's good equally. Also keep meta-ethics (what ethical words mean) apart from applied ethics (what to do in a real case).

Where it breaks. Utilitarianism can justify harming a few for the gain of many. Deontology struggles when two duties clash. Virtue ethics describes a good person but gives little guidance on a specific choice. That is why careful decision-makers test a choice against several approaches, not one.

For exams. Expect to classify: utilitarianism and egoism are teleological; rights, social contract and social justice are deontological. Match "greatest good of the greatest number" to the utilitarian approach.

Go deeper for practitioners

The thinkers behind the labels. Utilitarianism comes from Jeremy Bentham and John Stuart Mill. Immanuel Kant is the central deontologist: act only on a rule you could want everyone to follow, and never treat people merely as a means. Virtue ethics goes back to Aristotle. John Rawls's justice theory asks which rules you would choose behind a "veil of ignorance", not knowing what position you would hold.

A decision. Your firm can save ₹50 lakh a year by moving work to a supplier that pays below the local norm. A utilitarian test looks at total gains and losses. A rights test asks whether the workers are being exploited. A virtue test asks whether you would defend the choice in front of your own staff. When the tests disagree, write down why you chose the one you followed.

A cement plant earns well from its site near a village. Dust settles on the fields, and the village school has no toilets. Whether the company should act, and how far, is the question of corporate social responsibility.

CSR integrates social, environmental and economic responsibility into business operations. It aims at shared value, where business success and social welfare reinforce each other. Its outcomes include a better corporate image, investor attraction, employee morale, compliance and sustainable development.

CSR in India. India moved from guidelines to law in four steps.

Applicability: a company that meets any one of these thresholds: net worth of ₹500 crore or more, turnover of ₹1,000 crore or more, or net profit of ₹5 crore or more. Spend: at least 2% of the average net profit of the preceding three years. Focus areas include education, the environment and rural development.

Worked example (illustrative). Company A has a net worth of ₹300 crore, turnover of ₹800 crore and net profit of ₹7 crore.

1. Net worth and turnover are below their thresholds. Net profit, ₹7 crore, is above ₹5 crore. One test is enough, so the law applies.
2. Its net profits for the preceding three years were ₹5 crore, ₹6 crore and ₹7 crore. Average: (5 + 6 + 7) ÷ 3 = ₹6 crore.
3. Minimum spend: 2% of ₹6 crore = ₹0.12 crore = ₹12 lakh.

Company B, with a net worth of ₹450 crore, turnover of ₹900 crore and net profit of ₹4 crore, meets none of the three tests and is not covered.

Don't confuse CSR with charity. Charity is only the top layer of Carroll's pyramid. CSR starts with how the money is earned: fair pay, safe products and clean production. A firm that pollutes a river and funds a school nearby has not met its responsibility.

Where it breaks. Milton Friedman argued in 1970 that the social responsibility of business is to increase its profits, within the rules. Others warn that CSR can become box-ticking: a law that sets a spend measures money paid out, not good done.

For exams. Learn the three thresholds (any one is enough), the 2% of three years' average net profit, the years 2009, 2011, 2013 and 2014, and Carroll's four layers in order.

Go deeper for practitioners

Shared value. Michael Porter and Mark Kramer (2011) argued that firms should look for "shared value": business opportunities in social problems, such as a dairy that trains its farmers and so gets better milk. They presented it as different from CSR spent as an add-on.

The triple bottom line. John Elkington proposed that firms report on people and the planet as well as profit. Many sustainability reports follow that idea.

A decision. Company A's ₹12 lakh could fund a one-day health camp in a city, or toilets for the school beside its own plant. The camp gets more press. The toilets answer a need the plant's neighbours actually have, and build trust where the firm operates. Which would you defend to the village, and to your board?