Ethics and Corporate Social Responsibility in the corporate world are very important. What follows will help you in your understanding of this very important topic – please summarize this in 2-3 pages and explain the importance that ethics and corporate social responsibility play in the accounting profession:
Ethics: Ethical issues as they relate to organizations and their social responsibility
What is Corporate Social Responsibility?
Corporate Social Responsibility (CSR) is the responsibility of an organization for the impacts of its decisions and activities on society, the environment and its own prosperity, known as the “triple bottom line” of people, planet, and profit. Not only do responsible, sustainable and transparent approaches help build brand and reputation, they help strengthen the community and therefore the marketplace. A solid business plan, embedded into the business culture, reflecting organizational values and objectives through strategic CSR application, will help to build a sustainable and profitable future for all.
The obligation of an organization's management towards the welfare and interests of the society in which it operates.
What is business ethics?
Business ethics examines ethical principles and moral or ethical problems that arise in a business environment. It applies to all aspects of business conduct and is relevant to the conduct of individuals and entire organizations.
Business ethics reflects the philosophy of business, one of whose aims is to determine the fundamental purposes of a company. If a company's purpose is to maximize shareholder returns, then sacrificing profits to other concerns is a violation of its fiduciary responsibility. Corporate entities are legally considered as persons in USA and in most nations. The 'corporate persons' are legally entitled to the rights and liabilities due to citizens as persons.
Generally business ethics involves coming to know what it right or wrong in the workplace and doing what's right -- this is in regard to effects of products/services and in relationships with stakeholders. Attention to ethics in the workplace sensitizes leaders and staff to how they should act. Perhaps most important, attention to ethics in the workplaces helps ensure that when leaders and managers are struggling in times of crises and confusion, they retain a strong moral compass. Business ethics can be strong preventative medicine. Ethics is also about assessing and cultivating the corporate culture. Culture is comprised of the values, norms, folkways and behaviors of an organization. Ethics is about moral values, or values regarding right and wrong. Therefore, cultural assessments can be extremely valuable when assessing the moral values in an organization. Businesses have recently become aware of the severe implications of the unethical behavior of employees. In response, many businesses have begun training their employees to make ethical decisions and establishing company codes of conduct. The message from businesses today is clear—employees must be capable of making ethical decisions to protect the business from legal liability and to maximize long-term profits.
Most students’ principles of right and wrong are well established prior to their attending high school. Thus, the presentation of business ethics does not involve the teaching of right and wrong. Instead, students need to learn how to apply their principles of right and wrong to business situations.
The principles of right and wrong that guide an individual in making decisions are called ethics. The use of personal ethics in making business decisions is called business ethics. In these Business Ethics Activities, you will have the opportunity to analyze the ethics of common business situations by using the following three-step checklist as a guide in collecting relevant information regarding an action.
1. Is the action illegal? Does the action violate any laws? Obeying the law is in your best interest and the best interest of your business.
2. Does the action violate company or professional standards? Public laws often set only minimum standards of behavior. Many businesses and professions set even higher standards of behavior. Thus, an action may be legal, yet still violate standards of the business or profession. Violating these standards may affect your job security or any professional certification you may hold.
3. Who is affected, and how, by the action? If an action is legal and complies with business and professional standards, you must rely on your principles of right and wrong to determine if the action is ethical. Determining how the action affects individuals and groups—including business employees and owners, customers, the local community, and society—will help you decide if an action is ethical.
In the activity presented below, you will read about a person who overstated information on a résumé. Note how the three step checklist, described above, was used to determine whether the individual demonstrated ethical behavior in preparing the résumé. A solution to the activity is included. The solution illustrates the use of the three-step checklist. (Note that the answers for future Business Ethics Activities will not be provided to you.)
Social responsibility a part of business ethics???
Social responsibility and business ethics are often regarding as the same concepts. However, the social responsibility movement is but one aspect of the overall discipline of business ethics. The social responsibility movement arose particularly during the 1960s with increased public consciousness about the role of business in helping to cultivate and maintain highly ethical practices in society and particularly in the natural environment. Many companies believe they have a responsibility to "give back" to society. This focus includes contributions of time and money, a duty to provide environmentally friendly products and services, and a desire to improve the lives of individuals here and around the globe. Such socially responsible companies see to it that this "consciousness" permeates everything they do.
The following 10 companies stand out as prime examples of how social responsibility can be productively coupled with sound strategies to advance goodwill, while building sustainable and impressive businesses. They provide the leadership to demonstrate how marketers can pursue both objectives simultaneously. As such, socially conscious companies have stepped up their efforts with increasing effectiveness and productivity. It is an impressive movement and one that invites society at large to do even more. Let's use these as examples for "how to get it done" so that we can effectively expand our efforts to give back.
Burt’s Bees - The focus for Burt's Bees has always been on well-being and "the greater good." As part of the Natural Products Association, the company helped develop The Natural Standard for Personal Care Products, which created guidelines for what can be deemed natural. Burt's Bees follows the highest possible standards for packaging sustainability, furthering its dedication to the cause as a member of the Sustainable Packaging Coalition. Since the brand's start at a crafts fair selling $200 worth of honey, the company has since expanded to candles, lip balm and now more than 150 products. In 2009, revenue topped $250 million.
GE - To stay true to GE's mission, Ecomagination offerings include products that significantly and measurably improve customers' operating performance or value proposition and environmental performance. Ecomagination helped GE build its business by increasing awareness of how the company is using renewable energy and reducing carbon emissions. As proof of the effectiveness of GE's program, the Ecomagination portfolio has grown from 17 products to more than 80 today, with revenues reaching $17 billion in 2008, an increase of 21% over 2007.
Method - As a cleaning product, Method hit the jackpot. While cleaning products historically contained hazardous chemicals, Method was able to make safe and effective home and personal cleaning products derived from natural ingredients such as soy, coconut and palm oils. The products also come in environmentally responsible, biodegradable packaging. As one of the fastest-growing companies in the world, and with $100 million in annual revenue, Method proves that socially responsible products can be wildly successful.
The Body Shop - The Body Shop is regarded as a pioneer of modern corporate social responsibility as one of the first companies to publish a full report on its efforts and initiatives. Founder Anita Roddick led her company to stand up for its beliefs and champion causes such as self-esteem, environmental protection, animal rights, community trade and human rights. From sponsoring posters in 1985 for Greenpeace to presenting a petition against animal testing to the European Union with 4,000,000 signatures, The Body Shop has contributed significantly to the causes it supports, and exemplifies how other companies can do the same.
Starbuck’s Coffee - Since Starbucks Coffee started in 1971, the company has focused on acting responsibly and ethically. One of Starbucks' main focuses is the sustainable production of green coffee. With this in mind, it created C.A.F.E. Practices, a set of guidelines to achieve product quality, economic accountability, social responsibility and environmental leadership. The company supports products such as Ethos Water, which brings clean water to the more than 1 billion people who do not have access. To date, Ethos Water has committed to grants totaling more than $6.2 million.
Ben & Jerry’s - Ben & Jerry 's founders Ben Cohen and Jerry Greenfield have infused the company with the notions of giving back in every way possible, as well as "linked prosperity" between the company, its employees and the community. They started the Ben & Jerry 's Foundation, were founding members of the Business for Social Responsibility organization and set an extraordinary rate of giving to charitable organizations in the corporate world, donating a full 7.5% of pretax profits. In their own words, they "strive to show a deep respect for human beings inside and outside our company and for the communities in which they live." Unilever bought Ben & Jerry 's in 2000 and continues to support the foundation; it donated $2 million in 2009.
Kenneth Cole - Since 1985, Kenneth Cole has been openly involved in publicly supporting AIDS awareness and research. He uses fashion to promote awareness of, and help fight, various social issues. After 25 years of addressing meaningful social issues, Kenneth Cole established the awareness’ Fund, a not-for-profit initiative that uses partnerships, merchandise, events and its blog to celebrate, encourage and empower acts of service volunteerism and social change. A full 100% of net proceeds of the Awareness products go toward the fund. These efforts have helped fuel the success of the Kenneth Cole brand, a company with nearly $500 million in sales.
Pedigree - Pedigree dog food built its brand by focusing on the need for people to adopt homeless dogs. Funding the support and care of these animals and sponsoring a national adoption drive, Pedigree's 2009 goal was to distribute $1.5 million in grants to 1,000 shelters and breed rescues. Pedigree donates one bowl of food to animal shelters every time it gets a Facebook fan, and it did the same when the company's 2009 Super Bowl commercial was viewed online. Pedigree's goal is to donate 4 million bowls of dog food, enough to feed every shelter dog in America for one day.
Tom’s Shoes - Blake Mycoskie started Toms Shoes on the premise that for every pair of shoes sold, one pair would be donated to a child in need. This innovative idea resulted from a trip to Argentina where Mycoskie saw an overwhelming number of children without shoes. Toms Shoes recognized that consumers want to feel good about what they buy, and thus directly tied the purchase with the donation. In just four years, Toms Shoes has donated more than 400,000 shoes, evidence that consumers have clearly embraced the cause.
Whole Foods - Whole Foods supports sustainable agriculture, promotes the reduction of waste and consumption of nonrenewable resources and encourages environmentally sound cleaning and store-maintenance programs. The company created the Local Producer Loan program, which provides up to $10 million in low-interest loans to small local producers to help grow their businesses. Whole Foods has also created Whole Planet Foundation, which fights poverty through micro lending in rural communities around the world. The foundation has raised $1.5 million to help 40,000 women lift themselves out of poverty by empowering micro entrepreneurs.
In the post-Enron era, the number of companies reporting their social and environmental impact on society has increased immeasurably. Indeed, to its many advocates, the emergence of corporate social responsibility (CSR) is not only a blueprint for the future, but a new highway to follow for conducting business in an uncertain world that has witnessed the evisceration of many long-accepted norms of conduct.
Broadly speaking, CSR — also known as sustainable development — involves the increased recognition by publicly held companies that they need to address and heed not only shareholders, but all the multiple stakeholders impacted by the company’s behavior. These include employees, customers, suppliers, governments, and nongovernmental organizations. In the new paradigm of social responsibility, stakeholders also could include socially responsible investor organizations, consisting of investors who make investment decisions using various social and ethical screens.
What follows are the major factors behind the emergence of CSR and an outline of key global and U.S. standards that have been put in place, as well as a review of current corporate and social audit reporting and support activities at numerous multinational companies. Several audit practitioners also offer their suggestions on best practices for evaluating, developing, supporting, and reporting on social and audit compliance standards.
EMERGENCE OF CSR
The theory behind CSR is that companies can be profitable while at the same time minimizing their negative impact on stakeholders. As evidence, a recent study by Oekom Research, a German agency that rates environmental and social performance, and securities firm Morgan Stanley indicates that companies with higher sustainability ratings outperform their counterparts who score lower on sustainability practices. The study examined the 602 companies in the Morgan Stanley Capital International World Index that have received Oekom’s Corporate Responsibility
Ratings and found that, between January 2000 and October 2003, the 186 highest-ranked companies in terms of sustainability outperformed the remaining 416 companies by 23.4 percent. Further, Lynn Sharpe Pains, a Harvard Business School professor, looked at all academic studies conducted on the subject of whether ethics pays (85 studies, total) and found a positive correlation between better financial performance and better social performance in 55 — or 65 percent — of the studies.
As recently as five years ago, CSR was seen as an either-or proposition. If a company attempted to address stakeholder concerns, it might be perceived as impacting the company’s profitability. More recently, studies and actual practice have shown that critical stakeholders — including customers, employees, and socially responsible investors — are actively looking to do business with socially responsible companies.
The 2004 Cone Corporate Citizenship Study, conducted by strategic marketing and public relations firm Cone Communications, shows that eight in 10 Americans say corporate support of causes wins their trust in that company, a 21 percent increase since 1997. Moreover, the study reveals that Americans stand ready to act against companies that behave illegally or unethically: more than three-fourths of respondents indicated they would respond to a company’s negative practices by taking actions such as switching to another firm or speaking out against the company among family and friends. Increasingly, the value of companies’ long term is seen as dependent upon their ability to meet their expectations of social responsibility.
Furthermore, a significant percentage of many companies’ value today is made up of “good will,” or benevolence — an asset easy to lose and difficult to regain. In consequence, companies that recognize this fact are increasingly seeing the need to take appropriate steps to minimize their negative impacts on stakeholders and thereby protect their valuable reputations and good will.
Failure to pay heed to CSR can dramatically impact a company’s reputation and even its value. Multinationals such as Royal Dutch/Shell Group, Dow Corning Corp., Coca-Cola Co., and Nike Inc. have taken hits to their reputations for failing to stay ahead of their stakeholders’ expectations. At Wal-Mart Stores Inc., CEO Lee Scott recently apologized publicly for letting the reputation of the company be sullied by questionable hiring practices. “For a bottom-line company like Wal-Mart, that was a significant step,” observes Bruce K. Packard, a corporate attorney at Dallas-based law firm Davis Munck P.C. who has advised several boards and audit committees concerning their codes of social responsibility.
As the profile of CSR has increased globally, numerous governmental, non-governmental, and advocacy groups have joined the dialogue. Several European governments are looking at regulatory approaches to CSR issues. France, for example, has enacted a law requiring listed companies to report annually, not merely on their financial performance, but on their social and environmental performance as well. In addition, the United Kingdom requires pension funds to identify social and environmental criteria relied upon in making investment decisions. Moreover, the IIA–UK and Ireland recently issued a “Professional Issues Bulletin” on the growing importance of CSR in organizations. The bulletin discusses issues and challenges associated with CSR and how internal auditors can help their organization address them.
Today, worldwide conferences such as the United Nations World Summit on Sustainable Development proliferate. Groups such as Business for Social Responsibility, a global nonprofit organization, help companies identify and manage their social responsibility obligations. The recently published report by retail giant GAP Inc. on its social responsibility activities attracted considerable and favorable media attention worldwide. Indeed, social responsibility reporting by publicly traded corporations has become an expected part of doing business on a global scale.
GUIDELINES FOR BEHAVIOR
There are upwards of 50 global and domestic guidelines by which companies can measure their social responsibility efforts. Most have been issued in the last decade or so. The more prominent categories covered include the environment, supply chain management, hiring practices, community relations, internal management or corporate governance, and charitable donations. Some of the global benchmarks against which companies’ CSR performance is being measured include the United Nations Declaration of Human Rights, the International Labor Organization’s (ILO’s) labor standards, and several globally recognized voluntary standards, such as the Organization for Economic Co-operation and Development’s guidelines for multinationals and the United Nations Global Compact, to name just a few.
Perhaps the most widely accepted reporting guideline, however, is the Global Reporting Initiative (GRI), based in Amsterdam (see “Key Global Standards on Sustainable Development”). Launched in 1997 and billed as a common framework for sustainable reporting, the GRI was developed by a group of organizations widely involved with responsible business reporting. Among them were representatives of the Association of Chartered Certified Accountants, the United Nations Environment Programmed, and the World Business Council for Sustainable Development. “What the GRI accomplished was to take the best practices in the area of human rights, labor relations, environmental management, and sustainable development, and craft them into guidelines that enable any corporation to produce one comprehensive report,” says Jeffrey Hollander, author of What Matters Most: How a Small Group of Pioneers Is Teaching Social Responsibility to Big Business and Why Big Business Is Listening.
Social responsibility also has become more prevalent in the United States. Witness the recent lawsuits against U.S. nonprofit hospitals for charging poor, uninsured patient’s higher rates than they charge insured patients. “Although the lawsuits seek to attack their tax status, the bigger issue is whether these institutions are behaving in a socially responsible manner,” notes attorney Packard.
The U.S. Sarbanes-Oxley Act of 2002 has raised the bar for many corporations with mandates that they conduct business with social responsibility in mind. The legislation includes an expectation that companies build “effective” programs based on adherence to values as opposed to merely laws. Principally through Sarbanes-Oxley Section 302, company executives must now certify that they have effective disclosure controls and procedures in place — and they must continually evaluate them to ensure their ongoing effectiveness.
Other portions of the act — including the whistleblower and code-of-ethics provisions — “combine to make social auditing essential,” Packard says. Nonetheless, he believes the jury is still out on whether Sarbanes-Oxley will be an effective locus for corporate social responsibility. “We don’t know where the courts are going to go. The litigation is just beginning.”
More needs to be done by U.S. companies to incorporate sustainable development issues, agrees author Hollender, who is president of Seventh Generation, a producer of natural household products. “What we need is to develop a parallel to the Generally Acceptable Accounting Principles financial reporting guidelines to make sure the information is complete and independent.” Hollender recently accepted the Corporate Stewardship Award for Small Business from the U.S. Chamber of Commerce Center for Corporate Citizenship. The award recognizes Seventh Generation for exemplifying the highest ideals in corporate stewardship.
RESPONSE TO CSR CONCERNS
Thus, the question arises: Are the existing audit inspection measures such as Sarbanes-Oxley and recent CSR initiatives working or not? Perhaps the key determination will be what the public does with this additional information. So far, the signs are encouraging. Many domestic and international companies are taking social issues more seriously and making them an important part of their agendas.
Under fire for years, cigarette manufacturer Brown & Williamson Tobacco Corp. (now merged with R.J. Reynolds Tobacco Co.) began approximately four years ago an unprecedented series of dialogues with various stakeholders across the United States to improve its image. The question was simple: “What would we need to do to meet your concerns?” The company has held more than 25 dialogues with different constituencies including members of the public, legislators, public health officials, employees, retailers, and wholesalers. Both an external auditor and an internal auditor audited the process.
The company’s efforts have led to significant change. Brown & Williamson has asked that more of the money U.S. states receive from tobacco settlement funds be spent by the states on education, prevention, and treatment. It has also requested that the Motion Picture Association of America not feature cigarettes in movies. Moreover, the company will no longer put any advertisements on the back of any magazine lest a child see it.
Bill White, director of audit for Brown & Williamson, said, “We were impressed by the openness and directness displayed during the dialogue sessions and by the integrity and willingness of management to address the key issues. Our conclusion was that the CSR annual report accurately reflected the issues and management’s response to them.”
Likewise, Baxter International, a manufacturer of pharmaceutical and biomedical products, has a viable sustainability program in place. The external verification aspect of Baxter’s program got its start in the mid 1990s in response to a stockholder group wanting assurance that environmental data presented to the public was accurate. Initially, Baxter only used its internal personnel at the division and corporate levels to verify environmental data. External auditors were drawn into the verification process as a result of the stockholder group’s concerns. Over time, the external report evolved to incorporate the reporting of health and safety data as well as environmental data. Currently, an external consultant, ERM Certification and Verification Services (CVS), and Baxter have an arrangement in which they jointly verify selected data at every facility they audit. ERM CVS maintains overall quality control of the process through recently created verification protocols for use by all their auditors assessing Baxter’s facilities.
“Besides improving the accuracy of the data, the verification process has also assisted Baxter in improving the efficiencies of collecting, combining, and publicly reporting the data,” says Mike Cycyota, Baxter’s director of corporate environmental health and safety audits. Because Baxter has manufacturing facilities in almost 30 countries, the cultural differences between auditors were an additional concern. Cycyota adds, however, that the verification protocols used by ERM CVS will help minimize these inevitable auditor differences when working in different geographic areas.
Another company that is paying more than lip service to sustainable development is French telecommunications giant Alcatel. Having emerged from a major reorganization in 2003, Alcatel, which operates in 130 countries with 60,000 employees, has a comprehensive sustainable development program. Its strategy is based on strict guidelines published in policies and charters, as well as social, environmental, and economic objectives, defined by the company’s executive management.
Alcatel’s sites around the world have benefited from an environmental management system; and through its “Digital Bridge” initiative, Alcatel technologies serve development in scores of countries. In 2003, the company joined the UN Global Compact, reinforced its corporate governance practices, updated its “Statement on Business Practices,” and elaborated on its Social Charter, which emphasizes Alcatel’s commitment to socially responsible practices.
In a country with a substantial natural resource sector, Canadian investors, businesses, and taxpayers have been sensitive to social and environmental concerns for some time. Rio Algom Ltd., which before a takeover in 2000 was one of Canada’s leading diversified mining and metals distribution companies, developed and operated mines in North and South America.
“The company believed a strong corporate social awareness went beyond a matter of being a good corporate citizen to being good business,” recalls Archie Thomas, a former chief audit executive of Rio Algom. “The company also believed that the responsible reputation it was building was key to gaining a competitive advantage when it came to getting local acceptance and regulatory permits for new projects.”
Thomas speculates that Rio Algom’s CSR program was one factor that made the company an attractive takeover candidate. He adds: “I think in any corporation that sets out measurable goals for operating at a high level of corporate social responsibility, internal auditors can play an important role in assessing the risks and controls associated with these goals and the strategies and tactics put in place to attain them, as well as the integrity of the resulting performance reporting.”
THE RISK OF IRRESPONSIBILITY
In an address on matters related to CSR at The IIA’s International Conference in Sydney in June 2004, Charles Macek, chairman of the Australian Financial Reporting Council and the Sustainable Investment Research Institute (SIRIS), said companies should regard their social responsibilities at least on a par with their financial obligations. Too often, he said, financial analysis of companies ignores other risks and resources beyond purely financial matters. “These are regarded as ‘soft’ or nonfinancial issues,’’ Macek said. “Yet a failure to meet environmental, labor market, or even social obligations can have a substantial impact in the longer term. Names such as Shell, Exxon, Nike, Philip Morris, and Coca-Cola come to mind.”
According to Macek, directors are appointed by shareholders as fiduciaries, and have an obligation to the company, which should include its multiple stakeholders. “The shareholder perspective focuses on the short term and only on items that are readily measured,” Macek said. “The stakeholder view considers the long-term view and recognizes that so-called soft issues can involve considerable financial costs that are ultimately borne by shareholders.”
Internal auditors, he said, should take the lead in managing risk in these areas beyond their traditional role in financial reporting. Macek took to task cynics and others who say corporate social responsibility is of little value except to “do-gooders.” This is a “narrow and erroneous view dangerous to shareholders’ wealth,” Macek said. “The issue of CSR is best considered by answering the following question: Does reputation matter? When a company that rated in the top 25 global brands with 120,000 employees [Arthur Anderson] can literally disappear within a matter of weeks, the answer is self-evident.”
INTERNAL AUDITING’S ROLE
There is broad agreement that for the future, chief audit executives need to ensure that social responsibility is on the board’s agenda of corporate governance issues. They should be aware of existing standards and global initiatives as they relate to CSR and use them as yardsticks against which to measure their organization’s performance.
Additionally, auditors should advise the board on identified best practices and determine whether their organization’s core values and code of conduct still reflect the desired position of the enterprise in today’s and tomorrow’s world.
Finally, internal auditors should use the international standards and practices designed by independent organizations or competitors as benchmarks against which to measure their organization’s CSR performance. Summing up the role internal auditors need to play in the future, Phillip H. Rudolph, an attorney involved in Foley Hoag LLP’s corporate responsibility practice, says, “CSR issues are increasingly touching upon subjects of material relevance to corporations and their boards, and internal auditors need to be correspondingly vigilant in making sure their companies are not falling short of what shareholders and management should reasonably expect.”