11.5 Contemporary Questions of Corporate Ethics

The subject of corporate ethics is an ever-evolving theme. Sometimes companies and the individuals in those companies cross the line and commit acts that are unethical, immoral, or illegal. Society has attempted to erect barriers to prevent these activities from happening by passing laws and regulations, expecting a strict code of ethics and conduct, and providing measures of a firm’s social contribution. Depending on which party is in power in Washington, laws and regulations are relaxed because they are “bad for business,” or they are strengthened to “protect the people.” Unfortunately, whatever the legal climate, violations of society’s standards and expectations continue to occur, and it is critical to recognize that laws represent the minimum ethical standard tolerated by a society.

Firms committed to ethical business practices must start by recognizing that just because an action is legal, it does not mean it is ethical. Strategists understand the importance of this distinction because it will be the organization’s stakeholders, and not the legal system, that will decide if the firm is satisfactorily ethical. For example, the 2020 boycott by advertisers of Facebook was a reaction to Facebook’s failure to take a more active position on hate speech, but Facebook’s decisions did not break any laws. (Fung, 2020).

This leads to questions about contemporary corporate ethics. In a global economy, where US companies are competing against cell phones from South Korean companies and Belgian chocolates, ethical questions arise as to the best path for a company to follow. Will companies stick to their core values statements when ethical decision making gets tough? Some of these questions are explored below.

Stakeholder Considerations

Bottom of the Pyramid Mini Case

In 2017, 8.6% of the world population controlled 86.3% of global wealth. This disparity continues to increase. This left about 3.5 billion people at the “bottom of the pyramid” (BOP) making $10,000 or less annually. This group has largely been ignored by business, assuming they did not have the means to purchase goods other than subsistence items (Prahalad, 2019).

Some companies are recognizing that this market of nearly half the world’s population may be a viable market and in doing so, provide the world’s poor with access to low-cost products that would improve the quality of their daily lives. There are three factors causing the increased interest in this market:

• The rise in income of this group in the last several decades.
• The widespread use of cell phone technology among the world’s poor, lowering the cost of communication and learning. Banking is even done by cell phone in some poor countries.
• The rise of corporate social responsibility and creating shared value philosophies among companies in richer nations (Prahalad, 2019).

Companies entering this market have used the strategy of “low price, low margins, high volumes” in attempts to gain profitability, but this strategy required appropriately 30% market penetration to be successful. Proctor and Gamble launched its PUR^(R) water purification powder on a large scale with this strategy but failed, not achieving sufficient penetration and volumes. Dupont attempted the same strategy selling protein powder packets to fortify foods, but failed for the same reason (Simanis, 2012).

There are criticisms of BOP strategies that extend beyond their failure to achieve market penetration. These BOP critics argue that the targeted marketing of the world’s poorest people is exploitative and will systematically keep the poor in poverty by pushing out local suppliers and failing to provide sustainable structures for local employment in their place. Pointedly, they suggest that this approach perpetuates the conditions it is trying to improve.

What can firms like P&G and Dupont do to be successful in the market? How do they need to change their strategy? How can this be a win-win for the company and those at the bottom of the pyramid, or can it? Should firms be engaging in this strategy at all?

Offshoring

As US wages increased, and with improvements in communications and transportation, many US companies offshored their activities. Often, manufacturing operations were closed down in the United States and performed in a country where the labor costs were much cheaper. The result has been the loss of thousands of jobs in the US, with plants closed down and communities left devastated. Another aspect of offshoring has been in the service sector, with US firms setting up their call centers abroad, along with IT services and even accounting services. Importantly, offshoring impacts the working conditions of people around the world, generally in the poorest economies with the least labor protections. Workers in agricultural and garment industries are particularly vulnerable to labor exploitation in the global supply chain (British Standards Institution, 2019), and global concerns about child labor are well documented (Moulds, n.d.).

The ethical question is, “Is offshoring ethical?” Justifications can be made on both sides of the issue. US companies compete in a global marketplace, and the dominant argument has been that if they had to pay US wages, they could not compete internationally. Also, in 2019 before the COVID-19 pandemic, the United States had record low unemployment, so the need to return jobs to the United States  was questionable. Conversely, the loss of good jobs and the resulting blight of closed facilities in communities across the country are just not worth the advantage of offshoring, in the opinion of some. As of 2018, efforts are being made by the federal government to encourage manufacturers to return to the United States, which include imposing additional tariffs on some goods made abroad. One outcome of the COVID-19 pandemic was the realization that the United States depends on foreign countries for many essential products, such as pharmaceuticals and face masks. This dependency, especially on China, a political adversary, gave more merit to the argument of reducing offshoring.

Of course, other countries besides the United States pursue cheap labor costs. Sometimes, this can lead to increased labor exploitation abroad, as foreign manufacturers compete against each other on price. This can even lead to labor exploitation at home, with the threat of offshoring to reduce wages and benefits. Conversely, ethical companies have produced the opposite effect abroad, making their suppliers pay fair wages if they want their business. Child labor has been reduced in developing countries because US firms required their suppliers to not use child labor. In an interesting twist, some industries are turning to the American South for cheap manufacturing labor. (Roberts, 2018)

Offshoring is a complicated strategic question, and without considering the full context of the questions facing the firm within its external environment, a strategist could easily make a short-sighted decision.

Environment/Climate Change/Sustainability

Another debate involving multiple world-wide stakeholders relates to environmental sustainability and global warming. As in offshoring, there are opposing forces that tip the scale one way or the other. On one side is the health of the economy and business environment. The opposing side is the health of the planet and its inhabitants; people, animals, and plant life. As environmental forces gain traction and laws and regulations are implemented by governments, some believe this hurts the economy, businesses, and employment. On the flip side, as regulations are loosened, others believe it contributes to increased pollution, poorer human health, and global warming with all its implications for drought, rising sea levels, and loss of animal and plant species.

These arguments have been going on since the early 1970’s with the passage of the Clean Air Act and Clean Water Act by Congress. Some take the position that the dichotomy of opposing forces does not have to exist, that movements toward clean renewable energy sources or reducing pollution are overall good for the business environment, stimulating innovation, efficiency, and job creation. Even though it may cost a manufacturer millions of dollars to retrofit their plant to reduce pollution, these costs can be made up and the overall impact is positive. The pendulum swings back and forth on this issue, often depending on who is in power in Washington. European countries have taken the lead in sustainability, with significant conversion to wind power for electricity generation. Others, including China, India, and emerging economies lag behind.

Global Economic Inequality

In 1990, approximately 36% of the world’s population lived in extreme poverty. The World Bank defines extreme poverty as living on less than $1.90 per day. Fortunately, this rate has been consistently declining about one percentage point annually, and in 2015 the percentage of people world wide living in extreme poverty was 10%. Approximately 68 million people are no longer considered in extreme poverty (The World Bank, 2018). China is a prime example of poor people moving to cities to take manufacturing jobs, with the result of millions elevating into the middle class.

What created such a drop in those living in extreme poverty? These people have benefited from the increase in global business and foreign direct investment that have impacted developing countries in Asia, Latin America, and Africa. Offshoring to low wage countries, although controversial, has helped millions move from an agrarian lifestyle of poverty to a steady job with steady income. The increase in global trade, particularly in commodities produced by poorer countries, helped in this effort. Likewise, the corporate social responsibility efforts of companies manufacturing in poorer countries insisted on their partners and supply chains to pay a living wage, pay men and women equally, and eliminate child labor, which meant more children received an education.

It is important to understand that even though there has been significant improvements in the number of people world wide living in extreme poverty (less than $1.90 per day), nearly half of the world’s population still lives in poverty. Approximately 46% (as of 2015) live on less than $5.50 per day, and 25% live on less than $3.20 per day. Progress has been made but there is still a long way to go. (Walton, 2019). 

Since 2015, the rate of decrease in extreme poverty has slowed. The world goal of reaching 3% living in extreme poverty by 2030 is doubtful (The World Bank, 2020). Several more recent factors slow the decline even more. In 2018–2019 the United States implemented tariffs on many products being imported into the country. This had the effect of slowing international trade, lowering manufacturing volumes abroad, and impacting the job growth seen earlier in poorer countries. The trend of reversing offshoring by US companies, called onshoring, will slow the rate as jobs transition to the United States. Lower commodity prices also influenced the decline. The COVID-19 pandemic had a tremendous negative impact on the world economy with a long term effect of increasing the poverty rate. COVID-19 caused economic activity to decline world wide, and employment in poorer countries dropped off considerably.

COVID-19 Mini Case

The world wide pandemic created by the COVID-19 virus had tremendous impact on businesses domestically and globally. For some, sales increased dramatically, such as in the grocery and medical ventilator industries. For most, however, volumes shrunk as countries mandated stay at home orders and social distancing. Local and national economies across the world were devastated, creating vast numbers of unemployed. Governments were tempted to open the economy back up as soon as possible, and sometimes even when the incidence of infections and hospitalization were still on the rise. This conflicted  decision was also deliberated by executives and owners of businesses large and small.

The pandemic created an ethical challenge for both political leaders and citizens: Open up to get the economy going and people back to work and school, but risk raising infection rates, or, continue to lock down to control and diminish the impact of the virus but keep people unemployed, or some balance in between.

(1) Suppose you are the governor of a state. Should lock down continue, at the cost of more unemployment over a longer time frame, or open the economy up at the expense of more coronavirus cases, hospitalizations, and even deaths? What do you do?

(2) Suppose you are the CEO of a 200 person company that makes specialized parts for airplanes. You outsource the manufacturing to another company in Mexico. With the coronavirus outbreak, you initially followed the governor’s guidance, closed the office and had people work from home. Productivity is suffering, and you have a lab where 30 people work in two shifts who cannot work from home. You have paid them for the first 4 weeks anyway, but now you are running in the red with sales down. What do you do? Bring everyone back to the office, and risk them getting infected? Bring only the lab staff back, with the same risk? Lay off the lab staff? Furlough everyone to stop the bleeding until this passes? Continue paying everyone and risk bankrupting the company? Some combination of these options? Or is there another option you haven’t thought of yet? What’s your decision, CEO?

(3) In the midst of this chaos, there are strategic opportunities for those firms positioned to take advantage of the new environment. What might some of those opportunities be?

(4) Suppose you own Sharkey’s in Blacksburg. Students are gone and your business has collapsed. Now you’re closed per the governor’s order, and all staff are furloughed. You tried to stay open for take-out only but it didn’t work. The governor has announced that Phase 2 will start next week, and you can open with 25% capacity. It’s July, there are a few students around, with many more expected in August. You have enough cash in the bank to stay closed and pay the bills until the semester starts. You’ll lose even more money if you open now at 25% capacity and have to pay staff.  They need their jobs, however, coming back also increases their risk of infection. What do you do? What’s the best decision? You first decide that you hate these ethical dilemmas. Then what?

References

British Standards Institution. (2019). Risk Factors for Labor Exploitation in Global Supply Chains. https://www.bsigroup.com/en-US/blog/supply-chain-blog/risk-management/risk-factors-for-labor-exploitation-in-global-supply-chains/.

Fung, B. (2020). Hundreds of brands are pulling advertisements from Facebook. Its largest advertisers aren’t among them. CNN Business. https://www.cnn.com/2020/07/01/tech/facebook-top-advertisers/index.html.

Moulds, J. (n.d.). Child labour in the fashion supply chain. The Guardian. https://labs.theguardian.com/unicef-child-labour.

Prahalad, D. (2019, January 2). The new fortune at the bottom of the pyramid. Strategy + Business. https://www.strategy-business.com/article/The-New-Fortune-at-the-Bottom-of-the-Pyramid?gko=c5f11.

Roberts, K. (2018, January 22). Insult to injury: Foreign manufacturers now making more case in the U.S. than U.S. companies. Forbes. https://www.forbes.com/sites/kenroberts/2018/01/22/insult-to-injury-foreign-manufacturers-now-making-more-cars-in-u-s-than-u-s-companies.

Simanis, E. (2012, January). Reality Check at the Bottom of the Pyramid. Harvard Business Review. https://hbr.org/2012/06/reality-check-at-the-bottom-of-the-pyramid.

Walton, D. (2019). Poverty trends: global, regional, and national. Development Initiatives. https://devinit.org/resources/poverty-trends-global-regional-and-national.

The World Bank. (2018). Decline of global extreme poverty continues but has slowed: World Bank. https://www.worldbank.org/en/news/press-release/2018/09/19/decline-of-global-extreme-poverty-continues-but-has-slowed-world-bank.

The World Bank. (2020). Poverty overview. https://www.worldbank.org/en/topic/poverty/overview.

Video Credits

Institute of Business Ethics. (2016, February 1). What are the ethical issues facing business today? Retrieved from https://youtu.be/_pLh6bOKbQE.