The Effects of Business Ethics

1
The Effects of Business Ethics

• Andy Gustafson
• Creighton University

2
Point 1 Business Is Global

• Effects of Mortgage Securities failure in US
• 1. IMF calculates worldwide losses in Trillions
• 2. Multi-Billion in Rescue Packages in US
• 3. 572 Billion in Rescue assurances in Ireland
• 4. France 280 Billion Euro Bank Bailout
• 5. 90 Billion British rescue package
• 6. Spain Bank Assurances 72 Billion

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More Effects of US Problems

• 7. German DAX index -38
• 8. Brazillian BMF Bovespa -40
• 9. Shanghai SE Composite -60
• 10. Russian RTS -67
• 11. US SP -33
• 11. Iceland is perhaps going to go bankrupt
• 12. Sovereign Wealth Funds have pulled out
  Billions from US

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Current Financial Crisis is Due to Ethical Lapses
at Every level

• 1. People borrowing for houses beyond their means
• 2. Banks and Mortgage Brokers not taking
  responsibility for shaky loans
• 3. Financial Firms wrapping shaky loans into debt
  securities, a novel financial tool.
• 4. Creative Accounting Irregularities
• 5. Investment/Financial firms focused on
  short-term
• 6. Analysts under-representing risks
• 7. Wall Street Stock Consumers acted recklessly
• 8. Lack of regulation and oversight
• 9. Conflicts of interests throughout system

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Root Symptoms

• Imprudence (unwise risk taking)
• Taking responsibility without understanding risks
• Short term view
• Unrealistic optimism
• Greed
• Passing consequences to the unknowing

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Our Financial Crisis is In part due to ethical
Lapses

• Failure to lead
• Failure to take responsibility
• Failure to watch out for interests of others
• Self centered exuberance

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What is Ethics?

• Minimal What we shouldnt do
• Dont steal, dont kill, dont lie
• Better What we should do (justice)
• Be fair, Be honest, Fulfill duties, work hard
• Best What we could do to make things excellent
  for all of us
• Improve Current Methods
• Aim High Create a Beautiful World as we make

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Business Its purpose/goal

• The purpose of business is to make me money, and
  increase stockholder value
• (Milton Friedman)

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Business as a Means to Transform Culture and
Society

• How can we use our power, position, and money to
  leverage real change in the world around us
  through business decisions which will change the
  face of our
• cities and communities
• where we are?

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Business Ethics???

• Business needs ethics to thrive
• Trust is foundational to contracts
• Customer Satisfaction/loyalty
• Happy Employees productive employees
• Transparency is essential to development
• Unethical practices ultimately undermine business
• Globalization requires some common values
• Many Customers want ethical businesses
• Ethics is important for branding/marketing

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Question

• Does Ethical perception play a significant role
  in consumer behaviors?
• --In other words
• Do Customers really buy products according to the
  ethics of companies??

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Answer Yes.

• Boycotts by ethical shoppers cost big brands at
  least 2.6bn a year
• 2002 ethical consumption in the UK was worth
  19.86bn in 2002
• (Co-operative Bank EP Index, 2003)

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Consumers Care about Ethics
Co-operative Bank Ethical Consumerism Report

• In 2002 every household in the UK spent an
  average 366 (730) in line with their ethical
  values
• In 2006 they spent 664 (1330)
• ( 81 per cent)

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The Ethics Factor

• In developed competitive markets, many companies
  distinguish themselves by positioning their brand
  as ethical or socially concerned

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Ethics Rankings

• The 100 Best Corporate Citizens list ranks firms
  based on eight categories 
• Shareholders
• community
• governance
• diversity
• employees
• environment
• human rights
• product

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Business Ethics 100 Best Corporate Citizens 2007

• 1. Green Mountain Coffee 13. Texas Instruments
• 2. Advanced Micro Devices 14. Herman Miller
• 3. NIKE 15. Rockwell Collins
• 4. Motorola 16. Interface,
• 5. Intel Corporation 17. Steelcase
• 6. IBM Inc. 18. Dell Inc.
• 7. Agilent Technologies 19. Cisco
• 8. Timberland 20. Lam Research
• 9. Starbucks 21. Johnson Johnson
• 10. General Mills 22. Adobe Systems Inc.
• 11. Salesforce.com, Inc. 23. Kimberly-Clark Corp
• 12. Applied Materials 24. Gaiam, Inc.

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Business Ethics 100 Best Corporate Citizens 2007

• 25Gap, Inc. (The) 39United Parcel Service
• 26Chaparral Steel 40Microsoft
• 27Pitney Bowes, Inc. 41Chittenden, Inc
• 28Freddie Mac 42PepsiCo, Inc.
• 29Google, Inc. 43Energy Conversion Devices
• 303M Company 44McGraw-Hill
• 31Heartland Financial USA 45Ecolab
• 32Chicago Mercantile Ex 46Wells Fargo
• 33Southwest Airlines Co. 47Autodesk
• 34Eastman Kodak 48Xilinx,
• 35Cummins, Inc. 49Xerox Corporation
• 36American Express 50TradeStation Group
• 37Northwest Natural Gas 51Kellogg Company
• 38Wainwright Bank Trust

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Most Ethically Perceived Brands

• United Kingdom United States Germany
• 1. Co-op 1. Coca Cola 1. Adidas
• 2. Body Shop 2. Kraft 2. Nike
• 3. Marks Spencer 3. Procter Gamble 2. Puma
• 4. Traidcraft 4 Johnson Johnson 4. BMW
• 5. Cafédirect 4. Kelloggs 5. Demeter
• 6. Ecover 4. Nike 5. gepa
• 7. Green Black 4. Sony 7. VW
• 7. Tesco 8. Ford 8. Sony
• 9. Oxfam 8. Toyota 8. Trigema
• 10. Sainsburys 10. LEVI 10. Bio Produkte
• 11. Innocent 10. Starbucks 10. Body Shop
• 12. Waitrose 12. Ben Jerrys 10. Hipp
• 13. Clipper Tea 12. Dell 10. Mercedes
• 14. Asda.. 14. Campbells 10. Wrangler

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BIG Brands want Ethical Brands

• Cadbury Schweppes bought Green Black's, a niche
  but fast growing UK-based organic and fair trade
  chocolate firm.
• Nestlé launched Fairtrade certified Partners'
  Blend coffee
• Kraft Foods introduced their Kenco Sustainable
  Development coffee brand

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Unethical Behavior Costs Companies

• Corporate ScandalsUnited States
• - Enron
• - Tyco
• - Adelphia
• - Xerox
• - Rite-Aid
• - Martha Stewart Madoff
• - ImClone
• - K-Mart
• - Boeing
• - WorldCom

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Corporate Scandals-- Europe

• - Mannesmann
• - ELF
• - Royal Dutch Shell
• - VW
• - ABB
• - France Telecom
• - ABN-Ambro
• - Heidelberg Cement
• - Ahold
• - Bank of Italy
• - Siemens
• - Daimler-Chrysler
• - Parmalat

22
Recent Subprime Scandals

• AIG
• Goldman Sachs
• Bear Stearns
• Pricewaterhouse Coopers
• Countrywide

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These Scandals cost

• Settlements
• - AIG (1.6B)
• - Time Warner-AOL (510M)
• - KPMG (465M)
• - Adelphia (715M)
• - Tyco (750M)
• - HCA (1.7B)
• - Prudential (600M)
• - Tenet (325M)
• Marsh McLennan (850M)
• Cardinal Health (600M)

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Results of Recent Scandals

• Investors have become more demanding about
  transparency
• Consumers have become more demanding about
  corporate behaviors (accounting, environment,
  production methods, etc)
• In U.S., government has become involved to ease
  investors concerns more regulation for
  business!!

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Environmentally green

• Today, social norms regarding the environment
  are changing and consumers are increasingly
  holding brands accountable for what they do As
  a result, more and more companies are making
  investment decisions that incorporate brand
  impact and brand risk into their equations.
  (David Wigder)

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What Can Be Done?

• There are a number of ways to improve the ethical
  image of your brand.
• Superficial changes are not enough, and
  authentic ethical commitment of a brand is
  displayed in real action on the part of companies
  in order to have real effect.

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• Some Examples

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Example CocaCola

• Coke is proactively redesigning its bottle to
  reduce material use and pledging to recycle 100
  of bottles sold in the US.
• Results
• Reduce Material Costs 10
• Improve Public Relations/Image with Public

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Ethical Production

• Nike was criticized for sweatshop labor issues in
  East Asia, and many consumers boycotted Nike.

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Nikes Response

• Nike responded to these criticisms, changed some
  of their production arrangements, and returned
  to the list of the 100 most ethical companies
  list

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Financial Honesty and Transparency

• Bad Example

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Financial Honesty and Transparency

• Wells Fargo Bank is known for its disclosure of
  financial data.

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Treatment of Workers

• Costco is well known for its great treatment of
  employees

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vs

• 48 Insured 82 Insured
• 2 yr wait for ins. 6 month wait
• 66 paid by walmart 92 paid by costco
• 50 Turnover 92 Turnover
• 7.50-11.45/hr 10.50-17/hr

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Strong Moral Leadership

• CEO leads troubled Tyco into turnaround
• Ed Breen, CEO
• Cleaned House
• Fired Management
• Fired Board

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• What Causes Unethical Behavior?
• Irrational exuberance uninhibited self-interest
• Arrogance
• Fraud
• Conflicts-of-interest
• Preferential treatment
• Accounting arbitrage
• Failure of independent auditors
• Failure of analysts
• Failure of rating agencies
• Failure of regulators
• Failure of board oversight
• Culture of greed

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Corporate Culture and Performance Starbucks Nord
stroms FedEx Southwest Airlines Costco Kiewit Goog
le