Solution Manual for Business and Society Stakeholders, Ethics, Public Policy 17th Edition Lawrence

Solution Manual for Business and Society: Stakeholders, Ethics, Public Policy 17th Edition Lawrence

richard@qwconsultancy.com

1|Pa ge

Page 1-1

CHAPTER 1 THE CORPORATION AND ITS STAKEHOLDERS INTRODUCTION Business corporations have complex relationships with many individuals and organizations in society. The term stakeholder refers to all those that affect, or are affected by, the actions of the firm. An important part of management’s role is to identify a firm’s relevant stakeholders and understand the nature of their interests, power, and alliances with one another. Building positive and mutually beneficial relationships across organizational boundaries can help enhance a company’s reputation and address critical social and ethical challenges. In a world of fast-paced globalization, shifting public expectations and government policies, growing ecological concerns, and new technologies, managers face the difficult challenge of achieving economic results while simultaneously creating value for all of their diverse stakeholders.

PREVIEW CASE Amazon.com Teaching Tip: Preview Case Video The Amazon example that opens the chapter illustrates the challenges of managing successfully in a complex global network of stakeholders. It may also be used to illustrate how different stakeholders may perceive a corporation differently, depending on their vantage point. Instructors may wish to introduce a discussion of the opening example with a short video profile of the company: “How Big Is Amazon?” (WCDaily, March18, 2021, www.youtube.com/watch?v=SWjpbc-FJII&t=18 (4:06 minutes).

This can be followed by prompts, such as: • Do you personally like or dislike Amazon? Why? • What groups have been helped by Amazon, and what groups have been hurt?

The instructor can then build on student comments on groups that have been helped or hurt when introducing the concept of stakeholder later in the session.

CHAPTER OUTLINE I.

BUSINESS AND SOCIETY

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 1-2

A. A Systems Perspective II.

THE STAKEHOLDER THEORY OF THE FIRM A. The Stakeholder Concept B. Different Kinds of Stakeholders

III.

STAKEHOLDER ANALYSIS A. Stakeholder Interests B. Stakeholder Power C. Stakeholder Coalitions D. Stakeholder Mapping

IV.

THE CORPORATION’S BOUNDARY-SPANNING DEPARTMENTS

V.

THE DYNAMIC ENVIRONMENT OF BUSINESS

VI.

CREATING VALUE IN A DYNAMIC ENVIRONMENT

GETTING STARTED KEY LEARNING OBJECTIVES LO 1-1: Understanding the relationship between business and society and the ways in which business and society are part of an interactive system. (pp. 4-5) Business firms are organizations that are engaged in making a product or providing a service for a profit. Society, in its broadest sense, refers to human beings and to the social structures they collectively create. Business is part of society and engages in ongoing exchanges with its external environment. Together, business and society form an interactive social system in which the actions of each profoundly influence the other.

LO 1-2: Considering the purpose of the modern corporation. (pp. 5-6) According to the stakeholder theory of the firm, the purpose of the modern corporation is to create value for all of its stakeholders. To survive, all companies must make a profit for their owners. However, they also create many other kinds of value as well for their employees, customers, suppliers, communities, and others. For both practical and ethical reasons, corporations must take all stakeholders’ interests into account.

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 1-3

LO 1-3: Knowing what a stakeholder is and who a corporation’s market and nonmarket and internal and external stakeholders are. (pp. 6-11) Every business firm has economic and social relationships with others in society. Some are intended, some unintended; some are positive, others negative. Stakeholders are all those who affect, or are affected by, the actions of the firm. Some have a market relationship with the company, and others have a nonmarket relationship with it; some stakeholders are internal, and others are external.

LO 1-4: Conducting a stakeholder analysis and understanding the basis of stakeholder interests and power. (pp. 11-18) Stakeholders often have multiple interests and can exercise their economic, political, and other powers in ways that benefit or challenge the organization. Stakeholders may also act independently or create coalitions to influence the company. Stakeholder mapping is a technique for graphically representing stakeholders’ relationship to an issue facing a firm.

LO 1-5: Recognizing the diverse ways in which modern corporations organize internally to interact with various stakeholders. (pp. 19-20) Modern corporations have developed a range of boundary-crossing departments and offices to manage interactions with market and nonmarket stakeholders. The organization of the corporation’s boundary-spanning functions is complex. Most companies have many departments specifically charged with interacting with stakeholders.

LO 1-6: Analyzing the forces of change that continually reshape the business and society relationship. (pp. 20-22) A number of broad forces shape the relationship between business and society. These include changing societal and ethical expectations; a dynamic global economy; redefinition of the role of government; ecological and natural resource concerns; and the transformational role of technology and innovation. To deal effectively with these changes, corporate strategy must address the expectations of all of the company’s stakeholders.

KEY TERMS boundary-spanning departments business external stakeholder focal organization

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 1-4

general systems theory interactive social system internal stakeholder shareholder theory of the firm society stakeholder stakeholder analysis stakeholder coalitions stakeholder interests stakeholder (market) stakeholder (nonmarket) stakeholder map stakeholder power stakeholder salience stakeholder theory of the firm

INTERNET RESOURCES www.economist.com

The Economist

www.fortune.com

Fortune

www.nytimes.com

The New York Times

www.wsj.com

The Wall Street Journal

www.bloomberg.com

Bloomberg

www.ft.com

Financial Times (London)

www.cnnmoney.com

CNN Money

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 1-5

DISCUSSION CASE TIPPING POINT AT UNION SQUARE HOSPITALITY GROUP Discussion Questions 1. What is the focal organization in this case, and what decision did it make?

The chapter defines a focal organization as the organization from whose perspective a stakeholder analysis is conducted. In this case, the focal organization is the Union Square Hospitality Group (USHG), an operator of upscale restaurants in New York City and Washington DC. The decision faced by its CEO, Danny Meyer, and his management team was whether to reintroduce tips for its servers when their restaurants reopened following the first wave of coronavirus closures in 2020. Five years earlier, USHG had eliminated tips, replacing them with a “hospitality included” policy.

2. List the four kinds of tipping mentioned in this case. If you worked in a restaurant, which kind of tipping would you support, and why? If you were a customer in a restaurant, which kind of tipping would you support, and why?

Four kinds of tipping are mentioned in the case. These are: 1) Direct tipping. Customers tip their servers (waiters and waitresses) directly, and the servers keep their own tips. (This kind of tipping was historically widespread in fullservice restaurants in the United States.)

2) Tipping out: Servers voluntarily share their tips with bussers, hosts, cooks, and others who help them during their shifts.

3) Pooled tipping: The employer pools (collects) all tips and service charges at the end of a shift and then redistributes them to all employees, according to an equitable formula.

(The National Restaurant Association supported this type of tipping.)

4) Hospitality included: Customers are not allowed to tip. Instead, menu prices are raised across the board to cover increased compensation for all employees.

Teaching Tip: USHG When USHG first introduced a “hospitality included” policy in 2015, Danny Meyer appeared on several media outlets to explain the change.

For example, he appeared on CBS Mornings in this 4:39 minute clip: www.youtube.com/watch?v=h3B2-_SLRBQ

Students might answer the second and third parts of the question in several ways. A sample response follows: If I worked in a restaurant, I would probably support whichever type of tipping produced the highest compensation. That would depend on my role. If I were a server, I would probably Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 1-6

support keeping my own tips, because tips can as much as double a server’s pay. If I were a back-of-the house worker, such as a cook or busser, I would probably support some type of shared tip policy, such as tipping out or pooled tipping, so I could receive a portion of customers’ tips. I might also support a hospitality included policy if it raised my compensation more than the other types.

If I were a customer in a restaurant, I might have mixed feelings about tipping. On one hand, I would want to be free to reward my waiter or waitress for excellent service (or punish them for poor service by lowering or withholding my tip). On the other hand, I might also be concerned that direct tipping was not fair to others on the staff who had served me indirectly, such as the chefs, leading me to support a tipping out or pooled system. I might prefer a hospitality included policy, since it would take away the hassle of thinking about and calculating a tip after my meal. It might also make me feel good, because this approach would more fairly compensate the back-of-the house workers. But a hospitality included policy might cost more.

3. Identify the stakeholder groups that will be impacted by Meyer’s decision to reintroduce tips. For each, identify its interests and power, with respect to tipping policy. (Note: Some stakeholders may have different segments, with varying interests and power.)

Teaching Tip: USHG This question can be addressed using board work, with a full class discussion, as shown. Alternatively, students groups may be assigned specific stakeholders and asked to identify their interests and power.

STAKEHOLDER Employees: frontof-the house

INTERESTS Highest possible compensation; freedom from harassment or discrimination by customers

Employees: backof-the-house

Highest possible compensation

POWER To quit and take a job somewhere else.

To share or not share tips in a “tipping out” system.

To provide variable levels of service to customers to attract higher tips.

To provide excellent support to the servers, to encourage them to share their tips in a

NOTES Power is quite high, particularly in a tight job market.

Power is quite low for low-skilled Bof-H workers, e.g., dishwashers. May be higher for skilled

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 1-7

STAKEHOLDER

INTERESTS

Customers

Best possible service; good value

Community

Good paying jobs; tax revenue

Suppliers

Regular orders; to be compensated fairly

Investors

Profitability; high returns on investment

POWER tipping out system.

To tip generously or not; to withhold tips.

To patronize a restaurant or not.

NOTES workers, e.g., chefs.

Power is high because customers can decide what restaurants to patronize and how much to tip (except under hospitality included policies).

Issue may be of low salience to community members.

To influence government to enact legislation governing tipping policies.

To refuse to supply, Suppliers are e.g., food or kitchen unlikely to be equipment. aware of tipping policies.

To sell stock and Investors are invest in other unlikely to be companies aware of tipping policies.

4. If you were in Meyer’s position, what tipping policy would you support to best meet the needs of all the company’s stakeholders? What steps should the USHG management team take to implement this approach?

USHG CEO Danny Meyer had a clearly articulated philosophy of “enlightened hospitality”—meeting the needs of all USHG’s stakeholders. He prioritized these stakeholders as follows: employees, guests (customers), community, suppliers, and investors. He strove to adopt policies that made “the math add up for all stakeholders,” in other words, to meet all their interests—although he acknowledged this “was never easy.”

The fact that USHG had experimented with several types of tipping policy over the years suggested that Meyer and his team did not find it obvious which one would best meet all stakeholders’ needs. The management team’s challenge was made more complex by laws in New York state (where many USHG restaurants were located) that prohibited any sharing of tips with workers who did not spend at least 80 percent of their time interacting with customers (seeming to exclude pooled tipping policies that included back-of-the-house workers, e.g., cooks and dishwashers) or mandatory service charges (which could potentially conflict with a hospitality included policy).

Students may respond to this question in several ways. Many students will argue that the best approach in 2020 would be to return to direct tipping by customers and to encourage servers to engage voluntarily in “tipping out” according to collectively determined rules.

Direct tipping would meet most customers’ expectations, keep menu prices lower, and help Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 1-8

attract and retain wait staff during the coronavirus pandemic. This approach would avoid potential legal challenges to pooled tipping and service fees. At the same time, USHG could join others in the restaurant industry to lobby for changes in the law that would permit pooled tipping, to enable employers to redistribute tips to all employees according to a standardized and fair formula.

Teaching Tip: Takeaways One takeaway from this discussion case is the difficulty of meeting all stakeholders’ interests simultaneously. By reinstating tipping in 2020, USHG may have met the interests of servers, some customers, and some investors, but may have disappointed back-of-the house workers and customers and investors concerned about equity in the workplace.

Another takeaway is that managers often need to work with other external organizations to meet stakeholders’ interests. In this situation, management might need to work with other companies in the restaurant industry to press for legislative changes.

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 2-1

CHAPTER 2 MANAGING PUBLIC ISSUES AND STAKEHOLDER RELATIONSHIPS INTRODUCTION Businesses today operate in an ever-changing external environment, where effective management requires anticipating emerging public issues and engaging positively with a wide range of stakeholders. Whether the issue is growing concerns about employee safety, civil disorder, or privacy, managers must respond to the opportunities and risks it presents. To do so effectively often requires building relationships across organizational boundaries, learning from external stakeholders, and altering practices in response. Effective management of public issues and stakeholder relationships builds value for the firm.

PREVIEW CASE The Business Roundtable Teaching Tip: Preview Case If instructors want more background, they could read and/or assign the Business Roundtable Statement for students to read. The reference is: https://opportunity.businessroundtable.org/ourcommitment/.

The members of the Business Roundtable explain the motivation for “The Statement of the Purpose of a Corporation”. Instructors may ask if the statement communicates commitment to a different way of doing business or provides cover and generates publicity to sway public opinion.

CHAPTER OUTLINE I.

PUBLIC ISSUES

II.

ENVIRONMENTAL ANALYSIS Teaching Tip: Eight Strategic Radar Screens The “eight strategic radar screens” is a useful tool for nearly any case.

The instructor may want to introduce a case from the end of the book,

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 2-2

before launching into a more elaborate analysis later in the semester using the same case, since the radar screens can provide an overview of the major forces engaged in the case. Or, a local situation from the community or campus might be a good focus for applying the radar screens.

A. Competitive Intelligence B. Stakeholder Materiality Teaching Tip: Stakeholder Materiality This emerging notion comes out of corporate practice. Students may be assigned to search for companies, other than Unilever, that use this tool.

The instructor may want to apply this tool to a case used earlier in the semester, or an emerging issue/current event. This tool is implicitly used to organize and prioritize the many demands on us in our daily lives.

III.

THE ISSUE MANAGEMENT PROCESS A. Identify Issue B. Analyze Issue C. Generate Options D. Take Action E. Evaluate Results Teaching Tip: Issue Management Process This is another opportunity where a current issue on campus, in the local community, or on the national or international stage could be used for students to analyze how this issue is progressing or has progressed through the issue management process. The instructor may use this opportunity to highlight the connection between managing issues effectively and preserving a firm’s reputation.

IV.

ORGANIZING FOR EFFECTIVE ISSUE MANAGEMENT

V.

STAKEHOLDER ENGAGEMENT

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 2-3

A. Stages in the Business-Stakeholder Relationship Teaching Tip: Stages in the Business-Stakeholder Relationship The four stages provide an excellent comparison of business action toward a stakeholder. Comparing the impact of these different actions to any case could be a good illustration for the students of the many demands on us in our daily lives.

B. Drivers of Stakeholder Engagement •

Goals

•

Motivation

•

Organizational Capacity

C. The Role of Social Media in Stakeholder Engagement Teaching Tip: The Role of Social Media Students could investigate and locate examples of businesses turning to social media to engage with its stakeholders. Examples could be internal to the business or from the larger social environment.

VI.

STAKEHOLDER DIALOGUE A. Stakeholder Networks B. The Benefits of Engagement

GETTING STARTED KEY LEARNING OBJECTIVES LO 2-1: Identifying public issues and analyzing gaps between corporate performance and stakeholder expectations. (pp. 27-30) A public issue is an issue that is of mutual concern to an organization and one or more of the organization’s stakeholders. Stakeholders expect a level of performance by businesses, and if it is not met a gap between performance and expectation emerges. The larger the gap, the greater risk of stakeholder backlash or missed business opportunity.

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 2-4

LO 2-2: Applying available tools or techniques to scan an organization’s multiple environments and assessing stakeholder materiality. (pp. 30-35) The eight strategic radar screens (the customer, competitor, economic, technological, social, political, legal, and geophysical environments) enable public affairs managers to assess and acquire information regarding their business environments. Managers must also assess the importance or materiality of public issues to the firm and their stakeholders.

LO 2-3: Describing the steps in the issue management process and determining how to make the process most effective. (pp. 35-38) The issue management process includes identification and analysis of issues, the generation of options, action, and evaluation of the results.

LO 2-4: Identifying the managerial skills required to respond to emerging issues effectively. (pp. 38-39) In the modern corporation, the issue management process takes place in many boundaryspanning departments. Some firms have a department of external affairs or corporate relations to coordinate these activities and top management support is essential for effective issue management.

LO 2-5: Understanding the various stages through which businesses can engage with stakeholders, what drives this engagement, and the role social media can play. (39-42) Stakeholder engagement involves building relationships between a business firm and its stakeholders around issues of common concern and is enhanced by understanding the goals, motivations, and organizational capacities relevant to the engagement. Social media is playing a more expansive role in stakeholder engagement.

LO 2-6: Recognizing the value of creating stakeholder dialogue and networks. (pp. 42-44) Stakeholder dialogue is central to good stakeholder engagement, supported by network building or partnerships.

KEY TERMS competitive intelligence environmental analysis environmental intelligence issue management issue management process Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 2-5

performance–expectations gap public issue stakeholder dialogue stakeholder engagement stakeholder materiality stakeholder network

INTERNET RESOURCES www.wn.com/publicissues

World News, Public Issues

www.nifi.org

National Issues Forum

unfoundation.org/what-we-do/issues

United Nations Foundation, Global Issues

www.issuemanagement.org

Issue Management Council

www.scip.org

Society of Competitive Intelligence Professionals

www.globalissues.org

Global Issues

millennium-project.org

The Millennium Project

www.cfr.org

Council on Foreign Relations

pac.org/fpa

Foundation for Public Affairs, Public Affairs Council

DISCUSSION CASE ROBINHOOD: THE CHALLENGES OF KEEPING PACE WITH INNOVATION Discussion Questions 1. What was the public issue facing Robinhood in this case?

Students are likely to identify poor customer service as the public issue facing Robinhood.

Sophisticated students understand that poor customer service is a consequence of a larger issue: offering amateur investors access to complicated trades without providing the necessary support to ensure they have access to and understand relevant information for making informed trades.

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 2-6

2. Describe the “performance–expectations gap” found in the case. What were the stakeholders’ (consumers, employees, legislators) expectations, and how did they differ from Robinhood’s performance?

Consumers expected a platform that would function properly along with prompt and responsive customer assistance.

Employees expected a leadership team that would be responsive when informed of technical problems with the platform as dedicate resources and support to address issues with customer service. Instead, it appeared as if the CEOs continued to conduct business despite promising to address these issues.

Legislators expected that Robinhood would address the customer support issue promptly, especially after unresponsive customer service was attributed as a contributing factor to a customer’s suicide. Instead, at the hearing where Robinhood CEO Vladimir Tenev was testifying, a congressman called the helpline and got a recorded message.

3. If you applied the strategic radar screens model to this case, which of the eight environments would be most significant, and why?

Customer Environment: Robinhood was targeted to young people who would be most comfortable with the technology. The app was “gamified” with transactions replicating the reward experiences often associated with video games. Unfortunately, this demographic is also vulnerable because they are likely to have little experience to inform complicated transactions such as options. Poor and unresponsive customer support exacerbated problems caused by inexperience with complex trades. Robinhood did have the staff necessary to field all of the requests for support.

Technological Environment: Robinhood’s app provided a novel platform for amateur investors to execute trades. Some trades were those that had been previously available to professional traders. This app was one of the first of its kind and as a result experienced technical problems (executing trades incorrectly, site crashing and/or freezing) Social Environment: Sentiment toward the app changed rapidly. Initially, Robinhood was perceived as tool that expanded access to non-professional traders. It was seen as democratizing trading so that the average joe could make bigger and more complex transacations that would yield bigger returns without the need to include a professional trader as an intermediary. Over time, Robinhood was seen as uncaring company that benefited from the inexperience of its customers.

Political Environment: Incidents like Nick’s suicide and complaints from constituents who experienced slow customer service and technological problems with the platform that resulted in loss of money motivate increased scrutiny from legislators. Congress convened hearings to investigate issues with Robinhood. All of these events could result in increased regulation.

Legal Environment: Robinhood could be the target of law suits initiated by customers who lost money due to the problems with the app as well as families, like Nick’s, who sue for the company’s part in contributing to their self-harm or suicide.

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 2-7

4. Apply the issue management life cycle process model to this case. Which stages of the process can you identify?

Identify issue: leadership at Robinhood failed to anticipate the problems generated by its investment app. Employees brought concerns about capacity to provide customer service.

Customers complained about the delay in responding to their requests for assistance.

Analyze the issue: leadership at Robinhood seemed unaware of the gravity of the concerns brought forward by employees and customers. Employees describe leadership as unresponsive.

Generate options: CEOs of the company proposed improvements to the app that would provide more guidance for customers, updates on how the app would display busying power, and live customer support for customers with open options positions.

Take action: CEOs failed to take action. When congressman called their customer service line, he was directed immediately to a recorded message.

Evaluate results: Information from the case does not address whether or not leadership did anything differently after the congressional hearing.

5. In your opinion, did Robinhood respond appropriately to this issue? Why or why not?

Students answers will vary. Good answers will express an opinion and refer to facts from the case to support their point of view.

6. If you were a member of Robinhood’s leadership team, what would you have decided to do (or not to do) in the face of emerging concerns about online investing apps?

Student answers will vary. Good answers will be informed by stakeholder model, considering the interests of affected stakeholders and developing a course of action that would address the needs of as many stakeholders as possible.

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 3-1

CHAPTER 3 CORPORATE SOCIAL RESPONSIBILITY AND CITIZENSHIP INTRODUCTION The idea that businesses bear broad responsibilities to society as they pursue economic goals has been debated for decades. Both market and nonmarket stakeholders expect businesses to act responsibly, and many companies have responded by making social goals a part of their overall business operations and adopting the goal of being a good corporate citizen. Businesses embracing these responsibilities often build positive relationships with stakeholders, discover business opportunities in serving society, and transform a concern for financial performance into a vision of integrated financial, social, and environmental performance. Business ventures of all sizes-entrepreneurial, small to medium business enterprises, and corporate endeavors-hold responsibilities to those stakeholders they impact. Establishing effective structures and processes to meet a company’s social and corporate citizenship responsibilities, assessing the results of these efforts, and reporting on the firm’s performance to the public are important challenges facing today’s managers and business owners.

PREVIEW CASES Nike Carnegie Mellon University’s CREATE Lab Are the efforts described above examples of social responsibility practiced by a corporation and social entrepreneurs? Do good global corporate citizens have an obligation to support social causes? How far should an organization or entrepreneur go to help those in society in need of their support?

Teaching Tip: Socially Responsible Companies The preview cases should provide students will ample opportunities to debate the questions raised above – social responsibility or inappropriate use of company assets – and how far “should” a company go? Students may want to locate examples of social responsibility from their local communities or off the Internet.

CHAPTER OUTLINE I.

CORPORATE POWER AND RESPONSIBILITY Teaching Tip: Iron Law of Responsibility

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 3-2

Students could look through local or national business periodicals or the Internet for examples of businesses who have abused their power and encountered the wrath of social interest groups or the government.

Alternatively, are there examples of businesses that have survived over the long term because they have used their power for social good?

To inspire debate in class, ask students whether the Iron Law of Responsibility exists in the modern business climate.

II.

CORPORATE SOCIAL RESPONSIBILITY AND CITIZENSHIP Teaching Tip: Corporate Social Responsibility and Citizenship The CEO at UBS sees it “as a duty to understand the scope and scale of societal challenges.” Do other executives share this vision or are they opposed to this view?

Besides the examples included in the text book, students could explore differences in corporate citizenship, possibly from around the world, based on their own experiences, observations, or from information acquired by surfing the Internet.

Students could search for CEO letters to shareholders to uncover CSR messages and visions.

A. The Origins of Corporate Social Responsibility B. Balancing Social, Economic, and Legal Responsibilities

III.

THE CORPORATE SOCIAL RESPONSIBILITY QUESTION Teaching Tip: The CSR Question Students could be divided into teams and assigned one side of the CSR question, or be in support of or have concerns about each issue in the question for in-class presentations. Students could support their position by acquiring quotes from local executives via interviews or from corporate documents, such as annual reports or press releases.

Figure 3.3 The Pros and Cons of Corporate Social Responsibility might help students form the discussion.

A. Support for Corporate Social Responsibility

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 3-3 

Balances Corporate Power with Responsibility



Discourages Government Regulation



Promotes Long-term Profits for Business



Improves Stakeholder Relationships



Enhances Business Reputation

B. Concerns About Corporate Social Responsibility

IV.



Lowers Economic Efficiency and Profits



Imposes Unequal Costs Among Competitors



Imposes Hidden Costs Passed on to Stakeholders



Requires Skills Business May Lack



Places Responsibility on Business Rather Than Individuals

SOCIAL ENTREPRENEURS AND B CORPORATIONS Teaching Tip: Introducing the B Corporation The B Corporation is intended to be somewhat controversial given the newness of this phenomenon and the few organizations that have received this certification. It is an effort to provide some sort of license or objective seal of approval on firms seeking to be socially responsible.

Is this a good development? Do firms really care about being known as a socially responsible company? Students may want to explore which other firms, besides those mentioned in the chapter, have been awarded this designation.

There are numerous videos available online focusing on and describing the actions of B Corporations – just search for “B Corporations videos” and many can be found on YouTube.

Also, see www.bcorporation.net for more information about these organizations and the certification procedures.

V.

MANAGEMENT SYSTEMS FOR CORPORATE SOCIAL RESPONSIBILITY AND CITIZENSHIP

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 3-4 Teaching Tip: Corporate Social Responsibility and Citizenship Professional Associations Groups of students could be assigned each of the associations listed in Exhibit 3.A and compare how each association serves the interests of its members differently. Are there regional differences around the world when it comes to the practice of corporate social responsibility and citizenship?

VI.

STAGES OF CORPORATE CITIZENSHIP Teaching Tip: Corporate and Individual Philanthropy The Boston College Center’s stage model, Figure 3.5, provides an array of possible assignments for students to explore a firm’s corporate citizenship activities. It might be interesting for students to identify firms operating at different stages of corporate citizenship. Are there firms within an industry that are at different stages? Or, students might explore corporate citizenship practices by a single firm over time to see if the firm has progressed from one stage of corporate citizenship to another. Another interesting question for exploration is whether firms change in their stage of corporate citizenship after experiencing a corporate crisis, embarrassment in the press, or change in senior leadership at the firm.

A. Elementary Stage B. Engaged Stage C. Innovative Stage D. Integrated Stage E. Transforming Stage VII.

ASSESSING AND REPORTING SOCIAL PERFORMANCE A. Social Audit Standards Teaching Tip: Corporate Social Audits Locate, using the Internet, examples of firms that conduct social audits.

Assess their audit evaluations. Do they consider the “major elements” of corporate citizenship? Are their conclusions and commitment for

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 3-5 future actions likely to promote the social and economic objectives espoused by the firm? Are they pursuing an effective corporate citizenship strategy to meet social goals?

B. Social Reporting Teaching Tip: Global Reporting Initiatives Students may also want to explore the Global Reporting Initiatives at www.globalreporting.org. What services or new opportunities does the GRI provide to firms?

Teaching Tip: Social and Environmental Reporting Social and environmental reports are easily available in most global corporation’s websites. Students could compare and contrast reports, determine the level of transparency found in the reports, and identify which firms have integrated reports.

GETTING STARTED KEY LEARNING OBJECTIVES LO 3-1: Understanding the role of big business and the responsible use of corporate power in a democratic society.

The world’s largest corporations are capable of wielding tremendous influence, at times even more than national governments, due to their economic power. Because of this potential influence, the organizations’ stakeholders expect businesses to enhance society when exercising their power.

LO 3-2: Knowing history and evolution of the corporate social responsibility concept and investigating how a company’s purpose or mission can integrate social objectives with economic and legal objectives.

The idea of corporate social responsibility was adopted by business leaders in the United States in the early 20th century. It has evolved from a notion of stewardship and strategic responsiveness to an ethics-based understanding found in culture and the practice of corporate citizenship. Socially responsible businesses attempt to balance economic, legal, and social obligations. Following an enlightened self-interest approach, a firm may be economically rewarded while society benefits from the firm’s actions.

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 3-6

LO 3-3: Examining the key arguments in support of and concerns about corporate social responsibility.

Corporate social responsibility is a controversial notion. Some argue that its benefits include discouraging government regulation, promoting long-term profitability for the firm, and enhancing the company’s stakeholder relationships and business reputation. Others believe that it lowers efficiency, imposes undue costs, and shifts unnecessary obligations to business.

Most executives believed that they should use their corporate power and influence to balance their response to multiple stakeholders rather than maximize stockholders’ return alone.

LO 3-4: Examining the role of business with an explicitly social mission, such as social entrepreneurial ventures and B corporations.

Social entrepreneurs incorporate social and environmental benefit into their core business mission. B Corporations, similarly, are businesses that seek and achieve certification, through rigorous assessments by the nonprofit B Lab organization, gained via specific social and environmental standards.

LO 3-5: Defining global corporate citizenship and recognizing the rapidly evolving management practices to support global citizenship.

Global corporate citizenship refers to putting a commitment to serving various stakeholders into practice by building stakeholder partnerships, discovering business opportunities in serving society, and transforming a concern for financial performance into a vision of integrated financial and social performance worldwide. Global corporate citizenship programs can be considered a strategic investment by the firm.

LO 3-6: Distinguishing among the sequential stages of global corporate citizenship.

Companies progress through five distinct stages as they develop as global corporate citizens; these are termed the elementary, engaged, innovative, integrated, and transforming stages. A specific company may be at more than one stage at once, as it may be progressing more quickly on some dimensions than on others.

LO 3-7: Understanding how businesses assess and report their social performance.

Many companies have created systemic audits of their social, ethical, and environmental performance, measured against industry-wide performance expectations as well as auditing standards developed by global standard-setting organizations. An emerging trend is the practice of communicating social, environmental, and financial results to stakeholders through an integrated corporate report.

KEY TERMS B Corporation Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 3-7 corporate citizenship corporate power corporate social reporting corporate social responsibility (CSR) creating shared value enlightened self-interest global corporate citizenship integrated reporting iron law of responsibility reputation social audit social entrepreneurs social entrepreneurship social venture transparency

INTERNET RESOURCES www.bsr.org

BSR: The business of a better world

www.businessinsociety.eu

The Business in Society Gateway

www.bcorporation.net

Certified B Corporation

www.csrwire.com

The Corporate Social Responsibility Newswire

consciouscompanymedia.com

Conscious Company Media

www.3blassociation.com

3BL Association

www.unicef.org/csr

UNICEF and Corporate Social Responsibility

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 3-8 www.globalreporting.org

Global Reporting Initiative

www.unglobalcompact.org

United Nations Global Compact

DISCUSSION CASE

CORPORATE SOCIAL RESPONSIBILITY AT GRAVITY PAYMENTS Teaching Tip: Gravity Payments There is an excellent video about this case from the New York Times: https://gravitypayments.com/thegravityof70k/

Discussion Questions 1. Is Price demonstrating elements of corporate social responsibility by his actions in this case, or not? Are Price’s actions creating shared value at Gravity Payments?

Although this is a subjective question, the chapter provides a number of tools to assess Price’s actions in terms of corporate social responsibility: • • •

Is Price using his corporate power as a CEO appropriately?

Is Gravity a good corporate citizen?

Is he embracing the responsibility notion of “giving back” to his employees?

In general, there should be ample evidence in the case and in the Teaching Tip link to a series of videos demonstrating Price’s commitment to corporate social responsibility, especially when it comes to his employees, when he announced that all 120 employees would receive a minimum annual salary of $70,000 over the next three years. Price was clearly using his power to benefit his employees and embracing the notion of “giving back” given the past success Price received from his employees’ efforts. Then the discussion may shift to – Did he go too far? There is a difference between whether Price was demonstrating corporate social responsibility and whether it was Price’s social responsibility to “give back”.

Price’s decision to manage credit card transactions in a more affordable way for businesses is a way of creating shared value. He was alarmed at how the industry was treating his clients and he responded by creating a more transparent way of doing business. In terms of stakeholder management, this action by Price generates societal value for his clients.

2. What principles of global corporate citizenship (using Figure 3.2) are evident in this case?

Students should refer to Figure 3.2 to align the principles of corporate citizenship and the drivers from the chart. The focus for the case should be on: Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 3-9

• • •

Forming stakeholder partnerships.

The integration of financial, social and environmental performance.

The sustainability of both the company and the environment.

NB: The textbook incorrectly refers to Exhibit 3.A as a reference for this question. It should be Figure 3.2 instead.

3. What arguments in support of, or concerns about, corporate social responsibility (referring to Figure 3.3) are relevant to this case?

One could claim that all of the arguments found in Figure 3.3 are relevant to this discussion case.

Price seems to be embracing the notion that a firm’s leader must “balance corporate power with responsibility” – (acquired wealth is power) by providing a fair wage to his employees.

Price also might argue that the “long-term profits for his business” could be sustained by the higher wages paid to employees, although this belief is seriously challenged by others outside of Gravity Payments. Price’s actions should “improve stakeholder (employee) relations” and likely will “enhance his business’s reputation.”

However, others may argue that Price is demonstrating some of the arguments against corporate social responsibility. His increase in employee wages could lead to “lower economic efficiency and profit,” and “impose hidden costs passed on to stakeholders,” although Price clearly states his will not do that.

4. Is Price acting like an executive of a firm that could be certified as a B corporation?

One might claim that Price is acting like an executive from a B Corporation. But, a closer look at the certification criteria for a B Corporation makes it difficult to support this claim. B Corporations “explicitly seek to balance the interests of multiple stakeholders.” In the discussion case, Price is focusing almost exclusively on his employees, a single stakeholder.

Moreover, he is not attempting “to solve social and environmental problems.”

On the other hand, Price is demonstrating an understanding of how an executive needs to “blend social objectives” – fair wages to employees – “with financial goals” – the firm’s profitability.

But, in general, Price’s actions are narrower in scope than what typically would be found when looking at a certified B Corporation.

5. What stage of global corporate citizenship (using Figure 3.5) is Gravity Payments operating at, and why do you think so?

Using the various dimensions found in Figure 3.5, one might conclude that Gravity Payments is at the Transformation Stage in many aspects, with only a few elements of an Integrative Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 3-10 Stage.

Price’s actions certainly reflect the “change the game” descriptor for Citizenship Content at the Transformation Stage. He has set a high standard, challenging other business owners to pay employees wages that will allow them to emerge from the limitations of trying to make ends meet. Price also is setting a standard for an owner to share the wealth, adjusting his own salary from nearly $1 million to $70,000, to match his employees’ new annual salary.

This focus continues when considering the Strategic Intent dimension. The Transformation Stage is evident due to the “social change” unmistakable in Price’s dramatic announcement and change in the employees’ wage structure.

Price has often demonstrated a strong leadership style indicative of a Transformation Stage of citizenship. When receiving awards as Entrepreneur of the Year, Price showed that he is a “visionary, ahead of the pack” type of business leader.

The underlying motivation for Price’s announcement is reflective of a “mainstream, business driven” decision that will change the business structure at Gravity Payments. This is reflective of the Transformation Stage for this dimension.

Considering the Issues Management dimension, Price may be showing elements of the Integrated Stage by creating a “proactive, systems” approach to setting employees’ wages.

His efforts may not rise to the level of the Transformation Stage (“defining”).

When looking at the element of Stakeholder Relationships, Price also seems to be operating at the Integrated Stage by developing a “partnership alliance” with his employees. The nature of the issue discussed in the case may preclude Price from attaining the Transformation Stage of this dimension since there is no “multi-organizational” element to his actions.

Finally, it seems clear that there is full disclosure of Price’s actions, thus the Transparency dimensions appears to be at the Transformation Stage.

The application of the Stages of Global Corporate Citizenship model to this discussion case demonstrates that it may be rare for an executive or firm to be operating at the same stage for all dimensions. Yet, the application does point out a general consistency of Price acting at the Transformation Stage.

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 4-1

CHAPTER 4 BUSINESS IN A GLOBALIZED WORLD INTRODUCTION The world economy has become increasingly integrated, and many businesses have extended their reach beyond national borders. Yet the process of globalization has been uneven, and it has slowed in recent years because of resurgent nationalism and a global pandemic. Doing business in diverse political and economic systems and in societies with stark differences in wealth and income poses difficult challenges. When a multinational corporation buys resources, manufactures products, or sells goods and services in multiple countries, it is inevitably drawn into a web of global social and ethical issues. Understanding what these issues are and how to manage them through collaborative action with governments and civil society organizations is a vital skill for today’s managers.

PREVIEW CASE Zoom in China Teaching Tip The opening example discusses a controversy that involved the popular videoconferencing service Zoom in 2020. Apparently at the request of the Chinese government, Zoom shut down the accounts of Chinese dissidents in the United States after they hosted worldwide commemorations of the Tiananmen Square massacre.

At first the company defended its actions by saying that it was simply complying with local laws. It later said it would no longer allow requests from the Chinese government to impact users outside China, and that it would develop technology to enable it to block specific participants based on their location.

In an interview with Haley Sweetland Edwards of TIME Magazine, Zoom CEO discussed the company’s struggle to reconcile its commitment to free speech with the need to comply with laws where its users were located. The relevant material appears from 10:25 to 14:21 in the interview, which may be found on YouTube: www.youtube.com/watch?v=OFUgmvdXZ-M

CHAPTER OUTLINE I.

THE PROCESS OF GLOBALIZATION

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 4-2

A. Major Multinational Enterprises B. International Financial and Trade Institutions II.

THE BENEFITS AND COSTS OF GLOBALIZATION A. Benefits of Globalization B. Costs of Globalization

III.

DOING BUSINESS IN A DIVERSE WORLD A. Comparative Political and Economic Systems B. Global Inequality and the Bottom of the Pyramid

IV.

COLLABORATIVE PARTNERSHIPS FOR GLOBAL PROBLEM SOLVING A. A Three-Sector World

GETTING STARTED KEY LEARNING OBJECTIVES LO 4-1: Defining globalization and classifying the major ways in which companies enter the global marketplace. (pp. 75-78) Globalization refers to the increasing movement of goods, services, and capital across national borders. Firms can enter and compete in the global marketplace by exporting products and services; locating operations in another country; or buying raw materials, components, or supplies from sellers abroad.

LO 4-2: Identifying the international financial and trade institutions that have shaped the globalization process in recent decades. (pp. 78-81) The process of globalization is driven by technological innovation, improvements in transportation, the rise of major multinational corporations, and social and political reforms.

LO 4-3: Analyzing the benefits and costs of the globalization of business. (pp. 81-84) Globalization brings both benefits and costs. On one hand, it has the potential to pull nations out of poverty, spread innovation, and reduce prices for consumers. On the other hand, it may also produce job loss, reduce environmental and labor standards, and erode national cultures.

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 4-3

An ongoing challenge is to extend the benefits of globalization to all, while mitigating its adverse effects.

LO 4-4: Identifying the major types of political and economic systems in which companies operate across the world. (pp. 84-86) Multinational enterprises operate in nations that vary greatly in their political, social, and economic systems. They face the challenge of deciding how to do business in other nations, while remaining true to their values.

LO 4-5: Understanding global inequalities of wealth and income and analyzing the special challenges of serving those at the “bottom of the pyramid.” (pp. 86-89) In a world of great inequalities of wealth and income, businesses are making progress in understanding how to serve the poor to aid social development while earning a profit.

LO 4-6: Assessing how businesses can work collaboratively with governments and the civil sector to address global social issues? (pp. 89-91) Businesses can work with governments and civil society organizations around the world in collaborative partnerships that draw on the unique capabilities of each to address common problems.

KEY TERMS anti-Americanism bottom of the pyramid central state control civil society debt relief democracy foreign direct investment (FDI) free enterprise system global action network (GAN)

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 4-4

globalization international finance and trade institution (IFTI) International Monetary Fund (IMF) microfinance multinational enterprise (MNE) nongovernmental organizations (NGOs) race to the bottom tariff trade war World Bank (WB) World Trade Organization (WTO)

INTERNET RESOURCES www.wto.org

World Trade Organization

www.imf.org

International Monetary Fund

www.worldbank.org

World Bank

www.ifg.org

International Forum on Globalization

www.globalpolicy.org

Global Policy Forum

www.weforum.org

The World Economic Forum

www.un.org/en/sections/resources-different-audiences/civil-society United Nations and Civil Society

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 4-5

DISCUSSION CASE Teaching Tip: Intel Instructors may wish to begin discussion of the case with a video, produced by Intel, in which Adam Schafer, director of supply chain sustainability, and Eric Mitchell, manager of the responsible minerals program, visit mines in Rwanda and discuss Intel’s efforts to promote responsibility in its global supply chain. The clip runs 2:48 minutes and may be found on YouTube:www.youtube.com/watch?v=UhCVH_CNdvs

INTEL AND THE RESPONSIBLE MINERALS INITIATIVE 1. How do conflict minerals, and in particular, conflict coltan get their name? What groups benefited from the trade in conflict minerals? What groups were hurt by it?

Conflict minerals are minerals such as tantalum, tungsten, tin, and gold in the Democratic Republic of the Congo and nearby countries. They are called conflict minerals because they are traded by warring groups to finance civil conflict. Coltan (a contraction of columbite-tantalite) is a specific conflict mineral. It is a black metallic ore which, when refined, produces a product called tantalum, which is used in portable consumer electronics. According to the United Nations and several NGOs, militias had looted coltan from eastern Congo and used the profits to help fund their operations. Warring groups and their supporters and business partners benefited from the trade in conflict coltan. Many civilians suffered brutal human rights abuses, especially in the DRC. The legitimate tantalum industry was also hurt, because it could be falsely accused of using conflict ore.

2. Consider the three sectors discussed in this chapter (business, government, and civil society). What were the interests of each, with respect to conflict coltan, and in what ways did their interests converge?

As explained in the chapter, the term sector refers to major parts or spheres of society, such as business (the private sector), government (the public sector), and civil society (nonprofit, educational, religious, community, family, and interest-group organizations).

In this case, firms in the electronics industry, including Intel and other participants in the Responsible Minerals Initiative, worked to eliminate conflict minerals from the supply chain to prevent damage to their reputations from association with human rights violations. Governments of countries with legitimate coltan industries, such as Australia, Brazil, and Canada, shared this concern, because they wished to protect their own companies. The United States took action in the Dodd-Frank Act to require disclosure of the source of tantalum used in their products. Finally, NGOs, such as the Enough Project and Global Witness, had an interest in preventing human rights abuses in connection with trade in conflict coltan.

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 4-6

3. Why was Intel unable to eliminate conflict minerals from its supply chain unilaterally, that is, without the help of others?

Excluding conflict minerals from the global supply chain is inherently difficult, because the supply chain is long and complex, and marking and tracing particular batches is difficult. Once coltan or other conflict minerals reach the end-user (in this case, Intel), determining its original source is nearly impossible. Therefore, Intel had to collaborate with smelters, processing companies, and traders all along the supply chain to create a system under which it could assure that minerals it used were not used to fund civil conflict in the DRC or elsewhere. In order to convince stakeholders of the integrity of this process, collaboration with governments and NGOs was also essential.

4. In what ways did Intel collaborate with other sectors (governments and civil society) in its efforts to eliminate conflict minerals from its products? What strengths and weaknesses did each sector bring to the task?

Possibly the easiest solution for Intel would have been to avoid minerals sourced from the DRC entirely. However, that would have unfairly penalized responsible mines there and also cut it off from an important source of needed minerals. Instead, Intel worked to eliminate only conflict minerals sourced from the DRC. In doing so, the company collaborated with both government and civil society organizations, as well as with other business firms organized as the Responsible Minerals Initiative. It worked with the U.S. State Department, a government agency, and with RESOLVE, a civil society organization, to support responsible mines in the Congo and to develop effective programs to monitor the chain-of-custody of responsibly-mined minerals as they moved through the supply chain. Governments brought to this process their legal authority, while NGOs brought community legitimacy and local knowledge.

5. What further steps could be taken by governments, NGOs, and companies to strengthen the process to exclude conflict minerals from the global supply chain?

Government actions mentioned in the case include offering guidance and requiring disclosure. Governments could do more by banning conflict minerals outright, or by providing incentives to companies that did so. Governments in mineral-producing nations could support and incentivize responsible mining practices. NGOs mentioned in the case had publicized the problem of conflict minerals and worked to map their supply chain. Additional effort could be directed at supporting responsible mines, refiners, and smelters; developing tight chain-of-custody programs; and participating in supply chain audits.

Teaching Tip Students may be asked to investigate and evaluate the programs of the Responsible Minerals Initiative: http://responsiblemineralsinitiative.org.

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 5-1

CHAPTER 5 ETHICS AND ETHICAL REASONING INTRODUCTION People who work in business frequently encounter and must deal with on-the-job ethical issues.

Being ethical is important to the individual, the organization and the global marketplace in today’s business climate. Managers and employees alike must learn how to recognize ethical dilemmas and know why they occur. In addition, they need to be aware of the role their own ethical character plays in their decision-making process, as well as the influence of the ethical character of others. Finally, managers and employees must be able to analyze the ethical problems they encounter at work to determine an ethical resolution to these dilemmas.

PREVIEW CASES Tesla Wirecard This chapter opens with two examples of business executives acting in an unethical manner.

Tesla’s CEO, Elon Musk put his employees in danger and caused potential harm by ignoring state of California pandemic measures. He disobeyed orders to lock down his facility and forced his workers to report to work despite the Covid-19 pandemic, resulting in many employees contracting the virus. Wirecard’s CEO, Marcus Braun, oversaw his company misleading investors by manipulating his financial statements. More than $2 billion in cash was missing.

This resulted in a class-action lawsuit by Wirecard’s shareholders. Why did Musk and Braun act in such unethical ways? What pressures were they under that caused them to ignore clear guidelines? Was the lawsuit enough to deter future ethical indiscretions? How can these behaviors be mitigated in the future?

CHAPTER OUTLINE I.

THE MEANING OF ETHICS Teaching Tip: Defining Ethics Establishing a clear definition of ethics is a critical task in understanding this and the following chapter. Ethics is not identical to law nor is it simply personal or cultural values. Defining ethics should promote a lively discussion, although at the conclusion of the class session all students should have a clear definition. The issue of ethical relativism may also spark a lively in-class discussion, especially if students were raised in differing cultures. A good question for students may be to ask them if they think universal ethical principles exist. Are there fundamental principles that operate in every culture across the world?

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 5-2

A. What Is Business Ethics?

B. Why Should Business Be Ethical?

•

Enhance Business Performance Teaching Tip: World’s Most Ethical Companies

Students might be interested in exploring in greater detail firms who are considered to be the “world’s most ethical companies.” Why do these firms consistently outperform, financially, the stock performance benchmark?

•

Comply with Legal Requirements Teaching Tip: World’s Corporate Sentencing Guidelines and the Sarbanes-Oxley Act

The U.S. Corporate Sentencing Guidelines and the Sarbanes-Oxley Act appeared on the U.S. ethics scene years ago. There are numerous current articles discussing these legal requirements. Students may be challenged by the question: Have the U.S. Corporate Sentencing Guidelines or the Sarbanes-Oxley Act promoted ethical behavior by employees, or have firms only been interested in avoiding or reducing jail time for their executives?

Students could think about how effective the items that establish a firm’s culpability are in mitigating corporate fraud and corruption. For instance, if a company has established standards in place, why does the wrongdoing still occur?

•

Meet Demands of Business Stakeholders

Teaching Tip: World Meets Demands of Business Stakeholders Students may be challenged by the question: How important is it to you to work for an ethical company? Would be willing to give up some amount of salary or other benefits just to work for a company with a strong ethical foundation and commitment to ethics?

•

Prevent or Minimize Harm

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 5-3 • II.

Promote Personal Morality

WHY ETHICAL PROBLEMS OCCUR IN BUSINESS A. Personal Gain and Selfish Interest Teaching Tip: Ethical Egoism There are plenty examples of ethical egoism in the media, including the example given in the chapter: Jennifer Woodley of Make-A-Wish Foundation. What led this individual to act so selfishly? Are there local examples of selfish behavior, examples of ethical egoism, which students could research and discuss in class?

B. Competitive Pressures on Profits C. Conflicts of Interest

Teaching Tip: Conflicts of Interest Conflicts of interests are reportedly one of the most common forms of ethical dilemmas in the workplace. Perhaps students can identify and describe their own conflicts of interest – how they spend their time, with whom they spend their time, do they attend class or a job interview scheduled at the same time, how do they make decisions to resolve their conflicts of interest?

Are there other corporate examples of conflict of interest in the news besides the Zuckerberg example presented in the chapter?

D.

III.

Cross-Cultural Contradictions

THE CORE ELEMENTS OF ETHICAL CHARACTER A. Managers’ Values B. Spirituality in the Workplace C. Managers’ Moral Development Teaching Tip: Stages of Moral Development Popular television shows or movies can be used to illustrate the stages of moral development. Some scholars have researched and published papers describing a moral reasoning analysis of M*A*S*H characters and The Simpson’s. Most children’s movies are classic battles between

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 5-4 good and evil and higher stages of reasoning can be seen in the reasoning processes for the “good characters” and lower stages in the “bad characters.” Find some modern popular shows that show this character dichotomy and have students discuss what ways the characters’ behaviors in the show illustrate different stages of reasoning.

IV.

ANALYZING ETHICAL PROBLEMS IN BUSINESS A. Virtue Ethics: Pursuing a “Good” Life Teaching Tip: What Is a Virtuous Person?

Student may be assigned to create their own list of virtues or good values to see how their ideas compare to those lists presented in the textbook. They also may want to discuss if “a virtuous person can be a successful business person?” and try to discover examples of good business managers or employees. What virtues are most important in the present-day business environment?

B. Utility: Comparing Benefits and Costs Teaching Tip: Do Patients Have the Right to Try? After reading Exhibit 5.A, should patients be given the right to try therapy or experimental drugs that are still in the testing phase in the hope of stopping the spread of their disease or possibly saving their lives? Using each of the ethical theories presented in the chapter, how would one answer this question?

C. Rights: Determining and Protecting Entitlements D. Justice: Is It Fair?

E. Applying Ethical Reasoning to Business Activities V.

THE MORAL INTENSITY OF AN ETHICAL ISSUE Teaching Tip: Applying Moral Intensity The concept of moral intensity can be found in many common ethical situations. Have students develop realistic personal situations where the moral intensity may be “high” or “low” for each of the five moral intensity characteristics described in the chapter. Ask students to speculate as to how an issue with high moral intensity may affect

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 5-5 behavior.

GETTING STARTED KEY LEARNING OBJECTIVES LO 5-1:

Defining ethics and business ethics.

Ethics is a conception of right and wrong behavior, defining for us when our actions are moral and when they are immoral. Business ethics is the application of general ethical ideas to business behavior.

LO 5-2: Evaluating why businesses should be ethical from a practical and normative view.

Ethical business behavior enhances business performance, complies with legal requirements, prevents or minimizes harm, is demanded by business stakeholders, and promotes personal morality.

LO 5-3:

Knowing why ethical problems occur in business.

Ethics problems occur in business for many reasons, including the selfishness of a few, competitive pressures on profits, the clash of personal values and business goals, and crosscultural contradictions in global business operations.

LO 5-4: Identifying managerial values and people’s spirituality as influences on ethical decision-making.

Managers’ on-the-job values tend to be company-oriented, assigning high priority to company goals. Managers often value being competent and place importance on having a comfortable or exciting life, among other values. In addition, individual spirituality can greatly influence how a manager understands ethical challenges; increasingly, it is recognized that organizations must acknowledge employees’ spirituality in the workplace.

LO 5-5:

Understanding stages of moral reasoning and how they affect ethical choices.

Individuals reason at various stages of moral development, with most managers focusing on personal rewards, recognition from others, or compliance with company’s rules as guides for their reasoning.

LO 5-6:

Analyzing ethical problems using generally accepted ethics theories.

People in business can analyze ethics dilemmas by using four major types of ethical reasoning: virtue ethics, utilitarian reasoning, rights reasoning, and justice reasoning.

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 5-6

LO 5-7: Understanding how perceptions of moral intensity affect an individual’s ethical decision making.

The perceived moral intensity of an issue, as determined by the issue’s affects how individuals make ethical decisions.

characteristics,

KEY TERMS business ethics conflict of interest ethical egoist ethical principles ethical relativism ethics human rights justice laws moral intensity Sarbanes-Oxley Act spirituality stages of moral development U.S. Corporate Sentencing Guidelines utilitarian reasoning virtue ethics

INTERNET RESOURCES www.ethics.org

Ethics and Compliance Initiative (ECI)

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 5-7 www.ibe.org.uk

Institute for Business Ethics (IBE)

www.business-ethics.org

International Business Ethics Institute

www.soxlaw.com

The Sarbanes-Oxley Act 2002

www.sarbanes-oxley-association.com

Sarbanes-Oxley Compliance Professionals Association (SOCCPA)

www.oge.gov

United States Office of Government Ethics

www.ussc.gov

United States Sentencing Commission

www.restoringconnections.org

Restoring Connections (formerly Center for Spirituality at Work)

DISCUSSION CASE 3M AND N95 RESPIRATORS FOR AMERICANS Discussion Questions 1. Do you believe it was right for the Administration to ask 3M to direct its N95 respirators first to U.S. customers? Why or why not?

This question raises ethical relativity questions. From an ethical relativist perspective, the Administration acted ethically by defining the “right” decision in terms of national standards.

Duty to one’s nation would be upheld by directing 3M to provide the respirators to the U.S. customers first. But from a global perspective, this suggests there are no global universal principles that protect human rights for individuals around the globe. Thus, the focus of the Administration’s request was narrow and did not support universal ethical standards that should guide ethical behavior and decision-making.

2. Considering the four methods of ethical analysis presented in this chapter: a. Would directing N95 respirators first to U.S. customers be consistent with 3M’s values, as stated in their code of ethics? b. What would be the costs and benefits to key stakeholders of directing N95 masks first to U.S. customers? How do these costs and benefits compare? c. Would directing N95 respirators first to U.S. customers be consistent with principles of human rights? Why or why not? d. Would directing N95 respirators to U.S. customers be fair and just? Why or why not?

3M’s Ethical Business Conduct Principle emphasizes the principles of honesty, integrity, fairness, respect and concern for others, and personal accountability. There is also an Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 5-8 emphasis on adherence to the law. These fundamental principles that 3M advocates make no mention of their global application. Thus, the espoused principles embedded in their code of conduct can be applied to a culturally relativistic group. There should be a debate about whether these principles should be applied to a universal population or only for national interests.

From a utilitarian perspective, domestic customers would benefit from directing the N95 masks to them first. But other potential customers across the globe, some of whom do not have access to the protective equipment would be harmed.

Universal human rights are certainly not upheld by directing the masks only to United States customers. The human rights of safety are honored, but only domestically. This discussion of human rights needs to focus around “whose human rights?” The right to safety should be respected internationally and is identified by the United Nations Declaration of Human Rights. But the Administration’s decision is not globally oriented. Also, the rights of individuals unable to access the masks appear to be sacrificed by this decision.

To direct the N95 respirators only to U.S. customers at the outset appears to violate international notions of fairness and justice. Again, fairness is applied as a principle only in an ethically relativistic way by the Administration in this case. As a MNC, should 3M’s masks be available to a global population who depend on their products? In terms of fairness based on need, people around the world need the masks. Thus, this can be perceived as unfair to them. In terms of equity, should not everyone have equal access to this protective equipment?

3. Considering the stages of moral development outlined in Figure 5.4, at what stage would you classify a decision to give priority to U.S. customers? Why? A decision focused on prioritizing U.S. customers is culturally relativistic. Thus, this is within society’s conventions and falls within Stage 4 moral reasoning. Stage 4 reasoners use a socio-moral perspective that looks at “right” behavior in terms of how it affects their own particular cultural group. In this case, the cultural group would be the United States citizens.

4. Which of the several types of moral intensity are relevant in the case?

Magnitude of consequences would be relevant as the consequences to the people who do not have access to the masks could be grave. U.S. customers would feel a degree of proximity with this decision since it affects the domestic population. There is some temporal immediacy as the length of time the consequences of this decision take effect would be short, thus implying some urgency. The probability of the consequences predicted is likely to be high because not having the masks put people in immediate and assured higher risk. The social consensus of this issue is interesting in that within the United States it is not clear to what degree the American people agree with the government’s decision.

5. If you were Mike Roman, what would you do to make an ethical decision?

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 5-9 Students should be encouraged to think globally and consider universal human rights, utility, and global fairness. The most ethically defensible theories are the ones that consider the broadest and most inclusive stakeholder group.

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 6-1

CHAPTER 6 ORGANIZATIONAL ETHICS INTRODUCTION Faced with increasing pressure to create an ethical environment at work, businesses can take tangible steps to improve their ethical performance. The organization’s culture and ethical work climate play a central role in promoting ethics at work. Ethical situations arise in all areas and functions of business, and often professional associations seek to guide managers in addressing these challenges. Corporations can also implement ethical safeguards to create a comprehensive ethics program. This can become a complex challenge when facing different customs and regulations around the world.

PREVIEW CASES Duracell and Johnson & Johnson Why are business executives, managers, and employees repeatedly being caught conducting illegal and unethical activities? What can firms do to minimize or prevent the unethical activities perpetrated by their executives and employees? Could companies set in place systems or programs to monitor workplace activities to detect illegal or unethical behavior?

The preview cases should provide the students with a good starting point to discuss other, possibly more current, examples of corporate wrongdoing. There are multiple reasons why employees act unethically and illegally, as discussed in Chapter 5, as well as examples – although not often portrayed in the media – of employees doing the right thing. The discussion may focus on [1] the individual decision-maker and her/his motivations to act ethically or not, [2] pressures faced by the decision-maker from her/his employer, boss or peers, and [3] organizational systems that help or impede ethical decision making at work. The emphasis may be on what businesses can do to help employees act ethically, avoiding the examples depicted in the preview case, or must efforts to ensure ethical behavior come from government, regulators or the courts?

CHAPTER OUTLINE I.

CORPORATE ETHICAL CLIMATES Teaching Tip: Corporate Ethical Climates An assessment of the ethical climates of the students’ course, college or university may provide the basis for a lively discussion. Students easily can observe their immediate surroundings and the impact of the schools’ culture and climates on ethical issues relevant to the students’ lives and use the language in Figure 6.1 to assess the ethical climate observed.

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 6-2

II.

BUSINESS ETHICS ACROSS ORGANIZATIONAL FUNCTIONS Teaching Tip: Types of Business Ethics Issues Have your students prepare a class report that identifies an example of a business ethics issue for each functional area. If the students have work or internship experiences, have them draw upon their own experiences.

If not, a review of recent newspapers or business periodicals or professional associations’ websites will provide a rich research source.

Challenge students – possibly matching students majoring in a discipline to the corresponding professional code of conduct (e.g.

Accounting majors matched to the AICPA code, etc.), to identify ethical issues in the current press. Then, locate passages in the professional code as a guide for those professionals encountering these ethical issues, answering the question: What should these professionals do when faced with the ethical issue?

A. Accounting Ethics B. Financial Ethics C. Marketing Ethics D. Information Technology Ethics E. Supply Chain Ethics III.

MAKING ETHICS WORK IN CORPORATIONS A. Building Ethical Safeguards into the Company Teaching Tip: Organizational Ethics Programs This section of the chapter provides an excellent opportunity to bring to class a number of different local organizations’ ethics programs.

Undoubtedly some programs will have some of the ethical safeguards discussed in this chapter, whereas others will not. Students can assess the effectiveness of these programs, with their variations, and suggest what the organization might be next to improve their ethics program •

Ethical Leadership Teaching Tip: Ethical Leadership This topic allows the instructor to invite a guest speaker to class that is

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 6-3

an example of exemplary ethical leadership, possibly recognized by a local organization for this achievement. Or, alternatively, students could search social media for examples of videos portraying ethical leadership and present these in class.

•

Ethics Policies or Codes Teaching Tip: Ethics Codes Examples of corporate codes of ethics are easily found using the Internet, especially for firms heavily involved in U.S. government contracting. Students could survey local firms to see if they have codes.

Some colleges or universities have codes of ethics to analyze. Some faculty members have found great success in having students craft their own code of ethics, governing their behavior in the class.

•

Ethics and Compliance Officers

•

Ethics Reporting Mechanisms

•

Ethics Training Programs Teaching Tip: Ethics Training Construct an exercise where the students use their own experiences in the classroom to identify what educational or training techniques were effective or ineffective. How can students’ classroom experiences translate into an effective ethics training program as they enter the workforce.

NB:

ASSESSMENT OF THE STRENGTH AND WEAKNESS OF ETHICAL PROGRAMS (Future heading to match with LO 6-4 will go here.)

IV.

ETHICS IN A GLOBAL ECONOMY A. Efforts to Curtail Unethical Practices

GETTING STARTED KEY LEARNING OBJECTIVES LO 6-1: Classifying an organization’s culture and ethical climate. (pp. 119-121) A company’s culture and ethical climate tend to shape the attitudes and actions of all Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 6-4

who work there, sometimes resulting in high levels of ethical behavior and at other times contributing to less desirable ethical performance.

LO 6-2: Recognizing ethics challenges across the multiple functions of business. (pp. 121126) Not all ethical issues in business are the same, but ethical challenges occur in all major functional areas of business. Professional associations for each functional area often attempt to provide a standard of conduct to guide practice.

LO 6-3: Creating effective ethics polices, ethics reporting mechanisms, ethics training programs, and similar safeguards. (pp. 126-132) Companies need to create a complex series of ethical safeguards to enable employees to behave ethically. Ethics codes or policies provide guidance to managers and employees when they encounter an ethical dilemma. After numerous waves of unethical behavior, many companies have turned their attention toward entrusting ethical compliance and the development and implementation of ethics programs to an ethics or compliance officer. Many firms reinforce these efforts by creating an ethical hotline so employees can anonymously report, without retaliation, observations of unethical behavior and by developing employee ethics trianing programs so employees know what the law requires, the company expects, how individuals to contribute to strengthening the firm’s ethical culture.

LO 6-4: Assessing the strengths and weaknesses of a comprehensive ethics program. (pp.

132-132; there is no header for this LO)

Each ethical safeguard introduced in this chapter can be effective or ineffective in the promotion of ethical behavior among employees in the organization. Organizations need to monitor the effectiveness of the safeguards and develop clear measures for their assessment. When safeguards fall short of these measures, quick and impactful steps should be taken to correct the weakness.

LO 6-5: Understanding how to conduct business ethically in the global marketplace. (pp.

132-135) Ethical issues, such as bribery, are evident throughout the world, and many international agencies and national governments are actively attempting to minimize such unethical behavior through economic sanctions and international codes.

KEY TERMS bribery corporate culture Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 6-5

employee ethics training ethical climate ethical leadership ethics and compliance officer ethics policies or codes ethics reporting mechanisms U.S. Foreign Corrupt Practices Act (FCPA)

INTERNET RESOURCES www.dii.org

Defense Industry Initiative on Business Ethics and Conduct

www.ethicaledge.com

Ethics and Policy Integration Center

www.ethicalsystems.org

Ethical Systems

ethisphere.com

Ethisphere Institute

www.ethics.org

Ethics and Compliance Initiative

business-ethics.org

International Business Ethics Institute (IBEI)

oecd.org/daf/anti-bribery

OECD

www.saiglobal.com

SAI Global

www.corporatecompliance.org

Society of Corporate Compliance and Ethics

www.transparency.org

Transparency International

www.unglobalcompact.org

United Nations Global Compact

DISCUSSION CASE THE VALE MINING COMPANY DAM COLLAPSE Discussion Questions Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 6-6

1.

Using Figure 6.1, how would you classify the ethical climate at Vale? In what way did it contribute to the mine collapse? What ethical climate might have prevented the dam collapse?

Students will likely argue with case evidence that Vale had an ethical climate of “egoism (self-centered approach)” and “focus on the organization,” which resulted in a “Company interest” ethical climate. The more ethical climate that might have prevented the dam collapse could be a climate that used “Benevolence (concern-forothers approach”) or a “Principle (integrity approach”) along with a “focus on society,” which leads to a “social responsibility” or “law and professional codes” ethical climate.

2.

What ethical safeguards were present at Vale at the time of the dam collapse?

Why did they not prevent the dam collapse?

Vale appeared to have created reporting mechanisms, but the underlying organizational ethical climate to render these safeguards more effective was not there so the reports of possible unsafe construction were not heeded. No other effective safeguards appeared to be present at Vale.

3.

What additional ethical safeguards were needed at Vale that could have prevented, or mitigated the harms from, the dam collapse?

In addition to the critical focus on a stronger ethical climate at Vale, the company could have demonstrated a stronger concern and support for ethics through examples of ethical leadership. In addition, the firm could have developed and distributed a code of ethics to its employees and other stakeholders, conducted employee ethics training, and appointed a senior manager as the company’s ethics and compliance officer.

4.

What role did the relationship between Vale and TUV SUD play in the dam disaster? Did TUV SUD have a conflict of interest, and if so, what was the conflict?

Vale presumably hired TUV SUD as an independent watchdog, ensuring the integrity of the dam construction. In fact, TUV SUD was hired to provide a “rubber stamp” in signing off on all safety reports to serve Vale and its profit motive. As discussed in the case, when the former safety inspections noted construction flaws, that company was fired and Vale found a company who would be less critical and more compliant with Vale and its objectives – TUV SUD. Without the checks-andbalance that a safety inspection would provide Vale, the company, its employees, and the local community were at risk for the dam collapse that occurred.

5.

Why did Vale’s employees and members of the community not advocate effectively for improvements in the dam’s safety?

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 6-7

Despite initial efforts to improve the dam’s safety, as described in the case, management thwarted these efforts, incentivized by the company, and employees quickly learned to be silent. Much of the safety information seemed to be withheld from the community, therefore many did not know of the impending disaster that was inevitable.

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 7-1

CHAPTER 7 BUSINESS-GOVERNMENT RELATIONS INTRODUCTION Governments seek to protect and promote the public good and in these roles establish rules under which business operates in society. Therefore, a government’s influence on business through public policy and regulation is a vital concern for managers. Government’s relationship with business can be either cooperative or adversarial. Various economic or social assistance policies significantly affect society, in which businesses must operate. Many government regulations also impact business directly. Managers must understand the objectives and effects of government policy and regulation, both at home and abroad, in order to conduct business in an ethical and legal manner.

PREVIEW CASES Occupational Safety and Health Administration (OSHA) Food and Drug Administration (FDA) What prompted or compelled governments to become more involved in the status of employees or the sale of a consumer product? How do these government’s actions affect businesses and what they are permitted to do? How did these actions affect competition or society and the public’s health? Did government’s involvement promote or harm companies or allow other firms to maintain their competitive advantage? Were these efforts by the governments necessary and effective, or can this only be answered in time?

Teaching Tip: Regulation of Worker Safety During a Pandemic The introductory example shows many errors regarding the protection of workers during a pandemic. Student might discuss this on-going issue as it expands to include the mandatory wearing of masks by workers or the organization requirement for all workers to be vaccinated. Are issues of worker safety and public safety at odds with workers’ right to a free choice?

Teaching Tip: Regulation of Vaping Student may want to extend the issue of safety versus free choice, from the example above, to a social issue involving the use of e-cigarettes or vaping. Should government control these activities or should the public be free to choose what activities they wish to enjoy in the privacy of their own home or in public?

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 7-2

CHAPTER OUTLINE I.

HOW BUSINESS AND GOVERNMENT RELATE A. Seeking a Collaborative Partnership B. Working in Opposition to Government Teaching Tip: How Business-Government Relate The proper role of government is always a matter of debate. Should government take a pro-business (or collaborative partnership) or an antibusiness (or opposition to the government) role? A simple exercise that can provoke some classroom enthusiasm is to split the class into two teams – Pro-business Government and Anti-business Government. Give one team thirty seconds to state one reason why its approach is best.

The other team can respond or offer its own point. Allow the point/counterpoint to continue for several rounds. By keeping a list on the board, this exercise will sharpen everyone’s sense of what each approach offers.

C. Legitimacy Issues

II.

GOVERNMENT’S PUBLIC POLICY ROLE A. Elements of Public Policy Teaching Tip: Public Policy New public policy issues abound frequently. This might afford an opportunity to have students scan the Internet or social media sites to identify an emerging public policy issue. There may be an issue that is relevant to your local community or state. Students should be able to identify the various elements of public policy in the issue they have discovered.

You might also challenge students to identify a public policy issue emerging in another country. How is the public policy process different across nations? Who are the major actors in the public policy process in another country and how does this differ from the major actors in your own country?

B. Types of Public Policy •

Economic Policies

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 7-3

Teaching Tip: Opening Case – Trade Policy Given the current regulatory climate in the U.S., do the current efforts at imposing tariffs or other trade barriers constitute a “trade war?” Who benefits and who loses during a trade war?

C. Social Assistance Policies Teaching Tip: Social Assistance Policies Social assistance policies, such as health care, are very important to individuals and families. It is likely that the U.S. government’s health care program will remain an active controversial issue for many years. Ask students to identify an elderly relative – such as a grandparent or neighbor – or someone without health care insurance at work. What is their opinion about governmental health care coverage, as compared to someone who is covered through their employer?

Perhaps the issue of how much an employer should pay for an employee’s health care will be a controversial issue for discussion or debate. Or, is it acceptable that an employer hires a worker as a part-time employee just to avoid paying for costly health care benefits mandated by the U.S. federal government?

III.

GOVERNMENT REGULATION OF BUSINESS A. Market Failure B. Negative Externalities C. Natural Monopolies Teaching Tip: Natural Monopolies Students should be able to easily recognize natural monopolies – cable television, electricity, railroads. Identify another common product or service and have the students debate whether this could or should be a monopoly, protected by the government from free competition, and warrant regulation by the government.

D. Ethical Arguments E. Types of Regulation

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 7-4

•

Economic Regulations

•

Antitrust: A Special Kind of Economic Regulation Teaching Tip: The Climate of Antitrust There appears to be numerous examples of questions of antitrust, or lack of competition, arising from proposed or approved mergers among large firms in the same industry. Students could locate a current, possible merger and discuss the antitrust implications for the industry if these firms were allowed to merge by the U.S. federal government or not.

•

Social Regulations

F. The Effects of Regulation •

The Costs and Benefits of Regulation Teaching Tip: How Much Regulation?

The issue of the costs of regulation is often a political one. Student may locate political positions that favor or oppose large government. Do the costs of regulation outweigh the benefits? Take a single regulation and try to conduct a cost-benefit analysis to answer this question.

•

Continuous Regulatory Reform Teaching Tip: “De-” or “Re-” Regulate?

The United States has experienced a cycle of deregulation, then reregulation. Which part of this cycle are we current in, and are there signs of moving into the next phase of this cycle? Which part of the cycle is good for business – deregulation or reregulation? Is the answer to this question industry-specific: “it depends on which industry is being analyzed”?

IV.

REGULATION IN A GLOBAL CONTEXT Teaching Tip: International Regulatory Control It seems reasonable to assume that some sort of regulatory control is necessary. What happens when trade involves more than one country?

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 7-5

Can there be an international regulatory body? Does it already exist?

Students could discover and then investigate the organizations that attempt to control international trade and then assess its achievements as well as weaknesses.

GETTING STARTED KEY LEARNING OBJECTIVES LO 7-1: Understanding why sometimes governments and business collaborate and other times work in opposition to each other. (pp. 142-144) Government’s relationship with business ranges from collaborative to working at arm’s length.

This relationship often is tenuous, and managers must be vigilant to anticipate any change that may affect business and its operations.

LO 7-2: Defining public policy and the elements of the public policy process. (pp. 144-149) A public policy is an action undertaken by government to achieve a broad public purpose. The public policy process involves inputs, goals, tools or instruments, and effects.

LO 7-3: Explaining the reasons for regulation.

(pp. 149-151)

Regulation is needed to correct for market failure, overcome natural monopoly, and protect stakeholders who might otherwise be hurt by the unrestricted actions of business.

LO 7-4: Knowing the major types of government regulation of business. (pp. 151-152, 153156; includes The Effects of Regulation) Regulation can take the form of laws affecting an organization’s economic operations (e.g., trade and labor practices, allocation of scarce resources, price controls) or focus on social good (e.g., consumer protection, employee health and safety, environmental protection).

LO 7-5: Identifying the purpose of antitrust laws and the remedies that may be imposed. (pp. 152-153; currently placed in the midst of LO 7-4) Antitrust laws seek to preserve competition in the marketplace, thereby protecting consumers.

Remedies may involve imposing a fine, breaking up a firm, changing the firm’s conduct, or requiring the disclosure of information to competitors.

LO 7-6: Comparing the costs and benefits of regulation for business and society. (p. 157158; includes Continuous Regulatory Reform) Although regulations are often very costly, many believe that these costs are worth the benefits Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 7-6

they bring. The ongoing debate over the need for and effectiveness of regulation leads to alternating periods of deregulation and reregulation.

LO 7-7: Examining the conditions that affect the regulation of business in a global context. (pp. 158-159) The global regulation of business often occurs when commerce crosses national borders or the consequences of unregulated business activity by a national government are so large that global regulation is necessary.

KEY TERMS antitrust laws cost-benefit analysis deregulation Dodd-Frank Act economic regulation fiscal policy market failure monetary policy natural monopoly negative externalities predatory pricing public policy regulation reregulation social assistance policies social regulation trade policy INTERNET RESOURCES www.cato.org

Cato Institute

www.consumerfinance.gov

U.S. Consumer Financial Protection Bureau

www.economywatch.com

Economy Watch

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 7-7

www.federalreserve.gov

Board of Governors of the Federal Reserve System

www.ftc.gov

U.S. Federal Trade Commission

www.mercatus.org

Mercatus Center, George Mason University

www.reginfo.gov

U.S. Office of Information and Regulatory Affairs

www.regulations.gov

Regulations.gov

www.un.org/en/law

International Law, United Nations

www.usa.gov

Online Guide to Government Information and Services

DISCUSSION CASE GOVERNMENT’S RESPONSE TO THE CORONAVIRUS PANDEMIC IN THE UNITED STATES AND THE EUROPEAN UNION Discussion Questions 1.

Trace the basic elements of the public policy process found in this case.

This discussion could focus on these major elements of public policy as described in the chapter: Inputs: The economic downturn in both the U.S. and Europe due to the global pandemic; Goals: The governments emphasized resurrecting the economy, reducing unemployment, providing direct assistance to individuals and businesses with the most critical need; Tools: The governments provided direct monetary assistance, loans, grants, unemployment benefits, and tax credits to many groups within their economy; Effects: Some financial help for individuals, businesses, and governments was offered to combat the economic and health impact of the global pandemic.

The effects of these actions may still be emerging months later.

2.

What types of public policy are evident in the U.S. and EU economic relief packages?

Clearly there are economic policies in the case – specifically, fiscal policy in the U.S., “spending funds intended to stimulate or support the economy” and monetary policy in the E.U., “affecting the supply and demand of a nation’s currency through loans and debt relief.” Yet, there seems to be social assistance policies included in the governments’ actions, as well when focusing on social assistance programs

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 7-8

through testing, treatment information, and vaccine development and distribution.

3.

In your view, was it more important for governments to respond to the pandemic with economic or social assistance policies?

This is a question that will evoke variant answers based on students’ opinions. Some students may focus more on the economic, whereas others will emphasize the social assistance.

4.

What else could either government do to protect their citizens and businesses from the impact?

Students may want to get creative with their answers to this question. Direct social assistance could be employed, rather than primarily economic activities. More regulatory activities – economic and/or social -- could have been enacted, perhaps taking over different critical industries or operations.

5.

Do you think the United States or the European Union used public policy better to respond to the pandemic? Why do you think so?

This also is a question that will evoke many answers based on the students’ personal opinions. The case seems to imply that the U.S. spent more and consequently had a better outcome. Student may wish to challenge this assumption.

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 8-1

CHAPTER 8 INFLUENCING THE POLITICAL ENVIRONMENT INTRODUCTION Businesses face complicated issues in managing their relationships with politicians and government regulators. Managers must understand the political environment and be active and effective participants in the public policy process. They need to ensure that their company is seen as a relevant stakeholder when government officials make public policy decisions and must be familiar with the many ways that business can influence these decisions. The opportunities afforded businesses to participate in the public policy process differ from nation to nation. Sound business strategies depend on an understanding of these differences, enabling businesses to manage worldwide business–government relations effectively.

PREVIEW CASES The Honest Ads Act Business Responses to the Violent Attack on the U.S. Capitol Building The preview cases demonstrate two very different responses by businesses to politically charged situations. In the first case, some businesses joined the effort to bring greater honesty to advertisements; whereas in the second case, businesses decided to show their displeasure with political actions that were seen by some as attacks on U.S. democracy. Both examples show businesses increased involvement in society and reaction to political issues.

CHAPTER OUTLINE I.

PARTICIPANTS IN THE POLITICAL ENVIRONMENT A. Business as a Political Participant Teaching Tip: Arguments For and Against Business in Politics The question of whether businesses should be allowed to be involved in the political environment is an excellent question for an in-class debate.

Students may want to focus on the ethical aspects of the question: businesses have the right to be involved versus it is unfair for businesses to be involved given their potential economic power which create imbalances in the process. Or, students may want to pose an “outcomebased” argument, citing examples where business’s involvement has benefited others or has harmed others. Figure 8.1 may be used as a foundation for this debate.

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 8-2

For an executive’s “pro-business in politics” view see : https://www.cnbc.com/2017/03/23/we-are-at-a-point-where-businessand-politics-are-inseparable-said-box-ceo-aaron-levie.html

II.

INFLUENCING THE BUSINESS-GOVERNMENT RELATIONSHIP A. Corporate Political Strategy Teaching Tip: Business Strategies for Influencing Government Figure 8.2 is a good tool for students to use to identify and discuss various political tactics used by business to influence an emerging piece of legislation or a current political campaign. A comparison of the tactics used by different firms, or to influence different political party candidates, or to impact different legislative efforts may be a good class exercise.

III.

POLITICAL ACTION TACTICS A. Promoting an Information Strategy •

Lobbying Teaching Tip: Revolving Door Is it ethical for a former regulator or legislator to accept a job that requires her or him to lobby or influence those colleagues still on the regulatory board or in Congress? Should a former regulator or politician be free to take any job she or he wants, or should there be greater controls on the revolving door practice? For a humorous, yet informational, explanation of the “revolving door,” see: https://www.youtube.com/watch?v=gMaWTxBDRSA

•

Direct Communications

•

Expert Witness Testimony

B. Promoting a Financial-Incentive Strategy •

Political Action Committees

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 8-3

•

Super PACs

•

Tax-Exempt Organizations

•

Direct Contributions by Corporations

•

Executive and Employee Personal Contributions Teaching Tip: Financing a Campaign Student may wish to research a recent federal, state or local political campaign and uncover how much each candidate raised and spent during the campaign to acquire a sense of the magnitude of political campaign financing. Perhaps a class debate could emphasize the arguments in favor of allowing widespread or unfettered financial influence by business, where the other group could argue that controls are needed.

•

Economic Leverage

C. Promoting a Constituency-Building Strategy •

Stakeholder Coalitions

•

Advocacy Advertising and Public Relations

•

Trade Associations

•

Legal Challenges Teaching Tip: Political Action Tactics Various realistic or hypothetical examples of political elections, regulatory reforms, or other political issues could be presented to student groups asking them to develop effective strategies emphasizing specific political tools. Then students in the other groups could comment on and critique how effective the other group’s strategies may be.

Inviting a local politician to class might be another way to assess the effectiveness of the group’s strategies and use of political tools.

IV.

LEVELS OF POLITICAL INVOLVEMENT

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 8-4

Teaching Tip: Levels of Political Involvement The investigation of a corporation’s political action history could support or challenge the developmental levels of political involvement model presented in this chapter. Or, inviting a senior executive to class to speak on the firm’s political action history could allow the students to seen the level of political involvement in practice or question the model.

NB: This heading is not currently associated directly with an LO. V.

MANAGING THE POLITICAL ENVIRONMENT Teaching Tip: Managing the Political Environment The public affairs department is often the central focus of political activity for a business organization. It might be helpful for students to invite a guest public affairs officer to the class or explore on the Internet public affairs functions of a major company. The Foundation for Public Affairs is an excellent resource for information.

VI.

BUSINESS POLITICAL ACTION: A GLOBAL CHALLENGE

GETTING STARTED KEY LEARNING OBJECTIVES LO 8-1: Understanding the arguments for and against business participation in the political process. (pp. 165-166) Some believe that businesses should be involved in politics because their economic stake in government decisions is great, and they have a right to participate, just as do other stakeholders in a pluralistic political system. But others believe that businesses are too big, powerful, and selfish, and that they wield too much influence in the political arena.

LO 8-2: Knowing the types of corporate political strategies and the influences on an organization’s development of a particular strategy. (pp. 166-167) There are three political strategies: information, financial incentives, and constituency-building.

Some firms implement strategies as needed, on an issue-by-issue basis, while other firms have a long-term, ongoing political strategy approach.

LO 8-3: Assessing the tactics businesses can use to be involved in the political process. (pp.

167-181; includes Levels of Political Involvement)

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 8-5

Some of the political action tactics available for business include lobbying, direct communications, expert witness testimony, political action committee contributions, economic leverage, advocacy advertising and public relations, trade association involvement, legal challenges, and encouraging the involvement of other stakeholders. Businesses are increasingly turning to social media to promote their political strategies.

LO 8-4: Examining the role of the public affairs department and its staff. (pp. 181-182) Businesses manage their government interactions through a public affairs department. Most public affairs officers report to the CEO, chairperson or president of the company, although how these departments are structured is widely varied.

LO 8-5: Recognizing the challenges business faces in managing business-government relations in different countries. (pp. 182-183) The differing national rules and practices governing political activity make business’s political involvement complex in the global environment. Many governments, like the United States, are trying to restrict lobbying or political contributions or are trying to make the political process more transparent.

KEY TERMS advocacy advertising bundling Citizen’s United decision corporate political strategy dark money economic leverage lobbying political action committees (PACs) public affairs department revolving door soft money super PACs Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 8-6

The Business Roundtable trade associations

INTERNET RESOURCES www.businessroundtable.org

The Business Roundtable

www.commoncause.org

Common Cause

lobbyingdisclosure.house.gov

Lobbying Disclosure, U.S. House of Representatives

www.endcitizensunited.org

End Citizen United

www.nfib.com

National Federation of Independent Businesses

www.opensecrets.org

Opensecrets.org

www.politico.com

Politico

www.politics.co.uk

Politics.co.uk

pac.org

Public Affairs Council

www.pdc.wa.gov

Public Disclosure Commission

www.fec.gov

U.S. Federal Election Commission

DISCUSSION CASE POLITICAL ACTION BY THE U.S. STEEL INDUSTRY, 2015-2020 Discussion Questions 1. Did the steel industry act appropriately as a participant in the political environment when it sought economic protection from foreign steel imports?

As discussed in the chapter, each business is a citizen in our society, according to the law, and thus has the right to participate in the political environment. The steel industry felt that it was experiencing negative consequences that additional government protection could lessen and participation in the political environment is an opportunity provided to all citizens. The industry appropriately became engaged in the political process, using many of the political tactics described in the chapter.

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 8-7

2. What political strategies, as shown in Figure 8.2, did the steel industry use to gain tariff protections?

The steel industry used many of the political tactics described in Figure 8.2 Information strategy (lobbying, direct communication, expert witness testimony) – The steel industry sought to educate Congress and the White House. They testified before Congress at hearings focusing on the economy, trade, and national security. They provided congressional members and their staffers with “white papers,” short briefings emphasizing key points regarding their views. In addition, the industry spent $9.43 million in 2018.

Nucor Corp was at the head of the pack in spending with $1.7 million spent on issues relating to the North American Free Trade Agreement (NAFTA) renegotiation, import surges and trade restrictions, among other topics.

Financial–incentive strategy (political contributions, economic leverage, political consulting aid, office personnel) – The steel industry, through the American Steel and Iron Institute, the industry’s trade association, and businesses, such as the United States Steel Corporation, funneled significant dollars to key politicians and political parties, targeting key political campaigns, to gain influence, as shown in Figure 1.

Constituency-building strategy (stakeholder coalitions, advocacy advertising, public relations, legal challenges) – A type of legal challenge was evident when the steel industry sought economic relief by filing a complaint with the U.S. Commerce Department. The industry also turned to the U.S. International Trade Commission to seek legal remedy, accusing Chinese steel producers and distributors with price fixing, stealing trade secrets, and falsely labeling steel products.

Stakeholder coalitions were created by the steel industry when they joined forces with manufacturers from the aluminum, textile, fabric, fiber, and resin industries to form the Manufacturers for Trade Enforcement group. Steel company employees were encouraged to sign petitions asking Congress to protect the steel industry. Publicity campaigns and advertisements were created to educate Americans about the industry’s economic crisis and attempt to gather grassroots support.

3. What other political strategies could the steel industry have used to promote their interests and how?

Although many of the available political strategies were employed by the steel industry seeking protection from foreign steel imports, other political tactics were at their disposal.

Students may wish to discuss how other political tactics, not mentioned in the case, could be used by the U.S. steel industry. For example, it seems reasonable that the steel industry could have used an economic leverage strategy. Firms could have threatened to shut down their American-based plants in favor of opening up new plants in other countries with more favorable economic climates, despite the high cost of doing so, unless their demands for economic relief were met.

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 8-8

4. What levels of corporate political involvement, as shown in Figure 8.5, are evident in the case?

It appears that the steel industry was operating at the first and second level of business political involvement, according to Figure 8.5.

At level 1, the steel industry and businesses contributed to political campaigns and created a new trade association. A significant amount of funding was central to this level of business political involvement.

There also was evidence of level 2 involvement, where the approach shifted from a purely financial involvement to a more personal one. The industry had a lobbyist on the industry payroll and developed an aggressive employee grassroots program. The creation of formal legal challenges also appears to be evidence of level 2 involvement by the steel industry.

5. Should Chinese and other country’s steel producers be permitted to engage as a political participant in the U.S. political environment to protect their economic interests?

An argument could be made that it would be fair to allow the Chinese and other steel producers to become involved in the American political process. They should be able to fight back against the U.S. steel industry’s efforts to protect their own economic interests. In some instances, participation by non-U.S. entities is permissible, typically through U.S.based organizations. Yet, in other cases, it is not permissible for non-U.S. organization to become engaged in the U.S. political system. This is a complex issue and students may wish to investigate this further.

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 9-1

CHAPTER 9 SUSTAINABLE DEVELOPMENT AND GLOBAL BUSINESS INTRODUCTION The world community faces unprecedented ecological challenges in the 21st century, including climate change, resource scarcity, and threats to biodiversity. Many political and business leaders have embraced the idea of sustainable development, calling for economic progress without depleting or destroying the natural resources on which future generations depend. Viewing the economic, social, and environmental challenges facing the planet as integrated and intimately linked, a critical task in coming decades for government policymakers, civil society organizations, corporations, and entrepreneurs will be to innovate solutions to ensure the longterm well-being of all stakeholders.

PREVIEW CASES World Summit on Sustainable Development, McDonald’s, Taylor Guitars, Amazon In 2015, representatives of 193 of the world’s nations gathered at the United Nations in New York City to adopt the Sustainable Development Goals, also known as Agenda 2030 because of the deadline for meeting them. The goals were broad and aspirational, covering many aspects of economic and social development. But all shared a vision of a sustainable future in which humanity could thrive without destroying the environmental basis for life on Earth. Agenda 2030 called, for example, for clean drinking water, renewable energy, responsible consumption and production, protecting the oceans, halting deforestation, and aggressive action on climate change.

The opening cases feature three firms who have committed themselves to sustainable initiatives.

McDonald’s set a 2025 goal to ensure that 100% of its customer packaging comes from renewable, recycled, or certified sources. Taylor Guitars decided to eliminate its practices of cutting down multiple ebony trees in search of one with the solid black wood needed to make its product. Their renewed process serves to protect the forest and natural resources. Finally, Amazon announced their commitment to become carbon neutral by the year 2040. In accordance with the Bezos Earth Fund, Amazon strives for achieving the Paris Climate Agreement goals 10 years ahead of schedule.

Teaching Tip: Preview Cases The preview material introduces students to examples of companies that have embraced the challenges of operating within the limits of the Earth’s natural systems. These examples include McDonald’s (green packaging), Taylor Guitars (sustainably sourced wood), and Amazon’s Bezos Earth Fund. Students may be asked to generate other examples Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 9-2

of businesses working creatively to address the issue of sustainability in their operations.

Teaching Tip: Taylor Guitars In “The State of Ebony,” Bob Taylor, the founder and CEO of Taylor Guitars, talks about his decision to harvest and use ebony wood sustainably. The video is available at: www.youtube.com/watch?v=anCGvfsBoFY&t=699s.

The key section runs from 6:26 to 13:12.

CHAPTER OUTLINE I.

BUSINESS AND SOCIETY IN THE NATURAL ENVIRONMENT A. Sustainable Development Teaching Tip: Sustainable Development The definition of sustainable development is development “that meets the needs of the present without compromising the ability of future generations to meet their own needs,” or more simply, “ensuring a better quality of life for everyone, now and in the generations to come.” This concept appears, on its face, to embody a contradiction. How can society meet its own pressing needs today, without damaging or depleting the ecosystem on which future generations will depend?

Students may be asked to explore this question.

B. Sustainable Development Goals C. Planetary Boundaries D. The Great Acceleration Teaching Tip: Ecological Footprint Students may be asked to calculate their own ecological footprint. A calculator is available at www.footprintnetwork.org, by following the link to “personal footprint.” The footprint calculation shows in a dramatic and personal way, how the resource use of most individuals in advanced societies greatly exceeds the earth’s carrying capacity, given present technology.

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 9-3

II.

SOCIO-ECONOMIC TRENDS A. Population Growth B. Urbanization C. Energy Use D. GDP Growth

III.

EARTH SYSTEM TRENDS A. Climate Change Teaching Tip: Global Warming The most important international treaty on global warming is the Convention on Climate, which is periodically re-negotiated at an international gathering called the Conference of the Parties. Students may be asked to research the results of the most recent negotiations.

(The December 2015 conference took place in Paris, France. The latest iteration was the Cop26 which was in Glasgow, Scotland in 2021.)

Students may check the current status of negotiations and ratification at https://unfccc.int/.

Teaching Tip: Climate Change Students may be interested in the video available from PBS entitled: “Climate Change Is Making Wildfires More Extreme” (6:26) at: www.pbs.org/newshour/show/climate-change-is-makingwildfires-more-extreme-heres-how

B. Stratospheric Ozone C. Land and Water Resources •

Arable Land

•

Fresh Water Resources

D. Threats to Marine Ecosystems E. Decline of Biodiversity

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 9-4

Teaching Tip: Marine Ecosystems “Fish Banks, Ltd.” is an excellent simulation that may be used to help students understand the impact of unsustainable fishing practices on marine ecosystems. The original multi-team board game, as well as an online version of the game, may be ordered at: https://mitsloan.mit.edu/LearningEdge/simulations/fishbanks/Pages/fishbanks.aspx.

IV.

RESPONSE OF THE INTERNATIONAL BUSINESS COMMUNITY

GETTING STARTED KEY LEARNING OBJECTIVES LO 9-1: Understanding how business and society interact within the natural environment.

Business and society operate within a finite natural environment. This reality confers constraints but also provides opportunities.

LO 9-2: Defining sustainable development and understanding how the Sustainable Development Goals (SDGs) can help society achieve it.

Many world leaders have supported the idea of sustainable development, that is, development that meets the needs of the present without hurting the ability of future generations to meet their own needs. Governments, businesses, and civil sector organizations are engaged in a range of innovations in an effort to reach this goal.

LO 9-3: Understanding that the planet has fixed boundaries based on its interrelated natural systems, and the importance of operating within these limits for the long-term well-being of humanity.

The Planetary Boundaries framework illustrates the idea that humans must respect a set of thresholds that serve as leverage points for the survival of the planet. Any further degradation of the environment through the air, land, or water would jeopardize current and future life on Earth.

LO 9-4: Recognizing socio-economic trends that have put great strain on the environment.

Four socio-economic trends--population growth, urbanization, the use of fossil fuels for energy, and growth of the gross domestic product in many parts of the world--have produced Earth systems trends with serious environmental consequences.

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 9-5

LO 9-5: Examining common environmental issues, including climate change, that challenge all nations and business.

Five critical environmental issues—climate change, ozone depletion, resource scarcity, threats to the marine ecosystem, and declining biodiversity are shared by all nations.

International treaties, including the Paris Agreement, are addressing some of these issues, although more remains to be done.

LO 9-6: Analyzing the steps both large and small businesses can take globally to reduce ecological damage and promote sustainable development.

Global businesses have begun to put the principles of sustainable development into action through such innovative actions as life-cycle analysis, extended product responsibility, the circular economy, carbon neutrality, and technology cooperation.

KEY TERMS Anthropocene biodiversity carbon neutrality carbon offsets carrying capacity circular economy climate change Convention on Climate Change ecological footprint extended producer product responsibility global warming Great Acceleration industrial ecology life-cycle analysis (LCA)

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 9-6

marine ecosystems natural capital ozone Paris Agreement planetary boundaries sustainable development Sustainable Development Goals (SDGs) technology cooperation

INTERNET RESOURCES www.ipcc.ch

Intergovernmental Panel on Climate Change

www.unep.org

United Nations Environmental Program

newsroom.unfccc.int

United Nations Framework Convention on Climate Change

www.wbcsd.org

World Business Council on Sustainable Development

www.iclei.org

Local Governments for Sustainability

www.triplepundit.com

New media company that covers sustainable business practices

www.worldwatch.org

The Worldwatch Institute

www.wri.org

World Resources Institute

www.weforum.org

World Economic Forum

www.futureearth.org

Future Earth

DISCUSSION CASE CLEAN COOKING

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 9-7

Teaching Tip: Clean Cooking An excellent PBS video to use in connection with this case may be found at: http://www.pbs.org/newshour/bb/building-cleaner-cookstoves/ In the video, which runs 7:46 minutes, journalist Fred de Sam Lazaro reports on a clean cookstove project in Guatemala.

Discussion Questions 1. In what ways would the widespread adoption of clean cookstoves address the global environmental issues discussed in this chapter?

Primitive cookstoves that use wood, animal dung, and scrap paper as fuel have several adverse environmental impacts. In particular, they contribute to air pollution, deforestation, loss of biodiversity, watershed degradation, and global climate change. Pollution from open cookstoves degrades indoor air quality. Cutting trees to produce wood or charcoal leads to deforestation—and the associated loss of biodiversity and watershed degradation. Moreover, the combustion of biomass in cooking produces more than a quarter of the world’s black carbon, or soot—now believed to be the second-most potent contributor to global warming (after carbon dioxide). Consequently, adopting cleaner cooking technologies would benefit the environment by reducing indoor air pollution, deforestation, and black carbon emissions across the globe.

(2) In what ways would the widespread adoption of clean cookstoves address the environmental issues discussed in this chapter?

NB: The second question listed in the textbook is a duplicate of the first and can be replaced with the question below.

2. In what ways would the widespread adoption of clean cookstoves address the issues of economic development and poverty discussed in this chapter?

The widespread adoption of clean cookstoves would help alleviate poverty and promote economic development. Open flames and indoor air pollution produced by primitive cookstoves pose serious health risks, especially for women and children. They contribute to premature death and illness from lung and heart disease, as well as burn injuries. Collecting fuel is also risky and is associated with accidents and assaults. Moreover, time spent collecting fuel is time not spent going to school, running a small business, or engaging in other economically productive activity. Adopting cleaner cooking technologies would improve health outcomes, educational attainment, and entrepreneurial activity in developing nations.

Teaching Tip: Environmental and Economic Outcomes

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 9-8

A theme of the chapter is the importance of integrating economic development and social and environmental goals. Indeed, the concept of sustainable development encompasses both development and environmental protection. An important “take-away” of this case for students is that the adoption of clean cookstoves would have simultaneous environmental and economic benefits—and thus contribute to sustainable development.

3. Which sectors (e.g., government, business, civil society) would need to be involved in a successful campaign to promote clean cookstoves in the developing world, and what would be the contributions of each?

The chapter suggests that all these sectors have important and complementary contributions to make to a successful campaign to promote clean cookstoves in the developing world.

National governments could lend legitimacy and provide financial support. Companies could contribute money, professional skills, and technical expertise. Nongovernmental organizations could become involved in on-the-ground campaigns to mobilize and motivate citizens to adopt new technologies—or develop innovative mechanisms of financing.

Entrepreneurs could apply their ingenuity to developing clean cooking equipment appropriate to local cuisines and cultural practices.

Teaching Tip: Social Entrepreneurship and the Bottom of the Pyramid Instructors may wish to use this case as an opportunity to refresh concepts and themes introduced in Chapter 3, which discussed social entrepreneurship, and Chapter 4, which discussed opportunities to serve customers at the “bottom of the pyramid.”

4. What would be the benefit to multinational corporations, such as CEMEX, Marks and Spencer, and Dow Corning, of participating in this effort?

Cemex, a global building products company based in Mexico, developed and contributed $2 million worth of concrete cookstoves. Marks & Spencer, a British retailer, committed to helping employees of its suppliers cook more efficiently. Dow Corning, a Midland, Michigan-based maker of silicon-based materials, donated both money and expertise in manufacturing. The case does not explain directly how these companies might benefit from their contributions. However, students may speculate that these actions might enable these companies to better understand the application of their expertise in manufacturing and material science to problems of customers in the developing world (Cemex and Dow Corning) and to attract environmentally-aware customers (Marks & Spencer). It might also help the company attract and retain skilled employees, who were motivated by the environmental commitments of their employers.

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 9-9

5. In what ways does the adoption of clean cookstoves address the sustainable development goals?

If the world economic market embraced clean and efficient cookstoves, several of the United Nations Sustainable Development Goals could be addressed. According to the Global Alliance for Clean Cookstoves (cleancookstoves.org), efficient cookstoves can save individuals on the costs related to establishing a healthy life. Less fuel consumption and smoke emissions will help with principles related to “No Poverty” and “Good Health and Well Being”, for instance. Clean cooking can also affect indoor air pollution which addresses the “Sustainable Cities and Communities” goal. Furthermore, limiting the wood that is burned in the less efficient stoves contributes to mitigating deforestation which affects overall climate change (“Life on Land”). Clean cooking also provides opportunities for jobs in new economic sectors (“Decent Work and Economic Growth”).

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 10-1

CHAPTER 10 MANAGING FOR SUSTAINABILITY INTRODUCTION Accelerating climate change, pressures on water and land resources, and declining biodiversity have made managing for sustainability more imperative than ever. Political, corporate, and civil society leaders have taken action to address a wide range of environmental challenges. In the United States and other nations, government policymakers have moved toward greater reliance on economic incentives, rather than command and control regulations, to achieve environmental goals. At the same time, many businesses have become increasingly proactive and have pioneered new approaches to effective sustainability management, sometimes in partnership with advocacy organizations. These actions have often given firms a competitive advantage by cutting costs, gaining public support, and spurring innovation—as well as enabled them to do the right thing for planetary survival.

PREVIEW CASES Levi Strauss & Company The Paris Agreement Environmental Defense Fund Teaching Tip: Preview Cases These Preview Cases illustrate new approaches to environmental protection by companies, governments, and NGOs. Levi Strauss & Company took several steps, including working with suppliers to meet sustainability goals, set up shops where customers could repair garments, and e to science-based targets. The European Union adopted cap-and-trade programs to reduce emissions of greenhouse gases. The Environmental Defense Fund partnered with many companies to improve their environmental performance. The preview cases are designed to highlight trends towards voluntary business efforts to reduce or prevent pollution, market-based mechanisms, and industryenvironmentalist collaboration. All three trends are described at greater length in the chapter.

Teaching Tip: Patagonia Similar to Levi Strauss & Company, Patagonia is implementing highly sustainable business practices. A good 8 minute PBS video on the topic can be found at: http://video.pbs.org/video/2365549614/.

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 10-2

Teaching Tip: EDF and Google Earth “Mapping the Invisible” (3:05) describes the partnership between the EDF and Google Earth. It is available at: www.youtube.com/watch?v=9TrE2x6zURo.

CHAPTER OUTLINE I.

ROLE OF GOVERNMENT A. Major Areas of Environmental Regulation 

Air pollution



Water pollution



Solid and Hazardous Waste Teaching Tip: Environmental Justice

Since land values are often lower in predominantly minority communities, environmental racism may be the indirect result of decisions to site waste facilities on inexpensive land. This raises an interesting ethical issue for class discussion. Can a company’s decision to site a waste facility in a predominantly minority community be considered racism if the primary motivation was economic?

A video that may be used in conjunction with this discussion is “Fenceline: A Company Town Divided” (PBS, 52 minutes, first aired 2002). This film tells the story of a conflict between Shell Chemical Company and the Dimond community of Norco, Louisiana. The Dimond community was a largely African-American neighborhood that was immediately adjacent to one of Shell’s chemical plants. Members of the community felt that they were subjected to very high levels of chemical contamination, and they wanted to be able to move away from the community and to be reimbursed by the company. A trailer for the film is available here: http://www.pbs.org/pov/fenceline/ Universities that subscript to Kanopy can show the film free of additional charge. More information is available at: www.kanopy.com/product/fenceline-company-town-divided.

B. Alternative Policy Approaches Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 10-3



Command and Control Regulation



Market-based Mechanisms



Information Disclosure



Civil and Criminal Enforcement Teaching Tip: Alternative Policy Approaches

Figure 10.2 summarizes some of the advantages and disadvantages of alternative policy approaches to reducing pollution. Students could be broken into four groups, with each assigned to one policy approach.

They could be asked to discuss for a particular kind of pollution, such as air or water, how their policy approach would be implemented, and if they think it would be effective. They could then be asked to report their conclusions to the rest of the class.

II.

COSTS AND BENEFITS OF ENVIRONMENTAL REGULATION

III.

MANAGING FOR SUSTAINABILITY A. Leading Change for Sustainability Teaching Tip: Corporate Sustainability Leaders Students could be asked to select a business with which they are familiar and to make recommendations for steps the business could take to become a corporate sustainability leader.

B. Sustainability Management in Practice C. Environmental Auditing and Reporting D. Environmental Partnerships IV.

SUSTAINABILITY MANAGEMENT AS A COMPETITIVE ADVANTAGE A. Cost Savings B. Brand Differentiation C. Technological Innovation

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 10-4

D. Reduction of Regulatory, Liability, and Climate Change Risk E. Strategic Planning

GETTING STARTED KEY LEARNING OBJECTIVES LO 10-1: Knowing the main features of environmental laws in the United States and other nations. (pp. 215-219) Government environmental laws and regulations focus on protecting the ecological health of the air, water, and land, and limiting the amount of pollution that companies may emit.

LO 10-2: Understanding the advantages and disadvantages of different regulatory approaches. (pp. 220-223) Environmental laws have traditionally been of the command and control type, specifying standards and results. New laws, in both the United States and Europe, have added market incentives to induce environmentally sound behavior.

LO 10-3: Assessing the costs and benefits of environmental regulation. (pp. 223-224) Environmental laws have brought many benefits. Air, water, and land pollution levels are in many cases lower than in 1970. A continuing challenge is to find ways to promote a clean environment and sustainable business practices without impairing the competitiveness of the U.S. economy.

LO 10-4: Defining corporate sustainability leaders and describing actions they take to align their business practices with science-based sustainability goals. (pp. 225-226) Corporate sustainability leaders recognize stewardship of the natural environment as one of their core responsibilities. They demonstrate leadership by seeking to align their practices with science-based targets.

LO 10-5: Understanding how businesses can best organize to manage for sustainability. (pp. 226-229) Effective environmental management requires an integrated approach that involves all parts of the business organization, including top leadership, sustainability managers, and employees in many functional areas, as well as strong partnerships with stakeholders and effective auditing.

LO 10-6: Analyzing how effective sustainability management makes firms more competitive and improves their financial performance. (pp. 229-233) Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 10-5

Many companies have found that proactive environmental management can confer a competitive advantage by saving money, attracting customers, promoting innovation, reducing regulatory risk, and developing skills in strategic planning. Emerging evidence shows a positive relationship between sustainability practices and stock market and financial performance.

KEY TERMS cap-and-trade chief sustainability officer (CSO) clean economy command and control regulation corporate sustainability leaders environmental justice environmental partnerships Environmental Protection Agency (EPA) market-based mechanisms material sustainability issues net zero Superfund (CERCLA) sustainability report

INTERNET RESOURCES www.epa.gov/

Environmental Protection Agency

www.envirolink.org

Environmental organizations and news

www.greenbiz.com

Green Business Network

www.sustainablebusiness.com

Network of sustainable small businesses

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 10-6

www.environmentalleader.com

Briefing for executives

www.sustainability.com

SustainAbility (consultancy)

www.sustainablog.org

Blogs on green and sustainable businesses

www.theguardian.com/us/sustainable-business The Guardian [newspaper] coverage of sustainable business

DISCUSSION CASE GENERAL MOTORS’ DRIVE FOR CARBON NEUTRALITY Discussion Questions Teaching Tip: GM Instructors may wish to introduce the discussion of this case with a short video recapping GM’s decision to go all-electric by 2035, which includes a visit to the factory where many of the vehicles will be made.

CBS This Morning, “Electric Future,” 5:32 minutes, April 6, 2021, available at: www.youtube.com/watch?v=6tFt4m14bko

1. What did General Motors commit to doing? How would its actions help address the environmental problems identified in Chapters 9 and 10?

In 2021, General Motors (GM) made several commitments: 1) By 2035, all new GM light-duty vehicles (including sedans, crossovers, SUVs, and light trucks) would be all-electric and would therefore generate no tailpipe emissions.

2) The company would invest $27 billion over the next 5 years to develop an innovative new battery and to re-tool three factories for electric vehicle production.

3) The company would become carbon neutral by 2040 (both its vehicles on the road and its own facilities would together generate net zero carbon emissions).

These actions would help address the environmental problems identified in Chapters 9 and 10 in several ways. Eliminating tailpipe emissions would reduce the discharge from vehicles of carbon dioxide (a cause of climate change) and nitrous oxides and particular matter (both of which caused air pollution). However, the case also points out that the environmental benefits of EVs depended in part on a switch from fossil fuels to clean energy in the power grid.

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 10-7

2. Do you believe that government policy and regulations influenced GM’s decision making? If so, how?

Yes, government policy and regulations probably influenced GM’s decisions. GM announced its commitments shortly after President Biden had taken office. In one of his first acts in office, President Biden had signed an executive order ordering the conversion of the more than half a million vehicles in the federal fleet, including postal delivery trucks, to zero-emission technology. This would create a large market for electric vehicles. On the state level, California had announced that all new cars and passenger trucks sold in the state would have to be zero-emission by 2035. California was a major market for GM vehicles. GM may have concluded that other states were likely to follow California’s lead.

3. Do you believe GM’s commitments are wise from a business perspective? Why? In some ways, GM’s commitments were wise from a business perspective. The market for electric vehicles was likely to grow. Public policy was promoting EVs, and executives thought consumers were at a “classic tipping point” where they would begin to choose EVs because of both their cost and environmental advantages. By making an early commitment to the technology, GM could potentially grab market share. Investors seemed to agree with this view, because the company’s share price shot up more than 7 percent after GM’s announcement. However, the company’s commitments also carried certain risks from a business perspective. In 2019, less than 2 percent of vehicles sold in the United States were EVs. Customers might resist switching from a technology they were familiar with. A successful pivot to EVs would also require significant infrastructure development (for example, by building charging stations).

4. What would be the impact of GM’s proposed actions on its stakeholders, including consumers, workers, and shareholders?

GM’s proposed actions would have different impacts on different stakeholders. Some would be helped, and some hurt. For example, consumers might welcome cheaper and more environmentally friendly vehicles, but be displeased by the lack of choice. Workers with skills related to EV production, maintenance, and repair would benefit, while those with skills related to internal combustion technology would lose out. Shareholders who owned GM stock would benefit if the company’s strategy succeeded but would be hurt if it failed.

5. Do you consider GM a corporate sustainability leader? Why or why not?

The chapter defines corporate sustainability leaders as organizations that recognize stewardship of the natural environment as one of their core responsibilities. These companies operate so that they can continue their activities indefinitely, without altering the carrying capacity of the biosphere. Specifically, they emit net zero carbon dioxide— that is, they emit no more of the greenhouse gas than they remove or offset. In 2021, GM Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 10-8

made clear commitments to become a corporate sustainability leader. They committed to making all-electric vehicles with no tailpipe emissions and to become carbon neutral in their own operations, both of which would represent significant moves towards net zero carbon dioxide.

6. Do you believe GM will succeed? Why or why not?

Students may argue either for or against this proposition. A great deal is unknown.

Teaching Tip: One way to approach this question in class is to ask students: On what factors would GM’s success or failure depend? Possible responses include: •

• • •

Public policy: In coming years, will public policy in the United States, individual states, and other countries support a transition to electric vehicle technology, e.g., by subsidies for EV purchases, requirements for vehicles to use EV technology, or support for the development of EV infrastructure?

Consumer sentiment: In coming years, will consumers become more willing and enthusiastic about purchasing or leasing EVs? Climate change: Will climate change accelerate or slow, compared with today’s expectations?

Technology: How quickly will supporting technologies, e.g., for building cheaper automotive batteries, develop?

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 11-1

CHAPTER 11 THE ROLE OF TECHNOLOGY INTRODUCTION Technology is an unmistakable economic and social force in both business and the world where we live. Global and local communications, business exchanges, the science that affects the quality of our lives, and the simple tasks that make up our daily lives are all significantly influenced by technology. Whether we are at home, in school, or in the workplace, emerging technological innovations have dramatically changed how we live, play, learn, work, and interact with others, raising important social and ethical questions for business.

PREVIEW CASES Chinese Scientists, The World’s First Digital Pill Technology is a major factor in our lives, helping us communicate with others around the world and across town, providing new opportunities for business to promote its activities, and improving the quality of our lives. But what are the consequences of the extraordinarily rapid pace of technological change? Has technology replaced human contact and, if so, what are the consequences of this change in how we relate to others? Who decides what technology should emerge and dramatically affect our lives? Should businesses be allowed to use technology freely or should there be some constraints on its use by business? Who should determine what these constraints are?

CHAPTER OUTLINE I.

TECHNOLOGY DEFINED Teaching Tip: The Constant Re-defining of Technology The chapter quotes Erik Brynjolfsson, Andrew McAfee and Michael Spence stating: "Technology has sped globalization forward, dramatically lowering communication and transaction costs and moving the world much closer to a single, large global market for labor, capital, and other inputs to production. Even though labor is not fully mobile, the other factors increasingly are. As a result, the various components of global supply chains can move to labor’s location with little friction or cost.” Students may be acutely aware of these changes in their lives, as students, as citizens, as emerging professionals, and should be challenged to share their understanding of the quick development of technology.

A. Phases of Technology in Society Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 11-2 II.

THE ROLE OF TECHNOLOGY IN OUR DAILY LIVES Teaching Tip: Technology as a Powerful Force Compare access to technology for a first-grader, high school student, and business manager. How is technology influencing educational and business opportunities? The video linked here shows how technology has developed over time and raises some interesting questions that might provide for a good discussion among students: https://www.youtube.com/watch?v=4lCYZ7s9o8U.

A. The Presence of the Internet Teaching Tip: Behavioral Addiction Students may share their experiences with technology or their observations of others using technology from the perspective of “behavioral addiction.” Is it simply inevitable given our dependence upon technology in our daily lives or can our behaviors change?

Is this problem more acute among younger children, and, if so, what can business or society do about this emerging problem?

B. Unwanted Technology Threats Teaching Tip: Unwanted Internet threats Students may want to discuss whether these unwanted threats – spam, phishing, etc. – are simply an acceptable intrusions and tolerable given the benefits of technology, or if something should be done to minimize or eliminate these threats, and if so, what could be done?

C. Big Data NB: On page 244, the textbook inadvertently refers the student to Chapter 11for more information on big data. The reference should be to Chapter 12.

III.

PUBLIC ACCESS TO AND USE OF TECHNOLOGY A. The Digital Divide in the United States and Worldwide Teaching Tip: Digital Divide This topic may provide for an in-class debate or discussions over (a) does the digital divide exist, (b) if so, where, and (c) is it diminishing or

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 11-3 growing, and (d) are various program seeking to address the divide effective and, if so, why?

For a good video explaining the Digital Divide issue in the United States see: https://www.cbsnews.com/news/rural-areas-internet-accessdawsonville-georgia/.

B. Mobile Telephones C. Cryptocurrency Teaching Tip: Bitcoin A lively discussion might center around Exhibit 11.C – Bitcoin: The Currency of the Future. Is Bitcoin a technological step forward or an emerging disaster? Students could investigate the currency rate of bitcoin and bitcoin theft, discussed in the exhibit, since the writing of the chapter. Are things getting better or worse?

D. Social Networking IV.

ETHICAL CHALLENGES INVOLVING TECHNOLOGY A. The Loss of Privacy Teaching Tip: Technological Invasions of Our Privacy?

Students might want to debate this topic to determine if, as a society, we are losing more privacy due to technology or, even if we are, is this something we can accept given the benefits technology provides us?

What aspects of privacy are we willing to give up and why? Where do we draw the line?

B. Free Speech Issues V.

GOVERNMENT CENSORSHIP OF FREE SPEECH

VI.

THE IMPACT OF SCIENTIFIC BREAKTHROUGHS Teaching Tip: Scientific Breakthroughs In a world of genetically modified food, human genome, biotechnology, and stem cell research, are we truly better because of these scientific

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 11-4 breakthroughs or not? Students could investigate and locate evidence that supports the benefits of these scientific breakthroughs, as well as uncover the threats or limitations that this progress has created.

A. Genetically Engineered Foods B. Sequencing of the Human Genome C. Biotechnology and Stem Cell Research D. Medical Breakthroughs GETTING STARTED KEY LEARNING OBJECTIVES LO 11-1: Defining technology and its characteristics. (p. 240-240) Technology is the practical application of science and knowledge that is rapidly changing and spreading across societies.

LO 11-2: Recognizing how technology has evolved throughout history. (pp. 240-241) Societies have sequentially moved through distinct phases of technology, always incorporating a greater reliance on technology.

LO 11-3: Analyzing and assessing how technology impacts individuals in society. (pp.

241-243) Technology has exponentially increased its potential to influence every aspect of our livesdriving innovation, affecting collaborative partnerships and changing business-stakeholder relationships. It also has contributed to behavioral addiction among some technology users.

LO 11-4: Understanding the potential challenges from unwanted threats arising from individuals’ use of the Internet and other social media platforms. (pp. 244-245) The presence of the Internet is a welcomed benefit, but also has opened the door to various threats, such as spam and phishing.

LO 11-5:

Examining inequalities in public access to technology. (pp. 245-249)

Gaps between those who have access to the Internet through technology and those who do not is called the digital divide. This is a problem as the less advantaged individuals and societies do not enjoy the same benefits of technology as others.

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 11-5 LO 11-6: Assessing the ethical challenges posed by new technologies. (pp. 249-251) With significant advances in technology come numerous ethical challenges, such as the loss of privacy and free speech. Citizens and consumers look to governments and businesses to protect these ethical rights.

LO 11-7: Identifying how some governments act to control or censor the use of technology by its citizens. (pp. 252-253) Governments play various and sometimes conflicting roles with respect to an individual’s free speech.

LO 11-8: Evaluating the benefits and risks of recent breakthroughs in science and medicine. (pp. 253-257) Genetically modified foods, sequencing the human genome, biotechnology and stem cell research, and other medical breakthroughs carry great promise for individuals in society, but have also raised serious concerns.

KEY TERMS behavioral addiction big data biotechnology cryptocurrency digital divide genetically modified foods human genome m-commerce mobile telephones phishing right to privacy social networking

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 11-6 spam stemcell research technology

INTERNET RESOURCES www.apwg.org

Anti-Phishing Working Group

www.businesscompanion.info

Business Companion, GM Foods

www.bio.org

Biotechnology Industry Organization

www.digitaldivide.org

Digital Divide Institute

www.ecommercetimes.com

E-Commerce Times

www.eff.org

Electronic Frontier Foundation

genomics.energy.gov

Genome Science Program

www.isscr.org

International Society for Stem Cell Research

www.internetsociety.org

Internet Society

www.socialmediatoday.com

Social Media Today

www.statisticbrain.com

Statistic Brain Research Institute

DISCUSSION CASE CHINA’S SOCIAL CREDIT SYSTEM 1. What are the potential advantages and disadvantages for individuals and society of China’s social credit system?

The case describes a number of advantages and disadvantages of China’s social credit system: Advantages: the benefit from the Chinese government’s efforts is to provide a holistic assessment of an individual or a company’s trustworthiness; “trust-keeping is insufficiently rewarded, the costs of breaking trust tends to be low,” explains the Chinese government. In

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 11-7 addition to establishing greater trust between individuals and organizations, it would help build a stronger system of financial credit.

Disadvantages: Chinese citizens are worried that the score may affect travel opportunities, employment, access to finance, and the ability to enter into contracts. And for the nonChinese seeking to establish a business presence in China, it is recommended that these individuals seek professional advice in how to best manage their own social credit score.

2. Do the potential advantages, identified in response to Question 1, outweigh the potential disadvantages?

This is a subjective question that may evoke multiple answers from students. It is important for students to see both sides of this potential debate – some advantage for the Chinese government and its citizens yet also a number of disadvantages for individuals regarding how this information may be used.

3. The chapter discusses various ethical challenges involving technology. What ethical challenges are present in the Chinese social credit system? What changes might the Chinese government make to address these ethical challenges?

One major potential ethical challenge that focuses on the consequences of being “blacklisted” can be serious. The case features the situation confronting Liu Hu, a Chinese journalist, who wrote about censorship and government corruption and was subsequently arrested, fined and blacklisted. Liu discovered he was named on a List of Dishonest Persons Subject to Enforcement by the Supreme People’s Court as “not qualified to buy a plane ticket, banned from traveling on some train lines, buying property, or taking out a loan.” “There was no file, no police warrant, no official advanced notification. They just cut me off from the things I was once entitled to,” explained Liu. “What’s really scary is there’s nothing you can do about it. You can report to no one.”

As this case indicates, it may be beneficial for the Chinese government to have a system in place to review all reporting of individual’s social credit score and make sure that mistakes are not made. “There are no genuine protections for the people and entities subject to the system,” said Samantha Hoffman, fellow at the Australian Strategic Policy Institute.

4. Could China’s social credit system be adopted in other countries? What would be the obstacles in other countries that do not exist in China?

It does seem unlikely that the Chinese social credit system would or could be adopted by other countries. It appears that this version of the system would require a very autocratic form of government. Yet, the students may find it informative to consider what such a system would look like in a more open, democratic country – like in Sweden or New Zealand, for example.

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 12-1

CHAPTER 12 REGULATING AND MANAGING TECHNOLOGY INTRODUCTION The rapid advances in technology in just the past few decades have radically changed how business operates. More information than ever before—about individuals, organizations, and governments—is located on servers or in “the cloud” and businesses increasingly include technology in their daily operations through e-business, robotics, artificial intelligence, and much more. These extraordinary developments challenge businesses and governments to manage information while protecting both data security and individuals’ privacy. What actions have governments and businesses taken, and what are the ethical implications of their actions?

Teaching Tip: Preview Case The introductory case examples touch on only a few of the many social, ethical and legal issues that arise from regulating and managing technology. Issues of who should be entrusted to provide oversight of technology are a rich area for in-class debate or research.

Technological breakthroughs occur every day. The following videos show some of the recent breakthroughs, yet students could likely locate even more recent discoveries: https://www.youtube.com/watch?v=pWWOEcd7f6k and https://www.youtube.com/watch?v=u3vdgJVyKeg.

PREVIEW CASES Apple and Google Track the Coronavirus and Chinese Elementary Student Headbands Should people give up some level of privacy for the possible effective tracing of the coronavirus, as shown in the example above, or should privacy be protected, as a priority in the EU’s method for tracing the coronavirus? How can technology users guard against the inappropriate access to personal information? To what degree should technology be used in our classrooms, possibly to monitor student attentiveness, or are there limits that must be respected? What role do governments or businesses need to play in protecting individuals’ privacy and avoiding the excessive use of technology?

CHAPTER OUTLINE I.

GOVERNMENT REGULATION OF TECHNOLOGY Teaching Tip: The Right to be Forgotten

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 12-2 Student could select opposing sides of the debate over whether users have the right to “be forgotten,” as now permitted in Europe. What are the pros and cons of this controversial issue?

Teaching Tip: Net Neutrality Net Neutrality, especially as being discussed in the United States and shown in Exhibit 12.A, is another strong candidate for a student debate on this topic.

II.

THE ROLE OF TECHNOLOGY IN BUSINESS A. Access to Stakeholders’ Personal Information Teaching Tip: Personal Information Technological advances occur at a rapid pace so students may be challenged to anticipate the next advancement and the implications this change may have on the protection of their personal information.

Also, students are become more and more comfortable with public access to information through social media, so is the protection of personal information still a major concern for students or is the lack of privacy just taken for granted in today’s technology-laden world?

B. E-BUSINESS III.

ARTIFICIAL INTELLIGENCE IN THE WORKPLACE AND THEIR CHALLENGES Teaching Tip: Understanding Artificial Intelligence The following video provides an explanation of the developing role of AI in our lives, from the viewpoints of those engaged in its development: https://www.youtube.com/watch?v=GboOXAjGevA.

A. The Use of Artificial Intelligence at Work B. Robotics in the Workplace C. The Emergence of Drones in Business

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 12-3 IV.

THE CHIEF INFORMATION, SECURITY, TECHNOLOGY OFFICER Teaching Tip: Chief Information Officer It might be helpful for students to invite a local company’s chief information, security or information officer to class to talk on the issues she or he faces each day on the job. What new challenges have emerged for this company executive? What solutions to knotty problems have been achieved?

V.

CYBERCRIME – A THREAT TO ORGANIZATIONS AND THE PUBLIC A. Exploring Why Hackers Hack Teaching Tip: Computer Hackers This is another controversial issue ripe for debate or discussion. Should computer hackers be punished as intellectual robbers or trespassers, or should all information be freely available to the public? What information should be protected, if any, and who should be responsible for information security? What role do white hatters or grey hatters play in today’s technology world and are they critical allies for businesses or potential criminals that should face prosecution? Is some hacking good for society but other hacking is not, and who decides?

B. Costs of Cybercrime VI.

BUSINESS RESPONSES TO INVASIONS OF INFORMATION SECURITY NB: On page 275, the CEO of J.P. Morgan Chase (not Chace) should be listed in the textbook as Jamie Dimon, rather than James Dixon.

VII.

GOVERNMENT EFFORTS TO COMBAT CYBERCRIME

GETTING STARTED KEY LEARNING OBJECTIVES LO 12-1:Identifying the various interventions undertaken by governments to regulate technology. (pp. 262-263)

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 12-4 In some countries, governments have taken steps to protect their citizens’ personal data from terrorism and other threats. These governments have also attempted to better ensure protection of intellectual property.

LO 12-2:Exploring how business accesses stakeholders’ personal information and understanding possible limits to this access. (pp. 263-265) Two major market stakeholders targeted by business organizations for the collection of information are employees and consumers, raising numerous ethical issues. The access to big data can be at odds with the protection of individuals’ rights to their own information.

LO 12-3:Understanding the increasing role of e-business and omnichannel distribution in the global marketplace. (pp. 265-266) Businesses increasingly use electronic exchanges, or e-business, for the buying and selling of goods and services between businesses, organizations, and individuals via Internet-based systems.

LO 12-4: Examining challenges businesses face in managing and adopting artificial intelligence, specifically through the use of robotics and drones, in business operations. (pp. 266-269) Robotic technology, artificial intelligence, collaborative machines, autonomous automobiles and other technological advances increasingly assume a greater role in business operations. This transformation of business practices also raises important ethical concerns, such as the loss of jobs for humans and whether artificial intelligence systems can make ethical decisions.

LO 12-5: Assessing the emerging role and responsibilities of the organization’s chief information officer and other organizational functions that are responsible to ensure information security and privacy. (pp. 270-271) Many businesses are relying on technology to enhance their operations and increasingly entrusted the management of technology to their chief information officer. These managers often report to the company’s CEO and are being entrusted with greater strategic responsibilities within the company.

LO 12-6: Understanding the threat of cybercrime, and the magnitude of the costs and possible causes of the increase in cybercrime. (pp. 271-274) Cybercrime is criminal activity committed by individuals or groups, called hackers, that gain unauthorized access to a business organization through its computer system. It imposes substantial costs on businesses that are hacked. Hackers appear motivated by financial incentives, government or business retaliation, or media attention for an issue or the hackers themselves.

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 12-5 LO 12-7:Identifying business responses and government efforts to combat invasions of information security and cybercrime. (pp. 275-277) Given the serious and costly threats of cybercrime, businesses have created comprehensive defenses, cutting across all organizational functions and supported by the organization’s executive leadership. Experts encourage companies to develop incident-responses plans against cyberattacks. International and national government groups have attacked cybercrime through regulatory and voluntary efforts. Additional coordinated efforts are needed and must be in harmony with businesses’ anti-cybercrime efforts.

KEY TERMS artificial intelligence autonomous vehicles chief information officer (CIO) cybercrime Digital Millennium Copyright Act e-business General Data Protection Regulation (GDPR) hackers intellectual property net neutrality omnichannel ransomware attacks right to be forgotten software piracy

INTERNET RESOURCES www.automate.org/robotics

A3 Robotics, Association for Advancing Automation

www.ftc.gov/datasecurity

Bureau of Consumer Protection, Data Security

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 12-6

www.bsa.org

Business Software Alliance

www.cio.com

Chief Information Officer professional website

www.ecommercetimes.com

E-Commerce Times

hackercombat.com

Hacker Combat Community

www.foresight.org

Foresight Institute

www.issa.org

Information Systems Security Association

www.dhs.gov

U.S. Department of Homeland Security

DISCUSSION CASE THE ARRIVAL OF AUTONOMOUS CARS—BRIGHT FUTURE OR LOOMING THREAT? Discussion Questions 1. What are the benefits and costs, or advantages and disadvantages, of autonomous driving technology to various corporate stakeholders and society?

There are many benefits touted from the emergence of autonomous driving technology. As Constantine Samaras, a university engineering professor, points out, “When humans are the backup systems, we’re pretty bad at doing [what is necessary to prevent crashes].” Thus, these vehicles may be safer on the road than driver-controlled automobiles. The case also introduces some research statistics that reinforce the idea that autonomous vehicles are safer than driver-controlled vehicles. In addition, some people look forward to the luxury of getting from one place to another without having to drive the vehicle. They could enjoy the scenery, perform work tasks, watch a movie, or many other activities. There may be other advantages brought about by autonomous vehicles that students can identify.

Counter, or negative, arguments are also mentioned in the case. Driverless vehicles could cost truckers, taxi drivers, and other driving professionals their jobs. Companies engaged in other forms of transportation, such as busses, trains and airplanes, could see fewer customers, as people might choose to travel by car if they were not burdened with the driving. If the number of accidents declined, auto repair shops and mechanics would likely have less business, and layoffs could occur. Another issue raised by critics of autonomous automobiles was the possibility that the vehicle’s computer systems might be hacked.

2. Are the threats of harm from autonomous vehicles simply an acceptable risk, especially when compared to fatalities caused by human-driven vehicles?

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 12-7

This is a highly subjective question. Students will need to argue the balance of acceptable risk against the benefit of certain advantages, as mentioned above. The case does indicate that most Americans said they thought autonomous cars would be quite common within 15 years, despite the survey that reported that 73 percent of Americans said they would not ride in an autonomous vehicle.

3. What steps could business, government, or individual drivers take to reduce the risk of hacking in autonomous vehicles?

Already we are seeing government stepping in to regulate the use of autonomous vehicles on the road. As the case mentions, by 2021, 38 states had enacted legislation governing autonomous vehicles. Some states, such as Florida and Arizona, encouraged the safe development, testing and operation of self-driving vehicles on their public roads, seeing this as an opportunity to encourage business development. Delaware established the Advisory Council on Connected and Autonomous Vehicles, tasked with developing recommendations for innovative tools and strategies that could be used to prepare Delaware’s transportation network for these vehicles—an action also taken by numerous other states. These appear to be good initial steps toward the regulation of safety regarding autonomous vehicles.

4. Do you think federal or state governments should regulate the emergence of autonomous driving technology, and if so how?

Students can debate if the initial steps, noted above, are adequate or not. If not, they can develop suggestions for additional steps that should be required. It seems inevitable that autonomous vehicles, as one of the most recent arrivals of technological development in our society, will become part of our transportation system. So the question may be: how (not if) should governments regulate this transportation mode?

5. If you were the chief technology officer of a company that was developing autonomously driven vehicles, what steps would you take to manage this technology appropriately?

As the chief technology officer of a company that was developing autonomously driven vehicles, the importance of developing fail-safe safety procedures seems paramount. We rely on transportation in our society but we also demand that the modes of transportation be safe.

It seems reasonable that autonomously driven vehicle manufacturers also need to be aware of the public’s concerns regarding these vehicles, especially the safety of passengers in the cars and pedestrians on the road. Not only do the cars need to have the technology-supported safer features, but also the public needs to be educated regarding these safety features.

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 13-1

CHAPTER 13 SHAREHOLDER RIGHTS AND CORPORATE GOVERNANCE INTRODUCTION Shareholders occupy a position of central importance in the corporation because they own shares of the company’s stock. As owners, they pursue both financial and nonfinancial goals. How can shareholders’ rights best be protected? What are the appropriate roles of top managers and boards of directors in the governance of the corporation? How can their incentives be aligned with the purposes of the firm, including the interests of the company’s shareholders? And how can government regulators best protect the rights of investors and promote good corporate governance?

PREVIEW CASES Exxon and Activist Shareholders Apple and Parental Controls Pinterest’s Toxic Work Culture As these three examples illustrate, the relationships among shareholders, top executives, and boards of directors in today’s companies are multiple and complex. In these cases, shareholders used a variety of techniques to assert their rights and pursue their interests—a board of directors election, public persuasion, and a lawsuit. This chapter will address the important legal rights of shareholders and how corporate boards, government regulators, managers, and activist investors can protect them. It will also discuss changes in corporate practice and government oversight designed to better guard shareholder interests, in both the United States and other nations.

Teaching Tip: Preview Cases “How Engine No. 1 Took on Exxon” is a 2:35 minute video clip on Engine No. 1’s successful campaign for seats on Exxon’s board.

Instructors may wish to play the video and then ask students: How did shareholders organize to influence Exxon? What was their goal? What kinds of shareholders were involved? The video is available at: www.youtube.com/watch?v=AnqAwgYJPUc

CHAPTER OUTLINE I.

SHAREHOLDERS AROUND THE WORLD A. Who Are Shareholders?

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 13-2

B. Objectives of Stock Ownership C. Shareholders’ Legal Rights and Safeguards Teaching Tip: Shareholder Rights Students may be interested to find the latest data on stock market capitalization by country at http://data.worldbank.org.

II.

CORPORATE GOVERNANCE A. The Board of Directors Teaching Tip: Director Compensation Students may be interested to find the latest data on director compensation at www.towerswatson.com.

B. Principles of Good Governance III.

SPECIAL ISSUE: EXECUTIVE COMPENSATION Teaching Tip: Executive Compensation The New York Times, Fortune, and The Wall Street Journal generally publish annual executive compensation data around the second week of April, before tax filing day. These may be used to update figures given in this section. Executive compensation makes a good topic for a student debate, since compelling arguments can be made on both sides.

IV.

SHAREHOLDER ACTIVISM A. The Rise of Institutional Investors B. Social Investment •

Stock Screening

•

Social Responsibility Shareholder Resolutions

C. Shareholder Lawsuits

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 13-3 V.

GOVERNMENT PROTECTION OF SHAREHOLDER INTERESTS A. Securities and Exchange Commission B. Information Transparency and Disclosure C. Insider Trading Teaching Tip: Insider Trading Students may be asked to locate a recent example of insider trading, through an Internet search or review of the business press. They may then be asked to analyze the case to determine if it met the elements of insider trading established by the Supreme Court in U.S. vs. O'Hagen, described in the text. One possible case is that of U.S. Representative Christopher Collins, his son Cameron Collins, and Stephen Zarsky. All three were charged with insider trading and pleaded guilty to related charges in 2019. The case involved trading in shares of Innate Immunotherapeutics, a biotechnology company on whose board Christopher Collins served. Mr. Collins was later pardoned by President Trump.

VI.

SHAREHOLDERS AND THE CORPORATION

GETTING STARTED KEY LEARNING OBJECTIVES LO 13-1:Identifying different kinds of shareholders and understanding their objectives and legal rights. (pp. 284-287) Individuals and institutions own shares of corporations primarily to earn dividends and receive capital gains, although some have social objectives as well. Shareholders are entitled to vote, receive information, select directors, and attempt to shape corporate policies and action.

LO 13-2:Knowing how corporations are governed and explaining the role of the board of directors in protecting the interests of investors and other stakeholders. (pp. 287-291) In the modern system of corporate governance, boards of directors are responsible for setting overall objectives, selecting and supervising top management, and assuring the integrity of financial accounting. The job of corporate boards has become increasingly difficult and challenging, as directors seek to balance the interests of shareholders, managers, and other

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 13-4 stakeholders. Reforms have been proposed to make boards more responsive to shareholders and more independent of management.

LO 13-3:Analyzing the function of executive compensation and debating if top managers are paid too much. (pp. 291-295) Some observers argue that the compensation of top U.S. executives is justified by performance, and that high salaries provide a necessary incentive for innovation and risk taking in a demanding position. Critics, however, believe that it is too high. In this view, high pay hurts firm competitiveness and undermines employee commitment.

LO 13-4:Evaluating various ways shareholders can promote their economic and social objectives. (pp. 295-299) Shareholders have influenced corporate actions by forming organizations to promote their interests, intervening in board elections, and by filing lawsuits when they feel they have been wronged. They have also organized under the banner of social investment. These efforts have included screening stocks according to social and ethical criteria, and using the voting process to promote shareholder proposals focused on issues of social responsibility.

LO 13-5:Understanding how the government protects against stock market abuses, such as fraudulent accounting and insider trading. (pp. 299-301) Recent enforcement efforts by the Securities and Exchange Commission have focused on improving the accuracy and transparency of financial information provided to investors.

They have also focused on curbing insider trading, which undermines fairness in the marketplace by benefiting those with illicitly acquired information at the expense of those who do not have it.

KEY TERMS board of directors corporate governance executive compensation hedge fund insider trading institutional investors private equity firm proxy Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 13-262 proxy access say-on-pay Securities and Exchange Commission (SEC) shareholders shareholder lawsuits social investing social responsibility shareholder resolutions stock option

INTERNET RESOURCES www.nyse.com

New York Stock Exchange

www.cii.org

Council of Institutional Investors

www.ussif.org

Forum for Sustainable and Responsible Investment

www.socialfunds.com

Site for socially responsible individual investors

www.ecgi.org

European Corporate Governance Institute

www.issgovernance.com

ISS (formerly Institutional Shareholder Services)

www.calpers.ca.gov

California Public Employees Retirement System

www.sec.gov

U.S. Securities and Exchange Commission

DISCUSSION CASE CORPORATE GOVERNANCE AND EXECUTIVE MISCONDUCT AT WYNN RESORTS Discussion Questions 1. Do you think Steve Wynn’s executive compensation was justified, and why or why not?

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 13-263 As reported in the discussion case, Wynn’s total compensation in 2016 was $28.2 million, placing him tenth on the list of top-paid U.S. CEOs (by contrast, the median in 2017 was $17.5).

Some students may argue that this amount was justified, since shareholders had averaged a total return of 19 percent per year since the company’s IPO in 2002, well above the 9 percent return of the S&P 500 during that period. Wynn had built a well-known brand and transformed several Las Vegas hotel properties, greatly increasing their value. Other students may argue that this amount was not justified, based on a lower total return to shareholders over the most recent fiveyear period. They may also argue that Wynn had allowed a culture of sexual misconduct to fester at the company, putting its reputation at risk.

2. Did the board of directors of Wynn Resorts operate according to the principles of good corporate governance, as described in this chapter? Why or why not?

The chapter describes several principles of good corporate governance. In many respects, Wynn Resorts failed to operate according to these principles. Many of the directors, although nominally independent (i.e., not employed by the company) were close friends or long-time business associates of Steve Wynn, comprising their willingness to challenge his leadership decisions. Directors were elected every three years, making it more difficult for shareholders to remove them promptly if necessary. Most elections were uncontested. Wynn served as both chairman and CEO, a practice disapproved by many governance experts, who recommended that these roles be separated. Finally, the Wynn Resorts board was lacking in diversity; only one member out of ten was a woman.

3. Do you think Wynn Resorts’ institutional and individual shareholders used the rights described in this chapter effectively to protect their interests? Why or why not?

The chapter describes several rights of shareholders, including the right to cast an advisory vote on executive compensation and the right to file suit. Shareholders exercised several of these rights to protect their interests. In 2017, 41 percent of shareholders—including the big institutional investors Vanguard Group and BlackRock Inc.—had opposed the company’s compensation policies in a “say-on-pay” vote. Soon after the publication of the sexual misconduct allegations against Steve Wynn, several state and union pension funds and individual shareholders filed suit against the board of directors. Many also sold their shares, as indicated by the ten percent drop in share value after news broke of Wynn’s misconduct. Student may debate whether these actions were effective in protecting shareholders’ interests. Instructors may encourage students to investigate the progress of the various shareholder lawsuits.

4. What do you recommend senior executives and the board of Wynn Resorts do now?

The discussion case describes several steps taken by senior executives and the board immediately after the revelations about Wynn’s behavior. Wynn himself resigned. The board issued a statement affirming the company’s commitment to maintaining a respectful culture and formed a committee and hired an outside law firm to investigate the allegations. Arguably, these actions were insufficient. Some students will argue that the entire board and top executive team should be replaced. The instructor should encourage students to research changes in the composition of the company’s executive team and board of directors since the incident. (As of Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 13-264 2021, Wynn Resorts had a ten-member board of directors, including four women and a nonexecutive chairman, Philip G. Satre. Only one member, CEO Matt Maddox, was an inside director. In 2020, the company developed its first Diversity, Equity, and Inclusion Policy.)

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 14-1

CHAPTER 14 CONSUMER PROTECTION INTRODUCTION Safeguarding consumers while continuing to supply them with the goods and services they want, at the prices they want, is a prime social responsibility of business. Many companies recognize that providing customers with excellent service and product quality is an effective, as well as ethical, business strategy. Consumers, through their organizations, have advocated for their rights to safety, to be informed, to choose, to be heard, and to privacy. Government agencies serve as watchdogs for consumers, supplementing the actions taken by consumers to protect themselves through self-advocacy and use of the courts and by the actions of socially responsible corporations.

PREVIEW CASE Quincy Bioscience’s Prevagen Teaching Tip: Introduction The preview case introduces students to several issues in consumer protection. A news clip (2:21 minutes) reporting on lawsuits against Quincy Biosciences by the FTC, the New York attorney general, and consumer groups may be found at: www.youtube.com/watch?v=x-Fas4s12C0 Instructors may ask: What did the company claim about its product, Prevagen? What did the government allege? Are supplements like Prevagen regulated by the government? What are some arguments for and against government regulation of the safety and efficacy of dietary supplements? If you or a loved one had been suffered serious side effects from this product, what would you do?

CHAPTER OUTLINE I.

THE RIGHTS OF CONSUMERS

II.

SELF-ADVOCACY FOR CONSUMER INTERESTS

III.

HOW GOVERNMENT PROTECTS CONSUMERS A. Goals of Consumer Laws

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 14-2

B. Major Consumer Protection Agencies Teaching Tip: Drug Approval Decisions The text discusses the FDA’s review of new pharmaceutical drugs and devices prior to their introduction. Students may be asked to find a current example of a drug under FDA review, or recently reviewed by the FDA, and to examine the FDA's decision. What criteria should the FDA use in determining if the benefits of a new medicine outweigh the risks? Examples that will interest many students include vaccines to protect against and treatments for COVID-19.

IV.

CONSUMER PRIVACY IN THE DIGITAL AGE Teaching Tip: Consumer Privacy Instructors may wish to organize a class exercise, giving the following instructions to students, organized in small groups (3-5 students): • Select a company of your choice.

• Please go online and investigate the customer privacy policy or policies of your selected organization.

• What information might customers disclose on the website in the course of using the product/service?

• What does the organization do with this information? Does it share this information with others? If so, with whom and for what purpose?

• Do customers have the right to control the use of their own information, e.g., through opt-in or opt-out mechanisms?

• What steps does the organization take to protect the security of sensitive information (e.g., credit card numbers, identifying information, passwords)?

• Based on what you have learned, determine 2 or 3 things about your organization’s privacy policies that concern you, and send up a team member to write them on the board.

V.

USING THE COURTS AND PRODUCT LIABILITY LAWS A. Strict Liability B. Product Liability Reform and Alternative Dispute Resolution

VI.

POSITIVE BUSINESS RESPONSES TO CONSUMERISM

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 14-3

A. Managing for Quality B. Voluntary Industry Codes of Conduct C. Consumer Affairs Departments D. Product Recalls Teaching Tip: Product Recalls Students may be asked to bring in an example of a recent product recall.

Do you believe the company took the right action? What, if anything, should the company have done differently?

VII.

CONSUMERISM’S ACHIEVEMENTS

GETTING STARTED KEY LEARNING OBJECTIVES LO 14-1: Knowing the five major rights of consumers. (pp. 307-308) The five key consumer rights are the rights to safety, to be informed, to choose, to be heard, and to privacy.

LO 14-2: Analyzing the reasons for consumer advocacy and the methods consumer organizations use to advance their interests. (p. 308-308) The consumer movement represents an attempt to promote the interests of consumers by balancing the amount of market power held by sellers and buyers.

LO 14-3: Assessing the ways in which government regulatory agencies protect consumers and what kinds of products are most likely to be regulated. (pp. 309-313) Consumer protection laws and regulatory agencies attempt to assure that consumers are treated fairly, receive adequate information, are protected against potential hazards, have free choices in the market, and have legal recourse when problems develop.

LO 14-4: Determining how consumer privacy online can best be protected. (pp. 313-316) The widespread use of digital technologies has given new urgency to the issue of consumer privacy. Three approaches to safeguarding online privacy are consumer self-help, industry self-regulation, and protective legislation.

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 14-4

LO 14-5: Examining how the courts protect consumers and efforts by businesses to change product liability laws. (pp. 316-319) Business has complained about the number of product liability lawsuits and the high cost of insuring against them. Although consumer groups and trial attorneys have opposed efforts to change product liability laws, modest tort reforms have been legislated.

LO 14-6: Evaluating how socially responsible corporations can proactively respond to consumer needs. (pp. 319-322) Socially responsible companies have responded to the consumer movement by giving serious consideration to consumer problems, increasing channels of communication with customers, instituting arbitration procedures to resolve complaints, and by recalling defective products.

They have also pursued voluntary codes of conduct and quality management to meet, and even anticipate, consumers’ needs.

KEY TERMS alternative dispute resolution (ADR) behavioral advertising consumer affairs officer consumer movement consumer privacy consumer protection laws deceptive advertising product liability product quality product recalls strict liability

INTERNET RESOURCES www.consumersinternational.org

Consumers International

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 14-5

www.cpsc.gov

U.S. Consumer Product Safety Commission

www.ftc.gov

U.S. Federal Trade Commission

www.bbb.org

Better Business Bureau

www.consumerfed.org

Consumer Federation of America

www.consumeraffairs.com

Consumer news and resource center

www.beuc.eu

The European Consumer Organization

www.consumerreports.org

Consumer Reports

DISCUSSION CASE VOLKSWAGEN’S “CLEAN DIESEL” CAMPAIGN Teaching Tip: Volkswagon’s “Clean Diesel” Campaign “Hard NOX” is an excellent 75-minute documentary on the Volkswagen diesel deception, which appears as the first episode in the Netflix series, Dirty Money. It is available through Netflix. The documentary may be used in a full class session to introduce coverage of consumer issues.

Teaching Tip: Discussion Case The discussion case mentions the marketing campaign for VW’s “clean diesel” vehicles. Two of these ads may be viewed here: https://www.youtube.com/watch?v=PVPyHrPZbVM The instructor can show these ads and then ask students; • In what ways were these advertisements deceptive? What lies were told?

• In what ways were consumers harmed by these ads?

Discussion Questions 1. In what ways were consumers (car owners) harmed by Volkswagen’s actions?

Owners of VW “clean diesel” vehicles were harmed in several ways by the company’s actions.

Consumers were led to believe by fraudulent advertising that these vehicles enjoyed both excellent fuel economy and low emissions. This was untrue, because in fact the vehicles were Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 14-6

polluting way above regulatory limits. Consumers paid a premium for these vehicles, relative to other similar gasoline models. When the deception was revealed, these vehicles suddenly lost a lot of value. Many consumers felt, as one put it, that they had been “completely duped.”

2. Did Volkswagen violate any U.S. consumer protection laws, and if so, which ones?

Yes, it did. As the chapter explains, deceptive advertising is illegal in the United States (as well as many other countries). Manufacturers may not make false or misleading claims about a product, as VW did in their “clean diesel” marketing campaign. (VW also broke various environmental laws, but these are not the main focus of the discussion case.)

3. What were the potential benefits and risks to Volkswagen of its decision to defraud consumers and regulators?

VW’s decision to defraud consumers and regulators had both benefits and risks. Initially, the strategy was successful, to the extent that VW sold over half a million of these vehicles in United States between 2009 and 2015. The risks of this illegal approach were revealed later, when academic researchers and government regulators uncovered the company’s defeat devices, which had been designed to mislead government emissions testers. VW was subsequently sued by consumers, the U.S. Justice Department, and the Federal Trade Commission. The cost to the company to settle these cases was estimated at more than $15 million.

4. If you were an owner of a VW, Audi, or Porsche vehicle equipped with a defeat device, what would be your options? What would you choose to do, and why?

Owners of vehicles with a defeat device had several options. Immediately after the deception was revealed, owners could choose to continue to drive their vehicles, knowing that they were emitting dangerous pollution. Or, they could attempt sell their vehicles, but the value had dropped precipitously. Many consumers chose to sue the company; these suits were eventually consolidated into a single class action. As part of the settlement of various lawsuits, consumers were eventually allowed either to sell the vehicles back to the company or to have them repaired.

Students may differ on which option they would have chosen.

5. What are the advantages and disadvantages to consumers of a class action lawsuit of the kind described here?

Consumer lawsuits have disadvantages: they take time and cost money (although in many lawsuits of this type, lawyers work on a “contingency” basis, meaning they are compensated with a percentage of any settlement). However, their advantage is that they can result in consumers being compensated for financial damages.

6. Was the settlement fair to consumers, or not?

Students may disagree on this point. The settlement was quite generous: VW was forced to buy back or repair the vehicles and to pay additional restitution of $5,000 to $10,000 per customer.

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 14-7

On the other hand, this arguably did not fully compensate consumers who may have felt guilty about driving a polluting vehicle and deceived by the company’s marketing campaign.

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 15-1

CHAPTER 15 EMPLOYEES AND THE CORPORATION INTRODUCTION Employees and employers are engaged in a critical relationship affecting the corporation’s performance. There is a basic economic aspect to their association: Employees provide labor for the firm, and employers compensate workers for their contributions of skill and productivity.

Yet, also present in the employee-employer exchange are numerous social, ethical, legal, and public policy issues. Attention to the rights and duties of both parties in this relationship can benefit the firm, its workers, and society.

PREVIEW CASES Non-compete Agreements for Low-wage Jobs Interviewer Requests Facebook Login Information from Job Applicant Worker Schedules Stabilized at Starbucks What is a fair pay level for workers? Who or what should determine wages—the free market, the employer acting unilaterally, collective bargaining negotiations between employers and unions, or government mandates such as minimum wage laws? Should employers be permitted to require employees—even in low-level jobs—to sign non-compete clauses?

Should employers, like the correctional services department in this example, have a right to review job applicants’ social media pages? What information should be considered private, and what should be considered public? What if the job was not in the correction services field but in some other line of work, would the employer have the right to review your Facebook page then?

Who should be responsible for protecting applicant and employee privacy?

What is the best way to balance the employer’s need for flexibility and efficiency in scheduling part-time workers’ hours with the employee’s need for predictability in organizing their lives and finances? Should scheduling be subject to government regulation, or be left to employers and employees to work out?

Teaching Tip: Fair Scheduling The third preview case and Exhibit 15.A profile the issue of fair scheduling. The website www.fairworkweek.org has several videos that may be used to introduce this segment. Several short clips profile workers whose lives have been disrupted by unpredictable work schedules. Clips follow workers in Chicago and Philadelphia who describe the impact inconsistent schedules have on their lives.

Instructors may ask students: Have you personally ever experienced a problem with unpredictable scheduling? What should be done about this by individual workers, companies, or the government?

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 15-2

CHAPTER OUTLINE I.

THE EMPLOYMENT RELATIONSHIP

II.

WORKPLACE RIGHTS Teaching Tip: Rights of Employees Students may be asked to consider the brief vignettes given in the preview examples. What rights, as shown in Figure 15.1, are illustrated by these mini-cases? Do any rights conflict? If so, which should be given priority?

A. The Right to Organize and Bargain Collectively B. The Right to a Safe and Healthy Workplace Teaching Tip: Workplace Health and Safety An excellent video for use with the section of workplace health and safety is “Deadly Oil Fields” (8:38), which may be found at https://www.youtube.com/watch?v=mQozLr_qHvc. It explores the impact of weak regulatory oversight and complex ownership structures on the occupational hazards of work in the Bakken oil fields of North Dakota.

C. Job Security and the Right to Due Process III.

FAIR WAGES AND INCOME INEQUALITY

IV.

THE RIGHT TO PRIVACY IN THE WORKPLACE A. Electronic Monitoring B. Romance in the Workplace C. Employee Drug Use and Testing D. Alcohol Abuse at Work E. Employee Theft and Honesty Testing

V.

THE RIGHT TO BLOW THE WHISTLE AND FREE SPEECH IN THE WORKPLACE

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 15-3

Teaching Tip: Whistle-blowing Various real corporate examples could be introduced into a class discussion to explore factors that may cause an individual to blow the whistle against a firm. How much harm must occur? How much potential for harm is a sufficient motivator? How much privacy should be given to an organization? Are internal whistle-blowing programs -developed by many firms -- adequate, or are they window dressing or legal protection? The clash between an employee’s loyalty to an organization and her or his duty to society or a corporate stakeholder is a rich area for discussion.

Instructors may wish to show a video interview with Frances Haugen, the data scientist who blew the whistle on Facebook. The 60 Minutes interview, which aired October 3, 2021, is available on YouTube: https://www.youtube.com/watch?v=_Lx5VmAdZSI&t=1s.

GETTING STARTED KEY QUESTIONS AND CHAPTER OBJECTIVES LO 15-1: Understanding workers’ rights to organize unions and bargain collectively. (pp.

329-332) U.S. labor laws give most workers the right to organize unions and to bargain collectively with their employers. Although unions have weakened over time, they continue to represent workers in some parts of the economy, particularly in the public sector. Unions are stronger in most other countries.

LO 15-2: Knowing how government regulations assure occupational safety and health and what business must do to protect workers. (pp. 332-334) Job safety and health concerns have increased as a result of rapidly changing technology in the workplace. U.S. employers must comply with expanding OSHA regulations and respond to the threat of violence at work.

LO 15-3: Evaluating the limits of employers’ duty to provide job security to their workers. (pp.334-336) Employers’ right to discharge “at will” has been limited, and employees now have a number of bases for suing for wrongful discharge. The expectations of both sides in the employment relationship have been altered over time by globalization, business cycles, and other factors.

LO 15-4: Analyzing employer obligations to pay workers fairly and how pay policies can contribute to income inequality. (pp. 336-339) Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 15-4

Corporate wage policies contribute to growing income inequality. Paying living wages and pursuing a high-wage “good jobs” strategy can benefit a company through high productivity, strong customer service, and innovation.

LO 15-5: Appraising the extent of employees’ right to privacy, when businesses monitor employee communications, police romance in the office, test for drugs or alcohol, or subject employees to honesty tests. (pp. 339-344) Employee’s privacy rights are frequently challenged by employers’ needs to have information about their health, their work activities, and even their off-the-job lifestyles.

When these issues arise, management has a responsibility to act ethically toward employees while continuing to work for a high level of economic performance.

LO 15-6: Debating if employees have a duty to blow the whistle on corporate misconduct, or if employees should always be loyal to their employer. (pp. 344-345) Blowing the whistle on one’s employer is often a last resort to protest company actions considered to be harmful to others. In recent years, U.S. legislation has extended new protections to government whistle-blowers.

KEY TERMS drug testing electronic monitoring employee assistance programs (EAPs) employment-at-will ergonomics labor union living wage Occupational Safety and Health Administration (OSHA) privacy rights social contract whistle-blowing

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 15-5

INTERNET RESOURCES www.aclu.org

American Civil Liberties Union

www.afl-cio.org

American Federation of Labor-Congress of Industrial Organizations

www.business.com/human-resources Business.com (human resources topics) www.drugfreeworkplace.org

Institute for a Drug-Free Workplace

www.fair-wage.com

Fair Wage Network

www.osha.gov

Occupational Safety and Health Administration

www.whistleblowers.org

National Whistleblowers Center

www.workplacefairness.org

Workplace Fairness

www.workrights.org

National Workrights Institute

DISCUSSION CASE DO IT WITHOUT DUES Teaching Tip: Case Video Tip: CNBC story titled: How Amazon fends off Unions offers an in depth explanation of union organizing as well as coverage of efforts to organize at Amazon. This video runs about 20 minutes. If the instructor does not want to invest that amount of time, then a shorter clip: A look into Amazon's employee conditions as the company pushes back against unionization a story run by the PBS NewsHour is available that runs 8:09 seconds The story interviews workers mentioned in the discussion case: https://www.youtube.com/watch?v=iHCA4WB6E4Y

1. Which workplace rights were violated in this situation?

Students may debate whether anti-union campaigns violate the right to organize. A thoughtful analysis will consider where the line is drawn between employers presenting their concerns about unionizing and engaging in unfair labor practices.

2. Why do you think management was unresponsive to employee concerns?

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 15-6

Some students may argue that management was responsive to employee concerns through providing above market salaries and benefits. Other students may point to a power imbalance between Amazon and individual employees which results in a lack of urgency to address issues that are perceived as inconsistent with financial goals.

Individually, employees have no leverage to motivate Amazon to address their concerns as they can easily be replaced.

3. What factors could prevent managers from addressing employee concerns?

Students may observe that managers may be constrained by their supervisors regarding their ability to respond to employee concerns. Depending on their level in the organization, managers may not establish the policy, therefore they won’t have the authority to modify problematic policies. They do have the option of bringing the concerns up the chain of command, but ultimately they are compelled to implement the policy regardless of whether or not they agree with the policy.

4. Amazon has consistently defeated worker efforts to unionize. What factors make it particularly difficult for Amazon workers to unionize?

Individually, Amazon workers are at a disadvantage. Amazon often provides benefits and pays higher wages than jobs that require similar skills. As a result, Amazon workers don’t have options. The fear of retaliation or termination discourages workers from organizing. Furthermore, Amazon engages in an aggressive information campaign suggesting that unionizing would result in lower wages, fewer hours and loss of benefits.

Finally, current legislation does provide the same level of protection for labor organizing as other countries. This has been attributed to the overall decline in Union Membership since its peak in the 1960’s.

5. Amazon’s efforts to counter efforts to unionize are legal, but are these efforts ethical?

Effective answers would apply one or more of the four approaches to ethical reasoning covered in chapter 5: Virtues, Utilitarian, Rights, and/or Justice.

Virtues: the ambitious student could do an internet search to find Amazon’s core leadership principles. Then an insightful analysis would compare Amazon’s behavior in this case with its core principles to evaluate if Amazon’s behavior is ethical.

Utilitarian: the students would conduct a cost-benefit analysis considering the economic, human, and social cost of Amazon’s actions to determine if Amazon is behaving ethically.

Rights: students would refer to the list of workplace rights at the beginning of the chapter to evaluate whether Amazon’s actions violated any of these rights. The right to organize, the right to a safe workplace, the right to due process, the right to privacy, and the right to free speech, are relevant.

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 15-7

Justice: students would consider if Amazon’s actions were fair. Do unions have equal opportunity to provide accurate information about their services and potential benefits of union membership?

6. Why do you believe that Amazon opposed the unionization of its employees? Would unionization of its workers benefit Amazon in any way?

Answers will vary. A common answer will be greed and self-interest. A sophisticated answer will identify Amazon’s concerns with sharing decision making with employees.

Amazon assumes that allowing workers to have a say in working conditions will result in less innovation, decline in the quality of customer service, and less productivity.

7. How would the PRO Act affect situations similar to the union campaign described in this case?

The PRO Act would provide better protection for workers, making it difficult for Amazon to retaliate against employees who participate in organizing activities. PRO Act would prohibit compulsory information meetings where management actively discourages union membership. The PRO Act would make it easier for workers to participate in union elections by allowing remote voting that could be done off-site.

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 16-1

CHAPTER 16 MANAGING A DIVERSE WORKFORCE INTRODUCTION The workforce in the United States is more diverse than it has ever been, reflecting the entry of women into the workforce, immigration from other countries, the aging of the population, and shifting patterns of work and retirement. Equal opportunity laws and changing societal expectations have challenged corporations to manage workforce diversity effectively. Full workplace parity for women and persons of color has not yet been reached. However, businesses have made great strides in reforming policies and practices in order to draw on the skills and contributions of their increasingly varied employees.

PREVIEW CASE Wegmans Teaching Tip: Preview Case The instructor may ask students to go to the Great Places to Work website’s section on diversity: www.greatplacetowork.com/best-workplaces/diversity Student teams may select a company from the most recent list of best companies in this category and research that company’s diversity and inclusion policies. The instructor can then ask for a brief report back from each group, highlighting their findings.

CHAPTER OUTLINE I.

THE CHANGING FACE OF THE WORKFORCE Teaching Tip: Gender in the Workplace Students may be asked to prepare a family tree, reaching back three or four generations, indicating the major life activity or occupation of each woman. Do the trends apparent over time reflect those of the society as a whole? If the student is an immigrant or has immigrant ancestors, what different trends were apparent, if any, in the student's family's country of origin?

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 16-2

II.

GENDER AND RACE IN THE WORKPLACE Teaching Tip: Women and Persons of Color in the Workplace Students may be asked to examine a business with which they are familiar, or their own university, preparing a table showing the proportion of women or persons of color in different positions and at different levels. How is this organization the same as or different from the distribution of women and persons of color in the economy as a whole? Does this organization show any evidence of occupational segregation?

A. Women and Minorities at Work B. The Gender and Racial Pay Gap C. Where Women and Persons of Color Manage D. Breaking the Glass Ceiling E. Women and Minority Business Ownership III.

GOVERNMENT’S ROLE IN SECURING EQUAL EMPLOYMENT OPPORTUNITY A. Equal Employment Opportunity B. Affirmative Action Teaching Tip: Affirmative Action The debate for and against affirmative action lends itself readily to classroom discussion and debate, because compelling arguments can be made on both sides. Instructors may wish to ask students if they can generate an approach that would meet the objectives of the supporters of affirmative action while also addressing the concerns of its critics.

C. Sexual and Racial Harassment Teaching Tip: Sexual and Racial Harassment Students may be asked to identify a corporate executive alleged by the #MeToo movement to have engaged in improper sexual behavior or harassment. A list is available in this story in Time magazine: Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 16-3

http://time.com/5321130/414-executives-metoo/.

Instructors may ask students: What were the allegations?

What evidence was made public?

What action, if any, did the executive or the company take in response to the allegation?

Do you believe the outcome was justified, or not?

Do you believe appropriate due process was followed?

IV.

WHAT BUSINESS CAN DO: DIVERSITY AND INCLUSION POLICIES AND PRACTICES A. Balancing Work and Life Teaching Tip: Diversity Policies Many students assume that "family-friendly" corporate policies and programs, such as those discussed in the chapter, are intended for and used primarily by women. It is useful in the classroom, therefore, to challenge them to consider the implications of these policies for men.

What are the workplace needs of fathers or of men with other familial responsibilities? To what extent do men use these policies? Why don’t men use them more widely?

B. Child Care and Elder Care C. Work Flexibility

GETTING STARTED KEY LEARNING OBJECTIVES LO 16-1: Knowing in what ways the workforce of the United States is diverse, and evaluating how it might change in the future. (pp. 350-352) The U.S. workforce is as diverse as it has ever been and is becoming more so. More women are working than ever before, many immigrants have entered the labor force, ethnic and racial diversity is increasing, the workforce is aging, and millennials are entering the workplace.

LO 16-2: Understanding where women and persons of color work, how much they are paid, and what roles they play as managers and business owners. (pp. 352-359) Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 16-4

Women and persons of color have made great strides in entering all occupations, but they continue to be underrepresented in many business management roles, especially at top levels.

Both groups face a continuing pay gap. The number of women-owned businesses has increased sharply, and many minorities, especially immigrants, also own their own businesses.

LO 16-3: Identifying the role government plays in securing equal employment opportunity for historically disadvantaged groups, and debating whether affirmative action is an effective strategy for promoting equal opportunity. (pp. 359-364) Under U.S. law, businesses are required to provide equal opportunity to all, without regard to race, color, religion, sex, national origin, disability, or age. Sexual and racial harassment are illegal. Affirmative action plans remain legal, but only if they are temporary and flexible, designed to correct past discrimination, and do not result in reverse discrimination.

LO 16-4: Assessing the ways in which diversity confers a competitive advantage. (pp. 366367; this LO is out of order and there is no header, starts with “Businesses that manage diversity…”)

Companies that manage diversity effectively have a strategic advantage because they foster innovation, serve a diverse customer base, and avoid expensive lawsuits and public embarrassment.

LO 16-5: Formulating how companies can best manage workforce diversity, making the workplace welcoming, fair, and accommodating to all employees. (pp. 364-366) Successful diversity and inclusion management includes articulating goals and measuring progress, recruiting widely, mentoring promising women and persons of color, and establishing mechanisms for assessing progress.

LO 16-6: Understanding what corporate policies and practices are most effective in helping today’s employees manage the complex, multiple demands of work and family obligations. (pp. 367-370) Many businesses have helped employees balance the complex demands of work and family obligations by providing support programs such as child care and elder care, flexible work schedules, domestic partner benefits, and telecommuting options.

KEY TERMS affirmative action child care

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 16-5

diversity diversity council elder care equal employment opportunity Equal Employment Opportunity Commission (EEOC) family-friendly corporation family leave gender identify and sexual orientation glass ceiling inclusion labor force participation rate occupational segregation parental leave pay gap racial harassment sexual harassment undocumented immigrant worker workforce diversity INTERNET RESOURCES www.eeoc.gov

U.S. Equal Employment Opportunity Commission

www.familiesandwork.org

Families and Work Institute

www.sba.gov

U.S. Small Business Administration

www.catalyst.org

Catalyst—“expanding opportunities for women and business”

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 16-6

www.diversityinc.com

Diversity Inc. magazine and other resources

www.workingmother.com

Working Mother magazine and other resources

www.hrc.org

Human Rights Campaign Foundation

DISCUSSION CASE HELLO, MY NAME IS …

Teaching Tip: Case There are two videos that can be used as an icebreaker for the discussion. The first video, Shiori: Gift it Like You Mean It, : https://www.youtube.com/watch?v=LgAqxLJHZQc is referred to in the case. It shows Japanese American teenager Shiori frustrated as people mispronounce her name.

The second video Your name is not a mistake: : https://www.youtube.com/watch?v=qUL4o0nxk9s highlights the recent campaign initiated by South African fast food chain, Nandos to update internet dictionaries so that non-western names are not automatically categorized as misspellings.

Discussion Questions 1. What dimensions of diversity are represented in a name?

If we look at the categories of diversity as covered by Title VII of the Civil Rights Act, dimensions of diversity are defined as race, color, sex, religion, and national origin. Students may observe that people make assumptions about race, sex, religion, and national origin from people’s names.

2. Do you think that Jinghua’s, Francisco’s, and Dhiriti’s nicknames promote or hamper workplace inclusion? Explain your answer.

Opinions will vary. Some students will not see the harm in anglicizing names suggesting that it reduces barriers to interpersonal interactions by reducing discomfort with unfamiliar names that are perceived as difficult to pronounce. Others will say that the nicknames promote assimilation instead of inclusion. The work of “fitting in” and “belonging” requires people to surrender essential parts of their identity, like their name. This places a disproportionate burden on minority group members that is not shared by majority members. When “American” nicknames are imposed on names that are unfamiliar for convenience, this could Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 16-7

be perceived as a lack of respect or recognition of the individual with a name from another culture.

3. Even though it was discovered that a disgruntled employee fraudulently sent posts to Black applicants rejecting their applications based on their names, should Mantality be held responsible?

Some students are likely to state that the company did not sanction this message, so it should not be held responsible for the message sent on its behalf by a former employee. However, intention is not required for legal responsibility. Companies are legally responsible for digital communication as if it were written on company letterhead. Companies are also responsible for the actions of employees. If the disgruntled employee was terminated at the time that the message was sent, then Mantality is responsible for the breach in security that would have allowed the former employee access to its hiring platform.

4. If you were an HR manager for one of the companies described in the case, what changes would you make to ensure that the hiring process was fair and inclusive? What changes would you make to promote an inclusive and equitable corporate culture?

Students should refer to the section in the chapter “What Business Can Do: Diversity and Inclusion Policies and Practices.” Some suggestions would be to audit recruitment and selection procedures that inadvertently exclude underrepresented groups. If the company automates its initial screening process, it may want to confirm that the algorithm used by the job placement platforms (Indeed, Monster, etc.) don’t apply criteria that disproportionately excludes minorities that are qualified for the position.

Additionally, they may cite the techniques described in the example of GapJumper , that uses job related assignments to screen applicants without any personally identifying information.

Expand recruitment to additional schools that have a higher proportion of qualified applicants from underrepresented groups. Articulate measurable diversity goals and hold managers accountable for reaching these goals. Mentor promising women and persons of color.

Establish affinity groups that provide support for underrepresented groups as well as provide feedback to decision makers about company’s climate and culture.

5. If an employer’s request to change someone’s name is intended to make it easier for others to pronounce, is this a violation of Title VII? Why or why not?

The request alone would not necessarily constitute a violation of Title VII. However, if this action combined with other incidents creates or facilitates a hostile work environment, the company could be legally vulnerable. While it may not meet the legal threshold for Title VII violation, it is bad practice. Associates should make the effort to learn the person’s name.

Leadership should model this behavior, by learning to pronounce the person’s given name and using this name in meetings unless the employee requests that another name be used.

6. What do you think Xiuying will do? What do you think she should do? Why?

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 16-8

Answers will vary. The purpose of this question is to promote empathy and encourage discussion. If it is difficult to begin a conversation, instructors may add some additional probing questions: How do you feel when your name is misspelled? Do you think it is fair that Xiuying should be concerned that her given name despite her qualifications may prevent her from securing a good job?

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 17-1

CHAPTER 17 BUSINESS AND ITS SUPPLIERS INTRODUCTION Corporations have complex relationships with their suppliers, other firms that provide them with goods and services and in some cases manufacture their products. In today’s interconnected world, many firms are embedded in complex, global supply chain networks. Increasingly, managers are responsible for social, ethical, and environmental issues that arise in supplier firms.

A failure to manage these issues proactively can lead to reputational and financial losses; conversely, success in doing so can yield benefits. Many companies have adopted supplier codes of conduct, carried out audits, and remediated failures. A growing trend is for lead firms to work collaboratively with their suppliers to build capabilities and create shared value.

PREVIEW CASES Walmart’s Project Gigaton and Monster Beverages and Human Trafficking and Patagonia Commits to Social and Environmental Conservation in Argentina Teaching Tips: Preview Cases A short (3:05) made by Walmart to introduce Project Gigaton to its suppliers is available at: www.youtube.com/watch?v=s0VOUxbzmX4 or: www.walmartsustainabilityhub.com/project-gigaton The Supply Chain Solutions Center developed by the Environmental Defense Fund, Walmart’s partner, is available here: http://supplychain.edf.org As an exercise, the instructor may ask student teams to identify a business of their choice that might be a supplier to Walmart and then go to the solutions center and find an action that business could take to contribute to meeting Project Gigaton’s goals.

CHAPTER OUTLINE I.

SUPPLIERS Teaching Tip: Suppliers

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 17-2

A useful way to introduce this chapter is to select a product students will be familiar with and display a supply chain map, showing the complexity of the supply network for even seemingly simple products.

The website sourcemap (http://free.sourcemap.com) has supply chain maps for a variety of products. Students can also be asked to research and develop their own supply chain map for a product that is of interest to them.

II.

SOCIAL, ETHICAL, AND ENVIRONMENTAL ISSUES IN GLOBAL SUPPLY CHAINS A. Social Issues B. Ethical Issues C. Environmental Issues D. Supply Chain Risk

III.

PRIVATE REGULATION OF THE BUSINESS – SUPPLIER RELATIONSHIP A. Supply Chain Auditing Teaching Tip: Supply Chain Auditing Students may be prompted to go online to investigate publicly available supply chain audits of companies that interest them. Examples of companies that post information about their supply chain audits include the Gap, Nike, Patagonia, and Apple.

IV.

SUPPLIER DEVELOPMENT AND CAPABILITY BUILDING

GETTING STARTED KEY LEARNING OBJECTIVES LO 17-1: Understand what suppliers are, the nature of suppliers’ interests and power, and the scope of the global supply chain. (pp. 376-379) A supplier is an organization that provides goods or services to another organization.

Suppliers are important market stakeholders, since they provide critical inputs and often manufacture branded products. Although suppliers are diverse, they share a common interest Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 17-3

in building long-term, stable relationships with buyers. Suppliers that provide unique skills, resources, or capabilities tend to have more power. As globalization has increased, supply chains have become increasingly complex.

LO 17-2: Examine the social, ethical, and environmental issues that arise in global supply chains and how they can affect a company’s reputation and bottom line. (pp. 379-383) Many social, ethical, and environmental issues arise in global supply chains. These include low wages, unsafe conditions, child and forced labor, unethical sourcing from conflict areas, and adverse environmental impacts of resource extraction, production, and transportation.

Companies that do not manage supply chain risks effectively can suffer financial and reputational damage; conversely, those that manage these risks well can benefit.

LO 17-3: Describe contemporary trends in the private regulation of supply chain practices and analyze the reasons for the emergence of company and industrywide codes of conduct. (pp. 384-386) Private regulation refers to nongovernmental institutions that establish rules in global supply chains. It generally takes the form of company and industrywide codes of conduct with which suppliers must comply. Private regulation tends to arise in situations where public regulation is weak, and lead firms carry significant reputational risk because of strong consumer brands.

LO 17-4: Understand the various methods businesses and nonprofit organizations use to audit global supply chains for compliance with codes of conduct and other standards. (pp. 386-388) Lead firms and groups of firms use several methods to audit compliance with supply chain codes of conduct. These include internal audit, third-party (external) audits, and crowdsourced audits. Increasingly, companies are working together to audit major suppliers and to share results, often on cloud-based platforms.

LO 17-5: Analyze the reasons for and benefits of engaging collaboratively with suppliers to build capability and create shared value and the conditions under which such initiatives are likely to succeed. (pp. 388-391) A growing trend is for companies to engage collaboratively with suppliers to build capability.

This benefits both the firm and supplier, creating shared value. Suppliers are more likely to engage with lead firms with which they have stable, long-term relationships.

KEY TERMS capability-building child labor Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 17-4

crowdsourced audit human trafficking integrated supplier scorecard private regulation root cause analysis supplier supplier development supply chain supply chain audit supply chain codes of conduct supply chain map supply chain transparency sweatshop tier-1 and tier-2 suppliers INTERNET RESOURCES www.weforum.org

World Economic Forum (reports on supply chain responsibility)

www.sourcingnetwork.org

Responsible Sourcing Network

knowthechain.org/

KnowTheChain (Forced Labor in Supply Chains)

www.greenbiz.com/topics/supply-chain

GreenBiz supply chain topics

www.responsiblebusiness.org/

Responsible Business Alliance

www.gsb.stanford.edu/faculty-research/centersStanford University research on initiatives/vcii/research/responsible-supply-chains responsible supply chains

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 17-5

DISCUSSION CASE IKEA’S SUSTAINABLE COTTON SUPPLY CHAIN Teaching Tip: Ikea A useful video (5:28) for introducing a discussion of this case is “IKEA and Cotton,” available at: www.youtube.com/watch?v=vNvUeb3OoVY

Discussion Questions 1. Draw a supply chain map of IKEA’s cotton supply chain.

The chapter defines a supply chain map as “a visual representation of the multiple links between a lead firm, its suppliers, and eventually its customers. It shows the movement of a product from the beginning of the supply chain to the end, superimposed on a geographical map.” As described in the discussion case, IKEA’s cotton supply chain was long and complex. The discussion case does not provide enough geographical information to draw a complete supply chain map. But students will be able to create a simple approximation, as shown: Cotton Farms→Ginning Mills→Spinning Mills→Weaving/Knitting Factories→ Dyeing Factories→Furniture, Bedding, etc. Factories→IKEA→Customers IKEA operated stores in 52 countries and sourced most of its cotton from India, China, Pakistan, and Turkey.

2. What social, ethical, and environmental risks were present in IKEA’s cotton supply chain?

Several social, ethical, and environmental risks were present in IKEA’s cotton supply chain.

Cotton used more water than any other agricultural commodity; cotton farming depleted surface and groundwater supplies. The sector was a major user of synthetic fertilizers, pesticides (insect-killers), and herbicides (weed-killers), many of which were highly toxic— threatening worker health and polluting land and water. Many cotton farmers had povertylevel incomes, and women received on average 25 to 30 percent less pay than men doing the same work. Child labor was used in the cotton industry in 18 countries.

3. What characteristics of the cotton supply chain made enforcing its code of conduct especially challenging for IKEA? As part of its supply chain responsibility initiative, IKEA committed to sourcing 100 percent sustainable cotton by 2015, and it achieved this goal. This was an impressive accomplishment, because the cotton supply chain was long and complex. Suppliers at every tier had to be motivated to participate. IKEA and its partners had to develop specialized Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 17-6

software to track sustainable cotton through the multiple nodes of the supply chain, so it would remain segregated from conventional cotton.

4. What were the advantages and disadvantages to IKEA of working collaboratively with other companies and NGOs to improve sustainability in its cotton supply chain?

IKEA joined with several other companies and NGOs to form the Better Cotton Initiative (BCI), a multi-stakeholder coalition. There were both advantages and disadvantages to IKEA of working collaboratively with other companies and NGOs to improve sustainability in its cotton supply chain. The BCI developed and published a common set of standards for the cotton supply chain calling for farms to use water efficiently, care for the soil, conserve habitats, maintain fiber quality, and promote decent work. Common standards made it easier for suppliers to comply, and demand from many buyers created incentives for suppliers to do so. BCI was able to tap into collective scientific and business knowledge in crafting the standards. On the other hand, working in collaboration introduced further complexity and possible costs into the company’s supply chain management process.

5. What motivated actors throughout the complex cotton supply chain to comply with IKEA’s sustainability goals?

Different suppliers had different motivations. For example, cotton farmers learned they could save money and increase their incomes by reducing their use of water and chemical inputs. Ginners learned if they separated sustainable from conventional cotton, they could benefit by increasing market share, even though they might initially incur extra costs.

6. What more, if anything, could IKEA do now to improve sustainability in the cotton sector?

The discussion case reports that IKEA had made great progress: in 2021, it was judged to have the second most responsible cotton supply chain in the world, and by 2020 had completely phased out conventional cotton. But, some felt that the movement towards sustainable cotton had become in a sense too successful; although more sustainable cotton was being produced, demand for it lagged supply. Possibly, IKEA could join others in the BCI to encourage other brands and retailers to buy sustainable cotton.

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 18-1

CHAPTER 18 THE COMMUNITY AND THE CORPORATION INTRODUCTION A strong relationship benefits both business and its community. Communities look to businesses for civic leadership and for help in coping with local problems, while businesses expect to be treated in fair and supportive ways by the community. As companies expand their operations, they develop a wider set of community relationships. Community relations programs, including corporate giving, are an important way for a business to express its commitment to corporate citizenship.

PREVIEW CASES Vodaphone and Whole Foods Market and Biogen Why do businesses as diverse as Vodafone, Whole Foods, and Biogen invest in community organizations, projects, and charities? Why do they contribute their money, resources, and time to help others? What benefits do they gain from such activities, and are their motivations always appropriate? This chapter explains why many companies believe that being an involved citizen is part of their basic business mission. The chapter also looks at how companies participate in community life and how they build partnerships with other businesses, government, and community organizations. The core questions that we consider in this chapter are: What does it mean to be a good corporate neighbor? What is the business case for doing so? How do charitable activities interact with a firm’s strategic objectives?

Teaching Tips: Preview Cases Instructors may wish to start the class with a quick (1:28 video) made by Vodafone Foundation that sketches several philanthropic initiatives.

After showing the video, the instructor may ask: What kinds of corporate giving did you notice?

An astute student will observe three kinds of giving (financial contributions to projects like health care and education); employee volunteerism (Vodafone team members helping after natural disasters); and contributions of product (free handsets for victims of domestic violence needing to connect to support services.)

The instructor can then prime the discussion by asking: What might be the benefit to Vodafone of these charitable gifts and activities?

The video is available at: www.youtube.com/watch?v=eSX7e95iMPY.

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 18-2

CHAPTER OUTLINE I.

THE BUSINESS-COMMUNITY RELATIONSHIP A. The Business Case for Community Involvement

II.

COMMUNITY RELATIONS Teaching Tip: Experiential Learning for Students This chapter provides an opportunity to integrate experiential learning into the business and society course. One idea that has been tried by many faculty members is organizing a student project in the community.

Nonprofit groups often have volunteer needs that can be integrated into a business and society course. For example, a class might participate in a local housing renovation project (e.g., Habitat for Humanity), a walk to raise money for a local social service or medical charity, or a blood drive. Students should be tasked with talking with other volunteers to learn about motivations, organizers, and expectations. For some, the experience of actually doing a project in the community will provide a powerful learning experience.

A. Economic Development Teaching Tip: Economic Development The Nightly Business Report (PBS) aired a segment on June 22, 2015, “Farming in the City,” that profiled AeroFarms, a business described in the chapter discussion of economic development. The segment (running 2:49) is available at www.youtube.com/watch?v=GoPwIAzpd-Y.

B. Housing C. Aid to Minority, Women, and Disabled Veteran-Owned Enterprises D. Disaster, Terrorism, and War Relief III.

CORPORATE GIVING A. Forms of Corporate Giving B. Priorities in Corporate Giving C. Corporate Giving in a Strategic Context

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 18-3

D. Measuring the Return on Social Investment IV.

BUILDING COLLABORATIVE PARTNERSHIPS Teaching Tip: Exploring Partnerships The need for new approaches to community needs has drawn many companies and universities into partnerships. Students can be directed to look at local community partnerships in several ways: the mayor’s office is often a ready source of information, as is the local Chamber of Commerce. Student assignments--including good term papers--can be developed around the study of individual partnerships, partnerships around selected social issues (e.g., education, drug prevention), or the partnerships in which a single company or organization participates.

• Individual partnerships: How were they formed? Motivation of key actors? Governance and decision-making process? Key factors in achieving effectiveness?

• Social issue partnerships: Why are partnerships necessary to address this issue? What organizations are involved in this partnership?

What is their rationale? Who represents these organizations in doing the work of the partnerships? Are they effective? Why or why not?

• Single company: How many community-based partnerships does this company participate in? Are there similar purposes or motivations? What other organizations participate in these partnerships?

GETTING STARTED KEY LEARNING OBJECTIVES LO 18-1: Defining a community, and understanding the interdependencies between companies and the communities in which they operate. (pp. 397-398) The community refers to an organization’s area of local influence, as well as more broadly to other groups that are affected by its actions. Businesses and their communities are mutually dependent. Business relies on the community for services and infrastructure, and the community relies on business for taxes and support of various civic activities.

LO 18-2: Analyzing why it is in the interest of business to respond to community problems and needs. (pp. 399-400) Addressing a community’s needs in a positive way helps business by enhancing its reputation, building trust, and winning support for company actions. Like other forms of Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 18-4

corporate social responsibility, community involvement helps cement the loyalty of employees, customers, and the public.

LO 18-3: Knowing the major responsibilities of community relations managers. (pp. 400402) Many corporations have established community relations departments and foundations that respond to local needs and community groups, coordinate corporate giving, and develop strategies for creating win-win approaches to solving civic problems.

LO 18-4: Examining how different forms of corporate giving contribute to building strong relationships between businesses and communities. (pp. 403-409) Corporate giving comprises gifts of cash, property, and employee time. Donations currently average about 0.9 percent of pretax profits. Philanthropic contributions both improve a company’s reputation and sustain vital community institutions. But, critics have also charged some companies with self-interested motives.

LO 18-5: Evaluating how companies can direct their giving strategically, to further their own business objectives. (pp. 409-412) Many companies have adopted a strategic approach to philanthropy, linking their giving to business goals. Corporate giving is most effective when it draws on the unique competencies of the business and is aligned with the core values of the firm and with employee interests.

Increasingly, companies are measuring the return on their social investment for both recipients and themselves.

LO 18-6: Analyzing how collaborative partnerships between businesses and communities can address today’s pressing social problems. (pp. 412-413) The development of collaborative partnerships has proven to be effective in addressing problems in education and other civic concerns. Partnerships offer an effective model of shared responsibility in which businesses and the public and KEY TERMS civic engagement collaborative partnerships community community relations community relations manager

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 18-5

corporate foundations corporate philanthropy (corporate giving) in-kind contributions license to operate return on social investment skills-based volunteerism social capital strategic philanthropy volunteerism INTERNET RESOURCES ccc.bc.edu

Boston College Center for Corporate Citizenship

www.pointsoflight.org

Points of Light Foundation

givingusa.org

Giving Institute and Giving USA Foundation

candid.org

Candid (merger of the Foundation Center and GuideStar)

businessfightspoverty.org

Business Fights Poverty

taprootfoundation.org

Taproot Foundation (skilled-based volunteerism)

DISCUSSION CASE SALESFORCE’S 1+1+1 INTEGRATED PHILANTHROPY MODEL Teaching Tip: Discussion Case The discussion case mentions that Salesforce was committed to spreading its integrated model to other companies. A nonprofit called Pledge 1% encouraged other companies to follow the Salesforce example and “take the pledge” by donating one percent of equity, Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 18-6

employee time, profits, sales, products or services—or any combination of these.

By 2020, Pledge 1% had reached 10,000 companies in 100 countries and created $1 billion in value. The instructor may ask students to discuss whether it benefitted Salesforce to “share” its model with others.

Discussion Questions 1. What evidence do you see in this case of the three kinds of corporate philanthropy discussed in this chapter: contributions of cash, in-kind products or services, and employee time?

Salesforce used the 1+1+1 model of integrated philanthropy: the company gave one percent of equity, one percent of product, and one percent of employee time to charity annually.

These paralleled the three kinds of corporate philanthropy discussed in the text: gifts of money, gifts of products or services (in-kind contributions), and gifts of time (employee volunteerism). Salesforce donated millions of dollars directly to charitable causes, prioritizing education, especially in the areas of science, math, engineering, and technology.

Through its Power of Us program, Salesforce provided free or deeply discounted software to nonprofits and educational institutions to help support their missions, with a value of as much as $20,000 a year to the recipient.

Finally, Salesforce employees received seven days a year of paid time-off to volunteer in whatever way they chose. Eighty percent took advantage of the opportunity to do so, many contributing valuable professional skills. In its 2020 annual report, Salesforce reported that since its founding, the company (and its philanthropic foundation) had donated $330 million to charitable organizations, 4.9 million hours of employee time, and free or discounted services to more than 46,000 nonprofits and educational institutions.

2. What does integrated philanthropy mean, and how does it compare with the philanthropic initiatives of other companies discussed in this chapter?

Integrated philanthropy, as practiced by Salesforce, refers to a strategy of coordinating its donations of 1 percent of equity, product, and employee time. The chapter includes many examples of other companies contributing money, products and services, and employee time, but arguably none did so at the very high level exemplified by Salesforce. The company is widely seen as a leader in corporate philanthropy.

3. Do you consider Salesforce’s various charitable initiatives to exemplify strategic philanthropy, as defined in this chapter? Why or why not?

The text defines strategic philanthropy as corporate giving that is linked directly or indirectly to business goals and objectives. In this approach, both the company and society benefit Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 18-7

from the gift. Many of the charitable initiatives described in the discussion case can be viewed as examples of strategic philanthropy. For example, Salesforce’s contributions to the public-school system in its home community of San Francisco enhanced the company’s reputation and provided tax deductions. Its involvement with CoderDojo strengthened its ability to attract and retain skilled professionals. Projects such as the one in which employees at Tableau, which was owned by Salesforce, developed a system to track COVID19 cases based on World Health Organization data no doubt enhanced employee skills as well as benefited society by providing real-time public health data. The company’s investments in start-ups addressing such issues as climate change, diversity and inclusion, and education and reskilling, arguably benefited both the company and society.

4. What are the benefits and risks to Salesforce of its approach to philanthropy?

Salesforce’s integrated philanthropy carries both benefits and risks for the company.

Benefits might include an enhanced reputation in the community, outreach to potential future customers and employees, and tax deductions for charitable gifts. Other benefits might include becoming a more attractive employer for community-minded professionals and skill development opportunities for employees. Risks might include loss of revenue (for example, from software that was donated rather than sold, or from time employees were not devoting to their work assignment), possible failure of various initiatives, and disapproval from shareholders who disagreed with allocating resources for the community’s benefit.

5. If you were a corporate philanthropy manager for Salesforce, how would you evaluate the impact of the company’s giving? What kinds of impacts would you attempt to measure?

The chapter explains that increasingly companies are evaluating the impact of philanthropic contributions. It explains that managers measure four specific elements in their assessing their return on social investment. These four elements are: Inputs refer to the resources that companies provide. In this instance, inputs would include cash contributions, employee time, and software donated by Salesforce.

Outputs are measures of the activities that took place—usually numerical counts of people and communities served. Here, this would involve the number of nonprofits, schools, and other entities served.

Impacts represent the difference the program made, that is, the actual benefits that accrued to the people and communities served. In the case of Salesforce, which was involved in many programs, this calculation would be quite complex.

Value creation represents the benefits to the company of its participation. For example, can Salesforce measure the extent to which various initiatives enhanced its employees’ skills and loyalty, or enabled it to attract new customers or employees?

6. Would Salesforce’s philanthropic programs lead you to consider working for this Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 18-8

company, and why or why not?

Students may differ in their responses to this question. Some may express an interest in working for a company that encourages and supports employee volunteerism, is committed to social betterment, and gives away its products and services to worthy nonprofits. Other may feel that the company is not sufficiently focused on its core business mission.

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 19-1

CHAPTER 19 MANAGING THE PUBLIC AND THE CORPORATE REPUTATION INTRODUCTION How the general public perceives a business firm can have a major effect on its performance and its ability to remain in business. Therefore, building a positive public reputation for providing superior products or services and responding to unexpected crises are of great importance. Most companies employ many people to help establish and maintain a good reputation and respond to crises. Their job is to formulate a strategy that includes, at a minimum, the careful management of the brand, interaction with the media, and managing key issues that may arise, and successfully responding to any unanticipated crisis. Ultimately, maintaining a positive public reputation depends on acting in an ethical and socially responsible manner.

PREVIEW CASES Pepsi and the Black Lives Matter Movement and Britain’s Committee of Advertising Practice Both the Pepsi and 21st Century Fox examples illustrate the importance of maintaining a good reputation with the public . and promoting positive gender stereotypes. In an era when information travels at lightning speed through both conventional channels—television, radio, and newspapers—as well as social media outlets—blogs, websites, Twitter, e-mails, and others— reaching thousands, if not millions, of people, reputations can be lost in an instant. While businesses seek publicity and spend millions of dollars annually to improve their image and reputation, company executives must navigate many minefields as they compete for the hearts and minds of the consuming public. This chapter will define the general public as a stakeholder and present a variety of tools that businesses can use to build and protect their reputations and brands.

CHAPTER OUTLINE I.

THE GENERAL PUBLIC Teaching Tip: The General Public There are numerous issues important to the public that involve businesses. One of these issues is the Black Lives Matters Movement, as discussed in the introductory case but there are many others. It may be a good exercise for students to search various media sources to identify some of these current issues.

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 19-2 II.

WHAT IS REPUTATION? A. Why Does Reputation Matter?

Teaching Tip: Why Does Reputation Matter?

Students might want to poll other students at their school to see which firms have the best and worst reputation. The survey could go outside the school to people on the street, or people students work with, or family members. The differences, or similarities, might be interesting to discover. Students may also want to differentiate between “corporate identity” and “corporate image” in their investigation of the school’s reputation.

III.

THE PUBLIC RELATIONS DEPARTMENT A. Public Relations in the Internet and Social Media Age

IV.

BRAND MANAGEMENT

V.

CRISIS MANAGEMENT Teaching Tip: Crisis Management Are there recent examples of a business crisis in your region or nationally in the news? Students could analyze these examples and compare them to examples presented in the chapter. Or, have the students carefully analyze the Wendy’s crisis management response, as described in Exhibit 19.B, and using the crisis management elements found in Exhibit 19.C. How could Wendy’s have improved their crisis response? .

VI.

ENGAGING KEY STAKEHOLDERS WITH SPECIFIC TACTICS A. Executive Visibility Teaching Tip: Executive Visibility Ask students “who are the most visible executives in your region?”

“Why are they visible, because of a tragedy at their company or for good works in the community?” “Does an executive want to be visible or stay behind the scenes?”

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 19-3 B. User-Generated Content C. Paid Content D. Event Sponsorship Teaching Tip: Event Sponsorship Students could engage in an exercise where they are planning an event and think about who could become a sponsor for their event and why are these sponsors helpful to the event?

E. Image Advertisements Teaching Tip: Image Advertisements Students can search the web or print magazines to locate examples of image advertisements. Are the advertisement campaigns positive or negative, ethical or unethical, and why, according to the students’ views?

GETTING STARTED KEY LEARNING OBJECTIVES LO 19-1: Recognizing why the general public is an important organizational stakeholder. (pp. 418-419) The general public affects the firm through its opinions of the firm’s activities or performance, which in turn help shape the firm’s public image or reputation. The public may utilize its own stakeholder networks and engage with government agencies, special interest groups, or the media to demand a certain level of firm performance.

LO 19-2: Understanding what constitutes a good corporate reputation and why it is important. (pp. 419-421) A good corporate reputation conveys the desirable qualities associated with an organization in order to positively influence the organization’s relationships with its stakeholders, on whom it depends to survive and thrive.

LO 19-3: Knowing the basic elements and activities of a firm’s public relations department. (pp. 421-424)

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 19-4 Firms often create public relations (or media relations) departments, appoint public relations officers, and develop public affairs strategies to manage their relationship with the public.

As new technologies have emerged, the variety of available channels of communication for the public affairs officer and departments has grown dramatically, including social media platforms and apps.

LO 19-4: Assessing how brand management can best manage a firm’s reputation. (pp. 424425) Effective brand management helps increase the perceived value of a product line or brand over time and helps companies be more successful because they can charge premium prices, enhance their access to capital markets and funding, obtain better credit, trust, and social ratings.

LO 19-5: Evaluating a firm’s crisis management plan as an effective tool for handling an unexpected situation. (pp. 425-428) An effective crisis management plan is one that is ready to be implemented before the crisis occurs. Such a plan enables the organization to quickly and accurately communicate with the media and to use a wide range of online platforms to reach the public directly, while always remaining focused on the organization’s ethical responsibilities to its stakeholders.

LO 19-6: Recognizing tactics that enable businesses to engage with the general public and other stakeholders to enhance the firm’s reputation. (pp. 428-435) Business organizations can influence or change their reputation through a variety of tactics such as executive visibility, media training, user-generated or paid content, event sponsorship, and image advertisements.

KEY TERMS brand management corporate crisis corporate identity corporate image corporate reputation crisis management crisis plan

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 19-5 dark site general public image advertisements media paid content public relations department social media influencers user-generated content

INTERNET RESOURCES aipmm.com

The Association of International Product Marketing & Management

www.icma.org.uk

International Crisis Management Association

crisisintervention.com

Professional Crisis Management Association

www.prsa.org

Public Relations Society of America (PRSA)

www.adcouncil.org

The Ad Council

www.socialmediaassoc.com

Social Media Association

americanmediainstitute.com

American Media Institute

www.fcc.gov

U.S. Federal Communications Commission (FCC)

www.ftc.gov

U.S. Federal Trade Commission (FTC)

DISCUSSION CASE UNITED AIRLINES – NAVIGATING A SOCIAL MEDIA STORM Discussion Questions

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 19-6 1. What was the impact of the incidents described in the case on United Airlines’ reputation?

As presented in the case, United Airlines encountered many “impacts” from the incidents described. Massive amounts of negative publicity followed each incident – from the barring of two girls on their flight due to their attire to the dragging of a bloodied passenger off the plane to a dog dying while in the overhead luggage compartment. A lawsuit was filed by the bloodied passenger, which was settled out of court, and the airline’s favorability rating dropped significantly.

2. Did these incidents impact the firm’s corporate identity or corporate image, or both, as described in the chapter?

While this question may also look beyond the case itself, it is reasonable that United lost potential passengers, especially in a highly competitive airline transportation industry, often with many alternative airlines for passengers. The favorability rating, mentioned in the case, could be used by passenger before selecting an airline for their flight or by businesses who are choosing which airline they will use to book travel for their employees or potential clients.

The apology issued by United CEO Munoz attempted to address the declining corporate image, how others see the company, as well as instill a sense of pride and respect among the United employees, enhancing how the company is presented to the public as their corporate identity. The apology was supported by Munoz’s public pledge to “conduct a full review of its policies in re-accommodating paid passengers to give off-duty crew members their seats and its interaction with law enforcement agencies within a few weeks.” Munoz reassured the public that “we are going to fix what’s broken so this never happens again.”

3. Did these incidents constitute a crisis, as defined in the chapter?

Yes, the incidents occurring at United did constitute a “crisis,” defined as “a significant business disruption that stimulates extensive news media or social networking coverage.” It likely falls into the “human error” (through miscommunication, improper employee behavior) crisis or a “management decision or indecision” (often involving a cover-up or lack of urgency type of crisis) type of crisis.

4. Did United Airlines engage in effective crisis management, and why or why not? If you were the public relations manager at United Airlines, what steps would you have recommended the company take when these incidents occurred?

United management manifested many of the suggested strategies for an effective crisis management response.

United attempted to “communicate quickly but accurately.” When CEO Munoz “immediately issued an apology” after videos of the bloodied passenger being dragged from the plane went viral on social media sites.

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Page 19-7

United appeared to “do the right thing” when Munoz said that the airline “would take full responsibility for the [Deo] situation.”

The airline also provided “follow up.” The follow-up response was particularly evident when the airline promised to “review their dress code policy” after the barring of two girls from their flight. The company also promised to conduct a full review of the airline’s polices regarding the re-accommodation of paid passenger to give off-duty crew members their seats.

After the tragic death of the dog in the overhead luggage compartment, the airline, again, assumed full responsibility for the tragedy and expressed its condolences to the family of the animal.

However, it also seems that United did not follow a solid crisis management strategy when it initially circulated a letter where the CEO appeared to be blaming the passenger, Deo. The airline also seemed hesitant, initially, to take responsibility for barring the two girls from the flight when it responded by reiterating its policy: “United shall have the right to refuse passengers who are not properly clothed via our Contract of Carriage. This is left to the discretion of the agents.”

Students might also go through the “A Dozen Critical Checkpoints for Ethics and Crisis Management,” shown in Exhibit 19.C, to assess the airline’s crisis management response.

5. What should the company do now to regain its customers’ trust?

There are numerous suggestions provided throughout the chapter on how to develop a strong crisis management response. It is unclear from the case if United had a proactive crises response in place. The development of this type of crisis response would allow United to use immediately its dark site to communicate via the Internet to customers, employees and the public.

The firm might also need to consider a new or renewed employee training program so that all employees are aware of the company’s policies, but more importantly, know how to response to the media when facing a crisis situation. The chapter discusses a number of approaches for media training for a company’s executives.

Copyright © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

FAILURE BY DESIGN: BOEING AND THE 737 MAX TEACHING NOTE

This case illustrates the following themes and concepts discussed in the chapters listed: Theme/Concept

Chapter

Conflict of Interest

5

Organizational Ethics

6

Business Government Relations; Government Regulation

7

Product Safety

14

Case Synopsis On Monday, October 29, 2018, Lion Air Flight 610 crashed into the Java Sea in Indonesia shortly after takeoff, killing all 189 people on board. The aircraft was a nearly new Boeing 737 MAX, delivered to Lion Air, a low-cost regional carrier and one of Boeing’s major customers, just four months earlier. The MAX was Boeing’s newest aircraft and the centerpiece of the company’s strategy for the short to mid-range commercial market. CEO Dennis Muilenburg faced an urgent an urgent task: to determine what had gone wrong and why with Boeing’s newest and so-far successful new model. The case presents the history of Boeing and its external competitive environment; the evolution of its strategy, governance, and ethics practices; and its relationship with U.S. regulators during the design and certification of the 737 MAX. What organizational and environmental factors had contributed to Boeing’s development of an apparently unsafe aircraft? What could Boeing, government regulators, and its airline customers and other stakeholders do to prevent unsafe aircraft from being manufactured and sold in the future?

TEACHING TIP: WHERE TO USE THE CASE IN THE COURSE This case is integrative, in that it draws on many themes in the text. Instructors may use it at the end of the course as a final, integrative assignment, or with the study of Chapters 5 and 6 (Ethical Reasoning and Organizational Ethics) or Chapter 7 (Business Government Relations).

1 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

TEACHING TIP: VIDEO Instructors may wish to introduce the class discussion with a short video of the Lion Air flight.

The first 4 minutes of this 9-minute segment depicts the fatal flight of Lion Air 610, in which a journalist rides in a simulator with an experienced 737 pilot who recreates the flight from the perspective of the cockpit. (The remainder of the clip depicts the Ethiopian Airlines crash and is not relevant to the case.) Viewers may find the video clip disturbing, even terrifying. www.youtube.com/watch?v=OxPsxmU_ocI

TEACHING TIP: STARTING A CASE DISCUSSION One was to start a class discussion of this case is to ask students to huddle in groups of 2 to 4.

Give them 5 minutes to write one or two sentences beginning with: “One reason that Boeing produced an unsafe aircraft was…” They should then have a representative write their sentence(s) on the board or share on a common electronic platform. The instructor may then categorize the answers and use them as a jumping off point for taking up various issues raised by the discussion questions.

Sample answers: One reason that Boeing produced an unsafe aircraft was…

The culture of Boeing had shifted from a focus on engineering excellence to a focus on shareholder returns. The company’s capabilities for aircraft design had deteriorated.

The FAA delegated most of the work of certifying the 737 MAX to Boeing itself, so the regulators were unable to exercise effective oversight.

Boeing was under tremendous pressure because of competition from Airbus, so they decided to update the 737 rather than design an all-new plane. This created an unsolvable engineering problem, because the bigger more fuel-efficient engines they wanted to use did not fit under the wings of 737.

Boeing’s top executives and directors emphasized shareholder returns over engineering excellence. Cost and efficiency were more important to them than the quality of the aircraft.

Boeing had spent so much money on stock buybacks and shareholder dividends that they did not have enough left over to invest properly in R&D and aircraft engineering.

Boeing had a code of ethics but did not seem to enforce it. It ignored worrisome survey results and did not listen to series warnings from senior managers.

Manufacturing of the MAX was rushed, possibly leading to defects in aircraft delivered to customers.

2 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

The FAA basically allowed Boeing to certify the safety of its own plane.

Boeing’s strategy was to acquire other manufacturers (e.g., McDonnell Douglas) and keep updating their old models, rather than to design new aircraft. Over the years, they lost much of their engineering know-how.

Instructor Tip: “C” students may answer this question by describing characteristics of the unsafe plane or its design flaws. For example, “One reason Boeing produced an unsafe aircraft was relying on just one sensor.” “A” students will understand the distinction between the problem itself (an unsafe design) and the cause of the problem (e.g., organizational culture, regulatory failures, external competition). The instructor may need to point out that the question asks for the reason Boeing produced an unsafe plane, not the reason the plane was unsafe. (Question 1, below, addresses the reason(s) the plane was unsafe.)

Discussion Questions and Answers

1.

What were the immediate technical causes of the crash of Lion Air Flight 610?

Based on information in the case, students will conclude: A faulty angle of attack sensor fed erroneous data into the plane’s computers, triggering the maneuvering characteristics augmentation system, or MCAS. The plane’s computer relied on only one sensor at a time (a single point of failure), and the aircraft did not have an active cockpit alert for disagreement between the two sensors. Once MCAS was activated, it repeatedly forced the nose of the plane down, destabilizing the aircraft. The Lion Air pilots had not been trained on a simulator, were unaware of MCAS and its capabilities, and their flight manual did not include relevant information. Eventually, the pilots lost control of the aircraft and it crashed nose down into the sea, killing all on board.

2. Describe the culture of the Boeing organization. How did the company’s culture affect the development and production of the 737 MAX? The textbook defines corporate culture as “a blend of ideas, customs, traditional practices, company rules, and shared meanings that help define normal behavior for everyone who works at a company” (Chapter 6). The textbook points out that weak ethical cultures can foster unethical behavior. To help students unpack this question, the instructor may wish to elaborate by pointing out that corporate or organizational culture is often understood as having three layers: basic assumptions, values and norms, and artifacts (Schein, 2004; Chatman, 2014).

Basic assumptions are deeply held values about the organization’s purpose and reason for existence. Norms are unwritten expectations for appropriate behavior that reflect these values.

Artifacts are visible organizational practices that communicate values, such as rituals, stories, and language.

3 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

One way to organize this discussion is to prompt students to fill in a board grid, showing how these three layers of Boeing’s culture changed following the company’s acquisition of McDonnell Douglas (1997).

Boeing’s Organizational Culture Before and After the Acquisition of McDonnell Douglas Level Basic Assumptions

Past Boeing is a trendsetter in aircraft technology. The purpose of the company is to design better planes that fly higher, faster, farther.

Values and Norms

Core values are quality, innovation, and safety. Engineering excellence is valued. Investment in research and development is prioritized.

Stories about William Boeing’s attention to quality, innovation, and safety were part of the company folklore. The company was described as an “association of engineers.”

Artifacts

Present Boeing is an aircraft manufacturer. The company’s purpose is to create the best value for its customers and the highest possible returns for its investors.

Shareholder value is prioritized.

Core values are efficiency, profitability, and low cost.

Shareholder value is prioritized.

Common slogans were “We’re in business” and “We’re managing for value.”

Summary: Over time, Boeing culture had shifted from a focus on quality, innovation, and safety to a focus on efficiency, profitability, and shareholder value. This affected the development of the 737 MAX, as it led to decisions to re-tool an old model (the 737) rather develop than a new, clean-sheet model, to keep costs down and speed up delivery to key customers. (The decisions made by Boeing during the development of the MAX are further explored in the response to Question 4, below.)

3. Describe the ethics policies and practices of Boeing. What ethical safeguards were in place to promote safety? Evaluate the effectiveness of these safeguards during the development and production of the 737 MAX. Chapter 6 describes how companies can institutionalize ethics by building ethical safeguards into their everyday routines. The case shows that Boeing had in place the key elements of a robust ethics and compliance program, including: • • • • • •

A code of conduct and values statement.

A senior executive with responsibility for ethics and compliance (Diana Sands).

A requirement that employees annually sign the code of conduct.

Periodic training.

Regular surveys of employees.

An ethics reporting system and periodic review of complaints filed in this system.

4 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

However, in practice the system failed, in that it did not prevent the design and production of unsafe aircraft. Why did it fail? Students might make several arguments: • • • •

The complaints process failed in practice, as exemplified by the experiences of Edward Pierson and others. Senior managers failed to respond proactively to serious concerns Pierson and others raised about safety and quality.

The ethics and compliance function was headed by an accountant. Presumably she was mainly concerned with financial returns and investor relations; she may not have had sufficient expertise in ethics.

Complaints made through the reporting system were not disclosed, e.g., by being turned over to the FAA or other external pary for review.

The pressures for robust shareholder returns and accelerated speed to market simply overwhelmed the ethics procedures, including responses to surveys and whistleblower complaints.

Summary: Strong ethics and compliance programs and policies by themselves were insufficient to prevent the production of an unsafe aircraft. They were staffed by individuals without appropriate expertise, were not vigorously enforced, and complaints were not promptly addressed.

4. Evaluate the external competitive environment of Boeing. How did external competition contribute to the development of an unsafe aircraft?

In the early 2010s, Boeing faced intense competition from the European consortium, Airbus, with which it competed in all segments of the commercial aircraft market. In 2010, Airbus announced its intention to develop the A320neo, a more fuel-efficient aircraft in the in the highly competitive market for short-to-medium range, narrow-body twinjets, long dominated by Boeing’s 737. The case shows that Boeing’s 2011 decision to upgrade the 737, rather than develop a clean-sheet aircraft, was a response to an immediate threat that a major customer, American Airlines, would defect to the Airbus 320neo.

The intense competition with Airbus may have influenced Boeing to make several decisions that, in retrospect, appeared misguided.

Mounting a larger engine on a low-slung aircraft.

Boeing’s objective to produce a plane that would be competitive with the A320neo required it to use a larger engine that delivered improved fuel economy. Yet the 737, which had been in production since 1967, was built low to the ground, and these larger engines did not fit beneath the wings. This required the designers to move the engines forward and higher, disturbing the plane’s aerodynamics and creating a tendency for it to pitch up during flight. This problem led to the development of MCAS and the various problems that followed. Arguably, by moving to compete with Airbus with its old 737, Boeing presented itself with an unsolvable engineering problem.

5 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Adopting a pricing structure that allowed customers to decline safety features.

Because of the competition with Airbus, Boeing was under pressure to keep the price of the 737 MAX low. The case suggests that certain safety features on the MAX, such as the “AOA disagree” indicator in the cockpit, were optional. As a result, some airlines purchased aircraft without safety features that would normally be expected to be part of the base model. Lion Air did not purchase the optional feature indicating a disagreement between the two AOA sensors.

Pressuring the FAA to agree that only computer-based, Level B training would be required for pilots to transition from earlier 737 models to the MAX. Boeing was intently focused on holding down costs for its customer airlines. One way to hold down airline costs was to avoid a regulatory requirement that pilots certified on earlier models of the 737 undergo training on a simulator before flying the MAX. In the end, Boeing convinced the FAA not to require simulator training; pilots had only to take a short course on a computer or tablet. Boeing also convinced the FAA to agree that the training materials and manuals provided to pilots did not need to mention MCAS. Most pilots were unaware of the system, its capabilities, or how to override it in case of emergency malfunction.

Summary: The intense competition with Airbus—which pressured Boeing to keep costs down and bring the MAX to market quickly—contributed to decisions that arguably made the aircraft less safe.

5. Examine the regulatory environment of Boeing, particularly Boeing’s relationship with the Federal Aviation Administration (FAA). In what ways did the relationship between Boeing and its regulators contribute to the development of an unsafe aircraft?

The case explains that in the United States, the safety of commercial aircraft was regulated by the Federal Aviation Administration (FAA). The agency had oversight of all civil aviation, including the certification of new and modified aircraft, such as the 737 MAX. It also oversaw the training and certification of flight crews. In 2005, as part of a broader deregulatory effort, Congress had approved a process called Organization Delegation Authorization, or ODA. This permitted the FAA to delegate authority for some aircraft certification tasks to the manufacturers themselves. As a result, companies such as Boeing and their employees could be tasked with certifying their own aircraft. The FAA was still required to oversee the delegated work.

Instructor prompt: Do you think delegating certification tasks to Boeing was a good idea?

Some students may defend the practice on the grounds that it augmented limited government resources, leveraged private sector expertise, and brought new aircraft to market more quickly.

Others may oppose it, however, on the grounds of conflict of interest.

6 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

THEORETICAL LINK: CONFLICT OF INTEREST The textbook defines a conflict of interest as a situation that arises when an individual’s (or organization’s) self-interest conflicts with acting in the best interest of another, when the individual (or organization) has an obligation to do so (Chapter 5). Conflicts of interest may produce unethical outcomes. Individuals and organizations that have contracted with an agent for a service that requires the exercise of judgment have a reasonable expectation that the agent will act in their interest, not the agent’s.

Instructor prompt: Do you recognize a conflict of interest in this situation? If so, what was the conflict of interest?

Yes, a conflict of interest existed in this situation. The FAA delegated to the ODA unit within Boeing many tasks associated with the certification of the 737 MAX aircraft. (Initially, the FAA delegated 38% [35/93] of certification items to Boeing; by 2018, this had risen to 98%.) This practice required Boeing employees to exercise professional judgment on behalf of the government (and indirectly the flying public). Yet, Boeing had a clear financial interest in certifying the aircraft as quickly and inexpensively as possible. This conflict of interest could have led Boeing would take inappropriate risks in the certification process to meet its own interests, harming the flying public. The conflict of interest was described colloquially in the case by Michael Driekorn, who commented, “you have the fox watching the henhouse.”

Instructor Prompt: Do you believe that the conflict of interest harmed the interests of the FAA and the public? If so, what is your evidence?

Yes, it appears that the conflict of interest did harm the public. The Lion Air 737 MAX aircraft crashed (as did another flight operated by Ethiopian Airlines, not described in the case). The case describes several serious errors made during the certification process. These included decisions to: • • • • •

Rely on data from a single angle of attack sensor to trigger MCAS, setting up a single catastrophic point of failure.

Make the angle of attack “agree light” an optional feature.

Modify MCAS to enable it to operate shortly after takeoff, make corrections up to 2.5 degrees, and trigger repeatedly.

Exclude information about MCAS from the pilot training manuals.

Permit pilots to transition to the MAX without simulator training.

At several points in the certification process, the FAA appears to have succumbed to pressure by Boeing, to the detriment of safety. The case does not prove that the FAA’s delegation of authority to Boeing contributed to the failures of design, but it does suggest this.

7 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Instructor Prompt: Did Boeing or the FAA take any steps to manage this conflict of interest?

The case suggests that both Boeing and the FAA were aware of the conflict of interest and took some steps to manage it. The company conducted a survey of ODA unit members to determine if they experienced “undue pressure” while performing their roles as authorized representatives (that is, acting on behalf of the FAA). Thirty-nine percent said they perceived undue pressure, and 29 percent were concerned about reporting it to management. The case does not say how Boeing responded, if at all, to the results of the survey.

Instructor Prompt: Did you observe any individuals in a conflict-of-interest situation in the case, and if so, what was the impact on these individuals?

The case does not identify any individuals as members of the ODA unit (that is, authorized representatives). However, Mark Forkner, the chief technical pilot on the 737 MAX program, was arguably in a conflicted position, even though he was not a member of the ODA unit.

Forkner was employed by Boeing’s training unit and was responsible for working closely with the FAA to determine training requirements for pilots transitioning to the MAX. He was responsible for achieving Boeing’s goal that transitioning pilots would need only Level B (computer-based) training, to reduce costs to its airline customers. But as a professional pilot, Forkner also had a clear duty to protect the safety of his fellow pilots, as well as flight crews and the flying public. Students may argue that Forkner experienced a conflict between his employee role and professional role.

The case clearly describes that Forkner experienced these conflicting pressures as extreme stress.

His colleague reported that he was “under an enormous amount of pressure [and] clearly stressed.” Forkner himself expressed fear that he would be (metaphorically) “burned at the stake” if he failed to meet his managers’ expectations.

Higher order prompt: Do you consider the relationship between regulators and Boeing to be adversarial or collaborative? More generally, what is the optimal relationship between a company and its regulators?

THEORETICAL LINK: COLLABORATIVE VS. ADVERSARIAL BUSINESS/GOVERNMENT RELATIONSHIPS The textbook draws a distinction between collaborative and adversarial business-government relationships: “In some situations, government may work closely with business to build a collaborative partnership and seek mutually beneficial goals…In other situations, government and business’s objectives are at odds, and these conflicts results in an adversarial relationship where business and government work in opposition to each other.” (Chapter 7)

The interests of the FAA and Boeing were in some ways aligned, and in other ways not. A key part of the mission of the FAA was to ensure the safety of commercial aircraft. Of course, Boeing shared the goal of producing a safe aircraft; its reputation and long-term viability 8 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

depended on it. In this sense, the relationship was collaborative. But Boeing also had interests in reducing the costs of development, accelerating time to market, and producing a pricecompetitive aircraft—interests potentially at odds with the FAA’s singular focus on safety. In this sense, the interactions of Boeing and its regulator had adversarial elements, with some degree of conflict inherent in the relationship. This conflict is normally healthy, in that it provides a check on any impulse the company might have to cut corners in the design and production of its aircraft. Arguably, during the certification of the MAX the relationship between Boeing and the government had become too collaborative—possibly bordering on regulatory capture. In an ideal world, a regulatory agency would collaborate with a regulated firm in situations in which their interests coincided (e.g., safety) and become more adversarial where their interests diverged (e.g., speed to market).

Summary: The unusually collaborative relationship between Boeing and the FAA, Boeing’s regulator, contributed to the conditions that made the production of an unsafe aircraft possible.

6. Recommend actions Boeing managers, regulators, and various stakeholders could take to prevent unsafe aircraft from being designed, manufactured, and sold in the future.

TEACHING TIP: One way to approach this final question is to ask students to meet in small groups. Each group should be tasked with developing three recommendations, which could be shared on a white board or online platform. The instructor may wish to organize these recommendations under three headings: managers, regulators, and stakeholders. They may also be organized into short-term and long-term recommendations. Sample board work might look like this:

Short-term

Long-term

Boeing

Regulators

-Work with aviation experts and regulators to fix the design flaws that contributed to the crashes of the 737 MAX. Presumably, this would include redesign of MCAS, installation of redundant angle of attack sensors, and augmenting pilot training.

-Fire Dennis Muilenburg, who managed the development of the MAX. -Apologize to and compensate the families of crash victims.

-The leadership and board of directors should redirect the company’s culture to (once again) prioritize engineering excellence, product quality, and

- Ground all MAX aircraft until the design flaws are fixed.

- Oversee the redesign of the MAX and recertification process.

- Undertake investigations of what went wrong and consider what legislative changes might be needed.

-Congress should pass legislation directing the FAA to reassert authority over all aspects of the aircraft certification process, and delegate

Airlines/Public - Cooperate with decisions of regulators on national and international level re: the grounding of MAX aircraft.

-Airlines should purchase all available safety options.

-Airlines should insist on simulator training for its pilots on all new or 9

© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

safety. This should be reflected in the company’s public and internal messaging, in its promotion and compensation practices, and ethics policies.

-Boeing should strengthen and reorganize its office of ethics and compliance, managed at top levels of the corporation. This office should be empowered to investigate and act on complaints, as well as to protect whistleblowers from retaliation.

- Pricing policies should be changed so that safety features of the aircraft are included in the base model and no longer offered as optional “add-ons.”

certification tasks to manufacturers only when accompanied by strict oversight.

-Strong processes should be established to manage any conflicts of interest that remain. For example, processes should be set up that enable persons in delegated roles to report undue pressure. All conflicted decisions should be carefully reviewed.

-The FAA should hire and train more staff as needed to retain control over aircraft certification.

significantly redesigned aircraft.

The question of what, if anything, members of the flyer public should do is difficult. After all, members of the public have no special expertise in aircraft safety and understandably rely on regulatory authorities in their own nations and (in Boeing’s case) the United States to assure them of the safety of aircraft they fly on. That is precisely why regulation of aircraft safety is needed: the customer cannot judge safety for him or herself.

Instructor Prompt: Would you feel comfortable flying on a 737 MAX now? Why or why not?

EPILOGUE On March 10, 2019, a second 737 MAX operated by Ethiopian Airlines crashed, killing all 157 persons on board. Following this crash, the FAA and other aviation regulators around the world grounded the 737 MAX. Following an extensive process of redesign, the FAA recertified the MAX in November 2020, approving it for service. Most other aviation authorities followed suit.

As of late 2021, 627 MAX aircraft had been delivered to customers and were in service around the world. The main users of the MAX were Southwest Airlines, American Airlines, Air Canada, and China Southern Airlines.

Following the two crashes, both the U.S. House and Senate held extensive hearings, and the FAA conducted a full investigation.

10 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

In 2020, the Aircraft Certification Reform and Accountability Act was introduced in the House of Representatives. The proposed legislation would require the FAA to revise the organization delegation authorization (ODA) process, with an emphasis on oversight and accountability; change the design review process; and specifically review the ODA program for Boeing. The legislation passed the House and moved to the Senate, where it was referred to committee. As of early 2022, the bill had not been voted on by the full Senate.

Note to instructors: A second case by the same authors focuses on Boeing’s management of the 737 MAX crisis. This case may be used in conjunction with the study of crisis management in Chapter 19. The full citation is here: Randall Harris, Anne T. Lawrence, and Vanessa D. Hill, “Boeing and 737 MAX Crisis,” Case Research Journal, Spring 2021, 41(2).

The case will be available for adoption through Harvard Business School Publishing’s case collection.

11 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

TEACHING NOTE Profiting from Pain: Business and the U.S. Opioid Epidemic1 This case illustrates the following themes and concepts discussed in the chapters listed: Theme/Concept

Chapter

Stakeholder analysis

1

Corporate social responsibility and citizenship

3

Government regulation of business

7

Consumer protection

14

Case Synopsis This case describes the U.S. opioid epidemic and explores its causes. The case addresses the role played by prescription drug companies, including Purdue Pharma, the maker of OxyContin; drug distributors such as McKesson Corporation; the U.S. Drug Enforcement Agency; unscrupulous “pill mills” such as Florida’s American Pain; and illegal drug dealers. Students are challenged to understand the multiple causes of a complex social problem, including the responsibility of both legal and illegal businesses. A specific theme is deceptive marketing by Purdue Pharma.

TEACHING TIP: WHERE TO USE THE CASE IN THE COURSE This case is integrative, in that it draws on many themes of the text. It may be used at the end of the course as a final, integrative assignment, or with the study of Chapter 14 (consumer protection). If used with Chapter 14, the instructor should refer to earlier work on social responsibility and government regulation.

TEACHING TIP: VIDEOS Several videos may be used in conjunction with this case.

PBS Frontline has produced a 2-hour documentary, “Chasing Heroin” (2016), available at www.pbs.org/wgbh/frontline/film/chasing-heroin/. The documentary is too long to be used in

1

By Anne T. Lawrence. Copyright © 2019 by the author. All rights reserved.

1

© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

class, but the instructor may wish to assign it for outside viewing or show in class a short segment dealing with the role of Purdue Pharma. This segment is available here: www.pbs.org/wgbh/frontline/article/inside-the-aggressive-marketing-of-oxycontin-revisitpurdue-pharmas-role-in-the-opioid-crisis/ Fox News aired a segment in a series called “Drugged” (3:34, May 31, 2018) in which host Tucker Carlson interviews journalist Barry Meier, author of Pain Killer, about the role of Purdue Pharma in the opioid epidemic. It is available here: www.youtube.com/watch?v=juthG7JgS5I Heroin(e) (39 minutes), an independent film produced in 2017, was nominated for an Academy Award for best short documentary. It is set in Huntington, West Virginia. The film profiles three women: the fire chief, a drug court judge, and the founder of a ministry that assists addicted prostitutes. The film clearly depicts the impact of the opioid epidemic on individuals and communities and suggests solutions. It does not focus on the role of business in contributing to the epidemic. Instructors may wish to use clips from this video to help students connect emotionally with the opioid crisis. It is available on Netflix and requires a subscription.

Discussion Questions and Answers 1. How would you define the opioid epidemic referenced in the title of the case?

Instructor prompt: The instructor may introduce this question by asking students to define the word “epidemic.” The dictionary provides this definition: 1. an outbreak of disease that spreads quickly and affects many individuals at the same time 2. an outbreak or product of sudden rapid spread, growth, or development The instructor may wish to emphasize these key points: An epidemic is a phenomenon that spreads rapidly and affects many people simultaneously. Because of the association of the term with disease, the term epidemic is usually used to refer to an unwanted or dangerous phenomenon.

Instructor prompt: Does opioid use in America fit this definition?

Yes. The opioid epidemic in the title refers to the rapid spread of addiction, injury, and death associated with prescription opioids in the United States since the late 1990s. The CDC called it “the worst drug overdose epidemic in [U.S.] history.”

Opioids, also called narcotics, are a class of painkillers derived from the opium poppy. They include legal prescription medications such as morphine, codeine, hydrocodone, oxycodone, and fentanyl, as well as illegal drugs such as heroin. Opioids are highly addictive, and as users develop tolerance, they require more and more s to experience their effects. In high doses, these drugs cause breathing to slow and finally stop, bringing death by respiratory arrest.

2 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

In 2015, 33,091 Americans died from an opioid overdose. Between 1999 and 2015, the rate of death from opioid overdose (number of deaths per 100,000 people) quintupled, that is, it was five times higher in 2015 than it was a decade and a half earlier.

Instructor prompt: What groups were most affected by the epidemic?

• • • •

Persons in mid-life (aged 45-54) Non-Hispanic whites Persons living in West Virginia, New Hampshire, Kentucky, Ohio, Rhode Island, Pennsylvania, Massachusetts, and New Mexico Persons living in regions where unemployment rates were high

The instructor may wish to highlight Exhibit 1, which shows the increase in overdose deaths from opioids over time, 1999-2016. It shows a dramatic rise over this period.

2. List the various businesses mentioned in this case, including drug manufacturers, distributors, clinics, and illegal drug dealers. Do you believe they acted in an ethical and socially responsible way, and why or why not?

The instructor may wish to construct a board diagram and fill it in, in dialogue with students, as shown. Alternately, instructors might wish to distribute a blank handout and ask students to work in small groups to fill in the cells.

3 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Business Drug manufacturers • Purdue Pharma • Also: Teva, Johnson & Johnson, Endo, Allergan

No, did not act responsibly: • • •

•

•

Distributors • McKesson • Also: Amerisource Bergen, Cardinal Health

Pain clinics • American Pain

•

• • •

Drug dealers • “Xalisco Boys” and other drug dealers

•

Yes, acted responsibly:

Aggressively marketed Oxycontin, causing its use to soar Downplayed potential for addiction, without solid scientific basis Found to have misbranded OxyContin “with intent to defraud and mislead” Did not properly formulate firstgeneration OxyContin, allowing for abuse Close correlation between number of opioids prescribed and overdose deaths

•

Paid $170 million in fines for failure to implement effective controls to prevent diversion for nonlegitimate uses

•

•

•

•

Brought to market a drug that treated severe pain In 2010, changed formulation of OxyContin so it could not be crushed or dissolved Lobbied for hard-toabuse formulations of opioids

Shipped only FDAapproved drugs Did not manufacture or prescribe opioids

Prescribed almost 2 million opioids over a 2-year period Hired unscrupulous doctors More than 50 people who had been patients at AP died in Florida, and more in other states Delivered heroin directly to addicts through street sales 4

© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

3. What stakeholders were impacted by the actions of these businesses? Which were helped, and which were hurt, and how?

The instructor can add a column to the right, continuing the board work in dialogue with students, as follows. (Alternately, instructors might wish to distribute a blank handout and ask students to work in small groups to fill in the cells.)

Business Drug manufacturers • Purdue Pharma • Also: Teva, Johnson & Johnson, Endo, Allergan

Stakeholders helped •

•

Some patients with chronic pain had access to pain medication who might not have had access previously Shareholders and owners (e.g., Sackler family) made a lot of money

Stakeholders hurt •

•

• •

Distributors • McKesson • Also: Amerisource Bergen, Cardinal Health

•

•

Addicts: tens of thousands of deaths due to opioid overdose Communities and government: increased costs for law enforcement, health care, public welfare, child services Victims of crime (e.g., theft to support addiction) Other businesses: loss of economic productivity, difficulty hiring

Efficient delivery of medication, benefitting pharmacies, hospitals, and patients Shareholders made a lot of money

•

Failure to divert drugs that were used inappropriately led to all the outcomes listed above

Pain clinics • American Pain

•

Owners and doctors made a lot of money

•

Inappropriate prescribing and dispensing of opioids led the all the outcomes listed above

Drug dealers • “Xalisco Boys” and other drug dealers

•

Cartel bosses made a lot of money

•

Illegal sale of heroin and other opioids led to all the outcomes listed above

5 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

4. Do you believe that drug companies fraudulently marketed their products? Why or why not?

The case provides information about Purdue Pharma’s marketing strategies for OxyContin.

Elements of its aggressive marketing strategy included: • • • • • • •

Supported professional associations that promoted the idea that pain was undertreated.

Sponsored educational conferences for doctors in resort locations promoting the use of opioids to treat pain.

Doubled its staff of sales representatives and incentivized them based on sales.

Gave out coupons for free 30-day supplies of OxyContin.

Asserted that the risk of addiction was less than one percent, based on dubious evidence.

Asserted falsely that the extended-release formula was not susceptible to abuse.

Denied responsibility, even as knowledge of OxyContin’s risks spread in the public health community.

The U.S. government believed Purdue’s marketing to be fraudulent, as evidenced by the fact that the company settled charges with the Justice Department that it had lied about OxyContin’s addiction risks. The company paid $470 million to settle federal and state claims and $130 million to settle civil suits.

5. In what ways did the government regulate the production and distribution of opioids?

Do you believe the government acted appropriately in doing so, and why or why not?

The government regulated both the production and distribution of opioids. The Drug Enforcement Administration (DEA) regulated most prescription opioids as Schedule II controlled substances and registered firms and individuals that manufactured, handled, or prescribed them. Distributors were required to maintain systems to prevent diversion. The DEA also set production quotas, which were negotiated annually with drug manufacturers.

Students may disagree in their response to the second part of the question. On one hand, the government strictly regulated these drugs. On the other hand, the government arguably: • • •

Approved drugs, formulations, and dosages that led to addiction and death; Steadily increased the amounts of oxycodone firms were permitted to produce, as shown in Exhibit 2, without adequate cause; Failed to adequately enforce rules on distribution.

6. Looking at the case as whole, what organizations or individuals do you believe bear the greatest responsibility for the opioid epidemic, and why? What should be the consequences for those responsible?

This question provides the greatest potential for higher-order reasoning. Students may argue:

6 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Individuals. Ultimately, individuals are responsible for their own drug use. If people had taken medication strictly as prescribed by their doctors, they would not have become addicted. If they started to become dependent, they should have discussed this issue with their doctors and entered a rehabilitation program if necessary. Individuals who sought drugs from pill mills or illegal drug dealers should have been aware of the risks they were running.

•

Counter argument: Opioids are highly addictive. Addiction causes changes in the brain, making it almost impossible to quit without medical assistance. Individuals who attempt to quit suffer excruciating withdrawal.

Purdue Pharma. Purdue was responsible, because it created a highly addictive medication, aggressively and fraudulently marketed it, and persisted even after the risks were well known in the public health community and to the company. The motivation was greed: the Sackler family, the owners of this private company, became phenomenally wealthy (the family’s net worth was estimated at $14 billion).

•

Counter argument: Purdue properly obtained FDA approval for OxyContin, for which there was a legitimate medical use. It was not responsible for individuals who abused the drug, for doctors who incorrectly prescribed it, or for distributors or pharmacies that improperly distributed and dispensed it.

Teaching Tip: Most students will make one of the two preceding arguments. In some ways, the most sophisticated argument follows; it is likely to be raised only by the most insightful students.

Government: The government was ultimately responsible because it continued to raise aggregate production quotas for oxycodone, as shown in Exhibit 2, even as the public health risks of OxyContin became increasingly apparent. If Exhibit 2 is compared with Exhibit 1, it is apparent that production quotas closely tracked both the number of prescriptions written and the number of opioid overdose deaths. If the government has not raised the quotas, the market would not have been flooded with addictive pills.

Teaching Tip: This argument raises the fascinating question: Why did the government keep raising the quota? There is no public information about the negotiations that occurred between pharmaceutical companies like Purdue and the DEA over quotas, nor on what might have influenced DEA officials to make the decisions they did.

Students may less commonly argue that the following were primarily responsible: Drug dealers, particularly the Mexican drug cartels.

Drug distributors that delivered large quantities of prescription opioids to communities without apparent medical need.

Pharmacies that dispensed opioids to individuals with suspect prescriptions.

Doctors who benefited by writing medically unnecessary prescriptions to drug abusers.

7 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Students will disagree on the consequences, depending of which individuals or groups they view as most responsible. Recommendations will cover a wide range, including: • • •

Better police the border with Mexico to prevent the movement of drug dealers and illegal drugs.

Prosecute executives of drug makers, distributors, pharmacies and clinics that improperly make, market, distribute, or prescribe opioids.

Bring civil suits against those responsible.

Takeaway: This case illustrates the complex, multi-faceted causality of a social problem.

Several businesses shared partial responsibility, but individuals and government were also partly to blame.

Teaching Tip: The case closes with a list of legal cases brought by local and state governments and Indian tribes against drug makers, distributors, and pharmacy chains. These lawsuits were unresolved at the time the case was written. Students may be asked as an assignment to investigate the status of these cases.

8 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

BANNING AMERICAN PARTS IN CHINESE MOBILE PHONES: ECONOMIC SANCTIONS, POLITICAL INFLUENCE, AND TRUMP’S TRADE WAR TEACHING NOTE

This case illustrates the following themes and concepts discussed in the chapters listed: Theme/Concept

Chapter

Comparative Political Systems; Authoritarian Capitalism

4

Ethics in a Global Economy; Bribery; Corrupt Practices

6

Public Policy; Trade Policy

7

Corporate Political Influence; Lobbying; Campaign Contributions

8

Case Synopsis This case describes the decision by the U.S. government to prohibit the partially state-owned Chinese firm ZTE from purchasing American-made components for its cell phones and other telecommunications products. The case then describes the subsequent reversal of this decision with an agreement that enabled ZTE to continue to purchase components from American firms, while imposing other less onerous penalties. What influenced this reversal of public policy?

The case explores several unethical actions by ZTE, including violation of U.S. trade sanctions against Iran and North Korea, bribery, and lying to regulators and investigators. It also explores ZTE’s efforts to influence the decisions of political leaders and legislators in the United States.

This story played out in the context of a trade war and geo-political rivalry between the United States and China.

TEACHING TIP: WHERE TO USE THE CASE IN THE COURSE This case may be used in conjunction with the study of Chapters 4 (Business in a Globalized World), 6 (Organizational Ethics), 7 (Business-Government Relations), or 8 (Influencing the Political Environment), or as an integrative case midway through the course.

1 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

TEACHING TIP: VIDEOS Several videos are available that may be used in connection with this case.

The U.S. Commerce Department ban is described here: “China’s ZTE Protests U.S. Ban,” April 25, 2018, Nightly Business Report (2:05). www.youtube.com/watch?v=HgoaR2jS3gQ The deal to reverse the ban is described here: “Inside the White House’s ZTE Deal,” May 25, 2018, Bloomberg (8:56). www.youtube.com/watch?v=gr2E3POEuNA

Discussion Questions and Answers 1. In your opinion, why did the U.S. Commerce Department ban ZTE’s purchase of U.S.made parts? In your answer, please give three explanations and state which one you support, and why.

The case reports that on April 16, 2018, the U.S. Department of Commerce banned ZTE, a Chinese telecommunications company, from purchasing parts (such as micro-processing chips) from U.S. companies for seven years. Data in the case are consistent with three possible explanations for this decision: 1. The reason given by the U.S. Department of Commerce when it announced the ban was that ZTE had sold telecommunications equipment to Iran and North Korea, in violation of U.S. sanctions. Since ZTE’s products contained components made by U.S. companies, the company was subject to compliance with American sanctions legislation.

U.S. federal investigators found that ZTE had not only shipped its products containing U.S.-origin components to Iran and North Korea, but it had also devised an elaborate scheme to hide these activities from federal investigators, its own internal investigators, and its own attorneys. ZTE had not stopped this behavior earlier, even when fined and placed “on probation” by the Commerce Department, so more severe punishment was warranted.

2. The ban occurred during a period of escalating trade disputes and increasing national rivalry between the United States and China. The United States’ trade deficit with China was large and growing. President Trump had accused China of unfair trade practices and intellectual property theft and had imposed a series of tariffs on imported Chinese goods.

China had retaliated with its own tariffs on U.S. exports. In this context, some saw the ban on ZTE as an escalation of this geo-political rivalry. A possible underlying 2 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

motivation for the ban may have been to impose hardship on a successful Chinese company—and help stem the Chinese ascension on the global stage.

3. The U.S. government had expressed concern that ZTE equipment might be used for espionage, network disruption, or other cyberattacks by the Chinese government. For example, ZTE could potentially remotely switch off cellular-tower equipment it had manufactured, disrupting communications. Or it might collect data on users of its phones, possibly even recording their conversations. U.S. officials may have been worried that ZTE could not refuse to take such actions if pressured to do so by their authoritarian government. An underlying motivation of the ban might have been to weaken ZTE’s threat of cybercrime.

Which explanation do you support and why? Students will likely argue that the main reason for the ban was, as the Commerce Department stated, to punish ZTE for their violation of sanctions. But students may also point out that the Commerce Department had flexibility in how serious a penalty to impose; their decision to impose an especially severe—and potentially fatal—penalty may have been influenced by political considerations (an ongoing trade war and the threat of cybercrime).

2. In your opinion, why did the Trump Administration and Congress reverse themselves on the ban and reinstate ZTE’s right to buy U.S.-made parts? In your answer, please give three explanations and state which one you support, and why.

The case reports that on July 13, 2018 (just three months later), the Commerce Department lifted its ban, on the condition that ZTE replace its leadership and allow the installation of an American team of monitors inside the company for 10 years. The company was also required to pay a $1 billion fine and place an additional $4 million in escrow for possible future breaches of the U.S. sanctions. Congress gave its approval for this move in early August 2018 (although it banned federal agencies from purchasing ZTE products). Data in the case are consistent with three possible explanations for this reversal of policy: 1. The ban was hurting U.S. firms. The ban, although aimed at punishing ZTE for violating sanctions, also harmed its American suppliers. The case reports that the Commerce Department’s action would damage several U.S. suppliers, including Qualcomm, which was projected to lose half a billion of sales from the ban. Other U.S. companies that were adversely affected included Acacia Communications Inc. and NeoPhotonics Corp. The case also reports that Qualcomm’s proposed takeover of NXP, a Dutch-based chipmaker, failed after the Chinese government failed to give its approval—apparently in retaliation for the ban. Although the case does not provide evidence that these companies lobbied for an overturn of the ban, students may infer that they brought political pressure to bear.

3 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

2.

ZTE vigorously lobbied and made campaign contributions to U.S. policymakers.

•

Just three days after the government order, ZTE’s U.S. subsidiary hired Hogan Lovells, an international law and lobbying firm, to influence U.S. lawmakers as well as handle negotiations with the Commerce Department, paying the firm $1.28 million. A former U.S. Senator managed the account.

ZTE retained Mercury Public Affairs, a lobbying and public relations firm, whose key lobbyist was a Trump campaign and transition official, Bryan Lanza. ZTE paid Mercury $75,000 a month for three months to help set up meetings with relevant U.S. government officials.

While Congress was debating the ZTE ban, the Chinese company made contributions to the campaigns of two Senators who served on the conference committee that could determine ZTE’s fate. In addition, the company also threw a party, where members of Congress were keynote speakers.

•

•

3. The Chinese government put direct pressure on President Trump. Soon after the ban, President Xi of Chinese personally reached out to President Trump on behalf of ZTE. Trump may have been particularly responsive to this appeal because he wanted to make progress in trade negotiations with China, and because he was dependent on China to help facilitate his upcoming meeting with North Korean leader Kim Jung Un. For whatever reason, on May 13, President Trump tweeted his supporting of getting ZTE “back into business, fast.” The case also hints at a possible corrupt motive for the president’s change of heart: around the time of the tweet, China awarded Ivanka Trump, the president’s daughter, seven new trademarks, in addition to those she had already received in the country. These trademarks would allow Ms. Trump to capitalize on the large Chinese market.

Which explanation do you support and why? Students may disagree on this point.

President Trump’s support for ZTE was likely decisive, putting pressure on the Commerce Department to negotiate the deal that eventually reversed the ban. ZTE’s lobbying and campaign contributions likely influenced Congress, at least on the margins.

The role of U.S. firms is not documented in the case, and it is unlikely their actions were influential.

3. Do you believe ZTE acted in a socially responsible and ethical manner in its interactions with its stakeholders? Why or why not?

No, ZTE had not acted in a socially responsible and ethical manner in its interactions with stakeholders. The case provides the following evidence: •

ZTE violated U.S. economic and trade sanctions against Iran and North Korea.

ZTE had not only shipped its products containing U.S.-origin components to these countries, but it had also devised an elaborate scheme to hide these activities from federal 4

© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

investigators, its internal investigators, and its own attorneys. It had illegally evaded sanctions and obstructed justice. The evasion had allowed ZTE to generate hundreds of millions of dollars in revenues. Ethically, these actions were wrong as well as illegal, because the company engaged in deception, gained an unfair advantage over honest competitors, and enabled the Iranian and North Korean governments’ suppression of human rights and threats to other nations.

•

ZTE had engaged (or allegedly engaged) in bribery and foreign corrupt practices.

The case gives several examples: o A ZTE subsidiary in China bribed a manager at China Mobile, the country’s largest wireless operator. o ZTE allegedly inflated the price of a $330 million contract with the government of the Philippines to build a broadband network; the excess allegedly helped pay kickbacks (bribes) to prominent officials there, including then-president Arroyo. o In Kenya, ZTE overbilled a contract with the local police; the contract was later cancelled. o In Algeria, two ZTE executives were convicted of corruption. o In Ethiopia, a World Bank investigation found that the government had awarded a contract to ZTE without competitive bidding, which gave the company monopoly over supply of telecom equipment for several years. Yet the service it provided there could be irregular: network glitches reportedly happened frequently, and smartphone users sometimes had to walk several miles to get a good signal. o The U.S. Justice Department had investigated ZTE for possible violations of the Foreign Corrupt Practices Act (FCPA), which prohibited U.S. businesses from bribing foreign government officials.

4. What power did the U.S. government have over ZTE? Do you think it used its power appropriately? Why or why not?

Although ZTE was a Chinese firm, the U.S. government had a great deal of power over the firm because ZTE was so dependent on American parts and American markets. The U.S. government had the power to: o o o o o

Prevent ZTE from purchasing American components Levy fines Place inspectors inside the firm Direct the company to discipline or remove executives Control the sale of ZTE products to the federal government, military, and military contractors

Students will have a range of opinions on whether this power was used appropriately. Some may argue that by reversing the ban, the U.S. government did not use the full range of its powers to deter violation of sanctions, unethical behavior, and possible cybercrime. Others

5 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

may feel the government did enough, especially in view of the conditions placed on the reversal.

5. What influence did ZTE have over the actions of the U.S. government? Do you believe that ZTE used undue political influence? Why or why not?

ZTE had quite a bit of influence over the actions of the U.S. government, judging from the fact that the ban was quickly reversed. This influence was based on: o Resources with which to lobby and make campaign contributions to powerful members of Congress o Resources with which to hire close associates of the U.S. administration (Bryan Lanza) to advocate on their behalf o Close ties to the Chinese government, as illustrated by Chinese President Xi’s personal appeal to President Trump on behalf of ZTE (and possibly the Chinese government’s decision to grant trademarks to Ivanka Trump) Did ZTE use undue influence?

This is a matter of opinion. Normally, foreign firms are not permitted to make campaign contributions or lobby U.S. Congress, but since these actions were taken by ZTE’s U.S. subsidiary, they were presumably legal. However, ZTE spent a large sum of money in a short period of time on lobbying, public relations, and campaign contributions, arguably constituting undue influence. As a partially state-owned enterprise, ZTE used its close ties with the Chinese government to mobilize high-level political pressure on the U.S. president and Congress. Some students will argue that this pressure also constituted undue influence.

6 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

TEACHING NOTE BP Blowout: The Aftermath of the Gulf Oil Disaster1

This case illustrates the following themes and concepts discussed in the chapters listed: Theme/Concept

Chapter

Stakeholder analysis

1

Government regulation

7

Sustainable development

10

Managing for sustainability

11

Crisis management

19

Case Synopsis This case, written especially for this edition by Daniel Jacobs, author BP Blowout: Inside the Gulf Oil Disaster (Washington, D.C.: Brookings Institution Press, 2016), describes the aftermath of the 2010 blowout of BP’s Deepwater Horizon well in the Gulf of Mexico. The blowout resulted in the death of eleven people and the discharge of more than three million barrels of oil and was the most expensive environmental manmade corporate disaster ever, in any country. The case enables students to explore the impact of the blowout on marine ecosystems, Gulf state communities and their residents, shareholders, and taxpayers, as well as on BP itself. It also permits students to explore the role of government in regulating oil drilling and preventing future disasters. The case does not explicitly explore the causes of the explosion, or who or what was responsible.

TEACHING TIP: WHERE TO USE THE CASE IN THE COURSE This case is integrative, in that it draws on many themes of the text. It may be used at the end of the course as a final, integrative assignment, or with the study of Chapter 1 (stakeholder analysis) or Chapters 10 and 11 (sustainability).

TEACHING TIP: VIDEOS Several videos may be used in conjunction with this case.

The 2016 film Deepwater Horizon, starring Mark Wahlberg and Kate Hudson, is a semi-fictionalized account of the disaster. Its trailer (2:35) includes a dramatic re-enactment of the explosion on the 1

By Anne T. Lawrence. Copyright © 2019 by the author. All rights reserved.

1 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Deepwater Horizon and may be shown at the beginning of the class session to focus student attention on the disaster and its aftermath. It is available here: www.youtube.com/watch?v=S-UPJyEHmM0.

The BBC documentary, “Profit, Pollution, and Deception: BP and the Oil Spill” (45:02, 2013) explores the issues of responsibility for the disaster.

Discussion Questions and Answers 1) What stakeholders were impacted by BP’s actions, and how were they impacted?

One way to approach this question is to form students into six teams, with each team responsible for answering this question for one stakeholder, filling in a form that can later be collected by the instructor. Students should be able to complete this task quickly (in 5 to 10 minutes). Each team can then be asked to summarize their findings for the class, for example, by orally reporting or filling in a section on a board template. Students should be encouraged to note the monetary costs of impacts, if that information is available in the case. This exercise trains students to quickly review a case to extract relevant information. Of course, students will need to have a copy of the case at hand.

The case discusses the impact of BP’s actions on these stakeholders: Local businesses • • • • •

Commercial fishing: the U.S. government closed large areas of water to fishing, shutting down more than a third of Gulf waters after the spill.

Tourism: tourists cancelled their trips to the region, not just to beach areas that had been spoiled by oil, but also to other areas they thought might be affected.

Some commercial property was directly damaged by the oil spill.

Other local businesses that serviced the oil, fishing, and tourism industries were also impacted.

Total economic damages to local communities can be estimated in the range of $20 billion (the amount BP paid in private economic and property claims).

Local governments •

Local governments lost tax revenue from the oil, fishing, tourism, and secondary industries (estimated at $5.9 billion, the amount they were compensated by BP).

Community residents • • •

Loss of jobs and related psychological impacts.

Health impacts from low-concentration exposure to oil and dispersants.

Destruction of natural beauty and recreational opportunities.

Employees of BP (including its contractors and rescue and clean-up workers) • •

11 workers on the Deepwater Horizon died, and 115 were injured or traumatized.

50,000 cleanup workers, including some of whom were homeless or unemployed and many of whom were minorities, experienced adverse health effects from exposure to oil and 2 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

chemical dispersants. These effects included high blood pressure, fluctuating blood sugar, and breathing and intestinal problems. Cleanup workers were also at greater risk for depression and anxiety.

TEACHING TIP: ENVIRONMENTAL JUSTICE Instructors may wish to raise the concept of environmental justice, defined in the text as “efforts to prevent inequitable exposure to risk, such as from hazardous waste.” This case presents evidence that minority residents and cleanup workers were disproportionately exposed to health hazards from the oil and chemical dispersants, thus representing an environment injustice.

Shareholders The case estimates the total cost of the disaster to BP at $66 billion—more than any company has ever paid for a disaster of its making. Much of this cost was borne by the company’s shareholders in the form of lower dividends and reduced share value (the price of the stock initially declined more than 50 percent). A year after the disaster, the stock was about one third lower than it would have been without it, by some economists’ estimates. Shareholders included many U.S pension plans and other institutions. Some shareholders were able to recover some of their losses in class action litigation.

Taxpayers (public) Because some of BP’s costs (but not its criminal and civil penalties) were deductible, the American taxpayer subsided part of the cost. The company estimated it would save around $56 billion over time, because of these deductions.

TEACHING TIP: TAKEAWAY A clear takeaway from this exercise is that the total costs to all stakeholders were extremely high—in the tens of billions of dollars and much more in intangible losses.

The instructor may wish to introduce the next question by asking: Why didn’t we include “the environment” or “ecosystems” as a stakeholder in the exercise we just completed? Can the environment be considered a stakeholder? Chapter 1 defines a stakeholder as “persons and groups that affect, or are affected by, an organization’s decisions, policies, and operations.” By this definition, the environment or ecosystems are not considered stakeholders (since they are not people or groups of people). However, they were clearly impact by BP’s decisions, policies, and operations, as the discussion of the following question will indicate.

2) What were the environmental costs of the disaster, and how can these be measured?

The case reports that the disaster “took a terrible toll on the environment.” Impacts discussed in the cases include: •

The discharged oil contaminated more than 43,300 square miles of the ocean surface, hit 1,300 miles of shoreline from Texas to Florida, and covered large areas of the sea floor.

These ecosystems were further damaged by exposure to chemical dispersants.

3 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

• • •

Beaches and wetlands were contaminated with oil and dispersants.

Wildlife death estimates included 27,000 to 65,000 turtles and 100,000 birds (93 species).

The natural capital of the Mississippi Delta ecosystem was damaged, impacting the ability of the delta to provide hurricane and flood protection, water supply, water quality, recreation, and fisheries.

TEACHING TIP: TAKEAWAY

A takeaway from this question is that many environmental impacts are difficult to quantify and can only be meaningfully assessed over a long period of time. Costs are hard to estimate. For example, what are the dollar costs of the loss of wildlife, natural beauty, or the protection against storm surges provided by wetlands?

3)

Do you think that the legal consequences faced by BP, its employees, and the false claimants were appropriate, and why or why not?

The legal consequences to BP were costly.

• •

•

The company pled guilty to manslaughter and other charges to resolve the criminal case, agreeing to pay a record $4 billion. Two BP employees were acquitted, and two pled guilty to misdemeanors. None went to prison.

The federal government, joined by the five Gulf states, also brought a civil suit against BP. The suit was eventually settled for over $20 billion, including $8.1 billion in natural resource damage payments for Gulf restoration; $5.9 billion in state and local economic damages; and $5.5 billion in Clean Water Act civil penalties.

The federal government also prosecuted hundreds of individuals for filing false claims against BP. One hundred and nine people received prison sentences for filing fraudulent claims, including some for as long as 15 and 17 years.

Many students will argue that the legal penalties suffered by BP were too low. While the total set a record for the highest settlement ever in a government case, $20 billion was only slightly higher than BP’s average annual profit of $16.5 billion in the four years following the blowout. The legal consequences to individual residents who filed fraudulent claims were much more severe than those experienced by BP’s executives and employees.

4) Do you think it is a company’s responsibility to prevent a disaster of this type or the government’s (or both)? Why? This is a philosophical question, and student responses will vary. Arguably, both the company and the government bear responsibility for preventing a disaster of this type. The company has an obligation to its shareholders, employees, and the communities where it does business to protect human life, the natural environment, and its own equipment and assets. The government has an obligation to protect its citizens by setting and enforcing appropriate environmental and health and safety standards.

4 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

5) Describe changes in the U.S. regulation of deepwater drilling since the disaster. What approach to regulation do you support, and why?

The regulatory approaches to deepwater drilling of the Obama and Trump administrations were very different.

• • •

After the disaster, the Obama Administration reorganized the Interior Department to eliminate the conflict of interest inherent in having a single agency both promote and regulate the industry.

In 2015, the Obama administration announced new offshore safety regulations, including a “well control rule” intended to reduce the likelihood of another disaster by improving the design and manufacture of blowout preventers. These rules went into effect in 2016.

In 2018, the Trump administration reversed restrictions on drilling, opening more than 90 percent of the outer continental shelf to drilling. It also loosened the well control rule.

Students may differ in which approach they support. The Obama approach emphasized greater restrictions on drilling and more stringent rules for blowout prevention equipment. The Trump approach opened more areas to drilling and weakened government oversight.

6) What lessons should the oil industry, business in general, government, and civil society draw from this case?

This is an open-ended question, and responses will vary.

Risk is often conceptualized as the probability that an event will occur multiplied by the severity of the consequences if the event does occur. Considered through this lens, the risk that BP’s deepwater drilling operation would fail catastrophically was low, but the severity of the consequences when it did occur were extraordinarily high. In general, the risk of offshore drilling can be considered very high, even though the probability of any specific rig failing is low, because an individual failure can be so catastrophic. For this reason, arguably all offshore drilling in ecologically sensitive zones should be halted.

Another possible lesson is the need to establish more severe criminal penalties for managers of firms that cause devasting environmental and human harm. Such penalties might deter the carelessness apparently exhibited by BP and its contractors.

5 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

TEACHING NOTE Wells Fargo’s Unauthorized Customer Accounts1 This case illustrates the following themes and concepts discussed in the chapters listed: Theme/Concept

Chapter

Stakeholder analysis

1

Organizational ethics

6

Corporate governance

13

Consumer protection/consumer rights

14

Employee compensation

15

Case Synopsis This case describes the actions of Wells Fargo, a leading bank and financial services company, which opened more than two million unauthorized checking, credit card, and other accounts without the consent of its customers between 2011 and 2015. Wells Fargo settled with the U.S. government and state and local regulatory agencies, paying more than $100 million in fines, without admitting or denying the alleged misconduct. In late 2016, when the case opens, the bank also faced lawsuits from customers, former employees, and shareholders alleging that the bank had misled investors about its financial performance and the success of its sales practices. The case enables students to identify which stakeholders were helped and which were harmed by the bank’s unethical practices. It also challenges students to analyze a firm’s culture and organizational practices to identify possible causes of its unethical actions and to recommend actions by Wells Fargo’s board and management team to prevent a recurrence.

This teaching note was prepared by Anne T. Lawrence, based on a more extensive instructor’s manual prepared by the case authors, Samir Kumar Barua, Indian Institute of Management Ahmedabad, and Mahendra R. Gujarathi, Bentley University. Copyright © 2019 by the author.

All rights reserved.

1

1 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

TEACHING TIP: WHERE TO USE THE CASE IN THE COURSE This case is integrative, in that it draws on many themes of the text. It is best used at the end of the course as a final, integrative assignment, or with the study of Chapter 6 (organizational ethics).

TEACHING TIP: VIDEOS Several videos may be used in conjunction with this case.

A short introduction to the case prepared by CNN Money, “Here’s How Wells Fargo Workers Created Fake Accounts” (4:27), which includes an interview with an employee explaining the pressure to open unauthorized accounts, is available here: https://www.youtube.com/watch?v=QXbD6YggCYQ A brief (1:26) graphical description of what Wells Fargo did, prepared by the Los Angeles Times, is here: https://www.youtube.com/watch?v=QXbD6YggCYQ A clip (17:52) of Senator Elizabeth Warren’s (D-Mass.) questioning of CEO John Stumpf during the Senate hearing, cited in the opening of the case, is available at: https://www.youtube.com/watch?v=xJhkX74D10M.

Discussion Questions and Answers 1. Describe the “unauthorized customer accounts” referenced in the title of the case.

What did the bank and its employees do? Which stakeholders were helped, and which were harmed by these actions?

The unauthorized customer accounts referenced in the title of the case refer to checking, credit card, and other accounts opened by Wells Fargo employees on behalf of customers, without their approval or consent. As the case documents, between 2011 and 2015, bank employees opened as many as 1,534,280 unauthorized deposit accounts and another 565,443 unauthorized credit card accounts. They had done so by creating phony PIN numbers and e-mail addresses, forging client signatures on paperwork, and moving money from existing accounts to newly opened ones. In many cases, customers did not know that a new account had been opened in their name. Opening unauthorized accounts clearly violated the bank’s rules.

Which stakeholders were helped, and which were harmed by these actions?

Shareholders benefited: During the period in which Wells Fargo was pursuing very aggressive sales practices—including the opening of unauthorized accounts—it was enjoying great commercial success. In 2015, with market capitalization of about $300 billion, Wells Fargo became the most valuable bank in the world. Its stock outperformed 2 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

the broader benchmark, consisting of about 24 leading national and regional banks. Thus, until 2015, shareholders may have benefited directly from cross-selling.

Top managers benefited: The case suggests that the bank’s top executives were well rewarded for the success of its sales strategy. In 2015, CEO John Stumpf and the head of the community banking division, Carrie Tolstedt, received total compensation of $19.3 million and $9.1 million, respectively. Tolstedt was scheduled to retire at the end of 2016 with a package worth $124 million.

Customers were hurt: The case does not quantify the losses to customers for whom unauthorized accounts were opened. The costs to customers included wrongfully-charged fees, inconvenience, and a deterioration in their credit-worthiness—leading possibly to higher interest rates or denied access to credit.

TEACHING TIP: ESTIMATING COSTS TO CUSTOMERS Instructors may ask students to research online the estimated cost of Wells Fargo’s unethical behavior to customers. This information may be gleaned from settlements from ongoing class action lawsuits against the bank by aggrieved customers.

Employees were hurt: Some employees benefited by earning higher bonuses. Many employees suffered from a stressful, high-pressure sales culture, punishment, and even termination for failure to meet sales quotas.

2. Do you believe Wells Fargo demonstrated an ethical corporate culture? Why or why not? In your response, please consider both the formal ethics policies of the bank and ethical leadership as modeled by its senior executives and board of directors.

Chapter 6 defines corporate culture as “a blend of ideas, customs, traditional practices, company values, and shared meanings that help define normal behavior for everyone who works in a company.” A corporation’s culture can either strengthen or weaken the likelihood that its employees will behave ethically. As the chapter explains, “most companies have a kind of moral atmosphere. People can feel which way the ethical winds are blowing. They pick up subtle hints and clues that tell them what behavior is approved and what is forbidden.”

How did Wells Fargo’s culture, as manifested in its formal ethics policies and the leadership modeled by its senior managers and board members, influence its employees behavior?

On the surface at least, Wells Fargo had taken many steps to establish a strong ethical culture and organizational practices, including many described as best practices in Chapter 6.

3 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

The bank had a Code of Ethics and Business Conduct that described the importance of ethical behavior and emphasized employees’ responsibility to protect the reputation and integrity of Wells Fargo. The bank had also established a process for employees to follow when faced with an ethical dilemma: they were instructed to contact their manager, HR advisor, or Office of Global Ethics and Integrity for help. Employees could also report any concern regarding accounting, internal accounting controls and auditing matters directly to the audit and examinations committee of the board or could call the bank’s ethics hotline if they saw or suspected illegal or unethical behavior. The bank had a no-retaliation policy.

The bank had publicly declared that “we strive for the highest ethical standards with our team members, our customers, our communities and our shareholders.” Top executives had emphasized the importance of values in their communications with employees. For example, the case quotes CEO John Stumpf as saying, “Around here if you have something to say, you say it—nobody is going to be offended” (implying an openness to internal criticism). A profile of Tolstedt reported that she “thinks up ways to communicate values to the front line.”

The corporate governance practices described in the case mostly correspond with the best practices described in Chapter 13. Of the bank’s 15-member board, all were independent (outside) directors except for the CEO. All standing committees of the board, including the human resources committee that determined the compensation of senior executives, consisted solely of independent directors. The board had adopted a code of ethics and business conduct for its members. The board had been honored for its diversity.

However, in one respect the board deviated from best practices, as Stumpf served as both chairman of the board and chief executive officer.

TEACHING TIP: WHY WERE GOOD PRACTICES NOT ENOUGH? One of the most intriguing issues for student discussion and analysis is why the bank engaged in widespread unethical action despite having policies and practices that in many ways conformed to ethical and governance best practices. When, and why, are “textbook” practices not enough?

3. Describe “cross-selling.” What were the benefits of cross-selling to the bank and its shareholders? In what ways did cross-selling contribute to the problems Wells Fargo later faced?

Cross-selling refers to the practice of marketing related or complementary products to an organization’s existing customers (as contrasted with attracting new customers). For example, the bank might market a credit card to a customer who already had a checking account, or a mortgage loan to a customer who already had a savings account.

4 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Cross-selling had several benefits. It: • • •

increased a customer’s reliance on the firm and decreased the likelihood he or she would switch to a competitor; allowed a firm to extract the maximum revenue potential from each customer; was more efficient (servicing a single account was less expensive).

Both Stumpf and Tolstedt placed great emphasis on the importance of cross-selling to achieving the bank’s financial goals.

The bank’s managers used several techniques to increase its cross-sell ratio.

First, it encouraged customers to open multiple accounts by offering discounts on interrelated products purchased as a package. For example, its premier relationship package (called a PMA account) offered customers a free checking account and free bill payments, together with options to add a savings account, credit card, mortgage loan, and a discount brokerage account.

Second, it provided both positive and negative incentives for employees to open new accounts for existing customers. Employees who cross-sold successfully (and their managers) were rewarded with extra compensation and bonuses. In addition, the bank mandated quotas for the number and types of products to be sold by employees.

Employees’ sales were closely monitored. The case provides anecdotal evidence that employees who failed to meet their quotas, or who complained, were harassed, publicly criticized, penalized, or terminated.

The problem, apparently, was that sales pressure at the company was so intense that employees felt compelled to violate the bank’s own rules and stated values to meet unrealistic quotas—to earn their bonuses or just to hold on to their jobs.

TEACHING TIP: ALIGNING COMPENSATION WITH VALUES One important takeaway from this case is the importance of aligning employee compensation and incentives with stated values. Wells Fargo’s stated values and ethical safeguards were admirable, but at the same time, it provided powerful incentives to employees to do anything necessary to meet aggressive and arguably unrealistic sales quotas. In the conflict between stated values and monetary incentives, the latter won out much of the time—apparently, as top managers had intended. The bank was thus arguably guilty of ethical hypocrisy—saying one thing while incentivizing another.

5 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

4. If you were an employee of Wells Fargo and felt pressured to cross-sell to customers, even when you felt this was inappropriate, what would you have done?

The case provides several examples of employees who individually resisted what they viewed an inappropriate pressure to cross-sell to customers. They took several actions, including refusing to cross-sell to customers who would not benefit from new accounts, complaining to managers, and reporting their concerns to human resources or to the company’s hot line. Some of these employees were later disciplined or fired. These examples imply that it was extremely difficult for employees to resist sales pressure without jeopardizing their jobs.

Employees also took collective action. Ten thousand employees presented a petition to the board at both the 2014 and 2015 annual meetings, urging the board to recognize the link between high-pressure sales quotas and the fraudulent opening of accounts without customer permission. Although the case implies that these petitions did not influence the board right away, they may have spurred government investigations, media attention, and lawsuits.

5. Did Wells Fargo respond appropriately to employees who voiced their concerns about unauthorized accounts? What should it have done differently?

As of the time of the case (late 2016), the bank had taken several actions. Stumpf had testified before Congress, where he had apologized and accepted full responsibility. Since 2011, the bank had fired 5,300 employees who had opened unauthorized accounts and refunded to customers $2.6 million of wrongfully-charged fees. Stumpf had recommended that Wells Fargo’s board rescind unvested stock awards of $41 million to him and $19 million to Tolstedt.

Arguably, the bank responded inappropriately to employees who had expressed concerns about unauthorized accounts. Instead of firing these employees, the bank should have investigated their concerns and taken remedial action.

6. Looking at the case as a whole, what steps would you recommend Wells Fargo, its senior managers, and its board of directors do now to prevent such events from occurring again in the future?

Students may make a range of suggestions for senior managers and the board.

These may include: • • • •

Replace John Stumpf as CEO and chairman.

Replace Carrie Tolstedt as head of the community banking division.

“Claw back” some of the compensation or retirement benefits of these two executives.

Separate the roles of CEO and chairman by appointing an independent lead director.

6 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

• • • • •

•

Replace some directors who may have been insufficiently attentive to problems with cross-selling.

Reorganize the bank to exercise greater centralized control over its divisions, including community banking.

Compensate customers who were harmed by deceptive or aggressive sales practices, or for whom unauthorized accounts were opened.

Settle ongoing lawsuits.

Completely overhaul the employee compensation system, removing all sales quotas in the community banking division and replacing them with incentives based on customer satisfaction.

Set up a stakeholder engagement or advisory council process.

TEACHING TIP: WHAT DID WELLS FARGO DO? After developing a set of recommendations, students may be instructed to compare their conclusion with what Wells Fargo has done. The bank has prepared a document that summarizes the remedial actions it has taken: https://stories.wf.com/betterbank.

In conclusion, the authors of the case offer the following lesson: “The case… provides a context to discuss how an excessive focus on a quantifiable goal can create blind spots that can run counter to the strategic vision of the businesses leaders. The case helps students to understand the limitations of a pay-for-performance system…and drives home the lesson that the negative impact of unethical business decisions far exceeds the shortterm financial gain to a few stakeholders. Although the case addresses issues in one firm (Wells Fargo) in one industry (commercial banking), its lessons are applicable to numerous other contexts and companies. Whenever a company has (a) an excessive focus on a singular performance metric, (b) its managerial bonuses tied to profits and stock price growth rather than to furthering its fundamental vision, and (c) a weak tone at the top, the consequences that Wells Fargo faced are inevitable. Possible approaches to deal with the issues faced by Wells Fargo and their implications are also relevant for other firms and other industries.”

7 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

TEACHING NOTE: THE UPPER BIG BRANCH MINE DISASTER1

This case illustrates the following themes and concepts discussed in the chapters listed:

Theme/Concept Stakeholders; ownership theory of the firm Corporate social responsibility Methods of ethical reasoning Ethical climate; ethics and the law Government regulation of business Corporate governance Workplace health and safety Crisis management and media relations

Chapter 1 3 4 5 7 13 15 19

Case Synopsis: On April 5, 2010, a massive explosion at the Upper Big Branch coal mine in West Virginia killed 29 miners and seriously injured two others. It was the worst mining disaster in the United States in almost forty years. The mine’s owner, Massey Energy, had a history of safety violations and a contentious relationship with both government regulatory agencies and the United Mine Workers union. It had succeeded in breaking the union and had actively resisted attempts by regulators to cite and fine its operations for safety violations. In the wake of the disaster, four separate investigations—by the federal and state governments, the United Mine Workers union, and the company itself—examined what had gone wrong. This case tells the story of the disaster and challenges students to consider the ethics of Massey’s actions, the causes of the disaster, and what can be done to prevent similar tragedies in the future.

TEACHING TIP: VIDEOS A useful way to start the class discussion is to show a video segment.

The video supplement available to adopters includes a segment from the PBS NewsHour, “Report on Deadly West Virginia Mine Blast Castigates Massey for Safety Lapses,” first aired May 19, 2011 [8:39]. It includes an introductory piece with video of the mine and interviews with various participants, followed by an interview with investigative reporter Howard Berkes of NPR.

1 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

As an alternative, instructors may wish to use “A Preventable Event: The Story of the Upper Big Branch Mine Disaster,” first aired May 20, 2011 [9:39] on the PBS “Need to Know” program. It is available on streaming video: http://www.pbs.org/wnet/need-to-know/video/video-a-preventable-event-the-story-of-the-upperbig-branch-mine-blast/9454/ For instructors who wish to use a more comprehensive report, “In the Coal: The Upper Big Branch Disaster” [December 10, 2010; 19:06] is available on streaming video: http://www.pbs.org/wnet/need-to-know/video/in-the-coal-the-upper-big-branch-disaster/5704/ Instructors wishing to explore the issue of mountaintop removal mining in greater depth may show excerpts from “The Last Mountain,” a documentary by Bill Haney (released November 1, 2011), available in DVD format from Amazon.

Various short videos of Don Blankenship are available on YouTube, including one showing a run-in with a journalist and another in which he explains why nonunion mines are more costefficient.

Summary of Discussion Questions 1. What were the costs and benefits to stakeholders of the actions taken by Massey Energy and its managers?

2. Applying the four methods of ethical reasoning (utilitarianism, rights, justice, and virtue), do you believe Massey Energy behaved in an ethical manner? Why or why not?

3. Who or what caused the Upper Big Branch Mine disaster, and why do you think so?

4. What steps could be taken now to reduce the chances of a similar tragedy occurring in the future? In your answer, please address the appropriate roles of mining companies (and their directors and managers), government regulators and policymakers, and the workers and their union in assuring mine health and safety.

Discussion Questions and Answers 1. What were the costs and benefits to stakeholders of the actions taken by Massey Energy and its managers?

Instructor may wish to work through a board grid, in which stakeholders are listed on the left and the costs and benefits to each are listed in two side-by-side columns, as illustrated below.

2 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Stakeholder Don Blankenship

Managers Board of directors

Shareholders Employees

Customers

BENEFITS

COSTS/RISKS

• $129 million over ten years in compensation • Use of a corporate jet, cars, and other perks • Social status • Power over others • Relatively high pay and status in a low-income region • At least $130,000 per year in compensation for a few days of meetings

• Referred to himself as “vilified;” apparently widely disliked in the community and by his own employees

• Mediocre returns during the 2000s, but not much different from industry averages • For some, a relatively highpaying job in a low-income region

•

•

Local community

• •

Union (UMW)

•

Government regulators

•

Environment

•

A steady supply of highquality, relatively low-cost fuel for steel, utility, and industrial customers For utility customers: a steady supply of relatively low-cost electric power from coal-fueled power plants Some jobs, some taxes, some philanthropic support Benefits to the broader community of energy independence None Massey’s flagrant disregard for compliance may have contributed to greater allocation of funding and positions to the regulatory agencies None

• Demanding boss, stressful job •

Reputational risk due to association with a company with a poor reputation for environmental impacts and worker safety • High volatility, high risk investment • Unsafe job; high risk of illness, injury, or death • Intimidating, threatening workplace culture • Lack of union protection • For some: a violent, sudden death by incineration or suffocation • For some: the trauma of experiencing the death or injury of friends and coworkers • For the families of victims: loss of a loved one • Risk of supply interruption from a supplier with high safety and environmental risks

• Water and air pollution • Environmental degradation

• Highly effective anti-union strategy; declining membership • Harassed, deceived and thwarted by Massey management in their efforts to enforce the law •

Widespread damage to ecosystems and watersheds due to mountaintop removal mining • Coal sludge spill

3 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

TEACHING TIP: OWNERSHIP THEORY OF THE FIRM The ownership theory of the firm, discussed in Chapter 1, prioritizes the maximization of shareholder value above all other considerations. Evidence in the case suggests that the board of directors and top managers of Massey subscribed to this view; they appear to have been singularly focused on shareholder returns (e.g., the board stated that the goal of the compensation system was to motivate executives to “achieve continuous improvements in company-wide performance for the benefits of our stockholders.”) Yet, the company did not do a particularly good job of achieving this goal: shareholder returns in the years preceding the disaster were mediocre, and were in any event no better than the returns for the coal industry as a whole.

Arguably, Massey took high environmental and safety risks without offsetting benefits to shareholders.

2. Applying the four methods of ethical reasoning (utilitarianism, rights, justice, and virtue), do you believe Massey Energy behaved in an ethical manner? Why or why not?

Instructor prompt: Would a utilitarian find Massey Energy’s actions to be ethical?

TEACHING TIP: UTILITARIANISM The textbook (Chapter 4) defines utilitarianism as follows: [Utilitarian reasoning] emphasizes utility, or the overall amount of good that can be produced by an action or a decision… It is often referred to as cost–benefit analysis because it compares the costs and benefits of a decision, a policy, or an action… These costs and benefits can be economic (expressed in dollar amounts), social (the effect on society at large), or human (usually a psychological or emotional impact). After business managers add up all the costs and benefits and compare them with one another, the net cost or the net benefit should be apparent. For a utilitarian, the alternative where the benefits most outweigh the costs is the ethically preferred action because it produces the greatest good for the greatest number of people in society.

The instructor may wish to build on the discussion of costs and benefits to stakeholders (Question 1) to help students formulate an answer to this question.

A utilitarian could argue this case either way. Some would conclude that the benefits (ends, or results) of Massey’s actions did not justify the costs (means). In this view, the means (high rates of injury, illness and death; environmental degradation; union-busting; open violation of the safety and health and environmental laws) did not justify the ends (employment for about 6,000 people in a relatively poor region; relatively cheap coal for industrial customers; and relatively cheap electric power for many utility customers.) A utilitarian might come to the opposite conclusion if he or she weighed cheap energy and energy independence more highly and viewed the Upper Big Branch disaster as an anomaly.

4 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Instructor prompt: Were any human rights violated by Massey’s actions?

TEACHING TIP: RIGHTS This prompt asks students to apply the theory of rights to the case. The textbook (Chapter 4) defines this theory as follows: Human rights are another basis for making ethical judgments. A right means that a person or group is entitled to something or is entitled to be treated in a certain way… The most basic human rights are the rights to life, safety, free speech, freedom, being informed, due process, and property, among others. Denying those rights or failing to protect them for other persons and groups is normally considered to be unethical. Respecting others, even those with whom we disagree or dislike, is the essence of human rights, provided that others do the same for us. This approach to ethical reasoning holds that individuals are to be treated as valuable ends in themselves just because they are human beings. Using others for your own purposes is unethical if, at the same time, you deny them their goals and purposes.

Yes, Massey’s actions violated human rights. Massey put the health and very lives of its employees at risk through its deliberate disregard for accepted standards of mine safety. It jeopardized the property rights and health of community members impacted by mountaintop removal mining. It intimidated its own employees, robbing them of the right to speak their minds freely about their concerns about their coworkers’ and their own safety. Massey violated workers’ rights to organize a union when it violently and callously broke the United Mine Workers at its own facilities. The company as a matter of policy broke the law by violating government mine safety regulations, deceiving government inspectors, and contesting penalties imposed by regulators.

TEACHING TIP: ETHICS AND THE LAW Students might be asked: Did Massey follow the law?

As Chapter 5 explains, ethics and law are not the same, although they usually coincide. Most business ethicists believe that companies should follow the law as a minimum, but in many cases should go “beyond compliance” to achieve a higher standard of behavior. Yet, a striking feature of Massey’s behavior is the extent to which it appeared to deny the very legitimacy of the government over its actions. The company apparently viewed mine safety (and environmental) regulations as illegitimate, and actively sought to contravene these legal requirements. Massey’s behavior was not only unethical; it was also illegal. The company’s actions can, in this sense, be considered “rogue” or “outlaw.”

5 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Instructor prompt: Were Massey’s actions fair and just towards all those affected?

TEACHING TIP: JUSTICE AND FAIRNESS This question asks students to apply the theory of justice and fairness to the case. The textbook (Chapter 4) defines this theory as follows: Justice, or fairness, exists when benefits and burdens are distributed equitably and according to some accepted rule. For society as a whole, social justice means that a society’s income and wealth are distributed among the people in fair proportions. A fair distribution does not necessarily mean an equal distribution. Most societies try to consider people’s needs, abilities, efforts, and the contributions they make to society’s welfare. Since these factors are seldom equal, fair shares will vary from person to person and group to group. Justice reasoning is not the same as utilitarian reasoning. A person using utilitarian reasoning adds up costs and benefits to see if one is greater than the other; if benefits exceed costs, then the action would probably be considered ethical. A person using justice reasoning considers who pays the costs and who gets the benefits; if the shares seem fair (according to society’s rules), then the action is probably just.

Most students will argue that Massey’s actions were not fair. One individual benefitted enormously: the company’s CEO, Don Blankenship (and possibly other senior executives, although the case does not discuss this). Over the course of his career as CEO at Massey, Blankenship earned around $129 million and enjoyed many perks of his position. The burdens of Massey’s actions fell disproportionately on the workers, communities, and unions of central Appalachia.

Instructor prompt: Were Massey’s actions “virtuous,” or reflective of good corporate character?

TEACHING TIP: VIRTUE ETHICS This question asked students to apply the virtue ethics framework to the case. The textbook defines this theory as follows: [Virtue ethics] focuses on character traits that a good person should possess, theorizing that moral values will direct the person toward good behavior. Virtue ethics is based on a way of being and on valuable characteristics rather than on rules for correct behavior…. [Most] scholars believe that there is a great deal of agreement on the question of who is acting as the virtuous person, as summed up by business ethicist Manuel Velasquez: “An action is morally right if in carrying out the action the agent exercises, exhibits, or develops a morally virtuous character, [as opposed to] develops a morally vicious character.” When placing virtue ethics in a business context, ethicist Robert Solomon explains, “The bottom line of [the virtue] approach to business ethics is that we have to get away from ‘bottom line’ thinking and conceive of business as an essential part of the good life, living well, getting along with others, having a sense of self-respect, and being a part of something one can be proud of.”

Although virtue ethics usually refer to an individual’s character, the concept can also be applied to an analysis of a company’s actions.

6 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Likewise, Massey’s actions do not pass the “virtue” test. Massey was animated by “bottom line thinking” and showed an almost complete lack of empathy for others.

In sum, an application of the four methods of ethical analysis to this case demonstrates that Massey’s actions did not meet the standards of rights, justice, or virtue, and may or may not have met the standards of utilitarianism.

TEACHING TIP: ETHICAL CLIMATE The instructor may wish to ask students to classify Massey according to the typology of ethical climates, as presented in Chapter 5. The textbook explains: The unspoken understanding among employees of what is and is not acceptable behavior is called an ethical climate… Three distinct ethical criteria are egoism (self-centeredness), benevolence (concern for others), and principle (respect for one’s own integrity, for group norms, and for society’s laws)… These ethical criteria can be used to describe how individuals, a company, or society at large approach various moral dilemmas.

By this typology, Massey’s would probably be classified as “egoist,” that is, the company was primarily concerned with its own profits and the compensation of its senior executives; it showed little concern for others or for society’s laws.

TEACHING TIP: FORMAL AND INFORMAL SYSTEMS Some theorists have pointed to the distinction between formal systems (stated policies) and informal systems (as set by a firm’s norms, climate, and managerial example). Ethics are strongest when both formal and informal systems are in alignment. One of the interest details of this case is that Massey apparently had a formal system (the “S-1, P-2” initiative) that placed safety first; but all its informal systems—such as the requirement to report production figures every 30 minutes to the CEO; the communications systems set up to warn underground managers of the arrival of government inspectors; and the infamous “RUNNING COAL” memo—seemed to contradict this. In other words, at Massey the formal and informal systems were not in alignment.

3. Who or what caused the Upper Big Branch Mine disaster, and why do you think so?

Some students will answer this question by citing the sequence of physical events that occurred on April 5, 2010, that is: A poorly maintained longwall shearer in contact with sandstone caused a spark which it could not extinguish because of inoperative water sprayers; the spark ignited a pocket of methane gas that had been allowed to accumulate at the coal face because of poor ventilation; and the resulting explosion propagated throughout the mine because of an accumulation of flammable coal dust that had not been properly treated with rock dust.

7 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

This answer would be correct, at least, according to the two government investigations and the union’s investigation. However, students should be prompted to consider the difference between the immediate cause of the explosion (a spark, a fuel source) and the responsible parties.

Instructor prompt: What people or groups were most responsible for the Upper Big Branch disaster, and why do you think so?

Students may answer this question in several ways. Among the possible responses are these: Don Blankenship: The case suggests that Blankenship had near-total control over Massey Coal Company, and later Massey Energy, for almost twenty years. During that time, he had decisive influence over the culture, policies, and practices of the firm. He directed a management system that gave priority to productivity—running coal—over all other considerations, including environmental impacts, worker health and safety, and legal compliance. As a hands-on manager, he was fully aware of everything that was going on in the company, down to the last tank of gasoline or ton of coal. Accordingly, he should bear the ultimate responsibility for the Upper Big Branch mine disaster. Students may note that Blankenship himself disavowed any responsibility for the disaster, telling analysts that his conscience was “totally clear.”

The board of directors: The board of directors was responsible for the disaster because it deliberately set up a compensation system for their CEO that incentivized high earnings and productivity over other factors. Blankenship’s incentive-based compensation (stocks and option awards and incentive plan) comprised more than 86 percent of his compensation in 2009 (Exhibit A). His compensation plan (Exhibit B) based more than half (55 percent) of his incentive pay earnings on earnings and productivity-related factors (EBIT, produced tons, continuous miner productivity, surface mining productivity, and fulfillment of contracts). Percent reduction in environmental violations counted for 10 percent, and percent reduction in NFDLs for 10 percent.

Arguably, the latter figure could be—and was—manipulated by the company by a deliberate policy of not recording miners’ injuries. Other factors (identification of successors, employee retention, and diversity of members) counted for 25 percent. Notably, there was no incentive for reducing fatalities. Arguably, Blankenship was doing exactly what the board wanted him to, that is, run as much coal as possible with only minimal regard for the costs to the environment and worker safety. The board put in place an incentive system that handsomely rewarded productivity—and then hired as CEO a trained accountant who was obsessed with numbers and seemed to have a complete lack of empathy for others. The result—a history of flagrant environmental and safety violations—was a predictable outcome.

TEACHING TIP: A STUDENT/C STUDENT Average students will immediately recognize Blankenship’s responsibility for the disaster.

However, only “A” students are likely to see the relationship between the structure of Blankenship’s compensation system and his behavior.

8 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

TEACHING TIP: INDUSTRIAL HOMICIDE The case mentions that the United Mine Workers called the disaster “industrial homicide” and called for the criminal prosecution of Massey’s managers. As an assignment, students may be asked to determine if any precedents exist for such a prosecution of managers and if they think there would be a basis for such a charge.

Government safety and health regulators: Another view is that the main responsibility lies with government regulators from MSHA and the corresponding West Virginia agency. Evidence in the case shows that inspectors were frequent visitors to the mine and issued repeated citations for violations of federal and state mine safety laws. However active the regulators were, they apparently did not use sanctions, up to and including shutting down the mine, that were sufficient to change Massey’s behavior.

Policymakers: Some may argue that despite decades of legislative advances in the area of mine safety and health, the law was still too weak to effectively constrain the actions of rogue corporations like Massey. In this view, strong laws might have prevented the tragedy.

The workers at Upper Big Branch: Many of the workers at Upper Big Branch appeared to be either intimidated by management, unaware of the danger in which they worked, or aware but resigned to acceptance of the conditions. For whatever reason, they had not effectively asserted their legal rights to organize a union. Some may argue that the workers were, in some sense, responsible for their own fate since they had not left the situation or effectively changed it.

“God:” Finally, it is worth mentioning that the company’s view was that “God” was responsible for the disaster, because the explosion was caused by a sudden inundation of methane, an “Act of God” that they could not have anticipated or prevented.

4. What steps could be taken now to reduce the chances of a similar tragedy occurring in the future? In your answer, please address the appropriate roles of mining companies (and their directors and managers), government regulators and policymakers, and the workers and their union in assuring mine health and safety.

TEACHING TIP: BOARD WORK One way to approach this question is to work across the board from “causes” to “possible remedies.” Another approach would be to look in turn at steps various parties could take, e.g., policymakers, management, etc.

Students may wish to make a number of specific recommendations for change, including the following: •

Management selection and advancement: Boards of directors should select ethical managers and advance managers through the organization based on a proven track record of effectively balancing the requirements of profit and productivity with the legitimate interests of stakeholders and the need to comply with all relevant laws.

9 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

•

Compensation systems: Boards of directors should design compensation systems that reward safe and environmentally sound operations (and apply penalties for noncompliance with the law).

•

Legal compliance: Managers should make it clear that the policy of the corporation is to comply with the law and to go beyond compliance to achieve “best practice” health and safety systems. Safety should be given priority over production.

•

Stronger protective legislation: The government needs to strengthen powers of regulatory agencies such as MSHA and West Virginia (office of mine safety) and give them sufficient authority to enforce their citations. Penalties for noncompliance should be strengthened, and flagrant violations should be felonies. Workers who report safety violations to government inspectors should be protected against retaliatory discipline.

TEACHING TIP: CHANGING THE LAW As a separate assignment, students might be asked to research existing mine safety and health laws and recommend public policy changes that would help prevent an Upper Big Branch-like disaster in the future. Students may be interested in comparing their recommendations with that of a Senate working group that explored options for policy change following the UBB disaster.

This document, titled “Proposed Legislative Changes to Protect the Safety of All Workers and Prevent Future Disasters,” may be found at: www.mshahelp.com/summary_proposal.pdf. Some of these recommendations later appeared in legislation introduced by Congressman George Miller of California.

•

Labor laws: Strengthen the labor laws that enable fair, unbiased elections for union representation.

•

Energy policy: Develop an energy policy that gives greater support to less polluting and less dangerous (for workers and the environment) sources of energy.

Epilogue: As of November 2015, the following further developments had occurred: •

In May 2011, Massey said it made a settlement offer of $3 million to each deceased miner's family, and seven families had agreed to its offer. Some other families refused the offer and pursued wrongful death suits against the company.

•

Massey failed to make a profit in any quarter of 2010.

•

After the investigations of the disaster had been completed, Massey permanently sealed the Upper Big Branch mine.

•

Various institutional investors sued Massey for damages.

10

© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

•

Congressman George Miller introduced legislation in late 2010 that would make it harder to companies to use the appeals process to delay or avoid enforcement action. The proposed law would also increase penalties for violations, protect employee whistleblowers, and protect the pay of workers who were out of work when violations led to a mine closure. The law would also empower regulators to obtain a court order to close an unsafe mine. The law failed repeatedly to get out of committee, and in 2014 the chair of the House Committee on Education and the Workforce declared the bill “dead.”

•

In December 2010, CEO Don Blankenship stepped down as CEO of Massey.

•

In January 2011, Alpha Natural Resources purchased Massey for $7.1 billion. Almost all of Massey’s and Alpha’s shareholders voted to approve the acquisition. As part of the agreement, Don Blankenship received a severance of $86 million. Massey’s nonemployee directors received payments ranging from $1.2 million to $4.9 million. Alpha Natural Resources worked to settle various lawsuits that had been brought against Massey.

•

Alpha Natural Resources publicly repudiated the Massey report that blamed the disaster on a sudden, unexpected inundation of natural gas through a crack in the floor.

•

In late 2011, Blankenship filed papers to open a new mining company, located in Belfry, Kentucky, to be called the McCoy Coal Group Inc. (presumably named after his mother’s ancestors). As of 2015, the company had not commenced operations.

•

In January 2012, Alpha settled with the families of victims (who had not already settled with Massey). Terms of the settlement were not revealed.

•

In late 2011, Hughie Stover, a former security officer, was convicted of lying to investigators looking into the causes of the disaster; he was later sentenced to three years in prison.

•

In March 2012, a former superintendent of the mine, Gary May, pleaded guilty to conspiring to “impede the Mine Safety and Health Administration's enforcement efforts” at the Upper Big Branch mine. May admitted he had given advance warning of inspections and concealing safety violations. In March 2013, he was sentenced to 21 months in prison.

•

In November 2012, David C. Hughart, formerly president of a division of Massey Energy, pleaded guilty to one felony count of conspiracy to defraud the United States and agreed to cooperate with prosecutors. In September 2013, he was sentenced to nearly four years in prison.

•

In March 2014, Don Blankenship released a nearly hour-long video he had commissioned to present his view that a sudden, unpredictable, and natural inundation of methane had 11

© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

caused the explosion at the Upper Big Branch mine. The video, entitled “Never Again,” is available at www.youtube.com/watch?v=0NYOBEQWIlg. •

In October 2015, Don Blankenship went on trial in West Virginia for breaking mine safety laws and lying to federal investigators. In November 2015, the trial was still ongoing.

12 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

STARBUCKS AT THE AIRPORT: DISCRIMINATION IN PUBLIC SPACES TEACHING NOTE

This case illustrates the following themes and concepts discussed in the chapters listed: Theme/Concept

Chapter

Stakeholder Interests

1

Workers’ Rights and Unionization

15

Employment Discrimination Based on Race and Gender

16

Management of Diversity, Equity, and Inclusion

16

Corporate Reputation

19

Case Synopsis In February 2020, Unite Here, a labor union, released a report critical of employment practices at airport Starbucks stores operated by licensee, HMSHost. The union alleged pay discrimination and harassment of store workers based on race, gender identity, and sexual orientation.

Although Starbucks did not employ these workers directly, the allegations threatened the coffee company’s reputation as a progressive employer. The case describes Starbuck’s earlier efforts to establish an equitable corporate culture and its relationship with HMS Host. The case ends with the challenge faced by Nzinga Shaw, Starbucks’ recently hired Global Chief Inclusion and Diversity Officer. How should she respond to the Unite Here report’s charges of racial and gender discrimination at airport stores associated with the Starbucks brand, in view of the company’s carefully cultivated reputation as a socially responsible employer?

TEACHING TIP: WHERE TO USE THE CASE IN THE COURSE This case is best used in conjunction with the study of Chapters 15 (Employees and the Corporation) and 16 (Managing a Diverse Workforce). Secondary themes are stakeholder interests (Chapter 1) and corporate reputation (Chapter 19).

1 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

TEACHING TIP: VIDEOS Several videos are available that may be used in connection with this case. https://www.youtube.com/watch?v=k_Hbxhc7tlM is a 4:06 minute video about Starbucks’ announcement of its May 29, 2018, training; it features Howard Schulz and a professor’s take on “symbolism” vs. “substance” of Starbucks’ initiative. https://www.youtube.com/watch?v=3V_rqb6Nuc4 is a 3:44-minute The Daily Show’s irreverent take on Starbucks’ upcoming training session. https://www.youtube.com/watch?v=e2PIWocGZCk is a 2:26 minute BBC video on “How Starbucks hopes to end staff racism” using unconscious-bias training. https://www.youtube.com/watch?v=NWOz3OZ6J9M is a 7:31 minute video in which Rashon Nelson and Donte Robinson tell Good Morning America what led to their arrest at a Philadelphia Starbucks, sparking backlash for the coffee chain. https://www.youtube.com/watch?v=EABn0bfVzNQ is a 1:00 minute video from EuroNews reporting on Starbucks’ closing of 8000 stores for anti-racism training. https://www.youtube.com/watch?v=G_egCFqhs6c is a 1:17 minute video that features Starbucks CEO responding to complaints of racial discrimination.

Discussion Questions and Answers 1. Chapter 16 discusses several kinds of employment discrimination prohibited by equal employment opportunity laws. Which kinds of employment discrimination did UNITE HERE allege had occurred at Starbucks’ airport stores?

Chapter 16 summarizes several kinds of employment discrimination that are prohibited by equal employment opportunity laws in the United States (and related regulations and court decisions).

The following table summarizes the kinds of employment discrimination at Starbucks’ airport stores alleged by UNITE HERE and the corresponding U.S. laws, regulations, or court decisions.

The instructor can develop a board grid, or ask students to generate a table as follows: Allegation of employment discrimination at Starbucks’ airport stores Racial inequity in pay: median pay of Black baristas was $11.15, compared with $12.67 for Hispanic/Latino baristas and more than $13 for white baristas.

Corresponding U.S. law, regulation, or court decisions Under U.S. equal employment opportunity laws, discrimination based on race, color, religion, sex, national origin, physical or mental disability, or age is prohibited in all employment practices. These include hiring, promotion, job classification and assignment, compensation, and other conditions of work.

2 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Forty eight percent of persons who were denied a promotion were African American.

However, it is unclear if this constituted bias because the case does not report what percent of employees who applied for promotion were African American. (The case does indicate that 85 percent of the employees analyzed by the report were persons of color.)

Under U.S. equal employment opportunity laws, discrimination based on race, color, religion, sex, national origin, physical or mental disability, or age is prohibited in all employment practices. These include hiring, promotion, job classification and assignment, compensation, and other conditions of work.

Anecdotal evidence of harassment based on race.

Government regulations ban both sexual and racial harassment. Harassment need not result in the victim’s firing or cause severe psychological distress; the presence of a hostile or abusive workplace can itself be the basis for a successful suit. Moreover, a company can be found guilty because of actions by a supervisor, even if the incident is never reported to top management.

In addition, Discrimination based on gender identity and sexual orientation is prohibited by some state laws. Moreover, in 2020, the Supreme Court ruled that discrimination based on gender identity and sexual orientation was illegal, extending these protections to people employed by organizations covered under Title VII of the Civil Rights Act.

Anecdotal evidence of harassment based on gender identity and sexual orientation.

2. What steps had Starbucks taken to promote equity, diversity, and inclusion in its own work culture? What more do you think Starbucks should do, if anything?

Starbucks had a history of promoting equity, diversity, and inclusion in its own work culture.

What steps had it taken?

• • • • • •

Achieved pay equity for women and men and persons of all races doing similar work at company-operated stores (2018).

Achieved representation of women and minorities exceeding the national market availability benchmark in every job category except store manager and manager (2020).

Offered full health benefits to domestic partners (since 1988).

Included sex-reassignment surgery in its health benefits package.

Established processes to update digital records to reflect employees’ preferred names and pronouns.

Hired a global chief inclusion and diversity officer (2019).

3 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

• • • • •

Following the April 18, 2018, incident at a Philadelphia store, closed more than 8,000 stores for a full day to train 175,000 employees on racial bias and announced a new policy that all visitors would be considered customers.

Engaged former U.S. Attorney General Eric Holder Jr. and the law firm Covington & Burlington to assess its policies on civil rights, equity, diversity, and inclusion (two times).

Adopted and later revised/strengthened policies on discrimination, harassment, and retaliation.

Provided training in anti-harassment.

Committed to creating a culture of “warmth and belonging, where everyone is welcome.”

What more should Starbucks do, if anything?

Students will express a range of views on this question, from “they have done enough” to “much more needs to be done.” An important area needing improvement is partnering with licensees to improve their practices with respect to diversity, equity, and inclusion, as discussed in the following questions.

3. Should Starbucks be concerned about the treatment of workers by its licensees, such as HMSHost? Why or why not?

Under the terms of the agreement between the two companies, HMSHost held an exclusive license to operate Starbucks stores at airports and travel plazas until 2020. HMSHost was granted the right to use Starbucks’ brand name, recipes, and production processes in exchange for payment of royalties and agreement to follow certain rules.

As the licensee, HMSHost had authority over employment decisions (e.g., hiring and firing), employee training, and workplace rules. However, this authority was not unlimited. Because HMSHost used their brand, Starbucks retained the right to conduct reviews and inspections of licensee operations. Starbucks also maintained that HMSHost locations were required to follow Starbucks’ store operating procedures and attend training classes “similar to” ones given to their own employees.

These rules set up a complex relationship in which Starbucks had authority over some aspects of the employment relationship at HMSHost, but not others.

Students may express views on both sides of this question.

On one side, students may argue that Starbucks should not be concerned about the treatment of workers at the HMSHost airport stores.

• •

Starbucks did not own these stores and were not responsible for the day-to-day management of their workers.

It did not have a legal obligation to resolve disputes between HMSHost and its employees.

4 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

•

By expressing concern about the allegations in the Unite Here report, Starbucks might appear to be siding with a union that was trying to organize workers at its airport stores.

Starbucks had a long history of opposing the unionization of its workers. It would likely oppose unionization at the airport stores since this might create a precedent for the unionization of its own employees.

TEACHING TIP: UNIONS AND UNIONIZATION

Instructors may wish to explore with students Starbuck’s attitude towards unions. The company had a long record of opposing unions, and most unionization efforts had failed. The case reports that in 2020, unionization at the company was “not significant.”

However, in December 2021 (after this case was written), workers at a Starbucks’ store in Buffalo, New York, voted to unionize. It was one of the first successful organizing efforts in the history of the company. In January 2022, these workers walked off the job to protest safety problems under COVID. Instructions may wish to show this video (7:51 minutes), an interview by a reporter for Yahoo!

Finance with a worker at the Buffalo store, who explains why she supports unionization and how the company has responded to the union organizing drive. The company’s response included visits by top executives to dissuade workers from voting for the union. www.youtube.com/watch?v=kPjcpQtDCis Instructor Prompt: Can Starbucks truly be considered a progressive and socially responsible employer if it routinely fights efforts by its workers to organize and be represented by unions in collective bargaining? Do worker efforts to unionize necessarily reflect poor management, or do they simply reflet workers’ desire for a greater voice in their workplaces?

Unite Here has continued to be active in efforts to organize workers at Starbucks’ airport stores, although it had not won any elections as of this writing (January 2022). Further information about Unite Here’s activities is available here: www.businesswire.com/news/home/20210611005493/en/ www.unitehere11.org/wp-content/uploads/HMS-Host-PHX-Letter-to-Starbucks.pdf

On the other side, students may argue that Starbucks should be concerned about the treatment of workers at the HMSHost airport stores.

• •

These workers wore Starbucks logo attire (green aprons) and served Starbucks products.

In the public’s eye, these stores were clearly identified with the brand.

Negative publicity about racial and gender bias at the airport stores had the potential to harm Starbucks’ carefully cultivated reputation as a progressive and socially responsible

5 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

• •

employer, as reflected in its awards as being among the “most ethical” and “most admired” companies.

Failure to respond decisively to charges of bias could fuel union organizing efforts at Starbucks’ own stores.

Licensed stores made up almost half of all Starbucks locations and were many customers’ point-of-contact with the brand. Starbucks certainly would not want to be associated with illegal activities or racial or gender bias there.

THEORETICAL LINK: CORPORATE REPUTATION Chapter 19 defines corporate reputation as the “desirable or undesirable qualities associated with an organization or its actors that may influence the organization’s relationship with its stakeholders.” Researchers have concluded that organizations with strong reputations outperform their competitors.

4. What factors should Nzinga Shaw consider, when deciding what to do with respect to UNITE HERE’s charges of discrimination at Starbucks airport stores?

One way to approach this question to identify the interests of the stakeholders who would be impacted by Starbucks’ response to the United Here charges. (Chapter 1) •

•

•

•

Shareholders – Because shareholders are concerned about returns on investment, Shaw will need to consider how her response will impact Starbucks financially. For example, if she recommends supporting training for employees at licensees, how much would this cost? Shareholders may also be concerned about corporate reputation, insofar as it potentially impacts profitability.

Customers – Customers are typically concerned with the quality of products and services, responsiveness, and low costs. Shaw should consider how her response would influence the customer experience and customer perceptions at the licensee’s stores. For example, disgruntled employees could degrade customer service, so addressing their concerns could improve customer service.

Employees. Employees are interested in fair pay, fair treatment, a quality work experience, and long-term employment. o Although Starbucks employees are not working for HMSHost, they may be concerned about the treatment of other workers who, like them, provide Starbucks products and services to the public. A failure to respond to the allegations might prompt some of them to be dissatisfied or even to consider unionization. o HMSHost employees—or at least some of them—are no doubt concerned about bias.

Business partners – HMSHost is part of this stakeholder group. Will Shaw’s response strengthen or hinder the partnership between Starbucks and HMSHost?

6

© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

5. What would you recommend Nzinga Shaw do, and why?

Most students will say that Shaw should work with HMSHost to promote best practices with respect to diversity, equity, and inclusion, within the constraints posed by law and the licensing agreement. Students may offer a range of recommendations, including: •

• •

•

• •

Request a review, audit, or investigation of the allegations made by Unite Here about HMSHost employment practices, to determine whether and to what extent the union’s claims are accurate. As the licensor, Starbucks has the right to conduct reviews and inspections of licensee operations. Before Shaw can take any further action, she needs to better understand the scope of the problem. This review could be carried out by Starbucks’ staff or by a specialized contractor.

Depending on the results of the audit, work with HMSHost management to correct any problems that violate the licensee’s contract (e.g., the requirement to follow Starbuck’s operating procedures).

Consider jointly developing training on diversity, equity, and inclusion for HMSHost employees. This may be problematical, since HMSHost declined to have its employees participate in the 2018 training following the incident at the Philadelphia store. Possibly, Starbucks would need to organize and/or pay for training by the same providers that ran their one-day sessions in 2018. A challenge is that most airport and travel plaza stores are small and geographically dispersed; accordingly, the training would probably need to be provided on an online platform.

Consider adding new provisions to any contracts with licensees going forward (e.g., the HMSHost contract was due for renewal in 2020) that set explicit standards for policies and practices with respect to diversity, equity, and inclusion, not currently included in the contract.

Establish processes for ongoing engagement and consultation with licensees, to reduce the likelihood of similar situations arising in the future.

Communicate with the public through multiple media channels about the company’s response to the Unite Here allegations.

7 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

NESTLÉ AND CHILD LABOR IN THE COCOA SUPPLY CHAIN TEACHING NOTE

This case illustrates the following themes and concepts discussed in the chapters listed: Theme/Concept

Chapter

Business in a Globalized World

4

Consumer Activism

14

Employees

15

Ethical Issues in Global Supply Chains

17

Case Synopsis This case explores the ethical and legal responsibilities of Nestlé, the multinational food company, for selling chocolate despite knowledge of forced child labor in the supply chain for cocoa beans in West Africa. The company insisted that it did not tolerate illegal labor practices. It adopted a code of conduct which required its suppliers, and their suppliers, to abide by all human rights, child labor, and forced labor conventions. It had worked with nonprofits and universities to study its cocoa supply chain and had invested millions a system to monitor and remediate child labor. But critics argued that Nestlé had not done enough. This case challenges students to consider human rights abuses that arise in global supply chains and the most effective strategies companies and others can adopt to prevent them.

TEACHING TIP: WHERE TO USE THE CASE IN THE COURSE Most instructors will choose to use this case in conjunction with the study of Chapter 17 (Business and its Suppliers). However, it may also be used as an integrative case at the end of the course.

TEACHING TIP: VIDEOS Several videos are available that may be used in connection with this case.

“A Report into Tackling Child Labor: Nestlé’s Cocoa Plan,” is a 2:49 minute piece produced in December 2019 by Nestlé describing their commitment to ending child labor in the cocoa supply chain: 1 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

www.youtube.com/watch?v=Hws6TlSNcj0 “The Challenge of Child Labour in Chocolate” is a 3:14 minute video with graphics explaining the challenge of child labor from the perspective of the World Cocoa Foundation and the International Cocoa Institute: www.youtube.com/watch?v=2urkKxLIQYk “Bitter Chocolate” is a 42-minute documentary by the French journalist Paul Moreira that aired on the German public broadcasting service in September 2020. In the first part of the video, Moreira travels to cocoa farms in Côte d’Ivoire, where he observed children trafficked from a nearby county who were working without pay and under hazardous conditions. Later, he interacts with a child trafficker while disguised as a farmer seeking workers and interviews an executive of Cargill.

The video also shows the destruction of rain forest to make way for cocoa farms. Although the video is probably too long for classroom use, the instructor may wish to use clips from it. www.youtube.com/watch?v=pRwMoGPTEEM “The Dark Side of Chocolate” is a 46-minute documentary made in 2010 by a Danish journalist.

Although dated, clips from the film may be used to show scenes of children working on cocoa farms in Côte d’Ivoire, filmed with a hidden camera. Selected clips are available using a Google search.

Discussion Questions and Answers 1. Would you choose to buy a Tony’s Chocolonely chocolate bar rather than a Nestlé chocolate bar because of Tony’s commitment to end child labor and forced labor in the cocoa supply chain? Why or why not?

TEACHING TIP: A TASTY TREAT A fun way to begin a discussion of this case is to pass out chocolate bars to the students, including Tony’s Chocolonely and other brands. They can discuss the first question while sampling the chocolate.

Tony’s Chocolonely Milk Wafer Strips (6.35 oz.) sell for around $5 at Whole Foods. One bar can be cut into smaller pieces. A family size bag of individually wrapped Kit Kat Minis (16.1 oz.) sells for about $6 at Rite Aid, Target, and other stores. One package contains 32 units.

Note: Students may ask why the Nestlé brand name does not appear on the Kit Kat minis (Kit Kat is one of Nestlé’s best known chocolate products globally.) In 2018, the Italian company Ferraro purchased Nestlé’s U.S. confectionery business for $2.8 billion. The purchase included the right to use the Nestlé name on the products for one year, after which it would be phased out. Accordingly, 2 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

in the United States, Kit Kat bars are simply Kit Kat bars, not Nestlé Kit Kat bars. In other nations, the candies continue to carry the Nestlé brand.

Of course, if the course is being taught remotely—or students are required to wear masks in the classroom—an exercise that requires the sharing of candy would not work.

Would you buy Tony’s? Why or why not?

YES, would buy Tony’s: • Tastes better than other brands (a matter of opinion) • Because of the company’s commitment to source cocoa from farms that do not use child or forced labor • Inspired by the founder’s commitment to ending human rights abuses

NO, would not buy Tony’s: • More expensive than other brands (at least two times as expensive as Nestlé, ounce for ounce) • Not widely available; unavailable where I shop • Does not taste as good as other brands (a matter of opinion) • Tastes the same as other brands, so not worth the extra money (a matter of opinion)

Instructor prompt: If child and forced labor in the supply chain is important to you, how much of a premium would you be prepared to pay for Tony’s chocolate?

2. Describe the extent of child labor in the cocoa supply chain. Why has child labor not yet been eliminated, even after decades of effort?

TEACHING TIP: SLIDE The instructor may wish to use the slide showing Figure 3 in connection with discussion of this question.

The instructor may wish the discussion of this question by asking: How is child labor defined? Is it always considered “child labor” if a child is working on a cocoa farm?

No, to be considering child labor, a child must either be engaged in hazardous work and/or to have exceeded an allowable number of hours per week (depending on their age). Normally, children occasionally helping their parents on the farm is not considered “child labor.”

What is the extent of child labor?

The case documents the extent of child labor in the cocoa supply chain in Côte d’Ivoire and Ghana, based on surveyed conducted by universities with support from the U.S. Department of Labor and various foundations. The relevant data are reported in Figure 3. The figure shows that 3 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

except for an increase shown in 2013/14 survey, child labor in the cocoa industry in West Africa has remained remarkably stable—and persistently high. In the most recent survey, more than one and a half million children in Côte d’Ivoire and Ghana were engaged in child labor, and 95 percent of these were engaged in hazardous work.

Why has child labor in the cocoa industry been so difficult to eradicate?

The case suggests several possible answers to this question.

•

Many children in the cocoa industry work alongside and at the direction of their parents, who either own or are sharecroppers on the farm. Their work is considered a normal part of their obligation to the family’s welfare and necessary to learn the skills of farming.

•

Most cocoa farmers in West Africa are extremely poor. Farmers’ income often falls below the cost of production. Under these circumstances, farming families are under tremendous pressure to enlist their own children to work.

•

Many children do not have access schooling, particularly at the secondary level. Many parents are uneducated and do not understand the value of continuing education for their children beyond the early grades.

The executive director of the International Cocoa Initiative summed up the problem: “[Child labor] is clearly a complex problem that has its roots in poverty, and rural poverty no less. And if the problem is rooted in poverty, then the solution, in a way, is as complex as poverty eradication.”

3. Evaluate the actions Nestlé has taken to address the problem of child labor in its cocoa supply chain. What do you think motivated the company to take these actions?

Do you think that Nestlé has done enough? What more could or should it do?

What has Nestlé done to address the problem of child labor in its cocoa supply chain?

Nestlé has taken the following actions: •

In 2001, Nestlé (with other chocolate companies) signed the Harkin-Engel Protocol, a voluntary multi-stakeholder compact, which promised to reduce the worst forms of child labor in Côte d’Ivoire and Ghana by 2005.

•

Nestlé joined the International Cocoa Initiative, an international foundation committed to ending the worst forms of child labor in the cocoa industry.

•

Nestlé had a comprehensive supplier code of conduct (most recently updated in 2018) that required that the company’s Tier 1 suppliers comply with all United Nations rules regarding human rights, child labor, and forced labor; and that they ensure that their upstream intermediaries also complied. The code set explicit rules for farms from which agricultural products were sourced.

4

© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

•

The company hired third party organizations to map its supply chain and audit compliance.

•

In 2009, Nestlé launched what the Nestlé Cocoa Plan to make cocoa production more profitable for farmers, eliminate child labor, and improve the transparency of the supply chain and the quality of cocoa. In its first decade of operation, the company invested $244 million to support these goals.

•

In 2012, Nestlé set up a Child Labor Monitoring and Remediation System (CLMRS) in collaboration with the International Cocoa Initiative, first in Côte d’Ivoire and later in Ghana. The CLMRS hired people from the local community (called community liaisons) to visit farm families to identify children who were at risk of hazardous work.

What do you think motivated the company to take these actions?

The case suggests three possible motivations.

•

Political pressure: In 2001, Congressman Eliot Engel of New York sponsored legislation to require labelling chocolate products to indicate they were produced without child slave labor. Although the bill failed in Congress, Engel and Senator Tom Harkin of Iowa took the lead in negotiating a voluntary, multi-stakeholder compact to address the issue.

•

Lawsuit/legal pressure: In 2005, plaintiffs first filed the lawsuit known as Nestlé USA v John Doe, which the Supreme Court ruled on in 2021. The lawsuit increased public attention on the issue of child labor in the cocoa industry.

•

Media pressure: The case reports that Dutch journalists in 2006 produced an exposé on the issue. (Other European journalists also covered the story around this time, although this is not reported in the case.)

In short, Nestlé probably acted in response to public pressure from politicians, human rights attorneys and activists, and journalists.

Do you think Nestlé has done enough? What more could or should it do?

Some students will argue that Nestlé has done enough: it had carried out studies, promulgated a code of conduct, and spent millions of dollars through its Cocoa Plan to eliminate child and forced labor in its supply chain. Yet, it missed the Harkin-Engel Protocol deadlines and by its own admission has reached only 10 to 20 percent of the cocoa supply chain with its mitigation measures.

Factors making it difficult for Nestlé to accomplish more include: •

The complexity of the multi-tiered supply chain 5

© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

•

Strong incentives for the use of child and forced labor due to systemic poverty

•

Threats linked to climate change and pandemics

•

Growing and harvesting cocoa do not lend itself to automation or economies of scale

4. Do you believe that the strategy of Tony’s and other sustainable chocolate companies for addressing the problem of child labor and forced labor in the cocoa supply chain will be effective? Why or why not?

The strategy of Tony’s and other sustainable chocolate companies was to assure their customers that their products were made without participating in child labor or other human rights abuses.

The company purchased its cocoa beans directly from farmers and farmer cooperatives, enabling it to track “every bean.” It paid 60 percent above the typical farm gate price (set by the national cocoa boards) to enable farmers to earn a living income without the use of child or forced labor. It signed long-term contracts with its suppliers and trained them.

Because of the higher price it paid for cocoa, Tony’s charged a premium for its products. Data in the case suggest that ounce for ounce, Tony’s products cost at least twice as much as competing Nestlé products. Tony’s acknowledged that their prices made it difficult for them to compete.

Tony’s had a market share of only 16 percent in its home country, The Netherlands. As of the date of the case, the company remained small. However, the case also indicates that a large beverage company and a private equity fund had invested in Tony’s, and it had landed an account with the upscale grocery chain Whole Foods.

The real question for Tony’s is to what extent consumers will be willing to pay more for an ethically sourced product—that is, if there is a “market for virtue.”

5. Do you think foreign citizens, like the “John Does” in this case, should be able to sue in U.S. courts for wrongs committed in another country? Did you agree with the U.S. Supreme Court decision or not, and why?

This is a complex legal question.

The lawsuit against Nestlé was brought under a law called the Alien Tort Statute (ATS). The ATS gave the federal courts jurisdiction over cases brought by citizens of other countries (“aliens”) for torts “committed in violation of the law of nations or a treaty of the United States.” Attorneys representing the plaintiffs (former trafficked child laborers) argued that Nestlé should be held legally responsible for its complicity in fostering a supply chain that relied in part on child slavery and forced labor, both of which were illegal under international conventions. They said that Nestlé had maintained influence over this “slavery-based system” by providing financial support, farming supplies, and training to cocoa farmers.

The challenge the attorneys faced in bringing this case was that the alleged harm had not been committed in the United States—but in West Africa. Nestlé defended itself by arguing that the 6 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

case was “impermissibly extraterritorial” (that is, the relevant acts had occurred outside the United States).

In its 2021 decision, the Supreme Court sided with Nestlé and the other companies, saying that for the ATS to be used for wrongs committed in other countries the plaintiffs had to establish that “the conduct relevant to the statute’s focus occurred in the United States.” The Court found that the plaintiffs had not met that burden.

6. What do you believe is the best strategy for eliminating child labor in the cocoa supply chain: litigation (lawsuits), legislation (and government regulation), voluntary action by corporations, competition from sustainable chocolate companies, actions by civil society organizations, workers, and consumers, or something else? Why? The instructor may wish to develop a board grid, showing strategies in each of these categories.

Alongside the strategies, students can suggest reasons why the strategy would or would not be effective. For example, the board work might look like this: What is the best strategy for eliminating child labor in the cocoa supply chain?

CATEGORY Litigation/lawsuits

STRATEGY • Sue in the U.S. under the Alien Tort Statute • Sue under laws prohibiting human trafficking

Legislation/government regulation

• Due diligence or duty of care legislation (in countries where chocolate companies are headquartered) • Government cocoa boards in producing countries raising the minimum farm gate price, with child labor restrictions for farmers receiving the higher amount.

• Laws requiring transparency in labeling

COMMENTS The Supreme Court decision of 2021 made using the ATS much less likely to succeed.

Plaintiffs would have to show that the companies had, through their activities in the United States, “aided and abetted” abuses that occurred elsewhere in their global supply chains.

Laws/international conventions outlawing child labor and forced labor are already in place and have not made much difference in West Africa.

Due diligence laws are quite recent; they may have an impact.

Cocoa boards in poor West African countries are unlikely to raise farm gate prices, in deference to large multinational buyers who

7 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

• Laws outlawing child labor have an interest in keeping prices down. and forced labor Voluntary action by companies

• Supply chain codes of conduct • Studies/surveys of child and forced labor in the supply chain • Monitoring and remediation efforts • Programs to support cocoa farmers and their families • Canceling contracts with suppliers that do not follow the code of conduct • Product labeling

Competition from sustainable chocolate companies

Action by civil society organizations and other stakeholders

• Pressure from journalists • Pressure from human rights NGOs • Consumer boycotts

Students will have already listed the steps Nestlé has taken voluntarily to address child labor. By their own admission, these programs had reached only 10-20% of child workers, even though their efforts had been going on for 2 decades.

One step Nestlé had apparently not taken was simply to raise the price paid for cocoa, conditioned on compliance. One study cited in the case estimated that a price premium of 12 percent over the farm gate price would be sufficient to eliminate excessive hours of work and hazardous work by children in the cocoa industry.

Tony’s seems to have made an impact in the small segment of the cocoa farming community with which it does business.

The success of this strategy depends on the willingness of socially aware consumers’ willingness to spend more for ethically sourced chocolate.

The case suggests that pressure from journalists had some impact in motivating Nestlé and other companies to address the issue of human rights abuses in their supply chain.

Students will probably conclude that action on all these fronts will continue to be necessary, but the problem of child labor in the cocoa supply chain is extremely difficult and resistant to solution.

8 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

TEACHING NOTE The Boycott of Stoli Vodka1 This case illustrates the following themes and concepts discussed in the chapters listed: Theme/Concept

Chapter

Stakeholder analysis

1

Business in a globalized world

4

Role of technology (social media)

11

Consumer boycotts

14

Diversity and inclusion

16

Corporate reputation, crisis management

19

Case Synopsis This case describes the boycott of Stoli brand vodka initiated by Dan Savage, a prominent gay rights blogger. Savage asserted that consumers should boycott Stoli vodka because the Russian government, under the leadership of Vladimir Putin, had recently passed a series of laws that discriminated against gay, lesbian, bi-sexual and transgender people. In fact, both the owner and top executives at SPI Group, the parent company of Stoli Group USA, had had progressively adversarial relationships with the Putin government for more than a decade, and the company was based in Luxembourg, not Russia. Nonetheless, the #DUMPSTOLI hashtag had begun to go viral, and the boycott had gained support. The top management team had to determine how best to respond. The case enables students to identify a corporate crisis and to formulate an effective crisis management plan to respond to a consumer boycott. It also enables them to explore the potential impact of social media on corporate reputation and the complexities of managing brand identification in a multinational company.

TEACHING TIP: WHERE TO USE THE CASE IN THE COURSE 1 This teaching note was prepared by Anne T. Lawrence, based on a more extensive

instructor’s manual prepared by the case authors, Janet L. Rovenpor, Grishma Shah, and Musa Jafar, of Manhattan College. Copyright © 2019 by the author. All rights reserved.

1 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

This case is integrative, in that it draws on many themes of the text. It may be used at the end of the course as a final, integrative assignment, or with the study of Chapter 19 (crisis management).

TEACHING TIP: VIDEOS The authors of the case have prepared online materials to accompany the written case. These materials consist of four segments: Facing a Crisis, Overview and History of SPI and Stoli Group USA, Stoli’s Support of the LGBT Community, and Stoli Responds. Instructors have the option of showing all four segments or any segment of their choice. They are available here: Segment 1 (3.05 minutes): https://www.youtube.com/watch?v=fO3nE2NoJzk Segment 2 (3.45 minutes): https://www.youtube.com/watch?v=uXSP5RhB1bo Segment 3 (1.10 minutes): https://www.youtube.com/watch?v=Z5YWgatQht8 Segment 4 (4.49 minutes): https://www.youtube.com/watch?v=mrf3f8ghBZw If the final segment is used, it should be presented as an epilogue at the end of the case discussion, after students have formulated their own recommendations for action.

2 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Discussion Questions and Answers 1) Describe the issue facing the managers of Stoli USA. Is this a corporate crisis, and why or why not?

TEACHING TIP: LAUNCHING THE DISCUSSION Instructors may wish to start the class by asking students: What was going on in Russia that made LGBT activists so upset?

The key issues were that new laws had been passed in Russia which 1) made teaching minors about homosexuality illegal; 2) banned the adoption of children by gay parents or parents living in countries that recognized gay marriages; and 3) fined citizens and deported foreigners who held gay pride parades or events. Members of the LGBT community had been subjected to numerous arrests, persecution, and acts of bullying.

Chapter 19 definies a corporate crisis as “a significant business disruption that stimulates extensive news media or social networking coverage. The resulting public scrutiny can affect the organization’s normal operations and also can have a political, legal, financial, and governmental impact on its business. A crisis is any event with the potential to negatively affect the health, reputation, or credibility of the organization.” The chapter lists several possible such disruptions, including “backlash against [a company’s] stance on controversial social or political issues.”

The boycott of Stoli vodka can be considered a corporate crisis, because it emerged suddenly and unexpectedly and posed a signficiant financial and reputational threat to the company.

Data in the case show that gays comprised an important part of Stoli USA’s customer base and were highly brand conscious, so reputational damage among members of this community could have a serious, negative impact on sales and profits. The boycott clearly demanded a crisis management response.

However, the boycott does not exactly fit the textbook’s definition. In this case, a disruption did not stimulate extensive social networking coverage; rather, extensive social networking coverage (generated by activists) stimulated a disruption (loss of sales and damage to reputation). Moreover, the organizers of the boycott were in many respects wrong about the company’s stance on an issue (lesbian, gay, bi-sexual and transgender rights). The company had historically supported the LGBT community, and the brand had no influence on or cooperative relationship with the Putin government. So, the company’s challenge was not to defend (or change) its practices, but rather to clarify its record and engage positively with the LGBT community.

2) Identify the market and nonmarket stakeholders in the case. What were their interests, sources of power, and likely coalitions?

Instructors may wish have fill in a to start the class by asking grid on the board, as follows: 3 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

NONMARKET STAKEHOLDERS LGBT community

Social media influencers, e.g., Dan Savage

MARKET STAKEHOLDERS Distributors, importers, retail shops, bars

Stoli employees in U.S., Latvia, and elsewhere Management

INTERESTS

SOURCES OF POWER

Human rights for LGBT persons in Russia and globally Human rights for LGBT persons in Russia and globally; building their own following on social media

Consumer (market) power (boycott); social media (informational) power Number of followers on social media

Carrying products that consumers want and will pay for; high sales; good relationships with brands Jobs; reputation of company to the extent that it affects sales Jobs; reputation of company to the extent that it affects sales and profits

Power to distribute, sell, and promote (or drop) specific brands Power to withhold labor

Control of company

What were their likely coalitions? A coalition to boycott the brand may emerge among social media influencers, some members of the LGBT community, and some retail shops and bars.

The boycott is likely to be opposed by management, employees, distributors and importers without direct interaction with customers and the public, and members of the LGBT community who viewed the boycott as poorly-conceived.

3) Should Stoli vodka be considered a Russian brand? In an age of globalized supply chains, what qualifies a brand’s national authenticity? Does it matter?

Stoli vodka’s national heritage was complex. As the case describes, Stoli vodka was first made in Russia (then the Soviet Union) in the late 1930s. For many years, the brand was owned by the Soviet government and union collectives. After the breakup of the Soviet Union in the early 1990s, a Russian entrepreneur named Yuri Shefler acquired the company and changed its name from Stolichnaya to SPI Spirits. But in the early 2000s, the Russian government tried to recapture the rights to Stoli vodka. Shefler fled the country and shifted his company’s operations to Latvia and its legal headquarters to Luxembourg. SPI continued to manufacture the raw alcohol in Russia, which was then shipped to Latvia to be blended, filtered, and bottled. Since Stoli was bottled in Latvia, it changed its label from “Russian vodka” to “premium vodka.” At the time to of the boycott, importation, marketing and distribution of Stoli vodka was controlled by Stoli Group USA.

4 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

To summarize, at the time of the boycott, Stoli vodka was produced in Latvia, using some Russian ingredients, by a company based in Luxembourg with a distribution arm in the United States. Stoli was no longer an authentic Russian brand, although it did have some historical association with the Soviet Union and included raw alcohol produced in Russia. It was natural for the public to be confused about Stoli’s country of origin, however. The truth was complex, and past advertising, movie placements, and media references had helped perpetuate the perception that Stoli was a Russian brand.

The case offers this quotation from the New York Times: The exact nationality of Stolichnaya, like many global brands, is hard to pin down. It was made for a time in Russia and simply bottled in Riga (capital of Latvia) but has in recent years been filtered and blended in Latvia . . . while its water comes from Latvian springs, its main ingredient, raw alcohol distilled from grain, still comes from Russia. Its bottles are from Poland and Estonia, its caps from Italy.

The question, “does it matter?” invites opinion. The authors of the case have written: It does not matter what the reality is, as perception of the brand is what carries the most weight in generating boycotts. Irrespective of its origins, Stoli was perceived to be Russian, and hence was being used as a surrogate for the Russian government… Activists go for ‘low hanging fruit’ or easy targets and time their protests strategically. High-profile products that consumers can easily do without are often targeted… There were plenty of substitutes for Stoli…, including vodka produced in the United States.

4) In what ways did the nature of social media pose specific challenges to the company?

The nature of social media posed specific challenges.

Speed: Hashtags on social media platforms such as Twitter and Facebook can and do travel with lightning speed, as individuals retweet and repost material. Thus, a crisis can gain intensity very quickly. Data in the case show that the number of retweets of Dan Savage’s original call to “dump Stoli” escalated rapidly over the first few days of the crisis. Thus, speed of response is critical.

Accuracy: Information on social media is only as accurate as the originator makes it. Unlike traditional media, which operates under professional norms that value and promote factual accuracy, social media has few filters for accuracy (although that has recently changed somewhat for political speech). In this case, Stoli USA faced information that was substantially false (that Stoli was a Russian brand).

5) Evaluate the crisis management response so far of both the SPI group and Stoli USA. What more should they do to restore the brand’s reputation?

5 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Chapter 19 defines crisis management as “the process by which an organization deals with a major event that threatens to harm the organization, its stakeholders, or the general public.

Every organization is likely at some time to face a crisis that forces management and its employees to act quickly and without perfect information.”

The key individuals responsible for crisis management were Val Mendeleev (CEO of the parent company, SPI Group), John Esposito (president of Stoli USA), and Lori Tieszen (senior vice president and chief marketing officer of Stoli USA). The case describes the initial response of these individuals as follows: •

•

Mendeleev published an open letter to the LGBT community. In it, he acknowledged that Stoli vodka included some Russian ingredients but was distilled, blended and bottled in Latvia. He also highlighted the strained relationship between the company and the Russian government and the brand’s historical support of the LGBT community.

Esposito emailed the firm’s business partners (distributors, bartenders, and retailers) to “set the record straight [about]… our longstanding support of the LGBT community.”

At the end of the case, Esposito seems to acknowledge that defending the brand had not been fully effective, saying “Our initial response was to get the facts straight . . . but in the end, this was the wrong response.”

Instructor prompt: What would you recommend that management do next?

The case authors suggest, based on their teaching experience with the case, that excellent student responses may include the following options: Website transparency: Stoli needs to be more transparent with the history of the brand to distance itself from controversial issues. It may also be helpful to incorporate a “Partnership” section on their website about the types of causes they support—in this case, gay rights.

Crisis plan and dark site: The dark site should consist of a plan of action for future crises.

Managers need to address what the issues are and how the company plans to address the issue.

Organizational announcements: Stoli should make announcements immediately to stress key company messages. They could do this via TV announcements and follow-up interviews to reach broad audiences in order to convey company positions and make … points about the distinctions between Russian government views on pride vs. their views as a local organization...

Employee training: Stoli should train its employees on appropriate uses of corporate media communication. Employees also need to be aware of the contingency plans that the organization may put into play, so they can learn their role and responsibility.

6 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Honoring Pride Month: Stoli could hold a panel discussion and a party as part of a “be yourself at work” campaign. This will allow employees to feel comfortable in their workplace settings.

Targeting the consumers (use of social media): Companies such as Oreo and Coca-Cola have been using images of their products to show their support of gay pride. These companies have adjusted the colors of their products and lined them up in the order of a gay pride flag.

Along with that they add a statement of support and a nice caption when they share it on social media in order to attract the customers. Stoli could do this with their vodka bottles, and line up their different flavors to express their support for love equality.

Support pride events/campaigns: Stoli could also create a campaign where profits are given to LGBTQ organization, such as the Lesbian & Gay Community Services Center, Inc. With the purchase of each bottle, a percentage of the proceeds could be donated and help promote pride events such as parades.

Epilogue Following the events described in the case, the organization pivoted its messaging from “we are not a Russian brand” to “we support LGBT rights.” Esposito explained: We started to claim that we were not a Russian vodka, which was technically true, but the people who were driving this cause were not worrying about technicalities… We quickly realized that we missed the point. The people [promoting the boycott] didn’t really care about that. They used it to bring attention to their cause. That was the bad news, since this approach led to a debate of what made it Russian or Latvian, and this is what dominated on-line and TV discussions.

So, the company switched its focus to a different message—its opposition to Russian policy and its support for LGBT rights. Esposito explained: We went viral and we had a dual message. We abhorred the path Russia was going down in restricting the human rights of the LGBT and immediately posted that on our Facebook Page and our website. We also went on record, radio shows, interviews and town hall meetings putting our position out for all to see.

The alphabetical letters in the message and on the Stoli website were changed to rainbow colors, symbolizing the firm’s support of the LGBT community.

A few weeks into the crisis, Stoli USA hired Edelman, a public relations/crisis management firm, to assist in maintaining brand equity. Edelman consultants agreed that “defensive messaging” would not help the company maintain its business value, satisfy the needs of consumers in the gay community, or protect its market share. They recommended several short-term (1-2 weeks), midterm (3-6 weeks) and long-term (2-24 months) strategies.

7 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

One of the first short term strategies involved implementation of a new policy for answering media queries. Instead of adding new content or dialogue when reporters called, executives simply referred them to pre-existing messages and public statements.

A second short-term strategy was to launch a dark site. (As Chapter 19 explains, dark sites are used when companies need to provide stakeholders with specific and consistent information from a reliable source in times of an emergency, crisis, or bad news.) Stoli’s dark site included answers to frequently asked questions (FAQs) about the location of its headquarters, where its beverages were produced, and what its contributions to the LGBT community had been.

The mid-term approach focused on developing partnerships with advocacy groups and fortifying business relationships. Executives were advised to initiate meaningful stakeholder dialogue with influential LGBT groups and activists. John Esposito (President), Lori Tieszen (VP of Marketing), and Mike Oringer (VP of Innovation) all became personally involved by attending rallies and events, even when they were not well received. Executives reached out directly to Dan Savage and other prominent activists to discuss the issues. Stoli began to sponsor high profile events, such as the National Lesbian & Gay Journalists Association’s annual summit. Stoli made a pledge of $10,000 from Most Original Stoli Guy contest to National Association of Gay, Lesbian, Bisexual and Transgender Community Centers (better known as Centerlink). Esposito noted, “We met with activists, attended rallies and sponsored high profile events, all in an attempt to address the issue as people, not just an easy to ignore corporation.”

Lastly, the long-term strategy was to demonstrate tangibly Stoli’s willingness to stand strong on the issue of LGBT rights. For example, several months after the crisis, John Esposito announced a $300,000 grant to support the LA Gay & Lesbian Center for a program aimed at developing critical leadership skills among its members and allies, and a $150,000 donation to the Russian Freedom Fund.

At the height of the crisis, Stoli Group USA lost 225 out of 800 LGBT accounts, which were held primarily by owners of bars and restaurants. Stoli bottles were poured out, removed from back bars, or put into inventory in basements. A year later, Stoli Group USA had regained 200 of those accounts. The remaining 25 accounts were captured by competing brands whose distributors were able to offer attractive deals and promotions.

8 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.