CANADIAN AUTOMAKERS MAKE A

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2 4Chapter Ethics and Social Responsibility in Marketing Learning OBJECTIVES After reading this chapter, you should be able to: 1 Explain the differences between legal and ethical behaviour in marketing. 2 Identify factors that influence ethical and unethical behaviour in marketing. 3 Describe the different concepts of social responsibility. 4 Recognize unethical and socially irresponsible consumer behaviour. CANADIAN AUTOMAKERS MAKE A COMMITMENT TO CANADA Canadian automobile manufacturers have a longstanding tradition of social responsibility and dedication to the country. They are involved in multifaceted efforts to support the communities in which they operate and to protect the natural environment of Canada. They have a history of supporting countless charities and other worthy causes and have even established specific foundations to support these charities and causes. For example, General Motors of Canada is committed to being a good corporate citizen, and its philanthropic contributions are evidence of that citizenship. Some of the organizations that GM supports are the YMCA, Junior Achievement, the United Way, Scouts Canada and Girl Guides Canada, and the Stratford Festival. GM Volunteer Plus International is a corporate citizenship program, created and funded by the GM Corporation to encourage and support GM employees volunteer efforts within GM communities. General Motors of Canada Limited also provides postsecondary education scholarships and bursaries for students across Canada. The Partnership for the Advancement of Collaborative Engineering Education (PACE), a corporate alliance between General Motors, EDS, and Sun Microsystems, also provides funding to prepare mechanical designers, engineers, and analysts with the skills to compete in the future. For

3 94 Initiating the Marketing Process PART ONE example, the University of British Columbia received an in-kind contribution with a commercial value of approximately $240 million. Improved global environmental quality is also a goal at General Motors of Canada. Accordingly, it has established a corporate philosophy and policy The General Motors Environmental Principles. As a responsible corporate citizen, General Motors is dedicated to protecting human health, natural resources, and the global environment. This dedication reaches farther than compliance with the law to encompass the integration of sound environmental practices into its business decisions. General Motors of Canada Limited also supports a variety of environmental organizations whose objectives, goals, and activities are aligned with the General Motors Environmental Principles. Ford Motor Company of Canada has also made a commitment to Canadian environment. Its facilities are ISO certified, and the company has made a major commitment to the 3Rs (reduce, reuse, recycle). It is committed to reduce emissions, energy use, and waste; reuse (almost all parts/components delivered to Ford plants are in returnable pallets/containers); and recycle (95 percent of all solid nonhazardous waste at its facilities is recycled, and all Canadian-built Ford vehicles exceed the industry average of 75 percent recyclability). The company has also made a major investment in producing and marketing hybrid vehicles that are more environmentally friendly and conserve finite energy sources. Nissan Canada developed the Nissan Canada Foundation as a signal of its commitment to the Canadian community. This foundation was established to help Canadian senior citizens, who represent a substantial portion of the population. The foundation has three main goals: (1) to raise funds, (2) to distribute those funds to nonprofit organizations that serve senior citizens (e.g., Meals on Wheels), and (3) to raise awareness about the needs and concerns of seniors. Toyota Canada is a sponsor of the Special Olympics. It is also an ISO certified company that has made a major commitment to the Canadian environment. For example, it is a leader in the hybrid vehicle category and its manufacturing activities focus around the entire vehicle life cycle. Toyota Canada strives to increase the fuel economy of its non-hybrid vehicles; decrease the environmental impact of manufacturing; curtail packaging waste, energy use, and water pollution; and improve end-of-life vehicle recycling. Toyota works with environmental partners, including Evergreen Canada and Earth Day Canada, to ensure a healthy environment for all Canadians. 1 This chapter focuses on ethics and social responsibility in marketing. You will see that some Canadian companies recognize that while ethically and socially responsible behaviour often comes with a price tag, the price for unethical and socially irresponsible behaviour is often much higher. In essence, in this marketplace, companies can do well by doing good.

4 CHAPTER 4 Ethics and Social Responsibility in Marketing 95 NATURE AND SIGNIFICANCE OF MARKETING ETHICS ethics The moral principles and values that govern the actions and decisions of an individual or group. laws Society s values and standards that are enforceable in the courts. As defined in Chapter 1, ethics are the moral principles and values that govern the actions and decisions of an individual or group. 2 Simply put, ethics serve as guidelines on how to act correctly and justly when faced with moral dilemmas. For marketing managers, ethics concern the application of moral principles and values to marketing decision making. Ethical/Legal Framework in Marketing A good starting point for understanding the nature and significance of ethics is the distinction between legality and ethicality of marketing decisions. Figure 4 1 helps you visualize the relationship between laws and ethics. 3 While ethics deal with personal and moral principles and values, laws are society s values and standards that are enforceable in the courts. 4 In general, what is illegal is also unethical. For example, deceptive advertising is illegal. It is also unethical because it conflicts with the moral principles of honesty and fairness. But not all unethical conduct is illegal. For instance, price gouging is usually not illegal but is often viewed as unethical. Marketing managers often find themselves in many situations where they must make judgments in defining ethical and legal boundaries. For some, the distinction between ethics and laws can sometimes lead to the rationalization that if a behaviour is within legal limits, then it is not really unethical. For example, a group of Canadian business students surveyed were asked, Is it okay to charge a higher price than normal when you know the customer really needs the product and will pay the higher price? Almost 35 percent of the business students who took part in the survey responded yes. 5 How would you have answered this question? Now consider the following situations. After reading each, assign it to the cell in Figure 4 1 that you think best fits the situation along the ethical legal continuum. Figure 4 1 Classifying marketing decisions according to ethical and legal relationships Ethical Ethical but illegal Ethical and legal Ethicality Unethical Unethical and illegal Unethical but legal Illegal Legality Legal

5 96 Initiating the Marketing Process PART ONE 1. Several companies meet and agree to bid rigging for sealed tendered government contract work. Bid rigging is illegal under the Competition Act because it eliminates free and open competition. 2. A company uses a technique called slugging, or selling under the guise of research. Once prospective customers agree to take part in the research, the salespeople switch to their sales pitch. 3. A real estate agent sells a high-rise condo unit to a customer, primarily because the customer loves the city view from the condo windows. The agent knows that in one year another high-rise will be built, effectively blocking the view so important to the customer. The agent decides not to give that information to the customer. 4. A company interviews a very qualified female for a business sales position. She is more qualified than any males who have been interviewed. However, the company knows that some male purchasing agents prefer to deal with a male salesperson, and so they hire a less qualified male applicant. Do these situations fit neatly into Figure 4 1 as clearly defined ethical and legal or unethical and illegal? Some probably do not. As you read further in this chapter, you will be asked to consider other ethical dilemmas. Current Perceptions of Ethical Behaviour There has been much discussion about the possible deterioration of personal morality and ethical standards on a global scale. The news media offer well-publicized examples of personal dishonesty, hypocrisy, cheating, and greed. There also has been a public outcry about the ethical practices of businesspeople, and public cynicism about the ethical practices of Canadian organizations is on the rise. 6 In particular, there is widespread concern over unethical marketing practices, such as price fixing, bribery, deceptive advertising, and unsafe products. Recent Canadian research also shows that most business students surveyed feel that the ethical standards of business have declined over the years and believe the situation is not likely to improve in the future unless some actions are taken. 7 For more about how Canadian students perceive the ethical climate in Canada read the accompanying Marketing NewsNet, How Canadian Business Students Perceive the Ethical Climate in Canada. There are at least four possible reasons why the state of perceived ethical business conduct is at its present level. First, there is increased pressure on businesspeople to make decisions in a society characterized by diverse value systems. Second, there is a growing tendency for business decisions to be judged publicly by groups with different values and interests. Third, the public s expectations regarding ethical business behaviour have increased. Finally, and most disturbing, ethical business conduct may have declined. EthicScan Canada, an organization that monitors the ethical performance of hundreds of Canadian companies, seems to have confirmed this decline. 8 Concept Check 1. What are ethics? 2. What are laws? UNDERSTANDING ETHICAL MARKETING BEHAVIOuR Researchers have identified numerous factors that influence ethical marketing behaviour. 9 Figure 4 2 presents a framework that shows these factors and their relationships.

6 CHAPTER 4 Ethics and Social Responsibility in Marketing 97 Figure 4 2 A framework for understanding ethical behaviour Societal culture and norms Business culture and industry practices Personal moral philosophy and ethical behaviour Corporate culture and expectations Societal Culture and Norms As described in Chapter 3, culture incorporates the set of values, ideas, and attitudes that are learned and shared among members of a group. Culture also serves as a socializing force that dictates what is morally right and just. This means that moral standards are relative to particular societies. These standards often reflect the laws and regulations that affect social and economic behaviour, which can create moral dilemmas. 10 For example, restraining trade, price fixing, deceiving buyers, or marketing unsafe products are behaviours that are considered morally wrong in Canada. Furthermore, the unauthorized use of intellectual property, such as another s ideas, copyright, trademark, or patent, is also considered both illegal and unethical in Canada. marketing newsnet How Canadian Business Students Perceive the Ethical Climate in Canada A recent study of Canadian, American, and British MBA students revealed that respondents in all three countries believe there are ethical standards that should be followed in business. However, most believe that current ethical standards fail to meet the needs of business and society. In fact, only 28 percent of Canadian MBA students feel that current ethical standards in Canada meet the needs of business and society. Moreover, close to 50 percent believe business ethics have deteriorated over the years. More unfortunate is that less than 30 percent of Canadian respondents believe business ethics will actually improve in the future, unless some action is taken. Most Canadian respondents believe that they can determine what is ethical business behaviour and what is unethical. But more than six in ten respondents actually believe you can be taught business ethics. And eight in ten state that they want a required an ethics course to be taught in business schools. The overwhelming majority of all respondents in the study, including Canadian respondents, believe that they could learn something of value in such a course. While respondents do not believe ethical standards in Canadian business have deteriorated to a point of anything goes, they are concerned about the ethical climate in Canada. They believe that it is possible to improve business ethics, but ethical training of Canada s future business leaders will be required. These students are receptive to such training and believe it will be a catalyst to improving the ethical conduct of business in the future. What are your thoughts? Do you think courses in business ethics will help improve the ethical climate in Canada?

7 98 Initiating the Marketing Process PART ONE Outside Canada, however, is another story. 11 Unauthorized use of copyrights, trademarks, and patents is routine in some countries, such as China, Mexico, and Korea, and costs the authorized owners billions of dollars annually. In Korea, for instance, copying is partly rooted in its society s culture. According to international trade officials, many Koreans have the idea that the thoughts of one person should benefit all, and the Korean government rarely prosecutes infringements. Copyright infringement in the global software and music industries is particularly widespread with the explosive growth of the Internet. Copies of software and music can be distributed and downloaded quickly and globally, with a click of the mouse, and many individuals in some countries do not feel it is illegal or unethical to engage in such conduct. Business Culture and Industry Practices Societal culture provides a foundation for understanding moral and ethical behaviour in business activities. Business cultures comprise the effective rules of the game, the boundaries between competitive and unethical behaviour, [and] the codes of conduct in business dealings. 12 Consumers have witnessed numerous instances where business cultures in the brokerage (insider trading), insurance (deceptive sales practices), and defence (bribery) industries went awry. Business culture affects ethical conduct both in the exchange relationship between sellers and buyers and in the competitive behaviour among sellers. caveat emptor The legal concept of let the buyer beware that was pervasive in Canadian business culture before the 1960s. Ethics of Exchange The exchange process is central to the marketing concept. Ethical exchanges between sellers and buyers should result in both parties being better off after a transaction. 13 Prior to the 1960s, the legal concept of caveat emptor let the buyer beware was pervasive in Canadian business culture. The growth and strength of the consumer movement resulted in this concept becoming an unacceptable marketplace philosophy. A codification of ethics between buyers and sellers was established, with consumers recognizing their rights to safety, to be informed, to choose, and to be heard. The right to safety manifests itself in industry and federal safety standards for most products sold in Canada. However, even the most vigilant efforts to ensure safe products cannot foresee every possibility. Mattel s experience with its Cabbage Patch Snacktime Kids doll is a case in point. The doll was designed to eat plastic french fries, celery, and other tidbits by drawing them into its motorized mouth. Despite exhaustive laboratory and in-home testing, Mattel executives did not consider that a child s hair might become caught in the doll s mouth and cause harm. Unfortunately, this happened. Mattel immediately pulled the dolls from store shelves, refunded buyers, and discontinued the product. The right to be informed means that marketers have an obligation to give consumers complete and accurate information about products and services. This right also applies to the solicitation of personal information over the Internet and its subsequent use by marketers. While most Web sites collect personal information, such as consumer addresses, telephone numbers, shopping habits, and financial data, many of these sites fail to properly inform consumers what is done with this information once obtained. In an effort to ensure that consumer information is properly obtained over the Internet and that consumers are fully informed about its use, the Canadian government uses legislation such as the Personal Information Protection and Electronic Documents Act (PIPEDA), which requires marketers to seek the consent of individuals prior to collecting, using, and disclosing their personal information. Relating to the right to choose, many supermarket chains now demand slotting allowances from manufacturers, in the form of cash rebates or free goods, to stock new products. This practice could limit the number of new products available to consumers and interfere with their right to choose. One critic of this practice remarked, If we had had slotting allowances a few years ago, we might not have had granola, herbal tea, or yogourt. 14

8 CHAPTER 4 Ethics and Social Responsibility in Marketing 99 Finally, the right to be heard means that consumers should have access to company and/or public policymakers regarding comments or complaints about products and services. Many Canadian companies have set up consumer service departments to deal with customer comments and complaints. In fact, it was consumer complaints about late-night and repeated calls by telemarketers that led to greater limitations on telemarketing practices. economic espionage The clandestine collection of trade secrets or proprietary information about a company s competitors. Ethics of Competition Business culture also affects ethical behaviour in competition. Two kinds of unethical behaviour are most common: (1) economic espionage, and (2) bribery. Economic espionage is the clandestine collection of trade secrets or proprietary information about a company s competitors. This practice is illegal and unethical and includes such activities as trespassing, theft, fraud, wire tapping, and searching a competitor s trash. Many Canadian and American firms have uncovered espionage in some form, costing them billions of dollars a year. 15 This practice is most prevalent in high-technology industries, such as electronics, specialty chemicals, industrial equipment, aerospace, and pharmaceuticals, where technical know-how and secrets separate industry leaders from followers. But espionage can occur anywhere, including the toy industry and even the cookie industry! Procter & Gamble charged that competitors photographed its plants and production lines, stole a sample of its cookie dough, and infiltrated a confidential sales presentation to learn about its technology, recipe, and marketing plan. The competitors paid Procter & Gamble $120 million in damages after a lengthy dispute. The second form of unethical competitive behaviour is giving and receiving bribes and kickbacks. Bribes and kickbacks are often disguised as gifts, consultant fees, and favours. This practice is more common in business-to-business and government marketing than in consumer marketing. In general, bribery is most evident in industries experiencing intense competition and in countries in earlier stages of economic development. Bribery on a worldwide scale is monitored by Transparency International. Recent results of the organization s Corruption Perceptions Index (CPI) reveal the worst offenders in term of the use of bribery were Russia, China, and India. Visit its Web site described in the accompanying WebLink box, and view the other country rankings, including Canada s. Corporate Culture and Expectations A third influence on ethical practices is corporate culture. Corporate culture is a set of values, ideas, and attitudes that is learned and shared among the members of an organization. weblink The Corruption Perceptions Index The use of bribery as a means to win and retain business varies widely by country. Transparency International, based in Germany, periodically polls employees of multinational firms and institutions as well as political analysts and ranks countries on the basis of their perceived level of bribery to win or retain business. To obtain the most recent ranking, visit the Transparency International Web site at Click on the Corruption Perception Index (CPI). Scroll through the Corruption Perceptions Index to see where Canada stands in the worldwide rankings. How about our neighbours, the United States and Mexico? Any surprises?

9 100 Initiating the Marketing Process PART ONE The culture of a company demonstrates itself in the dress ( We don t wear ties ), sayings ( The IBM Way ), and manner of work (team efforts) of employees. Culture is also apparent in the expectations for ethical behaviour present in formal codes of ethics and the ethical actions of top management and co-workers. code of ethics A formal statement of ethical principles and rules of conduct. Codes of Ethics A code of ethics is a formal statement of ethical principles and rules of conduct. Research shows that ethics codes are commonplace in corporate Canada. 16 Ethics codes typically address such issues as contributions to government officials and political parties; relations with customers, competitors, and suppliers; conflicts of interest; and accurate recordkeeping. Nortel Networks provides ethical guidance to its employees through its Living the Commitments code, which all employees must follow when conducting business on a worldwide basis. The Canadian Marketing Association (CMA), the largest marketing organization in Canada, whose members include Microsoft Canada, Bank of Montreal, The Shopping Channel, and Bell Canada, has a code of ethics that is compulsory for all members to follow. The purpose of the CMA code of ethics is shown in Figure 4 3. For a copy of the complete code of ethics, visit Additionally, the American Marketing Association (AMA), which represents marketing professionals in Canada and the United States, also has a statement of ethics. The preamble to their code is also found in Figure 4-3. For a copy of the AMA s complete statement of ethics, visit Figure 4 3 Excerpt from the Canadian Marketing Association Code of Ethics and Standards of Practice and from the American Marketing Association s Code of Ethics. The full documents are available at and at Purpose of Canadian Marketing Association Code of Ethics and Standards of Practice The CMA Code of Ethics and Standards of Practice (the Code ) is designed to establish and maintain standards for the conduct of marketing in Canada. Marketers acknowledge that the establishment and maintenance of high standards of practice are a fundamental responsibility to the public, essential to winning and holding consumer confidence, and the foundation of a successful and independent marketing industry in Canada. Members of the Canadian Marketing Association recognize an obligation to the consumers and the businesses they serve, to the integrity of the discipline in which they operate and to each other to practice to the highest standards of honesty, truth, accuracy, fairness and professionalism. American Marketing Association Statement of Ethics: ETHICAL NORMS AND VALUES FOR MARKETERS Preamble The American Marketing Association commits itself to promoting the highest standard of professional ethical norms and values for its members. Norms are established standards of conduct that are expected and maintained by society and/or professional organizations. Values represent the collective conception of what people find desirable, important and morally proper. Values serve as the criteria for evaluating the actions of others. Marketing practitioners must recognize that they not only serve their enterprises but also act as stewards of society in creating, facilitating and executing the efficient and effective transactions that are part of the greater economy. In this role, marketers should embrace the highest ethical norms of practicing professionals and the ethical values implied by their responsibility toward stakeholders (e.g., customers, employees, investors, channel members, regulators and the host community).

10 CHAPTER 4 Ethics and Social Responsibility in Marketing 101 However, an ethics code is rarely enough to ensure ethical behaviour. One of the reasons for this is the lack of specificity of ethics codes. Ultimately, it is the employee who often judges whether a specific behaviour is really unethical. whistle-blowers Employees who report unethical or illegal actions of their employers. Ethical Behaviour of Management and Co-workers A second reason for violating ethics codes rests in the perceived behaviour of top management and co-workers. Observing peers and top management and gauging responses to unethical behaviour play an important role in individual actions. For example, what message do employees receive when they see personnel being rewarded for engaging in unethical behaviour and see others punished for refusing to engage in unethical behaviour? Clearly, ethical dilemmas often bring personal and professional conflict. In some cases, whistle-blowers, employees who report unethical or illegal actions of their employers, face recrimination. To protect them, some firms have appointed ethics officers who are responsible for safeguarding such individuals. At other firms, such as Manulife, there is a culture that encourages employees to come forward and report ethical breaches; employees know that they will not be stigmatized for reporting unethical conduct. Additionally, senior management fosters ethical behaviour in other ways. Every day, for example, Manulife employees receive a daily prompt when they sign on to their computers and are taken to the company s intranet where they receive ethics reminders. The company also has a global ethics hotline that pops up as an autolaunch feature upon computer start-up. 17 Personal Moral Philosophy and Ethical Behaviour Ultimately, ethical choices are based on the personal moral philosophy of the decision maker. Moral philosophy is learned through the process of socialization with friends and family and by formal education. It is also influenced by the societal, business, and corporate cultures in which a person finds himself or herself. Moral philosophies are of two types: (1) moral idealism, and (2) utilitarianism. 18 moral idealism A personal moral philosophy that considers certain individual rights or duties as universal, regardless of the outcome. utilitarianism A personal moral philosophy that focuses on the greatest good for the greatest number by assessing the costs and benefits of the consequences of ethical behaviour. Moral Idealism Moral idealism is a personal philosophy that considers certain individual rights or duties as universal (e.g., right to freedom) regardless of the outcome. This philosophy is favoured by moral philosophers and consumer interest groups. This philosophy also applies to ethical duties, such as informing the consumer about the safety hazards of a particular product or even conducting a largescale recall of a defective product, regardless of cost, in order to uphold that consumer right to safety. Utilitarianism An alternative perspective on moral philosophy is utilitarianism, which is a personal moral philosophy that focuses on the greatest good for the greatest number by assessing the costs and benefits of the consequences of ethical behaviour. If the benefits exceed the costs, then the behaviour is ethical. If not, then the behaviour is unethical. This philosophy underlies the economic tenets of capitalism and, not surprisingly, is embraced by many business executives and students. 19 Utilitarian reasoning was apparent in Nestlé Canada s original decision to add peanut product additives to some of the company s chocolate snacks. However, some consumers, albeit only a small percentage of Canadians, are severely allergic to peanuts. Still, Nestlé was intent on pursuing this strategy until many Canadians protested the move. In the end, Nestlé decided to cancel the proposed practice and took out advertising in major newspapers to announce its decision. While the vast majority of Canadians may have enjoyed the newly formulated snacks, and certainly would not have been harmed by them, protestors believed that some consumers may have been harmed by this proposed practice. The views of the protestors prevailed in this case, even though Nestlé could have used the greatest good for the greatest number argument. 20

11 102 Initiating the Marketing Process PART ONE An appreciation for the nature of ethics, coupled with a basic understanding of why unethical behaviour arises, alerts a person to when and how ethical issues exist in marketing decisions. Ultimately, ethical behaviour rests with the individual, but the consequences affect many. Concept Check 1. What is caveat emptor? 2. What is a code of ethics? 3. What is meant by moral idealism? UNDERSTANDING SOCIAL RESPONSIBILITY IN MARKETING As we noted in Chapter 1, the societal marketing concept stresses marketing s social responsibility by not only satisfying the needs of consumers but also providing for society s welfare. As defined in Chapter 1, social responsibility means that individuals and organizations are part of a larger society and are accountable to that society for their actions. In the context of corporate behaviour, social responsibility is sometimes referred to as corporate social responsibility (CSR). Like ethics, agreement on the nature and scope of social responsibility is often difficult to come by, given the diversity of values present in different societal, business, and corporate cultures. 21 Concepts of Social Responsibility Figure 4 4 shows three concepts of social responsibility: (1) profit responsibility, (2) stakeholder responsibility, and (3) societal responsibility. Figure 4 4 Three concepts of social responsibility Societal responsibility Stakeholder responsibility General public Customers Profit responsibility Owners/ Shareholders Employees Ecological environment Suppliers/Distributors Public interest groups

12 CHAPTER 4 Ethics and Social Responsibility in Marketing 103 profit responsibility Idea that companies have a simple duty to maximize profits for their owners or shareholders. stakeholder responsibility Focuses on the obligations an organization has to those who can effect achievement of its objectives, including customers, employees, suppliers, and distributors. societal responsibility Refers to obligations that organizations have to the (1) preservation of the ecological environment, and (2) general public. Which of the three concepts of social responsibility do you think Perrier applied when it learned of quality problems with its popular water? Read the text to learn how the company responded to this problem and its reasoning. Profit Responsibility Profit responsibility holds that companies have a simple duty to maximize profits for their owners or shareholders. This view is expressed by Nobel Laureate Milton Friedman, who said, There is one and only one social responsibility of business to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud. 22 Genentech had sales of over $1.6 billion in 2006, an increase of 39 percent. Its colon-cancer drug, Avastin, had a sales increase of over 96 percent and it was a very profitable drug for the company. However, the firm charges patients over $47,000 for a ten-month treatment regime. Consumer groups call this price immoral since there is no other drug alternative, and Genentech has a monopoly. The company counters by saying that it provides free drugs to patients without insurance and who meet an income cap requirement. 23 Stakeholder Responsibility Frequent criticism of the profit view has led to a broader concept of social responsibility. Stakeholder responsibility focuses on the obligations an organization has to those who can effect achievement of its objectives. These constituencies include customers, employees, suppliers, and distributors. Source Perrier S.A., the supplier of Perrier bottled water, exercised this responsibility when it recalled 160 million bottles of water in 120 countries after traces of a toxic chemical were found in 13 bottles. The recall cost the company $35 million, and $40 million more was lost in sales. Even though the chemical level was not harmful to humans, Source Perrier s president believed he acted in the best interests of the firm s consumers, distributors, and employees by removing the least doubt, as minimal as it might be, to weigh on the image of the quality and purity of our product. 24 Societal Responsibility An even broader concept of social responsibility has emerged in recent years. Societal responsibility refers to obligations that organizations have to (1) the preservation of the ecological environment, and (2) the general public. Concerns about the environment and public welfare are represented by interest and advocacy groups such as Greenpeace, an international environmental organization, and Canadian organizations such as Evergreen Canada and Earth Day Canada. As we saw in Chapter 3, many Canadians are becoming more eco-conscious and sensitive to the impact their consumption has on the ecological environment. And, as you have read so far, many Canadian companies, too, have recognized the growing importance of preserving the ecological environment and have responded by engaging in green marketing. Green marketing can take many forms. 25 For example, Richard Branson, CEO of Virgin, is spending $3 billion in profits from his transport businesses to invest in commercial ventures designed to produce renewable energy in order to fight global warming. The Canadian aluminum industry recycles nearly two-thirds of all aluminum cans for reuse. The Food and Consumer Products Manufacturers of Canada has a program known as the Grocery Industry Packaging Stewardship Initiative, which is designed to promote responsible waste and product recycling. Black s Photography of Ontario has factored the environment into everything it does, from product conception to manufacturing, distribution, and sales. It even offers information to consumers through its online e-newsletter about how to respect the natural environment when taking

13 104 Initiating the Marketing Process PART ONE ISO Worldwide standards for environmental quality and green marketing practices. cause marketing Occurs when the charitable contributions of a firm are tied directly to the customer revenues produced through the promotion of one of its products. social audit A systematic assessment of a firm s objectives, strategies, and performance in the domain of social responsibility. pictures. Teknion Corporation, a Canadian manufacturer of office systems and furniture products, uses its GreenWorks employee teams to find ways to green its manufacturing and administrative facilities. Such efforts have led to not only more responsible environmental practices but also cost savings to the company of over $3 million. Finally, Mercedes-Benz has designed its S-class sedans and 500/600 SEC luxury coupes to be entirely recyclable. These voluntary responses to environmental issues have been implemented with little or no additional cost to consumers. A global undertaking to further green marketing efforts is the ISO initiative developed by the International Standards Organization (ISO) in Geneva, Switzerland. ISO consists of worldwide standards for environmental quality and green marketing practices. These standards are embraced by more than 100 countries, including Canada, members of the European Union, and most Pacific Rim countries. 26 Socially responsible efforts on behalf of the general public are also becoming more common. A formal practice is cause marketing, which occurs when the charitable contributions of a firm are tied directly to the customer revenues produced through the promotion of one of its products. 27 This definition distinguishes cause marketing from a firm s standard charitable contributions, which are outright donations. For example, Procter & Gamble raises funds for the Special Olympics when consumers purchase selected company products, and MasterCard International linked usage of its card with fundraising for institutions that combat cancer, heart disease, child abuse, drug abuse, and muscular dystrophy. Avon Products, Inc., focuses on different issues in different countries: breast cancer in the United States, Canada, Philippines, Mexico, Venezuela, Malaysia, and Spain; programs for women who care for senior citizens in Japan; emotional and financial support for mothers in Germany; and AIDS in Thailand. Cause marketing programs incorporate all three concepts of social responsibility by addressing public concerns, satisfying customer needs, and enhancing corporate sales and profits. 28 The Social Audit Converting socially responsible ideas into actions involves careful planning and monitoring of programs. Many companies develop, implement, and evaluate their social responsibility efforts by means of a social audit, which is a systematic assessment of a firm s objectives, strategies, and performance in the domain of social responsibility. Frequently, marketing and social responsibility programs are integrated, as is the case with McDonald s. The company s concern for the needs of families with children who are chronically or terminally ill was converted into Ronald McDonald Houses around the world. These facilities, located near treatment centres, enable family members to stay together during a child s care. In this case, McDonald s is contributing to the welfare of a portion of its target market. A social audit consists of five steps: Recognition of a firm s social expectations and the rationale for engaging in social responsibility endeavours. 2. Identification of social responsibility causes or programs consistent with the company s mission. 3. Determination of organizational objectives and priorities for programs and activities it will undertake. 4. Specification of the type and amount of resources necessary to achieve social responsibility objectives. 5. Evaluation of social responsibility programs and activities undertaken and assessment of future involvement. Corporate attention to social audits will increase as companies seek to achieve sustainable development and improve the quality of life in a global economy. 30

14 CHAPTER 4 Ethics and Social Responsibility in Marketing 105 Marketing and social responsibility programs are often integrated, as is the case with McDonald s. Its concern for ill children is apparent in the opening of another Ronald McDonald House for children and their families. McDonald s sustainable development Conducting business in a way that protects the natural environment while making economic progress. Sustainable development involves conducting business in a way that protects the natural environment while also making economic progress. Ecologically responsible initiatives, such as green marketing, represent one such initiative. Other initiatives related to working conditions at offshore manufacturing sites that produce goods for North American companies focus on quality-of-life issues. Public opinion surveys show that Canadian consumers are concerned about working conditions under which products are made in Asia and Latin America. 31 Some companies, such as Reebok, Nike, Liz Claiborne, Levi Strauss, and Mattel, have responded by imposing codes of conduct to reduce harsh or abusive working conditions at offshore manufacturing facilities. Reebok, for example, now monitors the production of its sporting apparel and equipment to ensure that no child labour is used in making its products. Companies that demonstrate societal responsibility are often rewarded for their efforts. For example, some research has shown that these companies (1) benefit from favourable word-of-mouth among consumers, and (2) typically outperform less responsible companies on financial performance. 32 However, other research has shown that some corporate social responsibility (CSR) behaviour is going unnoticed and/or is not impacting on the consumers choice of companies or brands purchased. For example, over 75 percent of leading Canadian companies are actively engaged in CSR initiatives, but only one-third of Canadian consumers are aware of any companies that do so. Additionally, research shows that while Canadian consumers say they are concerned about whether or not companies are being socially responsible, it does not often match their purchase behaviour. Specifically, researchers have found that lower prices, convenience, and customer service often trump whether or not a company engages in CSR when a consumer makes a buying decision. 33

15 106 Initiating the Marketing Process PART ONE greenwashing Disinformation disseminated by an organization so as to present an environmentally responsible public image. Still, many companies continue to engage in socially responsible activities and are receiving recognition for their efforts. For example, CorporateKnights, a Canadian magazine for responsible business, prepares an annual list of Canada s best corporate citizens, and widely disseminates this list. Some of the companies recognized include Shoppers Drug Mart, Maple Leaf Foods, Toyota Canada, Dofasco Inc, Bank of Montreal, and Loblaws. In addition, the magazine publishes an annual list of the Most Sustainable International Companies. Recently, the top 100 companies listed included five Canadian companies: Alcan, Enbridge, Royal Bank of Canada, Sun Life, and Transcanada Corp. 34 You should be mindful, however, that many environmentalists suggest that some companies claim to be green and/or to engage in sustainable development, but their actual behaviour indicates otherwise. These companies are often labelled greenwashers. Greenwashing, a modification of the term whitewashing, is defined as disinformation disseminated by an organization so as to present an environmentally responsible public image. Greenwashing is considered a deceptive marketing practice but its prevalence is hotly debated. However, most experts agree that it does exist and therefore it can be difficult for the consumer to determine which companies are really green and those that are not. Some suggest that greenwashing is common in food marketing where claims of environmental friendliness or sustainable agricultural practices can attract consumers to the products being offered. Turning the Table: Consumer Ethics and Social Responsibility Consumers also have an obligation to act ethically and responsibly in the exchange process and in the use and disposition of products. Unfortunately, consumer behaviour is sometimes spotty on both counts. Unethical practices of consumers are a serious concern to marketers. 35 These practices include filing warranty claims after the claim period; misredeeming coupons; making fraudulent returns of merchandise; providing inaccurate information on credit applications; tampering with utility meters; tapping cable TV lines; illegally downloading music, movies, and software from the Internet; and submitting phony insurance claims. Some consumers routinely redeem coupons for unpurchased products or use coupons destined for other products. Electrical utilities lose 1 to 3 percent of yearly revenues due to meter tampering while retailers lose billions of dollars yearly from shoplifting. Illegal downloading is also a major problem in Canada. A recent Canadian study indicated that neither the illegal downloading of copyrighted music, movies, and TV shows nor the illegal file swapping of such is not considered a big deal among most Canadians. While most Canadians believe that stealing or shoplifting a DVD is a serious offence, they do not feel the same way about illegal downloads. 36 The cost to marketers in lost sales revenue and prevention expenses is huge. Consumer purchase, use, and disposition of environmentally sensitive products relates to consumer social responsibility. Research indicates that consumers are generally sensitive to ecological issues. 37 Furthermore, some research indicates that seven in ten Canadians are willing to pay more for an environmentally friendly product. 38 However, as in the case of patronizing companies who engage in CSR initiatives over those who do not, some research indicates that some consumers may be unwilling to sacrifice convenience and pay potentially higher prices to protect the environment, and may lack the knowledge to make informed decisions dealing with the purchase, use, and disposition of products. 39 For example, some research that Canadians will

16 CHAPTER 4 Ethics and Social Responsibility in Marketing 107 Are Canadian consumers buying this car because they are ecominded? Or because it is a practical choice? Read the text. buy the new, small Smart cars not because they are green per se, but because they sell for under $20,000, are convenient to use, easy to park, and use little fuel. 40 Many marketers suggest that consumers must become more educated when it comes to environmentally conscious behaviour. CorporateKnights, for example, has prepared a Green Consumer Guide for Canadian consumers with information and tips on how to be a green consumer. This includes advice on how to choose and use environmentally friendly products, as well as recommended choices in various product categories such as automobiles, appliances, and consumer packaged goods. 41 It is also important for consumers to be proactive and to conduct their own research concerning the credibility of companies that make green or sustainable development claims. In the end, ultimately, both marketers and consumers are responsible and accountable for ethical and socially responsible behaviour. Concept Check 1. What is meant by social responsibility? 2. Marketing efforts to produce, promote, and reclaim environmentally sensitive products are called. 3. What is a social audit?

17 108 Initiating the Marketing Process PART ONE CHAPTER IN REVIEW 1 Explain the differences between legal and ethical behaviour in marketing. A good starting point for understanding the nature and significance of ethics is the distinction between legality and ethicality of marketing decisions. Whereas ethics deal with personal moral principles and values, laws are society s values and standards that are enforceable in the courts. This distinction can lead to the rationalization that if a behaviour is within reasonable ethical and legal limits, then it is not really illegal or unethical. Judgment plays a large role in defining ethical and legal boundaries in marketing. Ethical dilemmas arise when acts or situations are not clearly ethical and legal or unethical and illegal. 2 Identify factors that influence ethical and unethical behaviour in marketing. Four factors influence ethical marketing behaviour. First, societal culture and norms serve as socializing forces that dictate what is morally right and just. Second, business culture and industry practices affect ethical conduct both in the exchange relationships between buyers and sellers and the competitive behaviour among sellers. Third, corporate culture and expectations are often defined by corporate ethics codes and the ethical behaviour of top management and co-workers. Finally, an individual s personal moral philosophy, such as moral idealism or utilitarianism, will dictate ethical choices. Ultimately, ethical behaviour rests with the individual, but the consequences affect many. 3 Describe the different concepts of social responsibility. Social responsibility means that individuals and organizations are part of a larger society and are accountable to that society for their actions. In a corporate behaviour context, social responsibility is called corporate social responsibility (CSR). There are three concepts of social responsibility. First, profit responsibility holds that companies have a simple duty: to maximize profits for their owners or shareholders. Second, stakeholder responsibility focuses on the obligations an organization has to those who can affect the achievement of its objectives. Those constituencies include consumers, employees, suppliers, and distributors. Finally, societal responsibility focuses on obligations that organizations have to the preservation of the ecological environment and the general public, including engaging in green marketing and sustainable development activities. Companies placing greater emphasis on societal responsibility today can reap the rewards of positive word of mouth from their consumers and favourable financial performance. However, they must do more to make consumers aware of their corporate social responsibility initiatives. 4 Recognize unethical and socially irresponsible consumer behaviour. Consumers, like marketers, have an obligation to act ethically and responsibly in the exchange process and in the use and disposition of products. Unfortunately, consumer behaviour is sometimes spotty on both counts. Unethical consumer behaviour includes filing warranty claims after the claim period; misredeeming coupons; pirating music, movies, and software from the Internet; and submitting phony insurance claims, among other behaviours. Consumer purchase, use, and disposition of environmentally sensitive products relate to consumer social responsibility. Even though consumers are sensitive to ecological issues they may be unwilling to sacrifice convictions and pay potentially higher prices to protect the environment, and may lack the knowledge to make informed decisions dealing with the purchase, use, and disposition of products. Greater consumer education about environmentally conscious behaviour is required. FOCUSING ON KEY TERMS cause marketing p. 104 caveat emptor p. 98 code of ethics p. 100 economic espionage p. 99 ethics p. 95 greenwashing p. 106 ISO p. 104 laws p. 95 moral idealism p. 101 profit responsibility p. 103 social audit p. 104 societal responsibility p. 103 stakeholder responsibility p. 103 sustainable development p. 105 utilitarianism p. 101 whistle-blowers p. 101

18 CHAPTER 4 Ethics and Social Responsibility in Marketing 109 DISCUSSION AND APPLICATION QUESTIONS 1 What concepts of moral philosophy and social responsibility are applicable to the practices of the Canadian automakers described in the introduction to this chapter? Why? 2 Where would the following situations fit in Figure 4 1? (a) Exaggerating the performance of a product to get a sale, and (b) selling a used automobile knowing it had a major mechanical problem and not telling the buyer. 3 A recent survey of Canadian business students asked, Is calling your office pretending to be sick in order to take the day off ethical or unethical behaviour? How would you respond to this question? 4 Compare and contrast moral idealism and utilitarianism as alternative personal moral philosophies. 5 How would you evaluate Milton Friedman s view of the social responsibility of a firm? 6 The text lists several unethical practices of consumers. Can you name others? Why do you think consumers engage in unethical conduct? 7 Cause marketing programs have become popular. Describe two such programs that you are familiar with. Going online Ethics in Canada The Canadian Centre for Ethics & Corporate Policy is a charitable, registered, independent ethics centre. It works with its own contributors and with other organizations involved in business ethics. The centre is a volunteer-driven organization comprising corporations and individuals dedicated to developing and maintaining an ethical organizational culture. Visit its Web site at and click on the newsletter link. Management Ethics is the centre s bimonthly publication. Choose some topics from Chapter 4 pertaining to ethics or social responsibility that interest you, such as codes of ethics, ethical behaviour of management, sustainable development, and so on. Read some of the current and back issues of the newsletter. Update at least one example in the text related to your chosen topics. VIDEO CASE 4 Starbucks Corporation: Serving More Than Coffee Wake up and smell the coffee Starbucks is everywhere! As the world s number-one specialty coffee retailer, Starbucks serves more than 25 million customers in its stores every week. The concept of Starbucks goes far beyond being a coffeehouse or coffee brand. It represents the dream of its founder, Howard Schultz, who wanted to take the experience of an Italian specifically, Milan espresso bar to every corner of every city block in the world. So, what is the Starbucks experience? According to the company: You get more than the finest coffee when you visit Starbucks. You get great people, first-rate music, a comfortable and upbeat meeting place, and sound advice on brewing excellent coffee at home. At home you re part of a family. At work you re part of a company. And somewhere in between there s a place where you can sit back and be yourself. That s what a Starbucks store is to many of its customers a kind of third place where they can escape, reflect, read, chat, or listen. But there is more. Starbucks has embraced corporate social responsibility like few other companies. A recent Starbucks Corporate Social Responsibility Annual Report : described the company s views on social responsibility: Starbucks defines corporate social responsibility as conducting our business in ways that produce social, environmental, and economic benefits to the communities in which we operate. In the end, it means being responsible to our stakeholders. There is a growing recognition of the need for corporate accountability. Consumers are demanding more than product from their favourite brands. Employees are choosing to work for companies with strong values. Shareholders are more inclined to invest in businesses with outstanding corporate reputations. Quite simply, being socially responsible is not just the right thing to do it can distinguish a company from its industry

19 110 Initiating the Marketing Process PART ONE visit us at peers. Starbucks not only recognizes the central role that social responsibility plays in its business. It also takes constructive action to be socially responsible. THE COMPANY Starbucks is the leading retailer, roaster, and brand of specialty coffee in the world, with more than 13,000 retail locations in North America, Latin America, Europe, the Middle East, and the Pacific Rim. Beginning in 1971 with a single retail location in Seattle, Washington, Starbucks became a Fortune 500 company in 2003 with annual sales exceeding $4 billion. In addition, Starbucks is ranked as one of the Ten Most Admired Companies in America and one of the 100 Best Companies to Work For by Fortune magazine. It has been recognized as one of the Most Trusted Brands by Ad Week magazine. Starbucks ranked 21st in Business Ethics magazine s list of the 100 Best Citizens in Starbucks performance can be attributed to a passionate pursuit of its mission and adherence to six guiding principles. The Starbucks mission and guiding principles both appear in Figure 1. COMMITMENT TO CORPORATE SOCIAL RESPONSIBILITY Starbucks continually emphasizes its commitment to corporate social responsibility. Speaking at the annual shareholders meeting in March 2004, Howard Schultz said: From the beginning, Starbucks has built a company that balances profitability with a social conscience. Starbucks business practices are even more relevant today as consumers take a cultural audit of the goods and services they use. Starbucks is known not only for serving the highest quality coffee, but for enriching the daily lives of its people, customers, and coffee farmers. This is the key to Starbucks ongoing success and we are pleased to report our positive results to shareholders and partners [employees]. Each year, Starbucks makes public a comprehensive report on its corporate social responsibility initiatives. A central feature of this annual report is the alignment of the company s social responsibility decisions and actions with the Starbucks mission statement and guiding principles. The Starbucks 2003 Corporate Social Responsibility Report, titled Living Our Values, focused on six topical areas: (a) partners, (b) diversity, (c) coffee, (d) customers, (e) community and environment, and (f) profitability. Partners Starbucks employs more than 145,000 people around the world. The company began considering its employees as partners following the creation of Starbucks stock option plan in 1991, called Bean Stock. The company believes that giving eligible full- and part-time employees an ownership in the company and sharing the rewards of Starbucks financial success has made the sense of partnership real. In addition, the company has one of the most competitive employee benefits and compensation packages in the retail industry. Ongoing training, career advancement opportunities, partner recognition programs, and diligent efforts to ensure a healthy and safe work environment have all contributed to the fact that Starbucks has one of the lowest employee turnover rates within the restaurant and fast food industry. Diversity Starbucks strives to mirror the customers and communities it serves. On a quarterly basis, the company monitors the demographics of its workforce to determine whether they reflect the communities in which Starbucks operates. In 2003, Starbucks U.S. workforce comprised 63 percent women and 24 percent visible Figure 1 Starbucks mission statement and guiding principles Establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining our uncompromising principles as we grow. The following six principles will help us measure the appropriateness of our decisions: 1. Provide a great work environment and treat each other with respect and dignity. 2. Embrace diversity as an essential component in the way we do business. 3. Apply the highest standards of excellence to the purchasing, roasting, and fresh delivery of our coffee. 4. Develop enthusiastically satisfied customers all the time. 5. Contribute positively to our communities and our environment. 6. Recognize that profitability is essential to our future success.

20 CHAPTER 4 Ethics and Social Responsibility in Marketing 111 minorities. The company also is engaged in a joint venture called Urban Coffee Opportunities (UCO) created to bring Starbucks stores to diverse neighbourhoods. There were 52 UCO locations employing almost 1,000 Starbucks partners at the end of Supplier diversity is also emphasized. To do business with Starbucks as a diverse supplier, that company must be 51 percent owned, operated, and managed by women, minorities, or socially disadvantaged individuals and meet Starbucks requirements of quality, service, value, stability, and sound business practice. The company spent $80 million with diverse suppliers in 2003, $95 million with diverse suppliers in Coffee Starbucks attention to quality coffee extends to its coffee growers located in more than 20 countries. Sustainable development is emphasized. This means that Starbucks pays coffee farmers a fair price for the beans; that the coffee is grown in an ecologically sound manner; and that Starbucks invests in the farming communities where its coffees are produced. One longstanding initiative is Starbucks partnership with Conservation International, a nonprofit organization dedicated to protecting soil, water, energy, and biological diversity worldwide. Starbucks is particularly focused on environmental protection and helping local farmers earn more for their crops. In 2003, Starbucks invested more than $1 million in social programs, notably health and education projects, that benefited farming communities in nine countries, from Columbia to Indonesia. Customers Starbucks served customers in 40 countries in The company and its partners are committed to providing each customer the optimal Starbucks experience every time they visit a store. For very loyal Starbucks customers, that translates into 18 visits per month on average. Making a connection with customers at each store and building the relationship a customer has with Starbucks baristas, or coffee brewers, is important in creating the Starbucks experience. Each barista receives 24 hours of training in customer service and basic retail skills, as well as Coffee Knowledge and Brewing the Perfect Cup classes. Baristas are taught to anticipate the customers needs and to make eye contact while carefully explaining the various coffee flavours and blends. Starbucks also enhances the customer relationship by soliciting feedback and responding to patrons experiences and concerns. Starbucks Customer Relations reviews and responds to every inquiry or comment, often within 24 hours in the case of telephone calls and s. Community and Environment Efforts to contribute positively to the communities it serves and the environments in which it operates are emphasized in Starbucks guiding principles. We aren t in the coffee business, serving people. We are in the people business, serving coffee, says Howard Schultz. Starbucks and its partners have been recognized for volunteer support and financial contributions to a wide variety of local, national, and international social, economic, and environmental initiatives. For example, the Make Your Mark program rewards partners gifts of time for volunteer work with charitable donations from Starbucks. In addition, Starbucks is a supporter of CARE International, a nonprofit organization dedicated to fighting global poverty. Starbucks is also committed to environmental responsibility. Starbucks has been a long-time involvement with Earth Day activities. It has instituted companywide energy and water conservation programs and waste reduction, recycling, and reuse initiatives proposed by partner Green Teams. Profitability At Starbucks, profitability is viewed as essential to its future success. When the Starbucks guiding principles were conceived, profitability was included but intentionally placed last on the list. This was done not because profitability was the least important. Instead, it was believed that adherence to the five other principles would ultimately lead to good financial performance. In fact, it has. visit us at Questions 1 How does Starbucks approach to social responsibility relate to the three concepts of social responsibility described in the text? 2 What role does sustainable development play in Starbucks approach to social responsibility?