Business ethics and corporate social responsibility

1 Business ethics

Ethics is the study of right and wrong – of moral and immoral, acceptable and unacceptable behaviour. Much of strategic management has an ethical component: closing a factory in one region and opening it in another affects employees' livelihoods; how much testing a product receives before launch affects customer safety; how customer data is collected, kept and used is an increasingly sharp ethical question. Ethical judgements therefore run right through the devising and implementation of a strategic plan.

An organisation's ethical stance describes how far it will go beyond its minimum obligations to stakeholders and society at large (a framing associated with Johnson, Scholes and Whittington). Minimum obligations are set by law and regulation; the ethical stance is about everything above that floor.

Examples of ethical dilemmas that could easily face organisations:

• Relocating operations or cutting the workforce: damaging for current employees, but perhaps good for shareholders and for the job security of the employees who remain.

• How to deal with the environmental impact of operations, from emissions and waste to controversial techniques and technologies.

• How much compensation to pay for damage the organisation causes – to passengers of a cancelled flight, or users of a faulty product.

• At what price valuable pharmaceuticals should be sold to patients and hospitals.

• How much customer data to collect and how to use it – and whether decisions made by algorithms and AI about customers or employees are fair and free of bias (Chapters 15 and 16).

Where exactly 'talking up' a product becomes misrepresentation, or hospitality becomes bribery, is rarely marked by a bright line – which is why organisations publish codes of ethics and why the professional bodies (including CIMA) bind their members to fundamental ethical principles.

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2 Why ethics matter strategically

Many stakeholders simply want the organisations they deal with to act morally – though not everyone agrees on what morality requires. In business, however, much of that philosophical difficulty can be side-stepped: there is a hard-headed commercial argument that good ethics protects and increases long-term profit.

The argument rests on the observation that unethical behaviour is usually discovered. Discovery has never been easier: confidential files can be copied and leaked in seconds, whistle-blowers now often enjoy legal protection where disclosure is in the public interest, and social media can amplify an accusation worldwide within hours (Chapter 16). Given that, ethical behaviour:

• Protects and enhances reputation – attracting customers, better employees, and business partners. Customers and suppliers prefer to deal with organisations they trust; a company caught behaving badly leaves everyone wondering what else is hidden.

• Limits financial damage – all organisations make errors, but courts, regulators and the public treat honest mistakes owned up to quickly very differently from negligence and cover-ups, which attract punitive damages, regulatory penalties and, at the extreme, loss of the licence to operate.

• Reduces perceived risk – a record of ethical behaviour means fewer nasty surprises for investors and lenders, so finance can be raised more cheaply.

• Cheaper finance means a lower discount rate, higher net present values on projects, and ultimately higher value for shareholders.

3 Ethical stances

Johnson, Scholes and Whittington describe four possible ethical stances, in ascending order of obligation accepted:

1. Short-term shareholder interest. The organisation takes responsibility only for short-term shareholder wealth, follows the law but no more, and expects government to look after society. Short-term profit may be inflated by cutting corners – on training, safety testing, product quality – at the expense or exploitation of other stakeholders; the costs of that behaviour tend to come home to roost later.

2. Long-term shareholder interest. Still shareholder-focused, but recognising that long-term wealth depends on reputation and relationships. This stance leads companies to treat customers generously (no-quibble refunds), avoid 'shady' marketing practices, sponsor local causes, offer work experience, and adopt greener policies – because these protect long-term profitability.

3. Multiple stakeholder obligations. The organisation deliberately incorporates the interests and expectations of stakeholders beyond shareholders into its purposes and strategies, beyond any legal minimum – dealing fairly with suppliers and paying promptly, protecting local communities from pollution and disturbance, sometimes keeping marginal jobs open or paying above market rates. The difficulty is balance: whose interests, and how far?

4. Shaper of society. An ideologically driven stance in which financial considerations become secondary to changing society's expectations. It is easier for privately owned organisations, which are not accountable to external public shareholders.

4 Ethics, governance and the strategy process

Ethics and governance are not a compliance appendix to this paper – they shape how strategy is made:

• Purpose, vision and values come first. Chapter 3 showed mission and purpose at the top of the strategic hierarchy: why we exist, the difference we seek to make, the principles we hold. A purpose-led organisation generates and screens strategic options against those values from the outset.

• Ethics filters option generation. The ethical stance determines which options are even considered. A multiple-stakeholder firm will not table options a short-term-shareholder firm might pursue (aggressive tax structures, exploitative pricing, environmentally damaging shortcuts) – and under the acceptability test of the SAF framework (Chapter 10), options that conflict with stakeholder expectations and values should fail evaluation even if they promise attractive returns.

• Leaders own strategy – and its ethics. The board is responsible for setting purpose, values and strategic direction, approving strategy, and ensuring the organisation's culture actually delivers the values it professes; executives generate and implement options within those guardrails. Governance mechanisms – board oversight, independent challenge, transparency to stakeholders – exist precisely to keep the strategy process honest.

• Ethics extends into the ecosystem. An organisation is increasingly held responsible for its supply chain and partners: child labour at a supplier, or data misuse by a platform partner, lands on the brand at the centre (Chapters 4 and 17).

5 Corporate social responsibility

Corporate social responsibility (CSR) describes the ways organisations exceed their minimum obligations to stakeholders and society – a continuing commitment to behave ethically and contribute to economic development while improving the quality of life of the workforce, their families, the local community and society at large. Another way of putting it: an acceptance that the organisation is accountable not only for its financial performance but for its impact on society and the environment.

Common features associated with CSR:

• integration of social concerns into business operations

• voluntary actions, going beyond what law and regulation require

• operating in ways that exceed ethical, legal and societal expectations

• making a positive difference to society.

For example, an organisation could pay well above the legal minimum wage, cut pollution and its carbon footprint further than required, provide excellent healthcare and childcare for staff, give employees paid days for charitable work, or deliberately recruit and train people who struggle to find employment.

5.1 The critique of CSR – and the modern answer

Large-scale CSR spending has traditionally attracted a shareholder-primacy critique:

• Directors have a duty to act on behalf of shareholders. What right have they to spend shareholders' money lavishly on causes the directors happen to favour?

• How are CSR projects chosen? Is there any connection between where the money goes and what shareholders (or society) would choose?

• Perhaps government – democratically elected and able to allocate across all of society's needs – is better placed to spend; CSR spending reduces both profit and tax revenue.

• Shareholders who wish to give can do so personally out of larger dividends.

The conventional resolution is that CSR expenditure is justifiable where it serves the long-term interests of the business – public relations, community goodwill, attracting and retaining employees, staying ahead of regulation. Spending clearly beyond anything that could serve those interests puts directors on controversial, perhaps legally questionable, ground.

The debate has, however, moved on. Much of what was once discretionary CSR is now a baseline expectation enforced by customers, employees, investors, lenders and regulators – less 'nice to have' and more a licence to operate. That shift is the subject of the next section.

6 From CSR to sustainability and ESG

The 2027 syllabus treats sustainability as a driver of change in its own right, alongside institutional, social, market and technological drivers (Chapter 4). For strategy, sustainability is no longer a PESTEL footnote under 'ecological'; it is a force that creates and destroys strategic options:

• Decarbonisation and net-zero commitments – governments, customers and investors expect credible transition plans; carbon pricing and emissions regulation change cost structures and can strand carbon-intensive assets.

• The circular economy – designing out waste: products designed for repair, reuse and recycling, and business models based on sharing, refurbishing and take-back rather than make-use-dispose.

• Investor and lender expectations – capital increasingly flows through an ESG (environmental, social and governance) lens: sustainability performance affects the cost and availability of finance.

• Licence to operate – for some industries, meeting society's sustainability expectations is now simply the permission to play; falling short invites regulation, litigation and the reputational amplifier of social media.

Like every driver of change, sustainability cuts both ways. Risks: transition costs, stranded assets, supply-chain exposure, accusations of 'greenwashing' where claims outrun reality. Opportunities: new markets in low-carbon products and services, efficiency gains from lower energy and material use, preferential access to capital and talent, and first-mover advantage in shaping standards. Strategic analysis should treat it exactly as Chapter 4 treats the other drivers: scan, assess impact, and build it into option generation.

7 Integrated thinking and integrated reporting

If an organisation creates (and consumes) value across society and the environment, managing and reporting only the financials misses most of the picture. The integrated reporting framework therefore describes value creation across six capitals – financial, manufactured, intellectual, human, social and relationship, and natural – the full range of resources and relationships a strategy draws on. The framework and its custodianship are taught in Chapter 12 (in short: the IIRC no longer exists – its framework now sits within the IFRS Foundation, home of the ISSB); what matters in this chapter is the ethical dimension.

Integrated thinking is the management discipline of taking decisions with all of those capitals in view, instead of managing in silos. Its significance here is ethical: many trade-offs between capitals – profit versus people, output versus natural resources – are precisely the ethical dilemmas this chapter began with, and integrated thinking forces them into the open instead of letting financial capital win by default.

Integrated reporting is the output: a concise report explaining how the organisation's strategy, governance and performance create value across the capitals over the short, medium and long term. For the ethical and sustainability agenda it does two things: commitments to stakeholders and to sustainability are measured and published, so the organisation can be held to them; and the value-creation story reinforces the licence to operate that CSR and ESG performance earn (its role in strategic control is Chapter 12's subject).

8 Corporate governance

Corporate governance is the system by which companies are directed and controlled.

The problem it addresses: shareholders own companies, but day-to-day direction is delegated to the board of directors, and in large companies many shareholders are passive. Left unchecked, directors could run companies in their own interests, with adverse consequences for shareholders and other stakeholders alike:

• shareholders' returns suffer if directors take unwarranted risks or pay themselves too generously

• employees can be treated harshly

• suppliers can be squeezed or cheated

• local communities can be harmed by the organisation's activities.

Governance codes and principles have therefore been adopted in most countries to make companies more reliably – and more ethically – directed and controlled. The G20/OECD Principles of Corporate Governance (most recently revised in 2023) capture the essentials: protect shareholders' rights and treat them equitably; recognise the rights of stakeholders and encourage active co-operation between companies and stakeholders in creating wealth, jobs and sustainable enterprises; disclose material information – financial and, increasingly, sustainability-related – accurately and on time; and ensure the board provides strategic guidance to the company, monitors management effectively, and is accountable to the company and its shareholders.

Drawing the threads of this chapter together: the corporate governance framework oversees and controls the behaviour of directors and the board, to ensure ethical direction and control of the company, recognising the rights and interests of all stakeholders, for the long-term – strategic – success of the company. Governance is thus the mechanism through which ethics, CSR and sustainability stop being aspirations and become embedded in how strategy is actually set and controlled.

9 Test your knowledge

Two short exercises close the chapter in the online notes: ten flashcards on the terms and frameworks above, and ten practice questions with worked feedback on every option. Work through the cards first, then the questions.