Ch12. Business Ethics, CSR, and ESG — The New Standard for Sustainable Management

Who Does a Corporation Exist For?

Traditional view: The purpose of a corporation is to maximize shareholder value (Milton Friedman)

Modern view: Corporations must balance the interests of a diverse set of stakeholders

Stakeholder Theory

Stakeholders: All parties that are affected by or can affect the activities of a corporation

Internal stakeholders: shareholders, executives, employees
External stakeholders: customers, suppliers, creditors, communities, government, environment

Freeman’s Stakeholder Theory: Long-term corporate success depends on creating value for all stakeholders.

CSR (Corporate Social Responsibility): Business activities in which a company fulfills social and environmental responsibilities beyond profit pursuit

Carroll’s CSR Pyramid

        [Philanthropic Responsibility] ← Contribute to society, volunteerism
       [Ethical Responsibility]        ← Do the right thing, exceed expectations
      [Legal Responsibility]           ← Comply with laws, meet minimum obligations
    [Economic Responsibility]          ← Generate profit, ensure survival

Meaning of each level:

Economic responsibility: The foundation of business existence — generate profit
Legal responsibility: Comply with laws and regulations
Ethical responsibility: Act morally beyond what the law requires
Philanthropic responsibility: Voluntary contributions to society

ESG Management

ESG: Environmental · Social · Governance

First introduced in the 2004 UN Global Compact report, ESG has since become a core standard in global investment and corporate management.

E — Environmental

Key Issue	Content
Carbon Neutrality (Net Zero)	Achieve net-zero carbon emissions by 2050
Renewable Energy Transition	RE100 (100% renewable energy)
Circular Economy	Reduce waste; promote reuse and recycling
Biodiversity	Protect natural ecosystems

Protection of labor rights and fair wages
Diversity, Equity, and Inclusion (DEI)
Human rights due diligence across the supply chain
Community engagement and social contribution

G — Governance

Board independence and diversity
Transparent financial disclosure and accounting
Anti-corruption and ethical management systems
Appropriateness of executive compensation

ESG and Corporate Value

Why does ESG matter?

Investor pressure: Institutional investors include ESG performance in investment criteria
Regulatory tightening: EU Corporate Sustainability Due Diligence Directive, Carbon Border Adjustment Mechanism (CBAM)
Consumer shift: Millennial and Gen Z preference for ethical consumption
Risk management: ESG risk = long-term financial risk

ESG rating agencies: MSCI, Sustainalytics, S&P Global (formerly RobecoSAM), ISS ESG

Business Ethics Decision-Making Framework

Comparison of Major Ethical Theories

Theory	Core Principle	Application
Utilitarianism	Maximize the greatest good for the greatest number	Cost-benefit analysis
Deontology (Kant)	Follow universal moral rules	Judge actions as right or wrong in themselves
Virtue Ethics	Moral character and virtues	Build long-term trust
Stakeholder Theory	Consider all stakeholders	Balanced decision-making

Steps in Ethical Decision-Making

Recognize the ethical issue
Gather relevant facts
Identify the stakeholders involved
Apply relevant ethical principles
Evaluate alternatives and choose the best course of action
Monitor outcomes

The Future of Sustainable Management

Creating Shared Value (CSV) — Porter & Kramer A strategy that integrates a company’s competitive advantage with the creation of social value. Unlike CSR — which views social responsibility as a cost — CSV treats it as a business opportunity.

Triple Bottom Line:

People: Social responsibility
Planet: Environmental responsibility
Profit: Economic performance

Key Concept Cards

Carroll’s CSR Pyramid ★★★★★ : A four-level structure of Economic → Legal → Ethical → Philanthropic responsibility. Explains the scope of corporate social responsibility in a hierarchical framework. Memory tip: Economic → Legal → Ethical → Philanthropic (bottom to top)

ESG ★★★★★ : Acronym for Environmental, Social, and Governance. Non-financial sustainability indicators for corporations. Memory tip: Environmental · Social · Governance

Creating Shared Value (CSV) ★★★★☆ : A strategy that simultaneously pursues corporate competitiveness and solutions to social problems. Unlike CSR (obligation), CSV is approached as a strategic opportunity. Memory tip: CSR = duty; CSV = strategic opportunity

Practice Quiz

Q. What does “Ethical Responsibility” mean in Carroll’s CSR Pyramid?

It refers to the responsibility to meet the moral standards of conduct that society expects from corporations — beyond legal obligations. It is the normative requirement to “do the right thing”: behaviors that are not required by law but are socially expected.

Q. Explain the pathways through which ESG management affects corporate value.

Directly: reduced regulatory risk, lower cost of capital (preferred terms on ESG bonds and loans), and talent attraction. Indirectly: improved brand trust, stronger consumer loyalty, and more stable supply chains all compound into long-term corporate value creation.

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