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What you’ll learn to do: explain the laws that regulate marketing

While there are situations in which we expect individuals to act according to higher moral laws, at a basic level we always expect business professionals to follow the law. Most of the laws that impact marketers fall into a category called consumer protection. Consumer protection laws are created to ensure the rights of consumers and to create a fair marketplace for consumers.

The History of Consumer Protection

Historically, consumer protection laws in the United States have been specific formal legal responses to address public outrage over the disclosure of industry abuses and crises. For example, in 1905 a man named Upton Sinclair exposed the terrible worker conditions in the American meat-packing industry. His work sparked public outrage and, in turn, led to the creation of the Food & Drug Administration and the first comprehensive inspection and regulation of food safety in the United States.^[1]

Similarly, in the 1960s consumer advocate Ralph Nadar took on automobile safety, highlighting the immense profits made by auto companies relative to their investment in customer safety. In 1966 Congress unanimously passed the National Traffic and Motor Vehicle Safety Act, and the National Highway Traffic Safety Administration gained consumer protection powers. The number of vehicular deaths in the U.S. reached a high of 50,000 in 1960 and have continued to fall despite a larger number of drivers on the road.

Government Consumer Protection and Enforcement Agencies

A number of governments agencies are charged with protecting consumers. The U.S. Federal Trade Commission (FTC) was created in 1914 and is charged with protecting America’s consumers and promoting competition. The commission includes individual divisions that oversee a range of activities that are of importance to marketers, including the following:

• Privacy and identity protection
• Advertising practices
• Marketing practices
• Financial practices

The FTC’s Bureau of Consumer Protection stops unfair, deceptive, and fraudulent business practices by collecting complaints and conducting investigations, suing companies and people who break the law, developing rules to maintain a fair marketplace, and educating consumers and businesses about their rights and responsibilities.

In addition to government-based agencies, consumer associations and other nonprofit entities also play an important role in protecting the consumer.

As a marketer, it is important to understand the current laws and consider where there are risks to consumers that might lead to new legislation.

The specific things you’ll learn in this section include:

• Explain product liability and its impact on marketing
• Explain privacy law and its impact on marketing
• Explain fraud in the marketing process and its impact

Introduction

Product liability is the legal liability a manufacturer or trader incurs for producing or selling a faulty product.

There is not a single federal law or code that covers all product liability. Fourteen states have adopted the Uniform Commercial Code, which governs business transactions between states. Specifically, Article 2 of the code includes the requirements for contract formation and breach, which are important in many product liability cases. In general, product liability laws come about as a result of civil court cases being prosecuted at the state level.

The courts are increasingly holding sellers responsible for the safety of their products. The U.S. courts generally maintain that the producer of a product is liable for any product defect that causes injury in the course of normal use. Liability can even result if a court or a jury decides that a product’s design, construction, or operating instructions and safety warnings make the product unreasonably dangerous to use.

Types of Product Defects

There are three types of product defects that incur product liability: design defects, manufacturing defects, and defects in marketing.

Design Defects

Design defects exist before the product is manufactured. There is something in the design of the product that is inherently unsafe, regardless of how well it is manufactured. Since “product” is one of the primary elements of the marketing mix, the marketer bears responsibility for ensuring that the design results in a product that is safe and that the product will fulfill the promises of the other aspects of the marketing mix such as promotional commitments.

Hoverboard

Let’s look at a current example of a product design going awry. One of the hottest holiday gift items in 2015 is the hoverboard self-balancing scooter. The premium models often cost more than $1,000, but several companies have created less expensive versions by using lower-cost board components. One expensive component that has been downgraded in the cheaper models is the rechargeable lithium-ion battery. Many less expensive boards use a lower-quality (and lower-priced) mass-produced battery cell. These cheaper batteries are more likely to have quality issues that might cause them to break and burst into flame when they are repeatedly bumped, which is a regular occurrence during the normal use of the scooter. After more than ten reported fires, the U.S. Consumer Product Safety Commission opened a case to investigate the hoverboard fires.

Manufacturing Defects

Manufacturing defects occur while a product is being constructed, produced, or assembled. Specifically, when a product departs from its intended design, even though all possible care was exercised in the preparation and marketing of the product^[2], it is a manufacturing defect. The manufacturer may be very careful with the design, the material selection, the development of the manufacturing process, and the quality-assurance guidelines. Nevertheless, if a poorly manufactured product leaves the manufacturers facility and causes injury when used for any of its intended purposes, then there is a defect in manufacturing.

It might seem that manufacturing defects occur only in product sales and not in the service industry, but there’s a very well-known case in this category: the McDonald’s coffee case.

On February 27, 1992, a seventy-nine-year-old woman named Stella Liebeck went to McDonald’s with her grandson, Chris. They got the coffee, and Chris pulled into a parking space so that Stella could add cream and sugar. Since the car had a curved dash and lacked cup holders, Stella put the cup between her knees and removed the lid. When she did, the cup fell backward, burning her groin, thighs, genitalia, and buttocks. Liebeck was taken to the hospital, where it was discovered that she had third-degree burns on 6 percent of her body and other burns on 16 percent of her body. She required multiple skin grafts and was in the hospital for eight days. Liebeck spent two years recovering from the injury, lost 20 percent of her bodyweight after the accident, and was left permanently scarred by the ordeal.

Liebeck wrote a letter to McDonald’s asking them to pay her medical bills, which totaled around $10,500 in 1992 (approximately $16,110 today). The company offered her $800. Liebeck and McDonald’s exchanged several more letters, but the company refused to increase their $800 offer, so Liebeck hired a law firm.

Liebeck’s lawyers conducted a study of coffee temperatures. They discovered that coffee brewed at home is usually served at 135–145°F and coffee served at most fast-food restaurants is in the 160–175°F range. McDonald’s, however, served its coffee at 190°F, which can cause third-degree burns on human skin after two to seven seconds of contact. No safety study of any kind was undertaken by either McDonald’s or the consultant who recommended the hotter temperature.

Moreover, Liebeck’s lawyers also discovered more than seven hundred other burn claims—many of them for third-degree burns—from McDonald’s customers between February 1983 and March 1992. In court, McDonald’s quality-control manager, Christopher Appleton, testified that McDonald’s served around 20 million cups of coffee a year and that seven hundred incidents during nine years was statistically insignificant. While this was factually accurate, the jury did not like to hear that McDonald’s considered seven hundred burned customer to be insignificant.

The jury found in Liebeck’s favor. They awarded her $200,000 in compensatory damages, but that amount was later reduced to $160,000 because they felt that the spill was 20 percent Liebeck’s fault. The jury made headlines when it came to the punitive damages, however, which they settled at $2.7 million. The jurors defended the amount, saying that it was to punish the company for its callous attitude toward Ms. Liebeck and the 700+ other McDonald’s customers who had suffered burns. Although it sounds like a lot, $2.7 million represented only two days’ worth of McDonald’s coffee sales, and the jurors felt that was fair.

The judge agreed, accusing McDonald’s of “willful, wanton, and reckless behavior” for ignoring all the customer complaints.

McDonald’s process for making coffee constituted a manufacturing defect, which resulted in many customer injuries and generated significant product liability for the company.

Marketing Defects

Marketing defects result from flaws in the way a product is marketed. Examples include improper labeling, poor or incomplete instructions, or inadequate safety warnings. Often marketing defects are referred to as a “failure to warn.” It is important for the marketer to think not only about the warnings that the user might need when using the product as intended but also about other, potentially dangerous uses for which the product was not intended.

For example, fabric used in children’s sleepwear must meet certain flammability requirements to prevent the risk of injury from fires. Certain comfortable children’s clothing that does not meet the flammability requirement can be confused with sleepwear. For this reason, such clothing will often contain a warning label that reads, “Not intended for sleepwear.”

Over time, product liability has shifted more to the side of the injured product user. Consumer advocates like Ralph Nader argue that, for too long, product liability favored producers at the expense of the product user. They assert that it’s the threat of lawsuits and huge settlements and restitutions that force companies to make safe products. While a discussion of all aspects of product liability is beyond the scope of this course, it is clear that liability has and will continue to have a tremendous impact on consumers and manufacturers alike. These two groups are not the only ones affected, either. Retailers, franchises, wholesalers, sellers of mass-produced homes, and building-site developers and engineers are all subject to liability legislation.

What does privacy mean in today’s world? Privacy is the ability of an individual or group to seclude themselves, or information about themselves, and thereby express themselves selectively. Most of us expect some level of privacy, but the boundaries around privacy can differ depending on the individual and the situation.

The right-to-privacy issue has gotten more complicated as our culture has come to rely so heavily on digital communication—for everything from social networking to education to conducting business. Marketers have been quick to capitalize on the potential of digital technology to yield creative, aggressive techniques for reaching their target buyers. Sometimes these aggressive tactics cause a public backlash that results in new laws. For example, intrusive telephone marketing activities led to the passage of the the Do-Not-Call Implementation Act of 2003, which permits individuals to register their phone number to prevent marketing calls from organizations with which they don’t have an existing relationship. The act was intended to protect consumers from a violation of privacy (incessant sales phone calls particularly during the evening hours), and it closed down many businesses that had used telephone solicitation as their primary sales channel.

What follows is an overview of important privacy laws that have a particular impact on marketers. These are areas in which marketers need to be thinking ahead of the law. While there are plenty of perfectly legal marketing tactics that utilize personal information, if they are a nuisance to prospective customers, they are probably not good marketing and may be affected by future legislation when the public decides it has had enough.

Email Spam

Have you received email messages without giving permission to the sender? The Controlling the Assault of Non-Solicited Pornography and Marketing (CAN-SPAM) Act, passed in 2003, establishes federal standards for commercial email.  Consumers must be given the opportunity to opt out of receiving future solicitations, as in this opt-out notice provided by the clothing company Abercrombie & Fitch:

This is a product offering from Abercrombie & Fitch. You have received this email since you submitted your email address to our list of subscribers. To unsubscribe, please click here and submit your email address. Please see our Website Terms of Use, and to know how we use your personal data, please see our Privacy Policy.

Despite its name, the CAN-SPAM Act doesn’t apply just to bulk email. It covers all commercial messages, which the law defines as “any electronic mail message the primary purpose of which is the commercial advertisement or promotion of a commercial product or service,” including email that promotes content on commercial Web sites. The law makes no exception for business-to-business email. That means that all email—even, for example, a message to former customers announcing a new product line—must comply with the law. Each separate email in violation of the CAN-SPAM Act is subject to penalties of up to $16,000, so non-compliance can be very costly. The good news is that following the law isn’t complicated.

Managing Customer Data

Sometimes companies and organization possess personal data about their customers that is collected during the course of doing business. The most obvious examples are medical organizations that keep confidential patient records, financial institutions that capture your financial data, and educational institutions that record student test scores and grades. Other companies might know your contact information, your purchase patterns, and your Internet-shopping or search history. These organization all have important legal responsibilities to protect your data.

The Federal Trade Commission (FTC) gives access to an important source of information about the necessity of securing sensitive data: the lessons contained in the more than fifty law enforcement actions taken by the FTC so far. These are settlements—no findings have been made by a court—and the details of the orders apply just to the companies involved, but learning about alleged lapses that have led to law enforcement actions can help your company improve its practices. Most of these alleged practices involve basic, fundamental security missteps or oversights. Without getting into the details of those cases, below are ten practical tips that we can learn from them. Distilling the facts of those cases down to their essence, here are ten lessons to learn that touch on vulnerabilities that could affect your company, along with practical guidance on how to reduce the risks they pose.

1. Start with security: only collect customer data when necessary; be transparent; and treat the data with extreme care.
2. Control and restrict access to sensitive data.
3. Require strong, secure passwords and authentication; protect access to sensitive data
4. Store sensitive personal information securely and protect it during transmission: use best-in-class security technology.
5. Segment your network and monitor who’s trying to get in and out
6. Secure remote access to your network: put sensible access limits in place.
7. Apply sound security practices when developing new products; train engineers in security and test for common vulnerabilities.
8. Make sure your service providers implement reasonable security measures: write security into contracts and verify compliance.
9. Establish procedures to keep your security current and address vulnerabilities that may arise; heed credible security warnings.
10. Secure paper, physical media, and devices—not all data are stored digitally.

These may seem like overly technical considerations that aren’t important to someone working in a marketing organization, but in the same way that it is important for a marketer to protect its company from product liability suits, it is important to protect customers from security breaches related to the company’s products, services, and marketing activities.

Protecting Privacy Online

The Internet provides unprecedented opportunities for the collection and sharing of information from and about consumers. But studies show that consumers have very strong concerns about the security and confidentiality of their personal information in the online marketplace. Many consumers also report reluctance to engage in online commerce, partly because they fear that their personal information can be misused. These consumer concerns present an opportunity for marketers to build consumer trust by implementing sound practices for protecting consumers’’ information privacy.

The FTC recommends four Fair Information Practice Principles. These are guidelines that represent widely accepted concepts concerning fair information practice in an electronic marketplace.

Notice

Consumers should be given notice of an entity’s information practices before any personal information is collected from them, including, at a minimum, identification of the entity collecting the data, the uses to which the data will be put, and any potential recipients of the data.

Choice

Choice and consent in an online information-gathering sense means giving consumers options to control how their data is used. Specifically, choice relates to secondary uses of information beyond the immediate needs of the information collector to complete the consumer’s transaction. The two typical types of choice models are “opt-in” or “opt-out.” The opt-in method requires that consumers give permission for their information to be used for other purposes. Without the consumer taking these affirmative steps in an opt-in system, the information gatherer assumes that it cannot use the information for any other purpose. The opt-out method requires consumers to affirmatively decline permission for other uses. Without the consumer taking these affirmative steps in an opt-out system, the information gatherer assumes that it can use the consumer’s information for other purposes.

Access

Access, as defined in the Fair Information Practice Principles, includes not only a consumer’s ability to view the data collected but also to verify and contest its accuracy. This access must be inexpensive and timely in order to be useful to the consumer.

Security

Information collectors should ensure that the data they collect is accurate and secure. They can improve the integrity of data by cross-referencing it with only reputable databases and by providing access for the consumer to verify it. Information collectors can keep their data secure by protecting against both internal and external security threats. They can limit access within their company to only necessary employees to protect against internal threats, and they can use encryption and other computer-based security systems to stop outside threats.

In June 1998, the FTC issued a report to Congress noting that while more than 85 percent of all Web sites collected personal information from consumers, only 14 percent of the sites in the FTC’’s random sample of commercial Web sites provided any notice to consumers of the personal information they collect or how they use it. In May 2000, the FTC issued a follow-up report that showed significant improvement in the percent of Web sites that post at least some privacy disclosures; still, only 20 percent of the random sample sites were found to have implemented all four fair information practices: notice, choice, access, and security. Even when the survey looked at the percentage of sites implementing the two critical practices of notice and choice, only 41 percent of the random sample provided such privacy disclosures.

In the evolving field of privacy law there is an opportunity for marketers build trust with target customers by setting standards that are higher than the legal requirements and by respecting customers’ desire for privacy.

Fraud is the deliberate deception of someone else with the intent of causing damage. The damage need not be physical damage—in fact, it is often financial.^[3]

The Federal Trade Commission has determined that a representation, omission, or practice is deceptive if it is likely to:

• mislead consumers and
• affect consumers’ behavior or decisions about the product or service.

When it comes to marketing fraud, the two key words are deliberate deception. In a legal setting, a judge asked to rule on a marketing fraud case would need to evaluate the extent of the deception and the impact of the deception on the consumer. For our purposes, though, it is more useful to begin outside the courtroom with the basic starting point of marketing: the goal of marketing is not to deceive the customer; it is, in fact, to build trust.

When we consider the elements of the marketing mix—product, price, promotion, and distribution—there are opportunities for deception in each area.

Product: Is the product designed and manufactured as the customer would expect, given the other elements of the marketing mix? Is the customer warned about the product’s limitations or uses that are not recommended?

Price: Is the total price of the product fairly presented to the customer? Is the price charged for the product the same as the price posted or advertised?  Has something been marketed as “free” and, if so, does it meet FTC guidelines for the definition of free? Does the company disclose information about finance charges?

Promotion: Can claims made to consumers be substantiated? Are disclaimers clear and conspicuous? For products marketed to children, is extra care taken to accurately represent the product?

Place (Distribution): Does the distribution channel deliver the product at the price and quality promised? Do other companies in the distribution channel (wholesalers, retailers) perform as promised and deliver on expectations set for product, price, and promotions?

Marketing Fraud in Education

Sadly, it is easy enough to find a case of pervasive marketing fraud that any student can understand: Corinthian Colleges.

As you review the following press release from the Consumer Financial Protection Bureau, consider the following questions:

• Where was the Corinthian Colleges chain deliberately deceptive in presenting its offering to students?
• Where was Corinthian deliberately deceptive in the way it represented pricing?
• Where was the company’s promotion of its offering deceptive?

COPYRIGHT

This courseware was assembled by Christopher VanOosterhout from a variety of resources copyrighted and openly licensed by multiple individuals and organizations.  See our Copyright and Attribution page for additional details.  For details about permission to use please contact me at c@vanosterhout.com with the phrase  Courseware Usage Inquiry.  If you believe that this courseware violates your copyright, please contact me at c@vanoosterhout.com with the phrase Copyright Inquiry in the subject.  Details about the collector of these resources and Licentia LLC can be found at www.vanoosterhout.com

• Revision and adaptation. Provided by: Lumen Learning. License: CC BY-SA: Attribution-ShareAlike
• Outcome: Regulatory Laws. Provided by: Lumen Learning. License: CC BY: Attribution
• Image: Motor Vehicle Crash Deaths 1975u20132017. Provided by: Lumen Learning. License: CC BY: Attribution
• Fraud in Marketing. Provided by: Lumen Learning. License: CC BY: Attribution

• Fair Information Practice Principles. Provided by: Wikipedia. Located at: https://en.wikipedia.org/wiki/FTC_Fair_Information_Practice. License: CC BY-NC-SA: Attribution-NonCommercial-ShareAlike
• Privacy. Authored by: g4ll4is. Located at: https://www.flickr.com/photos/g4ll4is/8521624548/. License: CC BY-SA: Attribution-ShareAlike
• Tech Privacy. Authored by: Bernard Goldbach. Located at: https://www.flickr.com/photos/topgold/5534004979/. License: CC BY: Attribution
• Manufacturing Defects. Authored by: Jim Cofer. Located at: http://jimcofer.com/personal/2012/01/19/righting-the-wrongs-the-mcdonalds-coffee-case/. Project: Righting the Wrongs: The McDonald’s Coffee Case. License: CC BY-NC-SA: Attribution-NonCommercial-ShareAlike
• Chapter 5: External Considerations in Marketing, from Introducing Marketing. Authored by: John Burnett. Project: Global Text. License: CC BY: Attribution
• Hoverboard. Provided by: Soar Boards. Located at: https://en.wikipedia.org/wiki/Self-balancing_two-wheeled_board#/media/File:Red_self-balancing_two-wheeled_board_with_a_person_standing_on_it.png. License: CC BY: Attribution
• Lawsuits Welcome. Authored by: Chris Tengi. Located at: https://www.flickr.com/photos/cjtengi/2022308688/. License: CC BY-NC-ND: Attribution-NonCommercial-NoDerivatives

• Email Spam. Provided by: Federal Trade Commission. Located at: https://www.ftc.gov/system/files/documents/plain-language/bus61-can-spam-act-compliance-guide-business.pdf. Project: The CAN-SPAM Act: A Compliance Guide for Business. License: Public Domain: No Known Copyright
• Managing Customer Data. Provided by: Federal Trade Commission. Located at: https://www.ftc.gov/system/files/documents/plain-language/pdf0205-startwithsecurity.pdf. Project: Start with Security: A Guide for Business. License: Public Domain: No Known Copyright
• Protecting Privacy Online. Provided by: Federal Trade Commission. Located at: https://www.ftc.gov/system/files/documents/plain-language/bus28-advertising-and-marketing-internet-rules-road.pdf. Project: Advertising and Marketing on the Internet. License: Public Domain: No Known Copyright
• Press Release: CFPB Sues For-Profit Corinthian Colleges for Predatory Lending Scheme. Provided by: Consumer Financial Protection Bureau. Located at: http://www.consumerfinance.gov/newsroom/cfpb-sues-for-profit-corinthian-colleges-for-predatory-lending-scheme/. License: Public Domain: No Known Copyright

What you’ll learn to do: explain how ethical dilemmas in business-to-business marketing differ from those in consumer marketing

In June 2013, Los Angeles United School District (LAUSD), the second largest school district in the U.S., announced that it had signed a $30 million contract with Apple to provide students with iPads that were preloaded with educational software from Pearson PLC. It was an ambitious education technology initiative that promised to give students new learning tools and technology literacy.

By the end of 2015 the superintendent would resign, the program the would be canceled, Pearson’s philanthropic foundation would be closed, the companies would pay a $6.4 settlement to the school district to prevent litigation, and the FBI would be involved in a criminal probe of the program. It would be hard to imagine a worse result for any of the parties involved.

Circumventing the Public Bid Process

California law requires that such large projects to go to public bid, which this project did, but well before the bid process, the email record between LAUSD Superintendent John Deasy and then CEO of Pearson Marjorie Scardino suggested that deals were made to purchase Pearson curriculum and Apple hardware. In fact, Superintendent Deasy made the inital introduction between Scardino and Apple CEO. In an email to Scardino, Deasy writes:

I wanted to let you know I have [sic] an excellent meeting with Tim at Apple last Friday. The meeting went very well and he was fully committed to being a partner. He said he and his team will take 5 days to present a price plan and scope of partnership. He was very excited about being a partner with Pearson. I think it would be good for you to loop back with him at this point. I will reach out to you again in a week.^[1]

Deputy Superintendent Jaime Aquino was tasked to work with Pearson on the project in advance of the bid process. His email messages indicate that he was attempting to influence the bid process in Pearson’s favor. His email messages to Pearson executives include the following statements:

I am not sure if legally we can enter into an agreement when we have not reviewed the final product for each grade and if the materials have not been approved by the state.

I believe we would have to make sure that your bid is the lowest one.^[2]

Violating the Restriction on Nonprofit Philanthropy

Pearson’s non-profit philanthropy foundation was also involved in securing the deal, which violated certain federal restrictions. A Pearson Foundation vice president, Sherry King, was deeply involved in discussions with top officials at the Los Angeles Unified School District about selling the district the new Common Core digital curriculum in 2012 and 2013, well in advance of the formal bid process. The Pearson Foundation was providing education leadership grants to LAUSD as early as 2007.^[3]

The Pearson Foundation came under fire for another tactic. The New York Times reported:

In recent years, the Pearson Foundation has paid to send state education commissioners to meet with their international counterparts in London, Helsinki, Singapore and, just last week, Rio de Janeiro.

The commissioners stay in expensive hotels, like the Mandarin Oriental in Singapore. They spend several days meeting with educators in these places. They also meet with top executives from the commercial side of Pearson, which is one of the biggest education companies in the world, selling standardized tests, packaged curriculums and Prentice Hall textbooks.^[4]

The New York Times reported that Gavin Payne of California participated in an expense-paid trip to Singapore.

The Pearson Foundation was also fighting battles over its tactics in New York state, where the New York state attorney general won a $7.7 million judgment against the foundation. His written statement read:

The fact is that Pearson is a for-profit corporation, and they are prohibited by law from using charitable funds to promote and develop for-profit products. I’m pleased that this settlement will direct millions of dollars back to where they belong.

The Pearson Foundation board announced that it was closing the foundation in December 2013, after the New York judgment.

Poor Execution from All Players

Almost immediately after the district announced the deal, Apple unveiled new, updated iPads—in other words, from the get-go, students in the district would be receiving out-of-date devices. The cost the district was paying per iPad was actually higher than the regular consumer price. Many schools did not have the Wi-Fi infrastructure needed to support devices for all students. The district hadn’t created policies or plans for loss or theft. Students bypassed security protocols so they could install music and video apps. The iPads were supposed to come preloaded with Common Core–aligned curriculum, designed by the education behemoth Pearson. But the curriculum was incomplete. A report^[5] on the district’s iPad program revealed that only one teacher actually used the Pearson materials.^[6]

The Fallout

In October 2014, John Deasy resigned his role as superintendent.

In December 2015, with the help of a grand-jury subpoena, the FBI seized twenty boxes of documentation related to the procurement process. No charges have been made since the seizure.

Immediately after the subpoena and FBI seizure, Deasy’s successor canceled the contract with Apple (and therefore Pearson).

In September 2015, the vendors (Apple, Pearson, and hardware-provider Lenovo)collectively agreed to pay LAUSD a $6.4 million settlement. Pearson has agreed to pay the full $6.4 million.

When businesses engage in selling to other businesses or to government entities, the laws, policies, norms, and ethics change. Some challenges involved in marketing to consumers are minimized, or go away altogether, but other ones arise. In this module we will explore the unique ethical challenges and opportunities in business-to-business marketing.

The specific things you’ll learn in this section include:

• Explain how B2B marketing creates unique ethical risks and challenges
• Describe the risks associated with customer gifts and bribes

You will recall that business-to-business (B2B) marketing differs from business-to-consumer (B2C) marketing in key ways. B2B marketers sell to other businesses or institutions, which then consume the product as part of their business operations or use the product in the assembly of the final product they sell to consumers. B2C marketers focus their efforts on consumers—the individuals who consume finished products.

Also, the marketing processes used by B2B marketers are different. One important difference is the tactic of more “personal” selling, in which a sales force builds personal relationships with individuals in decision-making roles in order to facilitate sales within the organizations they’re targeting. Also, because B2B sales tend to be higher-priced, larger-ticket items, marketing tactics often include extensive adjustments in factors such as the selling price, product features, terms of delivery, and so forth.

In the context of ethics, there are some important challenges that are unique to B2B marketing, too. These are discussed below.

The Challenge of Monitoring Ethics in B2B Marketing

Imagine that Banana Republic, the retail clothing store, wants to launch a new promotion with a significant price discount. Banana Republic sells to consumers, which makes it a B2C company. Before the promotion is announced, the corporate marketing team will analyze the pricing discount. The Web site design for the promotion will be throughly reviewed. If this is a new promotion, the legal team will evaluate and approve the official language. The display materials that are sent to stores go through the same review. The marketing team will craft communications for the sales associates in stores around the country, explaining the promotion and scripting how it should be presented to shoppers. It is possible that the marketing team at Gap Inc., Banana Republic’s parent company, will also review the promotion—or they may have provided a “promotion template” that’s been reviewed and approved. For a B2C company selling to a large consumer audience, pricing is fairly uniform for all buyers, and the marketing and legal teams typically review the pricing strategies and communications.

In a B2B sales environment this process is very different. Imagine that a sales representative from Microsoft comes to your college campus to meet with technology leaders about a new software package for student communications. She might meet with the college’s chief information officer over lunch and discuss the college’s current products, as well as the new software package she is hoping to sell. When the discussion turns to price, the sales rep will try to present the right price to close the sale. She will be thinking about what the college has already purchased, what else she hopes to sell to the college, and how she might “bundle” this product to drive the largest total sale. She will also care about the timing of the sale. Does she want the college to buy the product this year or this quarter in order to maximize her commission? That will make a difference in whether she presents more aggressive pricing now or tries to create a larger deal that may take longer to close. The individual sales rep has significant discretion in crafting the right deal. Often the company’s sales leadership will not have visibility into the details of this deal until she is well into the sales process, and the legal team will not review it until it is in a formal contract that the company is preparing to sign.

B2B sales processes generally have fewer controls than B2C processes for a number of reasons:

1. Personal sales are relationship based, requiring the seller to tailor the process according to the buyer’s personality and approach
2. B2B sales are often large and complex, which necessitates personalizing the marketing mix to the individual buyer
3. Pricing is negotiated between the buyer and seller, rather than being set and uniform across all customers
4. Communication about the product and pricing takes place mainly through informal or formal verbal presentations and discussions

The B2B sales process is difficult to monitor and control. It is also very high stakes. There are approximately 320 million potential consumers in the United States. There are just over 5.7 million firms doing business in the United States.^[7] B2B firms market to a much smaller number of customers and are often selling products with a higher total cost.

Structural Challenges in Personal Selling

The challenges of creating appropriate controls in the B2B sales process places special pressure on the individual sales representatives to make good judgment calls in a very flexible environment. In addition, personal selling almost always uses an incentive structure, which puts immense pressure on the sales rep to close large deals.

Often a B2B company will spend approximately 20 percent of its total revenue on sales costs, with a significant portion of that paid out in commissions. In other words, if a company buys a software package that costs $1 million, as much as $200,000 will be paid in sales commissions. This is generally distributed through the sales management chain, such that an individual sales rep is paid a commission on his sales, and a sales manager is paid a commission on the sales from all of the sales reps that she manages.

Let’s look at an example of a commission plan and consider how it might impact ethical judgment calls during the sales process.

Each salesperson has an annual sales quota that he is expected to meet—in this case, $1 million in annual sales. On top of a base salary, sales representatives are paid a commission on their sales. Often, either no commission is paid (as in this example) or a very low commission is paid until the sales quota is met. Once the sales quota is met, the sales rep earns a percentage of all sales. In this example, if the rep sells a $1 million deal, then he will meet his quota and be paid a $100,000 sales commission. There is also an accelerator: If the sales rep sells more, he will earn a higher-percent commission. B2B sales representatives have a personal financial stake in closing deals.

Besides the financial incentive they face, sales reps are also motivated to meet (and exceed) sales quotas because they don’t want to get fired (which is a pretty common, legitimate worry).

Let’s revisit the scenario above where a software sales rep is on your college’s campus. Will she act differently if she is approaching the end of the year and has only closed $800,000 in sales? In that case should would not have met her sales quota for the year, and both her compensation and her job would be at risk. She might be tempted to oversell the features and benefits of the product this one time in order to close a sale before the end of the year. She would also be more likely to advocate for steep pricing discounts that might bring the price of the software right to the $200,000 she needs to meet quota.

What if she has exceeded her quota but needs a few big sales once the new year starts? In that case, our sales rep might be tempted to slow down a sales deal in order to push the sale into next year. While that doesn’t present an ethical dilemma for the customer, it does create an issue for the company. If an employee is purposely reducing the company’s sales this year in order to profit, does that constitute ethical behavior?

Companies understand and expect that the sales compensation structure will influence behavior, but they try make adjustments that lead to smaller ethical issues (slowing down a sales process, e.g.,) rather than larger ethical issues (promising value that the product cannot deliver, e.g.). B2B marketers must carefully consider the sales-compensation and incentives structure and identify where it creates unnecessary ethical risks or puts sales reps in an ethical bind.

Diverse Policy Requirements

Finally, while all marketers are required to be aware of state and federal laws that impact their work, B2B marketers must also understand the procurement policies of the organizations to which they sell. The policies and guidelines can vary significantly. Company policies will generally define:

• The total purchase authority of a single individual or department
• The threshold at which a purchase decision must go out for competitive bid
• The circumstances under which the company’s status as a customer can be disclosed
• A dollar threshold for gifts from vendors

It is the responsibility of the employees within the company to follow the policies, so why does this matter to the marketer? Let’s return to the example of a software rep selling a product to your college or university. The chief information officer is responsible for understanding and following the college’s policies. Still, the software company and its sales rep are in a position to conduct sales and marketing efforts that either respect and support the college’s policies or push against them. Even when issues arise from the vendor’s ignorance about the college’s policies, such lapses can create a tone in which the vendor is seen to be undercutting the college’s requirements instead of understanding and supporting ethical behavior.

Gift giving in business is commonplace and contentious at the same time. Business gifts are usually seen as an advertising, sales-promotion, and marketing-communication medium.^[8] Such gifting is usually practiced for the following reasons:

1. In appreciation for past client relationships, placing a new order, referrals to other clients, etc.
2. In the hopes of creating a positive first impression that might help to establish an initial business relationship
3. As a quid pro quo—returning a favor or expecting a favor in return for something ^[9]

Making good decisions about when business gifts are appropriate is extremely complex in the United States. In global marketing it becomes one of the most challenging ethical issues, since the cultural norms in other countries can be at odds with standard ethical practices in the United States. For this reason, gifts and bribes warrant a deeper discussion, especially with regard to B2B marketing.

In considering appropriate business gifts it is helpful to think about the content of the gift, the context of the gift, and the culture in which it will be received. Let’s examine one of Microsoft’s promotions that included a gift.

Case Study: Microsoft’s “Gift” to Bloggers

When Microsoft introduced its Vista operating system, the launch included a noteworthy promotion. During the 2006 Christmas season, Microsoft sent out ninety Acer Ferrari laptops, loaded with Windows Vista Operating system, to approximately ninety influential bloggers.

Different bloggers received different machines, but the lowest model was worth around two thousand dollars. Michael Arrington, editor of TechCrunch, shared the message that accompanied his gift:

This would be a review machine, so I’d love to hear your opinion on the machine and OS. Full disclosure, while I hope you will blog about your experience with the PC, you don’t have to. Also, you are welcome to send the machine back to us after you are done playing with it, or you can give it away to your community, or you can hold on to it for as long as you’d like. Just let me know what you plan to do with it when the time comes. And if you run into any problems let me know. A few of the drivers aren’t quite final, but are very close.^[10]

Clearly, Microsoft was hoping to encourage reviews of Vista and wanted to make sure that the bloggers experienced Vista on a high-end machine that would optimize performance. Did they also hope to influence the bloggers’ opinions of the company along the way?

Sending the gift to bloggers was a risky marketing tactic even without the ethical question. Culturally, bloggers are a highly influential group of people with strong opinions, which they share openly to a wide audience. Many of the recipients reacted to the gift by sharing the news of the promotion and their opinions about it. A broad range of ethical issues emerged from the surrounding discussions in the blogosphere. Below are several excerpts.

The Gifts Diminish Trust in the Reviewers

Now that I know these guys (any gals?) have access to a tailored laptop, preloaded, etc., I know their wisdom is no longer that of The Crowd—I suspect it is going to be tainted (even if not the case), so I have already discounted them. And, since I don’t know who has and has not had the gift, I will distrust them all on this subject!^[11]

The Laptops Provide a Review Experience That Will Not Match Users’ Experiences

If you’ve ever tried to add a new Microsoft OS to an existing computer, you know you can’t do that without totally f****** up your computer. The only way to switch to a new Microsoft OS is to start with a new computer. And, of course, to wait a year or two while they get the kinks out. Microsoft wouldn’t chance having dozens of bloggers writing about how VISTA screwed up their computers, so they installed the system on brand-new computers. They gave the computers as gifts instead of lending them to the bloggers for review, which is the norm when dealing with traditional journalists.

The Bloggers Should Disclose the Gift in Their Reviews

Microsoft’s approach raises some problematic issues . . . How many bloggers have received a notebook but have not declared it on their blog? Quite a few, I suggest, which highlights the fundamental problem with blogging, which is that bloggers are not trained journalists and not necessarily in tune with the ethical problems that gifts entail . . .

Finally, sending bribes to bloggers is not a good look for Microsoft, and this is exactly how this initiative will be perceived. Even as they try to defend themselves, Microsoft’s PR gurus show that they do not understand the blogosphere.^[12]

Another blogger shared the disclosure concern while supporting the promotion:

That is a GREAT idea. After all, how can anyone have a decent conversation about Windows Vista without having put a bunch of time on one of the machines? Now, regarding blogger ethics. Did you disclose? If you did, you have ethics. If you didn’t, you don’t. It’s that black-and-white with me. ^[13]

While there was not a clear consensus on the ethics of this promotion, the debate drowned out whatever little positive opinion Windows Vista had generated in the blogs. The Microsoft case stands as a good example of a business gift program gone wrong. The company not only wasted the money spent on the gifts (none of the bloggers reported to have returned the laptops) but suffered weeks of bad press—and soured the commercial launch of the product.

Three Dimensions of Evaluating Gifts

The Microsoft example provides a three-dimensional framework by which to evaluate whether a gift crosses the line into bribery. (Remember that a bribe is something given to induce someone to alter their behavior—in this case, to write a favorable product review.) The framework helps establish guidelines for keeping business gifting aboveboard.

Content

The chief problem with Microsoft’s gift was the content. Content refers to the nature of the gift itself (a shiny, new, top-of-the-line laptop) and the price ($2,000 or more). The company claimed that such a high-end machine was necessary to showcase the full capability of the Windows Vista operating system. And, they asserted, since the bloggers were given the option of returning the laptops (or giving them away), the issue of bribery didn’t come into play and the onus of acting ethically fell to the recipients.

Nonetheless, Microsoft’s actions represented a departure from standard industry practice of sending preview disks of software to opinion-makers. While it might be acceptable to give out $2,000 gifts in other industries (like sending out expensive fashion clothing to movies stars), and one can dicker about whether $2,000 is or isn’t too extravagant, the point is that Microsoft broke with the conventions of its own industry.

The key lesson is that what is being given defines the nature of gifting, and extreme care must be taken to determine whether that gift is appropriate. While the market price of a gift item can be used as a benchmark, the type of gift is as important as its price. If Microsoft had given out $2,000 worth of software, it wouldn’t have been so controversial. Another point, which Microsoft surely knew, is that items sent around Christmastime are more apt to be perceived as gifts.

Context

The other objection to the Microsoft gifts was the company’s motives for giving them. People argued that Microsoft sent the expensive laptops to bloggers as a quid pro quo. Though the accompanying email said “you don’t have to write about Vista,” that was mainly a legal disclaimer meant to protect Microsoft against formal bribery charges (U.S. corruption law prohibits corporate gifts designed to induce action by the recipient). The company may have kept itself out of legal hot water, but it remained vulnerable to the charge that it tried to exert psychological pressure on the bloggers to write about their “pleasurable” experiences with Vista.

The other argument was that laptops were given to the bloggers so that they would lack the proper testing environment of mainstream tech journalists. The bloggers were set up to write good things about Vista by seeing it function in a brand-new machine, tuned and tested for this purpose by Microsoft engineers. The experience of actual users—who might be influenced by these bloggers’ opinions—would be different, since they would have to install the software on older machines with no help from Microsoft. Critics argued that the company’s promotion was intended to create a false opinion of the market.

While most businesses define what is a bribe and what isn’t in terms of the content of the gift, in most countries the matter is decided on the basis of context. So, regardless of the size, type, and value of the gift, if it can be established that the gift was given with the intent to induce an action, it will be regarded as a bribe. The lesson here is that it isn’t enough for businesses to set clear value/type limits on corporate gifts; it’s also necessary to scrutinize the motives behind the gift giving, think carefully about how the gift will be received, and stop short of anything that induces the recipient to crosses the line of ethical behavior.

Culture

Other critics held that Microsoft’s blunder was not caused by the content or context of the gifts but that the company fundamentally misunderstood the culture of blogging. This view came primarily from marketing practitioners, who pointed out that giving the laptops to elite bloggers violated the egalitarian and sponsorship-free nature of social media. It’s a culture whose members loathe any kind of commercial taint to their independence and are highly sensitive to charges of “selling out.”

Thus, culture is clearly the third very important aspect of gift giving. It’s crucial to establish clear boundaries and protocols so that gifts are truly received as gifts—not as attempts to influence. To do that means factoring in the recipient’s mindset and culture, since what may be perceived as a gift in one group may seem like a bribe in another. The “cultural” dimension is easily understood in personal gift giving (a toy truck might be an excellent present for your six-year-old nephew, but it wouldn’t be appropriate for your boss or grandparent). Yet, somehow the idea of discretionary gift giving hasn’t gained much ground in business. However, understanding the cultural preferences of the receiver is obviously an important issue in international business—and was a key failure.

COPYRIGHT

This courseware was assembled by Christopher VanOosterhout from a variety of resources copyrighted and openly licensed by multiple individuals and organizations.  See our Copyright and Attribution page for additional details.  For details about permission to use please contact me at c@vanosterhout.com with the phrase  Courseware Usage Inquiry.  If you believe that this courseware violates your copyright, please contact me at c@vanoosterhout.com with the phrase Copyright Inquiry in the subject.  Details about the collector of these resources and Licentia LLC can be found at www.vanoosterhout.com

What you’ll learn to do: describe measures companies take to encourage ethical behavior

Ethical issues arise at both an organizational level and an individual level. A single individual can engage in unethical behavior, but most ethical breaches that have significant impact on a business occur when many individuals come together to act unethically. This section will review the steps that businesses take at each level to define ethical behavior and create a culture that encourages employees to do the right thing.

The way to gain a good reputation is to endeavor to be what you desire to appear.—Socrates

The specific things you’ll learn in this section include:

• Explain the importance of ethics policies and a culture of accountability for all employees
• Identify the unique ethical considerations and roles for company executives
• Describe how companies manage ethical behavior of marketing employees

At the beginning of this module we discussed the 2015 revelation that Volkswagen installed emissions-altering software in eleven million diesel vehicles worldwide, which caused the cars to pass emissions tests they should have failed. Consider, for a moment, how many employees would have to be involved in order to achieve this level of fraud?  This was not the handiwork of a single employee but the result of a pattern of unethical behavior in the company. When the Ethics & Compliance Initiative (ECI) released the results of its 2013 National Business Ethics Survey, it noted that these types of broad, organizational breaches are fairly common.

The survey shows that a significant amount of misconduct involves continuous, ongoing behavior rather than one-time incidents: Employees say that more than a quarter (26 percent) of observed misconduct represents an ongoing pattern of behavior. Another 41 percent said the behavior has been repeated at least a second time. Only one-third (33 percent) of rule breaking represents a one-time incident.^[1]

In the case of Volkswagen, an early internal investigation pointed to a “culture of tolerance” for ethical compromises. Employees were pushed to do what was needed to meet corporate objectives at any cost.

The organizational culture is comprised of the values and beliefs that an organization shares, which create its social environment. The culture of a large organization can be difficult to understand since it is influenced by many different factors. Still, many research studies point to leadership and policies as being instrumental in building an ethical organizational culture.

Policies That Encourage Ethical Behavior

Many companies have a specific policy that defines appropriate behavior. The policy is often called the Standards for Business Conduct. As the name suggests, the policy is intended to set the standards for acceptable behavior; it’s not meant to be an exhaustive list of every type of ethical behavior.

Many of these policies do the following:

• Define the threshold for behavior: While it should go without saying that employees are expected to be law abiding, companies choose to be quite explicit about stating that they require their employees to follow the law.
• Create expectations for behavior: The policies identify common issues that employees may encounter—such as accepting gifts from suppliers—and explain how they should be handled.
• Set policy: establish company protocols for handling confidential information, including customer data, etc.
• Give guidance on making judgment calls: Companies often define how they would like employees to make decisions when guidelines do not adequately cover them.
• Describe reporting and enforcement procedures: There is generally a process for reporting and addressing issues, as well as information about how the company will protect those reporting concerns.

Let’s examine some examples from company policies to see how some of these components are addressed.

The Legal Threshold

The ethics policy generally begins by reminding employees that they are required to act in accordance with the law. For companies that engage in business across the globe this can be complex. Starwood Hotels and Resorts addresses this issue in their Code of Business Conduct and Ethics:

You must, at all times, obey the laws of the jurisdictions where we conduct business. Starwood conducts business all around the world. Our associates are citizens of many countries. As a result, our operations are subject to the laws of many jurisdictions. It is often challenging for us to understand how those various laws apply to our businesses. However, whether you are a Starwood associate or member of the Board of Directors, you are expected to conduct yourself in accordance with applicable law.

Starwood is a company organized under the laws of the United States and is generally subject to U.S. federal law. From time to time, the laws of the United States conflict with laws of a city, town, country or other jurisdiction where we conduct business. If there is a conflict between the applicable laws, seek guidance from the Office of the General Counsel (Legal).  ^[2]

Starwood has established a clear expectation to follow the law, acknowledged the complexity of their business environment, and provided direction when employees need help.

Creating Expectations for Behavior

In the course of a normal business day, many service employees receive tips. Where is the line between an appropriate tip and a gift? Starbucks has defined this for employees in its Standards of Business Conduct:

A gift or favor should not be accepted or given if it might create a sense of obligation, compromise your professional judgment or create the appearance of doing so. In deciding whether a gift is appropriate, you should consider its value and whether public disclosure of the gift would embarrass you or Starbucks.

A gift of money should never be given or accepted. (Some retail partners, however, may accept customary tips for service well done.) As a general rule, partners should limit gifts to or from any one vendor or business associate to US $75 per year. A gift of nominal value may be given or accepted if it is a common business courtesy, such as coffee samples, a coffee cup, pens or a similar token. However, during traditional gift-giving seasons in areas where it is customary to exchange gifts of money, such as China, Japan, Malaysia, Singapore and Thailand, partners should not solicit but may exchange cash with nongovernmental business associates in nominal amounts up to the equivalent of US $20.^[3]

It is very common for company’s to set a threshold for giving and receiving gifts. These specific guidelines help employees navigate what would otherwise be a judgment call and make it easier to identify an ethical breach and initiate corrective action.

Setting Policy

United Parcel Service (UPS) groups the sections of its Code of Business Conduct into stakeholder groups: our company, our people, our customers, our shareholders, and our communities. This enables the company to address a range of workforce expectations, such as workplace safety:

UPS is committed to a safe work environment that is free of threats, intimidation, and physical harm. Everyone has a right to work in a safe environment and everyone shares the responsibility for ensuring the safety of others. We have zero tolerance for workplace violence, and we will investigate and take appropriate action up to and including dismissal regarding any threats to a safe workplace.

UPS prohibits violent behavior in the workplace including, but not limited to, physical assaults, fighting, threatening comments, intimidation, threats through electronic communications including social media, and the intentional or reckless destruction of property of the company, employee, UPS representative, or customer. Comments or behavior that reasonably could be interpreted as intent to do harm to people or property will be considered a threat. We also prohibit the unauthorized possession and/or use of weapons by any employee or UPS representative while at work, on company property, or while on company business.^[4]

The UPS policy is very specific about its expectations of employees in ensuring a safe work environment.

Judgment Calls

No policy will address every issue, nor should it try. Most policies try to guide employees in the way they should make judgment calls. In its Standards of Business Conduct, American Airlines addresses this issue specifically:

Remember, your best resource about what’s right or wrong is your own conscience. So if you find yourself in a difficult situation, think before you act. And ask yourself the following questions:

• Is it legal? If it’s not legal, don’t do it.
• Is it ethical? If it feels wrong, it probably is wrong.
• How would it look in the newspaper? If you wouldn’t feel comfortable if your friends and family knew about your actions, you probably shouldn’t do it.^[5]

These policies are an important tool in building a culture of accountability and ethical behavior in a company, but the policies must be upheld by all the employees, and senior leaders play a significant role in reinforcing their importance.

Consider the following observation by the ECI on the results of the National Business Ethics survey:

Managers–those expected to act as role models or enforce discipline–are responsible for a large share of workplace misconduct (60 percent) and senior managers are more likely than lower-level managers to break rules. Surveyed employees said that members of management are responsible for six of every ten instances of misconduct and they pointed the finger at senior managers in 24 percent of observed rule breaking. Middle managers were identified as the culprit 19 percent of the time and first-line supervisors were identified as bad actors 17 percent of the time.^[6]

If you’re thinking about ways of boosting or ensuring ethical behavior in an organization, this is an interesting and alarming finding. In a supplemental report on Ethical Leadership, ECI reports that employees at all sizes of companies draw conclusions about their leaders’ character primarily on the basis of the following:

• The overall character of their leaders as experienced through personal interactions;
• How senior managers handle crises; and
• The policies and procedures adopted by senior leaders to manage the company.

Employees want to know, for example, whether leaders treat lower level employees with dignity and respect, share credit when good things happen, and uphold standards even when it reduces revenues and profits. They watch to see whether leaders are steady in crisis, hold themselves accountable or, alternatively, shift blame to others. Workers also look at day-to-day management decisions to gauge whether ethical behavior is recognized and rewarded, or whether praise and promotions go to workers who bend the rules.^[7]

These findings suggest the important role that executives play in building ethical organizations—ethics and integrity tend to start (or fail) at the top and trickle down.

Executives Set Company Objectives

When executives establish specific, measurable objectives for the company, those objectives determine where people will focus their time and effort. When the objectives cannot be met and there are dire personal consequences for failure, such conditions can lead to the compromise of ethics and standards. In the National Business Ethics Survey, 70 percent of employees identified pressure to meet unrealistic business objectives as most likely to cause them to compromise their ethical standards, and 75 percent identified either their senior or middle management as the primary source of pressure they feel to compromise the standards of their organizations.

In the Volkswagen case, internal investigations have questioned how both the company culture and the behavior of former CEO Martin Winterkorn contributed to a systemic ethical breach. Like many chief executives, Martin Winterkorn was a demanding boss who didn’t like failure, but critics say the pressure on managers at Volkswagen was unusual, which may go some way toward explaining the carmaker’s crisis. When he became CEO in 2007, Winterkorn set an objective to make VW the world’s biggest carmaker, which would require tremendous growth in the highly competitive U.S. car market. In the years since, VW has nearly doubled it global annual sales to 10 million cars and its revenue to $225 billion. In early 2015, VW finally approached its goal, selling marginally more vehicles than the world’s number-one automaker, Toyota of Japan. One former sales executive said that the pressure soared under the target.”If you didn’t like it, you moved of your own accord or you were performance-managed out of the business,” he said.^[8]

In describing a Winterkorn’s leadership style, a former VW executive confidentially told Reuters New Agency, “There was always a distance, a fear and a respect . . . If he would come and visit or you had to go to him, your pulse would go up. If you presented bad news, those were the moments that it could become quite unpleasant and loud and quite demeaning.”

A week after U.S. regulators revealed the company’s cheating, Bernd Osterloh, the employee representative on VW’s supervisory board, sent a letter to VW staff suggesting the change that was needed: “We need in the future a climate in which problems aren’t hidden but can be openly communicated to superiors,” said Osterloh. “We need a culture in which it’s possible and permissible to argue with your superior about the best way to go.”^[9]

In Fortune magazine, Dr. Paul Argenti suggested, “Rather than playing the blame game, executives should ask if pressures to grow at all costs might have created dishonest employees.”^[10]

It seems likely that aggressive corporate objectives (and more specifically marketing objectives related to market share) played a contributing role in the Volkswagen ethics scandal. Moreover, when executives set aggressive goals, it becomes more important to cultivate communication channels to openly address issues. This was obviously not the case at Volkswagon.

Executives Create Company Policy

In the previous reading we reviewed a number of company policies that address ethical conduct. Executives play an important role in creating those policies—and by visibly following and upholding them. As the survey data cited above suggest, employees look to executives to decide whether standards-of-business-conduct policies should be observed and respected. When executives bend the rules or turn a blind eye to bad behavior, the policies lose value and executives lose the respect of employees. This opens the door to a range of unanticipated issues, as employees look to ethical norms outside stated policy and beyond the executives’ control.

Executives Hire and Promote Company Managers

Internal promotions send very strong signals about what is important to a company. When the company hires an employee from a different company, she is likely not well known by most employees. If the company promotes an employee who is already working at the company, others know him and understand what he has done to deserve the promotion. If the company promotes individuals to management positions when they have displayed questionable ethics in the workplace, it creates two issues. First, it creates a level of managers who are more likely to encourage their employees to achieve business results at any cost, even when ethics are compromised. Second, it sends a message to all employees that business results are more important than ethics.

If you are hired to work in marketing at a typical company, there will likely be clear ethical standards defined in a company policy and some level of compliance among employees at all levels in the company. You will witness ethical breaches and need to decide whether to report them or not. You will see examples of outstanding ethics and have the opportunity to participate in debates about ethical disagreements and issues. No company is perfect, but most are trying to be ethical.

How can you, as a marketer, make a difference? Marketers have a specific set of responsibilities when it comes to preventing and addressing ethical issues. These are described below.

Demonstrate Respect for Your Target Customer

Marketing is not a game of manipulation. Good marketing provides compelling solutions and informs customers to help them make good selections and realize value. Recognize the customer’s need for an offering that is easy to use and includes clear instructions and appropriate warnings. Remain available to customers to hear complaints. Be humble enough to recognize that not everyone wants to hear your messages. If you demonstrate respect for the consumer, you will find new opportunities to provide value. If you treat consumers like a commodity to be manipulated, a host of ethical issues will clutter your path.

Prepare the Sales Team to Sell Effectively and Ethically

Demonstrate High Personal Standards in Business Relationships

Provide Fair Value to the Target Customer

Many ethical issues result from some level of deception involving misstatement of value to the customer. Be accurate in communications to customers about the value that a product provides. Be clear in pricing and contracts. Pricing strategies that confuse customers and cost more than the customer initially believed are never a good long-term strategy.

Play Nicely in the Competitive Environment

Be Truthful

COPYRIGHT

This courseware was assembled by Christopher VanOosterhout from a variety of resources copyrighted and openly licensed by multiple individuals and organizations.  See our Copyright and Attribution page for additional details.  For details about permission to use please contact me at c@vanosterhout.com with the phrase  Courseware Usage Inquiry.  If you believe that this courseware violates your copyright, please contact me at c@vanoosterhout.com with the phrase Copyright Inquiry in the subject.  Details about the collector of these resources and Licentia LLC can be found at www.vanoosterhout.com

COPYRIGHT

This courseware was assembled by Christopher VanOosterhout from a variety of resources copyrighted and openly licensed by multiple individuals and organizations.  See our Copyright and Attribution page for additional details.  For details about permission to use please contact me at c@vanosterhout.com with the phrase  Courseware Usage Inquiry.  If you believe that this courseware violates your copyright, please contact me at c@vanoosterhout.com with the phrase Copyright Inquiry in the subject.  Details about the collector of these resources and Licentia LLC can be found at www.vanoosterhout.com

• Simulation: Ethics. Authored by: Clark Aldrich for Lumen Learning. License: CC BY: Attribution

What you’ll learn to do: explain how demonstrating corporate social responsibility can impact marketing

We have reviewed many ethical challenges and potential traps for marketers. How can a marketer win? Actually, in lots of ways. Increasingly, marketers are doing more than just trying to avoid doing harm; as you’ll see, they’re taking on important issues and are making a difference, actively doing good.

Earlier in this module we discussed what corporate social responsibility is and how social responsibility programs impact many different stakeholders in a business.  In this section we focus on the role of corporate social responsibility in marketing. We will look at the marketing mix—product, price, promotion, and distribution—and see how companies are changing their marketing strategies to visibly contribute to their communities.

Finally, we’ll talk about the results that companies achieve when social responsibility is part of the marketing strategy.

The specific things you’ll learn in this section include:

• Define social responsibility
• Identify examples of social responsibility that create value for customers
• Explain the impact of social responsibility on marketing results

You’ll recall that we defined corporate social responsibility as the ethical behavior of a company toward society. It means acting responsibly toward the stakeholders—not just the shareholders—who have a legitimate interest in the business. Let’s focus on how marketers use corporate social responsibility to achieve marketing objectives.

First, let’s return for a moment to the marketing planning process. Where does social responsibility fit in? It generally comes into the planning process in one of two ways:

1. Social responsibility may be a corporate-level strategy with specific objectives.
2. Social responsibility may be part of the marketing mix based on the situation analysis

Let’s look at both of these approaches.

Corporate Strategy at Coca-Cola

Coca-Cola’s mission is:

• To refresh the world . . .
• To inspire moments of optimism and happiness . . .
• To create value and make a difference.

In support of the vision, the company has created what it calls a “roadmap” that defines the focus areas for company strategies and tactics. These include:

• People: Be a great place to work where people are inspired to be the best they can be.
• Portfolio: Bring to the world a portfolio of quality beverage brands that anticipate and satisfy people’s desires and needs.
• Partners: Nurture a winning network of customers and suppliers, together we create mutual, enduring value.
• Planet: Be a responsible citizen that makes a difference by helping build and support sustainable communities.
• Profit: Maximize long-term return to shareowners while being mindful of our overall responsibilities.
• Productivity: Be a highly effective, lean, and fast-moving organization.^[1]

Which of the roadmap areas focus on social responsibility? “Planet” is clearly a social responsibility focus, as it acknowledges a responsibility to improve the world beyond the sale of Coca-Cola’s products. “People” also suggests a note of social responsibility; Coca-Cola strives to be a place where employees are not only doing a good job for the company but are inspired to be their best as people.

Marketing Strategies to Address Childhood Obesity

Coca-Cola doesn’t specifically call out customer health in its roadmap, but that concern has become a significant component of its marketing strategy, and the company has developed a specific set of marketing programs to address childhood obesity. Childhood obesity is a challenging issue for the company. If you were to conduct a SWOT analysis of Coca-Cola, you could imagine that this issue would appear under “external threats” and have a negative impact on its market. In most K–12 schools in the United States, the sale of soft drinks has been steadily eliminated. Rather than wait to find out how this trend might play out, marketing decided to take a proactive role. In 2013, Coca-Cola announced its four global well-being commitments to help fight obesity, each of which has a direct impact on the marketing mix:

1. Offer low- or no-calorie beverage options in every market. (Product)
2. Provide transparent nutrition information, featuring calories on the front of all of our packages. (Product)
3. Help get people moving by supporting physical activity programs in every country where we do business. (Promotion)
4. Market responsibly, including no advertising to children under 12 anywhere in the world. (Promotion)^[2]

Coca-Cola has added a number of water and juice brands to its product portfolio in order to achieve these social responsibility objectives, and has devoted a substantial budget to develop physical activity programs in its markets. The tone of the company’s advertising has shifted to focus on an older audience.

Increasingly companies around the world are including some social responsibility objectives in their corporate-level plans. The majority of U.S. companies in the S&P 500 and Fortune 500 provide reporting to investors on their sustainability goals and performance.^[3] In South Africa, companies are required to provide such reporting in order to be listed on the Johannesburg stock exchange.

With this emphasis and accountability, social responsibility is no longer regarded as a “special project,” but is becoming an integral part of the corporate and marketing planning process that is central to business performance and success.

The Business Case for Social Responsibility

Regardless of broader benefits, there is a strong business case for social responsibility. Public companies’ stock prices benefit from strong social responsibility initiatives. In 2013, more than $6.57 trillion were invested based on socially responsible investment strategies.^[4]

For marketers, the desire for socially responsible products and companies is driven by consumers. Nearly 30 percent of consumers plan to increase the amount of goods and/or services they buy from socially responsible companies in the coming year. Twenty-five percent avoided buying products from an enterprise because they thought it wasn’t socially responsible.^[5]

Social Responsibility Programs

In defining social responsibility programs and goals, companies are acknowledging a commitment to creating a better world. How do they determine where to focus these efforts and what are they trying to achieve? Generally, companies are expanding on unique market strengths that benefit society and trying to reduce the negative impact of their products on society.  As with any other business strategy, an approach that is customized to the company and its market is likelier to have greater impact. For example, Coca-Cola’s emphasis on preventing childhood obesity acknowledges and addresses a risk that the company brings to its market. If Exxon Mobile launched a childhood obesity initiative, it wouldn’t have the same impact. The company’s oil and gas offerings don’t have a direct impact on childhood obesity, and thus it would raise questions about the energy company’s commitment to addressing issues much closer to home—i.e., the serious impact that Exxon Mobile products have on the environment.

Many companies are implementing a host of social responsibility strategies through sustainable product initiatives.

Creating Sustainable Products

A sustainable product is constantly environmental-friendly during its entire life. That is, from the moment the raw materials are extracted to the moment the final product is disposed of, there must be no permanent damage to the environment.^[6]

A sustainable product focus may include:

• Use of organic raw materials
• Sustainably harvesting of raw materials
• Emphasizing human rights and labor conditions in sourcing decisions
• Use of renewable energy in the production process
• Ensuring that use of the product creates a positive impact on the community
• Creating product recycling and reuse options
• Improving the impact of the product’s use on human and environmental health

The intent of a sustainable product strategy is that the company is identifying the impact of its products on society at every phase of the product lifecycle, and minimizing the negative impacts. Sustainable product initiatives are so broad in scope that they often encompass all of the social responsibility initiatives. This broad scope also requires companies to be focused and realistic about what they can achieve, setting appropriate objectives that demonstrate progress and identify where more work is needed.

As the world’s largest retailer, Wal-Mart faces unique challenges in product sustainability. It must not only focus on its stores, but on the products provided and transported by a board network of suppliers. To address this, Wal-Mart has partnered with The Sustainability Consortium to create a sustainability index that can be used to set standards and measure progress across its value chain. The goals of the index are to:

• Improve the sustainability of the products customers love
• Integrate sustainability into the business of buying and selling merchandise
• Reduce cost, improve product quality and create a more resilient supply chain
• Strengthen customers’ trust in retailers and the brands we carry

The company cites progress in its work to date.

• Eliminated 7.575 MMT of GHG by the end of 2013
• Implemented projects that are estimated to eliminate 18MMT of GHG emissions by the end of 2015^[7]

Clearly, Walmart has significant work ahead, but independent evaluations have been positive. Joel Makower of Green Biz reports that Walmart’s sustainability initiatives are having a real impact, both on its operations and those of the companies in its supply chain. He also notes that some of that progress is offset by the company’s rapid growth.^[8]

COPYRIGHT

This courseware was assembled by Christopher VanOosterhout from a variety of resources copyrighted and openly licensed by multiple individuals and organizations.  See our Copyright and Attribution page for additional details.  For details about permission to use please contact me at c@vanosterhout.com with the phrase  Courseware Usage Inquiry.  If you believe that this courseware violates your copyright, please contact me at c@vanoosterhout.com with the phrase Copyright Inquiry in the subject.  Details about the collector of these resources and Licentia LLC can be found at www.vanoosterhout.com

• Social Responsibility Initiatives. Provided by: Lumen Learning. License: CC BY: Attribution
• Outcome: Social Responsibility Marketing Impact. Provided by: Lumen Learning. License: CC BY: Attribution

In this module we’ve covered a range of different corporate ethical challenges, legal requirements, and opportunities to contribute to social good. Every year, a company called Ethisphere provides a through review of businesses seeking to gain recognition for being upstanding corporate citizens. (See the full list of the World’s Most Ethical Companies honorees.)

The review process captures company performance in five areas, but in order to be honored, the companies must demonstrate that they are addressing ethics and social responsibility holistically. The five factors, which are nicely aligned with the topics of this module, are described below, each with a brief description of how the companies show compliance.

Ethics and Compliance Program

We discussed this topic in our focus on company policy, along with the important role of executive leadership in supporting and following the policy. This category reviews the ethics program structure, responsibility, and resources, and evaluates the program oversight and tone among top management in the company.

In the following video, Walmart’s chief ethics officer, Cindy Moehring, explains how the compliance and ethics team makes this sophisticated program simple:

Corporate Citizenship and Responsibility

We’ve looked at a number of ways in which companies can be good corporate citizens and “give back” to society and stakeholders. In this category, Ethisphere evaluates a wide range of a company’s performance indicators associated with sustainability, citizenship, and social responsibility, with special attention to areas such as environmental stewardship, community involvement, corporate philanthropy, workplace impact and well-being, and supply chain engagement and oversight.

In the video below, Executive Vice President of Government Affairs, General Counsel, and Corporate Secretary of PepsiCo Tony West discusses the responsibility to society that businesses have:

Culture of Ethics

We also discussed the importance of building a culture of accountability within an organization. In this area the Ethisphere evaluation measures an organization’s efforts and success at establishing an ethical tone throughout every level of the company.

In the following video, Tony West of PepsiCo shares insight on sustainable ethical cultures, employee values, and their persistence over time:

Governance

We discussed the importance of executive leadership when it comes to monitoring and promoting a quality company culture. This category of the Ethisphere review examines the availability and quality of systems designed to ensure strong corporate governance, which not only includes executive managers, but also the company’s board of directors.

CH2M Hill board member Georgia Nelson discusses the positive effects of board diversity on corporate governance and innovation in the video below:

Leadership, Innovation, and Reputation

The companies that make Ethisphere’s list of honorees are visibly presenting themselves in an ethical context, which supports their reputation among all stakeholders. This category evaluates the company’s ethical reputation in the marketplace and among key stakeholders such as employees and customers.

In the video below, the corporate communications manager of Aflac International, John Sullivan, explains how ethical practices reflect on the business:

COPYRIGHT

This courseware was assembled by Christopher VanOosterhout from a variety of resources copyrighted and openly licensed by multiple individuals and organizations.  See our Copyright and Attribution page for additional details.  For details about permission to use please contact me at c@vanosterhout.com with the phrase  Courseware Usage Inquiry.  If you believe that this courseware violates your copyright, please contact me at c@vanoosterhout.com with the phrase Copyright Inquiry in the subject.  Details about the collector of these resources and Licentia LLC can be found at www.vanoosterhout.com

Instructions

Write a two-part post for the Discussion on this topic. Each part should be 1–2 paragraphs in length.

Part 1: Current Status

It is no longer acceptable for businesses to disregard issues related to ethics and social responsibility. Conduct research and briefly describe what your organization is doing now with regard to corporate social responsibility and pursuing sustainable business practices.

Think broadly about what to consider: philanthropy, energy conservation, sustainable supply chains, reducing carbon footprint, fair trade, community service, volunteerism, etc.

Part 2: Recommendations

Based on your understanding of the organization’s goals, what recommendations do you have for how to create a more ethical, socially responsible, and/or sustainable business? What practices do you recommend the organization pursue?

Part 3: Respond to Classmates’ Posts

After you have created your own post, look over the discussion posts of your classmates and respond to at least two of them.

Grading Rubric for Discussion Posts

The following grading rubric may be used consistently for evaluating all discussion posts.

Discussion Grading Rubric

Total Points Possible for Discussion Assignment: 10pts.

COPYRIGHT

This courseware was assembled by Christopher VanOosterhout from a variety of resources copyrighted and openly licensed by multiple individuals and organizations.  See our Copyright and Attribution page for additional details.  For details about permission to use please contact me at c@vanosterhout.com with the phrase  Courseware Usage Inquiry.  If you believe that this courseware violates your copyright, please contact me at c@vanoosterhout.com with the phrase Copyright Inquiry in the subject.  Details about the collector of these resources and Licentia LLC can be found at www.vanoosterhout.com