Business ethics implies the concept of social responsibility, though the two ideas remain distinct. Social responsibility is a subset of ethics in that it deals with the social consequences of ethical decisions and the ways that these decisions improve — or harm — the surrounding community. Business ethics authors O.C. Ferrell, John Fraedrich and Linda Ferrell have devised a scheme that places social responsibility within a four-tiered system of business ethics.
According to Ferrell and Fraedrich, the first level, and the most basic, is the economic level of ethics and social responsibility. Here a firm has a commitment to be profitable and to maximize the value of shareholder investments. This profitability isn't just for shareholders but for labor, the consumers and the surrounding community. In short, the increase in firm value is about benefiting all stakeholders of the firm. Without the increase in value, other areas of corporate civic responsibility have no foundation.
The second level is legal commitment, and it comprises the following of all laws and regulations pertaining to the operation of the firm. This conformity brings the firm's profit motive in line with public goods such as fair wages, environmental concern and worker participation. These goods don't necessarily exist in the world of the market but the legal framework of the market does contain these goods. Therefore, a firm committing to these is showing it's just as concerned with stakeholders as with shareholders.
Firms exist within a social context. They exist within a locality, a state and a nation. This means that ethical norms are a necessity to reflect this membership. The basic concept is that the free market, by itself, doesn't contain ethical norms per se — they must be decided upon outside of the firm's profit motive. These are basic standards of behavior both within the organization and outside of it. Basic ethical norms such as transparent accounting standards and the free flow of information are the starting points of the ethical point of view.
The final level of corporate social responsibility is the philanthropic level. This is about the firm going beyond simple legal and ethical behavior and bringing about a positive change in the locality where the firm is located. Donations to schools, hospitals and libraries are common means of firms to show they don't just follow rules but truly seek the benefit of the community. This can lead to a good reputation for the business, public trust and both worker and customer loyalty. Good ethics and philanthropic behaviors affect the bottom line.